Background 

Section 10(3) of the International Arbitration Act (Cap. 143A) (IAA) provides:

"If the arbitral tribunal rules —

(a) on a plea as a preliminary question that it has jurisdiction; or

(b) on a plea at any stage of the arbitral proceedings that it has no jurisdiction,

any party may, within 30 days after having received notice of that ruling, apply to the High court to decide the matter."

The UNICITRAL Model Law on International Commercial Arbitration (“Model Law”) entered into force in Singapore law under section 3 of the IAA. Article 34(2)(a)(iii) of the Model Law provides:

"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"

Southern African Development Community (SADC) 

The Kingdom of Lesotho (“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 Southern African Development Community (17 August 1992) 32 ILM 116 (“SADC Treaty”). The SADC Treaty also established a tribunal (“SADC tribunal”) which had the jurisdiction to adjudicate disputes and issue advisory opinions in respect of the SADC Treaty.

On 7 August 2000, the SADC signed the Protocol on Tribunal in the Southern African Development Community (“Tribunal Protocol”) which clarified the operation of the SADC Tribunal. On 18 August 2006, the SADC signed a Protocol on Finance and Investment (“Investment Protocol”) which included an Annex conferring investors with the option to refer certain investor-state disputes to international arbitration under various fora, namely the SADC tribunal, ICSID or an ad hoc arbitral tribunal (“Annex 1”). The Investment Protocol (together with Annex 1) entered into force on 16 April 2010. 

Article 28 of Annex 1 to the Investment Protocol provides:

"1. Disputes between an investor and a State Party concerning an obligation of the latter in relation to an admitted investment of the former, which have not been amicably settled, and after exhausting local remedies shall, after a period of six (6) months from written notification of a claim, be submitted to international arbitration if either party to the dispute so wishes.

2.Where the dispute is referred to international arbitration, the investor and the State Party concerned in the dispute may agree to refer the dispute either to:

(…)

(c) An international arbitrator or ad hoc arbitral tribunal to be appointed by a special agreement or established under the Arbitration Rules of the United Nations Commission on International Trade Law.

(…)

4. The provisions of this Article shall not apply to a dispute, which arose before entry into force of this Annex."

Facts

On 12 June 2009, the defendants, which included Swissbourgh Diamond Mines (Pty) Ltd (“Swissbourgh”) as the first defendant, commenced arbitral proceedings under the SADC Treaty and the Tribunal Protocol against the Kingdom, before the SADC tribunal (“SADC Claim”). The defendants sought damages for the Kingdom's violations of the SADC Treaty through its purported expropriation of five mining leases which it had previously granted to Swissbourgh (“Expropriation Dispute”).

In 2010, the SADC tribunal was suspended as a result of a series of resolutions adopted by the SADC Summit (which included the Kingdom). As a result, the SADC tribunal was prevented from determining the cases pending before it, which included the SADC Claim.

On 20 June 2012, the defendants commenced ad hoc arbitral proceedings under the Permanent Court of Arbitration (“PCA”) against the Kingdom under Article 28 of Annex 1, on the basis that the Kingdom had breached its obligations under the SADC Treaty, the Tribunal Protocol and Annex 1 by contributing to or facilitating the shutting down (or shuttering) of the SADC tribunal without providing alternative means for the SADC Claim to be determined (“Shuttering Dispute”). Singapore was chosen as the seat of the arbitration. In August 2012, the SADC Summit resolved to dissolve the SADC tribunal entirely.

By a majority, the tribunal in the ad hoc proceedings (“PCA tribunal”) issued an award which dismissed various jurisdictional objections made by the Kingdom and found in favour of the defendants in respect of the Shuttering Dispute. By way of relief, the PCA tribunal found that the parties should establish a new tribunal to hear and determine the SADC Claim.

The Kingdom applied to the Singapore High Court for the award to be set aside or reversed under section 10(3) of the IAA or Article 34(2)(a)(iii) of the Model Law, based on the following jurisdictional objections:

• The PCA tribunal lacked jurisdiction ratione temporis (by reason of time) over the dispute, which arose before the entry into force of Annex 1 (before 16 April 2010) and therefore fell foul of Article 28(4) of Annex 1.
• The PCA tribunal lacked jurisdiction ratione materiae (by reason of the matter) because the dispute did not have the necessary connection to an "investment" within the meaning of Article 28(1) of Annex 1.
• The defendants' purported investment had not been "admitted" within the meaning of Article 28(1) of Annex 1.
• The dispute was not one which concerned an "obligation" of the Kingdom "in relation to" the defendants' purported investment within the meaning of Article 28(1) of Annex 1.
• The dispute was not one in relation to which the defendants had exhausted local remedies, as required by Article 28(1) of Annex 1.
• The PCA tribunal lacked jurisdiction ratione personae (by reason of the person concerned) over Swissbourgh and the fifth to ninth defendants, who were not capable of qualifying as "investors" for the purposes of Article 28(1) of Annex 1, and therefore lacked standing to commence the arbitration.

A preliminary objection was raised by the defendants as to the Kingdom's ability to bring the application under section 10(3) of the IAA and Article 34(2)(a)(iii) of the Model Law read with section 3(1) of the IAA.

Decision

The Singapore High Court set aside the PCA award in its entirety, after finding in favour of the Kingdom in respect of five out of the six jurisdictional objections.

Defendants' preliminary objection: the basis for the setting aside application

The court followed the ruling in AQZ v ARA [2015] 2 SLR 972 and held that section 10(3) of the IAA did not apply since the award dealt with the merits of the dispute, namely the Kingdom's alleged breach of its treaty obligations by participating in the shuttering of the SADC tribunal.

However, the court found that it had jurisdiction to determine the Kingdom's jurisdictional challenges under Article 34(2)(a)(iii) of the Model Law, among other things, on the basis that a tribunal's award can be set aside under Article 34(2)(a)(iii) of the Model Law if it decides a dispute beyond the terms or scope of the arbitration agreement.

Applicable laws and principles of treaty interpretation

Since this case involved novel and complex legal questions, the court spent time considering the applicable laws and principles of treaty interpretation before proceeding to consider the Kingdom's jurisdictional objections.

In respect of the applicable laws, the court recognised that an application to set aside an international arbitral award in an investor-state treaty arbitration will typically involve the following different substantive laws:

• The law applicable to the substance of the dispute (lex causae), namely the relevant treaty as interpreted according to public international law.
• The law applicable to the arbitration agreement between the investor and the state.
• The law applicable to the arbitration procedure itself (lex arbitri).

In this case:

• The lex causae comprised of the SADC Treaty, its related protocols and general principles of international law applicable to the interpretation of the same, because the dispute concerned the Kingdom's alleged breaches of its obligations under the SADC Treaty and protocols.
• Since the arbitration agreement in this case arose under Article 28 of Annex 1, the law applicable to the arbitration agreement was irrelevant.
• Given the seat of the arbitration, the lex arbitri governing the setting aside proceedings was the law of Singapore.

As to the interpretive approach, the court considered that the general international law principles of treaty interpretation, in particular those set out in the Vienna Convention on the Law of Treaties, were relevant to the interpretation of the arbitration agreement set out in Annex 1 of the Investment Protocol.

Jurisdictional objections

Applying a de novo standard of review in assessing the Kingdom's jurisdictional objections (see Sanum Investments Ltd v Government of the Lao People's Democratic Republic [2016] 5 SLR 536, discussed in Legal update, Singapore Court of Appeal reinstates tribunal's finding that PRC-Laos BIT applies to Macau: full update), the court made the following findings in respect of the Kingdom's jurisdictional objections:

• The dispute submitted to arbitration was the Shuttering Dispute, which was within the PCA tribunal's jurisdiction ratione temporis under Article 28(4) of Annex 1.
• The defendants' right to submit disputes to the SADC tribunal was not an "investment" within the meaning of Article 28(1) of Annex 1.
• The defendant's purported investment (namely the defendants' right to submit disputes to the SADC tribunal) was not "admitted" for the purposes of Article 28(1) of Annex 1.
• The Shuttering Dispute did not concern any obligation of the Kingdom "in relation to" the defendants' purported investment.
• The defendants had failed to exhaust local remedies as required by Article 28(1) of Annex 1.
• Swissbourgh and the fifth to ninth defendants were not "investors" for the purposes of Article 28(1) of Annex 1.

Were the two disputes separate and distinct?

The first jurisdictional objection turned on whether the relevant dispute arose before the entry into force of Annex 1, thereby falling foul of Article 28(4) of Annex 1. According to the defendants, the dispute before the PCA tribunal concerned the Shuttering Dispute and not the Expropriation Dispute. According to the Kingdom however, the real dispute was the Expropriation Dispute which had arisen before April 2010. The court found that the true dispute before the PCA tribunal was the Shuttering Dispute which arose after the entry into force of Annex 1 and was therefore within the PCA tribunal's jurisdiction ratione temporis.

In reaching its decision, the court analysed various arbitral decisions and distilled the following non-exhaustive considerations which are relevant in assessing whether a dispute submitted to arbitration is separate and distinct from an underlying dispute:

• Whether the two disputes involve the same factual or legal disagreement. Can the second dispute be resolved without simultaneously determining the first dispute?
• Whether the two disputes have the same real cause. Do the facts and considerations that giving rise to the earlier dispute continue to be central to the later dispute? Do the disputes have the same origin or source?
• Whether the two disputes target or centre on the same conduct. Were the acts of wrongdoing committed by the same entity? 

Applying the above considerations, the court found that the Shuttering Dispute was distinct and separate from the Expropriation Dispute. In particular, the two disputes did not involve the same legal conflict because:

• The substantive disagreement in the Expropriation Dispute was whether the Kingdom's acts from 1991 to 1995 constituted unlawful expropriation of the Mining Leases.
• The substantive disagreement in the Shuttering Dispute was whether the Kingdom's participation in the SADC Summit's decision to dissolve/shutter the SADC tribunal constituted a breach of the Kingdom's treaty obligations. 

Did the dispute concern an obligation in relation to an admitted investment within the meaning of Article 28(1)?

Given that the dispute for the purposes of Article 28(1) was the Shuttering Dispute, the court found the corresponding investment for the purposes of Article 28(1) to be the right to refer the disputes to the SADC tribunal (and thereby the right to claim for compensation before the SADC tribunal for the expropriation of the Mining Leases) rather than the Mining Leases themselves.

However, the court disagreed that this right to refer disputes to the SADC tribunal was an "investment" for the purposes of Article 28(1). According to the court, "investment" encompassed rights or property acquired in the host state and arising under its domestic laws. The court also rejected the "bundle of rights" analysis relied on by the PCA tribunal which viewed the defendant's secondary right as part of the "bundle of rights" created by the Mining Leases, because the right to refer disputes to the SADC tribunal arose under the SADC Treaty and the Tribunal Protocol which both entered into force after the Mining Leases themselves. Therefore, this right was not given to the defendants in response to, in exchange for or in recognition of their investment activities in the Kingdom.

Further, the court held that the defendants' right to refer disputes to the SADC tribunal was not an "admitted" investment. According to the court, "admission" is a matter of compliance with a host state's domestic laws and regulations and the court found that the defendants' right to refer disputes to the SADC tribunal was not "admitted" in the ordinary sense of that word, since such a right was not susceptible to admission in accordance with the Kingdom's laws. 

The court interpreted "obligation" in Article 28(1) to mean an obligation owed by the Kingdom to the investor (rather than to other SADC Member States) and held that "obligation" was not restricted to obligations arising under Annex 1. The "obligations" identified by the PCA tribunal in the award, which included the obligation not to withdraw the Kingdom's consent to, or otherwise interfere with, the SADC tribunal's jurisdiction under the Tribunal Protocol in respect of the defendants' part-heard case, were not obligations which existed "in relation to" an admitted investment. Since the defendants' purported "investment" (being the right to refer disputes to the SADC tribunal) was itself a treaty protection under the SADC Treaty and Tribunal Protocol and accorded to investors, the court reasoned that it would be contrived to describe the identified obligations as obligations existing "in relation to" the purported investment, as this would mean that the "obligation" and the "investment" would be one and the same.

Had the defendants exhausted local remedies?

The question before the court was whether there were local remedies under the Kingdom's municipal legal system, which were effective and available as a matter of reasonable possibility and which the defendants had not relied upon, that addressed the termination of the defendants' right to refer the Expropriation Dispute to the SADC tribunal. . The court held that the defendants should have pursued a local remedy described as an "Aquilian action" which could give rise to compensation for pure economic loss caused by the Kingdom's participation in the shuttering of the SADC tribunal and their failure to do so meant that they had not exhausted the local remedies. The defendants had failed to assert that the Aquilian action was unavailable or did not suit the facts of the present case, 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 Lesotho courts.

Were the defendants "investors"?

The court found that Swissbourgh and the fifth to ninth defendants were not "investors" for the purposes of Article 28(1) of the Annex 1. Having regard to the context, object and purpose of Annex 1, the court also rejected the argument that "investors" in Article 28(1) was intended to extend to domestic investors.  

The court's conclusion

Given the court's decision in respect of the jurisdictional objections raised by the Kingdom, the court found that the award dealt with a dispute not contemplated by and not falling within the terms of the submission to arbitration, thereby falling foul of Article 34(2)(a)(iii) of the Model Law. 

While the court recognised its residual discretion not to set aside an award, even where the grounds under Article 34(2) of the Model Law are made out, it pointed out that this discretion should only be exercised if no prejudice has been sustained by the aggrieved party (see CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK [2011] 4 SLR 305). This was clearly not the case here, since the PCA tribunal had wrongly assumed jurisdiction. Therefore, the court set aside the award in its entirety.

Comment

This case is noteworthy because it is the first case in Singapore to consider an application to set aside an investor-state arbitral award on the merits and it involves questions of arbitral and international investment law which the Singapore courts had not previously considered.

While most of the court's findings were arguably specific to the particular facts of the dispute and the wording of the SADC Treaty, this judgment nevertheless provides useful guidance as to the Singapore court's approach to the interpretation of international treaties in the context of investor-state arbitrations.

Case

Kingdom of Lesotho v Swissbourgh Diamond Mines (Pty) Ltd and others [2017] SGHC 195 (Singapore High Court).