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Singapore and Investment Arbitration

A brief explanation of the growing field of investment arbitration and its significance for Singapore practitioners.

Investment arbitration is a species of arbitration that involves disputes arising from foreign investments made usually by a multinational corporation in a state other than its home state. In Asia, as well as in other developing countries, such contracts are made largely with the host state or the entities of the host state as much of the different sectors of production in these host states are operated through state entities. Unlike in international commercial arbitration, the contracts that are made have a public law feature. The disputes that arise also usually have a public law feature as the contracts are ended through the use of the state's legislative or administrative powers.

Examples of such disputes in recent times are becoming of significance to the practice of law in Singapore. There are many reasons why this is so. One is the emergence of Singapore as an arbitration centre. Increasingly, high end arbitration of this type will come to be located in Singapore for reasons of convenience. Many firms, both local and off-shore, with the capacity to handle such arbitration are located here. Singapore's traditional importance as a centre from which foreign investment, both of Singapore entities as well as multinational corporations located in Singapore, moves outwards through the region from Singapore will ensure that work in the subject of foreign investment and related areas will increase. The National University of Singapore Law School, anticipating this fact, has taught courses in these areas for the last two decades.

Some examples of recent foreign investment arbitrations that are linked to Singapore help to demonstrate the nature of the subject. Yaung Chi Oo Ltd v Myanmar, an arbitration decided in Singapore with Singaporean legal counsel on both sides was the first ever case decided under the ASEAN Investment Treaty. The case arose out of the allegation of the Claimant, a Singapore incorporated company, that the beer factory it had run in Myanmar had been expropriated. The tribunal held that it lacked jurisdiction. The award has been widely reported and cited in the literature on the subject because it was decided by a distinguished tribunal and involved many interesting issues of law. (The decision may be viewed online at http://ita.law.uvic.ca/documents/YounghiOocase.pdf).

Another award, the Karaha Bodas Award, has relevance for Singapore as some matters relating to its enforcement reached our courts. The dispute concerned a project to construct an electricity plant in Jakarta which was stopped as a result of a Presidential Decree issued during the economic crisis. The American investor claimed against the Indonesian state entity for breach and a tribunal sitting in Geneva upheld the claim. The issue as to enforcement of the award arose before the courts of the US, Hong Kong and Singapore as assets were held in these jurisdictions by the Indonesian state entity.

These two instances are but some of the recent disputes with which Singapore had connections. There are several others with direct and indirect involvement of Singapore either through arbitrators or through counsel being Singapore-based. As indicated, Singapore involvement with this type of arbitration will increase. There are Singapore-based counsel and arbitrators have been involved in cases which have arisen out of disputes in other regions like the Middle East and Latin America. There are several unreported instances of these disputes as most arbitration cases are generally unreported.

Singapore is a party to many investment treaties which contain dispute settlement provisions which enable unilateral invocation of arbitration by its investors against other host state treaty partners or by foreign investors against it. Notable treaties are free trade agreements which Singapore has made with US and other partners which contain chapters on investment. Singapore has treaties with several developing countries of this region as well as with many
European states.

A short explanation of the main characteristics of the area would be appropriate. At the end of this essay, there is a bibliography which will enable deeper pursuit of the subject.¹

What sets investment arbitration apart from other types of commercial arbitration is that it involves on the one hand a private party, usually a multinational corporation as the investor and on the other, a state corporation or the state itself. This is usual in our region as large projects in several sectors like the oil or natural resources industry or large projects such as the construction of airports or highways are handled by state agencies. As a result, the law that applies to the contract would be different as the foreign investment contract is usually a state contract which may have distinct principles applying to it. One problem that often crops up in our region as well as others is the possibility of bribery and its impact on the formation of the state contract. Also, the state contract has to be made in accordance with the rules of the laws that apply to the formation of such contracts. Otherwise, the validity of the contract is suspect. It is a popular defence taken up by respondent state entities that the contract on the basis of which the dispute arose was ultra vires. It is a defence that has succeeded in some cases but it must be approached with caution.

A basic issue relates to the jurisdiction of the tribunal over the dispute. We can see from a comparison of the Yaung Chi Oo Ltd case and the Karaha Bodas arbitration referred to above that there are two bases on which jurisdiction could be established. The first, as in the Karaha Bodas arbitration, is through the arbitration clause in the contract. The rules that apply to jurisdiction where a contractual provision is involved closely track the rules that would apply to instances of commercial arbitration. But the explosion of investment arbitration in the last decade and a half has resulted from the proliferation of investment treaties that seek to give protection to foreign investment in the hope of generating greater flows of such investment into the states making them. The theory is that such protection given through unilateral rights of arbitration created in the foreign investor by the treaty would result in greater confidence in investing in a developing country, particularly if there is no general trust in the legal system of the country to provide an effective remedy.

As a result of the existence of such treaties and the decision in AAPL v Sri Lanka² that jurisdiction can be invoked by a foreign investor from a state having a treaty giving such a unilateral right to the foreign investor, there has been an explosion in the number of cases, particularly before the International Centre of Investment Arbitration ('ICSID'). This World Bank Centre was created by treaty in 1965 (the Convention for the Settlement of Disputes between States and Nationals of Other States). It was a relatively dormant centre, dealing with disputes that contained contractual clauses submitting the disputes to arbitration before it. But, since AAPL v Sri Lanka, its activity has picked up dramatically. Ever since, the invocation of investment treaties has become the usual way of establishing jurisdiction and pursuing the argument that there had been treaty violations which had to be redressed. Some treaties also provide for jurisdiction in other arbitral institutions and recognize the setting up of ad hoc tribunals under the UNCITRAL Rules on Arbitration. The possibility also exists of invoking jurisdiction through the use of the most favoured nation clause in the treaty. As the Yaung Chi Oo case demonstrated, there may be conditions which have to be satisfied, stated in the treaty, before the jurisdictional hurdle is cleared. If the conditions are not satisfied by the Claimant, the tribunal will obviously refuse to exercise jurisdiction. In Asian treaties, such conditions are common. They usually require that there should be specific approval for the purpose of treaty protection, a major stumbling block in establishing jurisdiction, as the investor usually would not have secured such approval at the time of making the investment.

If jurisdiction is established, a claimant would have to show violations of contractual obligations in the situation where the tribunal is constituted under the provisions of the foreign investment contract. This type of arbitration shares many features of international commercial arbitration, though it must be kept in mind that one of the parties has sovereign or quasi-sovereign features making the situation different. In the case of a tribunal constituted under a treaty, a claimant has to show treaty obligations owed to him that have been violated. The two types of situations are distinct. Sometimes - and this is still a matter of controversy - due to the presence of an 'umbrella clause' in the treaty which enables a claimant to invoke protection against violation of commitments given to him by the respondent state party, it is possible to invoke violations of contractual and other commitments before a treaty tribunal. It is best to think of the two situations as distinct. Because they are distinct, it is possible to bring separate arbitrations in respect of the two different types of obligations - contractual obligations and treaty obligations - which have been violated.

The causes of action under a treaty can be classified under three headings. The first relates to violations relating to the treatment standards. The usual treatment standards mentioned in the investment treaties are:
1 national standard of treatment which requires the foreign investor to be treated alike with domestic investors;

2 the international minimum standard, a standard which grew up in the practice of capital exporting states;

3 the fair and equitable standard, which has attracted much focus in recent arbitration; and

4 an obligation to give 'full protection and security' to the foreign investor.

Each of these standards has involved contentious issues and much commentary. There has been an effort to interpret these standards expansively by some arbitrators. This has led to a split in the views expressed in different awards, sometimes involving the same fact situation, leading to considerable concern as to the stability of the system.

The second cause of action is based on expropriation of the assets of the foreign investor. The law in the past was largely concerned with the outright taking of foreign investment by the host state. Such outright expropriations hardly occur in modern times. Instead, what happens would be infringements of the ownership rights of the foreign investor. The treaty includes within the definition of expropriation, takings which are done through measures that are 'indirect or tantamount to an expropriation'. These extend that types of measures which could be regarded as expropriation under the treaty. The paradigm case remains the dispossession of the foreign investor. Any other act which achieves a similar result would be considered an indirect expropriation. What is tantamount to an expropriation is capable of creative interpretation and the attempt to interpret it expansively has caused considerable difficulty. In some awards, any measure taken by the state that leads to the depreciation of the value of the foreign investment has been considered tantamount to an expropriation. Such creative interpretations by the legal fraternity may well lead to the killing of the golden goose that many are so excited about. There must be a necessary balance achieved through interpretation. Some states leave the phrase out of their new treaties so as to prevent such imaginative interpretations.

A third cause of action is refusal to prevent repatriation of profits. This cause of action has been seldom resorted to.

There has been an increasing tendency to create defences to liability by employing two techniques. The first is by having resort to traditional principles of public international law. Argentina is involved in a series of cases arising from the measures it had taken to deal with the financial crisis it faced during 2001. These measures included devaluation of the peso contrary to promises that the dollar-peso parity would be maintained, and prohibitions of repatriation, both of which affected foreign investment. There were claims made alleging violation of treaty standards. Argentina has pleaded economic necessity, a defence available in general international law with some measure of success. As the new awards in these series of disputes come out, there seems to be a sharpening of the arguments based on economic necessity which appear to be succeeding.

The second type of defence appears in the treaty itself. Events indicate that the heydays of neo-liberalism when full protection was given by the treaties on the assumption that they uniformly benefit developing states are over. The treaties now contain several defences which are based on the need to safeguard against abuses in the environmental and human rights areas.

The pattern of investment is also changing. In the past the rich states of Europe and the United States were capital exporters. Now, they are among the largest recipients of capital. China, India and smaller states like Singapore and Dubai are capital exporters as well as receivers of capital. As a result, the day is not far off when the erstwhile capital exporters will be the respondents in claims brought by Chinese, Indian and Singapore investors. There will be considerable back-stepping when this happens. We can already see this in the context of NAFTA where the US and Canada have become targets of litigation under the investment chapter of NAFTA. There is considerable dismantling of the law taking place as a result. There is a rediscovery of the view that regulatory expropriation is not compensable. There is a reading out of the fair and equitable standard of treatment. These trends will continue. These are exciting times in this area of the law which needs to be studied by lawyers in Singapore as the City becomes the legal hub of the region and farther afield.

International Arbitration Practice Group, KhattarWong
Rajan Menon
Hee Theng Fong
Chia Ho Choon
Deborah Barker, SC
K Anparasan
Professor M Sornarajah

Notes

1 The International Law on Foreign Investment (2nd Edition, Cambridge University Press, 2003) is a good starting point, as is Rudolph Dolzer and Christoph Schreuer, International Investment Law (Oxford University Press, 2008). The latter work however, concentrates largely on treaty based investment arbitration. There is an expensive work by Campbell McLachlan and others, Investment Treaty Arbitration (Oxford University Press, 2008). Most awards in the area are available free on various web-sites. The best of them is http://ita.law.uvic.ca/. ICSID has a useful web-site on which ICSID awards appear. Investment treaties of virtually every country can be obtained on a website run by UNCTAD. There are various publications on specialist areas of the law in the field.

2 In AAPL v Sri Lanka, a Hong Kong company investing in the aquaculture of prawns in the Eastern Province of Sri Lanka had its factory bombed by the Sri Lankan army as it was suspected that the Tamil Tiger rebels had taken refuge in the factory. The Hong Kong claimant sought jurisdiction over the dispute by invoking the UK-Sri Lanka treaty which by extension applied to the then Crown Colony of Hong Kong. The Claimant was able to obtain jurisdiction and relief through this technique.