July 2017 BUCG v. Yemen decision clears jurisdictional hurdles for investment claims by Chinese state-owned enterprises under the ICSID Convention Introduction In a recent decision issued on 31 May 2017 in the case of Beijing Urban Construction Group Co. Ltd v. Republic Yemen1, an ICSID Tribunal affirmed its jurisdiction over a claim brought by Beijing Urban Construction Group Co. Ltd. (BUCG), one of China’s largest international contractors, against the Republic of Yemen (Yemen) under the bilateral investment treaty (BIT) between the People’s Republic of China (PRC) and Yemen (the Treaty). In so doing, the Tribunal dismissed Yemen’s allegations that state-owned enterprises in the PRC were precluded from bringing claims under the ICSID Convention. The dispute arises out of the termination of BUCG’s contract for the construction of an airport terminal at Sana’a. BUCG alleges that Yemen unlawfully deprived BUCG of its investment by employing its military forces and security apparatus to assault and detain BUCG’s employees and forcibly deny BUCG access to the construction site, which served as the excuse for termination of BUCG’s construction contract. While the Tribunal has not yet considered the merits of BUCG’s claim, in its recent decision, it made certain findings on jurisdiction that are of interest for PRC enterprises with investments outside the PRC. In particular, the Tribunal found that PRC state-owned enterprises (SOEs), such as BUCG, operating as commercial entities abroad may bring claims before ICSID. The Tribunal also held that the Treaty, which provides recourse to ICSID arbitration for “any dispute relating to the amount of compensation for expropriation” empowered the Tribunal to consider BUCG’s expropriation claim, including the question of whether an expropriation had occurred. The tribunal’s findings on jurisdiction PRC SOEs may bring claims before ICSID The ICSID Convention, to which 161 States are signatories, including the PRC since 1990, provides a forum for the settlement of investment disputes brought by foreign investors against host States, but excludes State-to-State disputes from its scope. The ICSID Convention does not, however, address specifically the standing of SOEs to bring claims. It is widely considered that for SOEs to bring claims at ICSID they must satisfy the so-called Broches test, formulated by Aaron Broches, the first Secretary-General of ICSID, by demonstrating that they are not acting “as an agent for the government” or “discharging an essentially governmental function”. 1 Beijing Urban Construction Group Co. Ltd v. Republic Yemen (ICSID Case No ARB/14/30) Decision on Jurisdiction, 31 May 2017. The authors represent BUCG in the arbitration. 1 In this case, Yemen contended that BUCG did not meet the Broches test and therefore did not qualify as “a national of another Contracting State” under Article 25(1) of the ICSID Convention because it: (i) acted under the direction and control of the PRC government in carrying out its activities; and (ii) was empowered to exercise elements of governmental authority in the PRC. In support of its position, Yemen relied on certain features of PRC law that are common to PRC SOEs. First, Yemen relied on the concept of “democratic centralism” under Article 3 of the PRC Constitution that applies to all State organs of the PRC. Second, Yemen relied on Article 19 of the PRC Company Law which requires corporations to permit the establishment of an organisation of the Chinese Communist Party (CCP) to carry out Party activities within the company. Yemen argued that under PRC law, SOEs act effectively under the direction and control of the PRC government and the CCP, and, in particular, that the PRC government was the ultimate decision maker for BUCG’s operational, management and strategic decisions. According to Yemen, this is demonstrated by the fact that: i. BUCG is wholly-owned by the State Owned Assets Supervision and Administration Commission of the State Council (SASAC), a Commission established by the PRC government. SASAC exercises general direction/oversight over PRC SOEs, in general, and makes certain management, operational and strategic decisions for PRC SOEs; and ii. the CCP plays an integral role in the instruction, direction and control of SOEs in the PRC, including actively participating in corporate governance, personnel decisions and ensuring the implementation of principles and policies from the Party and the State. In response, BUCG contended that the Broches test must be considered in the specific context of the investment which gives rise to the dispute, and that any structural links BUCG may have with the PRC government or the fact that it may discharge certain public functions in China are irrelevant to BUCG’s standing as an investor at ICSID. In this case, BUCG explained that its investment in Yemen (the construction of an airport terminal) was made while acting as a commercial enterprise, after participating in a competitive tender, and did not involve the exercise of governmental or public powers. The Tribunal agreed that the relevant analysis under the Broches test is to consider whether BUCG “functions as an agent of the State in the fact-specific context.” The Tribunal noted that “the corporate controls and mechanisms are not surprising in the context of PRC State-owned corporations” and took the view that Yemen’s positioning of BUCG in the broad context of the PRC’s State-controlled economy and the structural links with the PRC government is “largely irrelevant.” The Tribunal held that “the asser- tion that ‘the Chinese State is the ultimate decision maker’ for BUCG is too remote from the facts of the Sana’a International Airport project to be relevant.” The Tribunal concluded that there was no evidence to suggest that, in respect of the construction of an airport terminal in Sana’a, “… BUCG was discharging a PRC governmental function rather than a commercial function.” Rather, BUCG participated in the airport project as a general contractor following an open tender and its bid was selected on its commercial merits. Moreover, the Tribunal noted that according to Yemen’s case, BUCG’s contract had been terminated not for reasons associated with “the PRC’s decisions or policies” but for reasons associated with BUCG’s performance of its “commercial services on the airport site”. The Tribunal’s decision is only the second ICSID decision to consider the application of the Broches test and provides welcome clarification as regards the standing of SOEs at ICSID. The decision will be of interest to PRC SOEs, which have made significant investments abroad in a variety of economic sectors, by providing important points of guidance on the capacity of PRC SOEs to bring claims against foreign states under the ICSID Convention. The BUCG decision means that PRC SOEs whose investments are protected by the PRC’s network of more than 110 BITs can bring claims at ICSID in the face of expropriatory or other adverse regulatory measures taken by host States, so long as they can demonstrate that they did not act as an agent of the PRC or discharge a public function in the host State in making their foreign investments. 2 Can the PRC’s first generation BITs be interpreted to allow arbitration over disputes beyond merely the quantification of an expropriation claim? This issues arose out of the narrow scope of the dispute resolution provision found in Article 10 of the Treaty: 1. Any dispute between one Contracting Party and an investor of the other Contracting Party relating to an investment shall, as far as possible, be settled amicably through deliberations and negotiations between the parties to the dispute. 2. If the dispute cannot be resolved by the parties through direct arrangements for amicable negotiations within six months from the date on which a request for settlement is submitted in writing, such dispute may be submitted at the choice of the investor to: a. a competent court of the Contracting Party in the territory of which the investment has been made; or b. the International Centre for the Settlement of Investment Disputes (ICSID) which was established by the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States opened for signature at Washington DC on March 18, 1965, for arbitration. For this purpose, either Contracting Party shall give its irrevocable consent to the submission of any dispute relating to the amount of compensation for expropriation for resolution under such arbitration procedure. Other disputes submitted under such procedure shall be mutually agreed upon between both Contracting Parties. The wording of Article 10 and, in particular, the qualification regarding the availability of ICSID arbitration for “any dispute relating to the amount of compensation for expropriation” is common to the first generation of the PRC’s BITs negotiated before 1998. That said, each BIT is worded differently and should be read and interpreted in accordance with its own terms. Yemen sought a narrow reading of Article 10 of the Treaty, limiting the Tribunal’s jurisdiction solely to disputes as to the calculation of “the amount of compensation” where there is admitted liability by the host State. Yemen relied on the published opinions of a number of well-known Chinese academics to the effect that, prior to 1998, the PRC’s intention when concluding BITs was to limit the scope of ICSID’s jurisdiction in investment disputes to matters only of quantum. The consequence of Yemen’s narrow interpretation is that, if liability is not conceded by the State, or if an investor wishes to complain about anything other than the State’s monetary assessment of its alleged loss, ICSID has no jurisdiction. In contrast, BUCG advocated for a broad interpretation, extending the Tribunal’s jurisdiction to matters of liability of a claim for expropriation as well as an assessment of compensation, since without determining the issue of liability there could be no consideration of quantum.