30 January 2019
Swissbourgh Diamond Mines (Pty) Ltd and others v Kingdom of Lesotho  SGCA 81
In Swissbourgh Diamond Mines (Pty) Ltd v Kingdom of Lesotho, the Singapore Court of Appeal upheld the High Court’s decision to set aside an investor-State arbitral award (“Award”) made by an ad hoc tribunal constituted under the auspices of the Permanent Court of Arbitration (“PCA Tribunal”). The Singapore Court found that the PCA Tribunal had no jurisdiction to hear a claim made by a South African national and his associated trusts and companies (“appellants”) against the Kingdom of Lesotho (“Kingdom”).
The disputes leading up to the proceedings arose from two distinct matters. The first was the Kingdom’s alleged expropriation of the appellants’ mining leases (“Mining Leases”) during the 1990s (“Expropriation Dispute”). The second was the shuttering of a tribunal (“SADC Tribunal”) established by a treaty of the Southern African Development Community (“SADC Treaty”), of which the Kingdom was a member, without the provision of an alternative forum to determine a claim brought by the appellants against the Kingdom before the SADC Tribunal (“Shuttering Dispute”).
The appellants had failed in their expropriation claims before the domestic courts of the Kingdom, and so commenced proceedings against the Kingdom before the SADC Tribunal in 2009. The appellants claimed that the Kingdom had breached its obligations under the SADC Treaty by wrongfully expropriating the Mining Leases (“SADC Claim”). However, the SADC Tribunal was dissolved by a resolution of the Summit of the Heads of State or Government of the SADC before it could determine the SADC Claim.
In 2012, the appellants commenced arbitration proceedings against the Kingdom before the PCA Tribunal pursuant to a Protocol on Finance and Investment of the Southern African Development Community (“Investment Protocol”). Article 28 of Annex 1 to the Investment Protocol (“Art 28”) provided for disputes between an investor and a State Party concerning an investment, to be submitted to international arbitration, after exhausting local remedies. It was common ground that the Expropriation Dispute fell outside of the PCA Tribunal’s jurisdiction since that dispute had arisen before the Investment Protocol entered into force. This left the question as to whether the Shuttering Dispute, which occurred after the Investment Protocol had entered into force, was caught by Art 28. The claim was heard by the PCA Tribunal, which chose Singapore as the seat of arbitration. In 2016, the PCA Tribunal rendered the Award, finding that the Kingdom had breached various obligations under the treaties by failing to protect the appellants’ right of access to the SADC Tribunal. The PCA Tribunal directed the parties to constitute a new tribunal to hear the appellants’ expropriation claim.
Dissatisfied, the Kingdom commenced proceedings in the Singapore High Court to set aside the Award in its entirety. The Singapore High Court granted the Kingdom’s application on the basis that the Award dealt with a dispute not contemplated by and not falling within the terms of the submission to arbitration. The appellants appealed.
Decision of the Court of Appeal
On appeal, the Court of Appeal upheld the High Court’s decision and dismissed the appeal.
Court had jurisdiction to set aside Award
The Court of Appeal found that it did have jurisdiction to set aside the Award under Art 34(2)(a)(iii) of the Model Law on International Commercial Arbitration. Under Art 34(2)(a)(iii), an award may be set aside if it “deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration”. The appellants argued that Art 34(2)(a)(iii) could not apply to a situation (like the instant case) where the Kingdom was contesting the very existence of the PCA Tribunal’s jurisdiction to deal with the dispute. The court rejected this argument, reasoning that Art 34 should be read flexibly as it is intended to prescribe an exhaustive mechanism for the setting aside of all types of awards. In the court’s view, the arbitration clause in this context was analogous to a unilateral contract. 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. This offer is then accepted once an investor initiates arbitration proceedings in accordance with those terms. Therefore, where an investor purports to rely on an arbitration clause contained in an investment treaty, but the dispute falls outside the scope of that clause, the court would have jurisdiction to set aside the award on the basis of Art 34(2)(a)(iii).
PCA Tribunal lacked jurisdiction to hear and determine appellants’ claim
Under Art 28, the PCA Tribunal could assume jurisdiction if, among other things, there was an “investment”, and there was a qualifying “dispute” which concerned an obligation of the Kingdom in relation to that investment.
To qualify as an “investment”, the court ruled that an asset must both satisfy the definition of “investment” provided in the Investment Protocol and bear a territorial link with the host State. The latter requirement was supported by the broader context surrounding the definition of “investment” (e.g. requiring each host State to promote investments “in its territory”) and as a generally accepted principle of international investment law. On the facts, the Mining Leases satisfied both requirements. First, the Mining Leases were “licences to search for, cultivate, extract or exploit natural resources” (as set out in the definition of “investment” under the Investment Protocol). Secondly, the Mining Leases satisfied the territoriality requirement since they were assets consisting of rights validly created under the domestic laws of the Kingdom in respect of property within the Kingdom’s territory. Therefore, the Mining Leases qualified as an “investment”.
The court, however, rejected the appellants’ contention that the right to refer a dispute to the SADC Tribunal and the SADC Claim could also qualify as “investments”, either as part of the bundle of rights constituting the Mining Leases, or as “stand-alone investments” in their own right. The court accepted that an investment could encompass a bundle of rights, comprising not just the primary right to exploit an investment but also a secondary right to seek remedies and vindicate the primary right. Nonetheless, the alleged assets did not satisfy the territorial nexus requirement: the SADC Tribunal could have been dissolved by a majority of the SADC member states and the Kingdom acting alone would not have been able to prevent this; likewise, the SADC Claim only existed as a matter of international rather than domestic law, and fell outside the Kingdom’s enforcement jurisdiction.
This meant that only the Mining Leases, without the right to refer a dispute to the SADC Tribunal or the SADC Claim in the constituent bundle of rights, were the only viable “investment”. In this regard, the court found that neither the Shuttering Dispute nor the Expropriation Dispute were qualifying disputes under Art 28. As discussed above, the Expropriation Dispute fell outside of the PCA Tribunal’s jurisdiction. As for the Shuttering Dispute, this was essentially about whether the appellants had a right to have the SADC Claim heard by the SADC Tribunal. However, as noted above, that right did not fall within the Mining Leases’ bundle of rights and the appellants’ investment in the Mining Leases did not give rise to any corresponding obligation on the part of the Kingdom to guarantee that the pending SADC Claim would be heard. Therefore, it could not be said that the Shuttering Dispute was concerned with any obligation in relation to the Mining Leases.
Consequently, the PCA Tribunal lacked jurisdiction to hear and determine the appellants’ claim, and the appeal was dismissed.
The definition of “investment” is crucial in determining the relevant parties’ rights and obligations under an investment treaty. Two points from the Court of Appeal’s remarks on the term bear mentioning. First, an “investment” must bear a territorial link with the host State, in addition to the definition expressly set out in the relevant investment treaty. Thus, from the judgment, it appears that an alleged investment must be made or located within the territory of the host State in order to be eligible for protection under the relevant treaties.
Second, in order to fulfil the territorial nexus requirement where the investment is conceived as a bundle of rights, these rights must exist and be enforceable under the host State’s domestic laws. Significantly, based on the judgment, it is generally not sufficient for a right to exist only extraterritorially or on the international law plane, unless the right is within the State’s sole control or where the State has expressly undertaken to guarantee a specific right. For this reason, a close examination of the relevant treaty under which the host State’s purported obligation arises is required.