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    04:45 PM Kevin Elbert (Associate, OC Queen Street LLC)

    Not So Different After All: Sanum Investments Ltd v Government of the Lao People’s Democractic Republic [2016] SGCA 57

        

    Sanum Investments Ltd v Government of the Lao People’s Democractic Republic [2016] SGCA 57 (“Sanum CA”) is the first dispute brought pursuant to a bilateral investment treaty (“BIT”) to have ever reached the Singapore court. The Court of Appeal decision elucidates that, generally, the review of jurisdictional awards under investor-state dispute settlement (“ISDS”) is not significantly distinct from those under international commercial arbitration (“ICA”) – they are not so different after all.

    Background

    In 1987, the People’s Republic of China (“PRC”) and Portugal signed a joint declaration stating that the PRC would resume the exercise of sovereignty over Macau (then under the sovereignty of Portugal) with effect from 20 December 1999 (the “Joint Declaration”).

    Subsequently on 31 January 1993, the PRC and the Lao People’s Democratic Republic (“Laos”) (collectively, the “Contracting States”) concluded a BIT (the “PRC-Laos BIT”). The PRC-Laos BIT, however, does not expressly provide if it would apply to Macau after the handover.

    In 2007, Sanum Investments Ltd (“Sanum”), a Macanese entity, began investing in Laos. Thereafter in 2012, Sanum initiated arbitral proceedings under the PRC-Laos BIT alleging an act of expropriation in violation of the BIT.

    Before an arbitral tribunal constituted under the PRC-Laos BIT (the “Tribunal”), the Lao Government raised preliminary objection to the Tribunal’s jurisdiction on two grounds: First, the PRC-Laos BIT does not extend to protect a Macanese investor; and second, the dispute falls outside the Tribunal’s subject-matter jurisdiction. The Tribunal (composed of Andres Rigo Sureda (chair), Bernard Hanotiau and Brigitte Stern) rejected these arguments and concluded that it has jurisdiction to hear the claim.

    The Lao Government then brought an application under s 10(3)(a) of the Singapore International Arbitration Act (the “IAA”) to challenge the Tribunal’s award on jurisdiction. The Lao Government also applied to have two Notes Verbales (the “2014 NVs”) be admitted as evidence: First, an NV by the Laotian Ministry of Foreign Affairs to the PRC Embassy in Vientiane expressing Laos’s view that the PRC-Laos BIT does not extend to Macau; and second, a reply by the PRC Embassy stating its concurrence with Laos’s view.

    At the High Court (Government of the Lao People’s Democratic Republic v Sanum Investments Ltd [2015] SGHC 15 (“Sanum HC”)), Edmund Leow JC substantively held that even though the PRC-Laos BIT applied to Macau, the subject-matter of the dispute falls outside the Tribunal’s jurisdiction as provided under the PRC-Laos BIT.

    The Court of Appeal Decision

    Rarely, a five-judge panel was constituted to hear the appeal; and even rarer, the Court of Appeal appointed two amici curiae to assist the Court: Mr. J Christopher Thomas, Q.C. from National University of Singapore, and Professor Locknie Hsu from Singapore Management University. The Court of Appeal unanimously reversed the High Court’s decision and held that the Tribunal had jurisdiction to adjudicate the dispute.

    As a preliminary issue, the Court of Appeal held that the interpretation and application of the PRC-Laos BIT are matters entirely within the scope of the Singapore court’s competence – in fact, the Singapore court was “obliged” to do so because parties have designated Singapore as the seat of the arbitration. The consequence flowing therefrom is that the arbitration is governed under the IAA, which “requires” the Singapore court to consider issues such as the Tribunal’s jurisdiction. This is so notwithstanding Singapore is not a party to the BIT.

    The Applicable Standard of Review

    The Court of Appeal rejected Sanum’s argument that the court should accord deference to the Tribunal’s finding, affirming its earlier holding in PT First Media TBK v Astro Nusantara International BV [2014] 1 SLR 372 (“PT First Media”) that a review of jurisdiction should be undertaken de novo. The Court commented that the tribunal’s reasoning may well be persuasive depending on the “cogency and quality of their reasoning”, but the court is not bound to accept or consider the tribunal’s findings on the matter.

    Agreeing with Prakash J’s observation in AQZ v ARA [2015] 2 SLR 972 (“AQZ”), the Court clarified that a de novo hearing does not mean that whatever that transpired before the Tribunal should be disregarded – it simply means that the court is at liberty to consider the material before it, unfettered by any principle limiting its fact-finding abilities.

    The Applicability of the PRC-Laos BIT to Macau

    The Court of Appeal identified two sets of principles of international law relevant to the dispute. First is the set of principles on treaty interpretation under Art 31 of the Vienna Convention on the Law of Treaties (“VCLT”).

    Second is the principles of state succession in respect of treaties governed by Art 15 of the Vienna Convention on Succession of States in respect of Treaties (“VCST”) and Art 29 of the VCLT – both of which reflect the customary international law (“CIL”) rule known as the “moving treaty frontier” rule (the “MTF Rule”). Simply put, the MTF Rule provides a presumption that a treaty is automatically extended to a new territory of a State as and when the new territory becomes a part of that State, unless an exception under Art 15 of the VCST or Article 29 of the VCLT was established. This means that on the facts, the PRC-Laos BIT will be presumed to automatically apply to Macau upon the handover to the Chinese sovereignty with effect from 20 December 1999 unless an exception was established.

    The Court held that the only applicable exceptions are those set out in Art 29 of the VCLT: either (a) there “appears” an intention from the BIT that it does not to apply to Macau, or (b) the evidence must “otherwise establish” that the BIT is not meant to apply to Macau.

    On the first exception, the Court noted that the BIT contains neither an express provision stating it applies to Macau, nor one excluding its application to Macau. To the contrary, the Court pointed out that there are two facts supporting the applicability of the PRC-Laos BIT to Macau: First, the fact that the Contracting States did not exclude the applicability of the BIT to Macau is a factor pointing towards the applicability of the BIT to Macau; and second, in any event, the Contracting States did not include any provision expressly excluding the applicability of the BIT to Macau even though the structure of the BIT allows for a review to be conducted after the handover. The Contracting States’ decision to remain silent on the applicability of the BIT to Macau would favour the conclusion that the presumption under the MTF Rule had not been displaced.

    On the second exception, the Court held that based on the evidence presented, the second exception has not been established. As a preliminary note, the Court accepted the amici’s view that there is no established standard of proof that must be met before “different intention” can be established under Art 29 of the VCLT. The Court of Appeal then held that on balance, it is appropriate to apply the standard of satisfaction on a balance of probabilities.

    The Court of Appeal proceeded to examine the evidence presented:

    •   The 1987 Joint Declaration

    Art VIII of the 1987 Joint Declaration recognises that Macau would retain a measure of international personality that it could develop relations and conclude agreements with other States in limited areas. In Sanum HC, Leow JC held that the Joint Declaration suggests that a positive act would be required in order to extend the PRC-Laos BIT to Macau, and the absence of that positive act meant that the PRC-Laos BIT did not extend to Macau.

    The Court of Appeal, disagreeing with Leow JC, held that the Joint Declaration is a bilateral document between PRC and Portugal, which would not ordinarily create rights or obligations for other States, including Laos. Hence, the Joint Declaration could not override the MTF Rules (being CIL Rules that bind all States) as being automatically applied to the PRC-Laos BIT.

    •   The PRC’s Experience With Respect To Hong Kong

    The Court of Appeal held that there was insufficient evidence establishing that the PRC-Hong Kong situation is analogous to the present case.

    •   The 1999 United Nation Secretary-General Note

    The Court of Appeal held that the Note (which states that the PRC would notify the UN whether international instruments not otherwise listed on the note would apply to Macau) bears no weight at all as it only applies to multilateral treaties for which the United Nation Secretary-General acts as depository, and not bilateral treaties.

    •   The 2001 World Trade Organization Policy Report

    The Court of Appeal held that Leow JC’s reliance on the Report (which states that other than agreements entered into with Portugal, Macau has no other bilateral investment treaties or bilateral tax treaties) was misplaced because the Report itself, and other dispute resolution tribunals, including those established under the auspices of the World Trade Organization, have stated that such reports should not be relied upon.

    •   The 2014 NVs

    On the admissibility of the 2014 NVs, the Court of Appeal held that even though the test under Ladd v Marshall [1954] 1 WLR 1489  as laid down in Lassiter Ann Masters v To Keng Lam [2004] 2 SLR(R) 392 is helpful (i.e. the principles of relevance, reason for prior non-admission and credibility), in the present case, the Court ought to take into account the applicable principle of international law, such as the “critical date” doctrine, because the dispute engages question of public international law. The critical date doctrine provides that self-serving evidence, which comes into being after the “critical date” and is intended by the party putting it forward to improve its position bears little weight, if any.

    The Court then held that the 2014 NVs should not be given any weight since it only came into existence after the critical date (i.e. the commencement of arbitration) and was intended to contradict the presumed position as per the MTF Rule before the critical date.

    Critically, in concluding its finding, the Court recognised that this conclusion might appear counter-intuitive because the Contracting States posited the opposite view that the PRC-Laos BIT did not extend to Macau. In response, the Court pointed out that this conclusion has to be seen in the context of international law framework: that the MTF Rule being a CIL Rule can only be derogated from if the parties expressly agree. However, there is nothing in the evidence to suggest that the Contracting States shared a common understanding to displace the MTF Rule – the 1987 Joint Declaration which underlies the 2014 NVs concerns the PRC’s domestic legal framework, and hence should not be relied upon to determine if the MTF Rule had been displaced. Further, it may be open to the Contracting Parties to enter into an express agreement today to modify the scope of the BIT, but this does not apply retroactively.

    On the Tribunal’s Subject-Matter Jurisdiction

    Art 8(3) of the PRC-Laos BIT provides that “if a dispute involving the amount of compensation for expropriation” cannot be settled through negotiation, the dispute may then be referred to arbitration [emphasis added]. Art 8(3) of the BIT also provides for a fork-in-the-road provision, i.e. where the investor has to elect whether to bring the dispute to the host State’s national court or arbitration.

    Essentially, the main controversy is whether the present dispute falls under Art 8(3) of the PRC-Laos BIT being a “dispute involving the amount of compensation for expropriation”. Sanum argued that a broad interpretation should be taken such that any claim—including a dispute over the amount of compensation—may be submitted to arbitration. On the other hand, the Lao Government argued for a restrictive interpretation that recourse to arbitration may be had only when the only issue in dispute is the amount of compensation for expropriation.

    The Court of Appeal held that a proper interpretation of Art 8(3) of the BIT applying the CIL rule of treaty interpretation under Art 31 of the VCLT shows that Sanum’s broad interpretation should be adopted. This is because the mechanism of the PRC-Laos BIT does not allow for the issues of liability and quantum to be segregated when adjudicating a claim of expropriation. This means that one cannot decide on the issue of expropriation without first deciding whether effective and appropriate compensation has been paid by the Contracting State. Hence, if recourse to arbitration is limited to the issue of quantum, and the issue of lawfulness of the expropriation had to be referred to national court, this would render Art 8(3) wholly ineffective as the national court would already have to deal with the issue of quantum in the course of deciding the lawfulness of the expropriation. This would offend the principle of effet utile (principle of effective interpretation).

    Further, the fork-in-the-road provision means that if any dispute is brought to the national court, the claimant will no longer be entitled to refer any aspect to that dispute to arbitration.

    Following the adoption of the broad interpretation, the Court of Appeal held that the Tribunal had subject-matter jurisdiction to adjudicate the dispute.

    Commentary

    This decision is highly anticipated to understand how the Singapore arbitration regime operates in relation to ISDS awards. Four comments follow from a scrutiny of this decision.

    First, this decision confirms that question of law pertaining to international law is justiciable before the Singapore court, and is indeed is argued as a matter of law (as opposed to being proved as facts in the common law system of proving the content of foreign law).  This is rightly so as the determination of the issues is material in the exercise of the court’s supervisory jurisdiction under the IAA. The Court of Appeal even held that that by virtue of the parties’ election of Singapore as the seat of arbitration, the Singapore court is “obliged” to tackle the issue of international law notwithstanding that Singapore is not a party to the BIT. This is in line with the judicial decisions handed down in the UK, the Netherlands and Switzerland.

    That issues of international law are justiciable by a municipal court reflects the primacy of party autonomy. By providing for a non-International Centre for Settlement of Investment Disputes (ICSID) forum, the Contracting States chose to anchor the arbitration process in accordance with municipal arbitral legislation, under which a municipal court might be entitled to review a tribunal’s jurisdiction. Such review process, at least in Singapore, would necessarily entail a de novo review of jurisdictional decision. This has also been agreed by the investor when it accepted the host State’s ‘offer to arbitrate’ (by way of notice of arbitration). In light of the above, States nor investor should dispute the justiciability of such issues before the municipal court.

    The Court’s readiness to tackle the issue of international law coupled with its thorough analysis and expertise of the issue should bolster confidence in Singapore as an attractive seat for investor-state arbitrations. This is especially in light of the highly anticipated release of the Investment Arbitration Rules by the Singapore International Arbitration Centre (the “SIAC”) (the draft Rules was released during the SIAC Congress on 27 May 2016, and can be accessed here:http://www.siac.org.sg/images/stories/articles/rules/IA Rules (rev 20160115).pdf (last accessed: 5 November 2016)).

    Second, in holding that the jurisdiction of investor-state arbitral tribunal is subject to a de novo review, the Court saw no practical distinction between treaty arbitration and commercial arbitration. The standard of review for tribunal’s jurisdiction is therefore uniform in both treaty arbitrations and commercial arbitrations. This is consistent with the fact that both ICA and (non-ICSID) ISDS arbitrations fall within the purview of the IAA as the lex arbitri.

    In the same vein, consistent with ICA cases, Sanum CA might lend support to the view that the same standard of de novo review would similarly be applied in the instances of setting aside and enforcement of (non-ICSID) investor-state arbitral awards in Singapore (see for example, PT First Media, AQZ, and Galsworthy Ltd of the Republic of Liberia v Glory Wealth Shipping Pte Ltd [2011] 1 SLR 727).

    Unfortunately, the Court of Appeal did not take the opportunity to determine the scope of the exercise of de novo review, especially with respect to parties’ rights to adduce new evidence that had not been put before the arbitral tribunal. Case law reflects two conflicting positions in respect of parties’ right to adduce new evidence: on one hand, the Sanum HC decision seems to stand for the position that the criteria under Ladd v Marshall must be satisfied before new evidence can be adduced; on the other hand, AQZ suggests that fresh evidence is admissible as of right.

    In the Singapore Law Blog’s earlier contribution, Darius Chan attempted to reconcile these two cases and suggested that the starting point is that a party has a right to adduce fresh evidence but the court retains control to prevent any abuse of process (citing Central Trading & Exports Ltd v Fioralba Shipping Co [2014] EWHC 2397). In that light, Sanum HC may be understood as suggesting that the court is entitled to consider inter alia the Ladd v Marhshall test for purpose of admissibility. At the same time, in AQZ, Prakash J (as she then was) did not foreclose the possibility of the court retaining residual discretion to allow admission of fresh evidence as of right (Darius Chan, “The scope of ‘de novo’ review of an arbitral tribunal’s jurisdiction”, Singapore Law Blog (8 October 2015) (http://www.singaporelawblog.sg/blog/article/140)). It is suggested that the Court of Appeal’s reasoning is consistent with Chan’s analysis, in its agreement with Prakash J’s observation in AQZ and its emphasis that the question of admissibility must be decided within the framework of international law.

    Third, the Court of Appeal’s clarification on the standard of proof on matters concerning public international law adds clarity to the adjudication process because under the public international law regime, there is no definite level of specificity with respect to standard of proof. As explained by the amici, international law can be viewed as a “common denominator” of the expectations and practices of States of widely varying legal traditions.

    Finally, perhaps the only material difference between the court’s methodology of review in ISDS and ICA is that in the former, the court has to consider and apply the relevant principles of public international law within the framework of domestic legal system in Singapore. As Sanum CA shows, the Singapore court is willing to apply the relevant test and/or principles under international law in place of the pre-existing domestic legal test. For instance, the critical date doctrine was heavily featured in determining the evidential weight of the 2014 NVs, in place of the test of admissibility of evidence under Ladd v Marshall, on the basis that the applicable law with respect to the dispute is public international law.

    Conclusion

    The review of ISDS tribunal’s jurisdictional finding inevitably involves complex and inextricable issues of international relations and international law. As such, decisions by courts and tribunals relating to ISDS are, more often than not, prone to scrutiny and criticism by States or other relevant parties. This case is no different. The PRC Foreign Ministry has recently proclaimed the Court’s finding as “incorrect” – the Foreign Ministry reasoned that under the “one country, two systems” policy and the Basic Laws, as principle, investment agreements concluded between the central government do not apply to the SARs (i.e. Macau and Hong Kong) unless otherwise decided (“Foreign Ministry Spokeperson Hua Chunying’s Regular Press Conference on October 21, 2016”, accessible at: http://www.italaw.com/sites/default/files/case-documents/italaw7687.pdf (last accessed: 5 November 2016)).

    Being the first ISDS award to be reviewed by the Singapore court, this decision has certainly provided a glimpse as to how the Singapore court would treat disputes concerning investor-state arbitration in the future, and how the Singapore arbitration regime operates in relation to investor-state arbitration. 

    * This blog entry may be cited as Kelvin Elbert, “Not So Different After All: Sanum Investments Ltd v Government of the Lao People’s Democractic Republic [2016] SGCA 57” (15 November 2016) (http://www.singaporelawblog.sg/blog/article/172)

    ** A PDF version of this entry may be downloaded here

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