Chinese investor succeeded in investment arbitration against Nigeria: Zhongshan Fucheng Industrial Investment Co. Ltd -v- Federal Republic of Nigeria

The claim brought by the claimant Zhongshan Fucheng Industrial Investment Co. Ltd (‘Zhongshan’) against the respondent the Federal Republic of Nigeria (‘Nigeria’) concerned the actions taken by the respondent in the summer of 2016, allegedly depriving Zhongshan of a substantial investment in the Ogun Guangdong Free Trade Zone (the ‘Zone’), contrary to the relevant provisions of the Bilateral Investment Treaty (the ‘Treaty’) between the P.R. China and Nigeria. The Zone was a substantial area of land in Ogun State in Nigeria, which was owned by the Ogun State Government (‘Ogun State’). The Zone was the subject of a Joint Venture Agreement entered into on 28 June 2007 (the ‘2007 JVA’) between the Ogun State and China-Africa Investment Ltd (‘CAI’), and CCNC Group Ltd (‘CCNC’). Under the 2007 JVA, the development of the Zone was to be carried out through Ogun Guangdong Free Trade Zone Company (‘OGFTZ’), which was to be jointly owned by Ogun State, CCNC and (as to 60%) CAI, for a period of 99 years. OGFTZ was a free trade zone company registered in the Zone.

By 2010 only limited development had been carried out and CAI was running short of funds, and as a result, Zhuhai Zhongfu Industrial Group Co Ltd (‘Zhuhai’) was introduced to Ogun State as a potential alternative or additional developer and manager. Following discussions, Ogun State and Zhuhai agreed that Zhuhai would effectively take over the development and management of Fucheng Industrial Park (‘Fucheng Park’) within the Zone.

On 29 June 2010, Zhuhai and OGFTZ entered into a ‘Framework Agreement on the Establishment of Fucheng INDUSTRIAL Park in the Zone’ (the ‘2010 Framework Agreement’). This Agreement gave Zhuhai the right to develop and operate Fucheng Park. CAI was not a party to the 2010 Framework Agreement.

On 10 October 2010, another document was entered into by Zhuhai, OGFTZ and Zhongshan (the ‘2010 Deed’). The 2010 Deed had the effect of entitling Zhuhai to carry out its obligation under the 2010 Framework Agreement through a third party. Thus, the 2010 Deed was treated by Zhongshan and Zhuhai as having the practical effect of transferring Zhuhai’s rights and obligations under the 2010 Framework Agreement to Zhongshan, which was a subsidiary of Zhuhai.

On 24 January 2011, Zhongfu International Investment (NIG) FZE (‘Zhongfu’) as a subsidiary of Zhongshan, was registered as a free trade zone enterprise in the Zone.

On 28 November 2011, a senior official of Ogun State wrote a letter to CAI complaining of its violation of the terms of the 2007 JVA, the unsatisfactory share arrangement, and rampant smuggling. In the letter it also referred to the fact that following extensive due diligence enquiries in both Nigeria and China, CAI or its parent company was now officially bankrupt.

On 10 April 2012, CAI’s appointment as manager and operator of the Zone was terminated by Ogun State via letter. On the following day a further letter wrote to Zhongfu confirming its appointment as the managers and operators of the Zone.

On 28 September 2013, Ogun State, Zhongfu and Zenith Global Merchant Limited (‘Zenith’) entered into a Joint Venture Agreement for the Development, Management and Operation of the Zone (the ‘2013 JVA’). Clause 3 of the 2013 JVA provided that OGFTZ would be the joint venture company, and that ownership would be 60% by Zhongfu, and 20% each by Ogun State and Zenith. Clause 4 was concerned with the control and running of OGFTZ. Clauses 6 and 12 contained a number of obligations on the parties. Clause 18 included provisions for early termination by one party if the other party was in breach, became insolvent, or ceased to carry on business. So far as early termination for breach was concerned, it could only be implemented if (i) the breach was material; (i) a notice specifying the breach had been served; and (iii) the breach was not remedied within 60 days of receipt of the notice. In addition Clause 27 provided that, in the event of any dispute arising under the 2017 JVA, it should first be the subject of an attempt to settle, and if that failed, either party could refer the dispute to arbitration under the UNCITRAL Rules in Singapore under the aegis of the Singapore International Arbitration Centre.

On 11 March 2016, PRC’s Consulate in Lagos issued a Note 1601 to Ogun State. The Note 1601 stated that the consulate had been officially notified by a PRC authority about the replacement of shareholding owner of CAI to Guangdong New South Group, which would legally lead to the preplacement of the management rights of the OGFTZ which was now in the hands of Zhongfu to Guangdong New South Group.

Since April 2016 Ogun State started challenging Zhongfu’s right to any interest in the Zone through OGFTZ relying upon the Note 1601. In July 2016, Ogun State communicated with Zhongfu with a number of written and oral correspondences threatening to (a) use security personal to get Zhongfu out of Nigeria; (b) force individuals working for Zhongfu, and it’s personnel, to leave Nigeria with an aim of getting Zhongfu to vacate the Zone. In particular the CEO and CFO of OGFTZ were under threat of having their passports seized and being put in jail. In August 2016, the CFO of OGFTZ was arrested at gunpoint on the basis of ‘criminal breach of trust’ by Ogun State police, deprived initially of food and water, intimidated, physically beaten, and detained for a total of 10 days. Ultimately both the CEO and CFO left Nigeria in October 2016.

Other proceedings prior to the current arbitration

On 18 August 2016, Zhongfu started proceedings in the Federal High Court in Abuja against, among others, Ogun State and Zenith seeking declaratory and injunctive relief, effectively seeking to be reinstated as manager of the Zone. On 9 September 2016, Zhongfu further started proceedings in Ogun State High Court against OGFTZ and Ogun State seeking possession of the Zone, an injunction, damages in excess of US$1 billion, plus interest. Nothing happened in these court proceedings for a substantial period. In March and April 2018, these proceedings were discontinued.

Meanwhile, Zhongfu began SIAC arbitration proceedings against Ogun State and Zenith pursuant to clause 27 of the 2013 JVC. On 5 January 2017, Zenith applied in the Ogun State High Court for an anti-suit injunction restraining the arbitration, the order of which was granted on 29 March 2017. On 23 June 2017, Zhongfu appealed this decision, but that appeal was discontinued in 2018.

The following clauses of the Treaty were relevant to the current arbitration:

• Article 1 (1): ‘investment’ was defined as ‘every   kind of asset invested by investors of one Contracting Party in accordance with the laws and regulations of the other Contracting Party in the territory of the latter’, and ‘in particularly, but not exclusively’ including ‘(a)…any property rights…, (b) shares…and any other kind of participation in companies…, (c) claims to money or to any other performance with economic value…, (e) business concessions…’
• Articles 2 (2) and (3): ‘Investments of the investors of either Contracting Party shall enjoy the continuous protection in the territory of the other Contracting Party’; and prohibited a Contracting Party ‘subject to its laws and regulations from ‘taking any unreasonable or discriminatory measures against the management, use, enjoyment and disposal of the investments by the investors of the other Contracting Party’.
• Article 3 (1): each Contracting Party was required to accord ‘fair and equitable treatment’ to the ‘investments of investors of the other Contracting Party’ in its territory.
• Articles 4 (1) and (2): a Contract Party was prohibited ‘expropriating against the investment if investors of the other Contracting Party in its territory’, unless it was ‘for the public interests’, ‘under domestic legal procedure’, ‘without discrimination’ and ‘against fair compensation’, which was described as ‘the value of the expropriated investments immediately before the expropriation was proclaimed’. Such compensation was to be paid ‘without unreasonable delay’, and that it must ‘include interest at a normal commercial rate’.
• Article 9 was concerned with the ‘Settlement of disputes between investors and one Contracting Party’:
  • Article 9 (1) provided for amicable settlement ‘as far as possible’.
  • Article 9 (2) stated that, if amicable settlement was unachievable ‘through negotiations within six months, either Party shall be entitled to submit the dispute to a competent court to the Contracting Party accepting the investment’.
  • Article 9 (3) provided that if ‘a dispute cannot be settled within six months after resort to negotiations…it may be submitted at the request of either Party to an ad hoc tribunal’; ‘the provisions of this Paragraph shall not apply if the investor concerned has resorted to the procedure specified in para.2 of this article’.
  • Article 9 (4) provided for the constitution of the ad hoc tribunal, with each party nominating an arbitrator, and the two party-appointed arbitrators appointing a ‘Chairman’.
  • Article 9 (5) stipulated that the tribunal ‘shall determine its own procedure’ but may take guidance from ICSID’s Arbitration Rules.
  • Article 9 (6) stated that the tribunal’s decisions were to be ‘by a majority of votes’ and were to be ‘final and binding on both parties of the dispute’.
  • Article 9 (7) provided that the tribunal shall ‘adjudicate in accordance with the law of the Contracting Party to the dispute accepting the investment…as well as the generally recognised principles of international law…’.

On 21 September 2017, Zhongshan sent to a notice of dispute and request for negotiations to Nigeria (the ‘2017 notice’), in which it expressed its willingness to discuss the dispute which had arisen as a result of the actions taken and statements made between April and August 2016. No response was received.

On 30 August 2018, Zhongshan served a Request for Arbitration (a ‘Request’) pursuant to Article 9 of the Treaty, setting out the history of Zhongfu’s involvement in the Zone, and contending that the actions taken between April and August 2016 were in breach of Nigeria’s obligations under the Treaty, nominating Mr. Matthew Gearing QC as arbitrator, and claiming compensation, interest and costs.

On 8 November 2018, Nigeria nominated Mr. Rotimi Oguneso SAN as its arbitrator.

By a notice of appointment dated 5 January 2018, Lord Neuberger was appointed Chairman by the two aforementioned arbitrators, whereupon the tribunal was formally constituted.

Nigeria’s jurisdictional and preliminary points

Nigeria raised a number of points of principle, some of which were jurisdictional in nature, as to why Zhongshan’s claim should fail. The tribunal dismissed all those contentions raised by Nigeria.

(a) No valid claim against Nigeria

Nigeria contended that Zhongshan’s complaints were not about the conduct of the Federal State of Nigeria because none of the actions complained of were carried out by the Federal State. Therefore, there was no claim against Nigeria.

The tribunal accepted that Zhongshan’s case was primarily based on actions of Ogun State, although the actions of other entities contributed. However, for the purposes of a claim such as this, all bodies of the State, including those which have an independent existence in domestic law, were to be treated as part of the State. This was customary international law and was clear in the light of the Articles on Responsibility of States for Internationally Wrongful Acts (‘ARSIWA’) adopted by the International Law Commission in August 2001. The principles which were enshrined in ARSIWA had been recognised and applied in a number of arbitral decisions relating to alleged breaches of bilateral investment treaties.

(b) No investment

Nigeria contended that Zhongshan had no claim because it did not hold an ‘investment’ within the meaning of Article 1(1) of the Treaty. However, from the tribunal’s point of view, the more difficult issue was whether the investment should be treated as its ownership of Zhongfu or Zhongfu’s indirect 60% ownership of the interests created by the 2010 Framework Agreement and the 2013 JVA.

The tribunal opined that it was not necessary to decide the point, because, whichever approach ws right, the far-reaching definition of’ ‘investment’ in Article 1(1) was wide enough to cover either the shareholding in Zhongfu or Zhongfu’s interest. It seemed to the tribunal that the natural inference was that the depreciation in the value of Zhongfu as a result of the loss of its interests would have been equivalent to the value of the rights which were lost. All the documents including the 2010 Framework Agreement and 2013 JVA demonstrated that Zhongshan paid money, and Zhongfu undertook obligations, which were referable, indeed solely referable, to the acquisition and enjoyment of the rights which Zhongshan said that Zhongfu had.

(c) The six-month wait

Nigeria contended that the tribunal had no jurisdiction because the six-month period referred to in Article 9(3) had not expired when this arbitration was launched, ie Zhongshan failed to allow the six month period to expire before serving the request. The tribunal rejected it.

As a matter of principle and in accordance with common sense and fairness, it was clear that the six month period referred to in Article 9(3) should be treated as running from the date of the 2017 notice. So far as common sense was concerned, it would be contrary to justice if Nigeria could rely on its own failure to take up the invitation to negotiate in order to say that Zhongshan had failed to allow for a sufficient negotiating period.

Furthermore, the tribunal were in some doubt whether a failure on the part of Zhongshan to wait six months would necessarily invalidate the request or this arbitration, particularly if it had become clear that there was no possibility of settling its claim. Yet the tribunal did not decide this point as it was unnecessary.

(d) The fork in the road

Nigeria contended that the tribunal had no jurisdiction as the court proceedings operated as a bar in the light of Article 9(3), ie the fork in the road point, on the ground that Zhongfu opted for court proceedings.

The tribunal noted that there were a large number of tribunal decisions where such a fork in the road point had been considered in connection with a provision equivalent to the second sentence of Article 9(3), and it was not easy to reconcile the approach adopted in all the decisions on the issue. That said, the tribunal decided to adopt the two familiar tests identified by the tribunal in Khan Resources B V and CA UC Holdings Company Ltd -v- The Government of Mongolia PCA Case No. 2011-09, Decision on Jurisdiction, 25 July 2012, at para.389, ie the triple identity test (which required the domestic court proceedings to involve the same parties, the same cause and the same object as the treaty arbitration), and the fundamental basis test (which involved asking whether the basis of the domestic court proceedings was fundamentally the same as the basis for the treaty arbitration). By applying the approach of the tribunal in Khan -v- Mongolia and in particular adopting the triple identity test, the tribunal rejected the fork in the road argument on the following grounds:

1. Neither of the parties to this arbitration, Zhongshan and Nigeria, was party to either of the court proceedings. The ‘investor concerned’ in this reference, ie Zhongshan, had not commenced any proceedings at all in the Nigerian courts and hence Article 9(3) had not been triggered.
2. In the court proceedings, the case of the plaintiff Zhongfu was based on alleged breaches of its contractual and possessory rights under the 2010 Framework Agreement and the 2013 JVC, and on alleged breaches of Nigerian domestic public law; whereas Zhongshan’s case in this arbitration was based squarely on the Treaty.
3. As to the relief sought, subject to one point, it was different also. In the court proceedings Zhongfu sought declaratory and injunctive relief whereas in this arbitration Zhongshan sought compensation. Despite the one area of overlap as in the court proceedings Zhongfu also claimed damages, the tribunal did not consider that this factor justified not following the approach of the tribunal in Khan -v- Mongolia.

The tribunal further considered that the same result would have been obtained if it had applied the fundamental basis test.

(e) The involvement of the PRC

Nigeria contended that Zhongshan’s claim should not be adjudicated in the absence of the PRC government being involved in the arbitration to explain its position and action, and in particular the conveying of Note 1601 to Nigeria.

The tribunal accepted that the facts and reasoning behind the existence and contents of Note 1601 were by no means entirely clear. However, that did not mean that, in the absence of such evidence, Zhongshan should be precluded from proceeding with this arbitration, or that the tribunal should be precluded from publishing an award. Zhongshan did not need to rely on such as evidence.

If Nigeria wished to contend that not merely that the 1601 Note itself, but that the PRC’s explanation for the Note, was relevant to Nigeria’s case in this arbitration, then it would have been open to Nigeria to call, or at least to seek to call, relevant employees or agents of the PRC government to give evidence to the tribunal. No such witness was called by Nigeria, and no proof or statement from such a witness was put before the tribunal.

Upon rejection of Nigeria’s jurisdictional and preliminary points and its argument based on misrepresentation and concealment, the tribunal then addressed the central question of liability, namely whether Zhongshan has established that Nigeria wrongly deprived Zhongfu of its rights under the 2010 Framework Agreement and/or the 2013 JVA, ie Zhongfu’s rights.

The tribunal found that the activities during 2016, ie the written and oral communications and the actions taken by Ogun State and its police between April and August 2016, were plainly designed to deprive, and indeed succeeded in depriving, Zhongfu of its rights under the 2010 Framework Agreement and the 2013 JVA in circumstances where there were no domestic law grounds for doing so, and in a way which involved a combination of actual and threatened illegitimate use of the state’s power to achieve that end. In particular, the tribunal held that the relevant actions breached Article 2(2) concerning continuous protection, Article 2(3) concerning no unreasonable or discriminatory measures, Article 3(1) concerning fair and equitable treatment, and Article 4 concerning expropriation. In addition, the tribunal opined that the Nigerian courts’ failure to grant any prompt interlocutory or declaratory order, and granting of the anti-suit injunction, while not enough on their own to constitute breaches of the Treaty, served to compound the wrongness of these actions and statements.

Accordingly, the tribunal concluded that Zhongshan has made out its case that Nigeria breached its obligations under the Treaty when it effectively deprived Zhongfu of its rights under the 2010 Framework Agreement and the 2013 JVC, and that Zhongshan was entitled to require compensation to be paid by Nigeria under Article 5 of the Treaty.

As regards the damages, the tribunal accepted the primary assessment adopted by Zhongshan’s expert principally based on a discounted cash flow, or DCF exercise, which involved assessing the likely income and outgoings which would have been enjoyed and incurred each year over the term of the agreements and capitalising the net annual income as at 22 July 2016. The tribunal noted that the use of a DCF calculation as a means of assessing compensation for the loss of an asset has been relied on by claimants in many cases where an income-producing asset has been lost or harmed, including in a large number of investor-state cases.

Upon emphasising such exercise should be used with caution, the tribunal adjusted the assumptions relied on by Zhongshan, and decided to award US$55.6 million in damages to Zhongshan. The tribunal also awarded US$75,000 as moral damages to the CFO for his mistreatment, which represented an indefensible and serious infringement of his human rights, and a humiliating and frightening experience, lasting the best part of two weeks. The tribunal further awarded interest on the aforesaid two sums from 22 July 2016 at the one month US$ LIBRO rate plus 2% for each year, or proportion thereof, such interest to be compounded monthly, until and including the date of the award, in the sum of US$9.4 million. In addition, the tribunal also awarded about US$2.9 million in respect of Zhongshan’s legal and related costs of the arbitration.

The International Centre for Settlement of Investment Disputes (‘ICSID’) released the case statistics of 2021 on 7 February 2022. According to the ICSID case database, to date, there have been a total of 10 ICSID cases filed by Chinese investors as applicants, of which five cases are still in progress. There are also five ICSID cases in which the Chinese government is the respondent, of which one case is still in progress. Although the present case was not arbitrated according to the arbitration rules of ICSID convention or administered by the ICSID, it can be seen that Chinese enterprises are more willing and better at resorting to arbitration to resolve disputes between investors and the host country and protect their legitimate investment rights and interests abroad.

As of February 2022, China has concluded over 200 cooperation agreements with 148 countries and 32 international institutions regarding the Belt and Roald Initiative (‘BRI’). BRI-related cross-border investments are flourishing despite the complicated and unstable international politics and economy. In 2020, China’s BRI-related direct investment in 58 countries amounted to US$17.79 billion, which was 18.3% growth from the same period last year, accounting for 16.2% of the total, and 2.6% higher than the previous year. The total contract value of newly-signed projects in the countries along  the routes of the BRI is worth US$141.46 billion, and the turnover was US$91.12 billion, accounting for 55.4% and 58.4% of the total in the same period respectively. Trading along BRI has become more and more frequent. In 2020, the total import and export volume between China and BRI-related countries was up to 9.37 trillion yuan, which was 1% increase over the same period last year.

Thanks to the ‘Go Out’ policy and the BRI, China has become the second largest investing nation in the world. It is anticipated that the trend of mergers and acquisitions along the BRI will continue to grow in the future. As China shares common interests with other BRI jurisdictions, there is a broad space for collaboration. The healthy investment prospect in BRI will attract more mergers and acquisitions activities. However, cross-border investments face various uncontrollable risk factors, eg conflict of law in different jurisdictions, different taxation systems, market barriers, exchange rate fluctuations, political instability, instability in governments, armed conflicts, cultural difference, etc. Due to the sluggish global economic growth, the prevalence of investment protectionism, and major risks in economic policies and geopolitics, whether Chinese companies’ overseas investments can be properly protected by the host country is an issue that Chinese investors must face and pay attention to. This is also a key factor for long-term health and development of BRI.

President Xi Jinping of the PRC recently pointed out in an article that it is necessary to utilise the rule of law to manage international conflicts, especially to expand law enforcement and judicial cooperation in the construction of bilateral and multilateral relations, and to extend the security chain to protect Chinese interests in overseas. China’s foreign investment inflow and outflow are both at a high level in the world. Most of China’s foreign investment flows are to countries and regions with unsound legal systems and high political risks. At present, among the main dispute resolution mechanisms to resolve investment disputes between investors and host countries, international investment arbitration is the most commonly used and the most effective means, which is of great significance for protecting the interests of investors and maintaining the international investment order. The use of the international arbitration mechanism stipulated in the investment protection treaty to resolve disputes is a powerful tool to protect the rights and interests of investors from international wrongful acts of the host country.

Investment arbitration is a procedure for settling disputes between foreign investors and host countries. The possibility for foreign investors to sue the host country provides legal safeguards for foreign investors. If a dispute arises, as in the present case, the foreign investor has an opportunity to resolve the dispute with the host country through arbitration by appointing an independent and qualified arbitrator (or a tribunal of arbitrators). As can be seen from the facts in this case, it also allows foreign investors to bypass national courts’ jurisdictions that may be considered biased or lack independence, and resolve disputes with host countries under the different protections provided under international treaties.

The substantial protection afforded to foreign investors for resolving disputes depends on the BIT or multilateral investment agreement. These agreements differ from the protections afforded by the host country’s domestic law, and sometimes the protections they offer may be greater. The most common protections offered to foreign investors include: protection from expropriation; fair and equitable treatment; national treatment; most-favoured-nation treatment; free transfer of funds and comprehensive protection and security.

Like the BIT between China and Nigeria involved in this case, most investment arbitration agreements provide for a cooling-off period, often 6 months, inviting investors and the host country to negotiate for an amicable solution. The cooling-off period usually begins with a notice of intent from the investor to initiate arbitration proceedings against the host state. Most host countries typically wait passively during this period to see if foreign investors are really willing to pay the very expensive costs required to conduct investment arbitration. If the dispute is not resolved within the cooling-off period, then the foreign investor must file a claim for arbitration in accordance with the applicable arbitration rules.

In certain circumstances, investors may be required under the arbitration agreement on which their arbitration is based to attempt all available domestic legal remedies before initiating arbitration. In contrast, some arbitration agreements force the investor to choose between the national court in the host country or an international arbitration tribunal (ie the fork in the road clause). For foreign investors, it is important to scrutinise the instrument containing the host country’s consent to arbitration before filing a lawsuit, because if the host country’s courts are the first option to resolve the dispute, then there is no way to initiate arbitration later. In this case, the arbitral tribunal conducted a detailed discussion and analysis of the fork in the road principle. One of the important reasons why Zhongshan won the case is that the subject who chose to file a lawsuit in the Nigerian court was Zhongfu, a company established by Zhongshan in Nigeria. In addition, Zhongfu’s argument in court was based on the joint venture agreement (‘JVA’) and other related agreements, not the BIT.

Qualified as a solicitor of Hong Kong SAR, England & Wales as well as a lawyer of P.R. China, Edward Liu’s main area of practice is in commercial and shipping litigation and arbitration. He is particularly renowned for his work in the commercial arbitration field as well as arbitration-related court applications. He has consistently been listed for many years as a leading lawyer in Shipping and Dispute Resolution by The Legal 500, Chambers & Partners, and Lloyd’s List.

Edward has been appointed as member of a number of statutory and advisory bodies to the Hong Kong Government, particularly including Advisory Committee on Promotion of Arbitration, Steering Committee on Mediation, Advisory Body on Third Party Funding of Arbitration and Mediation.

Edward is a Fellow of Chartered Institute of Arbitrator (CIArb), a listed arbitrator of Hong Kong International Arbitration Centre (HKIAC), a supporting member of London Maritime Arbitrators’ Association (LMAA), a member of Hong Kong Maritime Arbitration Group (HKMAG), an arbitrator of Shenzhen Court of International Arbitration (SCIA), an arbitrator of China Maritime Arbitration Commission (CMAC), and an arbitrator of eBRAM. Since 2018, Edward has started to accept appointments as an arbitrator and was appointed as arbitrator by HKIAC (including as a sole arbitrator) on many occasions, and he has dealt with arbitration cases as arbitrator under HKIAC, LMAA, HKMAG and UNCITRL rules. In addition, Edward is an accredited mediator of Hong Kong Mediation Accreditation Association (HKMAAL), a mediator of eBRAM, and an APEC neutral.