Landmark Singapore judgment on Chinese bilateral investment treaties

In a closely-watched landmark judgment, the Singapore Court of Appeal has allowed a Macanese investor to proceed with expropriation claims against the Lao Government under a 1993 People’s Republic of China-Laos bilateral investment treaty (PRC-Laos BIT). In Sanum Investments Ltd v Government of the Lao People’s Democratic Republic [2016] 5 SLR 536, the Court of Appeal unanimously upheld the arbitral tribunal’s decision on jurisdiction, finding that the PRC-Laos BIT applies to Macau notwithstanding that Macau was not under PRC sovereignty when the treaty was entered into.

From 2007, Sanum (a Macanese investor) began investing in the gaming and hospitality industry in Laos through a joint venture with a Laotian entity. Disputes later arose between the Lao Government and Sanum which culminated in Sanum starting arbitration against the Lao Government in 2012 pursuant to the People’s Republic of China-Laos Bilateral Investment Treaty which entered into force from June 1, 1993 (PRC-Laos BIT). The PRC-Laos BIT is silent on its applicability to Macau which, as of 1993, was under the administrative control and sovereignty of Portugal. Following the handover in 1999, the PRC resumed sovereignty over Macau and established it as a Special Administrative Region. Although not an issue in this case, the PRC-Laos BIT is also silent on its applicability to Hong Kong.

Among other claims, Sanum alleged that the Lao Government had deprived it of the benefits to be derived from Sanum’s investments through the imposition of unfair and discriminatory taxes. Sanum’s expropriation claim was brought under Article 8(3) of the PRC-Laos BIT, which provides that “if a dispute involving the amount of compensation for expropriation cannot be settled through negotiation within six months as specified in paragraph 1 of [Article 8]”, the dispute “may be submitted at the request of either party to an ad hoc arbitral tribunal. The provisions of this paragraph shall not apply if the investor concerned has resorted to the procedure specified in paragraph 2 of this Article [i.e. Laotian courts]”.

Before the tribunal, the Lao Government raised two jurisdictional objections

• The PRC-Laos BIT did not extend to Macau.
• Because Sanum  sought both a determination as to (i) whether an expropriation had occurred; and (ii) the amount of compensation therefore falling due, Sanum’s claim was not arbitrable as it was beyond the permitted subject matter prescribed under Article 8(3) of the PRC-Laos BIT.

The tribunal, which designated Singapore as the seat of arbitration in consultation with the parties, found that it had jurisdiction to hear the claim because (i) the PRC-Laos BIT applies to Macau, and (ii) the subject matter of Sanum’s claim fell within Article 8(3) of the PRC-Laos BIT.

Applying the Moving Treaty Frontiers Rule (explained below), the tribunal found that there was nothing in the text of the PRC-Laos BIT and on the facts that otherwise established and thus displaced the presumption that the PRC-Laos BIT applies to Macau. Reading Article 8(3) in context, the tribunal also concluded that Sanum’s expropriation claims (i.e. (i) whether an expropriation had occurred; and (ii) the amount of compensation therefore falling due) fell within Article 8(3) as a narrow interpretation (i.e. that only disputes involving the amount of compensation for expropriation would be arbitrable) would leave Article 8(3) without effect.

The Lao Government challenged the tribunal’s jurisdiction in an application under s 10(3) of the International Arbitration Act (Cap. 143A, 2002 Rev Ed) (IAA) before the Singapore High Court. Where Singapore is the seat of arbitration, Singapore courts are obliged under s 10(3) of the IAA to conduct a de novo review of a tribunal’s jurisdiction in deciding any jurisdictional challenge – in this respect, there is no difference in the treatment of jurisdictional awards in commercial arbitration and investment treaty arbitration.

The High Court admitted two diplomatic communications (Notes Verbales), both post-dating the Award, which the Lao Government introduced as new evidence to show that both the PRC and Laos considered that the PRC-Laos BIT did not apply to Macau (2014 Notes Verbales) and held that the tribunal had no jurisdiction.

Sanum appealed against the High Court’s decision on jurisdiction and Laos sought to admit two further Notes Verbales to confirm the authenticity of the prior 2014 Notes Verbales (which was disputed in the lower court).

In a carefully finessed judgment, which examined many investment treaty cases and academic writings and demonstrated an understanding of diplomacy, the five-member Court of Appeal held that the PRC-Laos BIT applied to Macau and that Sanum’s claim fell within Article 8(3) of the PRC-Laos BIT. In addition to the parties’ respective expert witness reports, the Court of Appeal was assisted by two court-appointed amici curiae well-versed in public international law.

Two international law principles formed the lynchpins of the Court of Appeal judgment with respect to why the PRC-Laos BIT applied to Macau

• The Moving Treaty Frontiers Rule (MTF Rule) under Article 15 of the Vienna Convention on Succession of States in respect of Treaties (VCST) read with Article 29 of the Vienna Convention of the Law of Treaties (VCLT) establish a customary international law rule that presumptively provides for the automatic extension of a treaty to a territory as and when it becomes part of that state.
• The “critical date” doctrine, an evidentiary rule under public international law that excludes evidence that is generated after a certain “critical date” beyond which the parties’ actions cannot impact on the dispute.

The High Court had glossed over the critical date doctrine and incorrectly relied on Article 31(3)(a) VCLT to find that, on the basis of the 2014 Notes Verbales, there was a subsequent agreement between PRC and Laos that the PRC-Laos BIT did not apply to Macau.

In the Court of Appeal’s view, the critical date crystallized on August 14, 2012 (Critical Date), the date on which Sanum commenced the arbitration. The Court of Appeal noted that states may by agreement elect to derogate inter se from customary international law when entering into a treaty, but held on the facts that there was insufficient pre-Critical Date evidence to find that it had been otherwise established that the MTF Rule would not apply to the BIT.

The Court of Appeal held that the 2014 Notes Verbales are post-Critical Date evidence adduced to contradict the pre-Critical Date position that the PRC-Laos BIT applies to Macau. The 2014 Notes Verbales rely on the PRC’s internal legislation concerning Macau which, under Article 27 VCLT, cannot be invoked to justify non-performance of a treaty. In relying on the MTF Rule and critical date doctrine to exclude the 2014 Notes Verbales, the Court of Appeal confined its decision to the facts and elegantly left open the possibility that the PRC and Laos may enter into an express agreement to modify the PRC-Laos BIT whilst ensuring that Sanum could pursue its claims against Laos.

The Court of Appeal then applied a purposive interpretation to the fork-in-the-road provision in Article 8(3) of the PRC-Laos BIT by considering the context of the BIT and held that the tribunal had subject-matter jurisdiction over Sanum’s claims.

The significance of the Court of Appeal’s judgment can be seen in the swift response of the PRC Ministry of Foreign Affairs, about a month after the Court of Appeal rendered its judgment, criticizing the decision and reiterating that PRC treaties do not apply to Macau or Hong Kong. The judgment could have significant ramifications given that the PRC is a party to some 120 BITs. It remains to be seen if the Court of Appeal judgment will be relied upon in future investor-state disputes involving Macanese or Hong Kong foreign direct investment under other PRC BITs. It may be that the PRC will seek to pre-empt the issue by entering into express agreements with the respective states irrefutably confirming that PRC treaties do not apply to Hong Kong and Macau.