Leiden Law Blog

Another First: Chinese SOEs in Investor-State Arbitration

Posted on by Anran Zhang in Public Law
Another First: Chinese SOEs in Investor-State Arbitration

On 31 May 2017, the ICSID Tribunal issued a decision on jurisdiction in the case, Beijing Urban Construction Group Co., LTD (BUCG) v. Republic of Yemen. For the first time, the International Centre for Settlement of Investment Disputes (ICSID) tribunal discussed whether a Chinese State-Owned Entity (SOE) could bring the claim under investor-state arbitration.

Factual Background

The Claimant, BUCG, is a publicly funded and wholly SOE established by the Chinese Government. BUCG entered into a construction contract in an international airport project with the Authority of Yemen (the Respondent). BUCG alleged that the Respondent had unlawfully deprived it of its investment and had prevented it from performing the contract. The Claimant submitted the claims to the ICSID pursuant to the China-Yemen Bilateral Investment Treaty (BIT and the ICSID Convention.

Disputes on Jurisdiction

In total, the Respondent raised five objections concerning jurisdiction. This blog will focus on the first objection. The Respondent argued that the Claimant was an agent of the Chinese Government, therefore the Claimant did not qualify as “a national of another Contracting State” under the terms of ICSID Convention. With respect to the objections raised by the Respondent, the Claimant argued that SOEs that were operating as ordinary commercial entities could bring claims under the ICSID Convention.

The Tribunal started the analyses on the basis of the Broches test and the Ceskoslovenska Obchodini Banka, A.S. (CSOB) v. The Slovakia Republic case that were cited by the parties. The Broches test was formulated by Aron Broches, the first Secretary-General of ICSID and it is also consistent with the International Law Commission’s Draft Article on State Responsibility. The Broches test established two branches to determine whether SOEs can bring claims. It claimed that a government-owned corporation can be qualified as a “national of another Contracting States” if the corporation does not act as an agent for the government or is discharging an essentially governmental function. In the CSOB case, the Tribunal also applied the Broches test and stressed that the activities made by the state-owned CSOB should be essentially commercial rather than governmental in nature in order to submit a claim.

Therefore, in the present case, the Tribunal examined the circumstances to establish whether either branch of the Broches test applied.

An agent of the government?

Relying on the documents and announcements published by the Chinese Government, the Respondent pointed out that BUCG was advancing the national interests of China. The Respondent argued that BUCG was supervised by the Chinese Government with regard to human resources, finance and materials to promote national development and polices. The Tribunal stressed that the corporation framework of SOEs is common, and the core issue is whether the corporate functioned as an agent of the state. On the basis of the available evidence, the Tribunal found that, firstly, BUCG participated in the airport project as a contractor that was in open competition with other companies; secondly, that BUCG’s contract was terminated due to failure to perform the commercial services at the site to a commercially acceptable standard; furthermore, the Respondent also argued that the present disputes was a commercial dispute. Therefore, the Tribunal found that BUCG performed the work as a commercial contractor and not as an agent of the Chinese Government.

Discharging an essentially Governmental Function?

The Respondent argued that the Chinese Government was the ultimate decision maker when it came to the key management, optional and strategic decision. But the Tribunal held that this was irrelevant. Moreover, the alleged military aggression was not made by Yemen against China, but against BUCG as a contractor. In the present case, the Tribunal focused on the functions of BUCG in this particular instance and with regard to the available evidence, BUCG was not fulfilling Chinese governmental functions.

Besides the above, the Respondent argued that BUCG had failed to register its investment in accordance with the domestic law of Yemen. The Tribunal found that there was not express provision in the China-Yemen BIT that imposed a requirement to obtained registration for an investment under protection. Therefore, the Tribunal dismissed all the Respondent’s objections ratione personae.

Contention in A New Time

Chinese SOEs always play an important role in China’s economic and international investments. Most of the Chinese companies on the list of Fortune 500 are state-owned, specializing in energy, finance, construction and the communications industry. Under the guideline of certain national strategies and policies, e.g. take the China-led “One Belt One Road (OBOR)” initiative, more infrastructure investment can be made by China’s SOEs. It is possible that these SOEs can be strongly promoted or guided by the national policy. Whether those companies that make an investment in other states are the “proper investors” under the terms of investor-state arbitration, remains the bone of contention.

Cover photo: “RAISING THE BAR - SOE” Illustration for Forbes Indonesia 

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