An investment treaty arbitration can be costly and time-consuming, and how to enforce the award after years of legal battle is the investors’ biggest concern. If an award is made under the International Centre for Settlement of Investment Disputes (ICSID) Convention, the ICSID has its own mechanism governing the enforcement; if made under other institutional rules or ad hoc rules, the New York Convention may apply.
The recent petition filed by Zhongshan Fucheng Industrial Investment against the Federal Republic of Nigeria before the US District Court for the District of Columbia (DC district court) sheds light on the latter.
FEDERAL COURT JURISDICTION
A petitioner who claims to enforce an investment treaty arbitral award has to establish US federal courts’ jurisdiction over the claim. Two common grounds to dismiss this claim under US law include lack of subject matter jurisdiction and lack of personal jurisdiction.
The US federal courts’ subject matter jurisdiction is mainly based on two pieces of legislation. First, section 203 of the Federal Arbitration Act (FAA) provides US federal district courts with subject matter jurisdiction over actions falling under the New York Convention. Second, the Foreign Sovereign Immunities Act (FSIA) provides an exclusive basis for establishing jurisdiction over a foreign state.
In addition, to establish personal jurisdiction over a foreign state, the FSIA requires service to be made for a claim over which a federal court has subject matter jurisdiction.
In deciding a motion to dismiss on the basis of the FSIA, federal courts’ subject matter and personal jurisdictional inquiries often collapse into the same question – whether any of the exceptions to sovereign immunity set out in the FSIA apply.
Under the FSIA, a foreign state cannot invoke jurisdictional immunity if a foreign arbitral award falls under the New York Convention. Notably, pursuant to the New York Convention’s commercial reservation adopted by the US, an award must arise out of a “commercial” legal relationship, whether contractual or not.
In other words, if an investment treaty award is considered commercial, it falls under the New York Convention in the US, and a foreign host state cannot invoke sovereign immunity. Otherwise, a federal court’s jurisdiction would fall apart.
ZHONGSHAN FUCHENG V NIGERIA
The Zhongshan Fucheng v Nigeria award concerned an investment dispute between a Chinese company and Ogun state, in Nigeria’s southwestern region. On 29 June 2010, Zhongshan Fucheng through its parent company acquired contractual rights to develop a fraction of the Ogun Guangdong Free Trade Zone into the Fucheng Industrial Park.
However, the relationship between Zhongshan Fucheng and Ogun state began to deteriorate in April 2016, resulting in deprivation of both contractual and management rights of the Fucheng Industrial Park. In addition, the employees of Zhongfu International Investment, a local company set up to lay the groundwork, were harassed, intimidated, arrested, physically beaten and detained by the Nigerian police and Ogun state.
Based on the China-Nigeria bilateral investment treaty (BIT), Zhongshan Fucheng initiated a London-based arbitration, bringing five specific claims against Nigeria for breaches of the BIT.
On 26 March 2021, the arbitral tribunal, chaired by Lord Neuberger, the former president of the UK Supreme Court, awarded Zhongshan Fucheng compensation of about USD70 million. It is noteworthy that additional moral damages of USD75,000 were also awarded to Zhongshan Fucheng to appease the Chinese investor’s employees who were mistreated by the Nigerian police.
On 25 January 2022, Zhongshan Fucheng sought to enforce the award against Nigeria before the DC district court. Nigeria moved to dismiss the petition for lack of both subject matter jurisdiction and personal jurisdiction. More specifically, Nigeria argued that the arbitral award made under the China-Nigeria BIT did not fall under the New York Convention because:
- The award basis in the China-Nigeria BIT renders the parties’ legal relationship non-commercial;
- The arbitration record proves that the dispute was non-commercial; and
- The underlying contract between Nigeria and Zhongshan Fucheng is required. As a result, Nigeria was immune under the FSIA.
On (1), Nigeria argued a distinction between “certain direct contractual arrangements between sovereigns and investors, which are subject to the New York Convention, and international treaties, which are not”. In the court’s eye, Nigeria’s argument was “bold” and “novel”, as the Restatement (Third) of Foreign Relations Law only carved out arbitrations of a public international character between states.
On (2), Nigeria asserted that the award was allegedly based on Nigeria’s “sovereign” rather than “commercial” conduct. The court held that the flaw in this argument stemmed from predication on a false dichotomy between sovereign and commercial conduct in the context of the New York Convention.
On (3), Nigeria argued that the award arose neither from a commercial agreement between Zhongshan Fucheng and Nigeria, nor from a contractual or other business relationship between them. The court noted that the FAA provided that a legal relationship need not arise from a contract to be commercial.
As a result, the court found that Nigeria had failed to discharge its burden of persuasion to establish that this arbitral award fell outside the scope of the New York Convention. Nigeria’s motion to dismiss was therefore denied.
TAKEAWAYS FOR INVESTORS
Zhongshan Fucheng’s victories in this investment treaty arbitration, and the US enforcement proceedings, are significant. First, this is the second BIT arbitration case in which the investment dispute was decided in favour of a Chinese investor on its merits. The first one was Tza Yap Shum v Peru in 2007.
Second, it is well known as the very first investment treaty case commenced by a Chinese investor against an African state, which has been an attractive destination for China’s outward foreign direct investment in recent years.
Last but not least, this case has filled a vacuum in Chinese BIT arbitration jurisprudence with respect to seeking overseas compulsory enforcement of investor-state arbitration awards.
The DC district court’s decision denying Nigeria’s motion to dismiss may send a positive signal to Chinese investors who are hesitant about wielding non-ICSID investment arbitrations against foreign host states for treaty breaches. Post-award recovery of the awarded amount is secured by the New York Convention.
Hui Zhong Law Firm
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