SUPREME COURT OF SINGAPORE

27 November 2018

Case Summary

Swissbourgh Diamond Mines (Pty) Ltd and others v Kingdom of Lesotho [2018] SGCA 81
Civil Appeal No 149 of 2017

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Decision of the Court of Appeal (delivered by Chief Justice Sundaresh Menon)

CoA dismisses appeal by South African investors against HC decision to set aside PCA arbitration award; PCA tribunal had no jurisdiction to hear their investment treaty claim against Lesotho for participating in the disbanding of a dispute resolution body established by multilateral treaty

Pertinent and significant points of the judgment

• 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 award issued by the arbitral tribunal should be considered to deal with matters not contemplated by or not falling within the arbitration agreement, such that the court would have the jurisdiction to set aside the award pursuant to Art 34(2)(a)(iii) of the UNCITRAL Model Law on International Commercial Arbitration: at [79] and [80].

• To qualify as an investment to be submitted to arbitration, an asset must both satisfy the definition of an “investment” provided in the investment treaty 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 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: at [98], [99] and [102].

• An investment is generally not limited to a single right, such as the primary right to exploit the investment; instead, it generally encompasses a bundle of rights which also includes the secondary right to seek remedies and to vindicate the primary right: at [120].

Background

1          This was an appeal brought by the first to ninth appellants (collectively, “the Appellants”) against the decision of the High Court judge (“the Judge”) to grant an application (“the Setting Aside Application”) brought by the Kingdom of Lesotho (“the Kingdom”) to set aside a partial final award on jurisdiction and merits (“the Award”). The Award was issued by an ad hoc international arbitration tribunal constituted under the auspices of the Permanent Court of Arbitration (“the PCA”) and seated in Singapore (“the PCA Tribunal”). The Appellants had commenced arbitration proceedings (“the PCA Arbitration”), pursuant to Art 28 of Annex 1 to the Protocol on Finance and Investment of the Southern African Development Community (“the Investment Protocol”), against the Kingdom, which is a member of an intergovernmental socio-economic organisation known as the Southern African Development Community (“the SADC”).

2          The Appellants’ complaint in the PCA Arbitration was that the Kingdom had contributed to or facilitated the shutting down (or “shuttering”) of another tribunal (“the SADC Tribunal”), which is a dispute resolution body established pursuant to the Treaty of the Southern African Development Community (“the SADC Treaty”) read with the Protocol on Tribunal in the Southern African Development Community (“the Tribunal Protocol”), without providing for an alternative forum to determine disputes referred to the SADC Tribunal. This in turn caused 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 part-heard SADC Claim. The Kingdom then commenced the Setting Aside Application, which the Judge granted (“the Judgment”).

The material facts

3          The first appellant, Swissbourgh Diamond Mines (Pty) Limited (“Swissbourgh”) is a Lesotho-incorporated company that is owned by the second to fourth appellants (ie, Mr Josias Van Zyl, and the representatives of the Josias Van Zyl Family Trust and the Burmilla Trust). In 1988, Swissbourgh was granted prospecting and mining leases (“the Mining Leases”) in five regions in the Kingdom. The fifth to ninth appellants (collectively, “the Tributees”) are Lesotho-incorporated companies which entered into and registered licensing agreements with Swissbourgh for the sub-lease of the Mining Leases, and served as operating companies responsible for the diamond mining operations in various areas in the Kingdom.

4          Subsequently, between 1991 and 1995, the Kingdom implemented various measures which allegedly hindered Swissbourgh from exercising its mining rights under the Mining Leases, resulting in losses of profit (“the Expropriation Dispute”).

5          In June 2009, the Appellants commenced proceedings against the Kingdom before the SADC Tribunal, claiming damages against the Kingdom on the ground that the Kingdom had allegedly breached its obligations under the SADC Treaty by wrongfully expropriating the Mining Leases (ie, the SADC Claim). However, between August 2010 and August 2015, the relevant governing organs of the SADC unanimously undertook a series of steps that left the SADC Tribunal unable to operate or function, which thus made it impossible for the Appellants to prosecute the SADC Claim. Also, no alternative forum was provided to hear and determine any of the pending claims before the SADC Tribunal (“the Shuttering Dispute”).

6          In June 2012, the Appellants commenced the PCA Arbitration against the Kingdom, alleging that the Kingdom had breached various obligations under the SADC Treaty, the Tribunal Protocol and the Investment Protocol by participating in the shuttering of the SADC Tribunal without providing an alternative means for the SADC Claim to be determined. The Kingdom challenged the jurisdiction of the PCA Tribunal. The PCA Tribunal found in favour of the Appellants, holding that it had jurisdiction to hear and determine the claim, and that the Kingdom had indeed breached its obligations under the various treaties. The PCA Tribunal granted relief by directing the parties to constitute a new tribunal to hear the Appellants’ expropriation claim, and ordered the Kingdom to pay the Appellants’ costs in the arbitration.

7          The Kingdom then filed the Setting Aside Application. The Judge allowed the application, and set aside the Award in its entirety on the ground that the PCA Tribunal lacked jurisdiction over the parties’ dispute. The Appellants appealed against the 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, and 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 Judge given the Appellants’ failure to satisfy the jurisdictional requirements under Art 28(1).

The court’s decision

8          The appeal was dismissed. To this end, the court held that: (a) it did have jurisdiction to hear the Setting Aside Application and to set aside the Award under Art 34(2)(a)(iii) of the UNCITRAL Model Law on International Commercial Arbitration (“the Model Law”); (b) the Kingdom was not bound by the doctrines of estoppel or formal unilateral declaration to accept the PCA Tribunal’s jurisdiction in these proceedings; and (c) 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: at [59] and [227].

9          The court had jurisdiction to hear the Setting Aside Application pursuant to Art 34(2)(a)(iii) of the Model Law, which states that 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”, even though the Kingdom was contesting the very existence of the PCA Tribunal’s jurisdiction to hear and determine the claim referred to it. Article 34(2)(a)(iii) covers situations where the award deals with matters not contemplated by or not falling within the arbitration agreement, and not merely situations where the award decides issues outside the scope of the parties’ submissions in the arbitration. 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. Hence, 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 would have the jurisdiction to set aside the award issued by the tribunal on this ground: at [71], [72], [75], [79] and [80].

10        The Kingdom was not bound to accept the PCA Tribunal’s jurisdiction. 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 estopped from resiling from. The Kingdom had only expressed its willingness to offer an alternative dispute resolution forum for the resolution of the part-heard SADC Claim: at [85], [88] and [91].

11        Article 28(1) of Annex 1 sets out the requirements which have to be satisfied for the PCA Tribunal to assume jurisdiction over the claim, and thus serves as the yardstick against which the Appellants’ purported acceptance of the Kingdom’s consent to arbitration is to be measured. It contains at least three key jurisdictional requirements: (a) there must be an “investment”; (b) the investment must have been “admitted”; and (c) there must be a dispute which “concern[s] an obligation of the [Kingdom] in relation to [that] admitted investment”. 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 SADC region by promoting and protecting investments in the SADC Member States: at [92] to [94].

12        To qualify as an “investment” for the purposes of Art 28(1) of Annex 1, an asset must both satisfy the definition of an “investment” found in Art 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. This requirement is supported by not only the provisions of Annex 1, but also general principles of international investment law. 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. When making an investment, investors acquire property and/or rights that exist or are conferred as a matter of the host State’s domestic law. The extent and scope of those rights are also to be determined as a matter of domestic law. As a matter of international law, the host State undertakes certain obligations and may be liable if those domestic law rights within its jurisdiction are violated. When it is alleged that the host State has violated its obligations under the investment treaty, it may be necessary to identify the particular right that has been violated and consider whether that right has the requisite territorial nexus with the host State so as to implicate the obligations of the host State that arise as a matter of international law: at [93], [98] to [103] and [109].

13        The Mining Leases, the shares in Swissbourgh and the Tributees held by Mr Van Zyl and the representatives of both the JVZF Trust and the Burmilla Trust, as well as the resources expended in pursuing the exploitation of the Mining Leases (collectively, “the Mining Leases”) qualified as an investment for the purposes of Art 28(1) of Annex 1. They satisfied the definition of an “investment” under Art 1(2) as “productive and portfolio investment assets”, as they fell squarely within para (e) of the definition of “investment” in Art 1(2), which refers to “licences to search for, cultivate, extract or exploit natural resources”. The Mining Leases also fulfiled the territorial nexus requirement as they consisted of rights created and conferred under the domestic laws of the Kingdom in respect of property situated within the Kingdom’s territory: at [111(a)] and [112] to [114].

14        The Judge erred by 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 Shuttering Dispute. The Mining Leases can in principle comprise a multitude of rights. An investment is generally not limited to a single right, such as the primary right to exploit the investment; instead, it generally encompasses a bundle of rights which also includes the secondary right to seek remedies and to vindicate the primary right. A dispute submitted to investment arbitration might concern the breach of a secondary rather than a primary right, provided that secondary right is part of the investment 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: at [120], [128] and [131].

15        The right to refer a dispute to the SADC Tribunal (“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. It could only exist on the international law plane and its assurance was not a matter within the Kingdom’s control as it was entirely dependent on the existence and maintenance of a mechanism established under international law by the consent of the SADC Member States. Pursuant to Arts 35 and 36 of the SADC Treaty, the SADC Tribunal could have been dissolved at any time as long as three-quarters of all SADC Member States were to adopt a resolution implementing such a decision or amend the SADC Treaty to achieve a similar outcome. It would have been impossible for the Kingdom, acting alone, to have vetoed or prevented any such resolution which the rest of the SADC Member States had all agreed to pass. The right to refer was therefore not a right that could be guaranteed by the Kingdom acting unilaterally, and fell outside its enforcement jurisdiction: at [135], [139] and [142].

16        In any event, the right to refer could not fall within the Mining Leases’ bundle of rights because it did not even exist at the time the SADC Claim was brought. The SADC Treaty and the Tribunal Protocol are not investment protection instruments, and do not confer upon the Appellants any enforceable right of access to the SADC Tribunal. In particular, Art 32 of the SADC Treaty only provides for a dispute resolution mechanism between SADC Member States in respect of inter-State disputes, and Arts 14 and 15 of the Tribunal Protocol only declare the scope of the SADC Tribunal’s jurisdiction in general terms and do not constitute an independent basis of consent by the SADC Member States to the submission of particular investment disputes by investors to the SADC Tribunal. The entry of force of the Investment Protocol in 2010 did not change this conclusion as the Expropriation Dispute had arisen long before the Investment Protocol entered into force, thus the SADC Claim would have fallen outside the SADC Tribunal’s jurisdiction ratione temporis under Art 28(4) of Annex 1: at [146], [152], [154] and [158].

17        Even though a part-heard arbitration claim can in principle qualify as a stand-alone investment, the SADC Claim did not. The SADC Claim satisfied the Art 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 para (c) of the definition of “investment” in Art 1(2). It might in principle also be considered a continuation or transformation of the original investment, which are the Mining Leases. However, the SADC Claim 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. The putative transformation of the Mining Leases into the SADC Claim was distinguishable from that found in other cases where the claimants’ original investments were replaced by the crystallisation of a domestic law right that fell within the investment’s bundle of rights. In contrast, the SADC Claim only existed as a matter of international law and lay beyond the Kingdom’s enforcement jurisdiction for the same reasons as the right to refer: at [162] to [164] and [172] to [175].

18        Having found that neither the right to refer nor the SADC Claim qualified either as investments or as inherent parts of a qualifying investment, this left the Mining Leases (without the right to refer or the SADC Claim in the constituent bundle of rights) as the only viable qualifying investment under Art 28 of Annex 1. The Mining Leases satisfied the requirement under Art 28(1) and Art 1(2) that an investment must be “admitted” in accordance with the Kingdom’s laws, as there was ample evidence of the Kingdom’s acceptance of the Mining Leases. Even if the Mining Leases were later found to be technically invalid, this would not mean that there was no valid admission: at [176], [177] and [179].

19       There was no qualifying dispute “concerning an obligation of the [Kingdom] in relation to [the Appellants’] admitted investment”, which was the Mining Leases, as required under Art 28(1) of Annex 1. The Shuttering Dispute could not be the qualifying dispute because it was, in essence, about 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. 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 which the Shuttering Dispute was concerned with, and therefore that dispute logically could not fall within the terms of Art 28(1). The Expropriation Dispute, on the other hand, fell outside of the PCA Tribunal’s jurisdiction ratione temporis. As there was no qualifying dispute which could fall within Art 28 and the scope of the Kingdom’s consent to arbitration before the PCA Tribunal, the PCA Tribunal lacked jurisdiction to hear and determine the Appellants’ claim: at [182] to [184].

20        Article 28(1) of Annex 1 and Art 15 of the SADC Treaty expressly require the Appellants to have exhausted all local remedies before submitting a dispute to international arbitration. The initial burden is on the Appellants to show that there are no reasonably available local remedies or where local remedies provide no reasonable possibility of effective redress. The Appellants’ argument that the Mining Leases are invalid would defeat the Kingdom’s objection on exhaustion of local remedies as they would not have suffered any wrong to be remedied, but this would in turn destroy their whole claim for investment protection. Accordingly, the court had to proceed with the exhaustion analysis on the basis that the Appellants did have a valid investment and rights in domestic law capable of protection. It would be premature to infer from the dearth of existing precedents alone that an Aquilian action, a claim in the law of delict for pure economic loss resulting from the wrongful conduct of the State, would not be reasonably available. There was no evidence that there is no possibility of effective redress in the Kingdom’s courts on the basis of intractable case backlog or a lack of judicial independence. There might therefore be a reasonably available and effective remedy in the way of an Aquilian action and this too would have foreclosed the Appellants’ claim and warranted a dismissal of the appeal in any event: at [207], [213], [219] to [222], [224] and [226].

This summary is provided to assist in the understanding of the Court’s judgment. It is not intended to be a substitute for the reasons of the Court. All numbers in bold font and square brackets refer to the corresponding paragraph numbers in the Court’s judgment.

Version No 3: 27 Oct 2020 (22:41 hrs)