by Andrew Flake
When does a foreign government, under its commerce-related treaties, move from acting as a sovereign to acting as a business partner in a deal, thereby submitting to arbitration of claims by private parties involved in the deal?
The question is an important one, because governments participate actively in development projects not only in their own countries, but in other countries around the world. Think of the United States Agency for International Development or China’s Belt and Road Initiative, extending to construction and finance of projects in more than 150 other countries.
When doing business with a government or government-affiliated entity, private international parties prize predictability and certainty in projects, even more so that in projects with one another because of the extraordinary powers a government has, including acting to nationalize property and enacting and implementing laws that can change the status quo. We’ve touched before on examples of bilateral investment treaties (or BITs), which are one means of protecting investors in those scenarios.
In this week’s case, we consider a BIT between China and Nigeria, with the government of Nigeria arguing, based on a claim of sovereign immunity — the protection that courts of one country afford to many official actions of other countries — that U.S. courts lack jurisdiction to confirm an arbitration award entered under this BIT.
The claimant in the arbitration was a Chinese company, Zhongshan, which had spent millions of dollars partnering with Ogun State in Nigeria to develop a free-trade zone. After Ogun State abruptly ended the business relationship and expelled Zhonshan’s executives, Zhonshan initiated an arbitration against Nigeria under the Nigeria-China BIT, a pact like other BITs specifically focused on ensuring fair treatment of each country’s investors and protecting their investment. Zhongshan obtained a $55 million award and moved to confirm it in federal district court.
Nigeria challenged the Court’s jurisdiction, urged that all of its actions were sovereign, that the case had to do with its governmental powers, not its commercial activities, and that, as a result, sovereign immunity applied.
The district court determined it had jurisdiction to confirm, Nigeria appealed, and the D.C. Circuit Court of Appeals made quick work of the question, agreeing that jurisdiction existed. Why? If we were making the movie version of the opinion, we might call it “Two Treaties and a Statute.”
The statute is our Foreign Sovereign Immunities Act (FSIA), codifies the long international tradition of foreign government immunity in other nations’ courts. But the FSIA is not unlimited in reach. It contains exceptions to sovereign immunity, one of which is for arbitration, so long as there is (1) an arbitration agreement (2) an arbitration award, and (3) a treaty governing the award.
Check, check, and check. The agreement to arbitrate came in the form of the BIT. There was an arbitration award, after a proceeding in which Nigeria participated. And the requirement of a treaty, in the Zhongshan-Nigeria case, meant the New York Convention, the treaty that requires its member countries, of which the U.S. is one, to recognize arbitration awards from other countries.
In acceding to the New York Convention, the only limitation the United States imposed, in order to give effect to such awards, is that they are “commercial.” So the main question on appeal was whether Nigeria’s actions were sufficiently official that they were not commercial, whether they “arose out of a legal relationship…considered as commercial.” If they did, jurisdiction existed. If they did not, the FSIA would afford absolute immunity.
Based on its precedent, the D.C. Circuit made fairly quick work of the appeal, writing that it had “repeatedly enforced under the New York Convention arbitral awards arising from foreign states’ sovereign acts that breach obligations owed to a third-party investor under an investment treaty.“
Nigeria made several arguments. Textually, it contended that as a country it was not a “person” under the New York Convention, a position that the Court rejected; after extensive discussion, it found in “neither the New York Convention nor the Federal Arbitration Act…a private-act qualification on the scope of ‘persons’ against whom an arbitral award can be enforced.”
Nigeria, as did the dissent in Zhongshan, also sought to exclude alleged treaty violations from contract disputes. Since almost every treaty is connected to commerce, it suggested that finding jurisdiction would mean any time a treaty touched on “economic topics,” there would be Convention enforcement.
The majority disagreed, emphasizing that not every treaty, as did the BIT, confers rights on third-party investors or permits arbitration; the treaty parties would need to consent to confer third-party rights, a sufficient limiting principle.
The majority then reviewed what it considered predominating commercial aspects of the case, making jurisdiction appropriate:
- Zhongshan invested in an enterprise to make money
- It invested in a free trade zone “intended to promote commercial activity”
- Nigeria reduced tariffs in the free-trade zone, which was “connected to commerce”
- Nigeria collected tax revenue from Zhongshan’s investment
- The Nigeria-China BIT was itself designed to promote commerce
The majority’s perspective and the overall result in Zhongshan does have intuitive appeal. Nigeria consented to an arbitration process in both the BIT and via the New York Convention. And while many aspects of Nigeria’s participation in the free-trade zone were undoubtedly sovereign in nature, they were also directed at business activities, and those two aspects, as the majority recognizes, can and frequently do co-exist.
[The case is Zhongshan Fucheng Industrial Investment Co. Ltd v. Federal Republic of Nigeria, No. 23-7016 (D.C. Cir. Aug. 9, 2024).]