Does the New York Convention Apply to Investor-State Awards?

On August 9, 2024, in Zhongshan Fucheng Industrial Investment Co. v. Federal Republic of Nigeria, the D.C. Circuit held that Nigeria was not immune from suit to enforce an arbitral award for a Chinese investor under a bilateral investment treaty. The U.S. Foreign Sovereign Immunities Act (FSIA) has an exception to state immunity for actions to confirm arbitral awards if the award is “governed by a treaty or other international agreement in force for the United States calling for the recognition and enforcement of arbitral awards.” Central to this case, therefore, was whether the New York Convention governed the award.

In an opinion by Judge Patricia Millett, the D.C. Circuit sensibly held that the New York Convention does indeed govern investor-state awards, a proposition that is taken for granted in the world of Investor-State Dispute Settlement (ISDS). What makes this case unusual is the lengthy dissent by Judge Gregory Katsas challenging that proposition. In this post, I explain why Judge Katsas’s position is not only legally wrong but would also be deeply disruptive to ISDS.

The Dispute with Nigeria

As explained in a prior post, Ogun State in Nigeria began contracting in 2007 with Chinese companies to develop a Free-Trade Zone near Lagos. Zhongshan, one of these Chinese companies, agreed to develop the Fucheng Industrial Park within the Zone, investing millions of dollars. In 2016, Ogun State terminated the relationship.

Zhongshan then brought claims against Nigeria to arbitration under the China-Nigeria Bilateral Investment Treaty (BIT), concluded in 2001. The arbitral tribunal, seated in London, found that Nigeria had violated the BIT and awarded $55.6 million in damages (plus interest, fees, and costs).

Zhongshan sought to confirm the award in in federal court in the District of Columbia under the Federal Arbitration Act (FAA). Nigeria argued that it was immune from suit under the FSIA because the United States made a reservation limiting the New York Convention to disputes that are “commercial.” But the district court rejected Nigeria’s argument that its dispute with Zhongshan was non-commercial.

The D.C. Circuit’s Decision

There was no dispute about the existence of an arbitration award or that it was rendered under an arbitration agreement. So, the applicability of the FSIA’s arbitration exception turned solely on whether the award was “governed by a treaty or other international agreement in force for the United States calling for the recognition and enforcement of arbitral awards”—specifically, the New York Convention.

Article I(1) says that the New York Convention applies “to the recognition and enforcement of arbitral awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought, and arising out of differences between persons, whether physical or legal.” Article I(3) allows a state ratifying the Convention to “declare that it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the State making such declaration.” The United States made such a declaration. So, for the Convention to apply, the award creditor had to show that the award “arose from (1) a legal relationship, (2) that is considered as commercial, and (3) is between persons.”

Legal Relationship

The D.C. Circuit concluded that the BIT established a legal relationship between Nigeria and Zhongshan. To be sure, the BIT is a treaty between Nigeria and China. But analogizing to the law of contracts, as the Supreme Court has done, Judge Millett reasoned that Zhongshan, as an investor, was a third-party beneficiary of this treaty. And the BIT expressly permits investors to bring claims to arbitration to enforce its obligations.

Commercial

The court also concluded that this relationship was commercial. Relying on circuit precedent, Judge Millett noted that a relationship “may be commercial even though it does not arise out of or relate to a contract, so long as it has a connection with commerce.” In this case, Zhongshan invested in a money-making enterprise, the purpose of the free-trade zone was to promote commercial activity, Nigeria relaxed tariffs in the zone towards this end, Nigeria collected hundreds of thousands of dollars in taxes on commerce in the zone, and the BIT itself was designed to promote commerce.

Between Persons

That left the New York Convention’s requirement that the award arise out of differences “between persons.” Nigeria argued that a sovereign state is a “person” for purposes of the Convention “only when it engages in private activity.” Because the arbitration award was based on its sovereign activities, Nigeria argued, it could not be considered a “person,” and the Convention did not apply.

Judge Millett began by noting that U.S. courts have routinely treated investor-state awards as subject to the New York Convention. She found no basis in the Convention’s text for treating states differently depending on whether they act in a private or public capacity. Nigeria is, concededly, a “person” under the Convention when it acts in a private capacity, and so Nigeria is also a “person” when it acts in public capacity. Nor was there any basis for this distinction in the practice of other states. Nigeria did not identify “any other signatory state that has asserted that cramped understanding of ‘persons’ in the 66 years since the Convention’s ratification.”

To the contrary, an amicus brief filed by the United States in 1980 explained that the “negotiating history of the Convention clearly reflects the interpretation that states are legal persons for the purposes of the Convention.” Judge Millett also noted that the Energy Charter Treaty (ECT), signed by more than 50 parties to the New York Convention (though not the United States) reflects the understanding that awards against states, even awards based on sovereign activity, come within the Convention. Article 26 of the ECT provides that claims under the treaty “shall be considered to arise out of a commercial relationship or transaction for the purposes of article I of th[e New York] Convention” (alteration by the court).

Nigeria also argued that the New York Convention was never intended to cover investor-state disputes, which is why the International Centre for Settlement of Investment Disputes (ICSID) Convention was concluded eight years later in 1966. But, as Judge Millett correctly noted, the two conventions have different scopes. The ICSID Convention establishes a dispute resolution mechanism for investor-state claims, as well as providing for the enforcement of resulting awards. The New York Convention does not establish a dispute resolution mechanism (though it does require states to enforce contractual parties’ agreements to arbitrate) and applies to a broader range of awards.

Nigeria also argued that the New York Convention’s travaux préparatoires supported its position. Suggesting that Nigeria was “cherry picking,” however, Judge Millett read its snippets of negotiating history differently and countered with others that undermined Nigeria’s position.

Judge Katsas’s Dissent

Judge Katsas did not disagree with the majority that there was a relationship between Zhongshan and Nigeria and that this relationship was commercial. In his view, the New York Convention did not apply solely because a state is not a “person” under Article I of the Convention when it acts in a sovereign capacity.

To establish the “common meaning” of “person,” Judge Katsas leaned heavily on U.S. court decisions interpreting U.S. statutes. As Judge Millett noted, however, “the meaning of the term in domestic statutes does not provide insight into the ‘shared expectations’ of contracting states regarding the meaning of a term in an international treaty.” Judge Katsas dismissed the U.S. amicus brief as old and the conduct of other states with respect to the ECT as not directly addressing the question. But at least these sources address the New York Convention rather than other texts.

Judge Katsas also relied on the international law background against which the Convention was adopted. First, when the New York Convention was concluded in 1958, there was “an ongoing worldwide debate” about the extent of sovereign immunity from suit and specifically about whether it extended to commercial activities. This is true but irrelevant. The New York Convention does not address sovereign immunity. That is what the FSIA’s arbitration exception does.

Second, in 1958, investor-state disputes were typically resolved through a process of espousal, in which in investor’s home state took up the investor’s claim as its own and “espoused” it in negotiations or dispute resolution with the host state. Again, this is true but irrelevant. The New York Convention does not create a system allowing investors to bring claims directly against host states. That is what bilateral investment treaties (like the China-Nigeria BIT) do and, likewise, the ICSID Convention.

Against this background, Judge Katsas argued, reading “persons” to include states would be finding “elephants in mouseholes.” But this misses the point that the New York Convention, by itself, is not about sovereign immunity or about investor-state claims. The Convention simply provides for the enforcement of arbitral agreements and arbitral awards, thus providing the background against which BITs were adopted and the FSIA’s arbitration exception was written.

Judge Katsas looked for support for his interpretation in Restatement (Third) of Foreign Relations Law § 487, comment f, which says: “Ordinarily, arbitration of a controversy of a public international law character, such as a boundary dispute or a dispute about interpretation of or performance under an international agreement …, is not subject to the New York Convention.” This comment addresses the meaning of “commercial” under the New York Convention (not “persons”), and it also states that “[d]isputes arising out of investment agreements are not excluded by [a commercial] declaration.”

The more recent Restatement of International Commercial and Investor-State Arbitration addresses the question more directly. It says that investor-state arbitrations not covered by the ICSID Convention (which has its own enforcement mechanisms) “are subject to the usual ground rules of international commercial arbitration, i.e., subject to the arbitration law of the arbitral seat, as well as to the New York and Panama Conventions, as the case may be” (Chapter 5, introductory note). The reason for applying the New York and Panama Conventions to investor-state disputes, the Restatement explains, “is that the arbitration, though governed substantively by the terms of the treaty between States, is considered to be based on an agreement to arbitrate between a State and a foreign investor and to involve commerce, within the meaning of the FAA” (§ 5.1, reporters’ note b). Thus, the Restatement concludes, “[a]ctions to enforce non-ICSID Convention awards are governed in virtually all cases by the New York or Panama Convention” (§ 5.6, reporters’ note a(v)).

As for the caselaw treating investor-state awards as subject to the New York Convention, Judge Katsas dismissed it because it had “overlooked” the question whether states acting in a sovereign capacity are persons. But the reason past courts overlooked this question is precisely because no one thought that “persons” carries the weight that he would put on it. The Arbitration Restatement’s provision on the applicability of the New York Convention (§ 1.4) discusses the requirements of (1) a commercial relationship, (2) a reasonable relationship to a foreign state, (3) an agreement in writing, and (4) the making of the award in a state-party to the Convention. It does not mention the word “persons” even once.

Judge Katsas would use “persons” in the New York Convention to distinguish BIT claims based on private action from those based on public action and to afford sovereign immunity to foreign states faced with (non-ICSID) awards. And he would do this despite the fact that the Convention says not a word about investor-state disputes or about sovereign immunity. To borrow a phrase, this seems a bit like finding elephants in mouseholes.

Implications for ISDS

The implications for ISDS of adopting Judge Katsas’s position are significant. ISDS depends on the existing treaty structure for arbitration. BIT’s frequently give investors the option of choosing among ICSID arbitration, arbitration under the ICSID Additional Facility Rules, or ad hoc arbitration (under the UNCITRAL Arbitration Rules, for example). The ICSID Convention has its own system for enforcement of awards. But the enforceability of ad hoc awards and awards under the ICSID Additional Facility Rules typically depends on the New York Convention. To hold that the Convention does not apply to these awards sets a trap for foreign investors by creating a significant but invisible difference in award enforceability among these options.

Some BITs do not provide a range of arbitration options. Article 9 of the China-Nigeria BIT allows only an “ad hoc arbitral tribunal.” With ICSID arbitration unavailable, an investor must rely for enforcement on the New York Convention, which both China and Nigeria joined long before they signed the BIT in 2001 (China in 1987 and Nigeria in 1970). Reading the New York Convention not to apply to awards under this BIT would upset the expectations that the state-parties had when they signed it.

Conclusion

Fortunately, none of this is likely to happen. Even if prior cases had not addressed the meaning of “persons” under the New York Convention and its implications for sovereign immunity from enforcement of investor-state awards under the New York Convention, the D.C. Circuit has now done so. Unless the U.S. Supreme Court is foolish enough to take up this question, the decision in Zhongshan Fucheng is likely to settle the question.

Unfortunately, this does not mean that the Chinese investor’s travails are over. Zhonghan may be able to confirm its award against Nigeria. But immunity from execution is a different question. And, as I discussed in my earlier post, finding Nigerian assets in the United States that are immune from execution may be a challenge.