This is an important and complex case and although the three members of the Tribunal had lengthy and challenging exchanges of views, they could not at the end of the day arrive at a unanimous analysis both on the interpretation of Article 45 and its consequences and on the question of the existence of an investment protected under the ECT, and therefore on the Tribunal's jurisdiction ratione voluntatis and ratione materiae.
The necessary starting-point for the analysis is that the Tribunal has been seized as an international tribunal by a Notice of Arbitration made by the Claimant against the Respondent under Article 26 of the ECT:
The agreement to arbitrate on which Yukos Capital relies is set forth in Article 26 of the Energy Charter Treaty of 1994 (the ECT).1
It is common ground that the Russian Federation did sign the ECT at the time it was adopted in 1994, and that it not only abstained from ratifying it, but that the Duma positively refused to ratify it in 1997. It is also on record that the Russian Federation terminated the provisional application of the ECT in 2009.
Notice of Arbitration, 15 February 2013, § 1. See also Interim Award on Jurisdiction (hereinafter "Award"), § 180: "It is common ground that the basis for jurisdiction of the present Tribunal that is invoked by the Claimant depends in the first instance upon the proper construction of the regime for provisional application of the ECT set forth in its Article 45. The Claimant brings its claim solely for alleged breach of rights contained in the ECT. It claims a right to choose to settle its dispute with the Respondent pursuant to the dispute settlement provisions of Article 26(2)(c) of the ECT, which includes submission to an arbitral tribunal under UNCITRAL Rules under Article 26(4)(b). It relies in particular upon the unconditional consent of the Respondent as a contracting party to international arbitration under Article 26(3)(a)."
It is uncontested that a treaty provisionally applied is not a treaty in force. This is consistent with the distinction made in the Vienna Convention on the Law of Treaties (VCLT) between the entry into force of a treaty and its provisional application, in Articles 24 and 25, respectively:
1. A treaty enters into force in such manner and upon such date as it may provide or as the negotiating States may agree.
2. Failing any such provision or agreement, a treaty enters into force as soon as consent to be bound by the treaty has been established for all the negotiating States.
Article 25 Provisional application
1. A treaty or a part of a treaty is applied provisionally pending its entry into force if:
(a) the treaty itself so provides; or
(b) the negotiating States have in some other manner so agreed.
2. Unless the treaty otherwise provides or the negotiating States have otherwise agreed, the provisional application of a treaty or a part of a treaty with respect to a State shall be terminated if that State notifies the other States between which the treaty is being applied provisionally of its intention not to become a party to the treaty. (Emphasis added)
Similarly, as noted in the ILC Commentary to Article 25 of the Vienna Convention, a provisionally applicable treaty is binding and constitutes a legally enforceable instrument among signatory states: "[…] there can be no doubt that such clauses have legal effect and bring the treaty into force on a provisional basis."
"[…] from a drafting point of view, it seemed necessary to specify that it is the treaties in force in accordance with the provisions of the present articles to which the pacta sunt servanda rule applies. The words 'in force' of course cover treaties in force provisionally under Article 22 as well as treaties which enter into force definitively under Article 21."2
However, Claimant's reliance on a notion of "treaties in force provisionally" or "treaty into force on a provisional basis" is based on a draft of the article on provisional application dated 1966, which is entirely different from the one finally adopted. The text commented by Claimant, on the basis of the ILC's comment3 of an article which was not finally adopted, is the following:
Article 22. Entry into force provisionally
1. A treaty may enter into force provisionally if:
(a) The treaty itself prescribes that it shall enter into force provisionally ending ratification, acceptance, approval or accession by the contracting States; or
(b) The negotiating States have in some other manner so agreed.
2. The same rule applies to the entry into force provisionally of part of a treaty.
Article 23 Provisional application of international treaties by the Russian Federation
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. (Emphasis added)
The Final Provisions of the ECT set forth in Part VIII draw a clear distinction between two types of unilateral acts by states which are to have legal consequences on the plane of international law: (i) signature of the Treaty under Article 38 by those states which have signed the Energy Charter; and (ii) ratification, acceptance or approval by those states under Article 39. That Article does not itself specify the consequences that flow from the act of signature.5
The consequences are indeed specified in Article 45.
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. (Emphasis added)6
The point of departure is Article 31(1), which requires interpretation "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."7
Each part of clause (1) must be interpreted in good faith. This means that the Tribunal must seek to give an effective meaning to the agreement of "[e]ach signatory … to apply this Treaty provisionally pending its entry into force for such signatory" as well as to the proviso to that agreement "to the extent that such provisional application is not inconsistent with its constitution, laws or regulations." An interpretation that would be so broad as to empty either the positive agreement of the relevant signatory or the domestic inconsistency proviso of any effect would not be consistent with an interpretation of the terms of Article 45 (1) in good faith.
I confess that I have some difficulty to follow the linguistic considerations on the interpretation of the expression "not inconsistent" as implying what has been called a double negative form in §§ 207-211 of the Award, especially in light of a further statement found in the Award, in § 233 (b), to the effect that "the negotiating states attached importance to inclusion of the Domestic Law Inconsistency Clause so as to ensure that provisional application 'does not create any commitment beyond what is compatible with the existing internal legal order of the Signatories.'"(Emphasis added), which seems to equate "not inconsistent" with "compatible." I would also like to add that it seems that there is no double negation in the Russian text, which by definition has some relevance here. The full Russian text reads: Каждая подписавшая сторона соглашается временно применять настоящий Договор впредь до его вступления в силу для такой подписавшей стороны в соответствии со Статьей, в той степени, в которой такое временное применение не противоречит ее конституции, законам или нормативным актам. The expression corresponding to what in the English text "is not inconsistent" is "не противоречит", which means "does not contradict."
To interpret the meaning of Article 45 (1), an important reference is to the views of representatives of the European Community9 and the States during the finalization of the negotiations in 1994 or thereafter, of an authorized legal commentator of the ECT, and, last but not least, of the respective structures of the national legal orders and the international legal system, which shed some light on the object and purpose of the Treaty, and in particular its Article 26. Some guidelines can also be found for the interpretation of the ECT article on provisional application in the interpretation given to a similar article in the GATT, which, as is well known, was provisionally applied from 1948 to 1994, the date of the adoption of the Marrakesh Agreement establishing the WTO.
The views expressed in a Joint Statement by the Council, the Commission and the Member States indicate both that the test for provisional application is whether or not a commitment in the Treaty is compatible with the existing legal order of the Signatories and that the European Community could only apply provisionally parts of the Treaty:10
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;
(c) this interpretation allows the Community to limit the provisional application to the matters which fall under its competence. (Emphasis added)11
Whereas the provisional application of the Energy Charter Treaty will help attain the objectives of the European Community;
Whereas the European Community has competence for parts of the Energy Charter Treaty;
The European Community shall apply on a provisional basis from the time of signature the Energy Charter Treaty to the extent that it has competence for the matters governed by the Treaty. (Emphasis added)12
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 to 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 'to the extent permitted by its constitution or laws' is essential to any provisional application obligation. (Emphasis added)13
… most national and subnational laws provide for disputes under those laws to go to the local courts, not through international arbitration unless there is special provision. Accordingly I imagine that provisional application does not, by and large, bind the signatory to Articles 30 and 31. But both these are really matters for lawyers. If I am wrong, however, the US position could be eased if there were specific provision in Article 50 under which a signatory could declare that it is not able to accept provisional application with respect to particular sub-federal bodies or to Articles 30 and 31. (Emphasis added)14
On the German side, unrestricted provisional application of a treaty may, in principle, only be agreed to if the treaty does not require either parliamentary consent in accordance with Article 59(2) of the German Constitution (Grundgesetz) or any other domestic implementation. Otherwise, provisional application would infringe the legislature's exclusive sphere of competence. […] This question is closely connected with the question of the need for a law granting parliamentary consent to a treaty (treaty law (Vertragsgesetz)): to the extent that treaty provisions trigger the aforesaid requirement, they can, in principle, not be applied provisionally. The provisional application of a treaty may in such cases only be agreed to, if made dependent on a unilateral statement that the domestic requirements for provisional application are fulfilled, or if it is agreed upon that provisional application is only foreseen within the limits of domestic law. (Emphasis added)15
It is presently unclear, however, to what extent additional commitments to the Energy Charter Treaty's substantive rights and obligations flow from the Treaty's "provisional" application commitments.
And it should be borne in mind that even after the Treaty has entered into force for at least 30 states, there is no predicting how long it will take before it is in force for all of the signatories, some of whom could continue to apply it "provisionally"' for a period of uncertain duration. Thus, it could become important to clarify the duties owed between a Treaty signatory for which the Treaty is in force and one that is applying the Treaty provisionally, the duties owed to their respective investors, and the extent to which these relationships are subject to the Treaty's dispute settlement mechanisms. (Emphasis added)16
At the present time the ECT is in a phase of "provisional application." The term of course refers to a treaty signatory's commitment to comply with a treaty, in whole or in part, before completion of the ratification process. Article 25 of the Vienna Convention allows for provisional application, which can create obligations going beyond those that Article 18 of the Convention imposes to "refrain from acts which would defeat the object and purpose" of a treaty. In states where the Legislative Branch of the Government has not been asked to consent to provisional application, such a commitment often rests on the actual or implied authority of the Executive Branch, the scope of which may not be clear, and which may be especially problematical as concerns the acceptance of legally binding resolution in an international forum of disputes over domestic matters. (Emphasis added)17
Provisional application of the GATT. Article 1 of the Protocol of Provisional Application of the GATT provides that the governments of the signatory states "undertake … to apply provisionally on and after 1 January 1948:
(a) Parts I and III of the General Agreement on Tariffs and Trade; and
(b) Part II of that Agreement to the fullest extent not inconsistent with existing legislation."
This language is not identical to Article 45. It refers to "existing legislation" and not to a signatory state's "constitution, laws and regulations." It also reinforces the primary obligation, by requiring the signatory states to give provisional application "to the fullest extent." Nevertheless, the clause sets the link between each state's international law obligations arising by virtue of their agreement provisionally to apply the GATT and their domestic law as determined by the former being "not inconsistent with" the latter.
In interpreting this requirement, GATT Panels, following a Working Party Report, adopted a construction that required that "the legislation on which [the reliance on the proviso] is based is by its terms or expressed intent of a mandatory character – that is, it imposes on the executive authority requirements which cannot be modified by executive action." The proviso did not operate to give priority to all existing legislation. Where such legislation did not prohibit the executive from committing to the provisional application of a rule different to the domestic law, the signatory state was obliged to do so in order to meet the obligations of Part II GATT in accordance with its agreement to provisional application. (Emphasis added)18
It can be noted here that the Hulley tribunal considered that because of the international rule of pacta sunt servanda, national law could not be taken into account, which seems to be a complete misunderstanding of what Article 45 provides. This is what the tribunal said, in § 313 of the award: "Under the pacta sunt servanda rule and Article 27 of the VCLT, a State is prohibited from invoking its internal legislation as a justification for failure to perform a treaty. In the Tribunal's opinion, this cardinal principle of international law strongly militates against an interpretation of Article 45 (1) that would open the door to a signatory, whose domestic regime recognizes the concept of provisional application, to avoid the provisional application of a treaty (to which it has agreed) on the basis that one or more provisions of the treaty is contrary to its internal law." To the contrary, the Dutch court understood correctly the interplay between international and national law: "Even while it is possible that provisions of national law can stand in the way of the performance of one or more provisions of the ECT, the basis for doing so is encased in the ECT itself – i.e., at treaty level. In other words: a state that relies on a conflict between a treaty provision and national law, on sound grounds and referencing the Limitation Clause, does not act contrary to the pacta sunt servanda principle, nor to the principle of Article 27 VCLT." The Hague District Court Judgment dated 20 April 2016, § 5.19.
The Tribunal considers that the principal issue that arises for its decision under this head is:
Did Russia's provisional application of the ECT "to the extent that such provisional application is not inconsistent with its constitution, laws or regulations" under the terms of Article 45 (1) include its consent to international arbitration under Article 26 (3) (a)?
The answer to this issue turns principally on the question whether the application of Article 26 is "not inconsistent with" Russia's "constitution, laws or regulations", since Respondent accepts that, if there were no such inconsistency, there would be a treaty obligation assumed by Respondent to apply that provision on a provisional basis.
The Tribunal is conscious of the fact that this issue is one that has generated differing views in the jurisprudence and difficulty in the doctrine. While remaining fully cognizant of the reasoning set forth in the decisions of other tribunals and of those publicists that have been cited to it, this Tribunal approaches the issue, as it is bound to do, in accordance with its power and duty to decide for itself upon its own jurisdiction. It addresses the question independently in the light of the evidence presented by the Parties before it and of the applicable law as it finds it to be.22
In order to answer the question of whether Article 26 was consistent or not with the Russian legal order, two complementary questions can be raised, as indicated in the Award:
The Tribunal therefore now turns to consider whether, and if so to what extent, such provisional application was "not inconsistent" with the Russian Constitution, laws or regulations
(d) This requires a conflict with a mandatory rule that precludes the executive from giving provisional application to Article 26
The Treaty's distinct references to a signatory state's constitution and to its laws directs attention to two distinct ways in which it may be said that the Domestic Law Inconsistency Clause is engaged:
(i) That the institution of the provisional application of a treaty is itself inconsistent with the state's constitutional arrangements in relation to the assumption of international law obligations under a treaty, because it is in conflict with a mandatory rule of the Constitution that has the effect of preventing the executive from exercising a power to agree to provisional application; or
(ii) That the subject-matter of the international law obligation in question conflicts with a mandatory limitation imposed by domestic legislation upon the provisional application of the particular type of treaty obligation.23
Article 9. Dispute Resolution
Investment disputes, including disputes over the amount, conditions and procedure of the payment of compensation, shall be resolved by the Supreme Court of the RSFSR or the Supreme Arbitrazh Court of the RSFSR, unless another procedure is established by an international treaty in force in the territory of the RSFSR.
International treaties in force in the territory of the RSFSR may provide for recourse to international means of resolution of disputes arising in connection with foreign investments in the territory of the RSFSR. (Emphasis added)
A dispute of a foreign investor arising in connection with its investments and business activity conducted in the territory of the Russian Federation shall be resolved in accordance with international treaties of the Russian Federation and federal laws in court, arbitrazh court or through international arbitration (arbitral tribunal). (Emphasis added)
The legal regime of foreign investments envisaged under the ECT is consistent with the provisions of the existing Law of the RSFSR on Foreign Investments in the RSFSR, as well as with the amended version of the Law currently being discussed in the State Duma, and does not require the enactment of any concessions or the adoption of any amendments to the abovementioned Law. (Emphasis added)
No distinction is made here between the 1991 FI Law and the 1999 FI Law.
The jurisprudence of the Russian Constitutional Court (CC) also has to be taken into account in order to ascertain the content and interpretation of the Russian legal system, as indeed underscored in the Award.32 The Award relies principally on one decision to analyze the consistency of the introduction of Article 26 in the Russian legal order under Article 23 of the FLIT with the constitution.
Article 23. Provisional application of international treaties by the Russian Federation
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. (Emphasis added)
The Tribunal attaches considerable weight to this Ruling of the apex Constitutional Court in the Russian legal system. It concludes from its Ruling that the institution of the provisional application of a treaty or part thereof is constitutionally valid under Russian law and gives rise to rights and duties within the Russian legal system that take precedence over other Russian laws. The Constitutional Court reached this conclusion, construing a treaty that was to be provisionally applied and contained no domestic law inconsistency proviso. When addressing the question whether there is a constitutional prohibition on provisional application, the Tribunal regards this Ruling as applicable a fortiori to a case, such as the present, where provisional application is subject to a domestic law inconsistency clause. The Ruling confirms that, irrespective of the inclusion or omission of a domestic law inconsistency clause, there is no objection under the Constitution to the provisional application of a treaty establishing rules other than those provided by law. (Emphasis added)34
In this regard, direct implementation of provisions of a provisionally applied international treaty of the Russian Federation affecting the rights, freedoms and duties of man and citizen and establishing rules other than those provided by law, shall be preceded, on a mandatory basis, by its official publication …
The necessity of the official publication of provisionally applied international treaties of the Russian Federation affecting the rights, freedoms and duties of man and citizen and establishing rules other than those provided by law is also dictated by the requirements for certainty, clarity and unambiguity of a legal rule, as well as its consistency with the existing system of legal regulation arising from constitutional principles of a rule-of-law state, supremacy of law, legal equality and justice … (Emphasis added)35
From Art. 23 it follows that the treaties, entry into force of which requires certain lengthy procedures in the State (e.g. ratification), can be applied provisionally.
Provisional application means putting the treaty into effect, applying its provisions in reality i.e. performing actions foreseen in the treaty to the extent provided for in the treaty.
… provisional application until entry into force and implementation of the treaty is not the same.
… Art. 31 (3) of the Law is of principal importance. It states that an international treaty is subject to implementation by the Russian Federation from its entry into force for the Russian Federation.
Analysis of provisional (till entry into force) application of international treaties by the Russian Federation shows that in each specific case a detailed study of the legal scope of provisional application of the treaty is necessary. (Emphasis added)
We proceed on the premise that the ratification of the Energy Charter Treaty by the Russian Parliament would largely depend on a successful finalization of the Transit Protocol …
The Claimant has insisted heavily on this Explanatory Note in order to support its argument according to which the Russian Federation never considered that the introduction of Article 26 by an executive act was contrary to the Russian legal order. The Respondent, on the other hand, has given an explanation according to which the different statements have to be put in context and mean essentially that once ratified, the ECT is consistent with the Russian legal order.
Prior to the entry into force of the ECT, the majority of the Contracting Parties agreed to apply the treaty on a provisional basis. In this respect, it was decided that such provisional application of the ECT would be implemented to the extent that it would not be inconsistent with the constitution, laws and regulations of the country in question.
At the time of the 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). (Emphasis added)
Ratification of the ECT will contribute to:
- improvement of the investment climate and the creation of conditions for attracting foreign investments …44
- the creation of favorable conditions for export …
- the acceleration of Russia's accession to the GATT/WTO …
- the resolution of the problem of transit of energy resources …
- the facilitation of access of Russian capital to the energy sector of other countries … - … and so on
Ratification of the ECT will also enable:
- Russia's national sovereignty over its natural resources
- Recognition of the transitional state of the Russian economy …
Ratification of the ECT will have a major foreign policy impact …
The provisions of the ECT are consistent with Russian legislation.
The ECT provisions touch upon legal principles which are envisaged by such legal acts as the Law of the RSFSR on Foreign Investments in the RSFSR …
The legal regime of foreign investments envisaged under the ECT is consistent with the provisions of the existing Law of the RSFSR on Foreign Investments in the RSFSR, as well as with the amended version of the Law currently being discussed in the State Duma, and does not require the enactment of any concessions or the adoption of any amendments to the abovementioned Law. The ECT is also consistent with the provisions of Russian bilateral international treaties on the promotion and protection of investment. (Emphasis added)
As summarized during the hearing by Respondent's counsel, this is a "post-ratification analysis"46, meaning that, once ratified, the rules of the ECT on arbitration will apply and will not be inconsistent with Russian law, as Russian law accepts that international arbitration can be introduced by federal laws or ratified international treaties.47
Hearing, Tr. Day 1, page 39, lines 11-21.
This understanding has also been endorsed by the The Hague District Court Judgment dated 20 April 2016, setting aside the Awards in Hulley Enterprises Ltd/Yukos Universal Ltd (Isle of Man)/Veteran Petroleum Ltd (Cyprus) v. Russian Federation, in its § 5.60: "Whether or not the ratification of the ECT and more specifically of Article 26 would require and adjustment of Russian legislation, is a wholly different question than the question whether the provisional application of this provision is in accordance with Russian law. The latter question is not answered in the explanatory memorandum."
It is not the case that a loan, considered in isolation, is ipso facto an investment; rather … the critical distinction is the extent to which the loan is linked to an economic venture in the host state.48
Award, § 434. I also agree with the references to case law and doctrine to support this view mentioned in §§ 435-437.
This has been in particular stated in Poštová banka, a.s. and ISTROKAPITAL SE v. Hellenic Republic, ICSID Case No. ARB/13/8, Award, 9 April 2015, where the bonds of the Greek Government were not considered as an investment, as they were not associated with an economic undertaking: "361. If an "objective" test is applied, in the absence of a contribution to an economic venture, there could be no investment. … 371. … under the objective approach of the definition of what constitutes an investment, i.e., a contribution to an economic venture of a certain duration implying an operational risk, the acquisition by Poštová banka of the interests in GGBs would not constitute an investment …"
Whether the Claimant "own[s]" an "asset" constituted by a "debt of a company" "associated with an Economic Activity in the Energy Sector" in the "Area" of the Respondent such that it has made an "Investment" to which the present dispute with the Respondent "relat[es]."51
Whether the Claimant "own[s]" an "asset", which it has invested, constituted by a "debt of a company" "associated with an Economic Activity in the Energy Sector" in the "Area" of the Respondent such that it has made an "Investment" to which the present dispute with the Respondent "relat[es]."
A change in the form in which assets are invested does not affect their character as investments and the term "Investment" includes all investments, whether existing at or made after the later of the date of entry into force of this Treaty for the Contracting Party of the Investor making the investment and that for the Contracting Party in the Area of which the investment is made (hereinafter referred to as the "Effective Date") provided that the Treaty shall only apply to matters affecting such investments after the Effective Date. (Emphasis added)52
The conclusion reached in § 513 of the Award, according to which "the Tribunal finds that the Claimant 'own[s]' an 'asset' constituted by a 'debt of a company' 'associated with an Economic Activity in the Energy Sector' in the 'Area' of the Respondent such that it has made an 'Investment' to which the present dispute with the Respondent 'relat[es]'", could seem prima facie convincing, especially as the different steps of the reasoning are excellently presented, but for the fact that the analysis is stopped one step too early. In other words, the majority's approach would be acceptable if there existed two sets of completely independent loans, each having its own rationale; but the analysis is flawed under the circumstances of this case, because it does not really consider exhaustively the legal construction created by the back-to-back loans.
Coming then to the analysis of the back-to-back loans, I will concentrate my comments on the loan flowing from Brittany to Yukos Capital and then to Yukos Oil. I rely here on the citations of the loan contracts which can be found in §§ 502-503 of the Award. A similar analysis on all counts can be performed concerning the loan from Hedgerow.
(a) Borrower intends to provide a loan facility to OAO "NK "YUKOS" [this is 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 (hereinafter referred to as "Sub-Lending", and respective loan agreement documenting such Sub-Lending to be hereinafter referred to as Sub-Lending Agreement);
(b) Lender has agreed to make available this Loan Facility on the terms set forth herein.
NOW, THEREFORE, the Parties have agreed as follows:
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. Lender undertakes to transfer Advances hereunder in US Dollars to the account of Borrower in total Facility amount in order to make feasible Sub-Lending by Borrower. (Emphasis added)59
1.1 During the term hereof the Lender undertakes to grant to the Borrower interest bearing loans with total amount (hereinafter referred to as "Loan Amount") not exceeding 80'000'000'000-00 (Eighty billion) Russian Rubles … and the Borrower undertakes to repay such loans and to pay interest for use of funds hereunder at the rate of 9% per annum. (Emphasis added)60
(a) … such loan facility … shall bear interest at the rate of 9 % per annum and shall mature not later than 31st December 2008 (hereinafter referred to as "Sub-Lending", and respective loan agreement documenting such Sub-Lending to be hereinafter referred to as Sub-Lending Agreement
Means the day when Borrower transfers funds to Sub-Borrower at the request of the latter under Sub-Lending Agreement.
Borrower shall repay the amount outstanding within one Business Day upon redemption of any part of Sub-Lending.
The loan shall accrue interest at the interest rate determined above with effect from each Drawdown date for actual number of days elapsed thereupon on the basis of actual calendar year. The interest shall accrue quarterly and shall be payable on the next Business Days upon receipt of respective quarterly interest from Sub-Borrower, or on final Repayment Date together with repayment of last outstanding balance to Lender. (Emphasis added)61
1.1 … the Borrower undertakes to repay such loans and to pay interest for use of funds hereunder at the rate of 9% per annum.
2. RIGHTS AND OBLIGATIONS OF THE PARTIES
2.4. The Borrower undertakes to repay all loans, borrowed hereunder, to the Lender not later than 31st December 2008. (Emphasis added)62
The majority based itself on the mere legal ownership to assert that the Claimant has made an investment. The majority considered that the investment of Yukos Oil was its right to interests and repayment of its loan to Yukos Oil, as stated in § 505 of the Award:
The only person that holds the right to claim repayment of the debt represented by Yukos Capital's loan to Yukos Oil is Yukos Capital. It is Yukos Capital that advances the loans to Yukos Oil under the Yukos Capital Loan Agreement. Yukos Oil's undertaking to repay those loans with interest is made to Yukos Capital alone. Yukos Capital does, therefore, have an economic interest in the Loans, since it is Yukos Capital that holds the debt. (Footnotes omitted)
1.1 … the Lender [Yukos Capital] undertakes to grant to the Borrower [Yukos Oil] interest bearing loans … and the Borrower undertakes to repay such loans and to pay interest for the use of funds …
1.2 3.1. In the event of non-fulfillment and/or not due fulfilment of obligations hereunder, the Parties shall be liable …
Moreover, if Yukos Oil does not pay, Yukos Capital has no obligation towards Brittany and therefore does not sustain any loss resulting from the non-fulfilment of its repayment to Brittany. This is indeed acknowledged by the majority in § 504:
… 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 …
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;63
One might analogise to beneficial ownership, but I think that the true economic position here is that Brittany and Hedgerow were the economic actors, and that, as we've tried to establish in these proceedings, Yukos Capital was just a passive conduit: it received a fee for transmitting funds back to Brittany and Hedgerow if and as it received them." (Emphasis added)64
Precedents recognizes that in cases where there is an apparent division of ownership as between a formal and legal owner, on the one hand, and a beneficial, substantive actual or equitable owner on the other, international law … has concerned itself with the beneficial, the substantive, the actual, the equitable or the real ownership.65
Barcelona Traction, Light and Power Co., Ltd. (New application) (Belgium v. Spain), Merits, Second Phase, Judgment, 5 February 1970, I.C.J. REPORTS, Pleadings, 1970, p. 444.
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. (Emphasis added)66
The spread was not the result of the investment. The result of the investment – if there had been an investment – would have been an interest of 9%. If Yukos Capital had made by contract a loan of money A obtained through a loan B in an entirely distinct loan contract, it could indeed be said that it earned an interest of 9% on loan A and could use that money to reinvest or to repay the other loan B. However, this is not the result of the working together of the two linked back-to-back contracts. What mechanism did they create? They created a differential mechanism: the spread has to be considered for what it is: it is the payment of the service rendered by Yukos Capital (for non-illegitimate tax purposes) to the Yukos group, the service of shifting forth and back certain sums of money from Brittany to Yukos Oil and from Yukos Oil to Brittany. Further, the amount of the payment of this service was in fact, according to counsel for Respondent, "the tariff that was charged by Luxembourg for the privilege of using it for its tax advantages, not for any economic motivation or purpose in the transaction."72 As the Award acknowledges in § 326:
The Respondent submits that the spreads were calculated to be the minimum necessary to achieve approval of the arrangements from the Luxembourg tax authorities and avoid the risk of the tax authorities imputing to Yukos Capital receipt of a larger spread based on transfer pricing rules. Thus, the spread declined between the 2003 and 2004 loans because the tax authorities agreed in the interim that the lower spread was acceptable.
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; (Emphasis added)
Q. Does that capture any failure to receive the spread?
A. Yes, because it's any payments under the sub-lending arrangement, and the spread only arises if there are payments under the sub-lending arrangement and then a repayment to Brittany.
Q. So there's no risk of not achieving the profit?
A. As I read those terms, that's correct.
Q. When I say there's no risk associated, it's a question, and you are answering that that is correct?
Consistent with Yukos Capital's lack of an economic interest in the "Loans," the record shows that Yukos Capital's litigation efforts have been paid for by other Yukos Group subsidiaries. For instance, in November 2010, Yukos Capital and Fair Oaks entered into a so-called "Loan Agreement" by which Fair Oaks gave Yukos Capital US$ 10 million interest free, for Yukos Capital to pay lawyers ("2010 Fair Oaks Agreement"). The stated reason for this arrangement was that "in accordance with Section 5 of the Loan Agreements, Lender has agreed to bear all risks associated with Sub-Loans and to indemnify Borrower [Yukos Capital] for legal and related expenses involved with the recovery thereof and to compensate Borrower for legal and related expenses incurred by Borrower in the course of seeking remedies for the default of Sub-Borrowers.75
263. This subjective limitation of ICSID jurisdiction is a natural consequence of international investment law. Arbitral tribunals are not courts of justice holding unfettered jurisdiction. The role of arbitral tribunals is not to redress torts worldwide. Arbitral tribunals are instruments created by and subject to the consent of States, as formalized in the relevant instrument, and are only empowered to adjudicate disputes between protected investors and consenting States. Other disputes are outside their remit. Investors cannot expand the jurisdiction ratione personae of arbitral tribunals by executing private contracts with third parties.
264. Specifically, protected investors cannot transfer beneficial ownership and control in a protected investment to an unprotected third party, and expect that the arbitral tribunal retains jurisdiction to adjudicate the dispute between the third party and the host State. To hold the contrary would open the floodgates to an uncontrolled expansion of jurisdiction ratione personae, beyond the limits agreed by the States when executing the treaty.76
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