These terms must be interpreted in the light of the object and purpose of the Investment Protocol, a cardinal objective of which is to increase the flow of investment into the South African Development Community (SADC) region by promoting and protecting investments in the member states of the SADC (the SADC member states).

Article 1(2) of Annex 1, defines an “investor” as “a person that has been admitted to make or has made an investment”, and Article 2(1) of Annex 1, obliges each State party to “promote investments in its territory, and admit such investments in accordance with its laws and regulations”.

Section 3(1) of the International Arbitration Act (Cap 143A, 2002 Rev Ed) (the IAA) provides:

"Model Law to have force of law

3. (1) Subject to this Act, the Model Law, with the exception of Chapter VIII thereof, shall have the force of law in Singapore.”

By virtue of section 3(1) of the IAA, the UNICITRAL Model Law on International Commercial Arbitration (the Model Law) entered into force in Singapore. Article 34(2)(a)(iii) of the Model Law provides as follows:

"Chapter VII

Recourse Against Award

Article 34. Application for setting aside as exclusive recourse against arbitral award

(2) An arbitral award may be set aside by the court specified in Article 6 only if:

(a) the party making the application furnishes proof that:

(iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside.”

The Kingdom of Lesotho (the Kingdom) is a member of the SADC, an inter-governmental socio-economic organisation comprising 15 Southern African states, which was established by the Treaty of the SADC (17 August 1992) 32 ILM 116 (the SADC Treaty). The SADC Treaty also established a tribunal (the SADC tribunal) which has jurisdiction to adjudicate disputes and issue advisory opinions.

The operation of the SADC tribunal including its composition, powers, functions, jurisdiction and procedures, was subsequently clarified by the Protocol on Tribunal in the Southern African Development Community (7 August 2000) which entered into force 14 August 2001 (the Tribunal Protocol).

On 18 August 2006, the SADC signed a Protocol on Finance and Investment (the Investment Protocol) which included an Annex conferring on investors the option of referring certain investor-state disputes to international arbitration via various forums, namely the SADC tribunal, ICSID or an ad hoc arbitral tribunal (Annex 1). Article 15 of the SADC Treaty expressly requires the appellants to have exhausted all local remedies before submitting a dispute to international arbitration.

Facts

The appellants commenced arbitration proceedings against the Kingdom (the PCA Arbitration), pursuant to Article 28 of Annex 1 to the Investment Protocol. The appellants’ complaint in the PCA Arbitration was that the Kingdom had contributed to, or facilitated the closure of the SADC tribunal, without providing an alternative forum to determine disputes referred to the SADC tribunal. This resulted in a pending claim brought by the appellants against the Kingdom (the SADC Claim) to remain unheard. The PCA tribunal found in favour of the appellants, and ordered the parties to constitute a new tribunal to hear the partially heard SADC Claim. The Kingdom then commenced proceedings to set aside the award, which the judge granted (see Legal update, Singapore High Court sets aside investor-state award on merits).

The appellants appealed against the High Court judgment, submitting that:

• The court had no jurisdiction to hear the setting aside application.
• The PCA tribunal did indeed have jurisdiction to render the award.
• The appellants should be entitled to have the expropriation dispute heard by a new tribunal to be established by the parties.

Conversely, the Kingdom submitted that the court did indeed have the jurisdiction to hear the setting aside application, and that the award had correctly been set aside by the High Court given the appellants’ failure to satisfy the jurisdictional requirements under Article 28 of Annex 1 to the Investment Protocol.

Decision

The appeal was dismissed. The Singapore Court of Appeal held that:

• It had jurisdiction to hear the setting aside application and to set aside the award under Article 34(2)(a)(iii) of the Model Law.
• The Kingdom was not bound by the doctrines of estoppel or formal unilateral declaration to accept the PCA tribunal’s jurisdiction in these proceedings.
• The award should be set aside because the PCA tribunal had no jurisdiction to hear and determine the claim referred by the appellants, and the appellants might not have exhausted their local remedies.

Whether the PCA tribunal had jurisdiction

The Court of Appeal held that it had jurisdiction to hear the setting aside application pursuant to Article 34(2)(a)(iii) of the Model Law despite the fact the Kingdom was contesting the very existence of the PCA tribunal’s jurisdiction to hear and determine the claim referred to it.

The Court of Appeal clarified that when a state enters into an investment treaty that provides for the submission of disputes to arbitration, it effectively makes a unilateral offer to arbitrate, and binds itself to arbitrate a claim brought under and in accordance with the terms of this offer if an investor accepts the offer by initiating arbitration proceedings in accordance with those terms. Therefore, where an investor purports to rely on the arbitration clause contained in an investment treaty to refer a dispute to arbitration, but the dispute is found to fall outside the scope of that clause, the court will have jurisdiction to set aside the award issued by the tribunal on this ground.

Identification of an investment

To qualify as an “investment” for the purposes of Article 28(1) of Annex 1, an asset must both satisfy the definition of an “investment” found in Article 1(2) and have a territorial nexus with the host state. To satisfy the territorial nexus requirement, the investment must be made or located within the territory of the host state and, if and to the extent it is conceived of as a bundle of rights, those rights must exist and be enforceable under the domestic laws of the host state. Investors can only expect to enjoy guarantees of certain standards of treatment or protection in relation to investments that are made within the host state because states generally have no extraterritorial jurisdiction and cannot purport to protect rights or property located outside their borders.

The investment in question comprised:

• Mining leases.
• The shares in the Lesotho holding and operating companies.
• The resources expended in pursuing the exploitation of the mining leases.
• The right to claim compensation before the SADC tribunal.

The Court of Appeal held that the lower court had erred in assuming that the mining leases could not have been the relevant investment just because the claim in the PCA arbitration had been brought in respect of the closure of SADC. It was held that the mining leases can in principle comprise a multitude of rights, which include not only the primary right to exploit the investment, but also, among other things, the secondary right to seek remedies and to vindicate the primary right, if and to the extent that the primary right has the requisite territorial nexus with the host state and has been violated. Therefore, where a particular right that constitutes a part of an investment has been violated, and this gives rise to a dispute, a claim may be brought in respect of that dispute. But the right that has been violated need not necessarily be the primary right to exploit the investment, and a dispute in respect of which an investment treaty claim is brought could conceivably concern the breach of a secondary right to vindicate the primary right, provided that secondary right is found to be part of the investment that the host state has undertaken to protect and has the requisite territorial nexus with the host state. A secondary right need not accrue to the investor at precisely the same time as the acquisition of the investment for that secondary right to be protected under the investment treaty.

Further, the appellants contended that the right to refer a dispute to the SADC tribunal as well as the SADC claim each qualify as protected investments under Article 28(1) of Annex 1 on either or both of the following two bases:

• They form part of the bundle of rights that constitutes the mining leases, and hence are an “integrated part of the appellants’ investment in the Mining Leases”.
• They constitute “stand-alone investments” in their own right that fulfill the definition of an “investment” in Article 1(2) of Annex 1, either as a “continuation or transformation” of the original investment in the mining leases, or on their own terms.

However, the Court of Appeal rejected this argument and held that the right to refer did not fall within the mining leases’ bundle of rights because it did not have the requisite territorial nexus with the Kingdom. Despite the fact that the SADC claim satisfied the Article 1(2) definition of an “investment” as it had economic value and fell within the ambit of a “productive and portfolio investment assets”, and more specifically, was a legal claim for a monetary remedy under paragraph (c) of the definition of “investment” in Article 1(2), it could not qualify as an “investment” because it failed the territorial nexus requirement. It only existed as a matter of international rather than domestic law, and fell outside the Kingdom’s enforcement jurisdiction and could not be a protected investment under the relevant treaties.

Admission of the Mining Leases

There was ample evidence that the Kingdom had accepted and admitted the mining leases as investments. The mining leases were issued, approved and registered by the Kingdom’s government officials and ministries after a formal application process, and granted to the holding company by the King. Therefore, the Court of Appeal was satisfied that the mining leases had fulfilled the requirement of admission under Article 28(1) of Annex 1.

Identification of a dispute concerning obligations in relation to the mining leases

There was no qualifying dispute “concerning an obligation of the [Kingdom] in relation to [the appellants’] admitted investment”, as required under Article 28(1) of Annex 1. The dispute concerning the SADC closure could not be the qualifying dispute because it related to whether the appellants had a right to have the SADC claim heard by the SADC tribunal. The correlative obligation to that right must be one owed by the Kingdom to guarantee the appellants’ access to the SADC tribunal or to establish an alternative forum for the SADC claim to be heard. However, because the right to refer did not fall within the mining leases’ bundle of rights, and the mining leases did not give rise to any corresponding obligation on the part of the Kingdom to guarantee that the SADC claim would be heard, there was no obligation in relation to the mining leases with which the SADC closure dispute was concerned. Therefore, that dispute logically could not fall within the terms of Article 28(1).

The original dispute concerning expropriation, on the other hand, fell outside of the PCA tribunal’s jurisdiction, by reason of time. As there was no qualifying dispute which fell within Article 28 and the scope of the Kingdom’s consent to arbitration before the PCA tribunal, it was held that the PCA tribunal lacked jurisdiction to hear and determine the appellants’ claim.

Estoppel

The Court of Appeal held that it had jurisdiction to hear the setting aside application and to set aside the award under Article 34(2)(a)(iii) of the Model Law. The Kingdom is not bound to accept the jurisdiction of the PCA tribunal to hear and determine the claim brought in respect of the closure of SADC on the basis of either estoppel or a formal unilateral declaration. Neither doctrine applied on the facts.

Further, the Kingdom did not make any formal unilateral declaration expressing any intention to accept the PCA tribunal’s jurisdiction or make any representation to that effect which it is stopped from resiling. The court found that the representations made by the Kingdom do not amount to formal unilateral declarations to this effect on the basis that the latter had only expressed its willingness to offer an alternative dispute resolution forum for the resolution of the partially heard SADC Claim.

Whether the appellants exhausted their local remedies

The court noted that the initial burden was on the appellants to show that there were no reasonably available local remedies or that local remedies provide no reasonable possibility of effective redress.

The High Court held that the appellants should have pursued a local remedy described as an “Aquilian action” (a claim in the law of delict for pure economic loss resulting from the wrongful conduct of the state) which could give rise to compensation for pure economic loss caused by the Kingdom’s participation in the closure of the SADC tribunal. Their failure to do so meant that the appellants had not in fact exhausted local remedies. The appellants had failed to assert that the Aquilian action was unavailable or unsuitable, nor had they adduced evidence to show that this remedy was ineffective, or that they would not have succeeded in an Aquilian action before the Kingdom courts.

The Court of Appeal agreed with the decision of the High Court in this regard. Not only was there no evidence that there was no possibility of effective redress in the Kingdom’s courts on the basis of intractable case backlog or a lack of judicial independence, but there may well have been a reasonably available and effective remedy in the way of an Aquilian action and this too would have foreclosed the present claim. The appellants’ failure to exhaust local remedies would therefore have been a bar to the PCA tribunal’s assertion of jurisdiction under Article 28(1) of Annex 1, warranting a dismissal of the appeal in any event.

Comment

This is the second investor-state matter that has been considered by the Singapore Courts following Sanum Investments Ltd v Government of the Lao People’s Democratic Republic [2016] 5 SLR 536 (Sanum) (see Legal update, Latest developments in the Sanum saga: application to refuse enforcement rejected (Singapore High Court). Similar to the Sanum case, the dispute here had no connection to Singapore other than the fact that, with the benefit of parties’ submissions, the tribunal had decided on Singapore as the seat of arbitration.

The Singapore Court of Appeal upheld the High Court’s decision to set aside the award in its entirety in exercise of its power under Article 34(2) of the Model Law. Much of the decision rested on the courts’ objective interpretation and reading of Annex 1 of the Investment Protocol, as well as other relevant treaty provisions in reviewing jurisdiction.

While the decision of the case is highly fact-specific, it indicates the willingness of local courts in undertaking a critical review of investor-state awards where the seat of the arbitration is Singapore. The Singapore courts’ comprehensive review of the arguments put forth by both parties serves to provide valuable guidance for future cases in Singapore and beyond.

Case

Swissbourgh Diamond Mines (Pty) Ltd and others v Kingdom of Lesotho [2018] SGCA 81 (27 November 2018) Sundaresh Menon CJ, Andrew Phang Boon Leong JA, Judith Prakash JA, Tay Yong Kwang JA, Steven Chong JA.