(a) Borrower intends to provide a loan facility to OAO "NK "YUKOS" (Yukos Oil], a company duly organized and validly existing under the laws of the Russian Federation (hereinafter referred to as "Sub-Borrower"), such loan facility to be granted shall not exceed 80'000'000'000-00 (Eighty billion) Russian Rubles, shall bear interest at the rate of 9% per annum and shall mature not later than 31st December 2008 ...5
Shall mean any advance made or to be made by Lender hereunder which Borrower undertakes to use for Sub-Lending.
Lender agrees on the terms and conditions herein, to make available to Borrower a loan facility equal to the Facility amount... in order to make feasible Sub-Lending by Borrower ...6
Means the day when Borrower transfers funds to Sub-Borrower at the request of the latter under Sub-Lending Agreement.
Final Repayment date
2nd January 2009, which date may be either accelerated or postponed by mutual agreement in writing by the Parties hereto. Such Final Repayment date will not be later than one Business Day after the date on which the Sub-Lending is redeemed.9
I hesitate to restate the well-known approach to the standard of reparation in case of damage caused by a violation of international law, which has been elaborated in the most quoted Chorzów Factory case, as reproduced in the Award in :
The essential principle contained in the actual notion of an illegal act ... is that reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed. Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which a restitution in kind would bear; the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it - such are the principles which should serve to determine the amount of compensation due for an act contrary to international law.10
Of course, this theoretical approach has to be translated into figures; in other words, the damages have to be quantified. This is why the PCIJ had decided to ask experts to value the loss of the Oberschlesische, the company to which the Chorzów Factory belonged:
[I]n order to obtain further enlightenment in the matter, the Court, before giving any decision as to the compensation to be paid by the Polish Government to the German Government, will arrange for the holding of an expert enquiry ...11
The Claimant has argued that the Tribunal should apply a but-for approach when dealing with the compensation to be granted to Yukos Capital. Its position is summarised in the Award, in , in the following way:
The Claimant advocates for a 'but-for’ approach to reparation. While acknowledging that Article 13 of the ECT provides for a specific rule of compensation for expropriation, the Claimant contends that such rule does not cover reparation in case of a breach of Article 13, in which event it submits that customary international law requires that the Claimant be placed in the same position it would have been in had the wrongful acts not occurred. (Emphasis added)
Yukos Capital’s claim for damages is simply not met out on the "but for" or "Counter Factual", i.e., the situation that in all probability would have existed absent Respondent’s alleged breach of the ECT. Yukos Capital would never have been entitled to the value of the Loans in their entirety, but merely the interest rate "spread" between ... the December 2003 Loan and the Brittany Loan ...12
... Even Claimant’s preferred Chorzów Factory standard is of little avail to it because the but-for scenario only affords Claimant the spread between... the December 2003 Loan and the Brittany Loan ...13
Notwithstanding the foregoing and for the avoidance of doubt Lender shall bear all risks associated with Sub-Lending, including, but not limited to the following:
(a) Failure to pay, which means the failure by Sub-Borrower to make, when and where due, any payments under Sub-Lending Agreement;
(b) Sovereign risk,...
(c) Foreign exchange risk, ...
(d) Tax risk, …15
Undoubtedly, Yukos Capital’s obligation to repay Brittany only arose if and to the extent that Yukos Oil repaid its debt to Yukos Capital. As between Brittany and Yukos Capital, it is Brittany that bears the risk of default associated with Yukos Capital’s loan to Yukos Oil, in terms of Yukos Oil’s failure to pay ...16
CHAIRMAN McLACHLAN: ... my understanding ... is that the effect of these Agreements was that Yukos Capital was under no obligation to make a repayment to Hedgerow and Brittany unless and until a repayment was made by Yukos Oil to Yukos Capital, and that’s reflected in Clauses 3 and 5 of the Agreement. Is that your commercial understanding of the structure here?
MR. GODFREY: Broadly speaking, yes.17
The Award summarises the loss as presented by the Claimant, in , in the following way:
With reference to the non-recourse or hedging arrangements in the Brittany and Hedgerow Loans, the Claimant argues that those arrangements 'restrict the manner in which the liability to those lenders is to be discharged’, but do not extinguish Yukos Capital’s liability. The Claimant applies the same analysis to the Respondent’s arguments regarding 'interest spread’, submitting that Yukos Capital’s funding arrangements can have no impact on its right to recover the value of the Loans.
The Award summarises the loss as presented by the Respondent, in , in the following way:
Following its argument relating to the back-to-back nature of the Loans, the Respondent submits that the maximum extent of Yukos Capital’s loss must be limited to the 'interest spread’ between the December 2003 Loan and the Brittany Loan. It argues that such damages have been claimed and awarded in cases involving non-recourse project financing, based on the net cashflows of the project after nonrecourse project financing obligations have been discharged. The Respondent calculates the interest spread to be 0.0625%, submitting that the Brittany Loan required Yukos Capital to pay Brittany the principal under the December 2003 Loan as well as 99.9375% of the interest. It contends that 0.0625% of the interest under the December 2003 Loan is equivalent to USD 9.4 million.
(i) The first document is Yukos Capital’s financial statements for the period ending on 31 December 2004:
Contingent Waiver of Ioans payable, interest payable and interest expenses. The loans payable have a limited recourse and any losses on the loans receivable are born by the lenders.18
(ii) The second document is an email from Fred van Rouwendal to John Douglass and others:
The loans you are referring to are back to back loans. From the relevant loan agreements granted to YC Sarl, it becomes clear that the loans payable have limited recourse on the related loans receivable. Any losses on the loans receivable would not result in a loss for the company.19
Further to Claimant’s submission dated 1 February 2019, please be advised following the judgment of the Dutch Supreme Court rendered on 18 January 2019 in Promnefstroy et al. v Godfrey et al., (in which the Dutch Supreme Court confirmed that the sham Yukos Oil bankruptcy could not be recognized as contrary to Dutch public policy), Yukos Capital Ltd has redeemed the Brittany and Hedgerow Loans from Yukos Hydrocarbons International Ltd. Thereby, Brittany and Hedgerow Loans were terminated and Claimant is released and discharged from all obligations, claims, and demands under these loans.20
The Loans lack of economic substance and therefore value is reflected by the fact that Claimant has been incapable of advancing a consistent basis to estimate either the value of the Loans or, in turn, the value of its loss. Claimant has variously valued the Loans or its loss between $0 and $13.07 billion:
(a) $0, as the value attributed to the Loans in Claimant’s financial statements including for 2005, 2006 and 2007;
(b) $4.3 billion and $4.8 billion (in April 2006 and October 2006 respectively), in the bankruptcy proceedings of Yukos Oil;
(c) $13.07 billion (to 31 January 2013) in Claimant’s Notice of Arbitration;
(d) $5.957 billion (to 27 October 2017) in Claimant’s Memorial on the Merits;
(e) $11.214 billion (as at 31 December 2017) based on the Loans "aggregated gross value, while simultaneously valuing them with a book value of $1; and
(f) $625 million, as the value that Claimant ascribed to the Hedgerow and Brittany Loans when it discharged these in January 2019. (Which are the near mirror images of the December 2003 and August 2004 Loans).
I need to answer here what looks like a common-sense remark by the majority, but is in fact a complete fallacy in view of the situation of Yukos Capital. In order to justify that the loss of Yukos Capital was not only its profit (the spread), the majority writes the following in :
The valuation of property, which is the thing that is to be valued in determining loss for the purpose of a claim of expropriation, is not limited to any profit that may be expected to be earned on that property. The value of income flows may (depending upon the valuation methodology adopted) be an input to the capital value of the property, but it is not the value. To take a simple example, the value of a house is determined by its market valuation as a capital investment. If the house were in use for a commercial purpose, the income derived from that activity may be relevant to the value of the undertaking as a whole. It would not make the capital value of the house legally irrelevant. In the event that the house were expropriated, the victim’s loss for which the respondent would be liable would include its loss of capital represented by the value of the house itself.
Because the majority persists in analysing the two Agreements as if they were independent of one another, it adopts some conclusions which I find fundamentally wrong. This results in clearly inaccurate statements. For example, in , the majority writes:
Conversely, Brittany’s Loan Agreement is only with Yukos Capital and not with Yukos Oil.
I consider that the majority, while purporting to apply the Chorzów Factory principles, manifestly applies its own interpretation of these principles. More precisely, the majority deliberately ignores the situation that would have existed in all probability without the breach even though it refers to Chorzów, which clearly indicates that the reparation has to reinstate the situation that would have existed without the breach. Once again, I quote the basic principle stated by Chorzów, already quoted above:
The essential principle contained in the actual notion of an illegal act ... is that reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed.
Borrower shall repay the amount outstanding within one Business Day upon redemption of any part of Sub-Lending.22
To support what I view as a fiction, the majority, unable to root its decision in general principles of international law, relies extensively on accounting practice rather than law, using valuation rules and discussing whether the FMV and the full compensation principle of Chorzów are equivalent. It gives a positive answer to this question, finally concluding in :
In light of all the evidence, the Tribunal therefore holds that the FMV of the December 2003 Loan for purposes of compensating the Claimant for the loss of its property is equivalent to the amount of principal actually advanced, together with the interest thereon, that was contractually due and remains unpaid.
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Date: 23 July 2021
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