July 5, 2017

Milbank Secures Significant Victory for Mongolia over Chinese SOEs in Treaty-Based Arbitration

The dismissal has implications for Chinese foreign investment worldwide

Mongolia, represented by Milbank, Tweed, Hadley & McCloy LLP, has prevailed in an arbitration brought by Chinese State-Owned Entities’ (SOEs) pursuant to the investment-protection treaty between the two countries following Mongolias revocation of a license for the Chinese entities to mine the vast Tumurtei iron ore deposit. The Tribunals award of June 30 dismissing all claims has potentially significant implications for Chinese foreign investment worldwide because the identical treaty language appears in the majority of Chinas 110 bilateral investment protection treaties with other countries.

The Tribunals award parted ways with determinations by two tribunals in prior arbitrations brought by Chinese investors, one confirmed by the Singapore Supreme Court, that found the critical treaty language to be a broad submission to the jurisdiction of international tribunals. In contrast, the Tumurtei Award relied upon evidence of historic Chinese state practices not considered in the prior cases and held that only national courts in the host country of foreign investment, not arbitral tribunals constituted pursuant to the China-Mongolia treaty, were empowered to determine whether the host State had committed an unlawful expropriation.

The final award handed down on June 30, which was unanimous, puts an end to seven years of arbitration. The arbitration was presided over by the former President and current Judge of the International Court of Justice Peter Tomka. A week-long hearing was held at the Peace Palace in The Hague in late 2015. The other members of the arbitration tribunal were Yas Banifatemi, a member of the Shearman & Sterling team that secured the $50 billion arbitration award for Yukos against Russia (by nomination of the Chinese claimants) and Mark Clodfelter, the former US State Department’s Assistant Legal Adviser for International Claims and Investment Disputes (by nomination of Mongolia).

At a time when Chinese outbound foreign investment has become enormous and is growing, the decision of the arbitral Tribunal has potentially significant implications for Chinese foreign investments around the world. Out of 110 bilateral investment treaties entered into by China and still in force, 70 are treaties of the “1st generation” – that is, early treaties concluded in the 1980s and 1990s almost all of which contain the same sort of language restricting access to arbitration to disputes involving the amount of compensation for expropriation. These early treaties reflect China’s distrust of arbitration as a mechanism to resolve disputes with foreign investors at a time when China was predominantly a capital importer hosting foreign investments. It is only around the time that China adopted its so-called “going out” strategy in 2001, shifting its focus to becoming a significant exporter of capital, that a new wave of BITs were signed. In these ‘2nd’ and subsequent generations of Chinese BITs, the arbitration clause was extended to “any disputes concerning an investment” so as better to protect China's outbound investments.

The Tribunals ruling on the Chinese Treaty departed from prior awards interpreting identical language in other Chinese treaties and similar language in communist-era treaties of Russia, Bulgaria and the Czech Republic. In support of its position, claimants had relied on arbitral awards in Tza Yap Shum v. Peru, EMV v. Czech Republic, Renta v. Russia and Sanum v. Laos. In Sanum, the Singapore Court of Appeal held, in September 2016, following extensive treaty-based arbitration proceedings, that a “narrow interpretation” of the dispute resolution clause of the China-Laos BIT (containing the same language) could “render illusory the availability of access to arbitration” and leave the clause without meaningful effect. In Tza Yap, the arbitral tribunal also agreed that the Chinese claimant’s “interpretation, the broader one, is the most appropriate.” 

The Tumurtei arbitration was the first in which a respondent-State had put forward the argument that international arbitration would be available for the determination of quantum following an expropriation formally “proclaimed” by the State. In the arbitration, Mongolia submitted substantial evidence of Chinas historic use of such proclaimed expropriations, whether through ordinances or decrees, when its 1st Generation treaties were entered. Thus, Mongolia argued that the critical treaty language had meaningful effect even if construed so as to exclude international review of the revocation of the Tumurtei license.

By unanimous decision, the Tribunal accepted Mongolia’s position and found that the China-Mongolia BIT “restrict[s] the jurisdiction of an ad hoc arbitral tribunal to encompass only disputes which involve the amount of compensation for expropriation.” The Tribunal disagreed with claimants’ view that the arbitration provision of the BIT would be deprived of any effect in practice, because “[a]rbitration before an ad hoc arbitral tribunal 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 other words, arbitration will be available where the dispute is indeed limited to the amount of compensation for a proclaimed expropriation.”

The Milbank team representing Mongolia was led by Litigation & Arbitration partner Michael Nolan, and associates Kamel Aitelaj and Elitza Popova-Talty.