ICSID tribunal affirms jurisdiction over dispute between Chinese construction firm and Yemen

Beijing Urban Construction Group Co. Ltd. v. Republic of Yemen, ICSID Case No. ARB/14/30

An arbitral tribunal constituted under the China­–Yemen bilateral investment treaty (BIT) has issued its decision on jurisdiction, accepting that the claimant state-owned enterprise (SOE) could pursue arbitration at the International Centre for Settlement of Investment Disputes (ICSID).

Background and claims

The claimant, Beijing Urban Construction Group Co. Ltd. (BUCG), is a wholly state-owned enterprise established under Chinese laws.

Yemen, together with international donors, has been engaged in improving facilities at the Sana’a International Airport for several decades. In 2006 BUCG entered into a contract with the Yemen Civil Aviation and Meteorology Authority (CAMA) to build a new terminal for the airport in the Yemeni capital.

BUCG alleges that, in July 2009, Yemen employed its military forces and security apparatus to assault and detain BUCG’s employees and forcibly deny BUCG access to the construction site. Subsequently, again according to BUCG, Yemen used this incident as an excuse for CAMA to terminate BUCG’s contract.

In its 2014 request for arbitration and subsequent submissions before the tribunal, BUCG claims that it was expropriated in violation of Article 4 of the BIT.

Parties disagree over an SOE qualifies as investor

The ICSID Convention provides a forum for the settlement of investment disputes brought by foreign investors against host states but excludes state-to-state disputes. The Convention, however, does not specifically address the standing of state-owned enterprises (SOEs), such as BUCG.

Yemen submitted that Article 25(1) of the ICSID Convention providing for “a national of another Contracting State” excluded BUCG for two primary reasons: BUCG was under the direction and control of the Chinese government in carrying out its activities, and BUCG was empowered to exercise elements of governmental authority in China.

Yemen further argued that, under Chinese law, SOEs act effectively under the direction and control of the Chinese government and the Chinese Communist Party (CCP), and that this meant that the Chinese government was the ultimate decision maker for BUCG’s operational, management and strategic decisions. In support of its position, Yemen invoked certain features of Chinese law applicable to SOEs generally and BUCG specifically.

BUCG contended that the question of whether or not it qualified under Article 25(1) must be considered in the specific context of the investment that had given rise to the dispute. It argued that its investment in Yemen 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. According to BUCG, structural links to the Chinese government and public functions inside China were irrelevant to its standing as an investor at ICSID.

Tribunal affirms jurisdiction over Chinese SOE

The tribunal agreed with BUCG that the relevant legal question was whether BUCG “functions as an agent of the State in the fact-specific context” (para. 39). For the tribunal, the evidence in the current case did not establish that, “in building an airport terminal in Yemen, BUCG was acting as an agent of the Chinese State in any relevant sense of the word ‘agent’” (para. 39).

In this regard, the tribunal found it particularly noteworthy that “BUCG participated in the airport project as a general contractor following an open tender in competition with other contractors. Its bid was selected on its commercial merits. Its contract was terminated, Yemen contends, not for any reason associated with the PRC’s decisions or policies but because of BUCG’s failure to perform its commercial services on the airport site to a commercially acceptable standard” (para. 40).

The tribunal further found that “the assertion 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” (para. 43).

Tribunal accepts jurisdiction over expropriation claims regarding both liability and compensation

Similar to other treaties negotiated by China prior to 1998, the BIT in its Article 10 contemplates ICSID arbitration for “any dispute relating to the amount of compensation for expropriation.”

Yemen argued that the tribunal’s jurisdiction was limited to disputes concerning the calculation of “the amount of compensation” where there is admitted liability by the host state. In contrast, BUCG advocated for a broad interpretation to include assessment of both liability and compensation. BUCG argued that without determining the issue of liability there could be no consideration of quantum.

The tribunal accepted BUCG’s position and found that Article 10 allows an investor to bring expropriation claims relating to issues of both liability and quantum. In this regard, the tribunal found that the ordinary meaning of the words “amount of compensation” was not conclusively in favour of either party’s position. As the ordinary meaning of the BIT was not conclusive, the tribunal’s interpretation moved to consider the context, object and purpose of the BIT.

Yemen’s objection that claims are purely contractual is dismissed

As a final matter, the tribunal considered Yemen’s objection that BUCG’s claim was purely contractual and thus subject to the exclusive jurisdiction of its contract with CAMA. Consequently, Yemen argued that the tribunal lacked jurisdiction.

BUCG responded that its claims arose under the BIT and were not merely contractual. According to the claimant, the tribunal should apply a prima facie test to the facts presented in the claimant’s memorial and that these facts demonstrated that its claims were capable of constituting BIT breaches.

The tribunal found that it indeed had no jurisdiction to resolve claims and counterclaims alleged by the parties on the basis of contractual obligations. It was limited to considering the relief to which the claimant may or may not be entitled under the BIT. The tribunal then found that it had jurisdiction to hear BUCG’s claims to the extent that they arose under the BIT, which was to be considered in the course of the merits phase of arbitration.

Notes: The tribunal was composed of Ian Binnie (President appointed by the parties, Canadian national), John Townsend (claimant’s appointee, U.S. national) and Zachary Douglas (respondent’s appointee, Australian national). The Decision on Jurisdiction of May 31, 2017 is available at http://www.italaw.com/sites/default/files/case-documents/italaw8968.pdf.

Matthew Levine is a Canadian lawyer and a contributor to IISD’s Investment for Sustainable Development Program.