D.C. Circuit says New York Convention applies to investment arbitration awards, but the Supreme Court may have the last word

In Zhongshan Fucheng Industrial Investment Co. Ltd. v. Federal Republic of Nigeria [1], the U.S. Court of Appeals for the District of Columbia Circuit addressed the applicability of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted on June 10, 1958, in New York (“New York Convention”) to enforcement of arbitral awards issued in non-ICSID investors-state arbitration proceedings. The D.C. Circuit confirmed that the New York Convention applies to such arbitral awards. However, this issue may yet be revisited by the Supreme Court as Nigeria filed a petition for a writ of certiorari following the D.C. Circuit’s judgment.

Background

In 2001, China and Nigeria concluded a bilateral investment treaty to promote and protect investments (“BIT”). Pursuant to this treaty, each country is obligated to protect investors originating from the other state in line with the text of the BIT. The BIT also includes an offer to arbitrate disputes between such investor and the host state in case of breach of the BIT protections.

In 2007, Zhongshan Fucheng Industrial Investment Co. Ltd. (“Zhongshan“), a Chinese company, invested in Nigeria by entering into a joint venture with Ogun State, a Nigerian state. The aim of the joint venture was to develop a free-trade zone and an industrial park. In 2016, Ogun State terminated the partnership, which lead among others to the detention of Zhongshan’s executive.

Seeking redress, Zhongshan initiated non-ICSID arbitration proceedings, alleging that actions of Ogun State were attributable to Nigeria, and, as such, Nigeria had violated its obligations under the BIT. In March 2021, the arbitral tribunal found that Nigeria indeed violated the BIT and awarded Zhongshan over $55 million in damages.

District Court Proceedings

In 2022, Zhongshan initiated proceedings for enforcement of the arbitral award against Nigeria in the United States District Court for the District of Columbia.

During these proceedings, Nigeria filed a motion to dismiss for lack of jurisdiction, contesting the subject-matter and personal jurisdiction of the court, and asserting sovereign immunity under the Foreign Sovereign Immunities Act (“FSIA”). Nigeria argued that no exception to sovereign immunity applies in this case, and, therefore, Nigeria could not be sued in the United States. In particular, the award could not be enforced under the New York Convention as implemented by the Federal Arbitration Act (“FAA”). Nigeria argued that (1) the United States adopted the New York Convention with the commercial reservation, limiting the Convention’s application to legal relationships, whether contractual or not, which are considered as commercial, including a transaction, contract, or agreement described in section 2 of the FAA [2], and (2) the award in this case did not arise from such a commercial relationship. For this reason, according to Nigeria, the FSIA arbitration exception [3] could not apply, as it requires that the arbitral award in question be governed by a treaty in force in the United States calling for recognition and enforcement of arbitral awards.

In reply, Zhongshan claimed that the New York Convention is applicable to the award and the requirements for the application of the arbitration exception have been satisfied.

In the decision of January 26, 2023, the district court sided with Zhongshan and denied Nigeria’s motion to dismiss for lack of subject-matter and personal jurisdiction under the FSIA [4]. The district court reasoned that:

The term commercial is not defined in the FAA, but in the context of international arbitration courts have interpreted as commercial those relationships “that arise out of or in connection with commerce.”
The Restatement (Third) of Foreign Relations Law supports a narrow interpretation of the commercial reservation to the New York Convention; the reservation should exclude cases concerning two states, and not those involving a state and a private actor such as an investor.
This is not the first case in which an investor seeks the confirmation or enforcement of an award based on the state’s breach of an international treaty, and in previous cases such petitions have been granted under the New York Convention. There is no reason to depart from this common practice.
By their very nature, investments are connected to commerce. Therefore, the distinction between “treaty claims” and “commercial claims” in the context of the New York Convention is baseless. Furthermore, a commercial relationship does not require an underlying contract between the parties involved.

D.C. Circuit’s Proceedings

Nigeria appealed from the district court’s denial of its motion to dismiss for lack of jurisdiction. On appeal, Nigeria argued that the district court erred in finding that the New York Convention applies to the award. In Nigeria’s view, the FAA requires that a commercial relationship meet the requirements of section 2 of the FAA, which in turn requires the underlying relationship to be a commercial transaction. Furthermore, a sovereign state may not be considered a person under the New York Convention.

In the judgment of August 9, 2024, the D.C. Circuit disagreed with the appeal and affirmed the district court’s decision. However, this decision was not unanimous, and a dissenting opinion was issued.

D.C. Circuit’s Majority Opinion

The majority opinion noted that for the FSIA arbitration exception to apply, a party must show that (1) an arbitration agreement exists, (2) there is an arbitration award and (3) there is a treaty that governs the award. In this case, the satisfaction of the first two requirements was not disputed by the parties. The only disputed requirement was the existence of a treaty that governs the award. The relevant treaty in this context was the New York Convention.

For the New York Convention to apply in the United States, (1) the arbitrated dispute must “arise out of a legal relationship” that is (2) “considered as commercial,” and (3) is “between persons”.

There was a legal relationship between Zhongshan and Nigeria, as “Nigeria owed Zhongshan legal duties” under the BIT:

The BIT obliged Nigeria expressly to protect the investments of Chinese investors such as Zhongshan;
The BIT precisely described the scope of this protection.
The BIT created a legal framework to govern these duties, but allowing the investors to arbitrate dispute with host states in case of breach of the treaty obligations.
Investment treaties create relationships which bind the state and investor, even if on their face they are concluded between two states. The BIT applicable to Zhongshan’s case is no different.

The relationship between Zhongshan and Nigeria was commercial as the term “commercial” should be interpreted broadly:

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 Zhongshan’s case the investment itself, and the circumstances surrounding it, showed the necessary connection with commerce.
At the same time, the interpretation of the commercial reservation based on the text of the FAA proposed by Nigeria, limiting it only to commercial transactions, is contrary to the text of the FAA itself. The FAA in §202 when cross-referencing to Section 2 of the FAA uses the word “including” and not “limited to”. As such, the term “commercial” is not limited only to the commercial transactions described in Section 2 of the FAA. Rather, it encompasses these types of transactions and other commercial legal relationships.

Both Nigeria and Zhongshan are “persons” within the meaning of the New York Convention:

There is extensive precedent in the D.C. Circuit which applies the New York Convention in cases involving sovereigns, and, as such, treats them as persons within the Convention’s meaning.
Nigeria’s proposal to limit the New York Convention’s application only to private acts of states (rather than applying it to both private and sovereign acts) would contradict the text of the Convention, which does not include such a limitation. If anything, this limitation is already addressed in the commercial reservation, which is separate from the term “person”. The drafting history of the New York Convention does not support Nigeria’s position either.
The FAA does not provide any limitation with respect to its applicability to foreign states.
A similar position was taken by the United States as Amicus Curiae in Libyan American Oil Co. v. Socialist People’s Libyan Arab Jamahiriya, Nos. 80-1207, 80-1252 (D.C. Cir. June 16, 1980). This additionally supports the interpretation of the New York Convention applied by the D.C. Circuit.
The interpretation of the term “person” adopted by the D.C. Circuit does not strip the foreign sovereigns from their immunity, as this only may happen if the sovereign agrees to arbitrate disputes in the first place.
Furthermore, sovereigns are not obliged to agree to the enforcement of arbitral awards. The sovereign’s decision to commit themselves to this by accessing the New York Convention is their own “and in part determines whether a state has consented to an award’s enforcement in foreign courts.”
The concept of espousal is irrelevant in the context of treaties that confer direct rights on private persons.

D.C. Circuit’s Dissenting Opinion

The dissenting opinion disagreed with the majority’s interpretation of the term “person” used in the New York Convention, stating that it should not be extended to states acting in their sovereign capacity. In this respect the dissenting opinion argued that:

The actions that were the basis for the award are not private, but sovereign acts.
The proper standard in assessing the scope of the term “person” should exclude sovereigns from it unless there is “some affirmative showing of … intent to the contrary.” This is particularly the case, when sovereign—rather than private—acts are at play. It is also relevant to establish the meaning of the term “person” at the time of the establishment of the New York Convention.
At the time when the New York Convention was drafted, the term “person” did not typically encompass sovereigns. This is corroborated by the Black’s Law and Webster’s Dictionaries.
The plain language of the New York Convention suggests it does not apply to sovereign acts of foreign states. So does the historical context of how sovereign immunity was understood in the 1950s, when the Convention was concluded.
Furthermore, in case of harm done by a sovereign to a citizen of another sovereign, the relevant principle at the time was espousal—the right of the harmed citizen to request its home state to pursue claims for violation of international law against the sovereign violating the international law. BITs did not become common until the 1970s.
Also, the drafting history of the New York Convention does not suggest that the term “person” extends to governments.
US domestic precedents are relevant to the interpretation of the international treaty such as the New York Convention, as this treaty is written in English and finalized in New York. And they do not consider sovereigns a “person.”
The application of the New York Convention to investment arbitration awards is controversial. At the same time, there is no binding precedent in the D.C. Circuit that would confirm the application of the New York Convention in investment arbitration context. Similarly, the United States’ amicus curiae brief is not sufficient to support the conclusion reached by the majority.

Nigeria’s petition for a writ of certiorari

On November 7, 2024, Nigeria filed a petition for a writ of certiorari [5], requesting the Supreme Court to review the judgment of the D.C. Circuit. In this petition, Nigeria requested the Supreme Court to review the case, presenting the following two questions:

Whether, for interpreting the intentions of the treaty parties regarding a word like “person,” extratextual information such as historical context and contemporary domestic law is a material input in parallel with the textual analysis; and
Whether the New York Convention applies for arbitration agreements governing a dispute with a sovereign nation arising out of its role as a sovereign.

Nigeria’s petition has not been heard yet. Zhongshan has the right to file its brief in opposition until December 12, 2024. Nigeria will have the opportunity to reply to the brief in opposition, and based on the filed briefs the Supreme Court will decide whether to grant certiorari or not.

Relevance of the case

The D.C. Circuit’s decision affirms that investment treaties create commercial relationships between states and investors, bringing such disputes under the New York Convention’s framework for enforcement in the United States. This interpretation reinforces the ability of investors to seek effective recourse against sovereign states, ensuring that non-ICSID investment arbitration awards can be enforced.

However, the implications of Nigeria’s petition filed with the Supreme Court for investor-state arbitration in the United States are significant. If the Supreme Court grants certiorari and revisits the discussed issues, the resulting decision could reshape the enforceability of non-ICSID investment arbitration awards in the United States. A narrower interpretation of the New York Convention—and the FSIA arbitration exception—could limit investors’ ability to secure enforcement of non-ICSID awards in the United States, potentially undermining protections offered by investment treaties. Conversely, upholding the D.C. Circuit’s decision would reinforce the confidence of foreign investors in the effectiveness of investment protection in the United States. As such, this case may be fundamental in shaping the balance between state sovereignty and investor protection in the United States.

[1] Zhongshan Fucheng Industrial Investment Co. Ltd. v. Federal Republic of Nigeria, No. 23-7016 (D.C. Cir. Aug. 9, 2024).

[2] 9 U.S.C. § 202.

[3] 28 U.S.C. § 1605(a)(6).

[4] Zhongshan Fucheng Industrial Investment Co., Ltd. v. Federal Republic of Nigeria, No. 22-cv-00170- BAH (D.D.C. Jan. 26, 2023).

[5] Petition for Writ of Certiorari, Federal Republic of Nigeria v. Zhongshan Fucheng Indus. Inv. Co. Ltd., No. 24-532 (U.S. filed Nov. 7, 2024).