Summary

In a recent decision, the High Court of Singapore set aside an arbitration award that applied the protections of the PRC-Laos bilateral investment treaty (BIT) to the Macau Special Administrative Region of China (Macau). This decision has implications for approximately 130 other BITs to which the PRC is a party. While not dispositive, the decision increases the uncertainty as to whether a Macau or a Hong Kong company would qualify for protection under a BIT agreed by mainland China. If the decision goes to the Court of Appeal, it may take 6 months or more to learn the ultimate outcome of the issue.

Background

On 20 January 2015, the High Court of Singapore decided Government of the Lao People’s Democratic Republic v. Sanum Investments Ltd, holding that the BIT between the People’s Republic of China (PRC) and the Lao People’s Democratic Republic (Laos) is not applicable to Macau, which, similar to Hong Kong, is a special administrative region of the PRC.

The High Court made its decision in the context of a dispute between Laos and Sanum Investments Ltd (Sanum), a company incorporated in Macau.  Sanum originally brought an arbitration claim against Laos under the PRC-Laos BIT, alleging breaches of the treaty in relation to its casino and other investments in the hospitality industry in Laos.  In December 2013, the arbitral tribunal accepted jurisdiction over the dispute on the basis that the territorial scope of the PRC-Laos BIT included Macau.  In January 2014, Laos asked the High Court of Singapore to set aside the award.

The decision

In deciding the central question of whether the PRC-Laos BIT applies to Macau, the court looked to Article 29 of the Vienna Convention on the Law of Treaties (VCLT), which states that a treaty is binding on the entire territory of each contracting state unless it (1) appears from the treaty or (2) is otherwise established that the contracting states intended otherwise. The court then acknowledged that prima facie the PRC-Laos BIT applies to the entire territories of Laos and the PRC, which undisputedly includes Macau, but held that the second exception to the VCLT applied.

The court noted that the first exception to Article 29 of the VCLT was not established since the language of the PRC-Laos BIT is inconclusive: it does not state whether it applies to Macau, nor does it expressly exclude Macau. Sanum, relying on the PRC-Russia BIT, which specifically excludes Hong Kong and Macau from its application, argued that the absence of a similar exclusionary clause in the PRC-Laos BIT shows that the treaty was intended to apply to Macau. The court, however, reasoned that at the time the PRC-Laos BIT was concluded in 1993, the PRC did not exercise sovereignty over Macau (which happened in 1999) and thus, both the PRC and Laos may have considered it unnecessary to exclude Macau. Therefore, the court held that no definite conclusion can be drawn from the language of the BIT.

To establish the second exception, the court relied heavily on two diplomatic letters between the PRC (through its Embassy in Laos) and Laos stating the view of the PRC that the PRC-Laos BIT does not apply to Macau “unless both China and Laos make separate arrangements in the future”.  As a preliminary matter, the court rejected Sanum’s argument that the letters should not be admitted as evidence because they were obtained only after the tribunal had issued its award.  The court accepted Laos’ explanation that the letters were not available earlier because it took time for diplomatic communications between Laos and the PRC to conclude.  The court also referred to the arbitral tribunal’s having noted “the difficulty it faced in ascertaining the application or non-application of the PRC/Laos BIT to [Macau] due to the paucity of factual elements presented by the Parties: there were no affidavits from the PRC, Laos or [Macau], which could probably have been obtained from the respective authorities.” 

In the court’s view, the letters were indicative of the governments’ intentions in drafting the PRC-Laos BIT with respect to the issue of whether the BIT would apply to Macau.  The court reasoned that the two letters constituted an agreement under Article 31(3)(a) of the VCLT, which provides that subsequent agreements between the parties regarding the interpretation of a treaty can be taken into account.  Moreover, in the court’s view, the two letters did not amount to a retroactive agreement that altered the positions and expectations of third parties such as Sanum, because they confirmed the status quo.

The court also specifically addressed the analogous situations between Hong Kong and Macau.  Although at least one arbitral tribunal has held otherwise – Tza Yap Shum v. Peru, ICSID Case No ARB/07/6 – the court was of the view that the prevailing assumption with respect to Hong Kong is that PRC treaties do not apply to Hong Kong.  The court then reasoned that because the arrangements made with respect to Hong Kong were likely used as a model for Macau and the basic laws of Hong Kong and Macau are similar in many respects, the PRC is likely to consider that its treaties do not apply automatically to Macau.

As to the standard of its review, the court rejected Sanum’s argument that the standard of judicial review of the award should be a limited one of deference to the jurisdiction decision of the tribunal because the decision involved the interpretation of an investment treaty by arbitrators expert in international law.  The court found that there was no basis to distinguish between treaty-based and commercial arbitration and followed the de novo standard of review which entails a fresh examination of any issue of jurisdiction. 

Although the court did not need to do so, it proceeded to interpret the arbitration article in the PRC-Laos BIT.  It adopted a restrictive interpretation to find that the agreement to arbitrate under the BIT applies only to disputes involving the monetary amount of compensation payable to investors.