Investment treaties and their role in protecting Chinese businesses abroad: A look at the Zhongshan v Nigeria award

Article Experience

In January this year, it was reported that a Chinese company, Zhongshan Fucheng Industrial Investment Co Ltd (‘Zhongshan’) had applied to a US court to enforce its US$70 million arbitration award against the Federal Republic of Nigeria (1). This award arose from a successful arbitration claim brought by Zhongshan against Nigeria for breaches of the China-Nigeria bilateral investment treaty (‘BIT’) as a result of certain actions taken by Nigerian state actors and entities. Consequently, Zhongshan was able to obtain significant compensation for such actions, including for steps taken to deprive the company of its rights under various agreements, unlawfully evicting the company and its employees from the free-trade zone in Nigeria and harassing and intimidating the company’s employees (2).

This case demonstrates the value of investment treaties in protecting Chinese businesses abroad and their utility in enabling Chinese companies to seek redress and compensation where they have been subject to unfair treatment in breach of investment treaty standards.

I. What are investment treaties?

Before considering the Zhongshan v Nigeria award, we address the fundamental question of what investment treaties are. Investment treaties are agreements signed between governments. They provide qualifying international investors with substantive protections against unfair treatment, discrimination and investment / asset expropriation by the host state (including but not limited to actions of the government) into which they have invested.

Investment treaties serve to protect international businesses in two ways. First, they allow investors – both companies and natural persons – to bring international arbitration claims directly against states for wrongful treatment of their investments. This significantly improves the position of foreign investors vis-à-vis host states because a foreign investor will not have to rely on the domestic courts of the host state to adjudicate its claim.

Further, there are international frameworks in place to ensure the efficacy of enforcement of arbitration awards. Under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘New York Convention’), state parties are obliged to recognize arbitral awards as binding and enforce them (3), with limited exceptions, and under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (‘ICSID Convention’), state parties are obliged to recognize an ICSID award as binding and enforce it as if it were a final judgment of a court in that state (4). The coverage of both these conventions is extensive with the New York Convention having 166 states as parties and the ICSID Convention having 155 contracting states.

Second, investment treaties can have a pre-emptive effect, deterring states from conducting themselves in a manner that would be in breach of investment treaties. A host state may be more hesitant to conduct wrongful acts knowing the existence of investment treaty rights held by investors, and when wrongful treatment does happen, threatening to exercise such rights can put the investor in a better position for negotiating a settlement with the host state.

II. The Zhongshan v Nigeria award

Zhongshan v Nigeria concerned an arbitration claim brought by a Chinese company against Nigeria for various breaches of the China-Nigeria BIT. The case involved a dispute between Zhongshan, a Chinese company, and the Ogun state government, the local government of a province in south-west Nigeria. In 2010, Zhongshan acquired certain rights under a contract with the OGFTZ company, a Nigerian company in which the Ogun state is a shareholder, to develop a 10,000 hectare free-trade zone in the Igbesa region of Ogun state (the ‘Zone’). Following this agreement, Zhongshan established a Nigerian subsidiary, Zhongfu International Investment (NIG) FZE (‘Zhongfu Nigeria’), to engage in the development of the Zone on the ground in Nigeria. In 2012, Ogun state appointed Zhongfu Nigeria as interim manager of the Zone and this appointment was made permanent in 2013 by way of a joint-venture agreement between Zhongfu Nigeria and Ogun state. The joint-venture agreement also conferred on Zhongfu Nigeria shareholding rights in the OGFTZ company.

However, in 2016, Ogun state purported to terminate its agreements with Zhongshan and Zhongfu Nigeria and forcibly evict Zhongfu Nigeria and its employees from the Zone. In so doing, Zhongfu Nigeria’s employees were harassed and intimidated by Ogun state and the police.

Zhongshan commenced its claim against Nigeria in 2018 and in early 2021, the arbitration tribunal found Nigeria liable for breaches of the China-Nigeria BIT and issued an award of approximately US$70 million in favour of Zhongshan.

The Zhongshan v Nigeria award is notable as it demonstrates the efficacy of investment treaties in providing redress for investors where there has been wrongful interference with their investment. Highlighted below are points which are of note to investors:

  • Although the actions complained of were of the local state government, i.e. the Ogun state government, and not primarily the federal government of Nigeria, Zhongshan was able to obtain compensation directly from Nigeria because of the application of international law, which provides that the local state government’s actions were attributable to the host state. In this way, investment treaties are able to protect against not only interferences directly from the host state government itself, but also emanations of the state, including local authorities and other entities empowered by the state to exercise elements of governmental authority.
  • Under international law, an investor is entitled to full compensation for the loss suffered as a result of the host state’s breaches of the BIT. In Zhongshan v Nigeria, this meant that compensation was awarded to Zhongshan on a discounted cashflow (‘DCF’) basis, i.e., that instead of only recovering the money already invested, Zhongshan was able to recover its likely lost profits projected for 20 years.

In addition, Zhongshan was also awarded moral damages, which are damages awarded for the injury and suffering caused by the host state’s breaches of the investment treaty. Moral damages are not commonly awarded in investment treaty cases. However, in the right circumstances, they can be successfully claimed, as in Zhongshan v Nigeria where the tribunal described the mistreatment suffered by one of the company’s employees as “an indefensible and serious infringement of his human rights, and a humiliating and frightening experience” (5).

III. Conclusion

Today, China has the second largest number of investment treaties in place, with over 120 in force. China’s extensive investment treaty network provides Chinese investors and investments with significant protections against political and regulatory risk in other countries. Knowledge of these protections will put investors in a stronger position should such political and regulatory risks occur and help guide their effective resolution.

Withers acted for Zhongshan in the investment arbitration against Nigeria from inception through to enforcement. If you have any queries, please feel free to reach out to us and we will be happy to assist and advise.

Footnotes:

(1) Jack Ballantyne, “Chinese investor takes Nigeria award to DC”, <https://globalarbitrationreview.com/chinese-investor-takes-nigeria-award-dc last accessed 9 February 2022.
(2) Zhongshan Fucheng Industrial Investment Co. Ltd. v Federal Republic of Nigeria, UNCITRAL, Final Award, 26 March 2021.
(3) Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) 330 UNTS 3, Art. III.
(4) Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (1965) 575 UNTS 159, Art. 54.
(5) Zhongshan Fucheng Industrial Investment Co. Ltd. v Federal Republic of Nigeria, UNCITRAL, Final Award, 26 March 2021, ¶ 177.

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