The tale of Zhongshan Fucheng v. Nigeria: how investment treaties help safeguard Chinese investments abroad

Thanks to schemes such as the Belt and Road Initiative, Chinese investment across the world has grown exponentially in the last decade. Cross-border trade and investments however are prone to a wide range of risks including adverse actions from host states. These can take the form of state interference with long-term licences/concessions, unfair regulatory changes, discriminatory administrative decisions, or unlawful expropriation without appropriate compensation.

Over the past few decades, China has concluded a large number of bilateral and multilateral investment treaties with countries around the world, of which over 120 are in force. These investment treaties provide substantial protection for Chinese investments abroad. Crucially, they allow qualifying Chinese investors, both companies and natural persons, to bring claims against host states before a neutral, independent arbitral tribunal and obtain compensation for wrongful treatment of their investments. The recent victory of Zhongshan Fucheng Industrial Investment Co Ltd (Zhongshan) in its USD70 million investment treaty arbitration against the Republic of Nigeria demonstrates how this can be achieved.

What happened?

In 2010, through its Chinese parent company, Zhuhai Zhongfu Industrial Group Co Ltd (Zhuhai), Zhongshan acquired rights to develop a substantial area of land, known as the Ogun Guangdong Free Trade Zone (the Zone), in the Ogun State in southwestern Nigeria. Zhongshan entered in framework agreement with OGFTZ, a subsidiary of the Ogun State of Nigeria. In 2011, Zhongshan set up a local Nigerian entity, Zhongfu International Investment (NIG) FZE (Zhongfu) in order to manage the work on the ground in Nigeria. Zhuhai and Zhongfu then carried out a significant amount of work in the Zone, developing infrastructure such as roads, sewerage and power networks, and marketing and letting sites within the Zone.

In 2012, the Ogun State appointed Zhongfu as interim manager of the Zone. Zhongfu's appointment was made permanent in a joint venture agreement concluded in September 2013 between Zhongfu and the Ogun State (among others) under which Zhongfu also acquired a majority shareholding in OGFTZ (the 2013 JVA).

In July 2016, the Ogun State purported to terminate Zhongfu's appointment (whilst attempting to install a new manager for the Zone with immediate effect) and took a series of actions allegedly aimed at driving Zhongfu out of Nigeria. It was noted in the Final Award that some individuals working for Zhongfu were harassed by the Nigerian police and faced threats of prosecution and prison sentence. It was further noted in the Award that the Nigerian Immigration Service took away the immigration papers of Zhongfu's foreign staff so that none of them would be able to work in Nigeria. Furthermore, arrest warrants were issued for two senior managers of OGFTZ, which resulted in one of them, a Mr Zhao Wenxiao, "[being] arrested at gunpoint, […] then deprived initially of food and water, intimidated, physically beaten, and detained for a total of ten days" (see paragraph 39 of the Final Award).

Zhongshan's investment treaty arbitration against Nigeria

In August and September 2016, Zhongfu issued proceedings in the Nigerian courts seeking possession of the Zone as well as damages and interest (among other things). Mr Zhao also issued local proceedings against the Nigerian police in connection with his mistreatment, and a SIAC arbitration was brought against the Ogun State pursuant to the 2013 JVA. However, these proceedings were either discontinued or brought to a close by the Nigerian courts in early to mid-2018.

In August 2018, Zhongshan commenced an investment treaty arbitration against Nigeria under the Bilateral Investment Treaty between the People's Republic of China and Nigeria (the China-Nigeria BIT). The Tribunal, chaired by Lord Neuberger, the former President of the UK Supreme Court, issued its Final Award in March 2021, finding Nigeria in breach of its obligations under the China-Nigeria BIT and awarding Zhongshan compensation of around USD70 million.

This decision highlights the advantage of investment treaty arbitration in providing recourse for Chinese investors to obtain compensation against host states where international law obligations have been violated. From an investor's perspective, three points are of particular note:

1. Under international law, investment treaties typically protect against adverse actions of not only the host state government itself but also potentially some organs of the state, including local governments that have an independent existence in domestic law. Moreover, individuals and entities that are empowered under local law to exercise elements of governmental authority may be treated as part of the state. Accordingly, Zhongshan's case against Nigeria succeeded on account of the actions of the Ogun State in 2016 (including those carried out by the Nigeria police and immigration services) which the Tribunal held should be attributed to the state of Nigeria.
2. Many investment treaties contain what is known as a "fork in the road" clause which requires an investor to choose between litigating its claims in the domestic courts of the host state or international arbitration – once chosen the choice of forum is generally irrevocable. Nigeria contended the domestic court proceedings brought by Zhongfu constituted a submission of "the dispute to a competent court" in Nigeria and that the Tribunal accordingly had no jurisdiction to determine Zhongshan's treaty claims. Although this argument was rejected, it is a timely reminder that investors should take great care when seeking domestic remedies in the host state to avoid losing the ability to pursue potential treaty claims in international arbitration.
3. Having concluded that Zhongshan had successfully made out its case against Nigeria, the Tribunal allowed compensation to be assessed on a discounted cashflow basis. This meant Zhongshan was able to recover not only the money it had invested in the Zone over the years, but also the profit it would likely have made but for the state’s violation of its treaty obligations, which was calculated based on a projection over 20 years.

Further, in recognition of the egregious behaviour of the Nigerian police in 2016, the Tribunal awarded an additional sum of USD75,000 in moral compensation on account of their mistreatment of Mr Zhao, which it considered "represented an indefensible and serious infringement of his human rights, and a humiliating and frightening experience, lasting the best part of two weeks" (see paragraph 59 of the Final Award).

Takeaways

This is an emphatic decision by a distinguished and highly-respected arbitral tribunal. It is thought to be the first ever investment arbitration win by a mainland Chinese investor against an African state (if not more widely). Whilst the case may have turned heavily on its own facts, Zhongshan's success nonetheless underscores why Chinese investors should consider using China's extensive network of investment treaties in order to safeguard their business and investments abroad. Where appropriate, Chinese investors should avail themselves of their rights under international law by initiating investment treaty claims to seek compensation against host states.

To this end, a good understanding of China's investment treaties, the protections they confer, and the applicable dispute settlement mechanisms will go a long way to assisting Chinese investors in their efforts.

Please feel free to contact us if you have any questions or would like further information or training on how you can use investment treaties and international law to protect your investments.

Access the Mandarin version of this article.