Chinese Investors Investing in One Belt One Road Lack an Effective Enforcement Mechanism at Home
Reporters: Anton Ware and Tereza Gao (Arnold & Porter, Shanghai)
Encouraged by the Chinese Government’s expansive Belt and Road Initiative, and often relying on the investor protections afforded to them under China’s dense network of investment treaties, Chinese companies are investing overseas in record numbers. As the volume of such outbound investment has grown, so too has the number of disputes between Chinese investors and host States regarding alleged violations of investment treaty protections. Unless settled amicably, those disputes generally are subject to resolution through investment treaty arbitration, most often under (1) the Convention on the Settlement of Investment Disputes between States and Nationals of other States (“ICSID Convention”) and the ICSID Arbitration Rules, or (2) in the case of ad hoc arbitration, the United Nations Commission on International Trade Law Rules (“UNCITRAL Rules”). In bringing such cases, investors are relying on the ability—if necessary—to enforce a favorable arbitration award against the host State under the ICSID Convention or the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (“New York Convention”), respectively. Given that China is a party to both Conventions, a Chinese investor could be forgiven for assuming that it would be able to obtain recognition and enforcement of a favorable investment treaty arbitration award in its own “home” courts (Chinese courts), and to obtain the assistance of such courts in executing the award against any commercial assets of the host State in China. But such an assumption would appear to be wrong. This article highlights the various obstacles that China’s adherence to the doctrine of absolute sovereign immunity pose to enforcement of investment treaty arbitration awards in China.
China's Adherence to Absolute Sovereign Immunity
“Sovereign immunity”—known in some jurisdictions as “State immunity”—refers to the customary international law principle that sovereign States enjoy immunity from suit in the courts of another State (“immunity from suit”) as well as immunity from execution of a judgment against State assets by the authorities of another State (“immunity from execution”), unless such immunity has been waived. In recent decades, an increasing number of States have abandoned the purest form of the sovereign immunity doctrine—“absolute” sovereign immunity—and adopted in its place a more limited form of the doctrine known as “restrictive” sovereign immunity. Under a restrictive sovereign immunity regime, a foreign State’s immunity is limited to claims relating to the State’s sovereign conduct, and does not extend to suits arising from the State’s commercial activities or to execution against commercial assets of the State.
China has thus far resisted the trend toward a narrower scope of immunity, continuing instead to adhere to the absolute sovereign immunity doctrine. The PRC Government reiterated this stance in 2008 and 2009 in formal communications to the Hong Kong government in connection with the case of FG Hemisphere Associates LLC v Democratic Republic of Congo (2011) 14 HKCFAR 95. In that case, the Hong Kong Court of Final Appeal accepted the PRC government’s submission that as a matter of PRC law and policy, State immunity covers not only a State’s sovereign acts but also its commercial activities. Simply put, the PRC Government’s position, as expressed in the FG Hemisphere case and thereafter, is that China follows the doctrine of absolute sovereign immunity and its courts do not adjudicate cases in which a foreign sovereign is named as the defendant (full stop).
Implications for recognition and enforcement of investor-State arbitration awards in China
Although the precise mechanism differs from jurisdiction to jurisdiction, the typical procedure for seeking recognition and enforcement of an arbitration award is for the award creditor (the winning party in the arbitration) to file a lawsuit in an appropriate court in the jurisdiction of intended enforcement, naming the award debtor (the losing party in the arbitration) as the defendant, and asking the court to convert the award into a judgment. After the award is converted into a judgment, the award creditor may then execute that judgment against the assets of the award debtor, using whatever procedures are available for that purpose in the enforcement jurisdiction. In the case of an investor-State arbitration, the first step in this procedure requires a successful claimant to commence a lawsuit in the enforcement jurisdiction naming the respondent State as the defendant. In an absolute sovereign immunity jurisdiction, however, the filing of such a lawsuit against the respondent State is not permitted, thus frustrating the claimant’s ability to recognize or enforce the award.
Such appears to be the case in China. Although there is no statutory provision or judicial interpretation directly addressing the issue, the logic of the Chinese Government’s position in the FG Hemisphere case suggests that a Chinese court would reject on sovereign immunity grounds an action to recognize or enforce an arbitration award against a sovereign State or any assets of a sovereign State. The FG Hemisphere case itself involved an attempt by a successful claimant to enforce two ICC arbitration awards against the Democratic Republic of Congo (among other respondents) in the Hong Kong courts. In response to a request by the Hong Kong Court of Final Appeal in that case, the Standing Committee of the National People’s Congress of the PRC clarified that Chinese courts do not exercise, and have never exercised, jurisdiction over cases in which a foreign State is named as the defendant. It is thus not surprising that there does not appear to be even a single reported case in a Mainland Chinese court involving recognition or enforcement of an arbitration award against a foreign State (or any agency or instrumentality of a foreign State).
Relevance of the New York Convention and the ICSID Convention
A question arises as to whether China’s stance on absolute sovereign immunity is consistent with its obligations as a Party to the New York Convention and the ICSID Convention, which create obligations on the part of member States to recognize and enforce arbitration awards within their respective ambits. Specifically, the New York Convention obligates member States (including China) to recognize and enforce international arbitration awards issued in another member State (“New York Convention awards”), subject only to certain narrow, enumerated exceptions. Other than ICSID awards (discussed below), investor-State arbitration awards—including ad hoc awards under the UNCITRAL Rules—generally will fall within the broad scope of coverage of the New York Convention. The ICSID Convention, for its part, creates a mandatory and exclusive regime for recognition and enforcement of ICSID awards by ICSID Convention member States (including China).
New York Convention. The New York Convention does not contain any provision expressly addressing the question of sovereign immunity. Article V(2)(b) of the Convention, however, permits a member State to refuse recognition and enforcement of a New York Convention award on public policy grounds. The sovereign immunity doctrine is a quintessential subject of public policy—especially in jurisdictions such as China that adhere to an absolute sovereign immunity regime. The New York Convention thus does not override any member State’s law of sovereign immunity.
ICSID Convention. Unlike the New York Convention, the ICSID Convention expressly addresses the issue of sovereign immunity. Under Article 54(1) of the ICSID Convention, each member State is obligated to (1) “recognize an award rendered pursuant to [the ICSID] Convention as binding,” and (2) “enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State.” Article 54(3) stipulates that execution of an ICSID award shall be governed by the laws concerning execution of judgments in force in the State of enforcement. Article 55 then provides an important clarification regarding sovereign immunity: “Nothing in Article 54 shall be construed as derogating from the law in force in any Contracting State relating to immunity of that State or of any foreign State from execution” (emphasis added). Read together, Articles 54 and 55 make clear: (i) the ICSID Convention does not override any member State’s domestic law with respect to sovereign immunity from execution; (ii) by ratifying the ICSID Convention, a State does not waive its own sovereign immunity from execution; however, (iii) the ICSID Convention does not permit domestic law immunity from suit to act as a bar to proceedings for the recognition of an ICSID award. China thus arguably has an international law obligation under the ICSID Convention to grant recognition to an ICSID award brought before a Chinese court for such purpose (i.e., to convert such an award to a judgment), notwithstanding any sovereign immunity doctrine to the contrary.
From the perspective of a claimant that has obtained a favorable ICSID award and wishes to enforce it in China, however, numerous legal and practical obstacles remain. First, China has not enacted legislation or promulgated any judicial guidance regarding implementation of the ICSID Convention, and as a result, it remains unclear whether a Chinese court would be able or willing to apply the Convention to a case brought before it. Second, it is not clear whether a Chinese court would accept the proposition discussed above, namely that the ICSID Convention effectively overrides each member State’s doctrine of sovereign immunity insofar as recognition of ICSID awards is concerned. Third, even if the first two obstacles could be overcome, the most that the award creditor could achieve would be to convert its ICSID award to a Chinese court judgment—something of a pyrrhic victory given that the award debtor would remain absolutely immune from execution of that judgment in China.
The question of waiver
The general rule in restrictive sovereign immunity jurisdictions (often codified in national legislation) is that by agreeing to arbitrate a given category of disputes (e.g., in an investment contract or investment treaty), a State has implicitly waived its right to assert sovereign immunity as a defense to actions (1) to enforce that arbitration agreement, and (2) to recognize a final arbitration award arising from that agreement (sovereign immunity typically remains available in such jurisdictions as a defense to execution against sovereign (non-commercial) assets). In absolute sovereign immunity jurisdictions, by contrast, implicit waiver of sovereign immunity is either not recognized at all or is given a far more narrow scope.
Can Chinese investors entering into investment agreements with foreign States overcome the obstacles described in this article by insisting that the State agree to an express waiver of sovereign immunity? Not necessarily. The Hong Kong Court of Final Appeal held in the FG Hemisphere case that under common law principles, a pre-dispute waiver of immunity is insufficient to effect a waiver—only an express waiver of immunity from both suit and execution before the Hong Kong courts would suffice. The authors are not aware of any Mainland Chinese statutory provision, court decision, or Supreme People’s Court interpretation addressing the effectiveness of a pre-dispute waiver of sovereign immunity. Chinese investors, therefore, are in uncharted territory when it comes to determining the requirements for a valid waiver. That said, from the investor’s perspective, there would seem to be no harm in including such a waiver provision in the investment contract, if the host State is willing to accept such a provision.
As unlikely as it may seem, at present Chinese investors face a significant home court “disadvantage” in attempting to enforce a favorable arbitration award against a foreign State’s assets in China in a Chinese court. There are some signs that China may be considering an eventual shift toward restrictive sovereign immunity. In 2005, China signed the United Nations Convention on Jurisdictional Immunities of States and Their Property, which implements a restrictive immunity approach. But China has not yet ratified this Convention, and has not yet accepted the policy framework that it reflects. Unless and until China embraces the restrictive immunity approach, Chinese investors that prevail in investment treaty arbitration will be left to rely on voluntary compliance by the host State or enforcement in other jurisdictions in which the host State has commercial assets and in which the courts apply a restrictive form of sovereign immunity.