"Fork in the Road" ("FITR") clauses, included in significant investment treaties, "provide that the investor must choose between the litigation of its claims in the host State's domestic courts or through international arbitration and that the choice, once made, is final".1 Hence, the fork in the road clauses result in that the investor has a choice of forum that is irrevocable.2
For a long time, Fork in the Roadclauses have remained dormant within international investment law ("IIL"). It was not until 2009 that the sole arbitrator, Jan Paulsson, in Pantechniki v. Albania for the very first time, declined his jurisdiction on the basis of the FITR clause contained in the Albania-Greece BIT.3 When it came to the application of the FITR clause, Mr. Jan Paulsson invested his emphasis on the normative sources of the claims concerned and the question of whether the claim brought before the investor-state arbitral tribunal has an "autonomous existence" from the claim submitted to the other court or arbitral tribunal instead of merely focusing on whether the dispute brought before the investor-state arbitral tribunal and the dispute submitted to another court or tribunal are the same. However, such an approach did not gain widespread acceptance, as many other tribunals continued to adhere to a rigid and formalistic interpretation regarding the application of FITR clauses.
In this article, three recent Chinese cases in relation to the application of the FITR clause will be examined. Based on these examination, we will then subsequently discuss why the emphasis regarding the FITR clause should be shifted from formalism to substantialism.
The Origin and Objectives of FITR Clauses
The increasing number of bilateral investment treaties ("BITs"), multilateral investment agreements and other international conventions provide the cross-border investors with ample instruments to seek remedies in cases where their rights and investments have been infringed by host states. However, when observed from the perspective of host states, the landscape of investor-State dispute settlement ("ISDS") undergoes a significant transformation. Host states have increasingly found their measures and policies subject to the scrutiny of international tribunals, and the local courts' jurisdiction over certain investment disputes arising out of foreign direct investment are frequently exercised by these international tribunals.
The ever-lasting struggle between the investors' demands for international remedy and the host states' insistence on sovereignty eventually gave birth to the FITR clause which can be found in most investment treaties nowadays. Within the envisagement of the drafters, this clause, as a compromised solution, is anticipated to serve, at least, two main purposes: to harmonize the different interests surrounding the ISDS; and to address the concerns of re-litigation or parallel proceeding and the potentially ensuing conflicting outcomes. However, as the following three cases would reveal, the FITR clause has significantly deviated from its intended purposes due to the rigid and formalistic approach adopted by international tribunals.
Three Chinese Cases Pertaining to the Application of the FITR Clause
On 26 March 2021, a three-member tribunal issued an award in Zhongshan Fucheng v. The Federal Republic of Nigeria. In this award, the arbitral tribunal rejected the jurisdictional objection raised by Nigeria on the basis of the FITR clause. Subsequently, on 10 January 2022, another tribunal, in the case of Wang Jiazhu v. Republic of Finland, ruled against Finland's jurisdictional objection on the grounds that the FITR clause is inapplicable in the current case. One year later, on 16 February 2023, in the case of Asiaphos Limited and Norwest Chemicals v. People's Republic of China, the tribunal came with a majority award in favour of China and this award, once again, touched upon the issue of FITR-based jurisdictional objection.
Despite the varying merit issues addressed in the aforementioned three Chinese-related Investment-Treaty cases, the tribunal in each case faced a shared procedural issue, namely, FITR-based jurisdictional objection. Ultimately, all three tribunals arrived at a consistent determination regarding the effect of the FITR clause. In light of this, the tribunals' findings concerning the application and effect of the FITR clause deserve close attention.
Zhongshan Fucheng v. The Federal Republic of Nigeria4
In this case, the dispute concerns the unilateral termination by the Nigerian Ogun State of the joint venture agreement ("JVA") signed with Zhongfu, a subsidiary of the Chinese company Zhongshan Fucheng ("Zhongshan"). The Claimant alleged that Nigeria had thereby breached its obligations under the China-Nigeria BIT (2001)5 and commenced the arbitration. During the arbitral proceeding, Nigeria invoked the FITR clause on the basis that Zhongfu had previously opted to initiate legal proceedings in the state court against Ogun State. As a result, this invocation triggered the application of the FITR clause and thereby prohibited Zhongshan from pursuing the international arbitration proceeding.
In detail, the tribunal primarily relied on the "triple identity tests"，which requires tribunal to determine whether claim is the same from parties, course of action, and relief sought, in reaching its decision. First, the parties are different as neither of the parties, Zhongshan and Nigeria in this arbitration, is party to the court proceedings where Zhongshan's subsidiary Zhongfu and Nigerian Ogun State are involved. Secondly, the course of action is different as the court proceedings are based on the alleged breaches of JVA and domestic law while this arbitration is based squarely on China-Nigeria BIT (2001). Thirdly, the relief sought is different as in the court proceedings Zhongfu seeks declaratory and injunctive relief, whereas in this arbitration, Zhongshan seeks compensation.
Based on the tribunal's reasoning, concerns may arise that under the well-established and widely accepted "triple identity tests", investors could potentially gain a significant advantage or even end up being invincible when confronted with the FITR-based jurisdictional objections raised by host states. One could reasonably imagine that initiating legal proceedings against the host state in its own courts, based on the provisions of the BIT can be challenging or practically impossible.
Wang Jiazhu v. Republic of Finland6
This arbitration was brought by the Claimant against the Republic of Finland and concerned the latter's alleged extensive raid of Claimant's investment center, the subsequent detention of Claimant and the effective appropriation of Claimant's investments in Kouvala Finland.
It is noteworthy, prior to the commencement of the arbitration, Claimant has originally chosen to submit the dispute at hand to the competent courts of Finland. Starting from 13 June 2013, the Claimant's domestic legal proceedings went through the District Court, then the Court of Appeal and finally reached to the Finish Supreme Court. In this regard, Finland raised the FITR-based jurisdictional objections, arguing that under Article 9 of the China-Finland BIT (2004)7, a typical FITR Clause, the Claimant no longer have recourse to international arbitration.
In the Ruling on Respondent's Jurisdictional Objection issued by the Tribunal on 10 June 2022, the Tribunal concluded that the Republic's Jurisdictional Objection failed and therefore proceeded to a consideration of the merits claims raised by the Claimant. Among this 12 pages ruling, one key finding raised by the Tribunal is that the significant factual basis relied upon by the Claimant during the arbitration is his denial of justice claim. To be more specific, Claimant alleged that throughout the ruling and adjudication of Claimant's Tort Claims heard in the Finland domestic courts, the courts had failed to give sufficient reasoning or neglected to address key issues. Such actions committed by the domestic courts fell within the scope of issues concerning fair and equitable treatment to investor during investmentand further gave rise to the Claimant's denial of justice claim.
Though Claimant had also initiated other claims such as protection and security, protection against expropriation which were likely to be overlapped with the claims raised in domestic courts, the very nature of the denial of justice claim eventually enabled the Claimant to circumvent the application of FITR clause. Because at the time when the Tort Claims were heard, the alleged denial of justice committed by the domestic court had not yet occurred. This case was settled on 24 October 2023, but an interesting hypothetical question worth considering. If the Tribunal later determines the denial of justice claim should be dismissed after considering the merits, would they revisit the jurisdictional aspects of the dispute and invoke the FITR clause? This issue appears to be insurmountable in practical application. Since it is commonly recognized that tribunal, especially international tribunal constituted based on treaty, has the power of competence-competence to determine its own jurisdiction, it has wide discretion to decide whether to deal jurisdiction issue in merits or not. Once the objection to FITR jurisdiction is adjudicated concurrently with the merits, the host state will largely be compelled to become involved in the substantive defense of the case.
Asiaphos Limited and Norwest Chemicals v. People's Republic of China8
If the Zhongshan case stands for a prevailing view on how to interpret the FITR clause in international investment law, the Asiaphos case serves as a unique example, from the host state's perspective, providing guidance to investors on how to circumvent one.
The dispute of this case relates to the shutdown, sealing and mandatory "exit" of investors' mines and associated mineral rights as China adopted a new policy which prohibited mining in and around the nature reserve. The Claimants initiated this arbitration primarily alleging the state's new policy has expropriated investors' investment which led to the violation of the Singapore-China BIT (1985)9. The core issue pertains to the determination of the scope of the state's arbitral consent on the basis of article 13 (3) of the BIT "if a dispute involving the amount of compensation resulting from expropriation [......], it may be submitted to an international tribunal established by both parties". The FITR clause, in this case, plays a significant role in the interpretation of the terms "dispute involving the amount of compensation resulting from expropriation".
To establish the Tribunal's jurisdiction to hear the dispute not only the compensation resulting from the expropriation but also the existence and lawfulness of the expropriation, Claimants advocated that these two issues were inseparable and if Claimants are required to first file a claim in the court proceedings regarding the existence of an expropriation, then it would be precluded from seeking recourse to international arbitration regarding the compensation because of the FITR clause. Contrary to the Claimants' position, the host state argued that the FITR clause would not be triggered if the domestic litigation is appropriately filed. The Tribunal eventually adopted the state's position and elaborated that the investors could limit their request for relief before the national court to the question of legality of the measure in dispute and defer the question of appropriate amount of compensation to the subsequent arbitral proceedings. Then there would be no risk of triggering the FITR clause and giving rise to contradicting decisions as the two proceedings deal with different issues.
Inspired by the Tribunal's above reasoning, the investors in other cases may utilize the tactic of "claim-splitting", which is dividing a single cause of action or claim into multiple ones and pursuing each one separately in different legal proceedings, to easily avoid triggering the FITR clause and then having a second bite at the cherry. In the end, the tribunal may find the award's initial purpose of avoiding parallel proceedings and the ensuing contradictory decisions is satisfied at the cost of rendering the finality of the results of dispute settlement moot.
Concluding thought: shifting the Emphasis from Formalism to Substantialism
Overall, the aforementioned three cases primarily adhere to the "triple indentity test" method to determine whether the FITR provisions should be triggered. However, Before deciding whether such test should be applied to interpret FITR clauses or not, the very fundamental issue to solve is determining which rules to be applied. Since FITR clauses are treaty texts, Vienna Convention on the Law of Treaties ("VCLT") is of certain to govern, of which Art. 31 referring that object purpose are to be considered when interpreting treaty texts gives a guideline to follow. In this regard, any test adopted by the tribunal should not deviate from the requirements regulated by VCLT. It is not difficult, however, to determine the actual role played by FITR clauses. As illustrated at the beginning of this article and has been observed by the ICSID tribunal in H&H v. Egypt, the purpose of a FITR provision is "to ensure that the same dispute is not litigated before different fora."10i.e., to avoid parallel proceedings, where Claimant would enjoy second opportunity to present their cases. Thus, conclusion can be drawn that FITR clauses are drafted to prevent various detrimental effects of parallel proceedings and balance unequal position between host state and investor.
Based on the foregoing analysis, the formalistic approach exemplified by the triple identity test exhibits significant deficiencies, rendering the application of the FITR clause virtually impossible. It is self-evident that investor-state arbitration is initiated based on treaty (namely treaty claim), while picture is far different in domestic litigation or arbitration, where majority of them are initiated solely and squarely based on domestic law or contracts (namely contract claim). If triple identity test is to be strictly followed, a foreseeable result is that FITR clause would enter a dormant state, which is also in violation of the interpretive principle of effectiveness.11
Let's revisit interpretation method provided in VCLT, since ordinary meaning of FITR clauses in many BITs are neutral, triple identity test is then applied as a supplementary tool to assist the tribunal determining the application of FITR clauses. However, This method of interpretation appears to have produced a contrary effect in practice, resulting in investor easily evading application of FITR clauses and having a second bite of the apple to present their case in different forums. Such interpretation is evidently contrary to the object and purpose of the FITR clauses.
Standing in the current era of expanded ISDS and ample remedies available for investors, it is therefore of significant importance to shift the emphasis from a rigid formalistic identity test to a substantial overall assessment of the parties involved, the legal grounds invoked, the objects pursued and underlying facts or a measures/injuries oriented approach. With this transformation, a tribunal is required to dig deeper to find out whether the measure, adopted by the host state, which gives rise to the investors' claim or the injury that formed the foundation of the claim, is the same in both proceedings.
For example, if an investor pursues a case in domestic court proceedings seeking restitution in integrum for alleged expropriation by the host state based on contractual obligations, but subsequently seeks compensation in international proceedings relying on a BIT, the tribunal is expected to conduct a comprehensive and fact-intensive analysis to determine whether in both cases, the measures claimed or the injuries suffered by the investor are identical, i.e., both lead to host state's commitment of expropriation. If the determination is affirmative, it is much likely that the FITR clause would be triggered.
Undoubtedly, the real case presented before the tribunal would be much more complicated. However, it is only when the emphasis regarding the FITR clause is shifted from formalism to substantialism that the two main purposes surrounding this clause can be truly satisfied.
Footnotes
1. Dolzer, R. and Schreuer, C., Principles of International Investment Law, Oxford University Press, 2nded., 2012, p. 267.
2. Billiet, J.,International Investment Arbitration: A Practical Handbook, 2016, pp. 187-188.
3. Pantechniki S.A. Contractors & Engineers (Greece) v. The Republic of Albania, Award, ICSID Case No. ARB/07/21
4. Zhongshan Fucheng v. The Federal Republic of Nigeria, Award, Case 1:22-cv-00170.
available at: https://www.italaw.com/sites/default/files/laws/italaw170107.pdf
6. Wang Jiazhu v. Republic of Finland,Ruling on Respondent's Jurisdictional Objection.
7. China-Finland BIT (2004), available at China - Finland BIT (2004) | International Investment Agreements Navigator | UNCTAD Investment Policy Hub
8. AsiaPhos Limited and Norwest Chemicals Pte Ltd v. People's Republic of China, Award, ICSID Case No. ADM/21/1.
9. Singapore-China BIT (1985), available at China - Singapore BIT (1985) | International Investment Agreements Navigator | UNCTAD Investment Policy Hub
10. H&H Enters. Invs., Inc. v. Arab Republic of Egypt, Award, ICSID Case No. ARB/09/15.
11. For a discussion of the meaning and scope of the principle of effectiveness, see Richard K. Gardiner, Treaty Interpretation, pp. 66-68 (2d ed. 2015).
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