Over two decades since the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID Convention) became effective on China, the country has always been one of the host states that has utilized the largest quantities of foreign investment in the world.
However, only two investment arbitration cases have been filed by foreign investors against China with the International Centre for Settlement of Investment Disputes (ICSID).
In one of these cases, Ansung Housing v China, the arbitral award was issued on 9 March 2017.
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The facts described in the award are as follows: On 12 December 2006, the South Korean company Ansung Housing entered into an investment agreement on a golf course and condominium development project in Sheyang-Xian with the Communist Party of the Sheyang Harbor Industrial Zone Administration Committee (the committee). The project construction was in two phases, each of which would occupy 1,500 mu (100 hectares) of land.
Shortly after the commencement of the first phase of the project, Chinese policies on real estate development changed, the committee could no longer provide the 300 mu of land necessary for the first phase at the price agreed in the investment agreement and Ansung would have to apply for land use rights through a public sale at higher prices. After the completion of the first phase, the committee didn’t provide the additional land necessary for the second phase.
Consequently, in October 2011, Ansung had to sell its assets in the golf business to a Chinese purchaser at a low price. On 7 October 2014, Ansung filed a request for arbitration with the ICSID on the basis of the agreement between the governments of the Republic of Korea and the People’s Republic of China on the Promotion and Protection of Investments (China-Korea BIT or the treaty) that entered into force on 1 December 2007.
On September 15, 2016, before the First Session, China’s representatives filed the respondent’s objection pursuant to ICSID arbitration rule 41(5), contending that Ansung’s claims under the China-Korea BIT manifestly lacked legal merit and should be dismissed. They reasoned that Ansung instituted the ICSID arbitration more than three years after the date on which it first acquired knowledge that it had incurred loss or damage, rendering the claim time-barred under article 9(7) of the China-Korea BIT. The Most-Favoured-Nation Treatment (MFN clause) in the treaty couldn’t save Ansung’s untimely claims.
Ansung’s representatives argued that they had met the prescribed three-year time limit on the claim because it served its notice of intent in two-and-a-half years from the date on which it knew the losses had been incurred. Moreover, regardless of the tribunal’s determination, the China-Korea BIT’s MFN clause also allowed Ansung to take advantage of more favorable treatment in any other BITs concluded by China with respect to the time requirement.
In general, the dispute mainly focuses on the following two legal issues:
- Does the claim that beyond arbitration limitation period constitute “manifestly without legal merit”? China’s representatives alleged that Ansung’s claims were “manifestly without legal merit” based on the following two reasons: (a) the factual background in the claims advanced by Ansung only shall be “incredible, frivolous, vexatious or inaccurate or made in bad faith” instead of “patently frivolous or absurd”; (b) the objection of limitation period.
–Ansung’s representatives argued that the factual background set out in its notice of intent and request for arbitration meets the temporal requirement of article 9(7) of the China-Korea BIT at a prima facie level.
- Does the MFN clause apply to the question of time limitation? The text of article 9(7) of the China-Korea BIT bears repeating: “An investor may not make a claim pursuant to paragraph 3 of this article if more than three years have elapsed from the date on which the investor first acquired, or should have first acquired, the knowledge that the investor had incurred losses or damage.”
–Moreover, article 3 provides: each contracting party shall in its territory accord to investors of the other contracting party – and to their investments and activities associated with such investments by the investors of the other contracting party – treatment no less favourable than that accorded in like circumstances to the investors and investments.
Ansung’s representatives noted that MFN clauses operate to allow investors to import substantive rights from other treaties. Also, even if the three-year period is considered to be procedural rather than substantive, according to the case law in the ICSID, the tribunal is more likely to import the MFN clause.
China’s representatives contended that the wording of article 3 limits MFN treatment to the host state’s territory and covers only “investment and business activities” which is defined as “the expansion, operation, management, maintenance, use, enjoyment, and sale or other disposal of investments”, and does not include dispute settlement.
THE TRIBUNAL’S ANALYSIS
Concerning the first disputed issue, the tribunal accepts the facts pleaded by Ansung’s representatives are not incredible, frivolous, vexatious or inaccurate or made in bad faith. At the same time, the tribunal accepts the preliminary objection advanced by China’s representatives by a decision regarding manifest without legal merit due to a lack of temporal jurisdiction.
With regard to the second disputed issue, the tribunal finds that the wording of the MFN clause shall not be extended to MFN treatment for a state’s consent to arbitrate with investors and, in particular, not to the temporal limitation period for investor-state arbitration in article 9(7) of the China-Korea BIT. So it is unnecessary to give further consideration to additional arguments or previous arbitral decisions on the interpretation of other MFN clauses or treaty practice.
COMMENTS ON THE CASE
The case was triggered by policy changes amid the backdrop of a hot real estate industry in China. Considering the structural reforms on the supply side in industries across China, it is necessary to attach great importance to investment dispute resolution for both the government and investors, protecting their rights and interests in inbound and outbound investments. To sum up, lessons should be learned from this case as follows:
Firstly, targeted studies of proper wording in BITs are necessary. The semantic and systematic interpretation of the application of MFN clauses, the “date on which the investor first acquired, or should have first acquired” and “making a claim” lays great significance on gaining the tribunal’s support on the China representatives’ preliminary objections. Chinese practitioners should pay more attention to the targeted studies of semantic and systematic interpretation of the articles and texts considering the massive quantities of BITs in China.
Secondly, Chinese practitioners should keep a close eye on investment arbitration as well as the prevailing practice and rules, and be capable of cutting litigation exhaustion and maintaining reasonable costs. Treaties related to international investment dispute resolution such as the ICSID Convention, the Convention Establishing the Multilateral Investment Guarantee Agency and the BITs usually do not contain detailed arbitration rules, leaving much more room for arbitration institutions to adopt their own regulations. In the case above, instead of being dragged into prolonged proceedings, China’s representatives successfully argued for dismissal by making use of the preliminary objection clause in the ICSID arbitration rules and stating the objection of “manifestly without legal merit”. Not only is the arbitration cost saved, but also the favorable award is thus assured.
Thirdly, Chinese practitioners need to keep up with jurisprudence and precedents of investment arbitration. Although arbitration institutions such as the ICSID and many other tribunals repeatedly denied the stare decisis in investment arbitration, it is a simple fact that parties and tribunals frequently recourse to the arbitral precedents to support their claims and defences. The persuasive influence of the arbitral precedents shall not be ignored.
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Yang Weidong is an arbitrator of the Beijing Arbitration Commission/Beijing International Arbitration Centre and a partner of Sunshine Law Firm. BAC/BIAC’s case manager Wang Mian also contributed to this article
