China: First Investment Arbitration Award
The People's Republic of China (China) has only been party to two investment treaty arbitrations, according to public records. Both were commenced under the ICSID Convention. The first arbitration, Ekran Berhad v People's Republic of China (ICSID Case No. ARB/11/15) was brought by a Malaysian investor. It was quickly suspended and eventually settled. The second arbitration, Ansung
Housing Co., Ltd. v People's Republic of China (ICSID Case No. ARB/14/25), was commenced by Ansung Housing Co. Ltd (Ansung), a South Korean investor. It has been dismissed by an ICSID Tribunal in its early stages on the basis that the claim was brought out of time.
The Ansung award provides useful guidance on when an arbitral tribunal can dismiss an investor claim on a summary basis for being "manifestly without merit", how limitation periods under investment treaties work, and the scope of "most favoured nation" clauses. Perhaps more importantly, the award, the first investment treaty award involving China, and the proceedings themselves, also provide insight into how China may approach future investment arbitration claims.
Background to the claim
Ansung commenced a claim against China under the Agreement between the Government of the Republic of Korea and the Government of the People's Republic of China on the Promotion and Protection of Investments that entered into force on 1 December 2007 (China-Korea BIT).
Ansung's claim arose from its investment in the development and operation of a golf country club resort in the Yancheng-Shi district. Ansung planned to build a 27 hole golf course, clubhouse and luxury condominiums. In December 2006, Ansung entered into an investment agreement with the Communist Party of the Sheyang Habror Industrial Zone Administration Committee (Committee). Ansung received approval to commence construction of the first phase of the project, which included an 18 hole golf course, and was informed that it would then be granted further land rights to build a 9 hole golf course in the second phase. Ansung took a loan from the Committee in 2009 and started construction.
Ansung faced problems during the construction, including the development of another golf course nearby. In November 2010, Ansung finished construction of the 18 hole golf course. Ansung repeatedly requested the Committee to provide the land for the second phase, but there were substantial delays. The second phase was a necessary part of the development to make it commercially viable. These delays led to the project becoming commercially unviable, resulting in Ansung being unable to repay the loan to the Committee. Eventually, Ansung had no choice but to sell the golf course to a Chinese investor at a loss, which it did in December 2011.
Tribunal's award - limitation period
The Tribunal consisted of Dr Michael Pryles (appointed by the investor), Professor Albert Jan van den Berg (appointed by China) and Professor Lucy Reed as the President (appointed by the Chairman of the Administrative Council).
On 9 March 2017, the Tribunal issued its award dismissing Ansung's claim under Article 41(5) of the ICSID Arbitration Rules. Article 41(5) provides that a claim may be dismissed by the Tribunal on the basis that it is "manifestly without legal merit" if such an objection is raised by one of the parties (in practice, this is usually the State). The Tribunal must give "the parties an opportunity to present their observations on the objection" and then issue a decision on the objection. The Tribunal issued its decision following a short oral hearing.
In this case, China raised the Article 41(5) objection on the basis that Ansung's claim was out of time pursuant to the terms of the China-Korea BIT.
Ansung argued its claim was not time barred; and, even if it was time barred, the three year limitation period should not apply. Ansung argued that the MFN clause in Article 3 of the China-Korea BIT meant that more favourable provisions in other BITs entered into by China should apply to Korean investors, such as Ansung. As other China BITs did not impose a three year limitation, Ansung should not be subject to such a restriction.
The Tribunal upheld China's objections. The Tribunal found that the claim may be "manifestly without legal merit" if the Tribunal did not have temporal jurisdiction due to the existence of a limitation period. In this case, the Tribunal found that the claim was time barred.
Article 9(7) provided that a claim could not be brought if it was more than 3 years after the date on which "the investor first acquired, or should have first acquired, the knowledge that the investor had incurred loss or damage". The Tribunal emphasised that the limitation period started on the "first" date on which the investor knew there was loss or damage, even if there was a continuing breach. The investor need only be aware that loss or damage has or may have occurred. The investor need not require full knowledge of the precise loss or damage in order to bring a claim.
The Tribunal found that Ansung first had knowledge that it had incurred loss or damage before October 2011, possibly even earlier by June 2011. In any event, Ansung first had knowledge prior to the sale of the business in December 2011. This date was when the loss was finalized or liquidated.
The Tribunal also found that the effect of Article 9(7) was that the investor must commence the arbitration by depositing a request for arbitration with ICSID prior to the expiry of the limitation period. Providing the Respondent State with a written notice of intent to submit the dispute to ICSID was not sufficient. Also, the date of registration of the request for arbitration was not the appropriate step for the purposes of Article 9(7).
Tribunal's award - MFN clause
The Tribunal also refused Ansung's arguments that the limitation period did not apply due to the MFN clause in Article 3(3) of the China-Korea BIT. Ansung had argued that the limitation period in Article 9(7) was less favourable to Korean investors and that Korean investors were entitled to the same protection as received by other foreign investors under other BITs with China. This protection extended to dispute settlement procedures.
Focusing on the wording of the MFN clause, the Tribunal found that it did not extend MFN treatment to China's consent to arbitrate nor to the limitation period. As a result, the limitation period in Article 9(7) applied.
Even though the claims in this ICSID arbitration were dismissed in its early stages, there are some interesting points to note coming out of these proceedings.
The scope of any time-bar in any specific investment treaty will always turn on its precise wording. However, the Ansung award suggests that the clear wording of these provisions will often be given full effect and can form the basis of any early dismissal where the relevant arbitration rules permit this for claims which are "manifestly without merit". Indeed, the guidance on early dismissal of claims which are "manifestly without merit" may also extend beyond the interpretation of the ICSID rules; for example, the SCC commercial arbitration and SIAC commercial arbitration and investment arbitration rules all contain similar provisions allowing for the early dismissal of unmeritorious claims.
The Award also suggests that MFN provisions are unlikely to provide a way to escape limitation periods (although, again, this will always turn on the precise wording of the provision in question).
Further, the proceedings give some insight into how China may approach future investment arbitrations. China fully engaged in the arbitration process. China appointed well known and respected arbitrators and engaged investment arbitration experts as well as external local lawyers to assist the government in responding to the claim. China also agreed at the outset for the Award to be made public.
How can I find out more?
For those that want to learn more, Baker McKenzie is holding its Investment Arbitration in Asia Roadshow at Baker McKenzie Wong & Leow offices in Singapore on 25 May 2017. The Roadshow comprises a seminar covering investment arbitration basics, and a panel discussion, with leading arbitration partners from across the region and globally, looking at regional trends, opportunities and challenges for foreign investment in Asia, particularly with respect to China, India and Indonesia.
If you are interested in the Ansung award, investment into China, or the upcoming Roadshow, please contact Rian Matthews, Jo Delaney or Richard Allen, or your usual Baker McKenzie contact.