Zhongshan Fucheng Indus. Inv. Co. v. Federal Republic of Nigeria, No. 22-cv-170 (D.D.C. Jan. 26, 2023) [click for opinion]

In 2007, Ogun State, located in Nigeria's southwestern region, began contracting with Chinese companies to develop the Ogun Guandong Free Trade Zone (the "Zone"). Eventually, Ogun State, Guangdong Xinguang International China-Africa Investment Ltd. ("CAI") and CCNC Group, Ltd. entered into an agreement where the three entities would jointly own the Ogun Guandong Free Trade Zone Company ("OGFTZ") for a term of 99 years, with CAI leading its development.

After three years of limited progress, in 2010, OGFTZ entered into an agreement with Zhuhai Zhongfu Industrial Group Co. Ltd. ("Zhuhai"), providing Zhuhai with rights to develop portions of the Zone into Fucheng Industrial Park. Zhuhai subsequently transferred its rights to its subsidiary, Zhongshan Fucheng Industrial Investment Co., Ltd. ("Zhongshan"), which operated in Nigeria through its Nigerian subsidiary Zhongfu International Investment (NIG) FZE ("Zhongfu").

From 2010 until the breakdown of the relationship in 2016, Zhongfu invested substantial assets into developing Fucheng Industrial Park. During this period, CAI's management of the overall Zone had broken down. Ogun State accordingly terminated CAI's participation in OGFTZ in 2012 and appointed Zhongfu to take CAI's place in 2013.

However, in 2016 Ogun State—prompted by a diplomatic note from the Chinese Consulate—sent a letter to OGFTZ indicating that CAI had been acquired by Guangdong New South Group ("NSG"), and that this acquisition may have somehow entitled NSG, rather than Zhongfu, to ownership of the Zone. Ogun State urged representatives of Zhongfu and Zhongshan to leave the country, then issued warrants for their arrest. Wenxiao Zhao, who had served as OGFTZ's CFO, was allegedly arrested, beaten and detained before being able to flee Nigeria.

In 2018, Zhongshan commenced an arbitration against Nigeria under the Agreement Between the Government of the People's Republic of China and the Government of the Federal Republic of Nigeria for the Reciprocal Promotion and Protection of Investments ("China-Nigeria BIT"). Zhongshan brought claims for violation of the obligation of fair and equitable treatment, unreasonable discrimination, failure to provide continuous protection, violation of contract, and wrongful expropriation without compensation. An arbitral tribunal in London rendered a final award in favor of Zhongshan and ordered Nigeria to pay an award of $70 million (the "Award").

After Nigeria's failure to pay the Award, Zhongshan brought suit against Nigeria under the Federal Arbitration Act (the "FAA"), Chapter 2 of which provides for confirmation of arbitral awards falling under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"). Nigeria subsequently filed a motion to dismiss for lack of subject-matter and personal jurisdiction under the Foreign Sovereign Immunities Act (the "FSIA"), contending that no exception to the FSIA applied because the award did not fall under the New York Convention.

The court disagreed. The New York Convention provides for signatory states' recognition of arbitral awards "made in the territory of a State other than the State where the recognition and enforcement of such awards are sought." When the United States ratified the New York Convention, it recognized that an arbitral award would fall under the New York Convention if two elements were satisfied: (1) the award must be rendered within the jurisdiction of a signatory country; and (2) the award must arise out of a legal relationship, whether contractual or not, which is considered as commercial.

Here, the award was rendered in the United Kingdom, a signatory country. Nigeria accordingly argued that the China-Nigeria BIT that gave rise to the Award did not establish a commercial relationship between Zhongshan and Nigeria. The court rejected this contention. According to Nigeria's logic, any award rendered pursuant to a sovereign state's violation of a treaty created under public international law would be per se "noncommercial." However, the D.C. Circuit had confirmed many awards in which sovereign nations had been found to breach treaty obligations owed to private investors.

The court also rejected Nigeria's attempt to distinguish between what it called "Treaty Claims" and "Commercial Claims." Nigeria attempted to define the New York Convention's "commercial" reservation by reference to the FSIA's "commercial activity" exception, under which a foreign state is only held to engage in commercial activities when it acts in the manner of a private player within the market. The court explained that, unlike with the FSIA, Congress was not codifying the restrictive theory of foreign sovereign immunity when it ratified and implemented the New York Convention. Instead, because the Convention's purpose was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts, D.C. courts have recognized that a matter is "'commercial' in an international arbitration context when it has a connection to commerce." Here, there was no debate that the multi-million dollar investment Zhongshan made in Nigeria was connected with commerce, such that the Award fell under the New York Convention.

Once this was established, the court rejected Nigeria's claim of sovereign immunity under the FSIA. Under the "arbitration exception" to the FSIA, Section 1605(a)(6), a foreign state shall not be immune from jurisdiction in which the action is brought to confirm an award made pursuant to an agreement to arbitrate if the agreement or award is governed by a treaty or other international agreement in force calling for the recognition and enforcement of arbitral awards. Zhongshan had showed that the arbitration exception to immunity was applicable: Nigeria had agreed to arbitrate under the China-Nigeria BIT, the tribunal had issued an Award, and the Award was governed by the New York Convention. For these reasons, the court denied Nigeria's motion to dismiss.

Duk-ki Moon of the Washington, DC office contributed to this summary.