In its highly anticipated first decision concerning an investor-state arbitration, the Singapore Court of Appeal has held in Sanum Investments v Government of the Lao People’s Democratic Republic (2016) that a 1993 bilateral investment treaty (BIT) between the People’s Republic of China (PRC) and Laos applies to Macau in the wake of the former Portuguese territory’s handover to the PRC in 1999.
In 2012, a Macau-based investor, Sanum Investments, commenced United Nations Commission on International Trade Law (UNCITRAL) arbitration proceedings against Laos, bringing claims for expropriation of gaming investments under the PRC-Laos BIT. Following consultation with the parties, the tribunal designated Singapore as the place of arbitration.
After the tribunal ruled that it had jurisdiction to determine Sanum’s expropriation claims, Laos filed an appeal to the Singapore High Court and produced notes verbales exchanged in 2014 (after the tribunal’s ruling) between the Laotian Ministry of Foreign Affairs and the PRC Embassy in the Laotian capital, Vientiane, which stated that the PRC-Laos BIT was not applicable to Macau. Accepting the notes verbales into evidence, the High Court concluded that the tribunal lacked jurisdiction over Sanum’s claims. When Sanum appealed, Laos produced further notes verbales sent in 2015, by which the PRC Ministry of Foreign Affairs confirmed the authenticity of the note verbale from the PRC Embassy.
In September 2016, the Court of Appeal – sitting as a five-judge bench – restored the tribunal’s ruling, holding that the PRC-Laos BIT did apply to Macau under the rules of state succession and, further, that the tribunal had subject-matter jurisdiction over Sanum’s expropriation claims on a purposive interpretation of article 8(3) of the PRC-Laos BIT.
MOVING TREATY FRONTIERS RULE
The court’s decision essentially turned on the moving treaty frontiers rule in customary international law, codified in the Vienna Convention on the Law of Treaties and the Vienna Convention on the Succession of States in respect of Treaties. The rule provides presumptively that a treaty is binding in respect of the entire territory of a state, extending by default to any territory when it becomes part of that state.
Thus, the PRC-Laos BIT would automatically apply to Macau upon restoration of Chinese sovereignty in 1999, unless Laos could prove that it was not intended to apply to Macau. The court found that no such intention appeared from the PRC-Laos BIT, since the PRC and Laos did not exclude Macau from its scope at the time it was concluded in 1993, even though the handover of Macau was foreshadowed by the 1987 PRC-Portugal Joint Declaration. As the PRC and Laos must be taken to have been aware of the moving treaty frontiers rule, their silence favoured the presumption that the PRC-Laos BIT would apply to Macau.
The court went on to consider whether it was “otherwise established” that the PRC-Laos BIT did not apply to Macau by turning to the evidence raised by Laos, including the 1987 PRC-Portugal Joint Declaration, the purported analogy with Hong Kong, publications by the UN Secretariat and the World Trade Organization (which the court declined to rely on), and the notes verbales.
ONE COUNTRY, TWO SYSTEMS
Although Laos pointed to the 1987 PRC-Portugal Joint Declaration, which established a “one country, two systems” regime over Macau, the court highlighted that the Joint Declaration was a bilateral arrangement that could not give non-contracting states, such as Laos, any rights or obligations under international law. Moreover, the Joint Declaration only concerned the PRC’s constitutional arrangements with regard to Macau. Given the principle that states may not rely on their internal laws to escape their treaty obligations, it would not have been open to the PRC – let alone Laos – to rely on the PRC’s domestic legal framework to avoid arbitration with an investor.
The court also noted that there was a dearth of evidence as to whether PRC treaties became applicable to Hong Kong after the handover from the UK in 1997. In any event, the court doubted if Hong Kong could be a “true analogue” for Macau.
Of particular interest is the court’s decision not to place any evidentiary weight on the 2014 and 2015 notes verbales produced by Laos, which stated the position that the PRC-Laos BIT did not apply to Macau. Referring to the “critical date” doctrine in international law, the court held that a party could not rely on self-serving evidence procured after the commencement of the arbitration to improve its position in the arbitration.
Despite Laos’ contention that the notes verbales merely “confirmed” the parties’ intention to exclude Macau from the PRC-Laos BIT all along, the court found that the notes verbales were being adduced to contradict the pre-critical date position (i.e., the PRC-Laos BIT applied to Macau by operation of the moving treaty frontiers rule).
While the court recognised that on the face of the notes verbales, the position taken was that the PRC-Laos BIT was not applicable to Macau, it rejected any suggestion that the notes verbales evidenced a “subsequent agreement” or “subsequent practice” between the PRC and Laos. Highlighting concerns of fairness and due process, the court held that it would be “impermissible” to give effect to the notes verbales, thereby granting a retroactive amendment of the PRC-Laos BIT to the detriment of a third party investor who has already brought his claim in arbitration.
To address the question of whether Sanum’s expropriation claims were covered by article 8(3) of the PRC-Laos BIT, which permitted arbitration of disputes “involving the amount of compensation for expropriation”, the court observed that the PRC-Laos BIT contained a “fork-in-the-road” clause that precluded an investor from bringing any aspect of an expropriation claim to arbitration once the claim was referred to the national court.
In that context, the court rejected Laos’ interpretation that article 8(3) permitted recourse to arbitration where compensation was the only issue in dispute. The court was mindful that cases of direct expropriation, with only the issue of compensation in dispute, were becoming increasingly rare, and host states could simply deny that they had engaged in expropriatory acts.
As a result, such a narrow interpretation of article 8(3) would mean that the investor could never actually have access to arbitration, offending the effet utile (effective interpretation) principle. Consistent with the PRC-Laos BIT’s objective of protecting investments, the court preferred to interpret article 8(3) purposively, such that any claim including a dispute over the amount of compensation – as in Sanum’s case – could be arbitrated.
Given the prominence generally accorded to Singapore jurisprudence on international arbitration, and the novelty of the issues involved in this case, one can expect the Court of Appeal’s decision to be cited and relied upon in future cases engaging similar issues.
In-house counsel advising on investor rights in situations where the host or home state has undergone a change of territory should be familiar with the operation of the moving treaty frontiers rule. For example, Macanese and possibly Hong Kong investors may potentially be able to enjoy the benefits and protections accorded under the PRC’s extensive BIT network.
This decision is also a timely affirmation of the pro-arbitration stance of the Singapore courts and is likely to boost the attractiveness of Singapore as a chosen seat in international arbitration, including in investment arbitration cases.
ALVIN YEO is chairman and senior partner at WongPartnership in Singapore. Co-author KOH SWEE YEN is a partner at the firm.