China Business Law Journal | 14 December 2023
Huawei v Sweden: bifurcation in international investment arbitration
by Yang Xueyu and Mariana Zhong
Bifurcation refers to the division of arbitral proceedings into distinct stages to address different issues, typically involving the separation of jurisdictional issues from merits of the dispute. The authors of this article take the case of Huawei v Sweden as a starting point to explore decisive factors in handling bifurcation requests, while also providing insights for investors.
In the high-profile Huawei v Sweden case, the arbitral tribunal rejected Sweden’s request for bifurcation. The primary focus of the case was whether Sweden’s measures – banning Huawei from participating in the rolling-out of its 5G network – violated its international investment protection obligations.
Specifically, Sweden’s Post and Telecom Authority decided that participants in 5G spectrum auctions may not use products supplied by Huawei or ZTE, citing “national security” reasons.
Sweden raised two “preliminary objections”, arguing that the arbitral tribunal lacked jurisdiction over the case, and requesting a bifurcation of jurisdiction and merits.
Sweden pointed out that the claimant, Huawei Technologies, indirectly held shares in Huawei Sweden through a Dutch entity, Huawei Technologies Cooperatief UA. For the respondent state, such indirect investments owned by Chinese investors are not protected under the China-Switzerland Bilateral Investment Treaty (BIT).
In its second objection, Sweden argued that Huawei had not established any rights regarding Sweden’s 5G network, which formed the basis of its claims. The state also contended that Huawei was not authorised by China’s central government to invest in Sweden’s 5G network.
Arbitral tribunal decisions
In response to Sweden’s request for bifurcation, the arbitral tribunal first highlighted its broad discretion under article 41(2) of the ICSID Convention and article 41(4) of the ICSID Arbitration Rules.
The arbitral tribunal noted that it was common ground between both parties that the exercise of this discretion should be guided by procedural fairness and efficiency, and previous arbitral tribunals had primarily considered the following factors:
- Is the objection prima facie serious and substantial in the sense that it has some likelihood of success, or at least is not frivolous or vexatious?
- Can the objection be assessed without going into the merits of the dispute?
- If successful, would the objection put an end to the proceedings, or at least materially narrow the dispute?
Applying the above-mentioned criteria, the tribunal considered that the first objection did not raise a “serious issue” as “the treaty’s plain text does not appear to limit its applicability or scope to a particular investment structure”.
Regarding the second objection, Huawei’s claims were not limited to the
5G network, and its authorisation obtained in 2004 “seemingly included 5G-related investments in Sweden”. These aspects were closely tied to the merits. Accordingly, the tribunal rejected Sweden’s bifurcation request.
This case exemplifies the broad discretion of arbitral tribunals in handling bifurcation requests. In deciding this issue, arbitral tribunals have placed a strong emphasis on procedural economy and efficiency, alongside a focus on overall fairness.
The three-prong test adopted in the Huawei case can be traced back to Glamis Gold v USA, and was further developed in Philip Morris v Australia. It should be noted that the criteria comprising the three factors do not constitute a “rigid and mandatory formula” that an arbitral tribunal must strictly adhere to, nor is it an exclusive list. Instead, they play a guiding role.
Insights for investors
Generally speaking, respondent states tend to prolong arbitral proceedings for different reasons (e.g. winning additional time for case preparation, employing delays as a tactic to push for settlement by investors, or to dissuade the interest of third-party funders). Investors, however, wish for a faster proceeding to get a favourable award as soon as possible.
Consequently, it is common for the respondent state to initiate requests for bifurcation on jurisdictional issues, whereas investors typically oppose these requests, preferring to address jurisdiction and merits in a single phase of the proceedings.
As requests for bifurcation become increasingly common, it is crucial for investors to be well prepared at the early stage of proceedings.
For example, in selecting arbitrators, consideration can be given to the candidates’ previous handling of bifurcation requests, including the time taken to deal with these requests, and the results.
In general, investors should oppose requests for bifurcation, especially when the state’s jurisdictional objections involve investors’ alleged misconduct, such as abuse of process. If investors do not oppose objections of this kind, arbitral tribunals may perceive this as the investor implicitly accepting the state’s objections to some extent.
Additionally, if such jurisdictional objections are bifurcated, it is usually disadvantageous for the investor, as the focus of the entire jurisdictional phase will be primarily on whether the investor had engaged in misconduct.
Investors are often portrayed by the state as disreputable “unqualified investors” who are not protected by the relevant treaty. At this stage, investors find themselves in a defensive position and unable to present issues related to the merits, such as the state’s unfair treatment to them.
Of course, investors could accept reasonable requests for bifurcation, especially when the respondent state raises jurisdictional objections that are irrelevant to the case’s facts and could potentially conclude the case; for example, when a respondent state challenges the jurisdiction of the ICSID on the grounds of its withdrawal from the ICSID Convention.
It is also worth noting that when allocating arbitration costs, arbitral tribunals have in some cases ordered investors to bear the state’s arbitration expenses, one of the considerations being that the investors had previously strongly opposed bifurcation of the proceedings.
Yang Xueyu and Mariana Zhong are partners at Hui Zhong Law Firm. Dang Hongwei, an associate at this firm, also contributed to this article.