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    12:56 PM Tan Xi-en Rachel (Research Assistant at the Centre for International Law and Incoming Practice Trainee at Rajah and Tann LLP) and Professor Lucy Ferguson Reed (Director, Centre for International Law and Professor, NUS Faculty of Law)

    Developing Singaporean Jurisprudence on Reviewing Investor-State Arbitral Awards: Kingdom of Lesotho v Swissbourgh Diamond Mines (Pty) Limited and others [2017] SGHC 195

        

    Introduction

    1                      Kingdom of Lesotho v Swissbourgh Diamond Mines (Pty) Limited and others (“Lesotho v Swissbourgh”) is the first case in which the Singapore High Court (“SGHC”) has set aside the final jurisdiction and merits award of an investor-State arbitral tribunal. The case was brought before the SGHC in Originating Summons No 492 (“OS 492”), in which the plaintiff, the Kingdom of Lesotho (“Lesotho”), successfully sought to set aside the final award issued against it by the arbitral tribunal (“Tribunal”) in an ad hoc arbitration administered by the Permanent Court of Arbitration (“PCA”) and heard in Singapore.  Following an exhaustive de novo review of a panoply of jurisdiction and admissibility issues, the SGHC held that the Tribunal lacked jurisdiction and set aside the entire award.

    2                     Lesotho v Swissbourgh comes on the heels of the well-publicized Singapore Court of Appeal (“SGCA”) decision affirming the positive jurisdictional decision of the arbitral tribunal in another investor-State arbitration; Sanum Investments Limited v the Government of the Lao People’s Democratic Republic [2016] SGCA 57.  Lesotho v Swissbourgh will no doubt attract similar attention, because, in Justice Steven Chong’s words, it “tick[ed] all four boxes of complexity, difficulty, novelty, and precedential value”. Courts, counsel and academics alike – in Singapore and beyond – will learn much from the comprehensive 172-page judgment addressing a multitude of public international law and treaty interpretation questions set against the backdrop of allegedly expropriated diamond mine leases and the dissolution of a special court established under the 1993 South African Development Community Treaty.  

     

    Background

    3                     The plaintiff in OS 492 is Lesotho.  The defendants are a South African businessman and eight associated companies and trusts, who in the 1980s invested in diamond mines in Lesotho.

    4                     The first defendant, Swissbourgh Diamond Mines (Pty) Limited (“Swissbourgh”), obtained five mining leases in 1988 in five regions of Lesotho, including Rampai.  This was two years after Lesotho and South Africa had entered into a large-scale commercial joint venture named the Lesotho Highlands Water Project, which benefited Lesotho with royalties for water transfers and electricity from hydropower stations.

    5                      Despite the leases having being granted by the King of Lesotho and registered, Lesotho subsequently claimed to discover non-compliance with the application process.  Lesotho alleged that the Rampai mining lease was illegal because there had been no consultation with the local chiefs.  Lesotho enacted legislation taking back areas within the Lesotho Highlands Water Project and enacted the Revocation of Specific Mining Leases Order of 1992.  This led to litigation in the Lesotho courts, culminating in a declaration that the Rampai lease was void ab initio. The investors did not pursue litigation over the other four leases because they anticipated the same negative outcome.  After failing to obtain diplomatic protection from South Africa, the investors commenced an action in 2009 before the South African Development Community Tribunal (“SADC Tribunal”), alleging expropriation of their investments in violation of the protections in the SADC Treaty. 

    6                     As events played out, the SADC Tribunal did not hear the claim because it was dissolved following controversy over previous decisions against Zimbabwe.  Importantly - for the purposes of the arbitration that was to follow - Lesotho approved the resolutions dissolving the SADC Tribunal.  

    7                     In 2012, the investors commenced an international arbitration against Lesotho under Article 28(1) of Annex 1 of the 2010 Protocol on Finance and Investment to the 1993 SADC Treaty (“Investment Protocol”).  The investors’ core complaint was Lesotho’s “shuttering” of the SADC Tribunal without providing an alternative means for adjudication. 

    8                     Lesotho disputed the Tribunal’s jurisdiction on various grounds, arguing that (a) the true dispute was the expropriation dispute which predated the entry into force of the Investment Protocol; (b) the defendants did not qualify as “investors” under the Investment Protocol, (c) the right to claim in a particular international forum was not an “investment” under the Investment Protocol, and (d) local remedies had not been exhausted.

    9                     The Tribunal, by a majority, found in favour of the investors in a final award on jurisdiction and merits.  The Tribunal ordered that a new tribunal be established to determine the original SADC claim.  Lesotho then commenced OS 492.

    The SGHC’s Decision in OS 492

    Jurisdiction to review the Tribunal’s decision

    10                   The SGHC first dealt with the objections raised by the investors to its own jurisdiction. The court agreed that it could not hear the case under s10(3) of the International Arbitration Act (“IAA”), because that provision limits review to awards on jurisdiction alone and excludes reviews of awards dealing with both jurisdiction and merits.  However, the SGHC found that it could proceed under Article 34(2)(a)(iii) of the UNCITRAL Model Law read with s3 of the IAA, because it applies where the final award on jurisdiction and merits exceeds the scope of the arbitration agreement. The SGHC detailed why this interpretation of Article 34(2)(a)(iii) is consistent with “authority, principle and policy”. As a matter of principle, the SGCA earlier confirmed that the reviewing court may set aside an award if there was a violation of due process or irregularities in the proceedings.  An award determining a dispute outside the scope of the arbitration agreement falls squarely within Article 34(2)(a)(iii) and cannot be set aside under any other limb of Article 34 of the Model Law.  As a matter of policy, to hold that Article 34(2)(a)(iii) does not apply where no other limb under Article 34(2) can be engaged would allow an arbitral tribunal to immunize its awards against judicial scrutiny by resolving jurisdiction and merits in a single award.  This would mean that such awards could escape review under both s10 of the IAA and Article 34 of the Model Law.

    11                   Having established its own jurisdiction, the SGHC proceeded to review Lesotho’s suite of jurisdictional defences in relation to the arbitral award.  It found the Tribunal correct in finding jurisdiction ratione temporis, but incorrect in finding jurisdiction ratione materiae and incorrect in its reasons for lacking jurisdiction ratione personae.

    Jurisdiction Ratione Temporis

    12                   The key question in determining jurisdiction ratione temporis turned on whether the true dispute before the Tribunal was the shuttering of the SADC Tribunal or the alleged expropriation of the mining leases.  The SGHC relied on ATA v Jordan and Chevron v Ecuador in setting out three considerations to separate a pre-existing dispute from the actual dispute submitted to arbitration; whether the disputes (a) were the same; (b) stemmed from the same cause; and (c) related to the same conduct. 

    13                   On the facts, the SGHC found that (a) Lesotho’s role in shutting down the SADC Tribunal was distinct from its actions in relation to the expropriation dispute, and (b) that the expropriation and the shuttering of the SADC Tribunal were attributable to different Lesotho actors.  Therefore, the Tribunal did possess jurisdiction ratione temporis because the true dispute was the “shuttering dispute”, which arose after the 2010 entry into force of the Investment Protocol.

    Jurisdiction Ratione Materiae

    14                   The characterization of the true dispute as the “shuttering dispute” proved fatal to the investors’ case as the SGHC determined that “a right to hear a claim”, ie, before the SADC Tribunal, could not constitute an “investment” under the Investment Protocol. The SGHC started its analysis of the definition of an “investment” with Article 31 of the 1969 Vienna Convention on the Law of Treaties (“VCLT”). Annex I of the Investment Protocol expressly provides that an “investment” is “the purchase, acquisition, or establishment of productive and portfolio investment assets”, rather than using the familiar broader language of “every kind of asset”. 

    15                   The SGHC then explored whether the secondary right to bring a claim before the SADC Tribunal nonetheless could be construed as part of the “bundle of rights” created by the underlying investment in the mining leases in 1988.   It found that the right to bring such a claim did not derive from the leases, but from the 1993 SADC Treaty and a 2001 Protocol.  Therefore, recourse to the SADC Tribunal was conferred through these instruments only after execution of the leases, rather than in exchange for the lease investments.  Thus the right to bring a claim before the SADC Tribunal also fell outside any “bundle of rights” created by the mining leases.

    Exhaustion of Local Remedies

    16                   As a question of admissibility, the SGHC considered whether the investors had exhausted local remedies as required by the Investment Protocol.  The SGHC concluded that the investors had not done so, because the earlier litigation was related to the separate dispute involving expropriation.  Further, Lesotho’s domestic courts recognize a special “Aquilian action” to seek compensation for economic loss.  The SGHC rejected the investors’ argument that an Aquilian action would be futile, noting that the Lesotho courts had found in the investors’ favour in certain earlier cases.

    Jurisdiction Ratione Personae

    17                   The SGHC dealt with Lesotho’s objection to jurisdiction ratione personae although it was not strictly necessary to do so.  The SGHC agreed with the Tribunal’s decision on jurisdiction ratione personae but disagreed with the Tribunal’s reasoning.

    18                   The Tribunal found that both domestic and foreign parties could fall under the definition of “investors” under Annex 1 of the Investment Protocol, but nevertheless found that only the three defendants who were nationals of South Africa or representatives of South African trusts were proper parties to pursue the claim. This was premised on the other defendants being Lesotho companies that had assigned their rights to pursue the expropriation claims to a South African trust. 

    19                   Again turning to the VCLT, the SGHC interpreted Annex 1 of the Investment Protocol to apply only to foreign investors.  The court reasoned that applying the definition of “investor” to Lesotho nationals would invariably include “every national who had ever purchased property, acquired company shares, or acquired licenses to exploit natural resources”, which would constitute a significant intrusion into State sovereignty.  This precluded personal jurisdiction over the Lesotho defendants, leading to the same outcome on jurisdiction ratione personae as the Tribunal.

    Observations

    20                   Lesotho v Swissbourgh again signals the Singapore courts’ willingness to undertake a critical review of investor-State awards where the seat of the arbitration is Singapore.  The SGHC undertook an exhaustive de novo review of the Tribunal’s jurisdictional decisions, even though it could have disposed of the case based on its holding that the investors’ right to have a claim heard in the SADC Tribunal did not constitute an “investment” under the relevant treaty. Regardless of any appellate proceedings to follow, the court’s comprehensive review of all the objections raised and the authorities cited by both parties serves to provide valuable guidance for future cases in Singapore and beyond.

    21                   A snapshot of the court’s approach to investment treaty law appears in the concluding remarks of Kannan Ramesh J at [343]:

     “Investment treaties are fine-tuned to balance the interests of host states and investors, and it would be ultimately counteractive to a treaty’s object and purpose to extend its protections to situations beyond its contemplation.  While the defendants are disappointed with the turn their investment has taken, that cannot be cured by doing violence to a dispute resolution provision in the treaty.  The defendants’ difficulties in establishing jurisdiction stem from the fact that their true investment – the Mining Leases – was made before Annex 1’s entry into force.” 

    The SGHC will objectively interpret relevant treaty provisions in reviewing jurisdiction, and take issue with the arbitral tribunal’s conclusions if necessary.  The investors may be disappointed in this case, but it could just as likely be the State in the next. 

    .   .   .   .   .

    * The opinions contained in this case comment reflect the authors’ own views and are not to be understood as reflecting the views of their employers or colleagues.  

    ** This blog entry may be cited as Rachel Tan and Lucy Reed, “Developing Singaporean Jurisprudence on Reviewing Investor-State Arbitral Awards” (9 October 2017) (http://www.singaporelawblog.sg/blog/article/196)

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

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