Singapore Court of Appeal Sets Aside Investor State Treaty Arbitral Award

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In Swissbourgh Diamond Mines (Pty) Limited & Ors v Kingdom of Lesotho [2018] SGCA 81 dated 27 November 2018, the Court of Appeal of Singapore addressed several novel and challenging issues of public international law and international investment. Detailed case analysis given below:

Factual Matrix

The case revolves around an investor-state dispute culminating from the Treaty of the Southern African Development Community (‘SADC Treaty’) and part heard by a tribunal (‘SADC Tribunal’) established under SADC Treaty. The Kingdom of Lesotho (‘State’) is the member of SADC. The SADC signed a Protocol on Finance and Investment (‘Investment Protocol’) which conferred the investors an option of referring certain investor-State disputes to international arbitration, under Annex 1 to the Investment Protocol (‘Annex 1’)

The investor was granted mining leases in regions of the State which it claimed to be an ‘investment’ in the host State. The investor unsuccessfully pursued several rounds of litigation before the Courts of the State alleging that State wrongfully expropriated (‘expropriation dispute’) its mining leases. Thereafter, the investor invoked arbitration before SADC Tribunal. To add to his miseries, the SADC Tribunal was dissolved by resolution of the SADC Summit before it had an opportunity to determine the investor’s claim.

Aggrieved investor then triggered another round of arbitration under the auspices of the Permanent Court of Arbitration (‘PCA’) seated in Singapore against the State pursuant to Annex 1. In this arbitration, the investor alleged that the State has breached its obligations under the SADC Treaty by contributing to or facilitating the shutting down (‘shuttering dispute’) of the SADC Tribunal without providing alternative means by which the investors expropriation claim might be heard, again. The award was rendered in favour of the investor and the PCA Tribunal held that the State had breached various obligations under the SADC Treaty. The PCA Tribunal directed the parties to constitute a new tribunal to hear the investor’s expropriation claim.

This award was assailed by the State before the High Court of Singapore. The High Court set aside the award in its entirety relying on Section 3(1) of the International Arbitration Act (‘IAA’) of Singapore read with Art 34(2)(a)(iii) of the Model Law, on the ground that the award dealt with a dispute not contemplated by and not falling within the terms of the submission to arbitration. This decision of High Court is challenged before the Court of Appeal of Singapore in the present proceedings.

Applicable Legal Principles

Article 28 of Annex 1 to the Investment Protocol

“Article 28

Settlement of Investment Disputes

1 Disputes between an investor and a State Party concerning an obligation of the latter in relation to an admitted investment of the former, which have not been amicably settled, and after exhausting local remedies shall, after a period of six (6) months from written notification of a claim, be submitted to international arbitration if either party to the dispute so wishes.

2 Where the dispute is referred to international arbitration, the investor and the State Party concerned in the dispute may agree to refer the dispute either to:

(a)The [South African Development Community] tribunal;

(b)The International Centre for the Settlement of Investment Disputes (having regard to the provisions, where applicable, of the ICSID Convention and the Additional Facility for the Administration of Conciliation, Arbitration and Fact-Finding Proceedings); or

(c)An international arbitrator or ad hoc arbitral tribunal to be appointed by a special agreement or established under the Arbitration Rules of the United Nations Commission on International Trade Law.

3 If after a period of three (3) months from written notification of the claim there is no agreement to one of the above alternative procedures, the parties to the dispute shall be bound to submit the dispute to arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law as then in force. The parties to the dispute may agree in writing to modify these Rules.

4 The provisions of this Article shall not apply to a dispute, which arose before entry into force of this Annex.”

Section 3(1) of the International Arbitration Act

“Model Law to have force of law

3 (1) Subject to this Act, the Model Law, with the exception of Chapter VIII thereof, shall have the force of law in Singapore.”

Article 34(2)(a)(iii) of the Model Law

“Recourse Against Award

Article 34 Application for setting aside as exclusive recourse against arbitral award

(2) An arbitral award may be set aside by the court specified in Article 6 only if:

(a) the party making the application furnishes proof that:

(iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside.”

Parties Contentions

Investor contended as under:

  • That the High court does not have jurisdiction to set aside the award under Art 34(2)(a)(iii) of the Model Law;
  • That the State is estopped from denying PCA Tribunal’s jurisdiction or bound by formal unilateral declaration made by the State through its numerous representations to the effect that the investor would be permitted to pursue their part-heard SADC Claim before an alternative forum;
  • That the investor has a qualifying “admitted” “investment” within the meaning of Annex 1 to the Investment Protocol;
  • That the shuttering dispute is a dispute concerning an obligation of the State in relation to the investors’ admitted investment for the purposes of Article 28(1) of Annex 1;
  • That the Investor has exhausted all local remedies prior to commencing arbitration proceedings.

Per contra, the State contended as follows:

  • That the High court has jurisdiction to hear and determine the setting aside application because the present case falls within either Art 34(2)(a)(iii) of the Model Law, or alternatively, Art 34(2)(a)(i);
  • That the State is not bound to accept the jurisdiction of the PCA Tribunal to hear and determine the claim brought in respect of the shuttering dispute on the basis of either estoppel or a formal unilateral declaration;
  • That the investor does not have a qualifying “admitted” “investment” within the meaning of Annex 1 to the Investment Protocol;
  • That the shuttering dispute does not concern an obligation of the State in relation to the States’ admitted investment for the purposes of Article 28(1) of Annex 1;
  • That the investor has not discharged its burden of showing it does not have a reasonably available local remedy or that there is no reasonable possibility of the investors’ obtaining effective redress before the Courts in the State.

Judgement

Court has Jurisdiction to set aside the award under Article 34(2)(a)(iii) & (i) of Model Law

The Court of Appeal observed that a dispute that is referred to arbitration by an investor who purports to rely on the arbitration clause contained in the investment treaty, but which is found to fall outside the scope of that clause (and accordingly, of the State’s offer to arbitrate) should be considered to fall outside the scope of the arbitration agreement and “the terms of the submission to arbitration” under Art 34(2)(a)(iii) because in such a case, the State would not, in fact, have agreed to arbitrate such a dispute.

In view thereof, the Court of Appeal held that States’ jurisdictional objections fall within the ambit of Article 34(2)(a)(iii), and the court would therefore have the jurisdiction to set aside the award on this ground.

Unilateral offer to arbitrate under Investment Treaty

The Court of Appeal also observed that when a State enters into an investment treaty that provides for the submission of disputes to arbitration, it effectively makes a unilateral offer to arbitrate. By doing so, the State binds itself to arbitrate a claim that is brought under and in accordance with the terms of that unilateral offer, which is then accepted once an investor initiates arbitration proceeding in accordance with those terms. The relevant terms for this purpose are those set out in the investment treaty.

Furthermore, Art 34(2)(a)(i) allows the court to set aside an award where the arbitration agreement is invalid. Thus, an investor who purports to commence an arbitration that is found to fall outside the scope of the investment treaty has in fact failed to match the terms of the State’s unilateral offer to arbitrate. In such a case, the arbitration agreement would not have been perfected and there would have been no valid contract at all. Therefore, in addition to Art 34(2)(a)(iii), the Court of Appeal held that it also had jurisdiction under Art 34(2)(a)(i) to set aside the award which covers the disputes where the arbitration agreement is not valid.

The State is not bound to accept the PCA Tribunal’s jurisdiction

The Court of Appeal noted that the representations made by the State in the course of the oral hearing before the PCA Tribunal and/or in the free-standing offer to arbitrate do not evince any intention on the part of the State to be bound to accept the jurisdiction of the PCA Tribunal. Therefore, the Court concluded that the representations made by the State does not amount to formal unilateral declarations to this effect.

Jurisdiction of the PCA Tribunal to hear and determine the claim

The Court of Appeal emphasised on the wordings of Article 28(1) to the Investment Protocol and found three key jurisdictional requirements that must be satisfied in order for the PCA Tribunal to assume jurisdiction. These requirements were –

  • There must be an “investment” which have a territorial nexus with the host State.
  • The investment must have been “admitted”.
  • There must be a dispute which “concern[s] an obligation of the [State] in relation to [that] admitted investment”.

No “investment” under Article 28(1) of Annex 1

On the first requirement, the Court of Appeal, as contrary to the view of the High Court, held that the mining leases do qualify as an investment for the purposes of Article 28(1) of Annex 1 to the Investment Protocol. The Court arrived on this conclusion relying on several authorities which supported the notion that an “investment” comprises a “bundle of rights”, which in turn may in principle include the secondary (procedural) right to bring a claim in order to vindicate the primary (substantive) right to enjoy and exploit the commercial benefit of the investment. The Court of Appeal also found that the putative right to refer the dispute to the SADC Tribunal did not have the requisite territorial nexus with the Kingdom, and in any event, did not even exist at the time the SADC Claim was brought. However, in the instant case, the right to refer fails the territorial nexus requirement because it is a right that exists only in international law, and which lay outside the State’s enforcement jurisdiction and its control, and which it could not therefore secure or guarantee.

No “admission” with regard to “investment”

The Court of Appeal found that there is ample evidence of the State’s acceptance and admission of the mining leases. They were issued, approved and registered by the State’s government officials and ministries after a formal application process, and granted to the investor by the King of the State. Therefore, the Court concluded that the mining leases satisfy the requirement of admission under Article 28(1) of Annex 1.

No qualifying dispute concerning State’s obligation in relation with investors’ admitted investment

The Court of Appeal remarked that shuttering dispute is, in essence, about whether the investor had a right to have the SADC Claim heard by the SADC Tribunal. The correlative obligation to that right must be one owed by the State to guarantee the investors’ access to the SADC Tribunal or to establish an alternative forum for the pending SADC Claim to be heard. However, as noted above, the right to refer does not fall within the bundle of rights constituting mining leases as a protected investment, and similarly, the investors investment in the mining leases did not give rise to any corresponding obligation on the part of State to guarantee that the pending SADC Claim would be heard. Therefore, the Court concluded that it cannot be said that the shuttering dispute is concerned with any obligation in relation to the mining leases, and therefore that dispute logically cannot fall within the terms of Article 28(1).

Consequently, arriving at this conclusion and given that the expropriation dispute falls outside of the PCA Tribunal’s jurisdiction, the Court held that there is no qualifying dispute which could have fallen within Article 28 and the scope of the State’s consent to arbitration before the PCA Tribunal. Thus, the Court concluded that the PCA Tribunal lacked jurisdiction to hear and determine the investors’ claim.

Investor had not exhausted local remedies

To decide this issue, the Court of Appeal considered the difference between ‘jurisdiction’ and ‘admissibility’ in light of legal literature available on this topic. The Court observed that jurisdiction is commonly defined as “the power of the tribunal to hear a case”, whereas admissibility refers to “whether it is appropriate for the tribunal to hear it”.  Further, a decision of the tribunal in respect of jurisdiction is reviewable by the supervisory courts at the seat of the arbitration whereas a decision of the tribunal on admissibility is not reviewable. Accordingly, given the express inclusion of the exhaustion of local remedies as a pre-condition for the SADC Member State’s consent to arbitration under Article 28(1) of Annex 1, the Court held that any failure on the part of the investor to exhaust their local remedies should be taken to be an issue that concerns the jurisdiction of the PCA Tribunal and it thus fell within the court’s purview.

In view thereof, the Court held that there may be a reasonably available and effective remedy in the way of an Aquilian action (a claim in the law of delict for pure economic loss resulting from the wrongful conduct of the State) and this too would have foreclosed the claim of the investor. If so, the investors’ failure to exhaust its local remedies would have been a bar to the PCA Tribunal’s assertion of jurisdiction under Article 28(1) of Annex 1, warranting a dismissal of this appeal in any event.

My Comments

The instant case is largely decided on the peculiar facts and circumstances of the investor-state dispute and reflects the Singaporean Court’s pro-arbitration stance and readiness in reviewing investor-state awards in Singapore seated arbitrations.

A similar case was decided by the Court of Appeal of Singapore in Sanum Investments Ltd v Government of the Lao People’s Democratic Republic [2016] SGCA 57. In that case, disputes arose between the investor and the State which culminated in investor commencing arbitral proceedings against the State pursuant to a Bilateral Investment Treaty (‘BIT’). The investor alleged, among other things, that the State had deprived it of the benefits to be derived from its capital investment through the imposition of unfair and discriminatory taxes. The arbitral tribunal ruled that it had jurisdiction to arbitrate the expropriation claims. Dissatisfied, the State brought proceedings before the High Court of Singapore challenging the tribunal’s ruling on jurisdiction under Section 10(3)(a) of IAA.

The High Court decided two questions – (a) whether the BIT was applicable to State; and (b) whether the subject-matter of the dispute fell within the dispute resolution clause of the BIT. The High Court answered both questions in the negative, thereby concluding that the tribunal did not have jurisdiction in the arbitration and allowed the State’s appeal against the tribunal’s ruling on jurisdiction. In appeal, the Court of Appeal overturned the decision of the High Court holding that BIT does apply to the State and the tribunal has subject-matter jurisdiction over the claims brought by the investor.

Sanum cemented Singapore’s position as a preferable choice for investor-state disputes. In this case, the Court of Appeal applied principles of public international law and treaty interpretation which paved the way for careful examination of such awards by the Singaporean courts in deciding cases of like nature including the case in hand. This case demonstrates the competence of Singaporean Courts to deal with issues concerning public international law and investment arbitration and will be cited with Sanum as a landmark case for future investment arbitrations seated in Singapore.

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