In a recent Permanent Court of Arbitration (PCA) case, China Heilongjiang International Economic & Technical Cooperative Corp. and others v Mongolia, the tribunal wielded the power of effet utile to strike down the investors’ claim against Mongolia. The occult science of treaty interpretation by international tribunals has produced a somewhat unexpected result that risks creating uncertainty and confusion for investors in China and Russia, whist highlighting how different tribunals can interpret very similar provisions in a seemingly inconsistent manner.
“Amount and method” provisions
Although the award in the Mongolia case has not (yet?) been published, the thrust of the respondent state’s jurisdictional objection appears to have involved the issue of proper interpretation of the dispute resolution provisions in Article 8.3 of the China-Mongolia bilateral investment treaty (BIT). As practitioners involved in Chinese and Russian treaty arbitration will be aware, a number of older treaties signed by China, Russia and certain former Soviet republics contain a somewhat unusual investor-state dispute settlement provision, which ostensibly limits the jurisdiction of tribunals to disputes involving the amount and method (including currency and timing) of compensation for expropriation. Article 8.3 of the China-Mongolia BIT is an example of this type of investor-state dispute resolution provision.
The question is whether this type of clause limits the jurisdiction of the tribunal to questions of quantum of compensation for expropriation, with the liability of the state having already been established in some other way.
A number of earlier authorities where this type of provision was considered, concluded that it does not preclude the tribunal from deciding on questions of liability (for example, Renta 4; EMV; Tza Yap Shum and Sanum).
Although it is difficult to do justice in this brief post to all of the points raised in those authorities, the gist of the argument in favour of a broad interpretation is that a narrow reading of the provision would limit the tribunal’s jurisdiction to such an extent as to make it illusory; that is, to lose its practical effect.
As the tribunal in Renta 4 (paragraph 32) put it:
“The search to give meaning to the eight (or eleven) words that follow “relating to” in Article 10(1) simply cannot be allowed to deprive the remaining text of its essential positive meaning.”
Limiting the international arbitral tribunal’s jurisdiction solely to determining the amount and method of compensation, with the host state deciding on liability, would amount to a “vanishingly narrow internationalisation” of the host state’s commitment (Renta 4, paragraph 56).
By contrast, the Mongolia case appears to have been decided on the basis that this type of provision does indeed limit the arbitral tribunal’s jurisdiction to questions of quantum only. As follows from Mongolia’s press release, its argument included the suggestion that a narrower interpretation would not deprive Article 8.3 of practical effect as arbitration would be available in cases where “an expropriation has been formally proclaimed and what is disputed is the amount to be paid by the State to the investor for its expropriated investment.”
In support of its position, Mongolia is said to have relied on “substantial evidence of China’s historic use of such proclaimed expropriations, whether through ordinances or decrees.” In this regard, an interesting further theoretical question would be whether the narrow interpretation would include “enforcement” of an award in a commercial arbitration, for example with a host state-owned enterprise, where the host state court refuses to enforce its award. In those cases, the “amount and method” of compensation could potentially include the question of any discount to be applied to the commercial award. It would also be interesting to see how (if at all) the Mongolia tribunal dealt with the various arguments raised in cases such as Renta 4.
It seems, however, that the difference between tribunals, insofar as the effet utile line of arguments is concerned, boils down to an individual tribunal’s own assessment of just how narrow a purported jurisdiction should be to make it non-existent for all practical purposes (that is, to deprive it of its effet utile). In the Mongolia case, the narrow jurisdiction of the tribunal appears to have been judged wide enough to be of (at least some) practical utility to investors.
In reaching its decision, the Mongolia tribunal seems to have swung the pendulum back to the decisions on very similar points in relation to Russian BITs in the Berschader and RosInvestCo cases (though in the latter case, the tribunal made used of the most favoured nation clause to assume substantive jurisdiction). The implications of this restrictive approach for investors in China and Russia could be far-reaching, as they bear on the availability (or its lack) of an international forum for determining the host state’s liability for alleged expropriation.
In search of consensus
Irrespective of the underlying merits, the apparently stark divergence between tribunals in interpreting very similar (if not identical) provisions of older Chinese and Russian treaties graphically illustrates one of the well-known challenges facing tribunals in an ad hoc system with no binding precedents or appeal process. In many cases, the apparent inconsistencies in tribunals’ decisions on similar points are a price worth paying for the flexibility afforded by the broad interpretive powers of the tribunal.
However, where the inconsistencies are as stark as in the present set of cases, one may well ask whether there is a better way to ensure consistent interpretation for the sake of legal certainty and predictability for investors. Given the current system’s set up, it seems that the only way to ensure consistency is for the arbitration community to reach a majority consensus on the proper interpretation of a particular provision. It remains to be seen whether the tigers and dragons of the arbitration world will ever come to a consensus on how to interpret the “amount and method” provisions, and whether that consensus will coalesce around the Mongolia or Renta 4 line of cases.