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ICSID Case No. ARB/14/25
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Date of Award 9 March 2017
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Claimant Ansung Housing Co., Ltd. (Republic of Korea)
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Respondent People's Republic of China
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Treaty Agreement between the Government of the Republic of Korea and the Government of the People's Republic of China on the Promotion and Protection of Investments, entered into force on 1 December 2007
Introduction
On 9 March 2017, an International Centre for Settlement of Investment Disputes (ICSID) tribunal chaired by Professor Lucy Reed, with co-arbitrators Dr. Michael Pryles (Ansung's appointee) and Professor Albert Jan van den Berg (China's appointee) (the Tribunal), issued its award in Ansung Housing Co., Ltd. v. People's Republic of China (the Award). The dispute arose out of Ansung's investment in a golf course and condominium development project in Sheyang-Xian, China. The Award dismissed Ansung's claim and ordered Ansung to pay 75% of China's legal fees and expenses, as well as the direct costs of the proceeding.
Ansung alleged that it was unable to complete the construction of a planned 27-hole golf course with luxury condominiums for several reasons, including alleged harassment by local officials and the imposition of higher prices for land than originally agreed with local government officials. Having only an 18-hole golf course and without the necessary land to complete the 27-hole course or build the luxury condominiums, and facing competition from a nearby golf course developed illegally by a Chinese company, Ansung was unable to sustain a profitable and stable business in Sheyang-Xian. In October 2011, in order to avoid further losses, Ansung disposed of its entire investment to a Chinese purchaser, at a price significantly lower than its investment.Footnote 1
On 7 October, 2014, Ansung filed a Request for Arbitration (RfA) relying on the Treaty and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which entered into force on 14 October, 1966 (Convention).
China filed a preliminary objection to the claim under Rule 41(5) of the ICSID Arbitration Rules (Arbitration Rules), which allows a party to file an objection that a claim is manifestly without legal merit no later than 30 days after the constitution of the tribunal. China's objection was that Ansung's claim should be dismissed as time-barred under Article 9(7) of the Treaty because the claim had been instituted more than three years after Ansung had first acquired knowledge that it had incurred loss or damage.
Why Is This Case Relevant?
This is the first claim to be brought at ICSID by a South Korean investor and the first claim at ICSID to involve China as a respondent State that has proceeded to a substantive hearing and led to an award.
The Award discusses the legal standard for preliminary objections under Rule 41(5) of the Arbitration Rules and dismisses with prejudice Ansung's claims at this preliminary stage.
The Award also raises the much-debated issue of whether a most favoured nation (MFN) clause applies to dispute settlement provisions – in this case, to a limitation period in the dispute resolution provision of the Treaty.
Main Findings of the Arbitration Tribunal
The Threshold for Upholding a Preliminary Objection Under Rule 41(5) is High
The Tribunal addressed the threshold that a respondent party must meet to succeed in an objection under Rule 41(5) that a claim is manifestly without legal merit. The Tribunal emphasized that the standard for upholding an objection under Rule 41(5) was high and, specifically, that China was required to establish its objection clearly and obviously, with relative ease and despatch.
The Tribunal accepted China's argument that mere registration of a claim by ICSID did not determine its legal merit. The ICSID Secretary-General based her decision to register a claim on an early screening process and only ‘on the basis of the information contained in the request’. Accordingly, if registration alone sufficed to demonstrate a claim's legal merit, Rule 41(5) would never lead to early resolution and cease to serve any purpose.
China's Objection to Ansung's Claim on the Basis of the Treaty's Limitation Period
Article 9(7) of the Treaty states that: ‘[n]otwithstanding the provisions of paragraph 3 of this Article, an investor may not make a claim pursuant to paragraph 3 of this Article if more than three years have elapsed from the date on which the investor first acquired, or should have first acquired, knowledge that the investor had incurred loss or damage’ (Emphasis added).
China submitted that Ansung's claim was time-barred under Article 9(7) of the Treaty as it instituted the proceedings more than three years after the date on which it had acquired the knowledge that it had incurred loss or damage.
Ansung countered that its claim was timely as: (1) it first acquired the knowledge that it had incurred loss or damage only around 17 December 2011, more than a year after the government had failed to provide the additional land promised for a second phase of the project; and (2) it had made a claim through submission of its Notice of Intent on 17 May 2014 or on filing its RfA on 7 October 2014.
Start Date of the Limitation Period
The Tribunal held that the determinative words in Article 9(7) were ‘first’ and ‘loss or damage’. It emphasized the difference between knowledge of the fact of having incurred loss or damage and knowledge of the quantum of that loss or damage.
In its RfA, Ansung submitted that it was forced to take certain steps in October 2011 to avoid further losses. This indicated that Ansung had already acquired knowledge of having incurred loss by that date. Although Ansung was able to finalize or liquidate its damage on 17 December 2011, this was not the first date on which Ansung became aware of having incurred damage. Ansung was neither required nor permitted to wait and observe the complete extent of the damage for purposes of Article 9(7). Accordingly, the Tribunal determined the start date for the limitation period (dies a quo) to be October 2011 or earlier.Footnote 2
End date of the limitation period
The Tribunal found that the end date of the limitation period (dies ad quem) was not the date on which Ansung gave its Notice of Intent, but rather the date on which Ansung filed its RfA with ICSID. The RfA was deposited electronically on 7 October 2014 and physically on 8 October 2014. Both dates were more than three years after Ansung had first acquired knowledge of loss or damage. Consequently, Ansung's claim was time-barred and, as such, manifestly without legal merit.
MFN Treatment of Limitation Periods
Ansung argued in the alternative that the MFN clause in Article 3(3) of the Treaty operated to save its claim from being time-barred. China had entered into other bilateral investment treaties which did not prescribe a limitation period within which an investor was required to initiate an arbitration claim. Therefore, the MFN clause operated to save the claim from being time barred and the limitation period in Article 9(7) could be disregarded.
Article 3(3) states that: ‘[e]ach Contracting Party shall in its territory accord to investors of the other Contracting Party and to their investments and activities associated with such investments by the investors of the other Contracting Party treatment no less favourable than that accorded in like circumstances to the investors and investments and associated activities by the investors of any third State (hereinafter referred to as “most-favoured-nation treatment”) with respect to investments and business activities, including the admission of investment’ (emphasis added).
The Tribunal noted that the ambit of an MFN clause is dependent on its wording. Relying on a plain reading of Article 3(3), the Tribunal held that this provision did not extend MFN treatment to a State's consent to arbitrate with investors.
The Tribunal further justified its conclusion by reference to Article 3(5) of the Treaty. Article 3(5) offered investors MFN treatment with respect to ‘access to courts of justice, administrative tribunals and authorities’. However, Article 3(5) conspicuously made no mention of international dispute resolution, such as arbitration under the Treaty.Footnote 3
In conclusion, the Tribunal held that the claim was time-barred under Article 9(7) of the Treaty and that the MFN clause did not assist Ansung. Accordingly, pursuant to Rules 41(5) and 41(6) of the Arbitration Rules, the Tribunal rendered an award that Ansung's claim was manifestly without legal merit.Footnote 4
Costs
The Tribunal noted that Article 61(2) of the Convention gives the Tribunal discretion to allocate all costs of the arbitration between the parties as it deems appropriate.
Recognizing both that Ansung was in the unfortunate position of being a small investor proceeding in good faith against China, and that the novelty of Ansung's arguments concerning the applicability of MFN treatment to limitation provisions was not in doubt, the Tribunal nonetheless found that these were irrelevant considerations for the allocation of costs following a successful preliminary objection under Rule 41(5) of the Arbitration Rules.Footnote 5 Accordingly, the Tribunal assessed all of the direct costs of the proceeding and 75% of China's legal fees and expenses against Ansung.
