Court Holds that Chinese Investor May Try to Enforce Arbitral Award Against Nigeria
February 7, 2023
Over the past two decades, China has invested heavily in Africa. A recent study found that between 2001 and 2018, China invested $41 billion in African countries and loaned an additional $126 billion. Some of these investments generated disputes, and some of those disputes are finding their way to U.S. courts.
In a recent decision, Zhongshan Fucheng Industrial Investment Co. v. Federal Republic of Nigeria, the U.S. District Court for the District of Columbia (Chief Judge Beryl Howell) rejected Nigeria’s motion to dismiss a Chinese investor’s action to enforce a $55 million arbitral award. The court held that the award was “commercial” for purposes of the New York Convention and that the Foreign Sovereign Immunities Act’s (FSIA) arbitration exception gave the court jurisdiction.
But the hard part of enforcing an investor-state award in the United States is not bringing the action. It is rather finding assets belonging to the foreign state that are not immune from execution under the FSIA. That challenge still lies ahead for this investor.
Chinese investment in Africa is often associated with Chinese President Xi Jinping’s Belt and Road Initiative (BRI), launched in 2013. But, in fact, China was actively investing in Africa for more than a decade before the BRI began. China has also concluded many Bilateral Investment Treaties (BITs)—145 by UNCTAD’s count—to protect its investors abroad.
In 2007, Ogun State in Nigeria began contracting with Chinese companies to develop a Free-Trade Zone near Lagos. In 2010, the Zone entered an agreement with Zhongshan, allowing it to develop and operate the Fucheng Industrial Park within the Zone. Between 2010 and 2016, Zhongshan built infrastructure and attracted businesses to the Park. When one of the original Chinese investors defaulted, Zhongshan also took over as part owner of the Zone. In 2016, however, the Chinese consulate advised Ogun State that the original investor had been acquired by another Chinese company and should now manage the Zone. Ogun State subsequently terminated Zhongshan’s ownership of the Zone and reneged on the agreement to operate the Park.
In 2018, Zhongshan brought claims against Nigeria to arbitration under the China-Nigeria Bilateral Investment Treaty, including denial of fair and equitable treatment, expropriation, and breach of the BIT’s umbrella clause. In 2021, 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). Nigeria moved to set aside the award in English court on the ground that the tribunal lacked jurisdiction but ultimately discontinued that proceeding. Zhongshan then brought an action in federal court in the District of Columbia seeking to confirm the award under the Federal Arbitration Act.
The District Court’s Decision
The United States has limited the recognition and enforcement of foreign arbitral awards under the New York Convention to awards that are “commercial.” Nigeria argued that the award against it was not commercial for three reasons: (1) because it was based on a treaty; (2) because Zhongshan’s claims were for breach of the treaty rather than breach of contract; and (3) because there was no contract between Zhongshan and Nigeria (since the contract was concluded instead with Ogun State).
If the district court had accepted any of these arguments, it would have sent shock waves through the investor-state dispute settlement community. Investor-state awards are generally considered “commercial” under the New York Convention, without distinction based on the kinds of claims, and the state-party to a BIT is responsible for violations by its subdivisions. As the district court noted, the D.C. Circuit has repeatedly upheldrecognition and enforcement of investor-state awards under the New York Convention. The court rejected each of Nigeria’s arguments, holding that the award was “commercial.”
That brought the district court to the question whether Nigeria, as a sovereign state, was immune from suit to confirm the award under the FSIA. In 1988, Congress amended the FSIA to add an arbitration exception, 28 U.S.C. § 1605(a)(6), which reads in relevant part:
A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case … in which the action is brought … to confirm an award made pursuant to … an agreement to arbitrate, if … the agreement or award is or may be governed by a treaty or other international agreement in force … calling for the recognition and enforcement of arbitral awards.
The court had no difficulty concluding that Zhongshan had shown an agreement to arbitrate in the BIT, an award made pursuant to that agreement, and the applicability of the New York Convention (as discussed above). The court therefore denied Nigeria’s motion to dismiss for lack of jurisdiction.
The Road Ahead
As I have explained elsewhere, however, overcoming a foreign country’s immunity from suit in an action to enforce an investor-state award is only one of the hurdles that an investor holding such an award must clear. The FSIA also contains special rules on venue and service of process with which the judgment creditor must comply. The rules on service have been interpreted (perhaps wrongly) to require actions to confirm awards to be brought in the District of Columbia. And the rules on service are very strictly enforced. Although these rules generally do not prevent enforcement of investor-state awards, they can certainly slow the process down.
The largest obstacle to enforcing an investor-state award against a recalcitrant country is finding assets in the United States that are subject to execution. The FSIA deals separately with immunity from suit and immunity from execution. The FSIA’s provisions on immunity from execution also contain an arbitration exception, 28 U.S.C. § 1610(a)(6), but this exception applies only to “[t]he property in the United States of a foreign state … used for a commercial activity in the United States.”
Courts in the United States have held that this language requires that the property against which enforcement is sought must be owned by the foreign state itself, not just by an agency or instrumentality of the foreign state. Courts have held that the property must also be used by the foreign state itself, not just by a third party. And courts have held that the property must be used for a commercial activity. It is not sufficient that the property be the proceeds of a commercial activity. Finding Nigerian assets that satisfy all these criteria may be difficult.
One way to find such assets is a discovery request. The Supreme Court held in Republic of Argentina v. NML Capital, Ltd. (2014) that the FSIA provides no special immunity from discovery to foreign states, and U.S. courts have routinely ordered discovery of assets that can be used to satisfy arbitral awards. On the other hand, the process can be quite time consuming. One company has spent more than a decade trying to enforce a different arbitral award against Nigeria, most recently failing in its attempt to attach the assets of Nigeria’s central bank.
Winning an investor-state award is often just half the battle. As some of China’s BRI projects inevitably sour and lead to investor-state awards under China’s many BITs, Chinese investors will inevitably discover this for themselves.
The losing state may still be entitled to immunity from suit and immunity from execution in any attempt to enforce the investor-state award. This means that if the state does not pay voluntarily, years of litigation may lie ahead before those issues are resolved.