State immunity and the execution of investment treaty arbitral awards against state assets

By Sana Mahmud, Senior Assocate

Zhongshan Fucheng Industrial Investment Co Ltd v The Federal Republic of Nigeria

This British Virgin Islands (“BVI”) Commercial Court case confirms that a state’s written undertaking in a BIT to enforce arbitral awards may be understood as agreeing not only to the recognition of such awards, but also to execution against state assets, provided the treaty does not expressly differentiate between enforcement and execution.

The case concerned the execution of an arbitral award by Zhongshan Fucheng Industrial Investment Co Ltd (“Zhongshan”) against property of the Federal Republic of Nigeria (“Nigeria”). Zhongshan applied to the BVI court for a final attachment of debts order attaching a debt of £20 million payable by Process & Industrial Developments Ltd to Nigeria. Nigeria contested the order on the basis of state immunity under the State Immunity Act 1978 (“SIA”).

The Facts

Zhongshan, a Chinese company, qualified as an investor under a bilateral investment treaty (“BIT”) signed in 2001 between China and Nigeria. The BIT was designed for the reciprocal promotion and protection of investments between the two countries and specifically included arbitration as a dispute resolution mechanism for disputes arising from investments made under the treaty.

Around June 2007, Ogun State, an arm of the Nigerian government, entered into a joint venture with Chinese entities to develop a Free Trade Zone in Ogun State. Zhongshan and its related companies made substantial investments in this Free Trade Zone and played a key role in its development. By the end of 2015, the Free Trade Zone had approximately 4,900 employees and 60 tenants, indicating significant operational success.

However, in May 2016, Nigeria initiated steps to terminate its arrangements with Zhongshan and evict it from the Free Trade Zone. This action by Nigeria effectively amounted to an expropriation of Zhongshan's assets, resulting in substantial losses and damage to Zhongshan.

On 30 August 2018, Zhongshan commenced arbitration proceedings against Nigeria under the BIT, seeking damages and relief for the expropriation. Although Zhongshan was not a direct party to the BIT, as a qualified investor it benefited from its protections and dispute mechanisms. The arbitral tribunal dismissed Nigeria's jurisdictional objections and assumed jurisdiction over the dispute.

A final award was issued on 26 March 2021, with the tribunal ordering the Federal Republic of Nigeria to pay Zhongshan:

• US$55.6 million as compensation for expropriation;
• US$75,000 as moral damages; and
• Interest and legal costs.

As of 14 December 2023, the outstanding amount on the award (including interest) had accumulated to US$73,413,608 and £3,232,076. Nigeria had made no payments to Zhongshan pursuant to the award, and all amounts remained outstanding.

In response to Nigeria’s non-payment, Zhongshan initiated enforcement proceedings in the BVI in January 2022. Zhongshan sought recognition and enforcement of the arbitration award as a court judgment. The BVI court issued an order on 15 February 2022 recognising the award and making it enforceable as a judgment in the amounts of US$65,075,000 and £2,864,445 (including interest) in the BVI.

Following the BVI court order, additional unrelated proceedings against Nigeria emerged: Process & Industrial Developments Ltd ("PIDL”), a BVI company, owed £20 million to Nigeria following a separate arbitration. Nigeria had applied to set aside the award, and the English court granted an order to that effect. In a further related hearing on 8 December 2023 in open court PIDL was ordered to pay £20 million to Nigeria within 28 days as an interim payment on account of the latter’s costs. The £20 million was not paid and remained a debt owing to Nigeria by PIDL (the “Third-Party Debt”).

Subsequently, Zhongshan sought to attach the Third-Party Debt in partial satisfaction of the outstanding enforcement order. The court granted a provisional attachment of debts order in March 2024, barring PIDL from paying Nigeria until final determination of the attachment of debts application. Service on Nigeria was challenged on technical grounds, but ultimately Nigeria withdrew its challenge, allowing the application for final attachment of debt to proceed.

The Issues

Nigeria disputed Zhongshan's entitlement to an attachment of debts order against the Third-Party Debt on the basis that it was property belonging to Nigeria and it is immune from execution under the SIA.

As a state, Nigeria was entitled to enforcement immunity against its property under subsection 2(b) of the SIA. However, that immunity was subject to certain exceptions, including that a process of enforcement can be issued with the written consent of the state. Such consent may be contained in a prior agreement and may be general or specific (subsection 3 of the SIA).

Zhongshan relied on primarily this exception to argue that the Third-Party Debt was subject to enforcement to recover at least a part of the judgment debt in the enforcement order. Zhongshan argued that Nigeria had consented in writing to enforcement and execution of the enforcement order under article 9.6 of the BIT by which Nigeria committed itself to the enforcement of an award arising out of the BIT arbitration proceedings. Zhongshan relied on the decision in General Dynamics United Kingdom Ltd v State of Libya.

Nigeria argued that it did not consent to its property being subject to the execution of an award under the BIT or otherwise, and that the better source for deciding whether Nigeria consented within the meaning of subsection (3) of the SIA was the ICSID Convention, which made a clear distinction between enforcement and execution. If Nigeria had consented, which was denied, it was to the enforcement of the enforcement order, not execution.

Consequently, the BVI court, amongst other matters, had to decide whether:

1. The Third-Party Debt (being the property of Nigeria) was immune from execution under section 13(2)(b) of the SIA, as extended to the BVI. This involved determining if any relevant exceptions to immunity applied.
2. Nigeria, by virtue of the wording in Article 9(6) of the BIT, had given the necessary written consent for its property to be subject to enforcement and execution, as required to displace state immunity under the SIA.
3. The commitment to “enforcement” of arbitral awards in the BIT also entailed “execution” (e.g., attachment of assets), or whether these concepts are distinct such that only recognition/enforcement (not asset seizure) is permitted without further or clearer waiver of immunity. This involved comparing the BIT’s language to other treaties, such as the ICSID Convention, which explicitly distinguishes between enforcement and execution.

Decision

The court held that Nigeria had, through the BIT, expressly consented to the enforcement and execution of arbitral awards against its property as contemplated by section 13(3) of the SIA. The distinction drawn in the ICSID Convention between enforcement and execution was deemed inapplicable to the BIT, and the court interpreted “enforcement” to include execution measures such as attachment of debt orders.

Section 13 of the SIA granted immunity to states from enforcement measures against their property but contained exceptions for circumstances where the state has consented to enforcement (section 13(3)).

Article 9(6) of the BIT dealt with the decision-making process and provided that:

“The tribunal shall reach its decision by a majority of votes. Such decision shall be final and binding upon both parties to the dispute. Both Contracting Parties shall commit themselves to the enforcement of the award” [Emphasis added].

The court found that the addition of the final sentence above showed that the contracting parties to BIT (Nigeria and China) committed themselves to the additional step of enforcing awards made in BIT arbitration proceedings. This was tantamount to Nigeria saying that it consented to the enforcement of awards made in BIT arbitration proceedings, including the process of execution against state property. The court found that it was not necessary to include the word execution in Article 9.6 because execution was by necessary implication included in the word enforcement.

The court referred to General Dynamics v State of Libya, adopting the rationale that terms such as “enforceable” in the treaty context were not limited to mere judicial recognition but extended to actual enforcement and execution measures, unless expressly limited. Furthermore, as the original treaty arbitration was not conducted in accordance with the ICSID Convention, the court distinguished the BIT from it, emphasising that, unlike the ICSID Convention (which bifurcates enforcement and execution in articles 54 and 55), the BIT did not draw such a distinction, nor did it restrict enforcement to exclude execution. The court highlighted that the inclusion of “enforcement” in the BIT without differentiating execution was a deliberate choice by the drafters, especially as they were evidently familiar with the ICSID Convention, which was explicitly referenced elsewhere in the BIT.

The court accepted that Nigeria, in acceding to the BIT, had given written consent within the meaning of section 13(3) of the SIA to enforcement (including execution) against its property to satisfy BIT-sourced arbitral awards.

Accordingly, the court found that Zhongshan was entitled to proceed with execution pursuant to section 13(3) SIA as Nigeria had waived its immunity under the BIT. The court made the provisional attachment of debts order final, subject to an interim stay pending application for a full stay of execution.

Analysis

This case was very fact specific in that:

1. The asset against which execution was sought was a third-party debt, which only came to light as a result of court proceedings in another jurisdiction;
2. The arbitration under which the award was issued was not conducted under the ICSID Convention, and there was no clear distinction between “enforcement” and “execution” in the underlying BIT; and
3. State immunity in the BVI was governed by the UK SIA, as extended to BVI.

However, some general points can still be drawn from the judgment. When seeking execution of an arbitral award under a BIT against a state’s assets where the state resists execution on the basis of state immunity, consideration should be given to any exceptions to state immunity provided for in the relevant jurisdiction’s applicable legislation.

The decision clarifies that a state's written commitment in a BIT to "enforcement" of arbitral awards may be interpreted as consent not only to recognition, but also to execution against state property, provided the treaty language does not distinguish between enforcement and execution. The wording of relevant treaties should be reviewed to assess whether such consent exists and whether it extends to execution measures such as attachment of debt orders.

For example, where a treaty arbitration is not conducted under the ICSID Convention resulting in an award requiring execution, careful consideration should be given to the wording of the dispute resolution provisions in the relevant BIT. These should be reviewed to ensure clarity on terms like "enforcement" and "execution", as there is a risk that courts may interpret these broadly in the absence of explicit limitations. This judgment, alongside General Dynamics United Kingdom Ltd v State of Libya, is useful precedent for cases where the underlying BIT does not make such a distinction.

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