Note: When a dispute arises in an overseas engineering project, companies usually think first about the contract: whether the project price has been paid, whether the schedule has been delayed, and whether the owner can terminate the contract.
But when a company has already obtained a commercial arbitration award and the award is then annulled by a court of the host State, or when the dispute begins to involve judicial or administrative conduct by that State, an ordinary contract dispute may enter the field of State responsibility under international investment law.
The case of PowerChina HuaDong Engineering Corporation and China Railway 18th Bureau Group Company Ltd v. Socialist Republic of Viet Nam, which has attracted attention in the international arbitration community, is a representative example.
Two Chinese State-owned enterprises first obtained a favourable award at the Vietnam International Arbitration Centre (VIAC) in connection with the Upper Kon Tum hydropower project. The award was subsequently annulled by a Vietnamese court, after which the companies commenced investor–State arbitration against Vietnam under the ASEAN–China Investment Agreement.
The case is still pending and no final award has been issued. It nevertheless raises a question that all companies investing overseas should take seriously:
When contractual remedies cannot resolve the entire dispute, can an investment treaty provide a second layer of protection?
01 How did an engineering dispute reach investment arbitration?
The Upper Kon Tum hydropower station is located in Vietnam’s Kon Tum Province and was planned to have an installed capacity of approximately 220 MW.
Around 2010, the Vietnamese project owner, Vinh Son–Song Hinh Hydropower Joint Stock Company, entered into an engineering contract with a Chinese consortium comprising PowerChina Huadong Engineering Corporation Limited and China Railway 18th Bureau Group Company Limited. The Chinese consortium undertook part of the project’s core construction works.
During the project, the parties disputed the construction schedule, payment obligations, termination of the contract and allocation of losses. In 2014, the Chinese consortium commenced arbitration at VIAC.
In April 2019, the VIAC tribunal issued an award ordering the Vietnamese owner to pay and compensate the Chinese consortium approximately VND 2.163 trillion, equivalent to about USD 90 million at the exchange rate then applicable.
In November of the same year, however, the Hanoi court annulled the award at the application of the Vietnamese owner. Publicly available materials indicate that the grounds concerned the hearing venue, the application of procedural rules, and the treatment of loss assessment and expert evidence.
Because the VIAC arbitration was a domestic arbitration seated in Vietnam, Vietnamese courts were entitled to exercise judicial supervision under Vietnamese arbitration law. Once the award was annulled, the payment claim obtained through commercial arbitration faced a substantial obstacle.
In November 2022, ICSID registered an investment arbitration brought by the two Chinese companies against Vietnam, ICSID Case No. ARB(AF)/22/7, relying on the 2009 ASEAN–China Investment Agreement.
Public case information also shows that the claimants later commenced another investment dispute procedure under the 1992 China–Vietnam Bilateral Investment Treaty, numbered ADM/23/1. The precise scope of the claims in the two proceedings and their relationship have not been fully disclosed.
Based on the information currently available, the dispute follows a clear progression:
Engineering contract dispute → successful commercial arbitration → award annulled by the host-State court → investment treaty arbitration
This does not mean, however, that an investor can automatically obtain compensation through investment arbitration whenever a commercial award has been annulled.
02 The three genuinely difficult legal questions
1. When does a contractual breach become State responsibility?
International investment arbitration first distinguishes between two types of responsibility.
The first concerns the project owner’s failure to pay, delay in performance or wrongful termination. These matters are generally addressed through contract law and commercial arbitration.
The second concerns the host State’s legislative, administrative, judicial or other sovereign conduct that injures a foreign investment and may give rise to responsibility under an investment treaty.
Even if the project owner has a State-owned background, its commercial conduct cannot necessarily be attributed directly to the State.
An investor therefore needs to prove more than the non-payment of engineering fees. It must also establish that:
- the relevant judicial or administrative conduct is attributable to the host State;
- the conduct breached a specific obligation under the investment treaty; and
- there is a causal connection between the State conduct and the investment loss.
This is the fundamental difference between commercial arbitration and investment arbitration.
Investment arbitration is not a rehearing of the engineering contract dispute, still less an “appeal” from the commercial arbitration.
2. Does the annulment of an award amount to denial of justice or indirect expropriation?
The annulment of a commercial award by a court does not automatically mean that the host State has breached an international investment treaty.
An investment tribunal will generally not act as an appellate court over the courts of the host State. Even an error of fact or law by a domestic court does not necessarily create responsibility under international law.
An investor usually needs to prove something more serious, such as a manifestly arbitrary or discriminatory judicial process, deprivation of fundamental procedural rights, or a failure of the judicial system as a whole to provide basic justice.
Some public commentary has also suggested that the annulment of the VIAC award by the Vietnamese court might involve indirect expropriation of the Chinese parties’ claim or investment interest.
Under international investment law, an arbitral award, contractual claim or other economically valuable claim may, in certain circumstances, qualify for treaty protection. Judicial supervision of a domestic arbitration award, however, is in principle an ordinary judicial function.
To establish indirect expropriation, it would generally be necessary to show that the judicial conduct substantially deprived the investor of its investment and clearly exceeded the bounds of good-faith, legitimate and non-discriminatory judicial regulation.
Because the claimants’ full pleadings have not been made public, the treaty standards ultimately relied upon in the case should be determined from the formal case documents.
3. Why is this not an arbitration under the ordinary meaning of the Washington Convention?
The “AF” in the case number stands for “Additional Facility”, namely the ICSID Additional Facility mechanism.
Vietnam is not a party to the Washington Convention. This is therefore not an arbitration strictly under the Washington Convention, but an investment arbitration administered by ICSID under the Additional Facility Rules.
That distinction directly affects annulment and enforcement.
Arbitration under the Washington Convention is subject to a relatively closed internal annulment mechanism, and an award cannot be annulled by the courts of the seat. An Additional Facility arbitration, by contrast, is in principle subject to the law of the seat and supervision by the courts of the seat.
As to enforcement, an Additional Facility award cannot directly rely on Article 54 of the Washington Convention. It will usually depend on the New York Convention, the law of the place of enforcement and the rules on State immunity.
Accordingly, even if the investor ultimately prevails, locating executable commercial assets of the host State and addressing sovereign immunity may become another complex legal battle.
03 Can State-owned enterprises and EPC contractors obtain treaty protection?
Both claimants are Chinese State-owned enterprises.
Under general principles of international investment arbitration, an enterprise does not automatically lose investor status merely because it is State-owned. A tribunal will usually examine whether the enterprise has a separate legal personality, makes commercial decisions independently, bears the profits and losses of the project independently, and performs governmental functions in the relevant transaction.
The Beijing Urban Construction v. Yemen case has already shown that a Chinese State-owned enterprise may qualify as an investor where the relevant conditions are met.
For a State-owned enterprise, board resolutions, feasibility studies, tender documents, sources of funding and risk-allocation arrangements are not only internal compliance records. They may also be important evidence of the enterprise’s independent commercial personality.
EPC contractors are likewise not automatically excluded from investment treaty protection.
An ordinary engineering contract or a simple commercial debt may not constitute an “investment” for treaty purposes. But in a large infrastructure project with a long construction period, substantial investment of capital, equipment, technology and personnel, and significant engineering and policy risks, the contractor’s overall project contribution and contractual interests may qualify as a protected investment.
The ultimate assessment must still be made by reference to the definition of investment in the relevant treaty and the specific facts of the project.
04 Four lessons for Chinese enterprises
1. Review the investment treaty as well as the contract before investing
When determining the investment vehicle and route, an enterprise should check in advance:
- whether an effective investment treaty exists between China and the host State;
- which investors and forms of investment are protected;
- whether direct investor–State arbitration is available; and
- whether there are cooling-off periods, local-remedy requirements, waiver provisions or limitation periods.
An investment structure may be planned lawfully, but an enterprise should not wait until a dispute has arisen, or could reasonably have been foreseen, and then restructure solely to obtain treaty protection.
2. Design commercial and investment arbitration at different levels
Commercial arbitration addresses a contractual dispute between the enterprise and the project owner. Investment arbitration addresses a treaty dispute between the investor and the host State.
Commencing commercial arbitration does not necessarily exclude subsequent investment arbitration, because the parties, causes of action and legal bases may be different.
The enterprise must nevertheless review the treaty’s provisions on the choice of remedies, waivers, cooling-off periods and local remedies to avoid conflicts between procedures.
The same loss cannot be recovered twice. Engineering arrears, loss caused by annulment of the award and impairment of investment value caused by State conduct must be identified separately.
3. The arbitral institution and the seat are two different choices
Choosing an international arbitral institution does not mean that the award will never be affected by local courts.
The institution primarily administers the procedure. The seat determines which arbitration law applies and which courts have power to supervise and annul the award.
When drafting a dispute resolution clause for a major cross-border project, the parties should assess the institution, the seat, interim measures and the place of enforcement together, rather than looking only at the institution’s reputation.
4. Preserve evidence of “State conduct” during performance
Many enterprises preserve contracts, engineering certificates, payment applications and correspondence, but overlook evidence relating to government authorities.
If investment arbitration may later be required, the enterprise should also systematically preserve:
- government correspondence and approval records;
- minutes of regulatory meetings;
- tax, customs, environmental and employment inspection materials;
- comparative materials showing that comparable local enterprises received different treatment; and
- contemporaneous records of the effect of government conduct on project financing, valuation and operations.
Important oral requests by government officials should be confirmed in writing by email or meeting minutes as soon as possible.
Conclusion
The significance of the Upper Kon Tum dispute is not that every failed commercial arbitration can be converted into ISDS. It is that the case reveals the layered structure of disputes arising from overseas infrastructure projects.
The first layer is a breach by the commercial partner; the second is judicial or administrative conduct by the host State; and the third is whether the award can actually be enforced.
For a major cross-border project, effective dispute management does not mean waiting for one procedure to fail and then searching for another. From the beginning of the project, contractual remedies, investment protection and cross-border enforcement should be placed on the same risk map and considered together.
Source note: This article is based on publicly available ICSID case information as of August 2026, the ASEAN–China Investment Agreement and other public materials. The case remains pending. The claimants’ complete claims, Vietnam’s specific defences and the tribunal’s determination on the merits have not all been disclosed. This article does not predict the outcome and does not constitute legal advice for any specific project.
References:
ICSID, PowerChina HuaDong Engineering Corporation and China Railway 18th Bureau Group Company Ltd v. Socialist Republic of Viet Nam, ICSID Case No. ARB(AF)/22/7.
ICSID, PowerChina HuaDong Engineering Corporation and China Railway 18th Bureau Group Company Ltd v. Socialist Republic of Viet Nam, ADM/23/1.
Agreement on Investment of the Framework Agreement on Comprehensive Economic Co-operation between ASEAN and the People’s Republic of China, 2009.
ICSID Additional Facility Rules, 2022.
Decision No. 11/2019/QD-PQTT of the Hanoi Court and related public materials.
This article is general information and not legal advice. Specific matters require assessment by appropriately qualified professionals.