|1994 Joint EC Statement||Joint statement by the Council, the Commission and the Member States of the then European Community on Article 45 of the European Energy Charter Treaty, 14 December 1994|
|1999 Law||Law on Foreign Investments in the Russian Federation, 1999|
|BIT||Bilateral investment treaty|
|Brill||Brill Management, a limited liability company incorporated in the British Virgin Islands|
|Brittany||Brittany Management, a limited liability company incorporated in the British Virgin Islands|
|Claimant or Luxtona||Luxtona Limited, a limited liability company incorporated in Cyprus in 2003|
|DR-CAFTA or CAFTA||The Dominican Republic-Central America-United States Free Trade Agreement, 2004|
|Carenet||Carenet Limited, a limited liability company incorporated in Cyprus|
|Constitution||Constitution of the Russian Federation, 1993|
|ECT or Treaty||Energy Charter Treaty, 1994|
|Fargoil||Fargoil Limited, a limited liability company incorporated in Russia|
|FLIT||Federal Law on International Treaties of the Russian Federation, 1995|
|Government||The government of the Russian Federation|
|Limitation Clause||The phrase at the end of Article 45(1) of the Energy Charter Treaty: "... to the extent that such provisional application is not inconsistent with its constitution, laws or regulations"|
|Parties||Claimant and Respondent|
|PCA||Permanent Court of Arbitration|
|Ratibor||Ratibor Limited, a limited liability company incorporated in Russia|
|Respondent||Russia, or the Russian Federation|
|Shares or Yukos Shares||The 53,938,075 ordinary shares in Yukos Oil held by Luxtona|
|Stichting or FPH Stichting||Stichting Administratiekantoor Financial Performance Holdings, a foundation incorporated in the Netherlands in 2005|
|UNCITRAL Rules||Arbitration Rules of the United Nations Commission on International Trade Law, 1976|
|USSR Fundamentals||Fundamentals of Legislation on Foreign Investments in the USSR, 1991|
|VCLT||Vienna Convention on the Law of Treaties, 1969|
|Yukos or Yukos Oil||Yukos Oil Company OJSC, a joint stock company incorporated in the Russian Federation in 1993|
On 16 June 2014, the Tribunal issued Procedural Order No.1, noting that the Parties were unable to agree on the place of arbitration and that, accordingly, the Tribunal would subsequently determine the place of arbitration taking into account the Parties' views.2 In light of the Parties' agreement on the issue, the Tribunal further determined that the proceedings would be bifurcated, with the following three objections of Respondent to be determined as a preliminary matter:
(a) "[t]he Russian Federation never ratified [the ECT] and applied the ECT until October 2009 on a provisional basis pursuant to Article 45(1) of the ECT only 'to the extent that such provisional application is not inconsistent with its constitution, laws or regulations'";3
(b) "[t]he Yukos shares allegedly held by Claimant are not 'investments' within the meaning of Article 1(6) of the ECT";4 and
(c) "[s]ince Claimant is a shell company with no substantial business activities in Cyprus and is ultimately controlled by nationals of a third State, Respondent is entitled to deny Claimant the advantages of Part III of the ECT pursuant to Article 17 of the ECT."5
Professor John R. Crook (Chairman)
Professor Luca G. Radicati di Brozolo
Mr. Rodrigo Oreamuno
Mr. David Godfrey
Ms. Natalia Kantovich
Representatives, Luxtona Limited
Mr. Cyrus Benson
Ms. Penelope Madden QC
Ms. Ceyda Knoebel
Ms. Victoria Orlowski
Ms. Sophy Cuss
Counsel, Gibson, Dunn & Crutcher LLP
Ms. Nadia Wahba
Mr. Paul Evans
Legal Assistants, Gibson, Dunn &Crutcher LLP
Mr. Mikhail Vinogradov
Mr. Andrey Kondakov
Representatives, The Russian Federation
Lord Peter Goldsmith QC
Ms. Sophie Lamb
Ms. Aimee-Jane Lee
Ms. Pam Shearing
Ms. Laura Rees-Evans
Ms. Ciara Murphy
Mr. Edward Pearson
Mr. Jonny McQuitty
Counsel, Debevoise & Plimpton LLP
Ms. Camilla Gambarini
Mr. Sam Oladeinde
Mr. Malte Ernsting
Mr. Mateusz Pluta
Mr. Rukshana Rahman
Ms. Claire Seaborn
Legal Assistants, Debevoise & Plimpton LLP
Mr. Bruce Misamore
Professor Paul B. Stephan
Professor Justice J.H.M. (Huub) Willems
Professor Anton V. Asoskov
Professor Dr. Rieme-Jan Tjittes
Retained Experts (Non-Testifying)
Mr. Philip Haberman
Mr. Nathan Choudhury
Permanent Court of Arbitration
Ms. Fedelma C. Smith, Legal Counsel, Tribunal Secretary and Registrar
Mr. Farouk El-Hosseny, Assistant Legal Counsel
Respondent requests that the Tribunal issue an award that:
(a) declines to exercise jurisdiction over Claimant's claims;
(b) orders Claimant to pay to Respondent the full costs of this arbitration, including, without limitation, arbitrators' fees and expenses, administrative costs, counsel fees, expenses and any other costs associated with this arbitration;
(c) orders Claimant to pay to Respondent interest on the amounts awarded under (b) above until the date of full payment; and
(d) grants any further relief to Respondent as it may deem appropriate.20
This Award refers to specific provisions of the ECT. For ease of reference, the key relevant provisions are reproduced below, in the order in which they appear in the Treaty:
"Article 1 - Definitions
(6) Investment" means every kind of asset, owned or controlled directly or indirectly by an Investor and includes:
(a) tangible and intangible, and moveable 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;
(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.
(7) "Investor" means:
(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.
Article 17 - Non-Application of Part III in Certain Circumstances
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;
Article 26 - Settlement of Disputes Between an Investor and a Contracting Party
(1) Disputes between a Contracting Party and an Investor of another Contracting Party relating to an Investment of the latter in the Area of the former, which concern an alleged breach of an obligation of the former under Part III shall, if possible be settled amicably.
(2) If such disputes cannot be settled according to the provisions of paragraph (1) within a period of three months from the date on which either party to the dispute requested amicable settlement, the Investor party to the dispute may choose to submit it for resolution:
(a) to the courts or administrative tribunals of the Contracting Party party to the dispute;
(b) in accordance with any applicable, previously agreed dispute settlement procedure; or
(c) in accordance with the following paragraphs of this Article.
(a) Subject only to subparagraphs (b) and (c), each Contracting Party hereby gives its unconditional consent to the submission of a dispute to international arbitration or conciliation in accordance with the provisions of this Article.
(b) (i) The Contracting Parties listed in Annex ID do not give such unconditional consent where the Investor has previously submitted the dispute under subparagraph (2)(a) or (b).
(4) In the event that an Investor chooses to submit the dispute for resolution under subparagraph (2)(c), the Investor shall further provide its consent in writing for the dispute to be submitted to:
(b) a sole arbitrator or ad hoc arbitration tribunal established under the Arbitration Rules of the United Nations Commission on International Trade Law (hereinafter referred to as "UNCITRAL")
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.
(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.
(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 Depository.
(b) In the event that a signatory terminates provisional application under 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 Depository of its request therefor."
Based on the Parties' written and oral submissions, the following issues arise for analysis and decision by the Tribunal:
A. Does the provisional application of the ECT by the Russian Federation pursuant to Article 45 ECT provide a basis for the Tribunal's jurisdiction over the merits of Claimant's claims?
1. Does the "To The Extent" Clause in Article 45(1) ECT relieve Respondent of the obligation to provisionally apply Article 26 ECT because that Article is inconsistent with Respondent's "Constitution, Laws or Regulations"?
2. Is Article 26 ECT inconsistent with Russian Law?
B. Are the Claims Barred by the "Denial-of-Benefits" Provision (Article 17) of the ECT?
1. Does Article 17(1) ECT give rise to a jurisdictional challenge?
2. Can Article 17 ECT be invoked to deny the benefits of Part III with respect to claims that have aleady been brought?
3. Can Respondent invoke Article 17(1) ECT because Claimant is controlled by nationals of the United States of America?
C. Is Claimant a Protected Investor with an Investment under the ECT?
1. Does Claimant's "Investment" amount to an investment by Yukos Oil in its own shares?
2. Does the ECT protect Investments of nationals of a Contracting State in the territory of, and with resources from, that same Contracting State?
3. Do Claimant's shares lack the inherent characteristics of "Investments" under Article 1(6) ECT?
In Respondent's view, "the 1994 Joint EC Statement is a joint statement of the European Community and its Member States and therefore sets forth the interpretation of Article 45(1) ECT by the European Community and the (then) twelve EC Member States" - a fact that the Hulley Enterprises tribunal failed to appreciate.66
Respondent refers to additional statements said to support its view made by the European Commission,69 the Council of the European Union,70 the UK Secretary of State for Foreign and Commonwealth Affairs,71 and the ECT Secretariat.72 Respondent also quotes from an article by Mr. Craig Bamberger, former chairman of the legal advisory committee to the European Energy Conference, which discusses the provisional application of the ECT's dispute resolution provisions in energy transit disputes.73 Mr. Bamberger takes the view that:
"[e]ven in the case of a state not making such a declaration [under Article 45(2)(a) of the ECT], it could prove extremely difficult to ascertain the extent to which the provisions of the ECT are inconsistent with the particular signatory's constitution, laws or regulations."74
For convenience, the relevant VCLT provisions are set out here:
"Article 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) Leaves to a result which is manifestly absurd or unreasonable."
Second, in the Tribunal's view, some scholarly and other discussions of Article 45 have not given sufficient consideration to all of the VCLT's requirements, instead basing themselves on what the interpreters see as the ordinary meaning of particular provisions without due regard to the VLCT's broader structure of interpretation.150 Some such analyses have failed to give appropriate weight to context, disregarding the connections among provisions of a complex text. There also at times has been a tendency to disregard the plain meaning of parts of the context that are inconsistent with the interpreter's preferred view, in effect assuming that these provisions cannot mean what they say, because if they did, the preferred "ordinary meaning" interpretation would be wrong.151
The four words "to the extent that", or some close equivalent, appear several times in the ECT,153 each time in a context where the words indicate some limitation or qualification either of the term preceding or following them. In addition to Articles 45(1) and 45(2)(c) (both discussed below), other uses of "to the extent" include:
• Article 6(5) ECT: "If enforcement action is initiated, the notified Contracting Party shall advise the notifying Contracting Party of its outcome and, to the extent possible, of any significant interim development."
• Article 8(2) ECT: "Accordingly, to the extent necessary to give effect to paragraph (1) the Contracting Parties shall eliminate existing and create no new obstacles."
• Article 19(2) ECT: "At the request of one or more Contracting Parties, disputes concerning the application or interpretation of provisions of this Article shall, to the extent that arrangements for the consideration of such disputes do not exist in other appropriate international fora, be reviewed by the Charter Conference aiming at a solution."
• Article 21(1) ECT: "In the event of any inconsistency between this Article and any other provision of the Treaty, this Article shall prevail to the extent of the inconsistency."
• Article 21(5)(b) ECT: "Whenever an issue arises under Article 13, to the extent it pertains to whether a tax constitutes an expropriation or whether a tax alleged to constitute an expropriation is discriminatory, the following provisions shall apply: [...]"
• Article 27(3)(f) ECT: "In the absence of an agreement to the contrary between the Contracting Parties, the Arbitration Rules of UNCITRAL shall govern, except to the extent modified by the Contracting Parties parties to the dispute or by the arbitrators. The tribunal shall take its decisions by a majority vote of its members."
In ordinary usage, one important function of the word "such" is to show the identity of two nouns or noun phrases in a phrase, sentence, or paragraph. This is reflected in dictionary definitions, which define "such" to convey the idea "of the kind mentioned" or "of the same or a similar kind."162 "Such" is consistently used in just this manner no less than eight times in Article 45. Each time, its function is to show that a noun ("signatory", "declaration", or "provisional application") appearing in the latter part of a sentence or paragraph is identical to a noun or phrase appearing earlier in that sentence or paragraph in the article. This is apparent in the actual language of Article 45 (emphasis added):
(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.
(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.
(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.
(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 Depository.
(b) In the event that a signatory terminates provisional application under 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)."
Article 45(3) is telling in this regard. Subparagraph 45(3)(a) establishes a procedure by which a signatory that later decides not to become a party to the ECT can terminate provisional application of the treaty. Subparagraph 45(3)(b) then states:
"In the event that a signatory terminates provisional application under subparagraph (a), the obligation of the signatory under paragraph (1) to apply Parts III [protections of investment] and V [dispute settlement] 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)."
Other elements of the context further support Claimant's interpretation, beginning with Article 45(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."
In contrast, while again not a model of clarity, Article 45(2)(c) lends further support the "all or nothing" perspective.
"Notwithstanding subparagraph (a), any signatory making a declaration referred to in subparagraph (a) shall apply Part VII170 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."
Article 2 ECT, captioned "Purpose of the Treaty," sets out the instrument's purpose:
"This Treaty establishes a legal framework in order to promote long-term co-operation in the energy field, based on complementarities and mutual benefits, in accordance with the objectives and principles of the [European Energy] Charter."
Standing alone, Article 2's broadly worded statement of the ECT's purpose does little to aid the interpretive exercise. However, Article 2 also calls for consideration of the "objectives and principles of the [European Energy] Charter." The 1991 European Energy Charter, a political document that was the precursor to the ECT, provides that its signatories "will ensure that international rules on the protection of industrial, commercial and intellectual property are respected." The Charter then lists the following among a number of agreed implementing measures:
"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.
They affirm that it is important for the signatory States to negotiate and ratify legally binding agreements on promotion and protection of investments which ensure a high level of legal security and enable the use of investment risk guarantee schemes."178
The statement provides:
"The Council, the Commission and the Member States agree on the following declaration: Article 45 (1) of the European Energy Charter Treaty should be interpreted as defining the conditions and limits for the provisional application of the ECT by the Signatories:
a) it does not create any commitment beyond what is compatible with the existing internal legal order of the Signatories;
b) on the basis of this interpretation of Article 45(1) to the ECT, a Signatory is not bound to enter a declaration of non-application, as is provided for in Article 45 (2) ECT;
c) this interpretation allows the Community to limit the provisional application to the matters which fall under its competence."
Moreover, Respondent's arguments regarding the statement do not take account of the fact that the text of the ECT clearly provided for the possibility of divided competence between a Regional Economic Integration Organization ("REIO") -notably the then-European Community, the only such entity participating in the ECT negotiations - and its member countries. The definition of REIOs in Article 1(3) ECT explicitly recognizes that competence for particular matters may be divided between the member States and the REIO:
"(3) 'Regional Economic Integration Organization' means an organization constituted by states to which they have transferred competence over certain matters a number of which are governed by this Treaty, including the authority to take decisions binding on them in respect of those matters."
This division of competence between the European Community and its member countries is again recognized in the voting rule in Article 36(7) ECT:
"(7) A Regional Economic Integration Organization shall, when voting, have a number of votes equal to the number of its member states which are Contracting Parties to this Treaty; provided that such an Organization shall not exercise its right to vote if its member states exercise theirs, and vice versa."
What must Respondent establish? Here, the Tribunal notes again the peculiar wording of Article 45(1) ECT (emphasis added):
"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."
Instead, Professor Asoskov was requested to give his opinion on two specific questions regarding Respondent's internal law:
"I. Does Russian law authorize or permit the arbitration of disputes concerning (i) taxation measures; (ii) enforcement measures related to tax assessments; and (iii) bankruptcy matters.
II. Does Russian law authorize or permit a joint-stock company's shareholders to claim compensation for losses based on damages caused to the company."210
The Tribunal emphasizes that the issue is whether Respondent is obligated to apply Article 26 of the ECT provisionally, not whether the ECT must be ratified for Respondent to become a Party to the treaty. In this regard, both provisional application of treaties, and the obligation to observe them in good faith, are firmly incorporated into Respondent's domestic legal order by Article 15(4) of the Russian Constitution, which incorporates treaties and other rules of international law into domestic law:224
"The universally-recognised norms of international law and international treaties and agreements of the Russian Federation shall be a component part of its legal system. If an international treaty or agreement of the Russian Federation establishes other rules than those envisaged by law, the rules of the international agreement shall be applied."225
These norms enjoy an additional layer of legislative sanction, because they have been incorporated into the FLIT, which entered into force a year after Respondent signed the ECT. Many of its operative provisions reproduce VCLT obligations, including Article 23 of the FLIT, which mirrors Article 25 VCLT on provisional application.226 By adopting the FLIT, Respondent's parliament gave additional weight to the position of provisionally applied treaties in Russia's domestic legal order. Article 23 FLIT, captioned "Provisional application of international treaties by the Russian Federation", provides:
"1. An international treaty or a part of a treaty 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 that effect has been reached with the parties that have signed the treaty.
2. Decisions on the provisional application of a treaty or a part thereof 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 consent to the binding character of which for the Russian Federation is, under this Federal Law, to be taken in the form of a Federal Law - provides for the provisional application of the treaty or a part thereof, or if an agreement to that effect 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 the form of a federal law according to the procedure set out in Article 17 of this Federal Law for the ratification of international treaties.227
3. Unless the international treaty provides otherwise, or the respective States otherwise agree, the provisional application by the Russian Federation of a treaty 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."228
Indeed, Respondent's Reply describes the FLIT's requirement that provisionally applied treaties be submitted for legislative approval within six months as a means that:
"[...] ensures that the legislative prerogative of ratification is not circumvented by requiring that a decision on the provisional application of a treaty that amends or supplements federal laws beyond six months be taken in the form of a federal law [...] Article 23(2) FLIT imposes an express restriction on the executive's powers to agree to provisional application of treaties that 'set out rules different from those provided for by law.'(emphasis in original)."234
What then was the domestic legal consequence of Respondent's international legal obligation to observe the ECT provisionally pending either ratification or a notification that it would not become a party? Professor Stephan took a broad view of the matter.
"[i]nternational treaties of the Russian Federation, as a matter of Russian constitutional law, form a part of Russian law, and the terms of such treaties apply in lieu of the rules provided by domestic law. For this reason, the idea that the terms of an international treaty to which Russia has consented to be bound could be inconsistent with provisions of Russian law is mistaken. This point applies to all treaties, including those that apply provisionally."235
The Court decided that, because the provisionally applied treaty had domestic legal effect, individuals must be given notice of it by publication. The Court's discussion makes clear its view that a provisionally applied treaty supplants inconsistent domestic legal provisions:
"4.1. 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.
In the context of 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."238
The Supreme Arbitrazh Court affirmed lower courts' decisions finding that the provisionally applied treaty entitled Lufthansa to exemption from VAT to which it was otherwise legally subject. As the Court explained:
"In accordance with Paragraph 7 of the Joint Declaration of the Government of the Russian Federation and the Government of the Federal Republic of Germany regarding the Agreement on Air Travel of 14.07.1993, the latter is subject to temporary application by the Contracting States.
The temporary application of an international treaty means that the treaty can operate before all actions necessary for that treaty's entry into force under the domestic laws of each signatory (Article 25 of the [VCLT]).
Accordingly, the Agreement on Air Travel [...] has been applied by the Contracting States from the moment of signing of the Joint declaration of 14.07.1993.
In accordance with Article 6(6) of the Agreement on Air travel [...] the Contracting parties reciprocally grant exemptions from sales taxes or similar indirect taxes on goods and services provided to any designated airline of the other Contracting party [...]
The courts found [...] grounds for application, inter alia, of the Agreement on Air Travel [...] in determining the tax rate."244
The actions of representatives of Respondent's Executive Branch during and after the ECT negotiations are also inconsistent with Respondent's present view that it cannot fully apply the ECT provisionally. In its 16 December 2004 Resolution authorizing signature of the ECT, Respondent's Government called for the Final Act of the ECT Conference to include five carefully phrased Declarations intended to assure consistency of Respondent's ECT obligations with its domestic law and its international obligations, presumably including during the period of provisional application.249 These did not reflect any concern regarding Article 26.250
Thereafter, Respondent's Government submitted the ECT to the legislature for the approval preliminary to ratification, accompanied by an explanatory statement.254 This statement recites, inter alia :
• At the time of signing of the ECT, the provision on provisional application was in conformity with the Russian legal acts. For that reason, the Russian side did not make declarations as to its inability to accept provisional application (such declarations were made by 12 of the 49 ECT signatories),
• The provisions of the ECT are consistent with Russian legislation.255
The first suggestion of Respondent's present position of record in this case appears in Respondent's 20 August 2009 communication to the ECT Depository (the Government of Portugal) pursuant to Article 45(3) ECT, giving notice of termination of provisional application. It states:
"[i]n accordance with Article 45(3)(a) of the E.C.T. [...] with the present the Russian Federation declares that it does not intend to become a participant in the said Treaty. The Russian Federation also confirms that in accordance with Article 45(1) of the Treaty, it did not apply provisionally any treaty provision to the extent that such provisional application was inconsistent with the Constitution, laws or regulations of the Russian Federation."258
Part III of the ECT, captioned "Investment Promotion and Protection", establishes the Contracting Parties' substantive obligations regarding protection of investments. Article 17(1) of Part III then provides:
"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 [...]"
Relying on the tribunals' findings in, inter alia, Plama v. Bulgaria,272Hulley Enterprises v. Russia,273Stati v. Kazakhstan274 and Khan Resources v. Mongolia,275 Claimant contends that "the dispute resolution procedure provided in Article 26, Part V is unaffected by any operation of Article 17(1)"276 and that "every ECT tribunal to have considered the issue has found against Respondent's case."277 Claimant quotes the Plama tribunal's observation that:
"[...] interpreted in good faith in accordance with their ordinary contextual meaning, the denial applies only to advantages under Part III. It would therefore require a gross manipulation of the language to make it refer to Article 26 in Part V of the ECT [...] the contrary approach would clearly not accord with the ECT's object and purpose. Unlike most modern investment treaties, Article 17(1) does not operate as a denial of all benefits to a covered investor under the treaty but is expressly limited to a denial of the advantages of Part III of the ECT."278
The Tribunal does not accept Respondent's contention that the invocation of Article 17(1) deprives it of jurisdiction by eliminating the existence of any dispute regarding compliance with obligations under Part III ECT. Respondent cited in support of this contention the decisions of the investment arbitration tribunals in Liman Caspian Oil, Libananco and Petrobart.283 However, it is not apparent how any of the cited cases supports the proposition that successful invocation of Article 17 deprives the Tribunal of jurisdiction:
• The relevant discussion in Liman v. Caspian Oil v. Kazakhstan holds that an exercise of the Article 17 reserved right requires an explicit action by the state concerned, and that any such action can only operate with prospective effect.284
• The tribunal in Libananco Holdings v. Turkey examined the meaning of the term "third state" in Article 17, an issue not presented here.285
• Petrobart v. Kyrgyz Republic's discussion germane to Article 17 addressed the identity of the entity or persons who owned or controlled the claimant.286
Respondent contests Claimant's reliance on the Plama v. Bulgaria tribunal's interpretation of Article 17 ECT, citing Professor Walde's criticism of that decision:
"[...] standard practice has been to consider 'denial of benefits' as an objection that a host State can raise against diplomatic protection, and its successor, investment arbitration against companies controlled from outside the treaty. The Plama tribunal did not look towards such practice; there was no indication in the travaux or elsewhere that Article 17(1) ECT was intended by the drafters (accepting a US proposal to adopt US practice) as anything else."296
Claimant contends that its interpretation is consistent with fundamental principles of good faith treatment of investors and legal certainty.319 To this effect, Claimant quotes the tribunal's finding in Khan Resources v. Mongolia :
"[...] good faith interpretation does not permit the Tribunal to choose a construction of Article 17 that would allow host states to lure investors by ostensibly extending to them the protections of the ECT, to then deny these protections when the investor attempts to invoke them in international arbitration."320
Article 2 ECT, captioned "Purpose of the Treaty," provides:
"[t]his Treaty establishes a legal framework in order to promote long-term co-operation in the energy field, based on complementarities and mutual benefits, in accordance with the objectives and principles of the [1991 European Energy] Charter."
However, Article 2's statement of purpose also calls for consideration of the "objectives and principles of the [European Energy] Charter." As noted previously, the 1991 European Energy Charter provides that its signatories "will ensure that international rules on the protection of industrial, commercial and intellectual property are respected." The Charter then lists the following among a number of agreed implementing measures:
"[i]n 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.
They affirm that it is important for the signatory States to negotiate and ratify legally binding agreements on promotion and protection of investments which ensure a high level of legal security and enable the use of investment risk guarantee schemes."334
Article 31(3)(c) VCLT also directs the Tribunal to take account of rules of international law applicable in relations between the Parties. While there is no single international law rule addressing retroactivity, the Tribunal observes that retrospective changes in international legal protections to the detriment of those previously relying upon them often are disfavored in international law. In the jurisprudence of International Court of Justice and other international courts and tribunals, mutual consent to jurisdiction, once perfected, cannot be terminated by the act of one party.335 An analogous principle is reflected in the law of treaties. Article 70 VCLT defines the consequences of termination of a treaty. Under Article 70(1)(b), "[u]nless the treaty otherwise provides or the parties otherwise agree, the termination of a treaty [...] (b) does not affect any right, obligation or legal situation of the parties created through the execution of the treaty prior to its termination." Judge Robert Jennings sharply criticized the North American Free Trade Agreement parties for adopting an interpretive statement that Sir Robert saw as an unacceptable effort to change the governing law in a case already underway, deeming this to be "against the most elementary rules of the due process of justice."336 In like vein, the Pac Rim v. El Salvador tribunal (which gave effect to a denial of benefits under DR-CAFTA) indicated concern regarding the time at which a claim of denial of benefits must be made under such treaty:
"[i]n a different case under different arbitration rules, this [...] question might have caused this Tribunal certain difficulties given the importance of investor-state arbitration generally and, in particular, the potential unfairness of a State deciding, as a judge in its own interest, to thwart such an arbitration after its commencement."337
The Tribunal is thus mindful of a number of unequivocal decisions by several experienced ECT tribunals denying retrospective effect to invocations of Article 17(1). These tribunals have considered the ECT's most relevant purpose for purposes of interpreting Article 17(1) to be to provide a stable and predictable legal regime for international investment in the energy sphere. Plama v. Bulgaria is a leading illustration, although, as Respondent points out, it has drawn distinguished critics.338 As seen by the Plama v. Bulgaria tribunal:
"161. The covered investor enjoys the advantages of Part III unless the host state exercises its right under Article 17(1) ECT; and a putative covered investor has legitimate expectations of such advantages until that right's exercise. A putative investor therefore requires reasonable notice before making any investment in the host state whether or not that host state has exercised its right under Article 17(1) ECT. At that stage, the putative investor can so plan its business affairs to come within or without the criteria there specified, as it chooses. It can also plan not to make any investment at all or to make it elsewhere. After an investment is made in the host state, the "hostage-factor" is introduced; the covered investor's choices are accordingly more limited; and the investor is correspondingly more vulnerable to the host state's exercise of its right under Article 17(1) ECT. At this time, therefore, the covered investor needs at least the same protection as it enjoyed as a putative investor able to plan its investment. The ECT's express "purpose" under Article 2 ECT is the establishment of "... a legal framework in order to promote long-term co-operation in the energy field... in accordance with the objectives and principles of the Charter"... It is not easy to see how any retrospective effect is consistent with this "long-term" purpose.
162. In the Tribunal's view, therefore, the object and purpose of the ECT suggest that the right's exercise should not have retrospective effect."339
The Khan v. Mongolia tribunal was of like mind:
"426. The Treaty seeks to create a predictable legal framework for investments in the energy field. This predictability materializes only if investors can know in advance whether they are entitled to the protections of the Treaty. If an investor [...] who falls within the definition of "Investor" at Article 1(7) of the Treaty and is therefore entitled to the Treaty's protections in principle, could be denied the benefit of the Treaty at any moment after it has invested in the host country, it would find itself in a highly unpredictable situation. This lack of certainty would impede the investor's ability to evaluate whether or not to make an investment in any particular state. This would be contrary to the Treaty's object and purpose.
429. It is difficult to imagine that any Contracting Party, whatever its general policy regarding mailbox companies, would refrain from exercising its right to deny the substantive protections of the ECT to an investor who has already commenced arbitration and is claiming a substantial sum of money. A good faith interpretation does not permit the Tribunal to choose a construction of Article 1(7) that would allow host states to lure investors by ostensibly extending to them the protections of the ECT, to then deny these protections when the investor attempts to invoke them in international arbitration."340
Other decisions similarly denying retrospective effect to invocations of Article 17(1) include:341
• Stati v. Kazakhstan: "Art. 17 ECT would only apply if a state invoked that provision to deny benefits to an investor before a dispute arose and Respondent did not exercise this right."342
• Yukos Universal Limited (Isle of Man) v. the Russian Federation: "[...] an exercise of the reserved right of denial [...] can only be prospective in effect from the date of that Memorial. To treat denial as retrospective would, in the light of the ECT's 'Purpose,' as set out in Article 2 of the Treaty [...] be incompatible "with the objectives and principles of the Charter." Paramount among those objectives and principles is "Promotion, Protection and Treatment of Investments" as specified by the terms of Article 10 of the Treaty. Retrospective application of a denial of rights would be inconsistent with such promotion and protection and constitute treatment at odds with those terms."343
• Liman Caspian Oil v. Kazakhstan : "[t]he Tribunal considers that the above mentioned notification requirement [...] can only lead to the conclusion that the notification has prospective but no retroactive effect. Accepting the option of a retroactive notification would not be compatible with the object and purpose of the ECT, which the Tribunal has to take into account according to Article 31(1) of the VCLT, and which the ECT, in its Article 2, expressly identifies as "to promote long-term co-operation in the energy field". Such long-term co-operation requires, and it also follows from the principle of legal certainty, that an investor must be able to rely on the advantages under the ECT, as long as the host state has not explicitly invoked the right to deny such advantages. Therefore, the Tribunal finds that Article 17(1) of the ECT does not have retroactive effect."344
The Tribunal recognizes that the trend of ECT tribunals' denying retrospective effect to invocations of Article 17(1), while strong, is not entirely clear-cut. As the Khan v. Mongolia tribunal observed,
"[t]wo decisions concerning the interpretation of Article 17(1) of the ECT, Petrobart Limited v. Kyrgyz Republic ("Petrobart") and [Amto LLC v. Ukraine]345 directly proceeded to consider whether on the facts of the case the relevant entity fell within the description of Article 17(1) of the ECT, "on the basis that the benefits would be denied if the conditions of Article 17 were fulfilled," "as if the exercise of the [host state's] right [to deny benefits] could be made upon the exercise of the investor's rights, that is, at the outset of the arbitration." In Amto, as in Plama, the tribunal examined the purpose of the ECT, but attached a particular significance to the reciprocal nature of the ECT and to the reference to "complementarities" and "mutual benefits" in the expression of the Treaty's objective in its Article 2."346
The Petrobart Limited v. The Kyrgyz Republic award also does not address whether invocation of Article 17(1) can have retrospective effect. The tribunal instead observed that "[n]either before nor after the present proceedings did the Kyrgyz Republic invoke Article 17, expressing the wish to deny the advantages of Part III of the Treaty to Petrobart [...]"349 In any case, the tribunal found that the two conditions for invoking Article 17(1) were not met. "Both of these conditions must be present for Article 17(1) to apply and in this case neither of them applies to Petrobart."350
The Tribunal does not share Respondent's view that the treaties applied in these cases are not materially different from Article 17(1). They are materially different. These treaties' denial of benefits clauses provide that a State party may deny to an investor "the benefits of the treaty" - the entire treaty, including the State's consent to arbitration. Thus, Article XII of the US-Bolivia bilateral investment treaty at issue in Guaracachi v. Bolivia provides:
"Each party reserves the right to deny to a company of the other Party the benefits of this Treaty if nationals of a third country own or control the company and [...] (b) the company has no substantial business activities in the territory of the Party under whose laws it is constituted or organized."351
Article 10.12.2 of DR-CAFTA is similar in concept:
"[s]ubject to Articles 18.3 (Notification and Provision of Information) and 20.4 (Consultations), a Party may deny the benefits of [Chapter 10 of DR-CAFTA] to an investor of another Party that is an enterprise of such other Party and to investments of that investor if the enterprise has no substantial business activities in the territory of any Party, other than the denying Party, and persons of a non- Party, or of the denying Party, own or control the enterprise."352
Respondent contends that, for purposes of Article 17(1), control "includes control in fact, including a financial or equity interest in a company, the 'ability to exercise substantial influence over its management and operation, and the selection of members of its board of directors or other managing body'."356 Respondent finds support for this interpretation in ECT Understanding No. 3, approved by the ECT Parties when the Convention was adopted.357 Respondent contends that control over Claimant in this sense is, and has at all times been, exercised by U.S. nationals, and thus by nationals of a state that is not an ECT Party.358
The Tribunal's Procedural Order No. 1, issued following consultations with and agreement of the Parties, states:
"2.1 The Parties have agreed that that the proceedings are to be bifurcated, and that certain of Respondent's jurisdiction and admissibility objections should be heard as preliminary questions. The jurisdiction and admissibility objections that the Parties have agreed should be heard in the first phase ("Jurisdictional Phase") are as follows:
(b) The Yukos shares allegedly held by Claimant are not "investments" within the meaning of Article 1(6) of the ECT; [...]"
However, for completeness, the Tribunal sets out here the Parties' arguments on these issues at this stage of the proceedings. The three main disputed issues may be summarized as follows:
1. Does Claimant's "Investment" Amount to an Investment by Yukos Oil in its own Shares?
2. Does the ECT Protect Investments of Nationals of a Contracting State in the Territory of, and with Resources from, that Same Contracting State?
3. Do Claimant's Shares Lack the Inherent Characteristics of "Investments" under Article 1(6) ECT?
Claimant emphasizes as a matter of principle, that:
"[...] the express language of Articles 1(6) and 1(7) ECT establish that the Yukos Shares are an Investment: i.e., 'shares [...] in a company' that are "owned or controlled directly or indirectly by an Investor.' The Yukos Shares are 'shares [...] in a company', they were at all relevant times 'owned' by Claimant Luxtona and Luxtona was at all relevant times an Investor (i.e., 'a company [...] organized in accordance with the law applicable in that Contracting Party [Cyprus]')."450
Claimant acknowledges that it is "a former, indirect, wholly-owned subsidiary of Yukos Oil" and that "[f]unds held by Yukos Oil's offshore subsidiaries represented profits from crude oil and crude oil products trading and investment operations."451 That said, Claimant emphasizes that it:
"[...] was at all relevant times an independent, non-Russian legal entity and remains so [...] Claimant engaged in legal activity protected under the ECT. While that activity was part of the broader business strategy of its now expropriated parent, that provides no basis for effectively ignoring Claimant's separate legal status, piercing several layers of corporate veils (without saying so) and effectively folding Claimant into Yukos Oil Company, a company rendered non-existent in 2007 by Respondent's illegal acts."452
Claimant contends that the Shares "were not [...] treasury shares in the way in which Russia tries to use the term," namely "under a Russian law concept as shares that a company owns in itself as a single legal entity."459 In his Second Statement, Mr. Misamore says that "[i]n the hands of Luxtona, the YUKOS Shares are ordinary shares that could be freely sold and transferred, including to third parties outside the YUKOS group and were accounted for in Luxtona's accounts accordingly."460 This is evidenced by a decision of the Russian Tax Ministry.461 Citing the decision in British Caribbean Bank Limited (Turks & Caicos) v. The Government of Belize, Claimant asserts that "[a]bsent illegality, there is of course nothing wrong with a subsidiary owning shares in its parent."462 In addition, Claimant relies on the expert opinion of Dr. Barry Jay Epstein to contend that:
"[i]ndeed, inasmuch as treasury stock by definition refers to shares of the reporting entity that have been reacquired after having previously been authorized and issued, it must immediately be understood that Yukos Oil shares held by Luxtona could not be presented as treasury shares in the Luxtona financial statements, inasmuch as these were not shares authorized and issued, and subsequently reacquired, by Luxtona."463
Claimant dismisses Respondent's argument that disposal of the Yukos Shares was restricted because they were to be used as part of Yukos Oil's compensation plan as "factually wrong and legally irrelevant."464 Claimant asserts that it had not committed the Yukos Shares for use in Yukos Oil's employee compensation plan and that, in any event, "Respondent has provided no rationale for why that should remove the Yukos Shares from the Article 1(6)(b) ECT definition of Investment" if Claimant "had committed to make some or all of the Yukos Shares available for use in the employee compensation plan."465 In this respect, Claimant relies on Mr. Misamore's Second Statement providing that:
"[...] there were no restrictions on the ability of Carenet to sell or otherwise dispose of the YUKOS Oil shares it owned and any duty it may have had to assist YUKOS Oil in meeting its obligations under the stock-based compensation plan was minimal and extinguished by early 2004 [...]"466