Hulley Enterprises v. Russia, Judgment of the Hague Court of Appeal (Unofficial English Translation), 18 févr. 2020

1.1.

For the course of the proceedings up to the interim judgment of 18 December 2018, the Court of Appeal refers to that judgment and the preceding interim judgment of 25 September 2018. In the latter interim judgment, the Court of Appeal held that HVY’s objection to a number of statements by the Russian Federation in the Defence on Appeal was in part well-founded and in part unfounded. In that interim judgment, the Court of Appeal furthermore specified that the parties could comment on the further course of the proceedings.

1.2.

The parties submitted deeds expressing their views on the further course of the proceedings. The Court of Appeal thereupon ruled, in the interim judgment of 18 December 2018, that HVY would be granted an opportunity to submit a deed by which they could respond to certain statements, specified in the interim judgment, that the Russian Federation had made in the Defence on Appeal, as well as - in the same context - to exhibits submitted at first instance by the Russian Federation. The Court of Appeal also held that the Russian Federation would then be granted an opportunity to respond to the exhibits accompanying the deed that HVY were to submit. The Court of Appeal also took a number of decisions in that interim judgment in respect of the period within which exhibits could be submitted for the parties' oral pleadings and the time allotted for such pleadings.

1.3.

HVY submitted the deed referred to in the previous paragraph on 26 February 2019.

1.4.

By letter of 18 March 2019, the Russian Federation objected against HVY’s Deed of 26 February 2019 and requested the Court of Appeal to deny this Deed, or at least to grant a further postponement for the Deed to be submitted by the Russian Federation. HVY responded to that objection by letter of 26 March 2019. The Court of Appeal denied both requests by the Russian Federation by letter of 29 March 2019. More particularly, the Court of Appeal, in response to the Russian Federation’s assertion that HVY failed to remain within the parameters set by the Court of Appeal in its interim judgment of 18 December 2018, ruled the following:

"To the extent necessary for the decision of this case, the Court of Appeal will, when rendering its (final) judgment, determine whether HVY has gone beyond said parameters and may disregard certain assertions of HVY on that ground. The Court of Appeal may also give the parties the opportunity to express further views on certain points, if it believes the right to be heard gives reason to do so."

1.5.

The Russian Federation responded to the exhibits submitted with HVY’s Deed by a Deed on 25 June 2019.

1.6.

On 23, 24 and 30 September 2019 the parties had their cases argued before the Court of Appeal, HVY's by the aforementioned mr. Leijten, and by mr. A.W.P. Marsman and mr. E.R. Meerdink, attorneys practising in Amsterdam, and the Russian Federation's by Prof. mr. A.J. van den Berg, attorney practising in Brussels, and by Prof. mr. M.E. Koppenol-Laforce, attorney practising in Rotterdam and mr. R.S. Meijer, attorney practising in Amsterdam, based in each case on the written arguments submitted to the Court of Appeal. HVY and the Russian Federation entered additional exhibits into evidence on this occasion. A record of this hearing, which is part of the procedural documents, was drawn up. Finally, judgment was requested.

1.7.

During the oral pleadings, the Russian Federation objected to the exhibits submitted with the Deed of 9 September 2019 in support of the oral pleadings. The Court of Appeal does not need to decide on this objection as it did not use these exhibits for its assessment. Superfluously, the Court of Appeal notes that the exhibits submitted with this Deed can reasonably be considered as a response to the exhibits submitted by the Russian Federation with the Deeds of 15 August 2019 and 26 August 2019; in addition, the Exhibits submitted by HVY are not of such a volume that the Russian Federation could not reasonably be required to respond to them during the oral pleadings.

1.8.

The following applies to the objection by the Russian Federation to the Deed of 26 February 2019. In so far as the Court of Appeal has taken the contents of this Deed or the exhibits into account in its assessment, these are assertions or exhibits that do not fall outside the parameters set by the Court of Appeal in its interim judgment of 18 December 2018. In particular, HVY were free to submit further opinions of Prof. Schrijver and Prof. Klabbers in the context of their response to the opinions of Prof. Nolte and Prof. Pellet submitted with the Defence on Appeal (see interim judgment of 18 December 2018, para. 3.1). Incidentally, HVY could also have submitted these exhibits on occasion of the oral pleadings.

2.1.

The present case is, briefly summarised and to the extent relevant in this appeal, about the following. For the sake of clarity, the Court of Appeal partly reiterates paragraphs 2.2 through 2.8 of the interim judgment of 25 September 2018.

2.2.

HVY are, or at least were, shareholders in Yukos Oil Company (hereinafter: Yukos), an oil company based in the Russian Federation, which was declared bankrupt on 1 August 2006 and deregistered from the Russian Commercial Register on 21 November 2007.

2.3.

HVY initiated arbitration proceedings against the Russian Federation in 2004 under Article 26 of the Energy Charter Treaty (Treaty Series 1995, 108, hereinafter: the ECT, or the Treaty), claiming that the Russian Federation had expropriated their investments in Yukos in violation of the ECT and had failed to protect those investments. HVY claimed that the Russian Federation should be ordered to pay damages. The place of arbitration was The Hague.

2.4.

The arbitral tribunal appointed pursuant to the UNCITRAL Arbitration Rules (hereinafter: the Tribunal) ruled in three separate Interim Awards on Jurisdiction and Admissibility of 30 November 2009 on a number of preliminary defences raised by the Russian Federation, including in relation to the Tribunal's jurisdiction. In the Interim Awards, the Tribunal rejected certain defences of jurisdiction and admissibility and ruled with respect to other preliminary defences that the decision on them would be stayed until the merits phase of the proceedings.

2.5.

In three separate Final Awards of 18 July 2014, the Tribunal rejected the Russian Federation’s remaining defences on jurisdiction and/or admissibility, found that the Russian Federation had breached its obligations under Article 13(1) ECT and ordered the Russian Federation to pay HVY damages amounting to USD 8,203,032,751 (to VPL), USD 1,846,000,687 (to YUL) and USD 39,971,834,360 (to Hulley), plus interest and costs. In brief, the Tribunal ruled that the Russian Federation, by taking a number of tax and recovery measures against Yukos, had been steering towards the bankruptcy of Yukos for no other purpose than the elimination of Mr Mikhail Khodorkovsky, chairman of Yukos and one of its shareholders (hereinafter: Khodorkovsky), as a potential political opponent of President Putin, and the acquisition of Yukos’ assets.

2.6.

By separate summonses of 10 November 2014, the Russian Federation summoned Hulley, VPL and YUL before the District Court of The Hague and requested the District Court to set aside the Interim Awards and Final Awards rendered by the Tribunal in each of their cases. These three cases were joined by the District Court at the request of the Russian Federation.

2.7.

On 20 April 2016, in one judgment rendered in the three joined cases, the District Court set aside the Interim Awards and the Final Awards because of the absence of a valid arbitration agreement. HVY filed an appeal against this judgment.

2.8.

By law of 2 June 2014 to amend Book 3, Book 6 and Book 10 of the Dutch Civil Code and the Fourth Book of the Dutch Code of Civil Procedure in connection with the modernisation of the Arbitration Law (Bulletin of Acts and Decrees 2014, 200), which entered into force on 1 January 2015 (see Bulletin of Acts and Decrees 2014, 254), Dutch arbitration law was revised. Pursuant to Article IV(4) in conjunction with Article IV(2) of this law, the Fourth Book of the Dutch Code of Civil Procedure (DCCP) as it was before the entry into force of the law remains applicable to the present proceedings. Where this judgment refers to provisions on the setting-aside or revocation of arbitral awards, articles from Book IV DCCP in the version applicable until 1 January 2015 are concerned.

2.9.

Although the Tribunal has rendered three separate Interim Awards and three separate Final Awards in three separate arbitrations in the cases of Hulley, VPL and YUL, these rulings do not differ materially from each other in respect of the matters at issue in these setting-aside proceedings. For the sake of brevity, the Court of Appeal will therefore hereinafter also refer to 'the' arbitration, 'the' Interim Award and ‘the’ Final Award. As the paragraphs in the Interim Awards have different numbering, the Court of Appeal will refer to the numbering of the Interim Award and the Final Award in the case of Hulley; this also applies to references to other procedural documents. The Interim Awards and the Final Awards will also be jointly referred to as the ‘Yukos Awards’.

2.10.

In applying and interpreting the ECT and the Vienna Convention on the Law of Treaties (the Treaty of 1969, Treaty Series 1985, 79, hereinafter: VCLT), the Court of Appeal will base itself on the authentic versions of these treaties in the English language. Where appropriate, the Court of Appeal will also take into account other authentic language versions when interpreting the ECT. For the sake of readability of this judgment, the Court of Appeal will also use the official Dutch translations of the ECT and the VCLT in the text (published in Treaty Series 1995, 250 and Treaty Series 1972, 51, respectively), but this does not alter the fact that the ruling of the Court of Appeal is based on the authentic English- and French-language versions of the ECT and the VCLT (as published in Treaty Series 1995, 108 and Treaty Series 1972, 51, respectively), as well as the authentic German- and Italian-language versions of the ECT (as published on the website www.energycharter.org).

2.11.

The exhibits that have been entered into evidence by the parties in these setting-aside proceedings bear the designation ‘RF’ (Russian Federation) or ‘HVY’ followed by a number. This judgment also refers to exhibits entered into evidence by the parties during the arbitration. As regards these exhibits, those from the ‘Claimant’ (HVY) are marked with ‘C’, those from the 'Respondent' (the Russian Federation) in the jurisdiction phase are marked with R, and those from the ‘Respondent’ in the merits phase are marked with 'RME', in each case followed by a number. When the number is preceded by a ‘D’, this means that it is an expert report. Appendices to the expert reports submitted by the parties sometimes have a separate letter code, such as ‘S’ (for Prof. Stephan), ‘M’ (for Prof. Mishina), ‘ASA’ (Prof. Avtonomov), ‘AVA’ (Prof. Asoskov) etc.

3.1.1.

As the District Court ruled that the Tribunal wrongfully declared itself competent to examine the dispute and the grounds for appeal are directed against that ruling, the Court of Appeal will first describe in broad strokes which positions the parties have taken concerning the jurisdiction of the Tribunal, as well as what the Tribunal and subsequently the District Court decided on the basis of those arguments. All these arguments and considerations will be addressed in more detail later.

3.1.2.

The fundamental nature of the right to access to the courts entails that answering the question of whether a valid arbitration agreement was concluded is ultimately up to the court and that the court will not exercise restraint when assessing a claim seeking the setting aside of an arbitral award on the grounds that a valid arbitration agreement is lacking. ¹ The Court of Appeal may leave the question of which party bears the burden of proof of the existence or absence of a valid arbitration agreement unanswered. The question of whether a valid arbitration agreement has been concluded in the present case depends on the interpretation of Articles 26 and 45 ECT in light of the law of the Russian Federation, not on factual points of dispute. In so far as any factual points of dispute exist between the parties in the context of this ground for setting-aside, these do not - as will be shown below - raise any questions regarding the allocation of the burden of proof.

3.2.1.

In the arbitration and in the present setting-aside proceedings, the Russian Federation invoked the Tribunal's lack of jurisdiction on the basis of Article 1065(1)(a) DCCP. To that end it puts forward - in sum - the following. The Russian Federation has signed the ECT but never ratified it. While Article 45(1) ECT provides that each signatory shall provisionally apply the Treaty, this applies only ‘to the extent that such provisional application is not inconsistent with its constitution, laws or regulations’ (‘the Limitation Clause’). Article 26 ECT, in so far as it identifies arbitration as one of the agreed possible forms of dispute settlement under the Treaty, is inconsistent with the law of the Russian Federation. Article 26 ECT is inconsistent with the Russian Constitution (hereinafter: the Constitution), in particular with the principle of the separation of powers enshrined therein, and with the rule expressed in several statutory provisions that public-law disputes cannot be subjected to arbitration. In addition, the law approving the ECT was not submitted to the State Duma within six months of the signing of the ECT, as required by Article 23(2) of the Russian Federal Law on International Treaties (hereinafter: FLIT). Finally, under Russian law, a shareholder cannot claim the damage suffered by the company.

3.2.2.

The Russian Federation further argues that the requirement set by Article 26 ECT that there is an ‘Investment’ within the meaning of Article 1(6) ECT has not been met and that HVY are not ‘Investors’ within the meaning of Article 1(7) ECT either. This is essentially an internal Russian dispute between the ‘oligarchs’ (a number of Russian businessmen who were involved in the privatisation of Yukos and to whom the Court of Appeal will hereinafter refer as ‘Khodorkovsky et al.’) and the Russian Federation. According to the Russian Federation, Khodorkovsky et al. are the ultimate stakeholders of HVY, which are themselves no more than sham companies. In this case, no foreign capital had been invested in the Russian Federation, whereas the ECT is intended for the protection of foreign investments only.

3.2.3.

Furthermore, according to the Russian Federation, the illegality of HVY’s investments in Yukos precludes protection by the ECT. HVY’s investments are illegal because HVY were exclusively set up and established in tax havens to evade Russian taxes. HVY’s investments are also illegal because their investments in Yukos and, with that, control over Yukos were acquired and consolidated through corruption and fraud during and after the time of Yukos’ privatisation.

3.2.4.

Finally, the Russian Federation argues that the Tribunal has no jurisdiction because Article 21(1) ECT (the so-called ‘carve-out’) provides that taxation measures are not covered by protection under the ECT ("... nothing in this Treaty shall create rights or impose obligations with respect to Taxation Measures of the Contracting Parties"). Although it is true that Article 21 ECT creates an exception to this (the so-called ‘claw-back’) in the sense that paragraph 5(a) provides that ‘Article 13 shall apply to taxes’, but according to the Russian Federation, HVY do not complain about ‘taxes’ but about ‘Taxation Measures’. Finally, the Russian Federation argues that the Tribunal wrongly neglected to seek advice from the national tax authorities (of the Russian Federation, the United Kingdom and Cyprus) as it believes is required by Article 21(5)(b) ECT.

3.3.1.

In the first place, HVY are of the opinion that the Russian Federation has forfeited its right, by estoppel or acquiescence, to invoke lack of jurisdiction of the Tribunal. After all, the Russian Federation applied the ECT provisionally for years without ever manifestly invoking its view that Article 26 ECT is ‘inconsistent’ with Russian law. In addition, the rule from the IMS/DIO judgment ² implies that the Russian Federation may not invoke limitations of jurisdiction contained in its own legislation to argue that a valid arbitration agreement was not concluded, if the other party did not know, and could not reasonably be expected to have known, those limitations. HVY further argue that the Russian Federation cannot invoke a possible inconsistency of Article 26 ECT with its national law, as the Russian Federation has failed to make a statement on the basis of Article 45(2)(a) ECT that it does not accept provisional application.

3.3.2.

According to HVY, the Limitation Clause must be interpreted as applicable only if the law of a Signatory does not provide for the principle of provisional application of treaties. The Limitation Clause does not mean that a Signatory may exempt itself from provisional application of the ECT whenever a provision of the Treaty is inconsistent with a rule of national law. In the appeal in the present setting-aside proceedings, HVY have added as an alternative position that, even if it must be assumed that the Limitation Clause does not relate to the principle of provisional application, the question is, in any event, whether the provisional application of any provision of the ECT is incompatible with a rule of national law, not whether any provision of the ECT is in itself inconsistent with national law. Apart from that, Article 26 ECT is not incompatible with any provision of Russian law according to HVY. On the contrary, the Russian Laws on Foreign Investment of 1991 and 1999 (hereinafter: LFI 1991 and LFI 1999 respectively) explicitly provide that investment disputes between a foreign investor and the Russian Federation may be subjected to international arbitration. The FLIT entered into force after the signing of the ECT, and, for that reason alone, Article 23(2) of that law, which provides that a provisionally applied treaty must be submitted to the State Duma for approval within six months, does not apply to the ECT. Incidentally, non-compliance with this requirement has no impact on the provisional application of the ECT. Moreover, under Article 15(4) of the Constitution, a provisionally applied treaty takes precedence over a federal law, so for that reason alone there can be no question of Article 26 ECT being incompatible with Russian law.

3.3.3.

HVY are ‘Investors’ within the meaning of Article 1(7) ECT and their shareholdings in Yukos are ‘Investments’ within the meaning of Article 1(6) ECT. HVY were validly incorporated under the law of their place of business and established in States that are Signatories to the ECT, not being the Russian Federation. HVY's shareholdings in Yukos clearly fall within the definition of ‘Investment’. The ECT does not impose any additional requirements on the terms ‘Investor’ or ‘Investment’, such as the requirement of legality or the requirement that capital has been invested from outside the Host State. HVY dispute that Khodorkovsky et al. have ultimate control over HVY or that HVY are sham companies that were incorporated to evade Russian taxes. HVY also deny that their investments in Yukos and, with that, control over Yukos were acquired or consolidated using corruption and fraud.

3.3.4.

Finally, HVY take the view that Article 21 ECT does not relate to the jurisdiction of an arbitral tribunal on the basis of Article 26 ECT but to the material scope of protection of the ECT. The provision also does not apply because it only regards bona fide taxation measures and these were not concerned in this case. The taxation measures taken against Yukos were aimed solely at eliminating Khodorkovsky as a political rival to President Putin and at appropriating Yukos' assets. Moreover, Article 21(5)(a) ECT provides that Article 13 ECT does in fact apply to ‘taxes’. This is not intended to mean anything different than the 'Taxation Measures' referred to in Article 21(1) ECT.

3.4.1.

To the extent relevant here, the Tribunal decided the following in the Interim Award:

(i) the Russian Federation has not (as a result of estoppel) forfeited its right to invoke the Limitation Clause (Interim Award nos. 286-288);

(ii) the Russian Federation may invoke the Limitation Clause, notwithstanding the fact that it has not made a declaration on the basis of Article 45(2)(a) ECT or otherwise indicated that it would not apply Article 26 ECT provisionally (Interim Award nos. 260-269; nos. 282-285);

(iii) the Limitation Clause constitutes an exception to the provisional application of the ECT only if the principle of provisional application is incompatible with Russian law, not if a specific ECT treaty provision is incompatible with Russian law (Interim Award nos. 301-329);

(iv) the question of potential incompatibility with Russian law must be assessed as of the moment the ECT was signed (Interim Award no. 343);

(v) the principle of provisional application is not incompatible with Russian law (Interim Award nos. 330-338);

(vi) superfluously: Article 26 ECT is not incompatible with Russian law: Article 9 LFI 1991 and Article 10 LFI 1999 provide that disputes between a foreign investor and the Russian Federation are arbitrable (Interim Award no. 370); the definitions of ‘foreign investor’ and ‘foreign investment’ in both LFIs are consistent with the definitions of ‘Investor’ and ‘Investment’ in Article 1 ECT (Interim Award no. 371); there is no ‘derivative action’, HVY claim compensation of their own direct loss (Interim Award no. 372); under the FLIT, the Russian Federation agreed to be bound by Article 26 ECT, albeit provisionally; this did not require ratification (Interim Award nos. 382-384); the requirement of Article 23(2) FLIT is merely an internal requirement and any failure to respect it does not terminate provisional application (Final Award no. 387);

(vii) it was not until 20 August 2009 that the Russian Federation notified the depositary of the ECT of its intention not to ratify the ECT; until then, it was a member of the ‘Energy Charter Conference’, a national of the Russian Federation was Deputy Secretary-General of the ‘Energy Charter Secretariat’, and the Russian Federation participated in the meetings of the ‘Energy Charter Conference’; in these arbitration proceedings, the Russian Federation cannot claim the benefits of provisional application of the ECT while disclaiming the obligations which that status imposes (Interim Award no. 390);

(viii) HVY meet the definition of ‘Investor’ in Article 1(7) ECT, as it is sufficient for this purpose that a company is validly organised in accordance with the laws of a State party to the ECT (Interim Award nos. 411-417);

(ix) in order to qualify as an ‘Investment’ within the meaning of Article 1(6) ECT, it is sufficient for HVY to have ‘legal ownership' of the shares they hold in Yukos; HVY have lawfully acquired and paid for their shares in Yukos; no ‘injection of foreign capital’ is required (Interim Award nos. 429-434).

3.4.2.

In the Final Award, the Tribunal ruled as follows on Article 21 ECT, as well as on the unclean hands argument:

(i) the ‘claw-back’ of Article 21(5)(a) ECT is applicable in the sense that the Russian Federation’s conduct that was at issue in the arbitrations has not been removed from the assessment of Article 13 ECT (Final Award nos. 1410-1416);

(ii) referral to the competent tax authorities under Article 21(5)(b) ECT would be pointless ("an exercise in futility") (Final Award nos. 1417-1428);

(iii) moreover, the ‘carve-out’ applies exclusively to bona fide taxation measures, i.e. measures designed to generate general revenue for the State, not measures which, as was the case with Yukos, served a completely unrelated purpose, such as the destruction of a company or the elimination of a political opponent (Final Award nos. 1430-1445);

(iv) the unclean hands argument does not preclude the Tribunal’s jurisdiction, nor does it have the effect of rendering HVY’s claims ‘inadmissible’ (Final Award nos. 1343-1373).

3.5.1.

Briefly summarised, the District Court ruled as follows:

(i) Article 45(1) ECT must be taken to mean that the Russian Federation is bound solely by those provisions of the ECT that are compatible with Russian law (para. 5.23);

(ii) there would appear to be no latitude in these proceedings to rule on the question of whether the Tribunal could have accepted jurisdiction based on another argument that the Tribunal itself had rejected (para. 5.25);

(iii) the Russian Federation was not obliged to make a prior declaration as referred to in Article 45(2) ECT in order to enable it to successfully invoke the Limitation Clause (para. 5.31);

(iv) the provisional application of the arbitration clause contained in Article 26 ECT is not inconsistent with Russian law only to the extent that it is forbidden by that law, but also in the event that such a method of dispute resolution lacks a legal basis or is inconsistent with the legal system or is incompatible with the basic assumptions and principles laid down by or that can be deduced from legislation (para. 5.33);

(v) there can also be inconsistency with Russian law if that law makes no provision for the possibility of arbitration, as provided for by Article 26 ECT; given that arbitration is limited to civil disputes, Russian law does not allow arbitration that requires an assessment of actions under public law by the Russian Federation; the current case involves an exercise of powers under public law by the authorities of the Russian Federation (para. 5.41); Article 9(1) LFI 1991 and Article 10 LFI 1999 fail to provide an alternative (paras. 5.51 and 5.58);

(vi) Article 9(1) LFI 1991, which should be read in conjunction with Article 43 of the Russian Fundamentals of Legislation on Foreign Investments in the USSR of 5 July 1991 (hereinafter: the Basic Principles Act), deals with civil law disputes arising from legal relationships between foreign investors and the Russian Federation in which the public law aspect prevails; this provision confers primacy on proceedings before the Russian courts and allows other methods of dispute resolution only if so provided by a treaty; this implies that Article 9 LFI 1991 fails to provide an independent legal basis for arbitration between HVY and the Russian Federation (paras. 5.43 and 5.51);

(vii) Article 10 LFI 1999 is a ‘blanket provision’ in that it renders the possibility of arbitration subject to the existence of a provision to that effect in a treaty or a federal law (para. 5.56); Article 10 LFI 1999 thus provides no separate legal basis for dispute resolution between an investor and a State by means of international arbitration as provided for by Article 26 ECT (para. 5.58);

(viii) the Explanatory Memorandum to the ECT ratification bill, which was drafted by the executive to encourage the Duma to proceed with ratification, does not carry sufficient weight to substantiate HVY’s position; on the contrary, the legislative history of many bilateral investment treaties concluded by the Russian Federation supports the view that Russian law does not provide for the arbitration of disputes such as in the present case (paras. 5.59-5.64);

(ix) the arbitration clause of Article 26 ECT thus has no legal basis in Russian law and is incompatible with the basic assumptions set out in that law (para. 5.65);

(x) the District Court, like the Arbitral Tribunal, has yet to examine whether the fact of having signed a treaty that contains a provisional application clause is enough to establish that the Russian Federation agreed to international arbitration;

(xi) neither the FLIT nor the VCLT provide an independent basis for unlimited provisional commitment to the Treaty; whether a signatory State is bound by a treaty on the basis of the provisional performance thereof is determined by that treaty and not by the FLIT or the VCLT (para. 5.71);

(xii) by signing the ECT, the Russian Federation was only (provisionally) bound by the arbitration clause of Article 26 to the extent that the clause was compatible with Russian law (para. 5.72);

(xiii) pursuant to Article 15(4) of the Constitution and the principle of the separation of powers, a treaty can only set aside conflicting legislation if it has been approved by the legislature, i.e. ratified (para. 5.91);

(xiv) the case law of the Constitutional Court, from which it emerges that even provisionally applicable treaties are part of the Russian legal system, is without prejudice to the fact that a treaty such as the ECT can limit the scope of provisional application to treaty provisions that are compatible with the Constitution and other legislation and regulations (para. 5.92);

(xv) Article 26 ECT adds a new form of dispute resolution to existing Russian law, namely one in which an international arbitral tribunal can potentially rule on actions in the exercise of powers under public law; the Constitution and the principle of separation of powers enshrined therein preclude a representative of the executive power from committing the Russian Federation to Article 26 ECT (para. 5.93);

(xvi) in the absence of the legislature’s consent, the Limitation Clause in any event precluded the provisional application of Article 26 ECT for any longer than the six months specified by Article 23(2) FLIT, i.e. the period within which a signed treaty being provisionally applied must be submitted for the legislature’s approval; said period is not a domestic requirement, but rather a clause that addresses conflicts between the provisional application of treaty provisions and domestic Russian law, including the Constitution (para. 5.94);

(xvii) in summary, it follows from Art. 45(1) ECT that the Russian Federation, by merely signing the ECT, did not commit itself to the provisional application of (the arbitration rules of) Article 26 ECT; the Russian Federation thus never made an unconditional offer to engage in arbitration, as implied by Article 26 ECT, and, as a result, no valid arbitration agreement was formed by HVY's 'notice of arbitration' (para. 5.95).

3.5.2.

The grounds for setting-aside adduced by the Russian Federation to argue that the Tribunal lacked jurisdiction, including its assertion that HVY and their investments in Yukos did not qualify as ‘Investors’ or ‘Investments’ within the meaning of Article 1(7) and 1(6) ECT, the Russian Federation’s reliance on Article 21 ECT and the assertion that HVY, as shareholders, were unable to claim compensation for damage suffered by Yukos, were not addressed by the District Court.

3.5.3.

On the basis of the above, the District Court, pursuant to Article 1065(1)(a) DCCP, set aside the Yukos Awards in the dispute between HVY and the Russian Federation and ordered HVY to pay the costs of the proceedings.

4.1.1.

The Court of Appeal will deal with the grounds of appeal on the basis of a thematic discussion of the points in dispute, in which the following subjects will be discussed in turn:

(i) the standards the Court of Appeal should apply in interpreting the ECT (para. 4.2);

(ii) the provisional application of treaties (para. 4.3);

(iii) the question of whether the Court of Appeal can deny the application for setting-aside in so far as it is based on the lack of jurisdiction of the Tribunal, if it finds that the jurisdiction of the Tribunal follows from arguments that the Tribunal has not addressed (para. 4.4);

(iv) the question of whether HVY can advance arguments in support of the jurisdiction of the Tribunal in the present setting-aside proceedings which they did not put forward in the arbitration (para. 4.4);

(v) the interpretation of Article 45(1) ECT, particularly of the Limitation Clause, and the interpretation of Article 45(2)(a) ECT (para. 4.5);

(vi) whether in the Court of Appeal’s interpretation of the Limitation Clause, the provisional application of Article 26 ECT is inconsistent with the 'constitution, laws or regulations' of the Russian Federation (para. 4.6);

(vii) whether, based on the Russian Federation’s interpretation of the Limitation Clause, the provisional application of Article 26 ECT is inconsistent with the 'constitution, laws or regulations' of the Russian Federation (para. 4.7);

(viii) HVY's reliance on estoppel and acquiescence, the rule from the IMS/DIO case (para. 4.8).

4.2.1.

It is, rightly, not in dispute between the parties that the provisions of the ECT must be interpreted on the basis of the rules set out in Articles 31 and 32 VCLT. These provisions read as follows:

"Art. 31

General rule of interpretation

1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.

2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:

(a) any agreement relating to the treaty which was made between all the parties in connexion with the conclusion of the treaty;

(b) any instrument which was made by one or more parties in connexion with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.

3. There shall be taken into account, together with the context:

(a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;

(b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;

(c) any relevant rules of international law applicable in the relations between the parties.

4. A special meaning shall be given to a term if it is established that the parties so intended.

Article 32

Supplementary means of interpretation

Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of Article 31, or to determine the meaning when the interpretation according to Article 31 :

(a) leaves the meaning ambiguous or obscure; or

(b) leads to a result which is manifestly absurd or unreasonable."

4.2.2.

When applying the rules set out in these provisions, the Court of Appeal takes the following guidelines as a starting point. ³ Interpretation of a treaty is always aimed at discerning the contracting parties’ intention, to the extent that this intention is adequately expressed in the text of the treaty. Textual interpretation has the most important role in the interpretative process, because the wording is deemed to be an authentic expression of the intention of the parties. The International Court of Justice (hereafter: ICJ) has therefore considered that treaty interpretation should be based 'above all upon the text of the treaty'. ⁴

4.2.3.

This does not mean that treaty interpretation is merely a grammatical exercise. The text of a treaty must be understood in its context as well as in light of its object and purpose, in respect of which Article 31(2) VCLT defines how (in any case) the context of the treaty is to be understood. The interpretation of a treaty provision in accordance with the treaty's object and purpose cannot result in an interpretation that is contrary to the clear text of the provision in question. Article 31(1) VCLT prescribes one rule of interpretation, compromising of three integral elements (text, context and 'object and purpose'); interpretation is a process in which these elements are applied - in good faith - in one joint exercise. That the interpretation must be performed in good faith means that it must comply with the fundamental principle of reasonableness and must not lead to a meaning that is manifestly absurd or unreasonable.

4.2.4.

As to the application of Article 31(3)(b) VCLT, the Court takes the following as a starting point. ⁵ Article 31(3)(b) VCLT provides that, together with the context, any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation shall be taken into account. This subsequent practice is not subject to form requirements, so in principle any action (or inaction) may be relevant. The practice must go beyond a single instance and must be committed as application of the treaty. In order to be accepted as relevant practice, it is not required that each contracting party participate in that practice, but it must be demonstrable that states that have not been active in that respect have accepted the practice of the other contracting parties. It is also necessary that the contracting parties be aware of the practice in question, which means that internal documents or acts that have not come to the knowledge of the other contracting parties cannot be regarded as a practice within the meaning of Article 31(3)(b) VCLT. Finally, subsequent practice which has not established agreement of the parties and therefore does not qualify as practice under Article 31(3)(b) VCLT may, however, still be relevant as an additional means of interpretation under Article 32 VCLT. Pursuant to Article 31(3)(c) VCLT, it is also necessary to take into account any 'relevant rules of international law' applicable in the relations between the contracting parties. The rules of international law as referred to in Article 31(3)(c) VCLT include (in any event) the law of the treaties, customary international law and internationally recognised principles of law. ⁶

4.2.5.

The interpretative means set out in Article 32 VCLT ⁷ are supplementary to the rules of Article 31 VCLT, coming up only after Article 31 VCLT has been applied. Firstly, these supplementary means can be used to confirm the meaning arrived at through the application of Article 31 VCLT. Secondly, the supplementary means of interpretation in Article 32 VCLT are used if interpretation in accordance with Article 31 VCLT leaves the meaning ambiguous or obscure, or leads to a result that is manifestly absurd or unreasonable. Supplementary means include the treaty's preparatory work (also referred to hereafter as the 'travaux préparatoires' or 'travaux ’). Such means can only include sources that can be assessed objectively, which means that personal recollections or memoirs may not be counted as part of the travaux préparatoires; the same applies to documents or records, such as internal notes or presentations to a legislative body in the context of a national ratification process, that were not introduced during the negotiations and as such were not brought to the attention of the other participants in the treaty negotiations.

4.3.1.

Article 39 ECT provides that '[t]his Treaty shall be subject to ratification, acceptance or approval by signatories. Article 44 ECT contains provisions on the entry into force of the Treaty, from which it follows that the Treaty will not enter into force for a state until that state has deposited an 'instrument of ratification, acceptance or approval' to that effect.

4.3.2.

On behalf of the Russian Federation, Mr O.D. Davydov, then Deputy Chairman of the Government of the Russian Federation, signed the ECT on 17 December 1994. He had been instructed to do so by a decision of the Government of the Russian Federation of 16 December 1994, signed by Mr V. Chernomyrdin, Chairman of the Russian Federation Government. ⁸ On 26 August 1996, the Treaty was submitted to the Duma for approval. The Duma did not approve the ECT and the Russian Federation accordingly never deposited an instrument of ratification, acceptance or approval. On 20 August 2009, the Russian Federation notified the Depositary of the ECT, Portugal, of its intention not to become a Party to the Treaty. The ECT has thus not entered into force for the Russian Federation in accordance with Article 44 ECT.

4.3.3.

Article 45(1) ECT provides that the Treaty shall be applied provisionally by each signatory pending its entry into force for that state in accordance with Article 44 ECT. The obligation to apply the Treaty provisionally applies to a signatory 'to the extent that such provisional application is not inconsistent with its constitution, laws or regulations’.

4.3.4.

Provisional application of treaties is an accepted concept in international law and is codified in Article 25 VCLT. Provisional application is in practice used, inter alia, in situations where states wish to respond to urgent economic needs by means of a treaty, as was the case with the ECT. ⁹ A provisionally applied treaty has the same binding force as a treaty that has entered into force following ratification ¹⁰, which does not alter the fact that the obligation to apply the treaty provisionally (as in the case of the ECT pursuant to the Limitation Clause) may be subject to certain limitations. There are no additional requirements for the provisional application of a clause such as Article 26 ECT in which arbitration has been agreed. Whatever else may be said about the Russian Federation's assertion that such an arbitration clause must have been agreed unambiguously, Article 26 ECT in any case satisfies that requirement. The fact that the scope of the Limitation Clause and its application in the light of the national law of the Russian Federation can be subject to debate does not make this any different.

4.3.5.

Therefore, the fact that the Russian Federation has not ratified the ECT does not in itself mean that Article 26 ECT does not bind the Russian Federation; this may indeed be the case by virtue of the obligation to apply the Treaty provisionally on the basis of Article 45 ECT. The question is whether this provisional application is not limited in the sense that the Limitation Clause precludes the provisional application of Article 26 ECT.

4.4.1.

The Arbitral Tribunal identified two possible interpretations of the Limitation Clause: (a) whether the principle of provisional application is contrary to Russian law (HVY position) or (b) whether a separate provision of the ECT (in this case Article 26) is contrary to Russian law (the Russian Federation's position). The Arbitral Tribunal accepted position (a) as the correct one.

4.4.2.

In these setting-aside proceedings - and for the first time on appeal - HVY defended the existence of a third possibility, which they put forward as an alternative argument in case their primary standpoint (the question whether the principle of provisional application is contrary to Russian law) would not be accepted. This alternative position is that the Limitation Clause concerns the question whether the provisional application of one or more provisions of the ECT is irreconcilable with the law of a contracting party, in the sense that the law of that state allows provisional application of a treaty in principle, but excludes certain (categories or types of) provisions of the treaty from provisional application (Statement of Appeal No. 232, 233, 301 and 321 et seq.; HVY deed 26 February 2019 nos. 141 and 174; pleading notes HVY hearing of 23 September 2019, part I, no. 68 et seq.; pleading notes HVY hearing of 30 September 2019, part V (Reply) No. 20). Thus the question arises whether HVY is entitled to plead this alternative argument, which they did not put forward in the arbitration, for the first time in these setting-aside proceedings, and whether the Court of Appeal, as the setting aside court, should be allowed to rule that the Arbitral Tribunal had jurisdiction to hear HVY's claims on the basis of this alternative argument, although the Arbitral Tribunal itself did not base its jurisdiction on it. The parties take opposing views on this matter.

4.4.3.

Article 1065(1)(a) DCCP provides that an arbitral award may be set aside 'if a valid arbitration agreement is lacking’. The wording of the law therefore does not relate to the arbitral tribunal's assessment of its jurisdiction, but to the question of whether or not a valid arbitration agreement between the parties exists. It is also established case law that the court ultimately has the final say on the question of whether a valid arbitration agreement was concluded and that this question is subject to a full review by the court. This is related, among other things, to the fact that by means of an arbitration agreement, the parties waive their right to bring the dispute to the ordinary courts pursuant to Article 17 of the (Dutch) Constitution: a valid arbitration agreement deprives the ordinary court of jurisdiction to hear the dispute, provided that this lack of jurisdiction is invoked prior to all defences (Article 1022(1) DCCP). It would not be compatible with this system to only allow the setting aside court to review whether the arbitral tribunal had assumed jurisdiction on proper grounds, but not to uphold that jurisdiction on grounds that the arbitral tribunal, for whatever reason, (in the court's view, wrongly) did not discuss. ¹¹ After all, this could lead to the unacceptable result that an arbitral award would have to be set aside, thereby reviving the jurisdiction of the ordinary court, simply because the arbitral tribunal based its jurisdiction on incorrect reasoning, while failing to discuss one or more determinative arguments in favour of its jurisdiction. In such a case, despite there being a valid arbitration agreement actually depriving the national courts of jurisdiction, the national courts would still have to rule on the parties' dispute, for the sole reason that the arbitral tribunal, which does not have the last word with regard to its jurisdiction, used incorrect reasoning.

4.4.4.

It cannot be seen that acceptance of HVY's position would lead to a less effective administration of justice in arbitration. It would be damaging to the effective administration of justice in arbitration if an arbitral award would have to be set aside because the arbitral tribunal relied upon an incorrect basis for assuming jurisdiction, even when in fact jurisdiction does exist. Ultimately, in such a case the parties would then have to take their dispute to the state courts again, without any need or justification.

4.4.5.

This also means that, in principle, there is no objection if the defendant in setting-aside proceedings pleads new arguments in support of the arbitral tribunal's decision that it has jurisdiction. After all, it cannot be held against the defendant, as is the case (and rightly so) if the claimant put forward a ground for setting aside that it did not plead in the arbitration, that if that argument had been argued earlier, the arbitral tribunal could have taken a decision on the matter at an early stage, which would, in as much as possible, have prevented unnecessary procedural steps from being taken. ¹² After all, the latter pleaded argument would only lead to the same conclusion already drawn by the Arbitral Tribunal. Moreover, as is clear from the judgment in Smit/Ruwa, referred to in the previous footnote, even in that case it could not be ruled out in advance that new arguments for the absence of a valid arbitration agreement may be pleaded in the setting-aside proceedings: this should be decided on the basis of the circumstances of the specific case (para. 3.4.2). This certainly does not support the application of a stricter standard in a reversed situation (where a new argument supporting jurisdiction is invoked). The considerations in the judgment of 2 April 2019 of the 'Cour d'Appel de Paris' ¹³, raised by the Russian Federation on this matter, related to a situation different from the one at hand. In that case, the arbitral tribunal had decided it partially lacked jurisdiction. The French court ruled that the claimants in the arbitration, who still sought a declaration that the arbitral tribunal had full jurisdiction, were not allowed to plea arguments in favour of the arbitral tribunal's jurisdiction that they had not pleaded in the arbitration. The reason was that it would be contrary to the purpose of the relevant legal provision ("qui est d'éviter qu'une partie se réserve des armes pour le cas où la sentence lui serait défavorable") for a party to be able to reserve its arguments for the event that the arbitral award would turn out to be unfavourable. In the present case, there would be no such situation of 'abuse', since HVY, unlike the claimants in the French proceedings, argue precisely that the Yukos Awards be upheld.

4.4.6.

Even if it must be assumed that there are circumstances in which new arguments are inadmissible in the setting-aside proceedings, for example because this is contrary to the due process of law, there is in any event no reason to do so in this case. Firstly, this case concerns a purely legal argument, i.e. the interpretation of the Limitation Clause, which HVY timely brought forward in these proceedings - in their Statement of Appeal - and on which the Russian Federation had the opportunity to comment. Secondly, the alternative position put forward by HVY is an extension of the position that HVY did advance in the arbitration. Indeed, HVY's primary position is that the application of the Limitation Clause is about whether Russian law completely excludes the provisional application of treaty provisions, whereas the alternative position is about whether Russian law excludes the provisional application of certain treaty provisions or types or categories of such provisions.

4.4.7.

The conclusion is that the Court of Appeal will take into account HVY's alternative position with regard to the interpretation of the Limitation Clause in its opinion as to whether a valid arbitration agreement is lacking within the meaning of Article 1065(1)(a) DCCP.

4.5.1.

Article 45(1) through (3) ECT read as follows:

"Article 45 Provisional application

1. Each signatory agrees to apply this Treaty provisionally pending its entry into force for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its constitution, laws or regulations.

2. (a) Notwithstanding paragraph 1 any signatory may, when signing, deliver to the Depository a declaration that it is not able to accept provisional application. The obligation contained in paragraph 1 shall not apply to a signatory making such a declaration. Any such signatory may at any time withdraw that declaration by written notification to the Depository.

(b) Neither a signatory which makes a declaration in accordance with subparagraph a nor Investors of that signatory may claim the benefits of provisional application under paragraph 1.

(c) Notwithstanding subparagraph a), any signatory making a declaration referred to in subparagraph a shall apply Part VII provisionally pending the entry into force of the Treaty for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its laws or regulations.

3. (a) Any signatory may terminate its provisional application of this Treaty by written notification to the Depository of its intention not to become a Contracting Party to the Treaty. Termination of provisional application for any signatory shall take effect upon the expiration of 60 days from the date on which such signatory’s written notification is received by the Depositary.

(b) In the event that a signatory terminates provisional application pursuant to subparagraph a), the obligation of the signatory under paragraph 1 to apply Parts III and V with respect to any investments made in its area during such provisional application by investors of other signatories shall nevertheless remain in effect with respect to those investments for twenty years following the effective date of termination, except as otherwise provided in subparagraph c).

(c) Subparagraph b) shall not apply to any signatory listed in Annex PA. A signatory shall be removed from the list in Annex PA effective upon delivery to the Depositary of its request therefor."

4.5.2.

The principal issue is now the interpretation of the phrase 'to the extent that such provisional application is not inconsistent with its constitution, laws or regulations' (the Limitation Clause) in Article 45(1) ECT. In summary, the positions taken by the parties and the considerations of the Arbitral Tribunal and the Court are as follows.

4.5.3.

The Russian Federation takes the view that the issue is whether a separate provision of the ECT (in this case Article 26) is inconsistent with Russian law. The use of the term 'regulations' points to this, because it is not plausible that the principle of provisional application would be regulated by 'regulations', rules of a lower hierarchy than statutes. The use of the terms 'to the extent' also indicates this, as these terms are not consistent with an explanation in which the issue is simply whether or not the principle of provisional application is recognised within the state in question. In the latter case 'if would have been used instead of 'to the extent', but that did not happen. In addition, the Russian Federation relies on the travaux préparatoires. In its opinion, the travuax préparatoires show that the negotiating states foresaw that the Limitation Clause could lead to partial provisional application of the Treaty, and that national rules of lesser importance could cause those provisions of the Treaty that are inconsistent with this provisional application, to be disregarded. Furthermore, the Russian Federation invokes state practice, including the '1994 EU Joint Statement', which supposedly endorses its position.

4.5.4.

HVY primarily argue that the issue at stake is whether the principle of provisional application is contrary to Russian law. According to HVY, the Russian Federation ignores the words 'such provisional application' and wants to rewrite the Limitation Clause as follows: "to the extent that ~~such provisional application~~the Treaty's provisions are not inconsistent with its constitution, laws or regulations". Such a provision was proposed by the Japanese delegation during the Treaty negotiations, but was not accepted. It is impossible for an investor considering investing in a contracting party to assess whether the national laws or regulations of that state contain any provision which is incompatible with a provision of the ECT. On the other hand, it is fairly easy to investigate whether a state is familiar with the principle of provisional application of treaties. In addition, situations of conflicts between ECT provisions and national law are regulated in provisions other than Article 45(1) ECT. Article 32 ECT contains provisions giving certain states time to adapt their legal regimes to the provisions of the ECT. In the appeal of these setting-aside proceedings, HVY added that even if it should be assumed that the Limitation Clause does not relate to the principle of provisional application, the question is in any event whether the provisional application of one or more provisions of the ECT is incompatible with national law, not whether any provision of the ECT is in itself inconsistent with national law.

4.5.5.

The Arbitral Tribunal considered that the (primary) position of HVY is correct. According to the Arbitral Tribunal, the term 'such' in the phrase 'such provisional application’ is crucial. The term 'such' refers to the preceding part, so that what is meant is 'the provisional application of this Treaty ', which the Arbitral Tribunal interprets as a reference to 'the entire Treaty’. According to the Arbitral Tribunal, Article 45(1) ECT therefore prescribes an "all or nothing" approach: either the entire Treaty is applied provisionally, or it is not provisionally applied at all. It is therefore a question of whether the principle of provisional application is compatible with the national law of a contracting party. An interpretation which would make provisional application conditional on the compatibility of each provision of the ECT with national law would be contrary to the object and purpose of the ECT and contrary to the very essence of international law. If the contracting parties had intended the latter, they would have had to agree this explicitly, but this has not happened.

4.5.6.

The District Court followed the interpretation of the Russian Federation. The District Court points out that the words 'to the extent' also occur in a number of other authentic language versions of the ECT 'in dem Maβe', 'dans la mesure où') and in the (non-authentic) Dutch version ('voor zover') and reflect a scope or differentiation (para. 5.11). This points more towards the correctness of the interpretation argued by the Russian Federation. The Arbitral Tribunal wrongly attributed decisive meaning to the term 'such’. The use of this term has little meaning, as it is obvious that the term refers to the Treaty; a different interpretation cannot be imagined. This does not say anything about whether provisional application concerns only the Treaty as a whole, i.e. the principle of provisional application, or only parts of it, and thus individual provisions of the Treaty (para. 5.12). On the other hand, the court does consider it relevant that Article 45(1) ECT not only relates the inconsistency of provisional application to 'constitution' and 'laws' but also to 'regulations’. It is inconceivable that a ban on the provisional application of a treaty, given its fundamental nature, would be laid down in delegated legislation (para. 5.13). Contrary to the Arbitral Tribunal, the District Court attaches importance to Article 45(2)(c) ECT which, in almost the same terminology as the Limitation Clause, makes the scope of provisional application dependent on the compatibility of Part VII of the Treaty with (lower) legislation ('laws and regulations’). Article 45(2)(c) ECT concerns the specific treaty provisions in part VII and not the principle of provisional application (para. 5.14-5.15). The District Court does not follow the argument of the Arbitral Tribunal that the interpretation of the Limitation Clause is completely contrary to the object and purpose of the ECT and the essence of international law. The Arbitral Tribunal did not specify the extent to which a limited application of the provisions of the Treaty would be contrary to that purpose. Parties are free to expressly limit the provisional application of a treaty by referring to provisions of national law (para. 5.19). The District Court does not take state practice into consideration, since none of the parties have asserted that it concerns a (broad) practice that is supported by all the states involved (para. 5.21). There is no ground for the use of the travaux to supplement the interpretation of the Limitation Clause, as the interpretation given to it by the District Court does not lead to an ambiguous or obscure meaning, nor to a result that is manifestly absurd or unreasonable (para. 5.22). The District Court also, superfluously, refers to the opinion of Mr Bamberger, Chairman of the Legal Advisory Committee of the European Energy Charter Conference (hereafter: Bamberger), who, in response to a question from the Secretary-General of the ECT Conference, provided the following explanation for the addition of the term 'regulations’:

"the effect is to suggest that relatively minor impediments in the form of regulations, no matter how insignificant they may be, can be the occasion for failing to apply the Treaty provisionally when in fact those regulations could be brought into conformity without serious effort."

4.5.7.

With regard to the term 'not inconsistent', the District Court considered that the provisional application of Article 26 ECT is not only contrary to Russian law if this provision is prohibited by that law, but also if such a method of dispute resolution has no legal basis, does not harmonise with the legal system or is irreconcilable with the starting points and principles that have been laid down in or can be derived from legislation (para. 5.33).

4.5.8.

In the following, so as to determine the interpretation of the Limitation Clause, the Court of Appeal will scrutinise the following elements of Article 31(1) VCLT: (i) the ordinary meaning of the terms of the Limitation Clause, (ii) the context of those terms and (iii) the object and purpose of the Treaty. Subsequently, the Court of Appeal will discuss (iv) the 'state practice' (Article 31(3)(b) VCLT). Then (v), with reference to these joint elements, the Court of Appeal will determine the interpretation of the Limitation Clause in accordance with the interpretation rules of Article 31 VCLT, during which the Court of Appeal (superfluously) will pay attention to the travaux préparatoires at (vi). Subsequently, the Court of Appeal will (at vii) discuss the explanation of 'not inconsistent' in the Limitation Clause. The conclusion follows at (viii).

4.5.9.

When determining the meaning of the Limitation Clause, the Court of Appeal takes the starting point that the interpretation of this provision must do justice as much as possible to the ordinary meaning of the terms used in it, not only in the sense that in principle this interpretation may not result in certain words needing to be understood differently than their ordinary meaning indicates, but also that this interpretation may not result in certain words being superfluous or remaining without meaning. "(....) [W]ords must be given effect". ¹⁴ The primary position of HVY (and the Arbitral Tribunal), as well as the position of the Russian Federation (and the ensuing decision of the District Court), do not satisfy this criterion.

4.5.10.

As far as the primary position of HVY and the opinion of the Arbitral Tribunal are concerned, the District Court rightly pointed out that the words 'to the extent' are not accorded their ordinary meaning in this 'all-or-nothing' interpretation. Indeed, the words 'to the extent' ('in dem Maβe', 'dans la mesure où' in the equally authentic German and French treaty texts) indicate that there are gradations possible to the extent the ECT is not provisionally applicable on grounds of inconsistency with national law, in the sense that certain parts or provisions of the Treaty should be applied provisionally and others should not. The use of those terms is not obvious in the 'all or nothing' approach, where the only issue is whether or not national law recognises the principle of provisional application. HVY and the Arbitral Tribunal explain that the term 'to the extent' is essentially given the meaning of 'if, but that that word is not used. This view of HVY and the Arbitral Tribunal can also be refuted by noting that the Limitation Clause does not contain the word 'principle' (of provisional application) or words of similar purport. If the (primary) position of HVY and the Arbitral Tribunal were correct, it would have been obvious that the Limitation Clause would read: "if the principle of provisional application is not inconsistent with its constitution, laws or regulations", but that formulation (or a similar formulation) has not been used. The District Court also rightly considered that the analysis by the Arbitral Tribunal of the word 'such' adds little, because in any case it is clear that it refers to the provisional application of the ECT. The conclusion of the Arbitral Tribunal that this necessarily refers to 'the entire Treaty' is not supported by the wording of the Limitation Clause (and is not consistent with the words 'to the extent’).

4.5.11.

On the other hand, the Russian Federation's interpretation accepted by the court is also inconsistent with the wording of the Limitation Clause. HVY rightly point out that in the interpretation of the Russian Federation and the District Court the words 'such provisional application' have no meaning, or a meaning other than that which follows from the ordinary meaning of these words. According to the Russian Federation, the question is whether one or more treaty provisions are inconsistent with national law. If the contracting parties had intended this, it would have been obvious that the Limitation Clause would have read: "to the extent that one or more provisions of this Treaty are not inconsistent with its constitution, laws or regulations", but this is not how the Limitation Clause reads. The wording of the Limitation Clause, as it does read, clearly indicates that the issue is whether 'such provisional application' is irreconcilable with the law of a contracting party.

4.5.12.

The alternative assertion of HVY concerning the interpretation of the Limitation Clause is that the question is whether the provisional application of any provision of the ECT is incompatible with a rule of national law, not whether any provision of the ECT is in itself contrary to national law. According to HVY, it should be examined whether there are provisions of national law that exclude the provisional application of certain (categories or types of) treaty provisions. HVY refer in this respect to the opinions of Professor Schrijver, Professor Klabbers ¹⁶ and Professor Pellet ¹⁷, who remark that some countries exclude the provisional application of treaties altogether, but that it is also possible that the exclusion of provisional application relates only to certain types of treaty provisions.

4.5.13.

The Court of Appeal observes that this alternative interpretation of HVY does justice to both the words 'to the extent' and 'such provisional application' in accordance with their ordinary meaning. If national law makes provisional application of certain types of provisions of the Treaty impossible, this leads to a limited provisional application, specifically to the extent that the provisions of the Treaty are not covered by that prohibition. This interpretation is also in accordance with the words 'regulations' in 'constitution, laws or regulations'. A large number of states with a variety of legal regimes and legal traditions are party to the ECT. It certainly cannot be excluded in advance that rules that exclude certain (categories of) treaty provisions from provisional application may (in any case in part) be found in regulations of a lower hierarchy than an statute adopted by parliament, for example in (lower) regulations based on such a statute. Until recently, an example of this could be found in Spanish law, where the provisional application of treaties was regulated by a Decree of the Minister of Foreign Affairs until 2014. ¹⁸

4.5.14.

The conclusion is that the alternative interpretation of HVY is most consistent with the ordinary meaning of the wording of the Limitation Clause.

4.5.15.

In accordance with Article 31(2) VCLT, the context of Article 45(1) ECT is in any case comprised by the text of the Treaty, including the preamble and annexes. This context is discussed below, in part with reference to the arguments that the parties have derived from it. In this framework, the Court of Appeal will also pay attention to the interpretation of Article 45(2)(a) ECT, as the parties also disagree on the purport of this provision.

4.5.16.

Parties, the Arbitral Tribunal and the District Court paid attention to the meaning of Article 45(2)(a) ECT. Article 45(2)(a) provides:

"Notwithstanding paragraph 1 any signatory may, when signing, deliver to the Depository a declaration that it is not able to accept provisional application. The obligation contained in paragraph 1 shall not apply to a signatory making such a declaration. Any such signatory may at any time withdraw that declaration by written notification to the Depository."

HVY have argued that this provision is an extension of Article 45(1) ECT and that a contracting party which has not made a declaration in accordance with paragraph (2)(a) is not entitled to invoke the Limitation Clause. The Court of Appeal does not endorse this interpretation. The language of neither paragraph (1) nor that of paragraph (2) indicates that paragraph (2) is an elaboration of, or a further condition for, paragraph (1). To the contrary, the term 'notwithstanding' with which paragraph (2) commences indicates that paragraph (2) is intended to derogate from paragraph (1), namely from the primary obligation contained in paragraph (1), which is that the Treaty must be applied provisionally. Incidentally, the Limitation Clause being only able to apply if a state makes the declaration under paragraph (2)(a) is also inconsistent with the wording of the Limitation Clause. As considered above, the words 'to the extent' in the Limitation Clause unequivocally leave open the possibility that only part of the Treaty is applied provisionally, while paragraph (2)(a), which does not use language suggesting a partial provisional application, could hardly be understood differently than that the declaration it refers to excludes provisional application altogether. HVY's interpretation would therefore create a discrepancy between paragraph (1) and paragraph (2)(a), which would be avoided if paragraph (1) and paragraph (2)(a) were considered separately. This leads to the conclusion that the relationship between paragraph (1) and paragraph (2)(a) of Article 45 ECT should be understood as follows: paragraph (1) provides that signatories provisionally apply the Treaty, with the exception of cases falling within the scope of the Limitation Clause, while paragraph (2) allows states - in particular those not familiar with the principle of provisional application - to prevent any discussion of the scope of the Limitation Clause in an individual case by denouncing provisional application entirely.

4.5.17.

This interpretation is also not inconsistent with Article 45(2)(b) ECT, which provides that a state making a declaration as referred to in Article 45(2)(a) ECT cannot benefit from the provisional application in accordance with paragraph (1) and the same applies to the investors of that state. HVY see a discrepancy between paragraph (1), because a state that has not made a declaration in accordance with paragraph (2)(a) supposedly would be able to benefit from provisional application by other states, but could nevertheless, by invoking the Limitation Clause, omit provisional application on its part in whole or in part. This argument does not hold. The emphasis in paragraph (1) is unmistakably on the obligation to apply the Treaty provisionally. The fact that in certain cases an exception can be made on the basis of the Limitation Clause does not affect this primary obligation. This situation is not comparable to the case of Article 45(2)(a) ECT, in which a state categorically excludes provisional application by making a declaration to that effect. Although it is conceivable in theory that a state that is unfamiliar with the principle of provisional application does not make a declaration in accordance with paragraph (2)(a), but in a particular case invokes the Limitation Clause in order to benefit from provisional application by the other contracting parties, this would not be in accordance with the obligation set down in Article 26 VCLT for that state to perform a treaty in good faith. No decisive weight can therefore be attached to that eventuality.

4.5.18.

For the interpretation of the Limitation Clause, this context implies that the 'all or nothing' approach (HVY's primary position, the decision of the Arbitration Tribunal) also given its relation to Article 45(2)(a) and (b) ECT is not obvious. If the national law of a signatory does not provide for the principle of provisional application, that state will be able to make the declaration of Article 45(2)(a) ECT and it is not possible to see what additional meaning the Limitation Clause has. Because in the (primary) view of HVY the Limitation Clause hardly has any independent meaning, this explanation is not obvious. The latter might be different if the declaration under paragraph 2(a) would have to be regarded as a condition for invoking the Limitation Clause, but, as held, that interpretation should be rejected.

4.5.19.

The District Court also paid attention to Article 45(2)(c) ECT. Article 45(2)(c) reads as follows:

"Notwithstanding subparagraph (a), any signatory making a declaration referred to in subparagraph (a) shall apply Part VII provisionally pending the entry into force of the Treaty for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its laws or regulations."

Part VII of the Treaty contains provisions on the powers of the Energy Charter Conference, as well as on the secretariat of, and voting at, an Energy Charter Conference and the costs associated with this conference. The District Court derived an argument from this provision against the primary position of HVY (the 'all or nothing' approach), by considering that Article 45(2)(c) ECT uses virtually the same words ('to the extent that such provisional application is not inconsistent with its laws or regulations') as the Limitation Clause while, given the context, Article 45(2)(c) ECT cannot pertain to the principle of provisional application. The Court of Appeal endorses the judgment of the District Court in this respect. Indeed, it cannot be assumed that Article 45(2)(c) ECT pertains to the principle of provisional application. The fact that Article 45(2)(c) ECT nevertheless uses almost the same wording as in the Limitation Clause then indeed argues against the Limitation Clause referring to this principle.

4.5.20.

HVY have also invoked Article 32 ECT. Article 32 ECT ('Transitional arrangements') provides that, "in recognition of the need for time to adapt to the requirements of a market economy", certain contracting parties may temporarily suspend compliance with certain of their Treaty obligations, mentioned in Article 32(1), provided that specific conditions are taken into account. HVY argue that the situation in which inconsistencies arise between the ECT provisions and national law is regulated in Article 32 ECT. By virtue of Article 32 ECT a state must disclose which provisions of the ECT it wishes to suspend. According to HVY, the carefully negotiated mechanism of Article 32 ECT is not compatible with an interpretation of Article 45(1) ECT following which a signatory does not have to apply one or more treaty provisions during the period of provisional application without disclosing this to the other states and investors.

4.5.21.

This argument does not hold. Article 32 ECT unmistakably pertains to a different situation than Article 45(1) ECT. Article 32 ECT provides states that have to adapt to the requirements of a market economy with the possibility of suspending their obligations under a number of specific Treaty provisions temporarily (in principle until no later than 1 July 2001) and subject to certain conditions. Article 45(1) ECT, on the other hand, applies during the period in which a state must provisionally apply the Treaty and allows an exception to that obligation only if provisional application of a Treaty provision is incompatible with the internal laws of that state. Accordingly, the two provisions are not comparable either in their scope or in their objectives, which means that no conclusions can be drawn from Article 32 ECT with regard to the interpretation of Article 45(1) ECT.

4.5.22.

HVY argue that, in the interpretation of the Russian Federation and the District Court, it will be unclear to a potential investor considering investing in a state that is provisionally applying the ECT, which parts of the Treaty that state is not applying due to their incompatibility with internal laws. According to HVY, it is impossible for an investor to investigate all laws and regulations of the envisaged host state for possible conflicts with provisions of the Treaty. According to HVY, this lack of clarity runs counter to the ECT's objective of attracting investment by providing a stable and secure investment environment and by promoting transparency, legal certainty and investment protection. This disadvantage does not, or does to a much lesser extent, attach to their own (primary and alternative) interpretation, as it is easy to ascertain what the laws and regulations of the host country entail in respect of the provisional application of treaties.

4.5.23.

In its assessment of this argument, the Court of Appeal takes the following context into account. The Preamble of the ECT includes the following:

"Wishing to implement the basic concept of the European Energy Charter initiative which is to catalyse economic growth by means of measures to liberalize investment and trade in energy."

Article 2 ECT ('Purpose of the Treaty') reads as follows:

"This Treaty establishes a legal framework in order to promote long-term cooperation in the energy field, based on complementarities and mutual benefits, in accordance with the objectives and principles of the Charter."

4.5.24.

The recitals of the European Energy Charter 1991, referred to in the 'Preamble' of the ECT and Article 2 ECT, include, inter alia:

"Recognising the role of entrepreneurs, operating within a transparent and equitable legal framework, in promoting cooperation under the Charter."

Chapter II ('Implementation') of the European Energy Charter 1991 under 4 ('Promotion and protection of investments states:

"In order to promote the international flow of investments, the signatories will at national level provide for a stable, transparent legal framework for foreign investments, in conformity with the relevant international laws and rules on investment and trade."

4.5.25.

Part III of the Treaty, which is entitled 'Investment Promotion and Protection', contains provisions aimed at protecting investors and their investments in another contracting party, such as Article 13 ('Expropriation') and Article 14 ('Transfers related to investments’). More specifically, Article 10 ECT, which features in Part III, provides:

"Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its area. (....)."

4.5.26.

The context of Article 45 ECT presented above shows that one of the aims of the ECT is to stimulate investment in the energy sector, inter alia, by providing stable and transparent investment conditions. The fact that the Treaty must be applied provisionally implies that the contracting parties intended that the obligation to create such investment conditions would arise immediately upon signature. Against this background, the interpretation of the Limitation Clause defended by the Russian Federation is less compatible with the objective of the Treaty than HVY's (primary or alternative) interpretation. The interpretation of the Russian Federation would result in the situation where an investor considering investing in a state provisionally applying the ECT always has to take into account that the provisions of the ECT, including those aimed at protecting its investment, are impaired by national laws and regulations, for example by the regulations of local or regional authorities. It is practically impossible for such an investor, even if he seeks legal advice, to assess whether the laws of the state in which it wishes to invest deviate from the ECT in any manner. This is not in line with the transparent investment conditions the Treaty pursues. This could after all lead the investor to abandon its planned investment, which would be contrary to the ECT's objective of encouraging investment from the moment of signing of the Treaty. It must be noted here that the period during which the Treaty may be provisionally applied by a state is in principle unlimited, and thus the Treaty may be provisionally applied for a considerable period of time, even aside from the 'remaining in effect' of twenty years of certain parts of the ECT for states which have not renounced this (Article 45(3)(b) ECT). The lack of clarity identified above could therefore persist for a longer period of time.

4.5.27.

HVY's primary and alternative positions on the interpretation of the Limitation Clause are not disadvantaged by such a lack of clarity. It may be assumed that, with the help of expert legal advice, a potential investor can ascertain relatively easily what the national rules on provisional application of treaties are in the country in which it is considering to invest and to what extent they preclude provisional application of the ECT. Contrary to what the Russian Federation argues, it is irrelevant for the interpretation of Article 45(1) ECT whether HVY could have easily determined in this specific case whether or not arbitration under Article 26 ECT is contrary to Russian laws and regulations. What is relevant is that there are numerous conceivable situations in which a possible conflict between the provisions of the ECT and national law would not be identifiable in a relatively simple manner. That thus speaks against the interpretation of the Russian Federation.

4.5.28.

Pursuant to Article 31(3) VCLT, when interpreting a treaty provision, account must be taken of:

"(b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;"

(hereinafter for the sake of brevity: 'state practice’). Both parties have relied on state practice in support of their assertions. The District Court disregarded these, because attributing significance to state practice is subject to the condition that this subsequent practice is evidence of an agreement on the interpretation of the Treaty between the parties, but it has not been established or demonstrated that there is a (broad) practice supported by all states involved (para. 5.21). HVY have not filed a grievance against this finding. However, the Russian Federation is of the view that state practice supports the District Court's interpretation, as it argues there is a broad consensus on the interpretation of Article 45(1) ECT. In this regard, the Russian Federation refers to the many declarations made by states under Article 45(2) ECT and to the Defence on Appeal nos. 108-121, the Writ of Summons nos. 155-170 and the Statement of Reply nos. 92.

4.5.29.

In the Writ of Summons (no. 160), the Russian Federation specifically referred to the position of Finland (as evidenced by the bill to ratify the ECT and a memorandum of November 1994) and the European Union (in a joint declaration by the EU and its Member States of 15 and 16 December 1994, the '1994 EU Joint Statement'), a declaration by the European Commission of 21 September 1994 and a declaration by the 'Council of Europe' (apparently this is a reference to: the European Council) of 13 July 1998. However, it does not appear that these are declarations of parties (or signatories) that have been accepted by the other parties to the ECT and the Russian Federation does not substantiate this further. In addition, although these statements do provide some support for the assertion that the 'all or nothing' approach (HVY's primary position) was not shared by these countries or institutions, it cannot be inferred from this that HVY's subsidiary position was considered incorrect as well. The passage appearing in the 1994 EU Joint Statement:

"(a) it [Article 45(1) ECT, Ct] does not create any commitment beyond what is compatible with the existing internal legal order of the Signatories"

is compatible both with the position of the Russian Federation and with the alternative position of HVY. This also applies to the declaration made by Italy mentioned in the Writ of Summons under No 169. Only the Finnish Government's proposal to its Parliaments19 endorses the Russian Federation's interpretation, but it does not follow as such that this interpretation was also accepted by other contracting parties.

4.5.30.

The same applies to the statements by the European Commission and the European Council cited by the Russian Federation. To the extent that the Russian Federation further asserts that several signatories of the Convention have not made a declaration under Article 45(2)(a) ECT that they do not accept provisional application but nevertheless consider themselves entitled to apply only those provisions of the ECT which are consistent with their internal laws and regulations, the Court of Appeal does not need to address this point. As held above, and - as will become apparent below - as the travaux préparatoires confirm, it is not necessary for a signatory to have made a declaration pursuant to Article 45(2)(a) ECT. This is in line with the position of the Russian Federation, which is shared by the Court of Appeal in this respect. The same applies to the relevant passage from the joint declaration of the European Union.

4.5.31.

In its Defence on Appeal, the Russian Federation firstly invoked an expert report by Professor Heringa ²⁰, who concluded on the basis of documents drawn up by Dutch civil servants at the time that (i) the Netherlands was relying on the Limitation Clause, (ii) assumed that it would provisionally apply only part of the Treaty and (iii) took the view that no prior declaration was required for invoking Article 45(1) ECT. A number of passages from these documents are quoted in the Defence on Appeal. However, here too it is the case that the opinion of Dutch civil servants, aside from the fact that this does not evidence any treaty practice accepted by other contracting parties, may run counter to HVY's primary position, but does not give a definite answer to the question of whether HVY's alternative position or the position of the Russian Federation was shared. The conclusion of Professor Heringa in § 34:

"My conclusion is both that the scope of Article 45 ECT as an instrument of provisional application is limited by the degree of inconsistency with national law, both under Dutch law, as well as from the perspective of the Dutch negotiators and from the EU perspective. Both Article 45 ECT and Dutch constitutional law do the same, namely assume that provisional application will have been applied only where this is permitted under national constitutional law, so that for the Netherlands this provision made the treaty fully in conformity with national law." is compatible with both views.

4.5.32.

The Russian Federation refers to comments made by certain countries (the United States, Italy, the United Kingdom, Finland and Japan) during the ECT negotiations. However, such observations do not qualify as state practice but as travaux préparatoires, for which Article 32 VCLT contains a separate regulation and to which the Court of Appeal will return below. Therefore, these comments do not belong in a discussion of the rules of interpretation prescribed by Article 31(3) VCLT. It should also be noted that these comments in essence show that provisional application of parts of the Treaty was considered, a view compatible both with the position of the Russian Federation as with the alternative position of HVY.

4.5.33.

On the basis of the foregoing considerations, the Court of Appeal concludes that, out of the three options advanced by the parties in this case, HVY's alternative position with regard to the interpretation of Article 45(1) ECT is, on the basis of the arguments set out above, most consistent with the ordinary meaning of the terms of the Limitation Clause and with the context and the object and purpose of the Treaty. An established state practice in the sense of Article 31(3) VCLT has been insufficiently shown, but in so far as this may be the case, it at most contradicts the primary but not the alternative position of HVY. This means that the Limitation Clause should be understood to mean that a signatory which has not made the declaration referred to in Article 45(2)(a) ECT is bound to apply the Treaty provisionally, except to the extent that provisional application of one or more provisions of the ECT is inconsistent with national law in the sense that the laws or regulations of that state preclude provisional application of the Treaty for certain provisions of the Treaty (or types or categories of provisions). Accordingly, the Limitation Clause cannot be invoked if a provision of the ECT is in itself contrary to any rule of national law.

4.5.34.

The interpretation thus established by the Court of Appeal in accordance with Article 31 VCLT does not leave the meaning of Article 45(1) ECT or the Limitation Clause ambiguous or obscure. Nor can it be said that this interpretation leads to a result that is manifestly absurd or unreasonable. There is therefore no reason to apply the supplementary rules of interpretation in Article 32 VCLT, for example by consulting the travaux préparatoires.

4.5.35.

Superfluously, the Court of Appeal holds that the travaux préparatoires confirm its judgment regarding the interpretation of Article 45(1) ECT. In this respect the Court of Appeal considers it particularly relevant that the Limitation Clause, which was initially lacking in the clause that stipulated that the Treaty (then still referred to as the 'Basic Protocol') had to be applied provisionally, was added at the instigation of the United States. According to a document dated 2 August 1991 from the ECT Conference Secretariat ²¹, it was submitted on behalf of the United States:

" "Provisional" application of the Protocol is not possible in the U.S., where a treaty or legislation is required before such a document can come into force.

This could be fixed with: "to the extent that their laws allow or some similar language." "

At a meeting on 14 December 1993 ²², a representative of the United States of America remarked:

"Mr Chairman, my delegation does not have quite the same difficulty as some other delegations do with the concept of provisional application. We have no a priori opposition in principle to the concept in appropriate cases.

(....)

Quite apart from the question of the ultimate resolution of whether there should be institutions, the difficulty of participating of the financing of a provisional organization is particularly acute for the United States. We cannot under our law do it for more than a certain period and so, certainly, we could not provisionally apply the Treaty in respect to the United States in that connection."

In a letter (by fax) of 24 February 1994 to the ECT Conference ²³ a representative of the United States further commented on a draft for a separate agreement on the provisional application of the ECT which was circulating at that time:

"As I noted during the last plenary, we do not have any legal difficulty with provisional application per se, so long as it is carefully qualified to ensure that no party is obliged to do, or refrain from doing, anything for which that party’s constitution or law requires an appropriately ratified treaty. Our law, for example, generally speaking prohibits expenditure of funds to pay the U.S. share of the expenses of an international organization absent the express approval of the Congress. For such reasons language along the lines of "to the extent permitted by its constitution or laws" is essential to any provisional application obligation; such language is conspicuously absent from the draft text."

4.5.36.

Italy notified the European Energy Charter Conference ²⁴ on 27 July 1994:

"Italy cannot consent to the provisional application of the Treaty since Article 80 of the Italian Constitution lays down, inter alia, that international treaties which provide for arbitration, confer judicial powers or impose financial burdens must be ratified by Parliament."

Japan made the following comment in response to a document from the ECT Secretariat dated 8 March 1994²⁵ :

"We have a constitutional problem in relation to paragraph (2) of CONF 91, which lacks the phrase "in accordance with their laws and regulations". We cannot apply Article 37 of Part VII unconditionally after signature, because our domestic legislation prohibits the Japanese Government from committing itself beyond its competence to make payments regarding treaties which have not yet been concluded."

4.5.37.

This overview shows that the provision, which eventually became the Limitation Clause, was included because the constitution of some states did not allow these states to provisionally apply certain obligations contained in the ECT (obligations of a financial nature, arbitration). These states could only be bound by such provisions by means of a ratified treaty. These states did not suggest that obligations to contribute financially to an international organisation, or to bind themselves to dispute resolution through arbitration, would by themselves be contrary to their internal laws and regulations; they merely could not commit to these obligations by means of a provisionally applicable treaty. It is particularly striking that the United States pointed out that, without a ratified treaty, it could only contribute to the financing of a (new) international organisation for a limited period of time. This highlights that, at least for the United States, Japan and Italy, the problem lay in the provisional application, which was subject to certain limitations in their national laws. Moreover, the travaux do not give sufficiently clear indications that the states participating in the negotiations related the Limitation Clause to an inconsistency between certain obligations contained in the Treaty and their national law. This also applies to Bamberger's comments to be discussed below.

4.5.38.

In its judgment (para. 5.22), the District Court attached importance to the answer given by Bamberger to a question from the chairman of the conference on 7 March 1994. The chairman asked Bamberger whether it was necessary to include the word 'regulations' in Article 45(1) ECT. Bamberger answered:

"Chairman, we’ve heard this question arise in a number of contexts. In one context, the Legal Sub-Group suggested that "in accordance with its law", in the singular, was sufficiently broad to cover the constitutional, statutory and regulatory laws of a country, but of course it does depend on the context. It seems that this desire, however, to specify "regulations" does arise often, and apparently it is because it is not, because some negotiating Parties are, do not consider that it is clear from the reference, so I am hesitant to try to give overly authoritative advice on something that really is probably very dependent on context.

Chairman Jones : May I put the question the other way around? Is there any harm in including the word "regulations"? I mean, for clarity, if a number of people are unsure, let’s include it I suppose?

Mr Bamberger : Well of course, Chairman, the effect is to suggest that relatively minor impediments in the form of regulations, no matter how insignificant they may be, can be the occasion for failing to apply the Treaty provisionally when in fact those regulations could be brought into conformity without serious effort. On the other hand, one can argue that the word "laws" would cover regulations, but it simply doesn’t put as much stress on the regulatory aspect, and so it is less likely to be viewed that way." ²⁶

This discussion first of all reveals that the discussion in the 'Legal Sub-Group' about the inclusion of the word 'regulations' had not led to a clear outcome and that it was ultimately decided to include the term in the text of the Limitation Clause for the sake of completeness, but without any compelling necessity being perceived. Furthermore, it appears that when Bamberger noted that the term 'regulations' raises the suggestion that 'relatively minor impediments' might stand in the way of the provisional application of the Treaty, he was expressing his expert view as to what that term suggests. It does not show that the word 'regulations' was included in the text of the Treaty because it was considered desirable to have less important inconsistencies with national law also prevent provisional application. Moreover, it is clear that Bamberger spoke on his own behalf as an expert lawyer and not on behalf of the members of the 'Legal Sub-Group’. Against this background, Bamberger's remark is not decisive for the interpretation of the Limitation Clause. To sum up, the quoted passage confirms that the addition of the word 'regulations' was based on the desire to be as complete as possible in the reference to national law, but that it was not based on any more profound considerations.

4.5.39.

The travaux préparatoires further confirm that the Limitation Clause is not about whether a contracting party is familiar with the principle of provisional application. The travaux contain no indication that the negotiators thought of this. On the contrary, the United States, which initiated the Limitation Clause, stated to have no issues with the principle of provisional application. There were states that had problems with the principle of provisional application, but they insisted on the inclusion of Article 45(2)(a) ECT (see below).

4.5.40.

Finally, the travaux préparatoires confirm that making a declaration in accordance with Article 45(2)(a) ECT is not a condition for invoking the Limitation Clause. After all, the travaux (as reflected, among others, in the opinion of Professor Schrijver of 8 March 2017 ²⁷) show that the opt-out provided for in Article 45(2)(a) ECT was only added at a relatively late stage, after drafts for Article 45(1) ECT had been circulating for some time, in order to enable a number of states, which, despite the Limitation Clause, continued to have issues with provisional application of the Treaty, to renounce provisional application altogether by submitting a declaration to the Depositary. This confirms that Article 45(2)(a) ECT was seen as an additional possibility for avoiding provisional application and not as a condition for invoking the Limitation Clause.

4.5.41.

The meaning of the words 'not inconsistent' follows from the Court of Appeal's interpretation of the Limitation Clause. This interpretation concerns whether national laws or regulations exist that exclude provisional application for certain treaty provisions, or types or categories of such provisions. If the latter is the case, provisional application of those treaty provisions, or types or categories of such provisions, is 'inconsistent' with national law.

4.5.42.

The parties also debated the question of how 'inconsistent' should be interpreted if the interpretation of the Limitation Clause of the Russian Federation should be followed, according to which the interpretation is whether a provision of the ECT is in itself not inconsistent with any rule of national law. The District Court took this interpretation as its starting point and in that context devoted considerations to the interpretation of the term 'inconsistent', which HVY challenged on appeal. Considering that the Court of Appeal will in the following - superfluously - examine whether, assuming the interpretation given by the Russian Federation to the Limitation Clause, the provisional application of Article 26 ECT is inconsistent with the 'constitution, laws or regulations' of the Russian Federation, the Court of Appeal will now discuss the interpretation given by the District Court to the term 'inconsistent' and the grounds of appeal that HVY have directed against it, in light of the interpretation of the Limitation Clause in accordance with the position of the Russian Federation.

4.5.43.

The District Court assessed (in para. 5.33) whether the provisional application of the arbitration clause of Article 26 ECT 'is in accordance with the Russian Constitution, laws or other regulations’. It rejected HVY's view that Article 26 ECT is incompatible with Russian law only if that treaty provision is prohibited and that there is no inconsistency if Russian law does not expressly provide for that treaty provision. The District Court held that inconsistencies can also be considered to rise when such a method of dispute resolution has no legal basis, does not fit into the legal system, or is not compatible with the principles and points of departure laid down in, or knowable from the laws of the Russian Federation. In doing so, the District Court attached importance to the fact that provisional application finds its legitimacy in the signing of the Treaty and that the sovereignty of the signatory parties is at stake in a number of provisions. In para. 5.41, the District Court considered that there even may be an inconsistency with Russian law if that law does not itself provide for the possibility of arbitration as provided for in Article 26 ECT. In para. 5.51, the District Court considered that Article 9(1) LFI 1991 does not provide an 'independent legal basis' for settling disputes between an investor and a state through international arbitration as provided for in Article 26 ECT. In para.

5.58.

the District Court comes to the same conclusion with regard to Article 10 LFI 1999.

4.5.44.

HVY are contesting this decision on appeal. According to HVY, 'inconsistent' with implies 'incontrovertible inconsistency' (Statement of Appeal no. 407) and the District Court wrongly looked for an 'independent legal basis’. According to HVY, two provisions are 'inconsistent' if they cannot be applied simultaneously (Statement of Appeal no. 385), that is to say, where the application of one provision results in a breach of the other (Statement of Appeal No. 389), also referred to as the 'impossibility of joint compliance' (Statement of Grounds of Appeal No. 393). In the Deed of 26 February 2019, HVY clarified this by stating that an explicit prohibition under national law is not necessarily required (No. 151).

4.5.45.

The Russian Federation takes the view that the question of whether 'inconsistent' means that there must be an undeniable inconsistency cannot be addressed in these proceedings, as HVY did not advance such an argument in the arbitration (Defence on Appeal no. 374). As it happens, there is an undeniable conflict between Article 26 ECT and Russian law (Defence on Appeal No. 375). The District Court responded to the position that HVY had taken in first instance (and that they apparently abandoned again on appeal), which entails that Article 26 ECT is only 'inconsistent' with national law if a provision of national law explicitly prohibits such arbitration. That position was rightly rejected by the District Court (Defence on Appeal No 377). It is correct that 'inconsistent' requires an inconsistency with national law, not that there must be undeniable inconsistency (Defence on Appeal no. 378). An inconsistency with national law also arises when there is no specific legal provision, but there is inconsistency with the legal system, in which regard general principles under constitutional law, such as the separation of powers and the primary authority of the federal legislation are also important (Defence on Appeal no. 381). Moreover, the Russian Federation is of the view that the discussion about the words 'not inconsistent with' is meaningless, because all kinds of explicit statutory provisions show that arbitration of the claims of HVY is manifestly inconsistent with Russian law (Deed of 25 June 2019 No. 120).

4.5.46.

The Court of Appeal observes that the parties essentially agree that the test to be applied for the purposes of the Limitation Clause (interpreted in accordance with the position of the Russian Federation) is whether a particular treaty provision is inconsistent with a provision of national law. The Court of Appeal endorses this principle. HVY are no longer maintaining the position taken by them in the Statement of Appeal, that this inconsistency must be incontrovertible; that position is also incorrect, as the Limitation Clause does not impose that requirement, nor is it contained in the use of a double negation ('not inconsistent’). The Court of Appeal holds that the question of 'inconsistency' cannot be answered in a general sense, but depends on the specific context of the relevant ECT provision and national law. An 'inconsistency' will in any event arise when an ECT provision and a particular rule of national law cannot be applied simultaneously because the application of one rule brings about the violation of the other. Based on the opinions of Professor Schrijver and Professor Klabbers ²⁸ and the case law cited there, from which the experts of the Russian Federation have not distanced themselves, and in accordance with the decision of the arbitral tribunal in the Yukos Capital case ²⁹, the court is of the view that this criterion is in accordance with generally accepted standards of international law for situations concerning priority between two conflicting treaty provisions. ³⁰ The fact that this case law relates to treaties other than the ECT and to conflicts between different treaty standards and not to conflicts between a treaty norm and national law, does not detract from its importance in the interpretation of the concept of 'inconsistency' in Article 45(1) ECT. This does not exclude the possibility that, as considered above (para. 4.5.45), there may also be an inconsistency within the meaning of Article 45(1) ECT in cases other than where a treaty norm and a rule of national law cannot be applied simultaneously without the application of one rule bringing about a violation of the other, for example if an ECT provision is incompatible with a generally accepted view on the law in the state concerned.

4.5.47.

As noted, the District Court held that Article 26 ECT is 'inconsistent' with national law even if such a method of dispute resolution has no legal basis in Russian law. Additionally, the District Court held that incompatibility with Russian law may exist even if that law does not itself provide for the possibility of arbitration as provided for in Article 26 ECT. Applying this criterion, the District Court then held that Article 9(1) LFI 1991 does not provide an 'independent legal basis' for arbitration between HVY and the Russian Federation and in para. 5.58 that the same applies to Article 10 LFI 1999 (para. 4.5.43 above). HVY rightly contest this decision of the District Court. The text of Article 45(1) ECT does not provide any basis for this interpretation, nor does it follow from the context of the Treaty. On the contrary, the District Court's judgment means that the ECT provisions can only be provisionally applied if there is already a legal basis for this in national law. This would deprive the provisional application of Article 45(1) ECT of much of its practical use and would not be consistent with the desire expressed in that provision by the contracting parties to provisionally apply the ECT to the furthest extent possible. In so far as the District Court has attached importance to the circumstance that the signatories' sovereignty is at stake by way of a number of the provisions of the ECT (para. 5.33), this is incorrect. It is unclear why that circumstance would influence the interpretation of the term 'inconsistent' in the Limitation Clause. After all, it is part and parcel of a treaty that it restricts a state's sovereignty to a certain extent, and this also applies when a state applies a treaty provisionally.

4.5.48.

It must be concluded that the Limitation Clause is to be interpreted as meaning that a signatory which has not made the declaration referred to in Article 45(2)(a) ECT is obliged to apply the Treaty provisionally except to the extent that provisional application of one or more provisions of the ECT is contrary to national law, in the sense that the laws or regulations of that state preclude the provisional application of treaty provisions or types or categories of such provisions. This interpretation corresponds with that of the arbitral tribunal in the Yukos Capital case. ³¹ On the basis of the Russian Federation's interpretation of the Limitation Clause, there is 'inconsistency' within the meaning of Article 45(1) ECT in any event if a treaty provision and a particular rule of national law cannot be applied simultaneously because the application of one rule brings about the violation of the other. Whether, besides this, an 'inconsistency' also exists depends on the specific context of the legislation at issue. In any event, there is no 'inconsistency' if national law does not provide a basis for, or does not provide for, the relevant provision of the ECT.

4.6.1.

Taking the interpretation of Article 45(1) ECT as accepted by the Court of Appeal in para. 4.5.48 above as a starting point, the Court of Appeal decides that the provisional application of the ECT is not inconsistent with the 'constitution, laws or regulations' of the Russian Federation. It has not been asserted or evidenced that Russian law comprises a rule that precludes the provisional application of Article 26 ECT. Art 23(1) FLIT reads:

"An international treaty or a part thereof may, prior to its entry into force, be applied by the Russian Federation provisionally, if the treaty itself so provides or if an agreement to such effect has been reached with the parties that have signed the treaty."

It follows that this provision does not comprise any limitation as to the treaty provisions, or types or categories of such provisions, that can be applied provisionally. The Russian legal scholars Osminin ³² and Karzov ³³ confirm that there are no restrictions on the provisional application of treaties that have to be ratified. Nothing else follows from Article 23(2) FLIT, to which the Court of Appeal will return below in a different context, because it does not contain a restriction with regard to the nature of the provisions that may or may not be applied provisionally. This means that the Russian Federation was obliged to apply Article 26 of the ECT provisionally and that the District Court wrongly decided otherwise. To that extent, HVY’s grounds of appeal are successful.

4.6.2.

Nevertheless, the Court of Appeal will examine, superfluously, whether Article 26 of the ECT is inconsistent with any provision of the law of the Russian Federation, on the basis of the interpretation given by the Russian Federation and the District Court to the Limitation Clause.

4.7.1.

The Russian Federation put forward the following three independent grounds which, in its view, lead to the conclusion that arbitration about HVY's claims is inconsistent with Russian law (Defence on Appeal, no. 153):

(a) it is inconsistent with the principle of the separation of powers enshrined in Russia’s (constitutional) law if the Government, on behalf of the Russian Federation, were to unilaterally agree to the provisional application of Article 26 ECT; treaties containing arbitration clauses must be ratified;

(b) under Russian law, disputes concerning powers under public law, such as tax and expropriation disputes, cannot be submitted to arbitration;

(c) under Russian law, shareholders are not entitled to bring an action in consequence of a reduction in the value of their shares on account of damage caused to the company.

4.7.2.1.

The Court of Appeal understands the argument of the Russian Federation is that, on these grounds, Article 26 ECT is inconsistent with its 'constitution, laws or regulations' within the meaning of Article 45(1) ECT (Defence on Appeal, no. 184), and that it does not argue that the person who has signed the Treaty on its behalf, even apart from Article 45(1) ECT, has exceeded his/her competence by signing a treaty that is to be applied provisionally. This would also be inconsistent with the undisputed fact that the Russian Federation has applied the ECT provisionally, at least in part, for many years.

4.7.2.2.

At first instance, the Russian Federation also put forward the following arguments. Article 2(c) FLIT explicitly states that signature of a treaty shall only be considered as consent of the Russian Federation to be bound by a treaty "if the treaty provides that signature shall have that effect." According to the Russian Federation, the ECT does not contain a provision to that effect. ³⁴ This argument fails because Article 45(1) ECT does definitely contain such a provision. It provides that ‘[e]ach signatory’, i.e. any state that signed the Treaty, agrees to apply the Treaty provisionally.

4.7.3.

Although the District Court did not address ground (c), the Court of Appeal must decide on it in connection with the devolutive nature of the appeal and will discuss this ground in this chapter on inconsistency with Russian law, given its coherence.

4.7.4.

The Russian Federation’s position (as set out, inter alia, in the Defence on Appeal, nos. 154-184) on this point can be summarised as follows. The Constitution is explicitly based on the principle of the separation of powers. The powers of the executive branch are limited by the Constitution and federal legislation, and the powers of the government in entering into treaty obligations are limited. Treaties derogating from the law must be ratified by a federal law, and without ratification, a treaty does not take precedence over federal laws. This follows from Article 12 of the 1978 Law 'On the Procedure for the Conclusion, Performance and Denunciation of International Treaties of the USSR', as well as from Article 6(2) and (15) of the FLIT. Therefore, the Russian government can only introduce general arbitration rules if there is an adequate legal or constitutional basis for such rules. Provisional application of a treaty that derogates from federal law requires parliamentary consent. The Government cannot independently take powers from the judiciary and allocate them to third parties. The power of the government to agree to the provisional application of a treaty is explicitly limited, since Article 23(2) FLIT stipulates that a decision to provisionally apply treaties that derogate from federal laws for more than six months requires parliamentary consent. Only ratified treaties take precedence over federal laws, according to the Russian Federation.

4.7.5.

The Russian Federation's argument is based on the premise that Article 26 ECT constitutes a form of dispute resolution that derogates from or supplements the federal laws of the Russian Federation. The findings below with regard to the second basis (referred to above in para. 4.7.1 under (b)) will show that this premise is incorrect. These findings will show in particular that Article 9 LFI 1991 and Article 10 LFI 1999 allow international arbitration on investment disputes in so many words. This means that basis (a) fails for that reason alone. However, the Court of Appeal will also consider whether basis (a) succeeds if it is assumed that Article 26 ECT constitutes a form of dispute resolution that indeed derogates from or supplements the federal laws of the Russian Federation.

4.7.6.

The Russian Federation’s position is essentially that the possibility of provisionally applying a treaty is limited in the sense that treaties that derogate from or supplement federal law, or at least the provisions thereof that constitute such a derogation or supplement, cannot be provisionally applied.

4.7.7.

With regard to the provisional application and ratification of treaties of the Russian Federation, the following is provided for in the Constitution and the FLIT. It is important to note that the Russian Parliament has two houses: the State Duma and the 'Council of Federation' (also known as the 'Federation Council').

Article 15(4) of the Constitution reads:

"Universally recognized principles and norms of international law as well as international agreements of the Russian Federation shall be an integral part of its legal system. If an international agreement of the Russian Federation establishes rules, which differ from those stipulated by law, then the rules of the international agreement shall be applied."

Article 106 of the Constitution provides:

"Federal laws adopted by the State Duma on the following issues must compulsorily be examined by the Council of Federation:

(...)

d) ratification and denunciation of international treaties of the Russian Federation."

Article 15 FLIT provides, inter alia:

"1. The following international treaties of the Russian Federation shall be subject to ratification:

a) international treaties whose implementation requires modification of existing legislation or the enactment of new federal laws, or that set out rules different from those provided for by law;

2. An international treaty shall likewise be subject to ratification if the parties have agreed to subsequent ratification when concluding the international treaty."

Article 17 FLIT (‘Decisions to ratify international treaties of the Russian Federation’) provides, inter alia:

"1. The State Duma shall consider proposals for the ratification of international treaties and, after preliminary discussion in committees and commissions of the State Duma, make relevant decisions.

Federal laws adopted by the State Duma for the ratification of international treaties of the Russian federation shall be subject, in accordance with the Constitution of the Russian Federation, to mandatory consideration in the Federation Council."

Article 23 FLIT (‘Provisional application of international treaties by the Russian Federation’) reads:

"1. An international treaty or a part thereof may, prior to its entry into force, be applied by the Russian Federation provisionally, if the treaty itself so provides or if an agreement to such effect has been reached with the parties that have signed the treaty.

2. Decisions on the provisional application of a treaty or a part of a treaty by the Russian Federation shall be made by the body that has taken the decision to sign the international treaty according to the procedure set out in Article 11 of this Federal Law.

If an international treaty - the decision on the acceptance of the binding character of which in respect of the Russian Federation is, under this Federal Law, to be passed in the form of a Federal Law - provides for the provisional application of a treaty or a part thereof, or if an agreement as to such provisional application was reached among the parties in some other manner, then this treaty shall be submitted to the State Duma within six months from the start of its provisional application.

The term of provisional application may be prolonged by way of a decision taken in a form of a federal law according to the procedure set out in Article 17 of this law for the ratification of international treaties.

3. Unless the international treaty otherwise provides, or the respective States otherwise agree, the provisional application of a treaty by the Russian Federation or a part thereof shall be terminated upon notification to the other States that apply the treaty provisionally of the intention of the Russian Federation not to become a party to the treaty."

4.7.8.

The fact that the ECT must be ratified in order to enter into force is not in dispute, this already follows from Article 39 ECT. That the Russian Federation has not ratified the ECT is also a fact. The ECT was submitted to the Duma on 26 August 1996 but has not been ratified.

4.7.9.

The FLIT entered into force on 21 July 1995, therefore after the Russian Federation had signed the ECT. This Act does not contain any transitional provisions. The Russian Federation takes the position that only Article 23(2) FLIT has been granted retroactive effect. The Russian Federation further argued that at the time the ECT was signed there was no specific legal or constitutional regulation on the provisional application of treaties and that before the FLIT entered into force, it was necessary to verify, based on general legal or constitutional provisions, whether the Government had the power to agree unilaterally to provisionally apply a treaty on behalf of the Russian Federation (Defence on Appeal, no. 171).

4.7.10.

The Court of Appeal takes as a starting point that at the time of Russian Federation's signing of the ECT, in so far as relevant in this matter, and with the exception of Article 23(2) FLIT, no substantially different rules applied than those currently laid down in the FLIT. There are no indications that this law introduced new rules in the field of the provisional application of treaties. Rather, it is plausible that in the area of provisional application the FLIT intended to seek alignment with previously existing practice. This practice meant that treaties were broadly applied on a provisional basis and that this was also the case with treaties that contained derogations from existing legislation (see paras. 4.7.15-4.7.16 below). The Russian Federation has been a party to the VCLT since 1986. ³⁵ Article 25 VCLT regulates the provisional application of treaties; paragraphs 1 and 2 of that Article 25 are identical in substance to Article 23(1) and (3) FLIT respectively. Pursuant to Article 15(4) of the Constitution, the treaties of the Russian Federation are an integral part of its legal system. Article 25 VCLT was thus already part of the Russian legal order before the entry into force of the FLIT.

4.7.11.

In addition, the FLIT entered into force before the ECT was submitted to the State Duma on 26 August 1996 and thus before the ratification process had properly begun. The time of entry into force of the FLIT is also before the time that HVY addressed its request for arbitration to the Russian Federation, thus indicating that it accepted the offer of arbitration contained in Article 26 ECT. Therefore, the Court of Appeal cannot but conclude that the FLIT is applicable to the question at issue here, i.e. whether the provisional application of the ECT, despite the fact that the ECT has not been ratified by the Russian Federation, entails that the Russian Federation is bound by the arbitration clause of Article 26 ECT.

4.7.12.

In addition, to the extent that the FLIT contains even fewer limitations on the provisional application of treaties than those that applied before its entry into force, the FLIT must be applied on the basis of the principle that a state is free to remove national obstacles that preclude or limit provisional application at the time of signing a Treaty, but not to introduce new obstacles. ³⁶ Implementation in good faith of the treaty in question then entails that the old limitation is not invoked against the other states or, as in this case, against investors who have been granted certain rights by the Treaty (such as Article 26 ECT), but that the new more favourable regime is applied. It is in line with this principle that the question of whether a valid arbitration agreement has been concluded because HVY addressed a request for arbitration to the Russian Federation in 2004 will be assessed on the basis of the situation existing at that time (in so far as this is more favourable to HVY than at the time the ECT was signed by the Russian Federation). Therefore, in so far as it must even be held that there was a period between the time of the signing of the ECT and the entry into force of the FLIT during which Article 26 ECT could not be provisionally applied, this does not preclude that provisional application was in principle possible from 1995 pursuant to the rules introduced by the FLIT.

4.7.13.

As regards the applicability of Article 23(2) FLIT, the following is important. The Russian Federation argues that this paragraph was given retroactive effect by Presidential Decree of 7 August 1995 (quoted in the Defence on Appeal, no. 174, footnote 237).The question whether this provision has indeed been given ‘retroactive effect’, which HVY dispute, may remain unanswered. As the FLIT does not contain transitional provisions, it is obvious that, at the time of its entry into force, this law applied to treaties that at that time were already being provisionally applied but had not yet been ratified. This also seems to be the most plausible tenor of the Presidential Decree of 7 August 1995. This means that the ECT should have been submitted to the State Duma within six months of 21 July 1995, which did not happen.

4.7.14.

The position of the Russian Federation that Article 26 ECT cannot be provisionally applied because the ECT is a treaty that must be ratified under Russian law is incorrect in the opinion of the Court of Appeal. There is no rule in Russian law that the government's power to agree to the provisional application of treaties is limited in the sense that provisional application cannot relate to treaties that are subject to ratification because they contain provisions that derogate from or supplement federal legislation. There is no such limitation in the Constitution or the FLIT. In particular, Article 23(1) FLIT includes no reservation whatsoever in this respect, because it makes provisional application subject only to the condition that provisional application has been agreed by the signatories. Similarly, Article 23(2) FLIT does not place any limitations on the decision-making regarding provisional application, where it provides, without reservation, that the body that made the decision to sign the treaty in question also decides whether that treaty is to be applied provisionally.

4.7.15.

Moreover, it does not appear that, prior to the entry into force of the FLIT, there were any limitations on the possibility of provisionally applying a treaty. The 1978 Law ‘On the Procedure for the Conclusion, Performance and Denunciation of International Treaties of the USSR’ contained no provisions on provisional application and thus no provisions limiting provisional application. The Russian Federation also has not identified specific limitations on provisional application, as it argues that prior to the entry into force of the FLIT, a determination had to be made on the basis of general legal or constitutional provisions whether the Government was competent to agree unilaterally on behalf of the Russian Federation to provisionally apply a treaty (Defence on Appeal, no. 171). Provisional application of treaties that contain provisions that derogate from existing legislation was also common before the FLIT’s entry into force. The Court of Appeal will confine itself here to referring to the following treaties.

4.7.16.

The 'Maritime Boundary Agreement' of 1 June 1990, which established the border in the Bering Sea between the Russian Federation and the United States, has been provisionally applied since 15 June 1990, ³⁷ even though it is a treaty that must be ratified. Ratification is required pursuant to Article 12 of the Law of 1978 ‘On the Procedure for the Conclusion, Performance and Denunciation of International Treaties of the USSR’, as the 'Maritime Boundary Agreement' so provides in its Article 6 and because that treaty relates to the ‘territorial demarcation of the U.S.S.R.’. ³⁸ Another example is the ‘Agreement establishing an International Science and Technology Centre’, signed on 27 November 1992 and declared provisionally applicable by means of an additional Protocol of 27 December 1993. ³⁹ As this agreement, in its Articles XI and XII, granted certain immunities to the 'Centre', which was headquartered in the Russian Federation (see Article IX A), and its employees, it derogated from existing Russian law to that extent and had to be ratified pursuant to Article 12 of the Law of 1978 ‘On the Procedure for the Conclusion, Performance and Denunciation of International Treaties of the USSR’.

4.7.17.

The Russian Federation responded to this by stating, in essence, that it is conceivable that a treaty was ‘accidentally’ applied from time to time that derogated from the law, that this does not mean that this is in accordance with the Constitution and, moreover, that the Russian Federation never agrees to the provisional application of arbitration. However, the Court of Appeal finds it implausible that the (years-long) provisional application of treaties that derogate from the law is the result of inadvertency. It is plausible that if, as the Russian Federation asserts, the provisional application of such treaties had been unconstitutional, this would have been noted, but there has been no evidence of that. More specifically, there has been no evidence that the Russian Federation terminated the provisional application of the 'Maritime Boundary Agreement' or that it ratified that treaty at a later date. The Russian Federation’s treaty practice of never agreeing to the provisional application of international arbitration, if correct, is irrelevant. What is important here is that treaties that derogated from Russian law were applied provisionally. It is irrelevant here on which point they derogated from Russian law.

4.7.18.

The fact that, in the present case, the government of the Russian Federation validly resolved to sign the ECT is not in dispute (see paras. 4.3.2 and 4.7.2.1 above). The government’s resolution of 16 December 1994 does not indicate any limitations on the provisional application of the ECT (or any specific ECT provisions).

4.7.19.

The fact that the FLIT is based on a different system than the one now being defended by the Russian Federation is also evident from Article 23(2) FLIT. After all, Article 23(2) FLIT does not provide that provisional application is not possible if the treaty must be ratified (because it contains provisions that derogate from or supplement existing federal laws, cf. Article 15 FLIT), but only that, in that case, the treaty must be submitted to the State Duma for approval within six months and that the period of provisional application must be extended by federal law. Article 23(2) FLIT thus allows treaty provisions that derogate from or supplement federal laws to be applied provisionally for six months following the signing of the treaty without submission to the State Duma. Incidentally, the parties agree that, even if the treaty is not submitted to the State Duma within six months, the provisional application remains in force until the Russian Federation has informed the other contracting parties that it will not ratify the treaty. This is also consistent with Article 25(2) VCLT. The provisional application of a treaty that contains provisions that derogate from or supplement federal legislation can therefore cover a much longer period than six months in certain circumstances. That is difficult to reconcile with the position regarding the strict separation of powers advocated by the Russian Federation in these proceedings.

4.7.20.

The Russian legal scholars Osminin ⁴⁰ and Karzov ⁴¹ confirm that there are no restrictions on the provisional application of treaties that must be ratified. Karzov states:

"The Russian Federation belongs to a third group of State, which also includes, among others, Spain and Switzerland. In these States, the relevant authorized bodies of State power are not limited in their right to make independent decisions with respect to provisional application of international treaties, including those that require adoptation of a law in order to be entered into."

(emphasis added by the Court of Appeal)

In the same vein Zvekov and Osminin ⁴² :

"From this it follows that exception(s) to the federal law on the basis of provisional application are possible."

4.7.21.

The Russian Federation itself also confirmed in a memo ⁴³ to the UN International Law Commission that, under Russian law, provisionally applied treaties have the same status as treaties that have entered into force:

"The Russian Federation’s consent to the provisional application of a treaty means that the treaty becomes part of the legal system of the Russian Federation and is subject to application on an equal basis with treaties that have entered into force."

while this memo also stated:

"Under the above-mentioned federal law [the FLIT, added by the Court of Appeal], the decision on the provisional application by the Russian Federation of a treaty is taken by the Government of the Russian Federation or the President of the Russian federation (depending on within whose competence the questions constituting the subject of the treaty reside)."

4.7.22.

The quotes taken from the preparation of the Constitution and the FLIT presented by the Russian Federation (Defence on Appeal, nos. 426-432) do not relate to any provisionally applied treaty. To the extent the publications of legal scholars cited by the Russian Federation (Defence on Appeal, nos. 433-434) could at all be said to reflect the view that a provisionally applied treaty cannot take precedence over a federal law, that position has now been superseded by various judgments of the Russian Federation Constitutional Court. The question of whether ‘international agreement’ in Article 15(4) Constitution should also be understood to include a provisionally applied treaty was, after all, answered in the affirmative by the Constitutional Court in its Resolution 8-P of 27 March 2012. ⁴⁴ The Constitutional Court held as follows under 4 and 4.1 :

"Agreement to provisional application of an international treaty means that it becomes part of the legal system of the Russian Federation and must be applied on the same basis as international treaties that have entered into force (unless otherwise expressly stated by the Russian Federation), since otherwise provisional application would be meaningless.

(...)

Being guided by the Vienna Convention on the Law of Treaties and provisions of the Federal Law "On International Treaties of the Russian Federation" in their literal interpretation, public authorities and officials of the Russian Federation consistently pursue the legal policy which provides that provisions of a provisionally applied international treaty become part of the legal system of the Russian Federation and, like international treaties of the Russian Federation that have entered into force, have priority over Russian laws in the absence of the officially published text, including instances when they alter the regulatory content of rights, freedoms and duties of man and citizen.

(...)

From the point of view of the requirements set forth in Article 15 (part 4) of the Constitution of the Russian Federation in conjunction with its Articles 2, 17 (part 1) and 19 (part 1), provisionally applied international treaties of the Russian Federation by their legal consequences, effect on rights, freedoms and duties of man and citizen in the Russian Federation are essentially equivalent to international treaties that have entered into force, ratified and officially published in accordance with the procedure established by federal legislation."

4.7.23.

The Russian Federation and its experts have argued, inter alia, that the question put to the Constitutional Court was whether a provisionally applied treaty could be held against a citizen, even though it had not been published, in the way this is done with a ratified treaty. This is correct by itself but fails to appreciate that the Constitutional Court decided that a provisionally applied treaty "affecting the rights and freedoms of man and citizen and establishing rules other than those provided by law" must be published because it has the same effect as a treaty that has entered into force. The Russian Federation's position that said decision shows no more than that in terms of the publication requirements, a provisionally applied treaty is at the same level as a ratified treaty, fails to appreciate that the Constitutional Court's judgment unmistakeably has a more general purport. After all, it reasoned its decision, that provisionally applied treaties should be published, by considering that such treaties "have priority over Russian laws". In that regard, the Court points out that, should a provisionally applied treaty not be applied on the same footing as a treaty that has entered into force, "provisional application would be meaningless". Finally, it cannot be derived from this judgment that a part was played by the fact that the old rates (that because of the treaty had been replaced by new rates, which was the target of the dispute) had been laid down in a government decision. Nothing in the Constitutional Court's reasoning indicates this. See in this regard the comments by Kurdyukov, in which the Russian Federation's narrow interpretation of this judgment is not endorsed. ⁴⁵ Finally, one might point out in this regard that Vyatkin, who took the floor on the State Duma's behalf during the Constitutional Court's hearing of this matter, defended exactly the same system when he commented ⁴⁶ :

"In case of a discrepancy between a federal law and a provisionally applicable treaty, we nevertheless consider that the international treaty shall apply, as the meaning of provisional application is, precisely, to apply the treaty immediately."

4.7.24.

In Resolution 6-P of 19 March 2014, ⁴⁷ the Constitutional Court confirmed this case law. The matter in question regarded a constitutional review, carried out by the Constitutional Court, of the treaty providing in the association of the Crimea. Article 1 of that treaty provides that the republic of the Crimea will be deemed a part of the Russian Federation as from the date of the signing of the treaty; Article 10 of the treaty provides that the treaty will be provisionally applied from the date of the signing. Although this undoubtedly concerned a treaty that had to be ratified - and that was subsequently indeed ratified - because the treaty provisions derogated from existing legislation, for example because the treaty established new borders, the Constitutional Court considered, referring to its Resolution 8-P of 27 March 2012, that this provision is in conformity with the Constitution and that, pursuant to the provisional application of that treaty, both the republic of the Crimea and the city of Sevastopol were part of the Russian Federation as from the date of the signing of the treaty (para. 3). That ratification followed only three days later naturally does not detract from the fundamental significance of the Constitutional Court's resolution.

4.7.25.

The Russian Federation and its experts have attempted in vain to detract from these clear resolutions of the Constitutional Court. Where they take the position that non-ratified treaties that are being provisionally applied do not have priority over federal legislation, that position has been indisputably rebutted by the case law of the Constitutional Court. This is also true for example for the Russian Federation's reliance on the quotes derived from the handling of the FLIT, inter alia of state secretary Krylov (Defence on Appeal, nos. 429-430). Moreover, in those quotes, provisionally applied treaties and their possible priority over federal laws are not mentioned. This is relevant because the legal system of the Russian Federation also has treaties that are in force without having to be ratified. Indeed, such unratified treaties do not have priority over federal laws. This means nothing for the effect of a treaty that is being provisionally applied, pending ratification. Also the decisions of the Supreme Court and the Constitutional Court on which the Russian Federation relies, some of which the District Court has mentioned in para. 5.91, do not regard the provisional application of treaties (or 'interstate treaties') such as the ECT. As professor Stephan explains in his first Expert Report ⁴⁸ and second Expert Report ⁴⁹ and as is clear also from the judgment of the Supreme Court in the ' Chinese border case', to be discussed herein below, the Russian Federation has three types of international (public law) agreements: 'interstate treaties' concluded on behalf of the Russian Federation with other states, 'intergovernmental treaties' concluded by the government of the Russian Federation with the government of another state, and 'interagency treaties' concluded between federal bodies of the Russian Federation. Article 15(4) of the Constitution relates only to 'international agreements of the Russian Federation', that is to say, the first category ('interstate treaties'). In the 'Chinese border case', the Constitutional Court held ⁵⁰ :

"By virtue of the hierarchy of legal acts, priority over the laws of the Russian Federation is accorded to international treaties of the Russian Federation concluded on behalf of the Russian Federation (interstate treaties), consent to be bound by which was given in the form of a federal law."

Treaties for which ratification is not prescribed may take effect by their signing by the President, the government or a state body; however, their status is lower than that of a ratified treaty, in the sense that after their entry into force, they do not have priority over legislation. The matter at hand regards a treaty that has to be ratified in order to take effect, and the question whether that treaty can be provisionally applied prior to its entry into force ('prior to its entry into force', see Article 23(1) FLIT). The court decisions the Russian Federation invokes do not regard this latter category of treaties, unlike said Resolutions 8-P and 6-P of the Constitutional Court. The Court of Appeal will discuss some of the judgments on which the Russian Federation relies in more detail.

4.7.26.

The 'Chinese border case' ⁵¹ regards an 'intergovernmental treaty' that was entered into between the government of the Russian Federation and the Chinese government. The treaty had entered into force through an exchange of memoranda and as such, did not need to be ratified. As was observed above, such a treaty has lower status than a treaty concluded on behalf of the Russian Federation ('interstate treaty'), such as the ECT. The Supreme Court held that such a treaty does not have priority over the federal laws of the Russian Federation. That judgment has no significance for the matter at hand. Not only did it regard a different type of treaty; the treaty also did not provide in provisional application (naturally since, after all, it did not require ratification). Also Resolutions No. 8 and No. 5 of the Supreme Court, of 31 October 1995 and 10 October 2003, respectively, ⁵² do not pertain, insofar as can be checked based on the parts of those resolutions submitted by the Russian Federation, to the question whether a provisionally applied 'interstate treaty' has priority over federal legislation. Incidentally, it is the Constitutional Court rather than the Supreme Court that has the last word where the interpretation of the Constitution is concerned (Article 125 of the Constitution).

4.7.27.

The Russian Federation has also invoked Ruling No. 2531-O of the Constitutional Court of 6 November 2014. ⁵³ However, that matter concerned the compatibility of a provision of Russian law with the WTO treaty was ratified by the Russian Federation. As such, the ruling was not about the provisional application, pending ratification, of a treaty and it does not contain anything that is inconsistent with Resolutions 8-P and 6-P of the Constitutional Court mentioned above.

4.7.28.

The Russian Federation has argued that Article 15(4) of the Constitution is not relevant (Defence on Appeal, no. 420). According to the Russian Federation, Article 15(4) of the Constitution is a conflict of laws rule that prescribes that obligations pursuant to treaties have priority where there is inconsistency with federal laws. This conflict of laws rule finds no application if a treaty provision, such as in this case the Limitation Clause, ensures that such inconsistency cannot arise, according to the Russian Federation. The District Court has used a comparable argument to set aside the Constitutional Court's case law. The District Court considers that this case law, providing that also treaties that are applicable on a provisional basis are integral parts of the Russian legal system, does not detract from the fact that a treaty such as the ECT may limit the scope of the provisional application (para. 5.92).

4.7.29.

These arguments of the Russian Federation and the District Court fail to convince. Article 15(4) of the Constitution is clearly more than just a 'conflict of laws rule', because it puts the fact that a treaty is an integral part of the Russian legal system first. Incidentally, this opinion of the Court of Appeal does not mean that, even if only because of the priority awarded to it in Article 15(4) of the Constitution, a provisionally applied treaty cannot be inconsistent with the law of the Russian Federation in the meaning of the Limitation Clause, because that priority rule already resolves any conflict with national legislation so that by definition, there can be no inconsistency with national laws. However, in the Court of Appeal's view the case law of the Constitutional Court does show that the Russian Federation's argumentation about the separation of powers is not correct. After all, the Constitutional Court considers admissible that the government obliges the Russian Federation to provisionally apply treaty provisions pending ratification, even if those treaty provisions derogate from federal legislation, and that those treaty provisions have priority at that point. That is incompatible with what the Russian Federation has argued and it shows that the separation of powers does not have the consequences the Russian Federation attaches to it.

4.7.30.

As was considered above, the Court of Appeal assumes that the term of six months within which a provisionally applied treaty must be submitted to the State Duma started the day the FLIT entered into force (21 July 1995). See likewise Zvekov and Osminin. ⁵⁴ Although the ECT was not submitted to the State Duma within the six-month term, this has no consequences for the provisional application of the ECT. If the rules in Article 23(2) FLIT are not observed, this does not, as the Russian Federation also acknowledges (Defence on Appeal, no. 174 footnote 239), end the provisional application, since this - in conformity with the regime of Article 25(2) of the VCLT and Article 23(3) FLIT - only ends after the Russian Federation has informed other signatories that it does not intend to become a party to the treaty in question. Therefore, neither the authority to agree on provisional application, nor the provisional application itself, is affected by non-observance of the term prescribed in Article 23(2) FLIT. This means that the provisional application of the ECT is not limited by the effect of the Limitation Clause of Article 45(1) ECT in combination with Article 23(2) FLIT. After all, it is untenable that the mere fact that the six-month term of Article 23(2) FLIT has not been satisfied means that a provision of the ECT (such as Article 26 ECT) is not consistent with Russian law in the meaning of Article 45(1) ECT. Now that under Russian law, the provisional application continues until the moment the Russian Federation has let the other signatories know that it does not intend to become a party to the treaty in question, which was done in this case in August 2009, it cannot reasonably mean anything else than that the provisional application of the ECT prior to that moment is not 'inconsistent' with Russian law within the meaning of Article 45(1) ECT. It is also not in dispute that in the period of 17 December 1994 to 19 October 2009, the Russian Federation provisionally applied the ECT, in any case parts thereof. In fact, during the 'Energy Charter Conference' on 17-18 December 2002, the Russian delegation confirmed that, although the Russian Federation had not yet ratified the ECT, 'as a Signatory Country' it was applying the ECT from the day the Treaty entered into force, which in view of the context could only be understood to mean that the Russian Federation was provisionally applying the ECT from the date of the signing. ⁵⁵ Apparently, that the six-month term was exceeded did not preclude this, in its opinion. Under those circumstances, the Russian Federation, which pursuant to Article 26 VCLT must carry out the ECT in good faith, is not at liberty, in order to evade its obligation under a single provision of the ECT (Article 26), to argue that said term was not satisfied and that therefore, it is not held to provisionally apply specifically that provision. The Arbitral Tribunal has correctly rejected the arguments put forward by the Russian Federation to that purpose (Interim Award, no. 390).

4.7.31.

Insofar as it should nevertheless be assumed that, by introducing the six-month term, Article 23(2) FLIT limits the provisional application of the ECT further than was the case at the time of the signing of the ECT by the Russian Federation, the Russian Federation cannot rely on this. After all, the good faith that states must observe upon implementing a treaty precludes that, after signing a treaty in which provisional application is agreed, a state introduces new obstacles for provisional application (see in this regard para. 4.7.12).

4.7.32.

The above means that the Russian Federation's reliance on the separation of powers cannot hold. It is undoubtedly correct that its Constitution contains the principle of the separation of powers; by itself, however, that principle has insufficient bearing on the question of what powers have been assigned to which state body. In this particular case, the federal legislator has not limited the power, as expressed in the FLIT, of the President or of the government under the President's supervision, to agree that a treaty will be provisionally applied, although the legislator could have limited this. It cannot be successfully argued, therefore, that in agreeing on that provisional application, the government has exceeded its powers.

4.7.33.

The Russian Federation takes the position that Article 26 ECT makes it possible to subject investment disputes that pertain to taxes, enforcement and expropriation to arbitrations, whereas under Russian law, such disputes are not arbitrable. This supposedly precludes provisional application of Article 26 ECT. In its assessment of this position, the Court of Appeal takes as its point of departure that the meaning of the concept 'inconsistent' should be interpreted as any case where a treaty provision and a specific rule of national law cannot be applicable simultaneously, because application of the one rule constitutes a violation of the other, and that a possible other inconsistency depends on the context (see para. 4.5.48).

4.7.34.

The Russian Federation has argued that HVY's claim regards powers under public law. That is the case irrespective of the legal grounds on which HVY base their claim, the ground in this case being a breach of the ECT. Public law disputes are not arbitrable under Russian law. The Russian Federation indicates a number of legal provisions in which the national court is designated the exclusive disputes resolving body (disputes about acts of court bailiffs, tax and enforcement disputes) and legal provisions that allegedly show that only civil law disputes are arbitrable (Article 27 of the Code of Civil Procedure, Article 1(2) of the International Commercial Arbitration Act, Articles 21 and 23 of the Code of Civil Procedure in Commercial Matters (Arbitrazh) and Article 1(2) of the Arbitration Act).

4.7.35.

The question whether arbitration pursuant to Article 26 ECT is inconsistent with Russian law is answered in the negative by the Court of Appeal. It is not correct that a dispute between a foreign investor and the host country is of a public law nature. According to Krupko, the view that prevails in the doctrine and case law is that such disputes are civil-legal in nature, even if there is no unanimity about this. ⁵⁶ Veliaminov and Volova endorse this view ⁵⁷ and the Court of Appeal follows it as being the prevailing doctrine in the Russian Federation.

4.7.36.

However, even if the Court of Appeal should assume that under Russian law, arbitration is open only for civil law disputes, and that the current dispute is not such a civil law dispute, international arbitration under Article 26 ECT is not 'inconsistent' with Russian law.

4.7.37.

Article 26 ECT provides international arbitration in accordance with the UNCITRAL rules for investment disputes related to violation of the rules of the ECT. An Arbitral Tribunal appointed pursuant to Article 26 ECT should decide a dispute put before it "in accordance with this Treaty and applicable rules and principles of international law". It cannot be perceived, nor does this follow from the Russian Federation's assertions, that such a form of international arbitration cannot exist alongside the legal provisions referred to by the Russian Federation. That for national situations, Russian law makes the option of arbitration accessible for civil law disputes alone is not inconsistent with the circumstance that for the cases regulated in the ECT, the ECT makes international arbitration accessible beside and in addition to the options offered under Russian national law. That Russian law can readily exist side by side with international investment arbitration is confirmed, moreover, by the fact that the Russian Federation is a party to many bilateral investment treaties ('bilateral investment treaties' or 'BITs') in which international arbitration was agreed as a (possible) form of dispute resolution. ⁵⁸ The model BITs from 1992 and 2001/2002 drawn up by the Russian Federation, which it uses as a point of departure in its negotiations on bilateral investment treaties with other states, ⁵⁹ include international arbitration in accordance with the UNCITRAL rules or the ICSID rules as one of the options for resolving disputes between an investor and the host state (Article 6 and 8, respectively, of those model BITs). The BITs referred to earlier and those model BITs include no limitations as to the nature (either civil or public law) of the dispute that may be subjected to arbitration, nor can a limitation be read therein in the sense that arbitrators can only decide the quantum of the damages. The treaty practice of the Russian Federation shows no restraint as to international arbitration of disputes about investment treaties, therefore. The Russian Federation's argument that said BITs were ratified and that as such, they constitute derogations by federal law from the supposed injunction on arbitration of public law disputes, is artificial and misses the relevant point. A state that agrees on international arbitration on investment disputes so regularly, and explicitly takes such a form of dispute resolution as a point of departure in its negotiations with other states, cannot reasonably maintain that this form of arbitration cannot exist side by side with the provisions of national law that limit such arbitration to civil law disputes, or is otherwise inconsistent with Russian law.

4.7.38.

Also the Explanatory Note the government submitted to the State Duma on 26 August 1996, by way of explanation to the bill for ratification of the ECT, ⁶⁰ and which pursuant to Article 16(4) FLIT had to include "a report on its conformity with the legislation of the Russian Federation", does not evidence any issue with the arbitration clause of Article 26 ECT or with provisional application of that provision. Where relevant, the Explanatory Note reads:

"At the time of the signing of the ECT, its provisions on provisional application were in conformity with the Russian legal acts. For that reason, the Russian side did not make declarations as to its ability to accept provisional application (such declarations were made by 12 of the 49 signatories).

(...)

The provisions of the ECT are consistent with Russian legislation."

The first sentence from this quote reads, in the - according to the Russian Federation - correct translation:

"At the time of signing of the Energy Charter Treaty, the provision regarding provisional application was not in contravention of the Russian legal acts." ⁶¹

These passages allow no other interpretation than that the government held the view that the provisions of the ECT, which necessarily include the provisions about international investment arbitration of Article 26 ECT, were 'consistent' with Russian law and that there was no reason to limit the provisional application of the ECT in any way by making a statement. Although naturally, this position of the government does not bind the State Duma, it constitutes a strong indication that the current position of the Russian Federation about the incompatibility of such arbitration with Russian law is not correct. Although in the Explanatory Note, it is not mentioned in so many words that Article 26 ECT is 'consistent' with Russian law, it can hardly be imagined that such a text would have been included in the Explanatory Note if the government had believed that Article 26 ECT was indeed inconsistent therewith. The Russian Federation's argument that this passage in the Explanatory Note pertain to the situation after ratification is contradicted by the clear text of the passage, which takes 'the time of the signing' (of the Treaty) as the point of reference.

4.7.39.

Even just based on the above, it cannot be held that Article 26 ECT is inconsistent with Russian law in the meaning of the Limitation Clause of Article 45(1) ECT, even if the Russian Federation interpretation of this is taken as a point of departure. About the specific provisions of national law invoked more particularly by the Russian Federation, the Court of Appeal also considers the following.

4.7.40.

The Russian Federation has referred to Article 27 of the Code of Civil Procedure, which provides that disputes ensuing from civil law relationships may be put to an Arbitral Tribunal if the parties consent to this. However, Article 25 of the same Code provides ⁶² :

"Courts shall also review cases with foreign citizens, stateless persons, foreign enterprises, and organizations participating in them, provided that no alternative is stated in interstate agreements, international agreements or agreements between the parties."

And Article 1(2) reads ⁶³ :

"If an international treaty of the Russian Federation has established the rules for the civil court procedures different from those stipulated by the law, the rules of the international treaty shall be applied."

These provisions allow for no other conclusion than that treaties may entail rules that have as a consequence that disputes other than civil law disputes may be subjected to arbitration.

4.7.41.

The Russian Federation also relies on Article 1(2) of the International Commercial Arbitration Act, which provides that disputes arising from contractual or other civil law obligations, ensuing from maintaining foreign commercial and other international economic relationships, may be subjected to international commercial arbitration if the commercial business of at least one of the parties is established abroad. Apart from the fact that, as evidenced by its Article 1(1), this act only applies if the arbitration takes place in the Russian Federation, and the Russian Federation itself admits that the act is not applicable to the current international investment arbitration (pleading notes in rejoinder of mr. Van den Berg, no. 37), Article 1(5) of this act reads ⁶⁴ :

"If an international treaty of the Russian Federation establishes rules other than those which are contained in the Russian legislation relating to arbitration (third-party tribunal), the rules of the international treaty shall be applied."

Also in this case, therefore, an exception was explicitly made for arbitration based on a treaty.

4.7.42.

The same is true of Articles 21 and 23 of the Code of Civil Procedure in Commercial Matters (Arbitrazh), which the Russian Federation invokes to argue that only civil law disputes can be subjected to arbitration. Also here, the Russian Federation fails to appreciate that that same Code provides in its Article 3(3) ⁶⁵ :

"If the rules of the court proceedings, established by an international treaty of the Russian Federation, differ from those stipulated by the legislation of the Russian Federation, the rules of the international treaty shall be applied."

This also shows that the national rules on the question of what disputes are arbitrable do not preclude that a treaty may offer more options for dispute resolution by means of arbitration..

4.7.43.

The Russian Federation and its expert professor Asoskov have also relied on Article 1(1) of the 'Provisional Regulation on Arbitral Tribunal for Resolving Economic Disputes' and on Article 1(2) of the 'Law on Arbitral Tribunals', which succeeded the 'Provisional Regulation'; both only relate to 'domestic arbitration', however, ⁶⁶ and as such, are not relevant for this dispute. Also the Russian Federation's invocation of Article 17 of the Act of 27 December 1991 on the principles of the tax system of the Russian Federation (No. 2118-1), Article 138(1) of the Tax Act (1998), Article 90 of the Federal Act regarding Enforcement Proceedings (1997, No. 119-FZ) and Article 428 of the Code of Civil Procedure (1964) (pleading notes of mr. Van den Berg in re. Article 45 ECT, part II, no. 125) fails. Said provisions say nothing about the question whether an international investment dispute can be subjected to international arbitration if a treaty provides this.

4.7.44.

Insofar as the Russian Federation argues that, where in the above laws, reference to a treaty only applies to ratified treaties, the Court of Appeal does not follow. As is clear from what was considered above, a provisionally applied treaty has the same effect in the Russian legal system as a ratified treaty. Professor Asoskov notes that the provisions in which an exception is made based on an applicable treaty constitute no more than a repetition of the rule in Article 15(4) of the Constitution. Be that as it may, these exceptional provisions at least make clear that international arbitration of other than purely civil law disputes based on a treaty is not inconsistent with the provisions of Russian law mentioned above.

4.7.45.

The Russian Federation also invokes the resolution of the Constitutional Court of 26 May 2011, no. 10-P. ⁶⁷ However, that matter regarded a dispute about real estate located in the Russian Federation, in which the question whether international investment arbitration is admissible on the basis of a treaty did not play a role. As such, said resolution of the Constitutional Court is not relevant for the question asked in the matter at hand. The same is true of the resolution of the Constitutional Court of 15 January 2015, No. 5-O ⁶⁸, in which that Court noted (in a national context) that 'the current legal system does not permit the arbitration of disputes arising out of administrative and other public law relations' (para. 2.2). It does not follow from that judgment that international investment arbitration based on a treaty is inconsistent with Russian law.

4.7.46.

HVY have argued, moreover, that Russian law not only does not preclude international investment arbitration based on a treaty, but that the LFI 1991 and the LFI 1999 explicitly make such arbitration possible.

Articles 5, 9 and 10 LFI 1991 read:

LFI 1991

"Article 5

Legal Protection of Foreign Investments in the RSFSR

Relations linked with foreign investments in the Russian Federation are regulated by the present Law, as well as by other legislative acts and international agreements in force on the territory of the Russian Federation. Should international agreements, in force on the territory of the Russian

Federation, determine other rules than those, contained in the RSFSR legislation, the rules of an international agreement shall apply.

Article 9

Procedures for Settling Disputes

Investment disputes, including disputes over the size, terms or procedure for paying compensation shall be settled by the Supreme Court of the Russian Federation or in the RSFSR Supreme Court of Arbitration, if no other procedure is envisaged by some international agreement in force on the territory of the Russian Federation.

Disputes of foreign investors and enterprises with foreign investment with state bodies of the Russian Federation, enterprises, public organizations and other juridical persons of the RSFSR, disputes among investors and enterprises with foreign investment on matters linked with their economic activities, as well as disputes between participants of an enterprise with foreign investment and the enterprise itself are subject to settlement in courts of the Russian Federation or, on agreement between sides, in a Court of Arbitration.

(...)

An international agreement in force on the territory of the Russian Federation may envisage the use of international means for settling disputes, arising from foreign investments on the territory of the Russian Federation.

LFI 1999

Article 10

Guarantee of Proper Settlement of Disputes Related to Investment and Business Activities of Foreign Investors in the Russian Federation

Any dispute involving a foreign investor and related to the investment and business activities of such investor in the Russian Federation shall be settled in compliance with the international treaties of the Russian Federation and federal laws in court, an arbitration court or international arbitration (arbitration tribunal)."

(all emphasis added by the Court of Appeal)

The LFI 1999 succeeded the LFI 1991. According to the Russian Federation, with the LFI 1999 the legislator did not intend to make substantive amendments pertaining to dispute resolution by means of arbitration. The Court of Appeal will also take this as a point of departure.

4.7.47.

The District Court has considered that, now that Article 9(1) LFI 1991 allows for different forms of dispute resolution (other than litigation before the 'Supreme Court of the Russian Federation' or the 'RSFSR Supreme Court of Arbitration', as provided in that Article) only where a treaty provides this, this provision offers no independent legal basis for arbitration between HVY and the Russian Federation (para. 5.51). The District Court has decided in the same way with regard to Article 10 LFI 1999 (para. 5.56 and 5.58). As was considered above, the District Court's decisions in this regard are erroneous (para. 4.5.47). It is not relevant whether the arbitration between HVY and the Russian Federation had a ground in the LFI 1991 or the LFI 1999. After all, the grounds for the arbitration can be found in Article 26 ECT. What matters is whether such a form of arbitration is inconsistent with Russian law. Both the LFI 1991 and the LFI 1999 show that this is not the case, since both laws explicitly leave open the option for a dispute between a foreign investor and the Russian Federation to be resolved in a different way than by a Russian court. Article 9 LFI 1991 refers in this regard to the option of "international means for settling disputes" and Article 10 LFI 1999 to "international arbitration (arbitration tribunal)". There can be no misunderstanding about the fact that arbitration pursuant to Article 26 ECT and in conformity with the UNCITRAL rules should be understood to fall under both descriptions.

4.7.48.

The Russian Federation has raised several arguments against the applicability of Article 9 LFI 1991 and Article 10 LFI 1999, which fail to convince. Insofar as the Russian Federation argues that the Articles referred to do not apply because they make the requirement of a ratified treaty ('international agreement in force'), whereas the ECT was not ratified by the Russian Federation, the Court of Appeal refers to what was considered above (paras. 4.7.22 et seq.): in the Russian legal system, a provisionally applied treaty has the same legal force as a ratified one. The Russian Federation also refers to Article 7(3) LFI 1991, which provides that "decisions of state bodies to confiscate foreign investments may be appealed against in RSFSR courts". According to the Russian Federation, this means that disputes about expropriation cannot be subjected to international arbitration. The Court of Appeal does not follow this argument. It cannot be perceived how an investor's choice to challenge a decision to expropriate before the national courts may detract from the very extensive possibilities offered by Article 9 LFI 1991 (both in the first paragraph and in the final paragraph) and Article 10 LFI 1999, to subject investment disputes to international arbitration where a treaty provides this. After all, for the grounds and scope of such arbitration, the law refers to what the treaty in question provides in this respect, independent from what is provided in Article 7 LFI 1991. Incidentally, in the arbitration proceedings HVY did not appeal an 'expropriation decision' but rather, claimed damages based on the contention that the Russian Federation, inconsistently with the ECT, had expropriated their investments in Yukos without offering damages, and had failed to protect those investments. The Yukos Awards also show that a formal 'expropriation' of (the shares in) Yukos never took place. After all, the Arbitral Tribunal considered that the Russian Federation did not formally expropriate Yukos or the shares of its shareholders, but rather, that the measures the Russian Federation had taken vis-à-vis Yukos had had "an effect equivalent to nationalization or expropriation" (Final Award, no. 1580).

4.7.49.

The Russian Federation also argues that the LFI 1991 and the LFI 1999 do not relate to investments such as the one at hand, in which - or so the Russian Federation believes - no foreign capital was injected into the Russian Federation and which was effectively made by Russian subjects (the Russian Federation refers to Khodorkovsky et al.). This argument cannot hold, if only because the jurisdiction of the Arbitral Tribunal should be assessed on the basis of the question whether Article 26 ECT offers grounds for this, rather than based on the question whether the LFI 1991 and the LFI 1999 offer grounds for this. What is relevant here is that both laws confirm that a dispute such as the current one is arbitrable. The question whether in a specific case, arbitration of an international investment dispute has been agreed on the basis of a treaty, must be answered based on the conditions that such a treaty makes of the Arbitral Tribunal's jurisdiction. The arguments put forward by the Russian Federation about the nature of the investment and the investors belong in a discussion about Article 1(6) and (7) ECT, therefore, and will be discussed there. The same applies to the contention that there is no 'investment' if shares are transferred to evade tax. Incidentally, no support for the Russian Federation's assertion can be found in the text of either law. No limitation to 'foreign investor' or 'foreign capital' may be read therein; apart from professor Yarkov's opinion, who admits that his interpretation of the two investment laws is not supported by the case law or the literature, there are no leading sources in which this interpretation is supported. Moreover, professor Stephan rightly points out that the limitations the Russian Federation wishes to read into both laws were introduced in 2018, which is a strong indication that those limitations did not exist before. ⁶⁹

4.7.50.

The Russian Federation argues that pursuant to the LFI 1991 and the LFI 1999, only private law disputes may be subjected to arbitration. However, these laws also, in terms of the question of which investment disputes between the Russian Federation and a foreign investor can be subjected to arbitration, refer to an applicable treaty. Based on the LFI 1991 and the LFI 1999 it is the treaty in question, therefore, which provides what investment disputes between the Russian Federation and a foreign investor are eligible for arbitration. Articles 9 LFI 1991 and 10 LFI 1999 do not limit that option to private law disputes alone. The Court of Appeal observes that, as was established above (para. 4.7.35), in accordance with the prevailing Russian views an international investment dispute should be considered a dispute under civil law.

4.7.51.

Moreover, Articles 9 LFI 1991 and 10 LFI 1999 start out from a broad interpretation of what may be considered an investment dispute under those laws; no limitation to private law disputes or subjects can be read therein. Article 9 LFI 1991 lists "investment disputes, including disputes on the size, terms or procedure for paying compensation" (emphasis added by the Court of Appeal), thus making clear that investment disputes are not limited to disputes about the modalities of damages to be paid. The model BIT that was established in 1992 also has no limitations in that respect. ⁷⁰ This is confirmed by Article 10 LFI 1999, which includes a broad description of the disputes that are arbitrable and in which there is no reference whatsoever to the modalities of damages to be paid: "Any dispute involving a foreign investor and related to the investment and business activities of such investor in the Russian Federation" (emphasis added by the Court of Appeal). This is also in accordance with the purpose of the LFI 1991 and the LFI 1999, which shows from their preamble and reads "to attract (...) foreign material and financial resources, advanced foreign technology and managerial experience". In this regard it is also significant that the heading for Article 10 LFI 1999 includes the words ' Guarantee of Proper Settlement of Disputes Related to Investments' (emphasis added by the Court of Appeal). Often, a foreign investor will not want to be dependent on the judiciary of the host country and will prefer international arbitration, or at least the option to choose this. It is self-evident, therefore, that the LFI 1991 and the LFI 1999, to stimulate investments in the Russian Federation, would wish to accommodate these interests. The narrow interpretation argued by the Russian Federation, and which would entail that a dispute such as the one between HVY and the Russian Federation would not be arbitrable, or only with regard to the modalities of damages to be paid, would make no essential contribution to attracting investments. In addition to this, it should be considered that in many cases, investment disputes between a foreign investor and a host state are likely to be such disputes as the matter at hand, in which (forms of) expropriation, nationalisation and taxation play a part. According to the Russian Federation, the two investment laws allow no arbitration specifically for such cases, because the public law acts of the Russian Federation are in dispute therein. This is diametrically opposed to the purpose of the two laws, however, and to the 'guarantee' that Article 10 LFI 1999 unmistakeably intends to offer.

4.7.52.

The Russian Federation has referred to legal authors who supposedly endorse that both investment laws make arbitration open for civil law disputes alone. ⁷¹ However, the authors cited by professor Asoskov do not support the Russian Federation's position. Both Boguslavsky's and Orlov's, and Doronina's and Semilutina's comments mention the second paragraph of Article 9 LFI 1991, which does not refer to any treaty and is not relevant in this regard. Paragraphs 1 and 3 of said Article refer to an applicable treaty, which directly concerns this matter. Professor Asoskov adds in regard to Article 9(3) LFI 1991 that the words 'international means of resolution of disputes' were included in the law to allow the Russian Federation to join the ECHR and, in relation thereto, to be able to recognise the jurisdiction of the ECtHR. He fails to mention any sources that support that contention, however; incidentally, it is unlikely that such a subject would be regulated in a law relating to foreign investments. Insofar as the Russian Federation here too tries to argue that the reference to international treaties is no more than a repetition of Article 15(4) of the Constitution, without special significance, the Court of Appeal does not follow it. Both in the LFI 1991 and in the LFI 1999, 'international means for settling disputes' (Article 9 LFI 1991) and 'international arbitration' (Article 10 LFI 1999) are referred to in so many words, which indicates that such a (treaty-based) form of dispute resolution for international investment disputes was acknowledged and automatically deemed possible.

4.7.53.

Prof. Asoskov has also referred to comments by R. Nagapetyants ⁷² and by Dolgov and Perskaya ⁷³, who contend that arbitration in investment treaties has remained limited to establishing the modalities of damages. Nagapetyants' comment explicitly relates to the treaty practice of the Soviet Union and is not decisive, therefore, for the legal situation at the time the Russian Federation signed the ECT. Dolgov and Perskaya state in their comments of 1993 that if the Russian Federation concludes treaties about investment protection with other states, the arbitration agreed therein remains limited to 'civil law matters only', more in particular to the modalities of damages to be paid. Dolgov and Perskaya do not state on the purport of the LFI 1991 or the question whether arbitration about investment disputes, in the event that a treaty does not limit arbitration to private law disputes (such as the ECT), is inconsistent with the law of the Russian Federation. Incidentally, professor Asoskov admits that halfway through 1992, the practice for concluding BITs changed; he refers to Regulation no. 395 in which a new model BIT was established. ⁷⁴ For disputes between an investor and a host state, Article 6 of this model BIT inter alia provides in UNCITRAL arbitration for "disputes (...) arising in connection with capital investments, including disputes over the size, terms or order of the payment of compensation". Professor Asoskov's contention that this development from 1992 cannot detract from the interpretation of the LFI 1991 is not plausible. It is more likely that the LFI 1991 opened the way for arbitration of investment disputes as formulated in the 1992 model BIT. Insofar professor Asoskov also means to assert that 'including' really means 'limited to', that is not just inconsistent with the clear wording of Article 6 of the model BIT (and Article 9 LFI 1991), but also with his own contention that a change in policy took place in 1992. ⁷⁵

4.7.54.

The Russian Federation has also invoked the Fundamental Principles Act, which the Russian Federal Socialist Soviet Republic of the time supposedly implemented by means of the LFI 1991. This is why, in interpreting the LFI 1991, allegedly what is provided in Article 43 of the Fundamental Principles Act should be taken into account ⁷⁶. To what extent the Fundamental Principles Act indeed affects the interpretation of the 1991 LFI can remain undecided, however, since paragraph (1) of Article 43 of that act provides:

"Disputes between foreign investors and the State are subject to consideration in the USSR in courts, unless otherwise provided by international treaties of the USSR."

Also the Fundamental Principles Act provides, therefore, that an international treaty may prescribe that investment disputes between investors and the USSR can be resolved by means other than by a Russian court. Moreover, no limitation to private law disputes can be read therein. The Russian Federation's position that Article 43(1) of the Fundamental Principles Act only refers to ratified treaties should be rejected based on the considerations argued above: in the Russian legal system, a provisionally applied treaty has the same effect as a ratified treaty.

4.7.55.

The Russian Federation finally relies on the explanatory notes to a number of BITs (Defence on Appeal, no. 223), in which it is expressed that the treaties in question, which contain an arbitration clause, had to be ratified on account of (inter alia) that circumstance. The District Court considered that said notes can only be understood to mean that the LFI 1991 and the LFI 1999 contain no grounds for investment arbitration. The passage the Russian Federation has quoted (in the Defence on Appeal, no. 223 and footnote 319) from the explanatory note to the Act for approval of the BIT with Argentina reads:

"Considering that the Agreement contains provisions different from those provided by the Russian legislation, it is subject to ratification in accordance with clause 15(1)(a) of the Federal Law (...) ‘on International Treaties of the Russian Federation’ (...) The key issues by virtue of which the above Agreement is subject to ratification are as follows (...) the settlement in an international arbitration court of investment disputes between one Party and an investor of the Other Party, as well as disputes between the Parties concerning the interpretation and application of the Agreement (...) the federal Law No. 1545-1 of July 4, 1991 ‘On Foreign Investment in the RSFSR’ does not provide for a mechanism of settlement of such type of dispute by international arbitration."

According to the Russian Federation, the explanations to other BITs include similar passages (Defence on Appeal, no. 224); these were partly quoted by professor Asoskov in his Expert Report of 10 November 2017. ⁷⁷ In the explanation to the Act for approval of the BIT with Yemen, slightly different wording is used:

"Pursuant to Article 15 of the Federal Law 'On International Treaties of the Russian Federation', the Agreement is subject to ratification because it contains provisions which are not provided for by Russian legislation." ⁷⁸

4.7.56.

The Court of Appeal puts first and foremost that, unlike what the Russian Federation argues, it is not obvious on the one hand to assign no significance to the explicit comment, in the 'Explanatory Note' to the ECT, that the provisions of the ECT are 'consistent' with Russian law, and on the other, to attach significance to comments in the explanatory documents to other (bilateral) investment treaties, which were not declared provisionally applicable. The Court of Appeal does not follow the Russian Federation in its arguments also otherwise. Pursuant to Article 15(1)(a) FLIT, to which the cited explanations refer in so many words, ratification is required (inter alia) if the treaty "(...) sets out rules different from those provided by law" (which is not the same as being 'inconsistent with' Russian law). Subsequently, it is noted in those explanations that the LFI 1991 "does not provide for a mechanism of settlement of such type of dispute by international arbitration" or - in a slightly different formulation -that the treaty 'contains provisions which are not provided for by Russian law’. Apparently, the government took the fact that the LFI 1991 does not provide (a specific mechanism of) arbitration, whereas the BITs in question do, as a reason to nominate that BIT for ratification insofar as there were 'rules different from those provided by law’. That is in accordance with HVY's position (and the Court of Appeal's view), that although the LFI 1991 and the LFI 1999 open the option of international investment arbitration (and as such, confirm that international investment arbitration is not inconsistent with Russian law), they do not offer the grounds for this - which, after all, should be found in the investment treaty in question, in this case, in Article 26 ECT. In short, the circumstance that the BITs had to be ratified, because international investment arbitration had been agreed therein, does not demonstrate the notion that such arbitration is inconsistent with Russian law. Professor Asoskov's argument that one of the reasons for ratification was "inconsistency with the Russian legislation of the dispute resolution provided for in the BITs" (emphasis added by the Court of Appeal) therefore finds no support in those explanatory notes.

4.7.57.

The Court of Appeal should note in conclusion that, even if it should be held that the LFI 1991 and the LFI 1999 offer no grounds to subject a dispute such as the one between HVY and the Russian Federation to international investment arbitration in a treaty, in any case it cannot be deduced from those laws that such a form of arbitration is 'inconsistent' with Russian law. As was considered above, this also does not follow from other sources of Russian law. It has not become established that Article 26 ECT cannot be applied without being inconsistent with any rule of Russian law. Nor is there any evidence of a legal conviction, generally held in the Russian Federation, that international arbitration of international investment disputes is not permitted.

4.7.58.

The conclusion is that Article 26 ECT is not inconsistent with Russian law in the meaning of the Limitation Clause.

4.7.59.

In the context of the question whether the Arbitral Tribunal had jurisdiction over HVY's claims, the Russian Federation has argued that HVY as (former) shareholders of Yukos cannot file a claim under Russian law in respect to the depreciation or loss of their shares resulting from damage inflicted upon the company (Yukos); the provisional application of Articles 1 and 26 is inconsistent with this legal rule. According to the Russian Federation, Article 45 ECT does not entail that HVY can rely on the ample powers, attributed to shareholders in Articles 1 and 26 ECT, to file claims for depreciation or loss of their shares (Defence on Appeal, no. 250). As a consequence of this, no legitimate arbitration agreement was formed (Defence on Appeal, no. 251).

4.7.60.

The Arbitral Tribunal has rejected this defence, considering that HVY are filing a claim based on the violation of their own rights, rather than Yukos' rights, based on the ECT, and that HVY's claim is not derivative but is a claim for HVY's own and direct loss, of their shares and the value thereof. ⁷⁹ HVY have argued that it is not a derivative claim and that the argument of the Russian Federation cannot, therefore, preclude the competence of the Arbitral Tribunal.

4.7.61.

The District Court did not arrive at this ground for setting-aside; since the grounds for appeal succeed (at least partly), however, the Court of Appeal will discuss it here, in relation to the devolutive nature of the appeal.

4.7.62.

Said ground (c) cannot result in the setting aside of the Yukos Awards. The contention that HVY as (former) shareholders of Yukos cannot file a claim under Russian law, for damage inflicted upon the company (Defence on Appeal, no. 242), has nothing to do with the question whether Article 26 ECT should be provisionally applied and whether a valid arbitration agreement was formed in the meaning of Article 1065(1)(a) DCCP. For an answer to the question whether pursuant to Article 26 ECT, the Arbitral Tribunal had jurisdiction to hear the dispute between the parties, said contention is therefore not relevant.

4.7.63.

Secondly, the Arbitral Tribunal's decision is correct. After all, the Arbitral Tribunal has understood HVY's claim thus, that they argue that the Russian Federation has expropriated (not explicitly but indeed, de facto) their shares. ⁸⁰ The Arbitral Tribunal has awarded HVY's claims also on this ground. The Court of Appeal endorses this interpretation of HVY's assertions, which incidentally, the Russian Federation has not challenged. On that basis, the Arbitral Tribunal has rightly decided that HVY have not filed a claim for damage inflicted upon the company (Yukos).

4.7.64.

Incidentally, to the extent that it should be held that the ECT makes shareholder claims possible which those shareholders cannot file under Russian law, it does not follow from this that in this respect, the ECT is inconsistent (in the meaning of the Limitation Clause) with Russian law. It cannot be perceived why the fact that the ECT offers shareholders an option to file a claim in an international investment dispute, that they might not have in the national context, would be inconsistent with the law of the Russian Federation. The Russian Federation also has not substantiated why this would be so.

4.7.65.

The conclusion must be, therefore, that ground (c) also cannot result in the setting aside of the Yukos Awards.

4.8.1.

In view of the above, there is no need for the Court of Appeal to address HVY's invocation of the IMS/DIO-decision ⁸¹ and of estoppel and acquiescence.

4.9.1.

The conclusion of the Court of Appeal is that the grounds for appeal succeed at least partly. The reasoning given by the District Court cannot carry it decision that no valid arbitration agreement was formed.

4.9.2.

This means that the Court of Appeal will now, subsequent to the devolutive nature of appeal, check whether the other contentions raised by the Russian Federation, to argue that the Arbitral Tribunal had no jurisdiction, are well-founded. To this purpose, the Court of Appeal will discuss the arguments of the Russian Federation as derived from Article 1(6) and (7) ECT and Article 21 ECT.

5.1.1.

The next ground put forward by the Russian Federation to support its position that the Tribunal should have declined jurisdiction pertains to the interpretation of Article 1(6) and (7) ECT. These provisions define the terms ‘Investment’ and ‘Investor’. According to the Russian Federation, the Tribunal misinterpreted these terms, with the result that it wrongly accepted jurisdiction to hear HVY's claim. Article 1(6) ECT defines the term ‘Investment’ as follows:

"(...) every kind of asset, owned or controlled directly or indirectly by an Investor and includes:

(a) tangible and intangible, and movable and immovable, property, and any property rights such as leases, mortgages, liens and pledges;

(b) a company or business enterprise, or shares, stock, or other forms of equity participation in a company or business enterprise, and bonds and other debt of a company or business enterprise;

(c) claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment;

(d) Intellectual Property;

(e) Returns;

(f) any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector.

(...)"

Article 1(7) ECT defines the term ‘Investor’ as follows:

"(a) with respect to a Contracting Party:

(i) a natural person having the citizenship or nationality of or who is permanently residing in that Contracting Party in accordance with its applicable law; (ii) a company or other organization organized in accordance with the law applicable in that Contracting Party;

(b) with respect to a "third state," a natural person, company or other organization which fulfils, mutatis mutandis, the conditions specified in subparagraph (a) for a Contracting Party."

5.1.2.

In both the Interim Award and the Final Award, the Tribunal has addressed the question of whether HVY can be considered investors within the meaning of Article 1 (7) ECT and whether HVY have made an investment within the meaning of Article 1(6) ECT.

5.1.2.1.

In the Interim Award, the Tribunal interpreted Article 1(7) ECT on the basis of the 'ordinary meaning' referred to in Article 31(1) VCLT and found that HVY qualify as investors within the meaning of Article 1(7) ECT because HVY are companies incorporated under the laws of Cyprus (Hulley and VPL) and the Isle of Man (YUL). The Tribunal rejected the Russian Federation's argument that the qualification as an investor within the meaning of the ECT is determined not only by the facts surrounding the formal incorporation of HVY, but that what is also determinative is that HVY are controlled exclusively by Russian nationals, that HVY are shell companies and that the companies they operate are economically owned and controlled by Russian nationals, such that HVY should not be classified as nationals of Cyprus or the Isle of Man, respectively, but of the Russian Federation, the 'host state'. In this context, the Tribunal considers that it is not familiar with any principles of international law that require an examination into how a company operates, when the applicable treaty only requires that it be incorporated in accordance with the laws of a contracting party. The principles of international law do not allow an arbitral tribunal to add new, additional requirements that the drafters chose not to include in the treaty. ⁸²

5.1.2.2.

The Tribunal further established in the Interim Award that HVY's legal ownership of the shares in Yukos qualifies as an investment within the meaning of Article 1(6) ECT. It recalls that pursuant to Article 31 VCLT, a treaty must be interpreted in good faith in accordance with the ordinary meaning of its terms. The Tribunal reads in Article 1(6) ECT the broadest possible definition of an interest in a company, without any indication that the drafters of the treaty intended to restrict ownership to beneficial ownership. The Tribunal thus rejected the Russian Federation's assertion that the mere legal ownership of shares is insufficient to qualify as an investment within the meaning of the ECT. In the view of the Tribunal, contrary to what the Russian Federation argues, there is also no requirement for an injection of foreign capital in order to qualify as an investment. Furthermore, the Tribunal rejected the assertion of the Russian Federation that the ECT is not intended to protect investments made in a contracting state by nationals of that same contracting state with capital generated in that state. ⁸³

5.1.2.3.

In the Interim Award, the Tribunal failed to discuss the unclean hands defence raised by the Russian Federation, a defence which also relates to Article 1(6) and (7) ECT. The same applies to the assertion of the Russian Federation that the legal personality of HVY should be disregarded because they are an instrument of a criminal enterprise. ⁸⁴ These issues were referred to the merits stage by the Tribunal.

5.1.2.4.

In the Final Award, the Tribunal has ruled as follows on the unclean hands defence. International arbitral case law assumes that investment treaties are subject to a legality requirement, according to which the investment in question must have been made in accordance with the law of the host state, even if that requirement is not expressly referred to in the treaty. The Tribunal endorses this principle and holds as follows:

"1352 (...) An investor who has obtained an investment in the host State only by acting in bad faith or in violation of the laws of the host state, has brought itself within the scope of application of the ECT through wrongful acts. Such an investor should not be allowed to benefit from the Treaty."

The Tribunal expressly does not take a position on whether failure to comply with this requirement of legality should lead to lack of jurisdiction of the Tribunal or result in an investor being deprived of the protection granted by an investment treaty. ⁸⁵

5.1.2.5.

The Tribunal further ruled that the right to invoke the protection of the ECT can only lapse if there is 'illegality' in the making of the investment, but not 'illegality' in the implementation phase of the investment. In the latter case, the substance of the investor's claim must be dealt with, according to the Tribunal. ⁸⁶

5.1.2.6.

The Tribunal also addressed the more general assertion of the Russian Federation that a claimant "who comes before an international tribunal with unclean hands is barred from claiming on the basis of a general principle of law."" The Tribunal considers that no such principle of law exists and that HVY are therefore not prevented on that ground from bringing a claim before the Tribunal. ⁸⁷

5.1.2.7.

In the arbitral proceedings, the Russian Federation argued that there are 28 cases in which HVY acted illegally and in bad faith. The Tribunal classified these cases into four categories ⁸⁸ :

1. Conduct of HVY in relation to the acquisition of Yukos and regarding the way in which control of Yukos and its subsidiaries has been consolidated.

2. Conduct of HVY relating to the Taxation Treaty between Cyprus and Russia.

3. Conduct of HVY relating to the use by HVY/Yukos of Russian low-tax regions.

4. Conduct of HVY frustrating the implementation of Russian tax measures.

5.1.2.8.

The Tribunal considers that the conduct of HVY in the first category, if established, could result in HVY not being able to bring a claim under the ECT. This does not apply to acts that fall under categories 2-4, which, in the Tribunal's view, all relate to events that took place after HVY had already made their investment. ⁸⁹

5.1.2.9.

The Tribunal then considered the conduct in the first category. It considered that the alleged conduct in question took place before 1999, whereas HVY acquired the Yukos shares in the years 1999-2001. The alleged conduct in question is that of third parties, such as Bank Menatep and Khodorkovsky et al. The Tribunal agrees with the Russian Federation that when assessing the legality of an investment, it is not only the last transaction that matters, because the making of an investment often involves a chain of acts. All conduct in this chain must be legal and bona fide. However, the Tribunal finds that in this case the Russian Federation has not demonstrated that the illegal conduct is sufficiently connected with the purchase of the shares by HVY. ⁹⁰

5.1.2.10.

The Tribunal's final conclusion is that the Russian Federation's unclean hands accusation does not result in the Tribunal's lack of jurisdiction or the inadmissibility of HVY's claims, nor does it mean that HVY are not entitled to invoke the material protection of the Treaty. ⁹¹

5.1.3.

The position of the Russian Federation in these setting-aside proceedings is - in essence - that the Tribunal had no jurisdiction because HVY and their shares in Yukos do not fall under the protection of the ECT, so the Yukos Awards should be set aside pursuant to Article 1065(1)(a) DCCP. HVY are, according to the Russian Federation, fake foreign investors. To this end, the Russian Federation submits, in summary, the following.

1. The ECT is aimed at foreign investments and does not protect investment disputes between the state and its own citizens.

a. HVY are sham companies that are economically owned and controlled by Russian citizens.

b. HVY are not investors and did not make investments within the meaning of Article 1(6) and (7) because the ECT does not protect 'U-turn' investments. This follows from the subject and object of the ECT, the context, the principles of international law and is confirmed by subsequent state practice.

c. HVY did not make any investment within the meaning of the ECT because they did not make any foreign economic contribution in the Russian Federation.

d. The Russian nationals referred to under (a) above abused the corporate structure of HVY for illegal purposes, including tax evasion. This justifies piercing the corporate veil to expose these Russian nationals behind HVY.

2. The ECT does not protect HVY and their shares in Yukos because of the criminal and unlawful background and conduct of HVY and the Russian citizens.

5.1.4.

These core assertions are further elaborated by the Russian Federation in the Defence on Appeal nos. 654-780, as well as in the documents submitted by the Russian Federation in the first instance proceedings and the other documents submitted in the appeal proceedings. According to the Russian Federation, the terms 'investment' and 'investor' should not only be interpreted in accordance with the literal meaning accorded to them by the contracting states. It also considers that the context of these provisions as included in the Treaty, the object and purpose of the Treaty, subsequent case law, state practice and (the principles of) international law should be taken into account. Taking these interpretative criteria into account, the conclusion should be that there is no investment or investor within the meaning of the ECT and that the conditions under which arbitration is permitted under Article 26 ECT are not met, according to the Russian Federation.

5.1.5.

For the rules applicable in the interpretation of the treaty provisions at issue pursuant to the VCLT, the Court of Appeal refers to paras. 4.2.2 - 4.2.5 above.

5.1.6.

As considered there, the point of departure for the interpretation of Article 1(6) and (7) ECT is the text of these provisions and the ordinary meaning that accrues to the wording. The Court of Appeal finds that it is not in dispute that HVY are companies that are "organized in accordance with the law applicable in that Contracting Party" (the internal affairs doctrine). Thus - from a textual point of view - the requirements set out in Article 1(7) for an investor within the meaning of the ECT have been met. The definition of investment as referred to in Article 1 (6) ECT is - from a textual point of view -also fulfilled. Investment is defined as "every kind of asset, owned or controlled directly or indirectly by an Investor". The paragraph gives a non-exhaustive list of 'assets', which includes shares (Article 1(6)(b) ECT). The Yukos shares, which are owned by HVY, therefore qualify as 'Investment' within the meaning of the ECT. Finally, the requirement set out in Article 26 ECT that there is a dispute between a Contracting Party (the Russian Federation) and investors from another Contracting Party (HVY, companies incorporated under the laws of Cyprus and the Isle of Man) "relating to an Investment of the latter in the Area of the Former" has - from a textual point of view - been satisfied. After all, the dispute relates to an investment (shares in Yukos) of HVY in the territory of the Russian Federation because Yukos is a company incorporated under Russian law.

5.1.7.

The Court of Appeal will discuss below the various arguments put forward by the Russian Federation in support of its claim that the Tribunal did not pay sufficient attention to the other interpretation rules referred to in Article 31 VCLT and that in applying these interpretation rules it must be concluded that the Tribunal did not have jurisdiction.

5.1.7.1.

The Russian Federation takes the position that HVY are 'sham companies' that do not conduct substantial business activities in Cyprus and the Isle of Man, respectively, and that are (ultimately) controlled by Russian nationals (Khodorkovsky et al.). They are incorporated and controlled by Russian nationals, who use HVY to channel money out of the Russian Federation. HVY are ultimately (economically) owned by Russian nationals and should therefore be considered Russian investors investing in the territory of the Russian Federation, according to the Russian Federation. ⁹² According to the Russian Federation, which refers in this respect to one of the expert reports of Prof. Pellet ⁹³, the undisputable aim of the ECT is to promote only foreign investments. In this context, the Russian Federation has, inter alia, invoked the object of the ECT as expressed in Article 2 of the Treaty:

"This Treaty establishes a legal framework in order to promote long-term cooperation in the energy field, based on complementarities and mutual benefits, in accordance with the objectives and principles of the Charter."

Additionally, the Russian Federation has highlighted the objectives of the Energy Charter, which states that its aim is to promote the international flow of investment and to provide a stable, transparent legal framework for foreign investment. ⁹⁴ If the provisions in Article 1(6) and (7) ECT are placed in the context of the other treaty provisions, it also becomes clear, according to the Russian Federation, that the ECT only covers foreign investors and foreign investment. ⁹⁵ The Russian Federation refers in particular to Article 26 ECT, which provides that the jurisdiction of an arbitral tribunal shall be limited to disputes between a contracting party and an investor of another contracting party. ⁹⁶ It also considers that other ECT provisions make clear that the investments must be made by foreigners and not by nationals who divert their investments through sham companies. This follows, for example, from the words "investors of other Contracting Parties" (Articles 10, 11, 14, 24, 45 and 47 ECT) and "investment in the territory of another Contracting Party" (Articles 12, 13 and 15 ECT), according to the Russian Federation. ⁹⁷

5.1.7.2.

In its assessment of these assertions, the Court of Appeal holds the following. As already considered above, the ECT opted for "the law of the country under the laws of which the investor is organised" in order to determine the nationality of an investor. This is a common criterion in investment treaties, which is easy to apply and predictable. A drawback of this criterion is that the place of incorporation does not guarantee that the investor has a genuine link with the country under whose law the company is incorporated. There are therefore investment treaties in which the siège social, i.e. the place where the activities take place, is used as a connecting factor for determining the nationality of companies. And there are investment treaties that use additional criteria or conditions to determine the nationality of a company, such as the criterion of who controls the company or the requirement that a company actually conducts business activities in the country of which it is a national. These criteria, combined with the internal affairs doctrine and the siège social, may ultimately help to limit the scope of the treaty to companies which have a genuine link with the country in which they are established. ⁹⁸ The drafters of the ECT could have chosen to include such additional conditions in Article 1(7) ECT which would have made it possible to determine whether HVY have a genuine link with Cyprus or Isle of Man, respectively. They did not do so.

5.1.7.3.

As regards the Russian Federation's reliance on the object of the Treaty, the Court of Appeal considers as follows. Indeed, the object of the ECT includes (also) - as the Russian Federation rightly argues - (in short) the promotion of international cooperation in the field of energy and the protection of international investments. Contrary to what the Russian Federation assumes, however, the ECT determines exactly when there is an investor and an investment and when an investment dispute has an international character that falls within the scope of Article 26 ECT. It follows from the wording of Article 26 ECT that this is the case if the legal person making the investment is incorporated under the law of one (contracting) state and the investment referred to in Article 1(6) ECT takes place in another (contracting) state. It follows neither from the context of Articles 1 and 26 ECT nor from the object of the Treaty that the drafters of the treaty intended to impose further requirements as to the foreign character of the investment or investor, or the international character of the dispute. The Russian Federation also invoked the arbitral award in the case of Cem Cengis Uzan v. Turkey, a case rendered under the ECT. ⁹⁹ This case, however, concerned a very specific situation which does not arise with regard to HVY: the investor was a Turkish national living in Turkey at the time of his investment (and therefore not covered by the ECT at that time), but who moved to another country at a later date (and thus possibly came within the scope of the ECT). The Court of Appeal therefore considers this judgment to be irrelevant in this context.

5.1.7.4.

The Russian Federation has also invoked the Understanding in Article 1(6) ECT which specifies how to determine whether an investment in one contracting party is directly or indirectly controlled by an investor from another contracting party. ¹⁰⁰ According to the Russian Federation, it follows from this 'Understanding' that the intention of the drafters of the treaty was not to adopt a formal approach, but to provide for the possibility of verifying that effective control is exercised by an investor from another contracting party. However, the reliance on this 'Understanding' is misplaced. Article 1(6) ECT provides that investment means any form of asset that is owned or controlled by an investor. It is established that the Yukos shares are owned by HVY. There is therefore no need to establish who controls the shares. Therefore, the 'Understanding' invoked by the Russian Federation in relation to the control criterion is not relevant here.

5.1.8.1.

The Russian Federation has invoked the 'denial of benefits clause' in Article 17 ECT. In so far as relevant, that provision reads as follows:

"Each Contracting Party reserves the right to deny the advantages of this Part to:

(1) a legal entity if citizens or nationals of a third state own or control such entity and if that entity has no substantial business activities in the Area of the Contracting Party in which it is organized. (...)"

5.1.8.2.

Investment treaties with a broad definition of the term 'investor' often contain a 'denial of benefits clause', with which the protection of the treaty is denied to certain categories of investors, for example investors who do not engage in any significant business activities in the country of which they are nationals. States can address abuse through such a clause; treaty shopping through sham companies can be countered. ¹⁰¹

5.1.8.3.

According to the Russian Federation, Article 17 ECT provides additional context for a proper understanding of Article 1 ECT. Article 17 ECT denies the protection of part of the Treaty to an investor controlled by nationals of a non-contracting state who does not engage in business activities in the state in which it is incorporated. According to the Russian Federation, it appears from Article 17 ECT that the drafters of the treaty intended to exclude sham companies from the protection of the ECT even if these companies formally meet the definition of Article 1 ECT. If investments controlled by third country nationals are not worthy of protection, then investments controlled by nationals of the host country (referred to as the U-turn construct) should a fortiori fall outside the scope of ECT protection, according to the Russian Federation. ¹⁰²

5.1.8.4.

In the view of the Court of Appeal, this assertion fails. It does not follow from the text of Article 17 ECT that investments via the U-turn construct (which according to the Russian Federation includes the investments of HVY) fall outside the protection of the ECT. Article 17 ECT gives contracting parties the right to deny the protection of part of the treaty to a well-defined category of investors, i.e. investors who are established in a contracting state only on formal grounds, but are to a large extent materially linked to a non-contracting state. This circumstance does not mean that Article 1 ECT is to be understood as meaning that it is to be read as an exception for another category of investor, namely sham companies and/or investors controlled by nationals of the contracting party in which they make investments.

5.1.8.5.

The Russian Federation has also invoked a rule of customary international law which, in its view, prohibits a national from bringing an international law action against his own state. According to the Russian Federation, this also applies to companies in which nationals of the defendant state have a controlling interest. ¹⁰³ According to the Russian Federation, this rule has been confirmed by several arbitral tribunals. ¹⁰⁴

5.1.8.6.

The Court of Appeal rejects the assertion that there is a rule of customary international law in the sense referred to by the Russian Federation. The arbitral awards cited by the Russian Federation do not sufficiently support this assertion. The awards cited by the Russian Federation cover situations in which the claimant has acquired a foreign investment in the international arbitration procedure with the (primary) purpose of gaining access to international arbitration, or equivalent situations in which a domestic investment acquires an international character after the conflict with the state where the investment was made has already arisen. In the case of Phoenix v. Czech Republic, for example, the following was at issue. Phoenix had acquired two Czech companies in 2002, which at that time were involved in litigation with the Czech government. Phoenix, a company incorporated under Israeli law, initiated international arbitration proceedings against the Czech Republic under the BIT between Israel and the Czech Republic. After having obtained information from the parties concerning the acquisition of the two Czech companies and the terms of the purchase agreement, the arbitrators found that "the whole operation was not an economic investment, based on the actual or future value of the companies, but indeed, simply a rearrangement of assets within a family, to gain access to ICSID [International Centre for Settlement of Investment Disputes, Court of Appeal] jurisdiction to which the initial investor was not entitled". According to the tribunal, this means that the claimant is abusing the system of international investment arbitration and that, for this reason, the tribunal has no jurisdiction. It has neither been asserted nor found that HVY acquired their investments with the main object of bringing international arbitration under the ECT. The rule referred to in Phoenix does not apply here.

5.1.8.7.

The Russian Federation further argues that it is a guiding principle of international law that where there is a separation between a formal or legal owner on the one hand and a material or economic owner on the other hand, international law confers legal standing on the latter. According to the Russian Federation, if the drafters of the treaty had intended to depart from this principle, they should have done so explicitly. In this respect, the Russian Federation refers, inter alia, to the decision in Occidental v. Ecuador ¹⁰⁵, in which the relevant appeals committee ruled:

"259. In cases where legal title is split between a nominee and a beneficial owner international law is uncontroversial: (...) the dominant position in international law grants standing and relief to the owner of the beneficial interest - not to the nominee. (...)

262. The position as regards beneficial ownership is a reflection of a more general principle of international investment law: claimants are only permitted to submit their own claims, held for their own benefit, not those held (be it as nominees, agents or otherwise) on behalf of third parties not protected by the relevant treaty. And tribunals exceed their jurisdiction if they grant compensation to third parties whose investments are not entitled to protection under the relevant instrument."

5.1.8.8.

The Court of Appeal is of the view that the aforementioned rule from Occidental v. Ecuador (as interpreted by the Russian Federation), is not applicable to the case of HVY for the sole reason that it has not been asserted nor found that there is a 'split' of the 'legal title' and it has not been explained in sufficient detail why Khodorkovsky et al. are to be considered as 'beneficial owners', or why HVY holds the Yukos shares 'on behalf of Khodorkovsky et al. in the sense referred to in Occidental v. Ecuador. Nor does it follow from the arbitration case law submitted by HVY (which relates to the ECT) that there is a general principle of law according to which - very generally - an arbitral tribunal must decline jurisdiction if it is not the material (economic) owner, but the formal (paper) owner who brings the claim. For example, in Charanne v. Spain ¹⁰⁶, Spain argued that the arbitral tribunal had no jurisdiction because the claimants (a Dutch and a Luxembourg company) were empty shells and the final beneficiaries of the company run by the claimants were two Spanish nationals. However, the arbitral tribunal considered that the ECT made no requirement of the capacity of claimant other than that it was established under the law of a country which is a party to the ECT. The Tribunal continued:

"415. While it is perfectly conceivable to lift the corporate veil and ignore the legal personality of an investor in the case of fraud directed at jurisdiction, as could be an instrumental transfer of the assets of the investment after the emergence of the dispute, there is no basis for importing to the ECT a general rule according to which the nationality of the investor should be analysed according to an economic criterion, when the ECT itself refers to the legal criterion of incorporation of the company under the law of a Contracting Party. (...)

416. To adopt the argument of Spain would amount to denial of benefits whenever an investor, legal entity incorporated under the applicable law of a Contracting Party in accordance with Article 1(7)(a)(ii), was controlled by citizens or nationals of the State receiving the investment. However, the drafters of the ECT did not intend to include this hypothesis in the denial of benefits clause of Article 17, which relates to the situation of a legal entity controlled by shareholders of a third country (a third country being a country not party to the ECT). Regardless of whether a denial of benefits under Article 17 is a matter of merits or jurisdiction - question that the Tribunal does not have to assess in this award - is an illustration of the fact that the drafters of the ECT did not want to exclude from the scope of its application the investors as legal entities controlled by nationals of the Contracting State receiving the investment."

5.1.8.9.

Nevertheless, there are arbitral awards that confirm (to a certain extent) that U-turn constructs do not deserve protection. The Russian Federation refers in this respect to the arbitral award in the case Alapli v. Turkey. ¹⁰⁷ In that case - which also concerned infringement of the ECT - the majority of the arbitrators considered that the arbitral tribunal did not have jurisdiction. One of the arbitrators found it decisive that Alapli (a Dutch legal entity) had not made a "meaningful contribution to Turkey"; "[s]tatus as a national of the other contracting state is not in itself enough". A second arbitrator, on the other hand, considered that the decisive factor was that Alapli's investment "had as its main purpose to gain access to ICSID arbitration at a time when there were already important disagreements between the Turkish company and the Turkish authorities". Considering the division of the arbitrators, the Court of Appeal is of the view that Alapli v. Turkey offers insufficient connecting factors to assume that there is an international principle of law whereby investment treaties do not or should not protect U-turn constructs. The award TSA Spectrum v. Argentina ¹⁰⁸ cited by the Russian Federation does not provide connecting factors for this either. The Russian Federation invokes the following finding from that arbitral award:

"145. This text may be interpreted in a strict constructionist manner to mean that a tribunal has to go always by the formal nationality. On the other hand, such a strict literal interpretation may appear to go against common sense in some circumstances, especially when the formal nationality covers a corporate entity controlled directly or indirectly by persons of the same nationality as the host State."

However, the Russian Federation ignores the context of this finding: the arbitral tribunal examined whether the claimant was to be considered a national of a contracting state within the meaning of Article 25(2)(b) ICSID, in particular whether the claimant - a legal person under the law of Argentina - was to be considered a national of another contracting state within the meaning of this provision of the treaty. There is therefore no question here is of whether the arbitral tribunal formulates a general principle of law in the sense referred to by the Russian Federation.

5.1.8.10.

It can be inferred from the arbitration case law cited by HVY that there is no generally accepted principle of law in the sense referred to by the Russian Federation. For example, in the Arbitral Award in Saluka v. Czech Republic ¹⁰⁹, the arbitral tribunal assumes that for the question of whether a company is an investor within the meaning of an investment treaty (in this case the BIT between the Netherlands and the Czech Republic), except "where corporate structures have been utilised to perpetrate fraud or other malfeasance" (para 230), it is not relevant who controls this company when there is no "clear language in the Treaty" from which it follows that this is relevant for the qualification as an investor under the treaty. The arbitral tribunal considers:

"The parties to the Treaty could have included in their agreed definition of "investor" some words which would have served, for example, to exclude wholly-owned subsidiaries of companies constituted under the laws of third States, but they did not do so. The parties having agreed that any legal person constituted under their laws is entitled to invoke the protection of the Treaty, and having so agreed without reference to any question of their relationship to some other third State corporation, it is beyond the powers of this Tribunal to import into the definition of "investor" some requirement relating to such a relationship having the effect of excluding from the Treaty’s protection a company which the language agreed by the parties included within it."

HVY have also pointed to a number of ECT cases. In the arbitral award in the case Plama v. Bulgaria ¹¹⁰ the arbitral tribunal has held that, for the purposes of qualifying as an "investor" within the meaning of Article 1(7) ECT, it is irrelevant who is the owner of the investing company and/or by whom it is controlled. In Isolux v. Spain ¹¹¹, it was argued by Spain that Isolux (a company incorporated under Dutch law) was a sham company which was actually controlled by its Spanish shareholders and therefore was not an investor within the meaning of Article 1(7) ECT. The arbitral tribunal rejected that assertion and considered that, apart from "fraud in the adjudication of justice":

"670. (...) the Arbitral Tribunal notes that the ECT does not contain, as some Treaties do, a carve-out clause to exclude application of the requirement to be organised pursuant to the laws of other Contracting Party where a legal person is controlled by nationals of the other Contracting State. (...)"

In short, the Court of Appeal agrees with HVY that there is no general principle of law according to which investment treaties do not provide protection to companies wholly controlled by nationals of the host country.

5.1.8.11.

Finally, 'in order to confirm' all of its aforementioned assertions, the Russian Federation has invoked Article 31(3)(b) VCLT, which states that any subsequent use in the application of a treaty text which has given rise to agreement between the parties to the treaty on its interpretation must be taken into account. According to the Russian Federation, a large number of ECT contracting parties have in subsequent investment treaties excluded investments via the U-turn construct from the scope. The Russian Federation argues that this is consistent with and reinforces the exclusion of U-turn investments from the scope of the ECT. ¹¹² However, little weight should be given to the state practice referred to by the Russian Federation, since the Court of Appeal has ruled that the correct interpretation of the ECT does not exclude U-turn investments. For this reason alone, the assertion of the Russian Federation fails. Moreover, the circumstances to which the Russian Federation refers do not comply with the provisions of Article 31(3)(b) VCLT because they do not relate to state practice in the application of the Treaty (the ECT), but to choices made by states in concluding new treaties. ¹¹³

5.1.9.1.

The Russian Federation is of the opinion that it follows from various ECT provisions that a foreign investor must actively make an investment within the territory of a Contracting State. It refers, inter alia, to the words "the investor making an investment" and "the investment is made" It follows from this that there is only an investment within the meaning of the ECT if an investor contributes funds of foreign origin to the territory of a contracting state, or at least makes an economic contribution to the host state. ¹¹⁴

5.1.9.2.

In this respect, the Russian Federation has also invoked international arbitral case law, more specifically the 'Salini criteria'. These criteria are derived from the arbitral award of 23 July 2001 concerning Salini v. Morocco. ¹¹⁵ In that case, the arbitral tribunal was faced with the question whether the case involved an 'investment' within the meaning of the ICSID. It should be noted that the ICSID -unlike the ECT - did not contain a definition of the term investment, so the arbitral tribunal had to determine the meaning of that term itself. The arbitral tribunal considered as follows:

"The doctrine generally considers that investment infers: contributions, a certain duration of performance of the contract and a participation in the risks of the transaction (...) In reading the Convention's preamble, one may add the contribution to the economic development of the host State of the investment as an additional condition.

In reality, these various elements may be interdependent. Thus, the risks of the transaction may depend on the contributions and the duration of performance of the contract. As a result, these various criteria should be assessed globally even if, for the sake of reasoning, the Tribunal considers them individually here."

5.1.9.3.

In Salini, therefore, the arbitral tribunal established four criteria to be met in order for an investment to qualify as an 'investment' within the meaning of the ICSID. One of these criteria is that there must be a "contribution to the economic development of the host State". In subsequent arbitral case law, the ‘Salini criteria’, or at least the requirement that the investment must make a contribution to the economic development of the host state, have been repeated regularly. ¹¹⁶ This case law (almost) always concerned the concept of investment in the sense of the ICSID. However, there are also arbitral tribunals that have ruled that a contribution to the economic development of the host state is not a requirement. For example, the arbitral tribunal in the Saba Fakes v. Turkey case ¹¹⁷ considered the following as regards the term 'investment' in the sense of the ICSID:

"111. The Tribunal is not convinced (...) that a contribution to the host State’s economic development constitutes a criterion of an investment within the framework of the ICSID Convention. Those tribunals that have considered this element as a separate requirement for the definition of an investment, such as the Salini Tribunal, have mainly relied on the preamble to the ICSID Convention to support their conclusions. The present Tribunal observes that while the preamble refers to the "need for international cooperation for economic development." it would be excessive to attribute to this reference a meaning and function that is not obviously apparent from its wording. In the Tribunal’s opinion, while the economic development of a host State is one of the proclaimed objectives of the ICSID Convention, this objective is not in and of itself an independent criterion for the definition of an investment. The promotion and protection of investments in host States is expected to contribute to their economic development. Such development is an expected consequence, not a separate requirement, of the investment projects carried out by a number of investors in the aggregate."

5.1.9.4.

The Court of Appeal notes that there may be a rule of unwritten law that an investment within the meaning of the ICSID can only exist if the investor makes an economic contribution to the host state. This in no way implies the existence of an internationally recognised principle of investment law according to which any investment treaty provides protection only to investments making an economic contribution to the host state, regardless of whether the treaty contains a definition of the term investment. The Russian Federation has not demonstrated the existence of such a legal principle. Although it has referred to a single arbitral award in which the existence of such a principle of law has been assumed, ¹¹⁸ the Court of Appeal considers that this is not sufficient to establish the existence of a principle of law in the sense invoked by the Russian Federation. The Russian Federation further argues the existence of arbitral case law and recent treaties which establish the existence of an international investment on the basis of objective criteria such as: contribution, duration and risk. ¹¹⁹ However, it has not demonstrated that such criteria also apply to an investment within the meaning of Article 1(6) ECT.

5.1.9.5.

The drafters of Article 1(6) ECT could have defined the term 'investment' more narrowly than they did, for example by requiring capital to flow from one contracting state to another, or requiring the foreign investor to make an economic contribution to the host state. It is clear from the wording of the Treaty, however, that only an 'asset based' definition, i.e. a non-exhaustive list of assets, will determine whether an investment within the meaning of the ECT is involved. Against this background, the fact that Article 1(6) ECT refers to an investor "making" an investment and (in the 'Understanding') to an investment "being made" does not provide sufficient guidance to read in this paragraph the requirement that the foreign investor must make an economic contribution to the host state.

5.1.10.1.

The Russian Federation has argued for piercing of the corporate veil as Khodorkovsky et al. cannot hide behind the corporate structure of HVY which they themselves have abused to commit fraud, bribery, and other crimes. According to the Russian Federation, it is a fundamental principle of international law that misuse of the corporate structure justifies piercing the corporate veil. It relies, inter alia, on a judgment of the ICJ in the Barcelona Traction case. ¹²⁰ The ICJ considered in that case, among other things:

"56 (...) Here, then, as elsewhere, the law, confronted with economic realities, has had to provide protective measures and remedies in the interests of those within the corporate entity as well as of those outside who have dealings with it: the law has recognized that the independent existence of the legal entity cannot be treated as absolute. It is in this context that the process of "lifting the corporate veil" or "di

Hulley Enterprises v. Russia

Documents de l'affaire

Avocats, autres représentants, expert(s), secrétaire du tribunal

Judgment of the Hague Court of Appeal (Unofficial English Translation)

1. The proceedings - the course of the proceedings; decision on the objections of the Russian Federation

1. The proceedings - the course of the proceedings

2. Decision on objections by the Russian Federation to the Deed of 26 February 2019 and the exhibits submitted with the Deed of 9 September 2019

2. Introduction and background

3. The jurisdiction of the Tribunal (Article 1065(1)(a) DCCP; the views of the parties, the Tribunal, and the District Court

3.1 Introduction and legal context

3.2 The Russian Federation’s position

3.3 HVY’s position

3.4 The Tribunal's decision

3.5 The District Court’s decision

4. The grounds of appeal

4.1 Introduction

4.2 (i) The rules to be taken into account in the interpretation of the ECT

4.3 (ii) The provisional application of treaties

4.4 (iii) and (iv) New grounds for jurisdiction and jurisdictional arguments in the setting-aside proceedings

4.5 (v) The interpretation of Article 45(1) ECT, in particular of the Limitation Clause, and the interpretation of Article 45(2)(a) ECT

a. Introduction

b. The position of the Russian Federation

c. The position of HVY

d. The considerations of the Arbitral Tribunal

e. The considerations of the District Court

f. The opinion of the Court of Appeal

(i) The ordinary meaning of the terms of the Limitation Clause

(ii) and (iii) The context, object and purpose of the Treaty

(iv) 'state practice' (Article 31(3) VCLT)

(v) The interpretation of the Limitation Clause in accordance with the interpretation rules of Article 31 VCLT

(vi) Article 32 VCLT; the travaux préparatoires

(vii) The meaning of 'not inconsistent'

(viii) Conclusion on the interpretation of the Limitation Clause in Article 45(1) ECT and of 45(2)(a) ECT

4.6 (vi) Application of Limitation Clause in this case (based on the Court of Appeal's interpretation of that provision)

4.7 (vii) Application of the Limitation Clause in this case (based on the Russian Federation's interpretation of that provision)

(a) The separation of powers

(b) Are disputes about public law powers arbitrable?

(c) Are shareholders entitled to file a claim in re. the depreciation of their shares under Russian law?

4.8 (viii) HVY's invocation of 'estoppel' and 'acquiescence', the rule from IMS/DIO

4.9 Conclusion as to the grounds for appeal

5. _____ Other grounds in respect of the Tribunal’s jurisdiction

5.1 Investment/Investor, Article 1(6) and (7) ECT

a. Introduction

b. The Tribunal

c. The Russian Federation’s position and the Court of Appeal’s suppositions

d. Foreign investment, foreign investor

e. Control of the investing company (U-turn)

f. Economic contribution to host country

g. Piercing the corporate veil