ARBITRATION PURSUANT TO THE 1976 RULES OF
THE UNITED NATIONS COMMISSION ON INTERNATIONAL TRADE LAW
PCA CASE No. 2013-31
(1) Yukos Capital S.à.r.l. (Claimant)
– and –
(2) The Russian Federation (Respondent)
Tribunal
Professor Campbell McLachlan, QC (Chairman)
Mr. J. William Rowley, QC
Professor Brigitte Stern
15 June 2015
GIBSON, DUNN & CRUTCHER LLP
Telephone House
2-4 Temple Avenue, London EC4Y 0HB
020 7071 4000 020 7071 4244 Fax
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V. REQUEST FOR RELIEF ... 140
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1. Respondent’s Reply on Jurisdiction dated March 2, 2015 (“Resp. Reply”) is essentially a rehash of its prior arguments. Certain arguments have been changed, certain have been abandoned and certain have been supplemented but, generally speaking, the thrust is the same. For the reasons set forth in Claimant’s Counter-Memorial on Jurisdiction dated 3 November 2014 (“Counter-Memorial”), therefore, Respondent’s objections to jurisdiction are without merit and should be rejected.
2. In this Rejoinder on Jurisdiction (“Rejoinder”), Claimant has sought to avoid repetition where possible. In that sense, it is necessary to read the Rejoinder and Counter-Memorial together.
3. In Section II below, Claimant addresses Respondent’s argument that, while it applied certain (albeit unidentified) provisions of the ECT until its provisional application was terminated in 2009, it did not provisionally apply the dispute resolution provisions of Article 26 ECT. This argument is without merit because: (i) during the relevant time period Respondent acknowledged, as a matter of fact, that it was provisionally applying the Treaty; in doing so it understood this included the Article 26 dispute resolution provisions and it cannot not now say otherwise; (ii) on a proper interpretation of Article 45(1), Respondent by its signature of the ECT obligated itself to apply the entire treaty provisionally; and (iii) even if Respondent was entitled not to provisionally apply provisions of the Treaty that were inconsistent with its domestic law (which is denied), the Article 26 ECT dispute resolution provisions were plainly not inconsistent with any provision of Russian law.
4. In Section III below, Claimant addresses Respondent’s argument that the Yukos Oil Loans are not protected Investments under Article 1(6) ECT. This argument also is without merit because: (i) pursuant to Article 1(6) ECT, “debt of a company” is an Investment and loans are quintessential “debt”; (ii) at all relevant times Respondent knew the Yukos Oil Loans were valid loans and it cannot now suggest otherwise; (iii) Respondent’s contrived argument that the Loans were actually dividends is dishonest and fundamentally flawed; (iv) there is no basis to supplement the express terms of Article 1(6) ECT by importing the “Salini,” “general international law,” “objective”
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or “inherent meaning” test; and (v) even if consideration of such tests were proper, the Yukos Oil Loans would satisfy them.
5. In Section IV below, Claimant addresses Respondent’s argument that it may deny the benefits of the ECT to Claimant under Article 17(1) ECT. This argument too is without merit because: (i) determinations under Article 17 ECT are for the merits and do not implicate this Tribunal’s jurisdiction; (ii) any right to deny benefits must be positively exercised and can have prospective effect only; and (iii) Respondent has not and cannot in any event establish the cumulative requirements of Article 17 that Claimant (a) has no substantial business activities in Luxembourg and (b) is controlled by nationals of a third state.
6. Before proceeding, we offer a short note on the equities. There is, in Respondent’s submissions, a sense of righteous indignation that Claimant should seek to hold it accountable before this Tribunal. It is difficult to see on what basis Respondent believes it is entitled to this sentiment. Implicit in Respondent’s arguments is the apparent notion that because Claimant is a former subsidiary of Yukos Oil Company, it cannot possibly have a grievance to air. This, it seems, flows from Respondent’s arguments that the Yukos Oil Loans represented “circular” transactions as to which Yukos Capital could not have had an independent economic interest. It would appear the logic is that having successfully expropriated the Claimant’s ultimate parent company, there should be a deemed expropriation of Claimant itself, together with all assets residing on its balance sheet including the Loans at issue herein.
7. Claimant submits that is an offensive proposition. Respondent’s “circularity” theory is materially flawed on its own (as addressed herein), but whatever merit it may have had was eliminated when Respondent broke the “circle” with its illegal expropriation and forced dissolution of Yukos Oil. Claimant was at all relevant times an independent, non-Russian legal entity and remains so despite the ongoing efforts of Respondent and its proxies to expropriate it as well.1 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
1 This, it appears, is what really pains Respondent. ↩
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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.
8. While this will be a subject for the merits phase of these proceedings, there should be no doubt that Respondent acted illegally – as every investment tribunal to have considered these matters has found. Indeed, the expropriation of Yukos Oil Company may be the most brazen and illegal taking of modern times, a taking orchestrated and implemented by a State that, by its actions toward Yukos and other international actors, has made clear its contempt for and disregard of its obligations under public international law and the rule of law.
9. Respondent also seeks to portray this proceeding as part of a vindictive litigation strategy engineered by and for the benefit of Yukos Oil Company’s former management. As the Tribunal is aware, Yukos Capital is ultimately held by Stichting Administratiekantoor Yukos International (“Yukos Stichting”). Among other things, the Yukos Stichting is charged with safeguarding the interests of the former non-Russian Yukos subsidiaries and “will ultimately strive for distribution of any funds received by it and to be received through a scheme to shareholders of Yukos Oil Company in accordance with the applicable law and principles of reasonableness and fairness.”2 The efforts of the Yukos Stichting to support the pursuit of claims held by Yukos Capital and other former Yukos subsidiaries represent the only possibility that anyone will ever return a penny to the former minority shareholders of Yukos Oil.
2 See R74, Article 2(3). The former majority shareholders of Yukos Oil, the Claimants in Hulley Enterprises, have no legal or other interest in Yukos Stichting or the assets held by it, including Claimant Yukos Capital. ↩
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10. As discussed in Claimant’s Counter-Memorial, in the context of seeking ratification of the ECT in the Russian State Duma, the Russian Government issued the following determination (i.e., the ECT Explanatory Note):
“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).
[...]
The provisions of the ECT are consistent with Russian legislation.
[...]
The legal regime of foreign investments envisaged under the ECT is consistent with the provisions of the existing Law of 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.”3
11. At the 17-18 December 2002 Energy Charter Conference, the Russian delegation emphasized that “[t]he Russian Federation has yet to ratify the Energy Charter Treaty, but, as a Signatory Country, it implements the Treaty from the day it entered
3 Exhibit R111, pp. 1, 4 (allegedly “corrected” translation, Resp. Reply, ¶ 190) (emphasis added); see also Exhibit C147, pp. 1, 4. ↩
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into force.”4 Similarly, as late as 23 May 2007, the website of the Ministry of Foreign Affairs of the Russian Federation contained an information bulletin confirming that: “[t]he Russian Federation applies [the ECT] on a provisional basis in accordance with Part II of the Vienna Convention on the Law of Treaties (1969) and Section II of the Federal Law On International Treaties of the Russian Federation of June 16, 1995.”5
12. Respondent seeks to minimize the significance of its stated position during the Energy Charter Conference by labelling it a “non-lawyer statement.”6 To the extent it is suggested states and investors are entitled to rely only on the statements of lawyers, this is an absurd assertion contrary both to logic and tenets of diplomacy. Similar efforts are made with respect to the Ministry of Foreign Affairs website, with Respondent’s long-standing pronouncement there said to be a “‘background information’ note,”7 whatever that is supposed to mean. Suffice to say the background publicly provided to investors worldwide was that Russia was applying the ECT provisionally.
13. Respondent suggests these statements did not “make clear” it was provisionally applying the ECT as a whole.8 No alternative interpretation is offered, which is telling in itself, and there can be none. Nor has Respondent submitted testimony from any fact witness to explain its meaning. One thing is abundantly clear, however. Respondent knew, believed and accepted at all relevant times that the dispute resolution provisions of the ECT and the substantive protections on which Claimant’s claims are based were not inconsistent with its laws.9 To the contrary, as Respondent’s Duma was advised, “[t]he provisions of the ECT are consistent with Russian legislation,” including Russian law on foreign investment. Respondent thus told the Energy Charter Conference and the investment world that it was applying
9 Respondent does not even argue that the substantive protections of the ECT are anything but wholly consistent with its laws. ↩
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“the Treaty”; no exceptions were identified.10 This Tribunal is entitled to, and should, make a finding of fact that Respondent at all relevant times accepted the obligation to, and did, apply – at a minimum – Article 26 ECT.
14. To the extent Respondent is suggesting it should be entitled to change its position after the fact, it should not be:
“[i]t is a principle of good faith that ‘a man shall not be allowed to blow hot and cold – to affirm at one time and deny another...Such a principle has its basis in common sense and common justice, and whether it is called ‘estoppel,’ or by any other name, it is one which courts of law have in modern times most usefully adopted’.”11
15. Respondent’s assertions that Claimant “Disregards Basic Principles Of The Law Of Treaties,” “Conflates Consent To Be Bound By A Treaty And Consent To Apply A Treaty Provisionally” and “Conflates Entry Into Force Of A Treaty And Provisional Application”12 are nothing more than (erroneous) semantic gamesmanship. Respondent was all relevant times legally bound to apply the ECT. By signing the ECT, it agreed to do so on a provisional basis in accordance with Article 45, until such time as it became a party to the ECT or terminated its agreement to provisionally apply it.
16. Claimant has never suggested the ECT was not subject to ratification. Nor has it argued that unratified treaty provisions should have supremacy over conflicting Russian domestic legislation. What Claimant has said, and Respondent does not and cannot dispute, is that the ECT foresees ratification under Article 39 while at the same time providing for a separate mechanism whereby states can express their consent to
10 Exhibit C118; Exhibit C119, p. 1. ↩
11 Cheng B., General Principles of Law as Applied by International Courts and Tribunals (CUP: 2006) (“Cheng”), pp.141-142, quoting England, Court of Exchequer, Cave v Mills (1862) 7 Hulstone & Norman, p. 913 at p. 927 (CL65). ↩
12 Resp. Reply, p. 7, sub-heading A, sub-heading 1; p. 9, sub- heading 2. ↩
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be bound by its provisions before ratification – i.e. provisional application under Article 45.
17. As discussed in detail in Claimant’s Counter-Memorial,13 the signatories of the ECT agreed that signature of the Treaty has the effect of stamping a state’s consent to be bound provisionally as per Article 45. This is the case unless a signatory expresses an opposite intent not to assume any Treaty obligations provisionally – which Respondent did not do. Claimant is not conflating provisional application with final entry into force.14 It simply sets out the implications of a treaty mechanism that Russia cannot deny it has consented to by its signature.
18. As Respondent’s own Constitutional Court has emphasised:
“Agreement to provisional application of an international treaty means that it becomes part of the legal system of the Russian Federation and must be applied on the same basis as international treaties that have entered into force (unless otherwise expressly stated by the Russian Federation), since otherwise, provisional application would be meaningless. That is why neither the Vienna Convention on the Law of Treaties nor the Federal Law ‘On International Treaties of the Russian Federation’ contains any exemptions from pacta sunt servanda with respect to provisional application of international treaties [...]”15
19. The Russian Federation delegate reacted in the following way to a United States proposal to remove the predecessor of Article 45 from the Treaty draft:
“What’s important for us is that if now we agree to remove an Article [45] from the proposal, this would mean a delay for a specific period in the entry into force of this extremely important international document. And as you first said quite rightly, Sir, it is of vital significance for many delegations and countries. And as we understand it, this period of provisional application of the Treaty would be a sort of running in
13 Counter-Memorial, ¶¶ 98-108; see also ¶¶ 64-65. ↩
14 Again, Respondent’s efforts in ¶¶ 36-38 of its Reply to distinguish provisional application from entry into force are misplaced. ↩
15 Exhibit R35, pp. 8-9, ¶ 4 (emphasis added); see also Hulley Enterprises Jurisdiction Award, ¶ 334 (admission by Russia’s counsel that “Russian law is of course familiar with the concept of provisional application, and that was never in dispute”) (CL9). ↩
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period of the implementation of this most important instrument for international cooperation.”16
20. 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.”17
21. Thus,
“[...] 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.”18
22. Respondent’s arguments concerning the fact that former President Yeltsin did not personally sign the ECT on its behalf19 are, like so much of its submission, irrelevant. Professor Stephan’s First Report considered the authority of the President under the Russian Constitution to express consent to be bound by international obligations under treaties, including those with provisional application.20 That Russia chose to have a duly recognized representative of the President, namely a member of the Government acting under the President’s authority, carry out the ministerial task of signing the document has no legal significance under international or Russian law. A signature by such representative, if that person is duly authorized – and Respondent has shown no reason to doubt that Deputy Chairman lacked the capacity to sign on Russia’s behalf21 – is equivalent to the President’s personal signature, who has the
16 Exhibit R80, p.6 (emphasis added); Resp. Reply, ¶ 34. The United States delegate made his remarks in relation to the twenty-year sunset provision under Article 45(3) rather than the provisional application obligation itself as Respondent represents in ¶ 34. ↩
17 ILC Yearbook, p.210 (CL46), in relation to Article 22 which was later adopted as Article 25 of the Vienna Convention (RL49). ↩
18 ILC Yearbook, p.211 (CL46) (emphasis added); see also United Nations General Assembly, Sixty-Fifth Session of the International Law Commission, Memorandum by the Secretariat, A/CN.4/658, 2013, ¶¶ 78-79 (CL43). ↩
21 Resp. Reply, ¶ 152; Exhibit R110; Second Expert Report of Professor A.V. Asoskov dated 2 March 2015 (the “Asoskov Second Rep.”), ¶ 9. ↩
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ultimate authority to negotiate, sign and consent to treaties as set out in Article 86 of the Russian Constitution.22
23. For the avoidance of doubt, Professor Asoskov and Respondent are fundamentally misguided in asserting that any aspect of Claimant’s case rests on the assumption that the ECT was personally signed by then President Yeltsin.23
24. While the point is settled above, we note further that Respondent’s repeated refrain that its legislature has the capacity to “ratify” treaties24 conflates international ratification with domestic consent to ratification.
25. As Professor Stephan explains in his Second Report, “ratification of a treaty is an international process and occurs only when a treaty party renders the relevant documentation as specified by the treaty [...]”25 In Russia’s case, a state’s executive, and not its legislature, renders these documents. Domestic ratification, on the other hand, is a process by which the legislature gives consent to ratification through adoption of a law, but the legislature cannot itself “ratify” a treaty. Russian law does not require legislative domestic ratification of all treaties and both international and Russian law contemplate the assumption of international obligations by other means, including by signature. Moreover, Russian law indisputably provides for provisional application of treaties with signature in advance of, and thus independent of, subsequent domestic ratification.26
26. In sum, Respondent and Claimant disagree on the interpretation and application of Article 45(1), not that Russia’s signature of the ECT created binding legal obligations for Russia.
22 See Second Expert Report of Professor Paul B. Stephan dated 10 June 2015 (the “Stephan Second Rep.”), ¶¶ 2-8. ↩
23 Resp. Reply, ¶¶ 152-153; Asoskov Second Rep., ¶ 7. ↩
24 Resp. Reply, ¶¶ 159, 163, 171. ↩
25 Stephan Second Rep., ¶ 15. ↩
26 Counter-Memorial, ¶¶ 63-64; 102-103. ↩
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27. Any provisional application provision must be interpreted on its own terms by reference to its specific wording and context and the object and purpose of that article in the treaty in which it appears, in accordance with the rules of treaty interpretation set out in Vienna Convention Articles 31 to 33.27
28. As discussed in Claimant’s Counter-Memorial,28 interpretation of the ECT begins with its plain language: here, the Article 45(1) obligation that “[e]ach 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.”
29. It is recalled that in Hulley Enterprises:
“[h]aving reviewed the totality of the evidence and considered the written and arguments of both Parties, the Tribunal finds that the ordinary meaning of the terms of Article 45(1), in their context and in light of the object and purpose of the Treaty, favours Claimant’s interpretation. In the Tribunal’s opinion, by signing the ECT, the Russian Federation agreed that the Treaty as a whole would be applied provisionally pending its entry into force unless the principle of provisional application itself were inconsistent ‘with its constitution, laws, or regulations’.”29
30. The Hulley Enterprises Tribunal’s finding was based on its parsing of the words of Article 45(1),30 which it noted was consistent with the decision on jurisdiction in the
27 The more recent work of the ILC on the general topic of provisional application (i.e., since 2012) is of marginal relevance and is in any event far from being completed. See Resp. Reply, ¶¶ 33, 36. The same is the case for academic work and commentaries, particularly those that do not address Article 45 ECT. See Resp. Reply ¶¶ 37, 46. ↩
28 Counter-Memorial, ¶¶ 39-66. ↩
29 CL9, ¶ 301; see also ¶ 329. ↩
30 Id., ¶¶ 303-308, 310, 320. ↩
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Kardassopoulos case,31 in keeping with ECT’s object and purpose and the grain of international law, and supported by state practice.32 It observed that:
“[a]n analysis of the statements or declarations made by [Austria, Luxembourg, Italy, Romania, Portugal and Turkey] confirms that each one of them relied on Article 45(1) – sometimes alone and sometimes in conjunction with Article 45(2) – for the non-application of the entire Treaty under the provisional application regime.
[...]
Similarly, in the lists it maintained to keep track of the intentions of the signatories, the ECT Secretariat identified the States that intended to rely on Article 45(1) as intending to do so in order to avoid provisional application of the Treaty altogether.”33
31. Herein, Claimant responds to the arguments raised by Respondent in its Reply, but refers the Tribunal to its Counter-Memorial (at paragraphs 39 to 66) for its position, which is not altered by the Reply.
32. Respondent effectively concedes the argument on provisional application as follows:
“Claimant argues that because the limiting language ‘to the extent that’ is followed by the terms ‘such provisional application,’ the ‘to the extent’ clause operates only ‘where applying “this Treaty” (i.e., the principle of provisional application itself) is inconsistent with the signatory’s constitution, laws or regulations.
Claimant is correct that the phrase ‘such provisional application’ refers to the provisional application previously mentioned in Article 45(1) ECT, namely the provisional application of ‘this Treaty.’”34
33. Only one interpretation is possible in light of this concession, that reached by each prior tribunal to have considered the point. Thus, as expressed by the tribunal in Kardassopoulos v. Georgia:
31 Respondent implicitly suggests that because the tribunal chair in each of Kardassopoulos and Hulley Enterprises was the same, they cannot be treated as separate authorities (see Reply, ¶ 92). This suggestion is plainly without merit and requires no response. ↩
33 Ibid., ¶¶ 321-322. See also ¶ 327, dismissing reliance on the 1994 EU Joint Statement. ↩
34 Resp. Reply, ¶¶ 53-54 (emphasis added) quoting Counter-Memorial, ¶ 42. ↩
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“It is ‘this Treaty’ which is to be provisionally applied, i.e., the Treaty as a whole and in its entirety and not just a part of it; and use of the word ‘application’ requires that the ECT be ‘applied’. Since that application is to be provisional ‘pending its entry into force’ the implication is that it would be applied on the same basis as would in due course result from the ECT’s (definitive) entry into force, and as if it had already done so.”35
34. The response offered by Respondent is reference to what can only be described as confused commentary devoid of any apparent logic:
“Even if ‘the provisional application of the Treaty’ means ‘the provisional application of the entire Treaty’ (as it probably does), it is not at all obvious why a state which agrees to apply ‘the entire Treaty’ provisionally, but only ‘to the extent that such provisional application [of the entire Treaty] is not inconsistent with its constitution, laws or regulations’ must thereby be taken to have agreed to apply the entire Treaty provisionally unless provisional application of the entire Treaty is impermissible in principle under its constitution, or under a law or (improbably, as Russia pointed out) a regulation.”36
35. But it is obvious. Just to read the above commentary makes Claimant’s point for it. Indeed, the commentary is a tautology as expressed and, therefore, the words “not at all” must be deleted from “it is not at all obvious” for it to make any sense.
36. The other authors relied upon by the Respondent do not support its interpretation. Annelise Quast Mertsch recognises that:
“[...] while there may be reasons to decide the matter the way the Yukos Tribunal did,37 it is submitted that these relate to the ECT and its regime of provisional application. Therefore, the Yukos award does not generally preclude the adoption of the piecemeal approach (for other limitation clauses) [...].”38
That is, she expressly distinguishes Article 45 ECT from her general argument about “limitation clauses.”
37. Reisman and Armanjani would not interpret Article 45(1) in the manner contended for by Respondent. On their reading, Article 45(1) cannot be invoked by Russia because
36 Resp. Reply, ¶ 54, quoting Roe & Happold, p. 76 (RL115) (emphasis added). ↩
37 The author identified specifically Article 45(3) ECT, discussed infra (RL117, p. 101, fn. 138). ↩
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it did not make a declaration on signature that it could not provisionally apply the ECT. That is, Russia would lose under their interpretation as well.39
38. If “such provisional application” means provisional application of the entire Treaty, as Respondent now concedes it does, the analysis is concluded. Respondent must show that the principle of provisional application is inconsistent with its constitution, laws or regulations. Respondent does not attempt to do so, nor can it. Consequently, Respondent is properly subject to the jurisdiction of this Tribunal.
39. In light of the above, the remainder of Respondent’s arguments on the interpretation of Article 45(1) ECT are irrelevant. That said, we address them below.
40. Respondent contends that Claimant’s interpretation of Article 45(1) ECT “deprives the term ‘to the extent’ of any meaning and would effectively substitute it for ‘if,’ ‘unless’ or ‘where’.”40 It is correct that Claimant’s interpretation would work if “to the extent” was substituted by “if” (noting that the words are often used interchangeably in legal drafting). But that would not deprive “to the extent” of meaning. As Respondent notes, “to the extent” connotes “the limit to which something extends”41 In the case of Article 45(1) ECT, the limit to which provisional application of the Treaty extends is that signatory states such as Respondent must do so (i.e., apply “the Treaty” provisionally) “if” it is not unlawful or “unless” it is. While more precise wordsmithing is almost always possible where treaties are concerned, nothing about Claimant’s interpretation deprives any part of Article 45(1) of meaning. Respondent’s interpretation, on the other hand, cannot be gleaned from the language on any logical basis.
41. Respondent’s reliance on the inclusion of “regulations” within the “to the extent” clause adds little. This word was added at the request of the Japanese delegation in
39 See Hulley Enterprises Jurisdiction Award, ¶¶ 312-315, 319 (CL9). See also discussion infra. ↩
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March 1994 and attracted no attention.42 Indeed, the question as put was whether the word “regulations” was needed if the word “laws” was already included in the draft or whether it caused any harm if it was.43 The Chairman (Clive Jones) concluded:
“In the light of our explanations, does anyone object strongly to including the word ‘regulations’? I am sorry to concentrate on a minor point, but we have to prepare the next draft and it does have some significance. Well, I’ll take it that we can, I think, adopt that particular slight change.”44
42. This is just one extract from the travaux préparatoires, some eight to nine months before the Treaty was concluded. The notion that the addition of “regulations” in this fashion somehow signalled a consensus understanding that Article 45(1) would be subject to a piecemeal interpretation is specious and there is no support for this proposition in the travaux or otherwise.45
43. Respondent’s approach to this point highlights a further weakness in its case, one represented by its very selective use of the travaux where it seems helpful while ignoring the rest together with the plain language of the Treaty. As the authors of the chapter on Article 32 in The Vienna Convention on the Law of Treaties: A Commentary (2011) note:
“Many of the those in the ILC, as well as in the Vienna Conference, who were opposed to conferring a primary role to preparatory works did so on the basis that they were not often conclusive. They commented that, in the majority of cases, the examination of these works did not shed more light on a controversial provision.
Prima facie, these works are often a composite of State’s individual opinions. The work of the interpreter is to determine whether positions are sufficiently similar to demonstrate a common intention, an exercise which is made more difficult if there is a large number of individual statements. In such a case, the recourse to preparatory works, in particular to interpret a provision that was
42 Japan ultimately made a declaration under Article 45(2)(a) ECT that it would not provisionally apply the Treaty. See Exhibit C143 and discussion of state practice infra. ↩
43 Transcript of Energy Charter Conference Plenary Session, 7 March 1994, p.11 (Exhibit R80). After considering the addition of the word “regulations”, the session went on to consider the 20-year investment protection clause. ↩
45 The Quast Mertsch commentary relied upon by Respondent attributes no significance to the presence of “regulations” in a “to the extent” clause. See RL117, pp. 96-97. ↩
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still controversial at the end of the negotiations, could simply confirm the ambiguity, instead of dissipating it.
Moreover, some of these State’s declarations could have been ignored by others and could have had no influence on the final text. It could also be that a State’s initial intention could have evolved during negotiations and was no longer the same as at the time of the adoption of the final text. For instance, a State could have been convinced to abandon its original interpretation of a provision because this would be incompatible with another provision adopted during the negotiations.”46
44. These well-placed concerns are, of course, only exacerbated where multilateral treaties are concerned.
45. Respondent suggests Claimant’s interpretation renders Article 45(1) ECT “largely superfluous” because “its sole function would be to allow a signatory that does not apply the ECT in its entirety to do so without making an opt out declaration under Article 45(2)(a) ECT.”47 That does not make Article 45(1) superfluous. It provides a safety net that, for signatories that do not make an opt out declaration for whatever reason, permits them to nonetheless avoid provisional application if, and only if, it is inconsistent with their laws to so apply the Treaty. Opt out declarations under Article 45(2)(a), on the other hand, may be made for any reason.
46. Respondent’s discussion of Article 45(3)(b) ECT is impossible to comprehend. For investments made prior to termination of provisional application, such as those involved in this case, that provision keeps alive for twenty years “the obligation of the signatory under paragraph [45](1) to apply Parts III and V [ECT].” Both by the fact that (i) “the obligation of the signatory under paragraph [45](1) to apply Parts III and V [ECT]” survives for investments made before provisional application is terminated and (ii) the unequivocal use of “the obligation,” it is clear “the obligation” cannot be excluded by any operation of Article 45(1).48
46 Corten O. & Klein P., The Vienna Convention on the Law of Treaties: A Commentary, Vol. 1 (OUP:2011) pp. 856-857 (CL67); see also fn.101 (CL67). ↩
48 To permit an interpretation consistent with Respondent’s position on Article 45(1), “the obligation” would need to be re-written to say “any obligation,” “to the extent obliged,” or words to that effect. ↩
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47. Under Respondent’s interpretation, however, “the obligation [...] to apply Parts III and V” does not exist at all under Article 45(1), at least not for it, thus stripping Article 45(3)(b) of all meaning for any signatory claiming that Parts III and V are inconsistent with its domestic law. If that were permissible, Article 45(3)(b) would have been worded very differently indeed.
48. Respondent’s point on Article 45(2)(b) is unclear. Article 45(2)(b) provides that a signatory opting out of provisional application under Article 45(2)(a) may not claim the benefits of provisional application under Article 45(1). According to Respondent: “Article 45(2)(b) ECT expressly refers to the ‘benefits of provisional application under paragraph (1),’ i.e., ‘to the extent that such provisional application is not inconsistent with [each signatory’s] constitution, laws or regulations,’ not to the benefits of provisional application of ‘this Treaty.’”49
49. This reasoning is both circular and of no apparent significance. The benefits of provisional application are received because (i) other signatories are obligated to apply the Treaty upon entry into force under Article 44 or provisionally under Article 45(1) and (ii) the investors of such other signatories rely upon the subject signatory’s provisional application in making investment decisions. Article 45(2)(b) simply provides for reciprocity. Where a signatory opts out under Article 45(2)(a) (i.e., declares that it will not apply the Treaty provisionally), it is not prior to ratification entitled to any of the benefits that would otherwise have been conferred on it by other signatories obligated to apply the Treaty under either of Article 44 or 45.50
50. The absurdity of Respondent’s position on reciprocity is reflected in the 1993 Bamberger memorandum on which it relies. Mr Bamberger’s apparent view was that:
“[...] the State for which the Agreement is in force might chose to adopt a policy of reciprocity insofar as concerns rights owed it by a provisionally-
49 Resp. Reply, ¶ 70 (emphasis in original). ↩
50 As for Article 45(2)(c), Respondent’s argument (in Resp. Reply, ¶ 67) misses the point: an interpretation of Article 45(1) which allows provisional application of the treaty except insofar as the treaty obligations are inconsistent with domestic law amounts to the same thing in practical terms as applying part of the Treaty. ↩
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applying State, so that no greater rights were afforded the provisionally-applying State than it was extending.”51
51. Respondent further contends that such “[f]lexibility in the extent of each signatory’s provisional application is a necessary and inherent feature of any provisional application clause with a domestic law limitation.”52 No support is cited for this proposition.53
52. Thus, according to Respondent’s piecemeal approach to Articles 45(1) and 45(2)(b), signatory states could invoke their own domestic law to determine which Treaty obligations they would apply provisionally. For states applying the Treaty provisionally, there would then be no legal obligation of reciprocity whatsoever, either to or from them: signatory states would be free to adopt (or not) their own subjective, non-transparent policies of reciprocity – which could and presumably would differ depending on the signatory at issue – based upon their domestic-law infused provisional application and their perceptions of which obligations various other signatories were prepared to accept provisionally as not inconsistent with their own domestic law. Even assuming a degree of transparency (which would be non-existent), it would take a mathematician of some standing to decipher the geometrical and non-reciprocal patchwork of “reciprocity” that would emerge from such a process. Investors would find the task impossible.
53. To adopt (and adapt) Ms Quast Mertsch’s language: “In other words, the reach of international law would be limited by approximately [40] internal legal orders and its regulatory force would be so marginal that any harmonisation, standardisation or unification of conduct through international law and treaties would be almost impossible to achieve.”54
53 Other than, possibly, the statement of Professor Nolte that “the parties might well accept such lack of clarity in return for the expectation that some parts of the treaty would be implemented in the preliminary phase.” (RL126, p. 8). See Resp. Reply, ¶ 77 (citing RL126). Respondent neglects to mention that Professor Nolte served as its expert in Hulley Enterprises and that his opinion was rejected by the tribunal in that case. ↩
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54. For from adopting improper “policy” considerations, therefore,55 the Hulley Enterprises Tribunal found that the Respondent’s interpretation could not be right, as it plainly cannot be, because:
“Allowing a State to modulate (or, as the case may be, eliminate) the obligation of provisional application, depending on the content of its internal law in relation to the specific provisions found in the Treaty, would undermine the principle that provisional application of a treaty creates binding obligations.”56
-and-
“This would create unacceptable uncertainty in international affairs. Specifically, it would allow a State to make fluctuating, uncertain and un-notified assertions about the content of its domestic law, after a dispute has already arisen. Such a State [...] ‘would be bound by nothing but its own whims and would make a mockery of the international legal agreement to which it chose to subject itself.’ A treaty should not be interpreted so as to allow such a situation unless the language of the treaty is clear and admits no other interpretation. That is not the case with Article 45(1) of the ECT.”57
55. As noted above, the situation becomes even more unwieldy and unworkable when Respondent’s subjective and variable reciprocity/counter-reciprocity theory is thrown into the mix.
56. Respondent attacks Claimant for referring to Vienna Convention Articles 27 and 46 (and their corollaries in Articles 3 and 32 of the ILC’s Articles on the Responsibility of States for Wrongful, Acts (referred to hereafter as the “Articles on State Responsibility”)).58 Vienna Convention Article 27 and 46 reflect the strong presumption in international law of the separation of international law and domestic law. If the international obligations of each state were determined by reference to its domestic law, international law would unworkable and tantamount to having no
55 See Resp. Reply ¶¶ 75-76. It is Respondent whose case on jurisdiction relies on improper policy arguments in seeking to import so-called inherent characteristics of “investments” to alter the ECT’s plain language. See discussion infra. ↩
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international rule of law at all.59 Equally, it cannot be for states negotiating and concluding international commitments to second guess the authority or powers of their “opposite number” officials of other states unless such lack of authority is manifest. Contrary to Respondent’s contentions,60 where the meaning of a “to the extent” clause is unclear (Claimant submits it is not), these fundamental building blocks of international law are relevant and required to be taken into account when interpreting it by virtue of Vienna Convention Article 31(3)(c).61
57. Thus, legal certainty is a fundamental principle of international and national law and not a mere “policy consideration.”62 It informs the specific principles and rules mentioned above, i.e. Vienna Convention Articles 27 and 46, and the rules on state responsibility reflected in Articles 3 and 32 of the Articles on State Responsibility. It is reasonable to assume this accounts for Professor Crawford’s observation that “[they] are routinely cited across a range of contexts.”63
58. The Hulley Enterprises Tribunal’s point, and that of the Claimant, is that given the strength of these principles of international law, if Article 45(1) was to depart from them it would need to expressly state that that is what it is doing. Article 45 does not. Respondent misses the point, and its arguments (see Reply, ¶¶ 85-89) can be dismissed accordingly.
59. It should also be noted that this argument cannot be taken in isolation from the other elements of Article 31 considered by the Hulley Enterprises Tribunal, that, together, are required to be considered under the general rule of interpretation in Article 31. That is, the text of Article 45(1), its context (which includes the practice of the
59 As observed by the authors of the Harvard Draft Convention on the Law of Treaties and Commentary, discussed by Quast Mertsch (RL117, p. 94). ↩
61 Gardiner, R.K., Treaty Interpretation (OUP: 2008), p. 260 (CL70). ↩
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negotiating parties and signatories under Article 31(2) and (3), (a) and (b)), and the object and purpose of the ECT.64
60. Moreover, while placing reliance on Professor Reisman’s criticism of Claimant’s interpretation,65 Respondent omits the following from the same source:
“A key objective of the ECT regime – encouragement and facilitation of investment in energy – depends on potential investors’ ability to know the legal situation with certainty. Clarity with respect to provisional application is clearly indispensable to the essential purposes of the ECT. As it is, a state is given ample opportunity to opt out of the provisional application regime. First, the state need not sign the ECT. Second, if it does, it can avoid the provisional application regime because of an inability arising from its domestic law by a declaration issued upon signature. But it must duly notify in advance that its constitution, laws or regulations disable it from provisional application, a requirement which puts prospective foreign investors as well as other states parties on notice. If the relevant time is not considered the time of signature and is left to the discretion of the state, then the balance of interests which is fundamental to all agreements, and was designed for protection by the ECT no longer exists. A state could then simply assert, at any time, even years after the signature of the ECT, with regard to a particular investor with a long-standing investment in its territory and a possible reliance claim that it is unable to comply with the provisional application regime of the ECT because of its constitution, laws, or regulations.
Alternatively, a state, subsequent to its signature, could change its laws and regulations so that it could not comply with the ECT provisional application. This would change the regime which an investor in that state reasonably assumed when it made its investment. The ECT provides explicitly for the legitimate interest of a signatory state in case of subsequent change of constitution, laws, and regulations. It has the right to terminate its obligation of provisional application under Article 45(3)(a) and (b), by notifying the depository that it does not intend to become a contracting parry to the ECT. Termination of the Treaty’s provisional application takes place 60 days after notification. For those investors that had already invested in that state, however, Part III and V of the ECT remain in force for 20 years with regard to any investments made in that state during the provisional application unless a declaration rejecting the ‘tail’ is made at the time of signature.”66
64 See Aust, A., Modern Treaty Law and Practice (3rd ed, CUP: 2013), p. 208 (CL62). These elements taken together distinguish ECT Article 45(1) from paragraph 1(b) of the GATT Protocol of Provisional Application, relied on by Respondent at Resp. Reply ¶¶ 90-91, 124-125. ↩
66 RL116, pp.94-95 (emphasis added). ↩
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61. As noted above, therefore, under Professor Reisman’s interpretation as well, this Tribunal has jurisdiction over Respondent under Article 45(1) ECT. On this fundamental point Professor Reisman, Claimant and the Kardassopoulos and Hully Enterprises Tribunals are in complete accord: the intention of the signatories to the ECT cannot possibly have been otherwise.
62. Respondent claims that the “to the extent” clause “excludes the treaty obligations that a State that validly consented to provisional application undertakes.”67 This is incorrect for the reasons discussed. Moreover, an exclusion of the kind Respondent proposes has the function of a reservation. According to Article 2(1)(d) of the Vienna Convention, a reservation “purports to exclude or to modify the legal effect of certain provisions of the treaty in their application to that State.”68 Article 46 ECT, however, precludes any reservations to individual Treaty provisions.69 The Treaty also provides for a specific mechanism to fully “exclude” the provisional application of the Treaty until ratification under Article 45(2) and 45(3)(c).
63. Further support for Claimant’s interpretation is found in state practice and the importance placed by negotiating states of the ECT on the promotion of security of supply, certainty and a level playing field in the energy sector for all signatory states. In fact, in the plenary sessions that Respondent quotes from, both Canada and the European Union delegations highlighted the importance of safeguarding legal certainty for investors putting their trust in the provisional application regime.70 And for precisely the same reason, ECT negotiating states included the 20-year survival clause in Article 45(3) on termination by a signatory state that had not expressly excluded provisional application.71 This emphasis on legal certainty prevailed over opposition from various delegations including the United States.72
67 Resp. Reply, ¶ 48; see also Respondent’s comments in relation to Luxembourg practice, ¶ 110. ↩
69 Article 46 of the ECT provides that “[n]o reservations may be made to this Treaty” (Exhibit C1). ↩
70 Energy Charter Conference Plenary Session on 7 March 1994, pp. 10-11 (Exhibit R80). ↩
71 Ibid. Note also Hungarian delegation’s remarks on p. 11 (Exhibit R80): “if we drop out [survival clause], then no one will invest in a country which is only in the preliminary application of the Treaty”. ↩
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64. As discussed in Claimant’s Counter-Memorial,73 the strong consensus in support of legal certainty is also why the Energy Charter Conference Secretariat in its Message No. 239 requested that all delegations wishing to make a request to be excepted from provisional application notify the Secretariat. The Secretariat then drew up a list of signatories that would not apply the Treaty provisionally as the signature and ratification process progressed.74
65. On 28 April 1994 the European Energy Charter Conference Secretariat sent a message to all negotiating parties on the subject of provisional application:
“At the March Plenary it was agreed that there should be a strong commitment to Provisional Application of the Energy Charter Treaty. This is provided for by Article 50 [later renumbered Article 45] of the Chairman’s Compromise Text. In response to the position taken by some delegations, Article 50(2)(a) would allow countries which did not wish to apply the Treaty provisionally to make a declaration to that effect at the time of signature.
[...]
It was emphasised at the March Plenary that all participants should be informed well before signature of which countries would request exceptions to provisional application. Any delegations wishing to make such requests should therefore notify the Secretariat, on or before 20 May:
(a) if they intend to make declaration under Article 50(2)(a) that they will not apply the Treaty provisionally; or
(b) they cannot accept the 20-year investment protection rule in Article 50(3)(b) and should therefore be listed in Annex PA.”75
66. The Secretariat received responses from Canada,76 Austria,77 Romania,78 Denmark,79 Norway,80 and Japan.81 Canada said it was not in a position to say whether it would
73 Counter-Memorial, ¶¶ 85-86. ↩
74 Id., ¶ 85. Claimant has provided documentary evidence verifying these efforts rather than relying on “an article written by counsel for claimant in the Hulley Enterprises arbitration,” as Respondent wrongly suggests (Resp. Reply, ¶ 98). ↩
75 Message No. 239 (Exhibit C142) (emphasis in original). ↩
76 Letter from Canada to the Secretary-General of the ECT Secretariat, 19 May 1994 (Exhibit C188). ↩
77 Letter from Austria to the European Energy Charter Conference Secretariat, 19 May 1994 (Exhibit C189). ↩
78 Letter from Romania to the Conference on European Energy Charter Secretariat, 30 May 1994 (Exhibit C190). ↩
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make a declaration; the other six states indicated they would be making a declaration under Article 50(2)(a).82
67. Subsequently Portugal advised the Secretariat it would make a declaration under Article 50(2),83 Italy advised it could not consent to provisional application because of Article 80 of its constitution,84 and Switzerland said it intended not to apply the ECT provisionally.85
68. The Italian example is informative. Italy wrote to the Secretariat of the Energy Charter Conference to advise that it could not consent to provisional application and therefore to request that it be listed in Annex PA to the ECT. The reason given was that its constitution forbade it to accept financial burdens or dispute resolution absent ratification.86 Clive Jones, Secretary General of the Secretariat, responded to point out that Italy seemed to be operating under a misunderstanding because Annex PA was for those signatories who would accept provisional application but did not wish to accept the obligations toward investors under Article 45(3)(b) ECT. Significantly, Mr Jones emphasized that if Italy could not accept provisional application of the Treaty it “would need to make a declaration to that effect under Article [45](2)(a) of the Treaty at the time of signature.”87 No suggestion was made that Italy might instead simply sign the Treaty and apply a piecemeal approach under Article 45(1) to provisionally apply the Treaty’s provisions excepting those involving financial contributions or
(Cont’d from previous page)
79 Fax from Denmark to Clive Jones, Secretariat of the European Energy Charter, 31 May 1994 (Exhibit C191). ↩
80 Letter from Norway to Energy Charter Secretariat, 31 May 1994 (Exhibit C192). ↩
81 Referred to in Summary of Responses to Message No. 239 (Revised), 9 June 1994 (Exhibit C193). ↩
82 Confirmed in Exhibit C193. ↩
83 Letter from Portugal to Clive Jones, Secretariat of the European Energy Charter Conference, 22 July 1994 (Exhibit C194). ↩
84 Letter from Italy to the Secretariat to the European Energy Charter Conference, 27 July 1994 (Exhibit C195). See also Letter from Clive Jones, Secretary General to Italy 31 August 1994 (Exhibit C196); and Letter from Italy to Secretary General, 1 September 1994 (Exhibit C141). ↩
85 Fax from Switzerland to the Charter Conference Secretariat, 21 September 1994 (Exhibit C197). ↩
86 Letter from Italy to the Secretariat to the European Energy Charter Conference, 27 July 1994 (Exhibit C195). ↩
87 Letter from Clive Jones, Secretary General to Italy 31 August 1994 (Exhibit C196). ↩
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dispute resolution. Italy then confirmed that it would make a declaration to not accept provisional application “in toto”.88
69. The signature ceremony of the ECT took place as planned on 17 December 1994 at Lisbon.
70. On 19 December 1994, the Secretariat sent a note on “Provisional Application,” annexing a “preliminary list of signatories which will not apply the Energy Charter Treaty provisionally, according to information available to the Secretariat”:89
“List of signatories
which will not apply the Treaty provisionally in accordance with Article 45(1):
Austria Romania Italy Turkey Portugal List of signatories
making a declaration that they cannot accept provisional application of the Treaty in accordance with Article 45(2)(a)
Bulgaria Malta Iceland Poland Liechtenstein Switzerland List of delegations
which intend, when they sign the Treaty, to make a declaration that they cannot accept provisional application of the Treaty in accordance with Article 45(2)(a)
Norway Japan”
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71. Iceland, Malta, Bulgaria, Cyprus, Switzerland, Turkmenistan, Norway, Japan and Poland made declarations that they could not accept provisional application under Article 45(2)(a).90 Hungary made a declaration that it could not accept provisional application under Article 45, but did not specify a paragraph.91
72. As the Hulley Enterprises Tribunal noted, none of the states relying on Article 45(1) relied on it for “selective or partial application of the ECT based on the non-application of only those individual provisions that are claimed to be inconsistent with a signatory’s domestic law.”92
73. In its Reply,93 Respondent alleges that Claimant grossly mischaracterises the ECT signatories’ practice. As the description of state practice concerning the application of Article 45(1) and (2) above shows, Claimant is entirely correct when it states that “all signatories having any difficulty in provisional application of the Treaty expressed their position, be it pursuant to Article 45(1) or Article 45(2) ECT” and “[e]ach did so with respect to provisional application as a whole.’”94
74. Claimant further notes there is no suggestion in the Decision of the Energy Charter Conference of 7 December 2000, which recorded the termination of transitional arrangements contained in Annex T by Armenia and Russia, that although the transitional arrangements had been terminated the substantive obligations referred to in Article 32(1) would only apply in part, dependent on whether they were consistent with Russian law.95 If that were the case, it might have been expected that that point would have been recorded. In addition, the practice of the ECT Secretariat concerning the transitional provisions in Article 32 in relation to, inter alia, Article
90 See Declarations by Iceland, Malta, Bulgaria, Cyprus, Switzerland, Turkmenistan, Norway, Japan under Article 45(2)(a) (Exhibit C198). Even though Poland initially made a declaration under Article 45(1)(Exhibit C199), it later clarified that it was for 45(2)(a); see Letter from Poland to Clive Jones, Secretariat of the European Energy Charter Conference, 11 January 1995 (Exhibit C200). ↩
91 Declaration by Hungary under Article 45, 7 February 1995 (Exhibit C201). ↩
94 Counter-Memorial, ¶ 86, cited at Resp. Reply, ¶ 98. ↩
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10(7) on non-discrimination,96 in “recognition of the need for time to adapt to the requirements of a market economy”, provides yet further support for the Hulley Enterpises Tribunal’s interpretation of Article 45(1). There would be no need for transitional protection of discriminatory domestic rules if Article 45(1) was interpreted to allow non-application of Article 10(7) where it was not consistent with (or, on Respondent’s interpretation in its Reply), or there was no positive law providing for non-discrimination.
75. One final point on reciprocity and legal certainty: Respondent claims it never received the “benefits of provisional application” and faults the Hulley Enterprises Tribunal for supposing that it did.97 If it is being suggested that a signatory able to make a factual showing that it did not benefit from provisional application of the ECT obtains, in effect, a denial of benefits defence against investors from all other signatory states, that is a novel proposition devoid of legal support or merit – as Respondent surely appreciates.
76. In any event, it can hardly be suggested that Respondent received no benefits. During treaty negotiations, Respondent affirmed the importance of provisional application for the success of the Energy Charter Conference. In the Russian Federation’s own words, the absence of a provisional application obligation:
“[...] would mean a delay for a specific period in the entry into force of this extremely important international document. [...] And as we understand it, this period of provisional application of the Treaty would be a sort of running in period of the implementation of this most important instrument for international cooperation.”98
77. The reason Respondent was anxious to bind as many signatories as possible to immediate provisional application of the Treaty was expressed in a 24 March 1993
96 Article 10(7) ECT (Exhibit C1): “Each Contracting Party shall accord to Investments in its Area of Investors of other Contracting Parties, and their related activities including management, maintenance, use, enjoyment or disposal, treatment no less favourable than that which it accords to Investments of its own Investors or of the Investors of any other Contracting Party or any third state and their related activities including management, maintenance, use, enjoyment or disposal, whichever is the most favourable.” ↩
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letter from the Russian Deputy Prime Minister to the Chairman of the Energy Charter Conference:
“We regard the Charter as a historic document setting principal guidelines for the development of world energy, as well as the economy as a whole for years to come. It is exceptionally important that the European Energy Charter and its Basic Agreement should create ‘game rules’ determining the development of international cooperation in energy, which are new for many countries, including Russia. At the same time we hope that the Basic Agreement will facilitate solving Russia’s current economic difficulties by the intensification of the foreign investment flow.”99
78. Indeed, the signing of the ECT was one of the steps the Yeltsin government took to attract foreign capital to support Russia’s economic restructuring following the collapse of the USSR.100
79. Respondent then provisionally applied the Treaty until its notification to the ECT depository in August 2009. During that time, substantial foreign investment was made in Russia’s energy sector. Presumably, at least some Russian investors also made investments in the energy sectors of other signatory states. The idea that the ECT had nothing to do with those investment decisions, a view not even Respondent is prepared to voice, defies belief.
80. Respondent’s reliance on a December 1994 position expressed by the European Community is misplaced. That position, discussed below, arose when the European Court of Justice handed down its Opinion 1/94101 in November 1994 on the division of competences between EC Member States and the Community as regards entering treaty commitments under international law, namely the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) and The General Agreement on Trade
99 Letter from the Russian Deputy Minister to the Chairman of the Energy Charter Conference dated 22 March 1993 (Exhibit C202). ↩
100 See Yeltsin Calls for Joint Energy Efforts, The Moscow Times available at (accessed on 15 June 2015)(Exhibit C203); Joint Statement on Cooperation in Promoting Rule of Law and Combating Crime by Clinton and Yeltsin, p.1653 available at (accessed on 15 June 2015) (Exhibit C204). ↩
101 Opinion of the European Court of Justice, 15 November 1994, Competence of the Community to Conclude International Agreements Concerning Services and The Protection of Intellectual Property - Article 228 (6) of the EC Treaty, [1994] ECR I-5267 (Exhibit C205). ↩
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in Services (GATs) agreements. By that time, the ECT negotiations had concluded and the Treaty language had been finalised.
81. Opinion 1/94 raised questions about whether the EC was competent under EEC Treaty Article 113 to agree to provisional application of the treaty. This raised sensitive political issues because the EC had already promised various expected signatories, most notably Respondent, that it would agree to provisional application. Moreover, the signing ceremony for the ECT had been set for 16-17 December 1994, so the EC had to act urgently to address the new EC competence issues without upsetting the delicate political balance.102
82. As a product of the urgency/expediency of the circumstances, the European Council adopted a decision containing a more restrictive, internal view on provisional application. With respect to this new position, the Council Presidency emphasised that: “[t]he Council Legal Service nevertheless considers that this restrictive and possibly unilateral interpretation of Art. 45(1) and (2) could create a problem of transparency in relation to other negotiating parties.”103
83. Indeed, the Council’s decision was both restrictive and unilateral and, were it valid, it would no doubt create a problem of transparency that the negotiating parties to the ECT had sought to prevent. The interpretation in the Council decision, however, is not valid. It is, moreover, limited to matters of competence, not part of the travaux and says nothing about the proper interpretation of Article 45(1) ECT, as the Hulley Enterprises Tribunal properly concluded.104
102 See Note from the Conference Chairman dated 14 September 1994 - Document 27/94 CONF 104 (Exhibit C206), enclosing the final text of the Treaty and noting that the signing ceremony was set to take place in December. The Chairman also asked all delegations to confirm “as soon as possible and in any case before the end of October” whether they agree to the adoption of the Treaty text by Charter Conference. See also EC Report to the Permanent Representatives Committee, 8 December 1994, p.2, ¶ 4 and p.3, ¶ 5 (Exhibit C207) reflecting the urgency of the need to address the EC competence issue after the issuance of Opinion 1/94. ↩
103 EC Report to the Permanent Representatives Committee, 8 December 1994, p.4 (Exhibit C207). ↩
104 CL9, ¶¶ 327-328. As regards Respondent’s argument (Resp. Reply, ¶ 103) that the Hulley Enterprises Tribunal did not take into account the fact that the 1994 EC Joint Statement included EC Member States as well as the EC, this was but one of four reasons the Tribunal gave for rejecting Respondent’s reliance on the 1994 Joint EC Statement, and not the most important. See CL9, ¶ 327, second bullet point. ↩
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84. Respondent also argues that the EC and its Member States “did not communicate their position” that they were entitled to invoke specific inconsistencies with their domestic legal order “to other ECT negotiating states” and that they “were not required to do so”.105 Quite clearly, the evidence shows this is not the case: the negotiating parties, including those which were also EC Member States (Austria, Luxembourg, Italy, Portugal, and Malta), independently made clear on or around the time of signature if they would not apply the treaty provisionally, relying on either Article 45(1) or (2).106 Respondent has produced no evidence to suggest that signatories who did not give notice or make a declaration under Article 45(1) or (2) adopted the “piecemeal approach” to their obligations under Article 45(1).
85. There is no evidence to support Respondent’s contention that the fact that the ECT Secretariat sought Russia’s ratification “evidences that they appreciated that provisional application did not impose on Respondent the same obligations as ratification.”107 The obvious, logical inference to draw from the emphasis on ratification by the ECT Secretariat and Conference is that it would affirm and strengthen the political commitment by Russia – a key player – to the ECT and the Secretariat’s work on related instruments.108 This would provide greater legal certainty and stability to the treaty regime into the future in a practical sense. From the formal legal perspective, one year’s notice of termination would be required under Article 47(2), rather than 60 days under Article 45(3)(a).
86. As to Respondent’s reliance on a 2006 Statement by the Secretary of State for Foreign and Commonwealth Affairs to the UK House of Commons109—an irrelevant statement in any event—the words used by Mr Douglas Alexander are consistent with an obligation to apply the treaty as a whole provisionally if the principle of provisional application is not inconsistent with a signatory’s “constitution, laws or regulations”:
108 Such as the Energy Charter Transit Protocol and the Supplementary Treaty on Investment, referred to in Decision of the Energy Charter Conference, CCDEC 2000, 14 NOT Brussels (7 December 2000), (Exhibit R104), referred to at p. 1 and p. 2, respectively. ↩
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“The obligations of the Energy Charter Treaty (ECT) on a signatory depend on whether it has ratified the treaty, is applying it provisionally or has opted out of provisional application.”110 Nowhere in his statement is there any reference to inconsistencies with particular provisions. Furthermore, he says the UK Government “has not undertaken an assessment of any particular signatory”. The brief statement appears to be no more than a basic summary of the formal position under the ECT, not an analysis of whether Russia is relying on the opt-out in Articles 45(1) or (2)(a). The reference to “some obligations” is not inconsistent with this; all signatories are obliged to comply with the obligation in Article 45(4) and have obligations under the Vienna Convention Article 18 to “refrain from acts which would defeat the object and purpose” of the Treaty.111
87. Claimant explained in its Counter-Memorial why, even if Article 45(1) does not refer to the principle of provisional application (which is denied), Article 26 is not inconsistent with Russian law.112 First, under Russian law at the time the ECT was signed by it, on 17 December 1994, an agreement to provisionally apply treaties was self-executing and, given the rules of the hierarchy of norms in Russian law, the ECT would prevail over inconsistent domestic law (if any) and so a fortiori there was and is no inconsistency. Second, there can be no inconsistency with the Russian domestic law on arbitration because Article 26 operates on the international plane, and claims based on the ECT are claims of international law, not domestic law. Moreover, Russian law on foreign investment was fully consistent with the principle of international arbitration of investment disputes.
88. The manner in which Respondent has framed its Reply alone defeats its objection to jurisdiction based on the “to the extent” clause. Respondent claims that “Claimant has failed to demonstrate that arbitration of the present dispute is consistent with
112 Counter-Memorial, Section III. D. ↩
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Russian Law.”113 This follows from Respondent’s apparent view that it may selectively “determin[e] the scope and content of its treaty obligations by reference to domestic law”114 and “...a State that relies on a ‘to the extent’ clause invokes its internal law to determine the extent and content of the obligations it has accepted under a treaty.”115
89. Thus, Respondent interprets the “to the extent” clause in Article 45(1) as meaning within the scope of positive Russian domestic law, i.e. consistent with internal law rather than “not inconsistent with” it. But these are not the same. “Not inconsistent with” has a wider meaning. It encompasses not only what domestic law already positively provides for, but obligations operating on the international plane or the domestic plane on which domestic law is silent, or whose implementation by government is not expressly and absolutely precluded by existing domestic legislation.
90. The plain language of Article 45(1) ECT thus requires that Respondent must demonstrate that provisional application of Article 26 ECT is inconsistent with Russian law. The burden of proof is entirely Respondent’s and Claimant is under no obligation to “demonstrate that arbitration of the present dispute is consistent with Russian Law.” As Respondent contends an inconsistency within the meaning of Article 45 exists and asks the Tribunal to so find, Respondent must prove such inconsistency.116
91. “Inconsistent with” means “incompatible with”; “in contradiction with”; or “not in agreement with”.117 Thus, pursuant to the ordinary meaning of the term championed by Respondent, arbitration of the current dispute has to be irreconcilable and in
113 Resp. Reply, p.54, Heading H. ↩
116 Kardassapoluos, ¶ 229 (CL11). ↩
117 “inconsistent”, Collins English Dictionary, available at (accessed 11 June 2015) (Exhibit C208); see also Oxford English Dictionary, available at (accessed 11 June 2015) (Exhibit C209). ↩
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contradiction with Russian law for the Respondent to take refuge in this limitation. It is only a direct conflict with Russian law existing at the time of the ECT’s signature that would satisfy the limitation in Article 45. At most, the “to the extent” clause absolved Respondent from an obligation to pass new legislation or modify existing legislation in case of a direct conflict with ECT provisions.
92. Claimant notes that, while wrong on the plain language, Respondent’s interpretation also would significantly weaken the obligation to provisionally apply the Treaty, and is therefore contrary to the object and purpose of Article 45(1).118 The meaning of provisional application would be rendered largely empty if a state could, under international law, rely on the absence of express domestic law providing for arbitration on the international plane to escape accountability for its acts. The fact that ECT signatories had to list themselves in Annex PA to avoid the 20-year investment protection provision reinforces the strength of protection investors were intended to enjoy under Article 45, during periods of provisional application.
93. In fact, Respondent elsewhere accepts what the limitation clause entailed (on its own interpretation of Article 45(1)). For example, it cites from the following passage of Annelise Q. Mertsch’s article on provisional application confirming the scope of “inconsistency”—as a general matter—under a limitation clause:
“[...]to the extent that the adoption of new legislation (implementing legislation) would be necessary to perform the treaty, the States are absolved from this obligation for the period of provisional application.”119
94. Respondent also refers to the GATT Protocol of Provisional Application which provides for provisional application “to the fullest extent not inconsistent with existing legislation”120, and to the GATT panel and working party reports confirming that
118 As set out in ECT Article 2, to establish “a legal framework in order to promote long-term cooperation in the energy field, based on complementarities and mutual benefits, in accordance with the objectives and principles of the Charter” (Exhibit C1). ↩
119 Resp. Reply, ¶ 123; RL117, p. 97. ↩
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contracting states do not have to “chang[e] existing legislation or [act] inconsistent with it.”121
95. The Report by the GATT Working Party appointed by the Intercessional Committee on German Import Restrictions adopted on 2 May 1958, affirmed the view of a number of delegations that this meant “where a legislation gave the government discretion between action which was in conflict with Part II of the Agreement and action which was consistent with it, then action in accordance with the GATT provisions would not be inconsistent with the national legislation, and there would be no ground for deviating from them.”122 A GATT party could not rely on the protocol of provisional application except in the case of outright inconsistency. The idea that states should do all in their power under domestic law to act consistently with their international obligations is not only reflected in GATT practice, but also national law and EU law on the principle of harmonious or consistent interpretation.123
96. The requirement of a positive conflict is also in line with the practice and understanding of two states that Respondent selectively relies upon in its submissions: Finland and the United States (not a signatory). Respondent argues in its Memorial and Reply124 that each of these states opposed provisional application of the financial contribution provisions of the ECT. But for each, the “inconsistency” arose because their respective domestic laws expressly precluded any financial contribution to the provisional Secretariat before ratification.125
122 “German Import Restrictions”, Report by the GATT Working Party appointed by the Inter-sessional Committee (Adopted by the Committee on 2 May 1958), L/821, 29 May 1958 (CL81), p.16, ¶15. ↩
123 For a useful summary, see Betlam G. & Nollkaemper A., ‘Giving Effect To Public International Law and European Community Law Before Domestic Courts: A Comparative Analysis If The Practice of Consistent Interpretation”, EJIL, Vol. 14 No. 3 (2003), pp. 569–589 (CL63). Similarly, the ILC’s Conclusions of the Work of the Study Group on the Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law, Yearbook of the International Law Commission, 2006, Vol II, Part Two, Chp. XII, at pp.175-184, p. 178 ¶ (4) said: “It is a generally accepted principle that when several norms bear on a single issue they should, to the extent possible, be interpreted so as to give rise to a single set of harmonious interpretations” (CL66). ↩
124 Resp. Mem., ¶¶ 43-44; Resp. Reply, ¶ 99. ↩
125 Exhibit R17Corr, p.6; Exhibit R15. ↩
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97. Similarly, investment treaty tribunals have required an express prohibition under domestic law when determining the existence of an “inconsistency” with treaty provisions. For example, in Kardassopoulos, Georgia relied on legislation requiring the ratification of treaties before they become part of domestic law to argue the inconsistency of provisional application. This argument was rejected because, absent a specific provision under domestic law establishing that provisional application of treaties and in particular the ECT would be inconsistent with domestic law, there was no “inconsistency”:
“[...]Laws, neither of which deal in terms with the provisional application of treaties but deal rather with the supremacy of treaties over domestic laws, and requiring that treaties have ‘entered into force’ as a condition for such supremacy, do not necessarily imply that provisional application of treaties is not permitted.”126
[...]
“A Constitutional provision which is not dealing with the provisional application of treaties but which establishes the circumstances in which treaties become an integral part of domestic law and prevail over inconsistent domestic law, and requires prior ratification for those purposes, does not necessarily imply that provisional application of treaties is not permitted.”127
98. In Achmea v Slovak Republic,128 the tribunal addressed the question of compatibility of EU law (as part of the domestic law of the state) with investor-state arbitration under the Dutch- Czech/Slovak Republic BIT. The Tribunal held:
“There is, however, no rule of EU law that prohibits investor-State arbitration. Far from it: transnational arbitration is a commonplace throughout the EU, including arbitrations between legal persons and States; and the European Court of Justice has given several indications of how questions of EU law should be handled in the course of arbitrations, including important questions of
127 Id., ¶ 245. See also De Gramont A. & Alban E. M., ‘The Sun Never Sets: Provisional Application and the Energy Charter Treaty’ in (ed). Coop G., Energy Dispute Resolution: Investment Protection, Transit and The Energy Charter Treaty (Jurisnet: 2011), pp. 211-248 (CL68) for commentary on the case. ↩
128 Achmea B.V. (formerly Eureko B.V.) v. Slovak Republic [I], PCA Case No. 2008-13, Award on Jurisdiction, Arbitrability and Suspension, 26 October 2010 (Lowe, van den Berg, Veeder) (emphasis added) (CL56). ↩
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public policy. It cannot be asserted that all arbitrations that involve any question of EU law are conducted in violation of EU law [...]”129
99. In Electrabel v Hungary, involving claims under the ECT, the Tribunal agreed with the reasoning of the Achmea Tribunal as follows:
“First, it is necessary to note again that the EU law is not incompatible with the provision for investor-state arbitration contained in Part V of the ECT, including international arbitration under the ICSID Convention. The two legal orders can be applied together as regards the Parties’ arbitration agreement and this arbitration, because only the ECT deals with investor-state arbitration; and nothing in EU law can be interpreted as precluding investor-state arbitration under the ECT and the ICSID Convention.”130
100. The recently released ECT award in Khan Resources v Mongolia is also on point. There, the relevant section of the Mongolian Foreign Investment Law stipulated (on similar terms to Russia’s foreign investment legislation) that:
“Disputes between foreign investors and Mongolian investors as well as between foreign investors and Mongolian legal or natural persons on the matters relating to foreign investment and the operations of the foreign invested business entity shall be resolved in the Courts of Mongolia unless provided otherwise by international treaties to which Mongolia is a party or by any contract between the parties.”131
101. The tribunal rejected Mongolia’s objection to jurisdiction, finding that, in its view:
“the Respondents incorrectly emphasize this provision’s reference to the courts of Mongolia. Article 25 does not preclude the submission of breach of the Foreign Investment Law claims to international arbitration. On the contrary, Article 25 authorizes the resolution of disputes concerning foreign investment in international arbitration where a relevant treaty or contract provides for this method of dispute resolution.”132
102. Respondent fails to put forward any case to establish that Russian law existing at the time of ECT signature forbade arbitration of investment disputes or required Respondent to modify existing legislation—i.e., that a conflict existed. Stated in the
129 Ibid., ¶ 274 (emphasis added). ↩
130 RL76, ¶ 4.175 (emphasis added). ↩
131 Khan Resources Inc. Khan Resources B.V. CAUC Holding Company Ltd. v. The Government of Mongolia MonAtom LLC, PCA Case No. 2011-09, Decision on Jurisdiction, 25 July 2012 (Williams, Fortier, Hanotiau), ¶ 71 (emphasis added) (CL61). ↩
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words of the Electrabel and Khan Resources Tribunals, respectively, “nothing in [Russian] law can be interpreted as precluding investor-state arbitration under the ECT”133 and “[Russian law] does not preclude the submission of breach of the [ECT] claims to international arbitration.”134
103. For the sake of completeness, and while this is addressed in Claimant’s Counter-Memorial,135 no Russian statute in effect as of December 1994 precluded arbitration of investment disputes. As explained by Professor Stephan in his first report, the 1991 Fundamentals of Legislation on Foreign Investments in the USSR (the “Fundamentals”), the 1991 Law of the RSRSR No. 1545-1 on Foreign Investment in the RSFSR (the “1991 Law”), and the 1999 Federal Law No. 160-FZ on Foreign Investments in the Russian Federation (the “1999 Law”) provided express legislative authorization for the Russian Federation to accept treaty obligations to submit to binding arbitration of investment disputes.136
104. This was confirmed by Respondent itself in its Explanatory Note to the Russian parliament, which (again) provides in relevant part:
“The provisions of the ECT are consistent with Russian legislation.
...
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.”137
135 Counter-Memorial, ¶¶ 122-123. ↩
137 Exhibit R 111, p.4 (emphasis added). Where any potential “inconsistencies” were identified, the ECT Explanatory Note made express reference to them. For example, the Note provided that foreign trade legislation needed to be brought in line with GATT/WTO provisions, and highlighted that environmental protection provisions still ensured priority of domestic legislation. ↩
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105. Appreciating the problem, Respondent resorts to eight explanatory notes drawn from its 57 BITs in force. It suggests that these notes confirm that “investor-State arbitration provisions set out rules different than provided by law [...] i.e. they derogate from federal law”, and therefore are subject to ratification.138 They confirm nothing of the kind. First, the relevant time period is December 1994 when Respondent signed the ECT and the relevant “inconsistency” analysis is with respect to the ECT. Only the ECT Explanatory Note addresses this analysis; the others are plainly irrelevant.139 Second: (a) none of these 57 BITs contained a provisional application provision so the only way Russia could be bound by their arbitration provisions was via ratification; (b) most of the BITs concerned legislation that did not exist at the time of the ECT’s signature; and (c) in Russia’s own words, these explanatory notes state that “ratification was required [for these BITs] because [foreign investment law] does not provide for a mechanism of settlement of such disputes by international arbitration.”140 It is correct that foreign investment laws did not provide a specific “mechanism” for arbitration. The point, however, which Respondent simply chooses to ignore, is that these laws did not prohibit, preclude or prevent such mechanisms but were fully consistent with them. The mechanism, of course, is provided by Article 26 ECT as provisionally applied by Respondent.
106. No doubt in recognition of this fact, Respondent has changed course in its Reply submissions. While initially arguing in its Memorial that unratified treaties including the ECT that “amend or supplement existing laws” are inconsistent with Russian law,141 Respondent now suggests that Article 26 ECT was inconsistent with Russian law because it is a “rule different from those provided for by law”.142
139 The Explanatory Note also makes clear that no new legislation was required to accommodate the Article 26 ECT dispute resolution provisions, a point Respondent now seems to have conceded by abandoning its argument that unratified treaties that “amend or supplement existing laws” are inconsistent with Russian law. See Resp. Mem., ¶ 61. ↩
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107. As support for this (irrelevant) proposition,143 its expert Professor Asoskov continues to cite from Russian court practice or commentaries concerning unratified treaties having no provisional application clause that include rules conflicting with existing legislation. According to Professor Asoskov, such unratified treaties do not have supremacy over inconsistent domestic laws.144 This is entirely beside the point for obvious reasons: the ECT is a treaty with a provisional application clause that has no rules conflicting with Russian investment legislation.
108. As Professor Stephan explains:
“Professor Asoskov discusses a 2009 decision of the Supreme Court of the Russian Federation that addresses this term in the context of choosing whether to apply a treaty or domestic criminal legislation to a person who had violated the national border. The relevant treaty would have immunized the criminal accused from Russian prosecution in deference to his home state's jurisdiction, while Russian legislation contained no such immunity. However, the treaty in question did not provide for provisional application of any of the treaty obligations in the period before ratification and it had not yet been ratified. Accordingly, the question of a contradiction or conflict did not arise because there was no argument, even a theoretical one, that the provisions of the treaty should be applied pre-ratification—whether in conflict with domestic law or not. The conclusions of the Supreme Court therefore are unremarkable and, more importantly, irrelevant to the issues raised in this case.”
Professor Asoskov also cites text by Professor B.L. Zimnenko, who provides several examples of Russian treaties that provided “other rules” and thus required legislative approval. Each of the examples cited by Professor Zimnenko, however, involved situations where the treaty substituted a new and different substantive legal rule for that established under existing municipal law. In other words, all of his examples involve direct conflicts. None, however, involves (i) a treaty providing for an undertaking of international obligations through provisional application that (ii) present no contradiction with existing law.
In sum, none of the authority cited by Professor Asoskov addresses the question of whether and in what circumstances a rule of international law based on a treaty to which the Russian Federation has consented to provisional application may be applied within the Russian legal system. Moreover, none of the cited authority addresses situations where the rule subject to provisional application is not in direct conflict with existing
143 As discussed, a “difference” is not an “inconsistency”, even if any such differences were introduced by Article 26 ECT, and they were not. ↩
144 Second Asoskov Rep., ¶¶ 12-27; see also Resp. Reply, ¶¶ 171-172. ↩
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municipal law. They therefore have no bearing on the issues under consideration here. ”145
109. In addition, Respondent's association of provisional application with non-ratification under Russian law is nonsense. As again explained by Professor Stephan:
“The other cases and authorities discussed by Professor Asoskov in paragraphs 53-59 and 63 of his report do not consider the effect of provisional application of treaty norms. Rather, they address only the legal status of treaty obligations that do not apply provisionally and do contradict pre-existing legislation. As a result, they have no bearing on the matters in dispute in this case.
For example, Resolution 8 of October 31, 1995, of the Plenum of the Supreme Court of the Russian Federation addresses only the legal effectiveness of treaty-based rules within the Russian legal system once a treaty has finally and conclusively entered into force, including through ratification and adoption of federal legislation giving effect to the treaty. It does not address the situation presented by the ECT, where a treaty by its terms provisionally applies to the Russian Federation.
Similarly, Resolution 5 of October 10, 2003, of the Plenum of the Supreme Court of Russian Federation addressed only the consequences within the Russian legal system of treaty-based rules once a treaty has entered into final and conclusive effect. It says nothing about the capacity of the Russian Federation to consent to provisional application of a treaty that by its terms provides for such effect.”
Accordingly, my First Expert Report does not confuse the legally distinct concepts of expression of consent to be bound by an international treaty, signature of an international treaty, and taking a decision on the provisional application of a treaty, as Professor Asoskov asserts. To the contrary, Professor Asoskov does not seem to accept that consent to provisional application of some or all of a treaty's obligations effected by the signing of that treaty on behalf of the Russian Federation constitutes acceptance of an international legal obligation. Russian law, however, is clear on each of these points.146
110. This clarity of Russian law was addressed by Professor Stephan in his First Report and by Claimant in its Counter-Memorial.147 In sum,
145 Stephan Second Rep., ¶¶ 25-27. ↩
146 Stephan Second Rep., ¶¶ 36-39. ↩
147 Counter-Memorial, ¶ 102; see also Stephan Rep., ¶¶ 21-26. ↩
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“under Russian domestic law the authority to sign international treaties on behalf of the Russian Federation rests with the executive branch (Article 11 of the FLIT) and such signature will operate to express Russia's consent to be bound (Article 6(1) of the FLIT). These principles are enshrined in Article 86 of the Russian Constitution. Moreover, under Russian law an international treaty may be applied provisionally ‘if the treaty itself so provides ...’and decisions on provisional application 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.'148
111. Respondent extraordinarily claims that: (i) Russia did not have investment treaties in force with 21 ECT Contracting States which meant there was no “pre-existing legal basis" in Russian law for the application of Article 26 ECT; and (ii) several of Russia's BITs limited investor-state arbitration to civil law issues excluding arbitral review of sovereign acts or omissions.149 These claims are wide of the mark on numerous counts.
112. First, Respondent effectively creates a requirement of a “pre-existing legal basis" for any international obligation that a state voluntarily assumes without offering any authority in support of it. The argument appears to be that Russia must have entered into similar obligations with other ECT signatory states before it could assume Treaty obligations under the ECT. Just to state the proposition is to recognize its absurdity. And even if the principle was a valid one, it does not come close to establishing an inconsistency—i.e., existing Russian law precluding or prohibiting the arbitration of public international law investment disputes.150
113. Second, it is in any event incorrect that the Russian Federation did not have any BITs with other ECT Contracting States providing for arbitration of investment disputes: the France-USSR BIT (ignored by Respondent) is one, providing for settlement of
148 Counter-Memorial, ¶ 102 (citing Article 23(1) and (2), FLIT (Exhibit R24)). ↩
150 See also, Article 16 ECT Relation to Other Agreements (Exhibit C1):“Where two or more Contracting Parties have entered into a prior international agreement, or enter into a subsequent international agreement, whose terms in either case concern the subject matter of Part III or V of this Treaty, (1) nothing in Part III or V of this Treaty shall be construed to derogate from any provision of such terms of the other agreement or from any right to dispute resolution with respect thereto under that agreement; and (2) nothing in such terms of the other agreement shall be construed to derogate from any provision of Part III or V of this Treaty or from any right to dispute resolution with respect thereto under this Treaty, where any such provision is more favourable to the Investor or Investment.” ↩
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investment disputes via UNCITRAL arbitration.151 Indeed, the Russian 1992 Model BIT, approved by Resolution of the Government of the Russian Federation in June 1992, provides for the arbitration of investment disputes without any limitation as to “civil law” issues as Respondent claims.152 And Russia had agreed to investor-state arbitrations in other BITs in existence at the time of the ECT's signature as well.153
114. In sum, Respondent's allegations based on its practice with respect to other investment treaties, in addition to being wholly irrelevant to any question properly before this Tribunal, lend no support to its position that “arbitral review of sovereign acts" was alien to the Russian Federation before the ECT was signed.
115. Respondent maintains its second inconsistency argument based on the non-arbitrability of so-called “public law” disputes. This argument is based on Professor Asoskov's theory of the “principle of non-arbitrability of public law disputes as a fundamental aspect of the Russian law".154
116. As Professor Stephan reiterates, however:
“[...]The authorities he discusses, however, establish only that Russian judges and jurists have interpreted the relevant Codes of court procedure in light of a presumption requiring an express legislative authorization to give effect to alternative dispute resolution of public-law claims challenging government action. These authorities involve only the interpretation of particular legislation, and do not indicate the existence of any broader principle barring the Russian Federation from submitting to binding arbitration. In particular, Professor Asoskov does not maintain that his principle has any constitutional basis.
151 See Agreement between the Government of the French Republic and the Government of the Union of Soviet Socialist Republics for the Reciprocal Promotion and Protection of Investments dated 4 July 1989, Article 7 (CL76) ↩
152 1992 Model BIT approved by Resolution of the Government of the Russian Federation of 11 June 1992 N 395, as amended on 26 June 1995 (CL74) ↩
153 See e.g., Agreement Between the Government of Canada and The Government of The Union of Soviet Socialist Republics For The Promotion And Reciprocal Protection of Investments dated 20 November 1989, Article IX (CL75); Agreement between the Government of the Kingdom of Denmark and the Government of the Russian Federation concerning the Promotion and Reciprocal Protection of Investments signed on 4 November 1993, Article 8 (CL78); Agreement Between The Government of The Hellenic Republic and The Government of The Russian Federation For The Promotion and Reciprocal Protection of Investments signed on 30 June 1993, Article 9(2) (CL77). ↩
154 Asoskov Second Rep., ¶¶ 67-96. ↩
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The Fundamentals, the 1991 Law, and the 1999 Law all stand as clear evidence of the limits of the principle that he asserts. In each of these enactments, the Russian legislature authorized arbitration as a means of resolving disputes involving foreign investors. This legislation is not limited to private-law issues, but rather encompasses all disputes, including those concerning the application of Russian public law. The dispute resolution contemplated by these laws, and realized by provisional application of the ECT, would not have the legal effect in Russian law of invalidating public acts of the government, whether cancellation of a contract or assessment of a tax liability. Rather, they would resolve disputes over the violation of international legal obligations of the Russian Federation under an international treaty and the duty to provide compensation for such violations.
In sum, Professor Asoskov provides no evidence that the principle of non-arbitrability of public law disputes, as he characterizes it, has any bearing on the provisional application of the ECT and its dispute resolution obligations to the Russian Federation. First, none of the cases he cites addresses a dispute resolution obligation that arises as a result of the provisional application of an international treaty. Second, none involves resolution of disputes with foreign investors, the subject of the Fundamentals, the 1991 Law, and the 1999 Law as well as the ECT.”155
117. Professor Asoskov further insists that “[t]he very fact that a state authority has acted in exercise of its public authority and exercise of its public authority and regulatory powers renders the dispute non-arbitrable.”156 He repeats that Russian law requires disputes concerning the assessment and collection of taxes and tax sanctions, the enforcement of tax authorities' decisions and disputes concerning the bankruptcy of Russian legal entities to be resolved in Russian state courts.157 This is a truly misleading point.
118. Russian law is not alone in its treatment of certain types of disputes that are not arbitrable within its domestic legal order as they pertain to matters of public policy and public interest: e.g. matters of competition, intellectual property, criminal law, tax and bankruptcy.158 However, as discussed in Claimant's Counter-Memorial,159 this dispute is not about the legality or the operation of taxation, enforcement or
155 Stephan Second Rep., ¶¶ 54-56. ↩
156 Asoskov Second Rep., ¶ 68. ↩
158 Redfern A., & Hunter J.M., et al., Redfern and Hunter on International Arbitration (OUP: 2009), pp.124-135 (CL72). ↩
159 Counter-Memorial, ¶¶ 116-120. ↩
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bankruptcy proceedings within the Russian domestic legal order. It does not entail the enforcement of a tax assessment or bankruptcy decree under Russian law. It instead concerns wrongful measures taken by the Russian authorities under the guise of 'taxation', 'bankruptcy' or 'enforcement' proceedings that deprived the Claimant of its use and enjoyment of property rights protected under international law and the ECT. At bottom the case concerns Respondent's liability for violations of independent legal duties derived from an international treaty. The fact that Russian public authorities used sovereign powers when effecting their expropriatory objectives does not disqualify this dispute as an investment dispute arbitrable under international law or somehow entrust its resolution to the Russian domestic legal order/system, as the Respondent claims160 -- it very much does the opposite.
119. In Professor Stephan's words:
“[Professor Asoskov's non-arbitrability] argument turns investment protection mechanisms under international treaties on its head. If labels under domestic laws classifying disputes as ‘taxation', ‘bankruptcy' or 'enforcement' proceedings were enough to eliminate state responsibility emanating from an international treaty, investment protection treaties would become an illusion. The very fact that the measures in dispute have been taken by the Russian state ‘in the exercise of its public authority' renders this dispute arbitrable under public international law rather than precluding it.”161
120. He further notes that:
“Solely by way of example, although there are many, Professor Asoskov continues to ignore the decisions of the previous investment tribunals where former OAO Yukos Oil shareholders brought claims against Russia. In all of these claims, even though the same state measures relating to taxation, bankruptcy and enforcement were in question, the tribunals found Russia liable under the respective BITs and the ECT based on these sovereign acts. In other words, these tribunals determined that the state's exercise of public authority violated international law obligations found in the treaties in question. None considered that they were being asked to determine issues of Russian tax or bankruptcy law.”162
161 Stephan Second Rep. ¶ 57 (emphasis added). ↩
162 Stephan Second Rep. ¶ 58. ↩
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121. Claimant notes finally on this subject that any invocation of the “to the extent” provision of Article 45(1) ECT is constrained by the principle of good faith:
“When a state assumes a treaty obligation, the principle of good faith- which governs the performance of treaty obligations- imposes a general limitation on every of the State so that none may be exercised in a manner incompatible with the bona fide execution of the obligation assumed.”163
122. In this respect, Claimant submits that Respondent's “inconsistency" arguments are contrived with the aim to escape accountability for its actions. The arguments themselves create the only inconsistency present—i.e., with Respondent's obligation under international law to ensure the “bona fide execution of the obligation assumed” when it signed the ECT and agreed to apply the Treaty provisionally.
123. Claimant notes that Respondent has abandoned its claim based on Article 23(2) FLIT. Respondent had argued forcefully in its Memorial that after the expiry of the six-month period during which treaties are to be submitted to the Duma for ratification, its provisional application automatically terminates. Therefore, it was said, provisional application of Article 26 ECT, at least beyond six months, was inconsistent with Respondent's constitution, laws and regulations.164 Respondent now maintains that Article 23(2) is not applicable to Respondent's consent to provisional application or to the ECT's implementation.165 Instead, Respondent claims that USSR FLIT is applicable without explaining the consequences of its application.166
124. This too is incorrect:
“[...]At the time of enactment of the 1978 USSR Law, the Soviet Union did not have a head of state as such. Rather, as a matter of U.S.S.R. Constitutional law, the Presidium of the Supreme Soviet (the legislative branch of the U.S.S.R.) served as a collective head of state, and the chair of the Presidium served as a ceremonial head of state for protocol purposes. Neither the U.S.S.R. Constitution nor that of the Russian Federation (the R.S.F.S.R at the
163 Cheng, p.124, 136 (CL31 and CL65); Polkinghorn M. & Goiffes. L., 'Provisional Application of the Energy Charter Treaty: The Conundrum' in (ed). Coop G., Energy Dispute Resolution: Investment Protection, Transit and The Energy Charter Treaty, (Jurisnet: 2011) p. 271 (CL71). ↩
165 Resp. Reply, ¶¶ 166-167. ↩
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time) provided for the office of the President until 1990. To my knowledge, the 1978 USSR Law was not amended to reflect these constitutional changes. In particular the provisions of the 1978 USSR Law could not have acknowledged the specific treaty-making authorities assigned to the President of the Russian Federation under the 1993 Constitution.
The 1978 USSR Law was adopted in an era of formally unlimited legislative supremacy, including in the field of foreign relations and the formation of international law. As I have explained in my First Expert Report, the 1993 Constitution created a strong executive branch based on the institution of the President, as well as protecting the interests of individuals from legislative power through principles of legality and human rights. As Professor Asoskov acknowledges, any inconsistency between the 1978 USSR Law and the 1993 Constitution would result in the invalidity of the 1978 USSR Law.
To take just one example of inconsistency between the 1978 USSR Law and the 1993 Constitution, the former required prior approval of the Supreme Soviet as a condition to opening negotiations on many categories of treaties. Article 86 of the 1993 Constitution, by contrast, assigns the ultimate authority to decide to negotiate to the President. The 1993 Constitution does not require the executive to seek the permission of the legislature to open negotiations, unlike the 1978 USSR Law.
Article 12 of the 1978 USSR Law required a legislative act in instances where a treaty provides for “other rules" than those under existing U.S.S.R. legislation. Prior language in that article specified the international obligations for which a legislative act would be a prerequisite, including treaties on “friendship, cooperation and mutual assistance, treaties on reciprocal renunciation of force or threats of force, peace treaties, treaties on territorial delimitation with other states . . .” I am not aware of any Soviet-era jurisprudence on the question of whether the term “other rules” in Article 12 meant something different from rules that contradict existing legislation, the term found in Article 90(3) of the current Russian Constitution.
I would not expect such jurisprudence to exist, as until 1989 the activity of the Supreme Soviet was carefully supervised to achieve coordination with acts of the government. As Soviet constitutional structures before that date did not provide for the possibility of political opposition, especially in the field of foreign relations, any differences that might have existed between resolutions and decrees of the government, on the one hand, and enactments of the Supreme Soviet (including those of its Presidium), on the other hand, would have been due to inadvertent inattention to legal detail, not to policy differences. To the extent that the 1978 USSR Law might be interpreted as limiting the authority of the Russian executive to accept international obligations pursuant to Article 86 of the 1993 Constitution, it would have been invalid.”167
167 Stephan Second Rep., ¶¶ 18-22. ↩
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125. In any event, for the reasons explained above in paragraphs 87 to 122, the USSR FLIT did not preclude provisional application of international treaties and therefore does not assist Respondent's case.
126. A central plank of Respondent's argument that Claimant has no protected Investment under Article 1(6) ECT is its contention that the Yukos Oil Loans are not loans at all, but dividends. Claimant does not dispute that if Respondent is correct, the Yukos Oil Loans cannot be characterized as an Investment of the Claimant. The corollary is also true, however. If Respondent is wrong and the Yukos Oil Loans are, in fact, loans, they clearly constitute an Investment under Article 1(6) ECT for the reasons discussed in Claimant's Counter-Memorial168 and below. Respondent knows this; hence the immense effort it has made to convince this Tribunal that the Yukos Oil Loans are something other than they appear. The effort is not only unpersuasive, it is dishonest and fundamentally wrong.
127. As explained further below, Respondent has known about the Yukos Oil Loans since they were made and at no time prior to this Proceeding did it ever seek to re-characterize them—either as dividends or anything else. Specifically, Yukos Oil's financial statements for 2003 and 2004 were provided to the Russian tax authorities. Those statements for each year expressly disclosed Yukos Oil's “Long-term Loans and Credit Facilities” and for each year there were only three: the Yukos Oil Loans from Yukos Capital at issue herein and a credit facility from Société Générale. Yukos Capital was identified as the lender and the maturity dates and principal amounts of
168 Counter-Memorial, ¶¶ 149-228. ↩
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each of the Yukos Oil Loans were also stated.169 Further, the interest paid on these loans was disclosed in the “Interest Expense” section of the “Notes to the Profit and Loss Statement”.170 It does not take a genius to conclude that these were intercompany loans.
128. As the Tribunal is aware, after having previously approved Yukos Oil's accounts for the 2000 tax year, in December 2003 the Russian tax authorities hastily issued a “re-assessment" for additional tax, including fines and penalties, amounting to approximately RUR 98.5 billion (USD 3.37 billion).171 Thereafter:
“Between 2004 and 2006, the Russian tax authorities re-assessed Yukos for approximately RUR 692 billion (USD 24 billion) of additional tax liabilities in respect of the 2001-04 tax years, all on the basis of the same ‘theories' propounded in the 2000 Tax Assessment. As discussed below, the tax re-assessments were entirely without basis and the linchpin to a politically motivated scheme to single out and destroy Yukos.”172
129. In order to succeed in the destruction of Yukos Oil, the tax authorities, among other things, had to come up with “re-assessed” liabilities sufficient to justify putting Yukos Oil into “bankruptcy”. Their capacity for disingenuousness had no bounds. And yet, one thing Respondent's tax authorities did not do, and never did, was to suggest that the Yukos Oil Loans made by Yukos Capital were not loans at all, but dividends and therefore should have attracted tax liability.173 That line was contrived for purposes of this Arbitration.
169 Explanatory Note to Yukos Oil 2004 Financial Statement, pp. 17-18 (Exhibit C137); Extracts from 2003 Yukos Oil Audit Report, pp. 7-8 (Exhibit C210). ↩
170 Explanatory Note to Yukos Oil 2004 Financial Statement, p. 22 (Exhibit C137); Extracts from 2003 Yukos Oil Audit Report, p. 12 (Exhibit C210). While Claimant has been unable to locate copies—and while nothing turns on the point—it also appears, despite Respondent's assertions to the contrary, that periodic forms were filed with the tax authorities advising them of the interest payments on the Yukos Oil Loans and that there would be no withholding tax in connection with such payments. Misamore Statement, ¶ 15; Second Witness Statement of Bruce K. Misamore dated 14 June 2015 (the “Second Misamore Statement”), ¶¶ 33-34. ↩
173 Second Misamore Statement, ¶ 31. ↩
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130. Thus, for example, when Claimant sought to have its claims under the Loans included in the register of creditor claims in the Yukos bankruptcy, Rosneft Oil Company174 and the Russian Federal Tax Service objected not because the Loans were dividends but because they allegedly were not yet due.175 The Federal Tax Service even cited a Yukos Oil note to the tax authorities dated 15 May 2006 in which the Loans were included in the section headed “Long Term Liabilities.”176 On 19 July 2006, the Moscow City Arbitration Court issued a ruling denying the inclusion of Yukos Capital's claims in the register of creditors' claims on the basis that the Loans were not yet due. The court's written decision was virtually identical to the submissions of the Federal Tax Service.177 No suggestion was made that the Yukos Oil Loans were anything other than loans.
131. The notion that the tax authorities had insufficient access to information on the Loans178 is laughable given Yukos Oil's premises were repeatedly raided, all documents were seized – including from Yukos's auditors PwC179 – and numerous employees and outside advisors, including PwC, were interrogated (and in many instances jailed) during the various “re-assessments.” This unsupported assertion of Respondent should be disregarded, particularly given that Respondent has elected to submit no testimony from any witness of fact.
132. Moreover, while inventing the “dividend” argument, Respondent conveniently forgot, or assumed it would go unnoticed, that it engages in similar intercompany lending practices and has not suggested that the loans made pursuant to those practices are
174 Then majority state owned (and still state controlled) and the chief beneficiary of the “fruits" of Respondent's expropriation of Yukos Oil. ↩
175 Notice, ¶ 180; Objections of Rosneft Oil Company OJSC regarding the claims of Yukos Capital S.a.r.l. for Inclusion of its Claim in the Registry of Yukos Oil Company OJSC Creditors dated 23 May 2006 (Exhibit C67). ↩
176 Ruling of the Moscow City Arbitration Court dated 17 and 19 July 2006, p. 3 (Exhibit C71); see also Minutes of the Court Proceeding of the Moscow City Arbitration dated 12 July 2006 (Exhibit C70). ↩
178 Resp. Reply, ¶¶ 236, 238. ↩
179 See e.g. PwC Withdraws Yukos Audits, The Financial Times, 25 June 2007 available at: <http://www.ft.com/cms/s/0/f18b722c-227a-11dc-ac53-000b5df10621.html#axzz3UCS9LkPG> (accessed on 13 June 2015) (Exhibit C211) in relation to the PwC raids widely reported in the media at the time. ↩
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anything other than “genuine” loans or that Luxembourg-based group financing companies are anything other than “genuine” lenders.
133. For example, in July 2009, O.J.S.C. Gazprom (“Gazprom”), described as “the world's largest natural gas company” and advised by PwC, submitted a request for approval of tax treatment to the Luxembourg tax authorities.180 The request described an arrangement where Gazprom had incorporated Gazprom ECP S.A. (“Gazprom ECP”) as an “orphan entity” and a “fully taxable resident company in Luxembourg with a share capital amounting to EUR 31,000.”181 The corporate object of Gazprom ECP was to issue commercial paper where “[t]he funds that would be received by Gazprom ECP under each ECP tranche will be lent to O.J.S.C. Gazprom or to a company wholly-owned by O.J.S.C. Gazprom under an intercompany loan agreement (hereafter the ‘Gazprom Loans').”182
134. The arrangements were to be back-to-back in the sense that:
“[...] Gazprom ECP would issue from time to time ECP Notes on one side and would grant loans to O.J.S.C. Gazprom on the other side (with the proceeds arising from the series of ECP Notes subscribed by the Noteholders). The ECP Notes and the Gazprom Loans will bear the same interest rate. As a consequence, from an accounting point of view, no margin will be reflected in the commercial accounts of Gazprom ECP.”183
135. Moreover, “[f]rom an economic point of view, Gazprom ECP's responsibility is limited under the ECP issue, since O.J.S.C. Gazprom will unconditionally and irrevocably guarantee the payment of all sums due by Gazprom ECP to the Noteholders [...].” Gazprom ECP would therefore be “in a financial on-lending position regarding the maturity of notes (debts) and the corresponding loans (receivables) in terms of maturity, principal and interest payment dates, etc.” where
180 OJSC Gazprom request for approval of tax treatment to the Luxembourg tax authorities, p. 3 (Exhibit C212). ↩
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“[a]ll the costs related to this financing program are reimbursed by the borrower under the relevant loan agreements (i.e. by Gazprom).”184
136. Viewing the Gazprom ECP financing structure together with “three other Gazprom related financing programmes”, Gazprom ECP would earn a margin on its lending to Gazprom in the range of 0.1 to 1.5 basis points depending on the aggregate principal loaned to Gazprom, a margin identified as “arm's length".185 Board meetings and most shareholders' meetings would be held in Luxembourg, meetings for important decisions would be held there and corporate secretarial records maintained there. PwC submitted on behalf of Gazprom that “[b]ased on the above, Gazprom ECP is effectively managed from Luxembourg and qualifies as Luxembourg tax resident company" and, on the basis of Gazprom ECP's planned lending program, PwC requested on behalf of Gazprom that “Gazprom ECP should be considered as Luxembourg tax resident entity”.186
137. Moreover, it is clear the Gazprom ECP loans were taxed in Russia as loans, not dividends, which is consistent with the back-to-back treatment requested from the Luxembourg authorities whereby:
“Provided that the interest rate on the ECP Notes to be issued will be determined at arm's length (taken into account the characteristics of the transaction and the characteristics of the borrower), no interest would be requalified as hidden dividend distribution . . . and, under the current tax law, no Luxembourg withholding tax would be levied on interests paid by Gazprom ECP to the Noteholders”.187
138. As the Tribunal will likely be aware, Gazprom is controlled by the Russian State and used by it to serve both commercial and geopolitical/strategic ends.188 The Gazprom
185 Exhibit C212, pp. 3, 4, 7. ↩
188 See e.g. As Gazprom Goes, So Goes Russia, The New York Times, 11 May 2008 available at: <http://www.nytimes.com/2008/05/11/business/worldbusiness/11gaz.html?pagewanted=all> (accessed on 13 June 2015) (Exhibit C213); How Gazprom Turned Up the Heat on the West, The Independent, 3 September 2007 available at:<http://www.independent.co.uk/news/world/europe/how-gazprom-turned-up-the-heat-on-the-west-401201.html> (accessed on 13 June 2015) (Exhibit C214); Russia's Wounded Giant, The Economist, 23 March 2013 available at: (Cont'd on next page) ↩
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lending program described above involves intercompany loans to Gazprom at spreads far lower than the margin to be earned by Claimant under the Yukos Oil Loans and Gazprom ECP is a special purpose vehicle rather than an active finance company such as Claimant—which extended more than 40 loans to various companies within the Yukos group. In light of its own lending practices via Gazprom, Respondent can hardly be heard to suggest that the Yukos Oil Loans are anything other than loans.
139. While the Tribunal should not be side-tracked by this issue, we turn to the afore-mentioned efforts by Respondent to suggest the Yukos Oil Loans are not loans, which come principally in the form of the “Expert Report of Professor Thomas Z. Lys, Ph.D”.189 Professor Lys, a professor of accounting and information management, was asked to opine on, among other things, “whether the Yukos Oil Legs of the Brittany Transaction and the Hedgerow Transaction economically constituted loans from Yukos Capital to Yukos Oil”. As part of his “analysis”, he also was asked to consider whether Yukos Capital hedged its risk and “whether Yukos Capital can fairly be compared with a commercial lender”.190
140. For purposes of the actual issue before the Tribunal, Professor Lys concludes that:
“Under the ‘substance over form' doctrine applied in most accounting and tax systems, the flow of funds to Yukos Oil . . . would have been deemed dividends when considered in light of all the documents”.191
141. This conclusion is based upon a manipulation of the facts and grossly flawed applications of tax and accounting rules.
142. As to the facts, Professor Lys relies upon prior statements by Bruce Misamore and Stephen Wilson, the former CFO and International Tax Director of Yukos Oil,
(Cont'd from previous page)
<http://www.economist.com/news/business/21573975-worlds-biggest-gas-producer-ailing-it-should-be-broken-up-russias-wounded-giant> accessed on 13 June 2015 (Exhibit C215).
189 Expert Report of Professor Thomas Z. Lys Ph.D dated 2 March 2015 (the “Lys Rep."). ↩
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respectively, to support his assertion that “the motivation for the Yukos Group's international structure, including the transfers of funds via Yukos Capital to Yukos Oil, was to effectuate dividends while minimizing taxes.”192 Having made this assertion, Professor Lys then includes a long block quote from one of Mr Wilson's statements that says nothing of the kind. Instead, having identified a number of objectives, Mr Wilson emphasised that “inter-company lending within the group was an important priority as funds accumulated outside Russia [...] would be needed for investment in Russia. [...] In fact a key treasury objective was to enable funds to be brought into Russia in the form of loans from Yukos Capital Sarl, the Luxembourg finance company established for this very purpose.”193
143. This could not be more clear. Investments were to be made by Yukos Capital in the form of loans, not dividends. Not to be deterred, Professor Lys's “factual" account continues as follows:
“Messrs. Misamore and Wilson further explained how the transfer of funds via Yukos Capital to Yukos Oil as ‘intra-company loans' supported Yukos Oil's overall ‘tax minimization' strategy. Implicit in their statements is that without Yukos Capital's participation in the Yukos Group's ‘tax minimization' strategy, the transferred funds . . . would have instead have been returned to Yukos Oil or other Yukos Group entities and taxed as dividends.”194
144. This is fiction, not fact, and it is nowhere implied in any of the statements to which Professor Lys refers. The plain fact is that funds were repatriated into Russia in the form of loans to Yukos Oil from Yukos Capital. These were undoubtedly loans. It is correct that one of the reasons Yukos Capital was the lender was that tax efficient lending could be implemented via a Luxembourg-based finance company. But even if Yukos Capital had not existed, there is nothing implicit in anything said by Messrs. Misamore and Wilson that suggests the investment of funds into Russia would have been made by dividend instead. That is pure fantasy.195
193 Ibid., quoting Record of Interview of Stephen John Wilson dated 16 April 2010, ¶ 49 (Exhibit C125). ↩
195 Misamore Statement, ¶¶ 10, 13-15; Second Misamore Statement, ¶¶ 8, 9. ↩
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145. Professor Lys's “analysis” is somewhat less than rigorous. He invents terms such as whether Yukos Capital was intended to be a “genuine” lender and the Yukos Oil Loans “genuine” loans and wraps this in the framework of a purported analysis under the “substance over form” doctrine said to be found in “[m]ost modern accounting and taxation rules” that “gives priority under appropriate circumstances to the economic substance of a transaction over its form".196 An additional element, according to Professor Lys, is to see whether transactions are integrated based upon the past views of “industry participants”, with the industries selected apparently financial derivatives, health care and education.197
146. Professor Lys spends considerable time on the question of whether “Yukos Capital's Role Was . . . That of a Typical Commercial Lender”.198 Indeed, this issue perhaps attracts the majority of his attention. It appears to be an issue erected by Professor Lys in order that he could knock it down. It is utterly and completely irrelevant. No one has ever suggested that Yukos Capital is comparable to a commercial lender, including that its interest rate spreads should be or ever were comparable to that of Société Générale. The claim is that Yukos Capital, a group finance company, made loans and that they are not and were not dividends.
147. As Mr Misamore explains:
“It is of course meaningless to compare Yukos Capital's role as an intergroup finance company with that of ‘commercial lending institutions'r such as Société Générale. Yukos Capital was never intended to be a commercial lending institution but a tax-efficient lending vehicle within the Yukos group, tasked with extending loans in support of other group entities' operations. In my experience, this kind of intercompany lending is carried out all over the world by multinational corporate groups, particularly those in the energy sector. I have never heard it suggested that lending ‘practices' must resemble those of commercial lenders in order for valid and enforceable loans to be made. My understanding has always been that the terms of the loans must be arm's length (i.e., they must have similar interest rates, maturities and repayment terms as loans between non-affiliates). There can be no question
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that Yukos Capital's loans, including the YUKOS Oil Loans, complied with this requirement.”199
148. Mr Gleichenhaus adds the following:
“[C]omparing spreads (i.e. profit margins) between these two companies is off-base. Yukos Capital and SocGen have completely different structures, operations, and corporate missions. SocGen has full financial operations to support and external stakeholders to whom its management is tasked with maximizing profits and thus must endeavor to earn larger profits than an intermediate finance company with the intended purpose is to provide financing to and facilitate cash movements among international companies within its corporate family.”200
149. Significantly, the one topic Professor Lys does not address, after acknowledging it is the thrust of Mr Gleichenhaus's report, is that the Yukos Oil Loans “have several trademark characteristics of ‘loans””.201 Thus, he nowhere explains why a transaction where funds are advanced coupled with a legal obligation and intent to repay is not a loan. Similarly, he nowhere explains how an obligation and intent to repay can ever be consistent with a dividend. Indeed, Professor Lys does not even identify the defining characteristics that distinguish loans from dividends, whether legal, accounting, tax or otherwise.202 It is inconceivable that any conclusions can be made without bothering to consider the “characteristics” of the transactions at issue. Yet Professor Lys does just that. (As discussed below, and as will not come as a surprise to the Tribunal, examining these characteristics is a core element of any application of the "substance over form” doctrine.)
199 Second Misamore Statement, ¶ 14. Respondent asserts the Loans were “far from being on 'arm's length terms'” (Resp. Reply, ¶ 208). No support is offered for this assertion, which is specious. On a related matter, the absence of “negotiations” is to be expected in the intercompany context (see Second Misamore Statement, ¶ 18) and says little—in this case nothing—about whether the actual terms of a transaction are arm's length. ↩
200 Supplemental Expert Report of Stuart Gleichenhaus, FTI Consulting, dated 15 June 2015 (the “Supplemental FTI Rep.”), ¶ 22. Professor Lys's comparison of spreads is also misleading in that he does not account for the “implicit or explicit cost to hedge Yukos Oil credit risk. This implicit or explicit cost to hedge would likely decrease the ultimate spread earned by SocGen”. Id. at ¶ 25. ↩
202 As noted by Claimant's expert Professor Stephen Shay in his Expert Report dated 12 June 2015 (the “Shay Rep.”): “Professor Lys' analysis [also] is without (i) discussion or explanation of how payments on those loans should be accounted for, (ii) reference to whether the Yukos Capital lenders in question were permitted to pay or were capable of paying dividends under applicable law or contractual arrangements, or (iii) reference to the fact these lenders were not owned directly by Yukos Oil and whether the intermediary entities were permitted to pay or capable of paying dividends under applicable law or contractual arrangements”. Shay Rep., fn. 34. ↩
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150. Professor Lys's “substance over form” analysis appears to be largely in the following extract from his Report, although it is in some respects difficult to follow:
“U.S. and international accounting and tax rules support this ‘substance over form' approach to transaction integration. For example, in ‘The Conceptual Framework for Financial Reporting 2010', the International Standards Accounting Board (‘IASB') noted: ‘In assessing whether an item meets the definition of an asset, liability or equity, attention needs to be given to its underlying substance and economic reality and not merely its legal form.' Likewise, in 2010, Tax Notes International magazine stated that ‘most tax authorities believe tax obligations should be determined by the underlying business substance, rather than the legal structuring of a transaction. This is known as the substance-over-form doctrine.' As another example, in assessing whether a transaction constitutes a taxable repatriation, the Internal Revenue Service in the U.S. stated that it was “concerned with the substance of the transaction, not its form.'
I thus disagree with Mr Gleichenhaus's analysis of the 2003 Yukos Oil Agreement and the 2004 Yukos Oil Agreement as standalone transactions and with his conclusion that those agreements can only properly be characterized as debt instruments. When looked at in the context of the Brittany Transaction and the Hedgerow Transactions, it is clear that these Agreements were not genuine loans in economic substance because Yukos Capital did not bear the risks of a genuine lender, in particular, the risk of non-payment of Yukos Oil.
Support for this conclusion is provided by both the non-recourse nature of the arrangements between Brittany and Yukos Capital, and the arrangements between Hedgerow and Yukos Capital, and by Brittany and Hedgerow both having agreed to bear 'all' of the risks associated with the funds that Yukos Capital made available to Yukos Oil”.203
151. This is factually and legally incorrect. Factually, Yukos Capital assuredly did have risk in connection with the Yukos Oil Loans:
“Contrary to Professor Lys's claim that Yukos Capital did not bear any risk in the transaction, Yukos Capital did bear the risk of a default by Yukos Oil. Yukos Capital wrote down the value of the loans to zero, recognizing billions in losses. While Yukos Capital did not have to repay its loans to Brittany and Hedgerow due to the contingent repayment term in those loans, it did incur losses related to its lending to Yukos Oil. Regardless of the contingent repayment terms, Yukos Capital could not have repaid the loans to Brittany nor Hedgerow given its financial situation. However, Yukos Capital, by the contingent repayment terms in its loan agreements with Brittany and Hedgerow, effectively perfectly hedged its cash flow risk but not its profit and losses related to its lending activities.
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Yukos Capital also bore the risk that it would not earn the profit margin contemplated by the back-to-back loan transactions. In the back-to-back loan transactions involving the December 2003 Loan, Yukos Capital would have earned approximately RUB 49.5 billion in profit as a result of the interest rate spread of 6.25 basis points on approximately RUB 80 billion of loans. At the exchange rate as of December 2, 2003, the expected annual profit was approximately USD 1.65 million. Furthermore, Yukos Capital had an expected profit of approximate USD 110,000 per year from lending the USD 355 million loan from Hedgerow to Yukos Oil in the August 2004 Loan.”204
152. Moreover, the presence or absence of risk is not the test and Professor Lys fails to acknowledge the irrelevance of the test in any event.
153. First the irrelevance. As explained by Claimant's expert Professor Stephen Shay, the substance over form doctrine determines the tax treatment to be applied to a particular transaction; it does not affect or otherwise alter the legal nature of the transaction for any non-tax purposes:
“These [substance over form] doctrines, while varied in the limits of their applicability, do not affect or modify the legal, as opposed to tax, form and consequences of a transaction based solely on tax avoidance motive in structuring a transaction. This is the case even if the applicable tax doctrine would cause the tax treatment to be different than the legal form of the transaction. Accordingly, Professor Lys was in error to argue that tax motivation of Yukos and its subsidiaries in structuring its intercompany loans, in the face of other non-tax motivations, should result in a recast of those loans as dividends for purposes of a legal analysis.”205
154. Stated differently:
“The doctrine of substance over form is applied in the tax law to legal arrangements as they are structured under applicable civil or common law. In circumstances where a transaction is recharacterized under a tax law substance over form doctrine for taxation purposes alone, the underlying legal arrangements and relationships are not otherwise disturbed or superseded. Thus, for example, loans remain loans; they are not somehow transformed into dividends for non-tax purposes.”206
204 Supplemental FTI Rep., ¶¶ 28-29. See also Second Misamore Statement, ¶¶ 24-25. ↩
206 Id., ¶ 14 (emphasis added). ↩
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155. Thus, even if some tax authority were to conclude that the Yukos Oil Loans should be taxed as dividends, and none ever did, they would still be loans as a legal matter. This Tribunal, of course, is not being asked to determine the proper tax treatment of the Yukos Oil Loans. It is instead being asked to determine whether, as a legal matter, they are loans or, more precisely, “debt of a company.”207
156. As a related point, Claimant again notes Respondent's prior claim that it is not “passing judgment on the legality of the ‘Loans””.208 Respondent suggests that to claim the Yukos Oil Loans are “the economic equivalent of dividends” is a separate matter from whether they were “lawful” or “legal”.209 Neither the logic nor legal foundation for this suggestion is anywhere apparent.
157. In any event, the substance over form test is not as described by Professor Lys. As applied in the United States, the jurisdiction selected by Professor Lys for his analysis, the relevant considerations are the following:
“The United States' ‘substance over form doctrine' (also commonly applied as the ‘business purpose doctrine', the‘economic substance doctrine' or the ‘step transaction doctrine') is the oldest and most developed and was first established in 1935 by the United States Supreme Court in its landmark decision in Gregory v. Helvering, 293 U.S. 465 (1935). The Court held that a transaction entered into purely for tax purposes and for which there was no business purpose will be taxed in accordance with its substance. Id. at 469-70 (‘To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.') However, the Court was careful to make clear that a taxpayer has the right ‘to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits.' Id. at 469. Over time, the economic substance doctrine has developed to require both (i) that a transaction have objective economic substance and (ii) that the taxpayer have a subjective non-tax business purpose for entering into the transaction.”210
158. In the context of this case, “[a]s a transfer of funds from a subsidiary to its parent in the form of loans, the Yukos Loans would, if challenged under the tax law doctrines of the United States, most likely be tested under authorities that consider whether a loan
207 Article 1(6) ECT (Exhibit C1). ↩
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to a shareholder is in substance a loan or, instead, should be recast as a dividend distribution".211
159. In such circumstances, as explained by Professor Shay:
“In the absence of statutory and regulatory standards, case law is the principal source of guidance in determining whether a loan by a corporation to its controlling shareholder should be reclassified as a dividend distribution. U.S. courts generally agree that the proper characterization of a transfer of cash or property to a shareholder as a loan or a dividend requires a facts and circumstances analysis, the primary goal of which is to determine whether the transaction, in both substance and form, represents a transfer to the shareholder in exchange for an unqualified promise by the shareholder to repay a sum certain on a specified date with interest (loan), or the transaction is a distribution of property that confers an economic benefit on the shareholder without expectation of repayment (dividend).
To guide this analysis, courts have focused on whether, at the time of transfer, the shareholder intended to repay the amounts received and the corporation intended to require repayment. Courts set forth various criteria against which to measure the intent of the parties. A frequently cited overview of the relevant factors to consider is Alterman Foods, Inc. v. United States. Drawing from a range of prior determinations, including judgments in other circuits, the Fifth Circuit in Alterman sets forth eleven criteria to examine when analyzing whether a distribution to a shareholder is intended to be repaid (and, accordingly, may retain loan treatment). Variations of these factors have been used by other courts, as well as by the Service, in similar analyses. In general, the authorities agree that no one factor is determinative and that each case turns on its own facts.
The judicial and administrative factors generally can be grouped into two overlapping categories. First, there are factors that identify the presence or absence of standard indicia of indebtedness. Second, there are factors that evaluate the loan's economic reality. Courts use this second set of factors to consider whether the shareholder's unfettered control over the creditor will result in a failure to establish an unconditional obligation to repay. Formal debt-like terms for the instrument, though usually necessary for a distribution to be classified as a loan, do not insure such treatment.”212
160. Based upon a proper application of the test, not done by Professor Lys:
212 Id., ¶¶ 54-56. This is consistent both with (i) Yukos Oil's payment of quarterly interest while in a position to do and (ii) the historic repayment of loans made by Yukos Capital to other entities within the Yukos group: see Letter from Brittany Assets to Yukos Capital dated 1 August 2005 (Exhibit R78-204); Compass Lexecon Report, Exhibit 8, p. 62 (Exhibit R38); Letter from Yukos Oil to Yukos Capital dated 12 November 2004 (Exhibit B18); Yukos Capital Bank Statements and Payment Order December 2003 to June 2004, pp. 2, 5, 6 (Exhibit B19). ↩
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“each Yukos Loan should be treated as a loan for U.S. federal income tax purposes because, based on the terms of the Yukos Loans, the rights and obligations of the parties under each Yukos Loan agreement, the intended conduct of the parties with respect to these rights and obligations, the financial strength of Yukos Oil at the time of the lending and the other facts described above, Yukos Oil intended to repay the amounts received and Yukos Capital intended to require repayment”.213
161. Again stated differently, even if the substance over form doctrine had relevance, “the Yukos Loans would be respected as indebtedness and such doctrines would not operate to recast the Yukos Loans as dividends or as anything other than loans”.214
162. As for Professor Lys's unsupported view that Yukos Capital should simply be ignored and the back-to-back loan arrangements treated—it would seem—as just one loan from Brittany and/or Hedgerow to Yukos Oil (abeit, this is inconsistent with any claim of dividend),215 this too is wrong. As again explained by Professor Shay:
“However, there exists no broad principle under the tax laws of the U.S., by way of example, that would support ignoring the separate, legal existence of Yukos Capital. To the contrary, the U.S. Supreme Court has long held that as long as a corporation is formed for a business purpose, or actually conducts business, the corporation will be treated as a separate entity for federal income tax purposes. Accordingly, U.S. tax law would respect the acknowledged legal standing of Yukos Capital and would require that the role of Yukos Capital and its business enterprise be taken into account when determining the tax treatment of its transactions.
In this case, Yukos Capital was utilized as a financing subsidiary to efficiently redeploy funds around the Yukos group. Use of intercompany loans under established loan agreements reduced transactions costs and time to execute financings. It also reduced the exposure of loaned funds to political and other risks. Yukos Capital would stand up to challenge under the Moline Properties standard for tax recognition of the corporate entity. Yukos Capital's 2003 Luxembourg tax ruling (reaffirmed in 2004) attests that it would be recognized for tax purposes in Luxembourg.”216
216 Shay Rep., ¶¶ 73-74; see also Supplemental FTI Rep., ¶¶ 18-19. Respondent's expert Lionel Noguera suggests the Luxembourg authorities might apply a different test today. Expert Report of Mr. Lionel Noguera dated 2 March 2015 (the “Noguera Rep.”), ¶¶ 20-37. The relevance of this is impossible to discern. The Yukos Oil Loans would have been repaid by 2008-09 absent Respondent's wrongful acts. In any event, as Mr Misamore has testified, great care was taken to comply with applicable safe (Cont'd on next page) ↩
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163. Moreover, Professor Lys ignores the following:
“The United States has adopted conduit financing regulations binding as law since traditional case law principles were too narrow in scope to achieve the sought after policy objectives. Although the U.S. conduit financing regulations can disregard an intermediate entity, such characterization applies for the limited purposes of calculating U.S. withholding taxes and explicitly does not apply for other tax purposes including, for example, calculating the deduction of interest payments. In other words, except as specified in a regulation binding as law, even other tax consequences of the legal arrangement are not disturbed. The legal arrangements themselves, of course, remain intact.
Transactions involving an intermediate corporation are disregarded under the U.S. conduit financing case law for lack of meaningful economic activity if the corporation is merely transitory, engaging in no business activity for profit. U.S. courts have not disregarded an intermediate corporate entity as a mere conduit or agent in the borrowing and interest-paying process so long as the intermediate corporation has a business purpose or engages in a business activity. The amount of business activity can be minimal and the intermediary is not disregarded even if the primary reason for the intermediary corporation's existence is to reduce taxes. The U.S. conduit rules do not allow U.S. tax authorities to disregard economic transactions, which result in actual, non-tax related changes in economic position. Because Yukos Capital earned income on the spread between the interest rate it charged and the interest rate it paid, each time Yukos Oil made an interest payment to Yukos Capital, Yukos Oil's economic resources were diminished while Yukos Capital's economic position was enhanced.217 Thus, because it has conducted cognizable business activity, under U.S. conduit financing case law, and in the absence of overriding regulations, Yukos Capital should be respected as a separate entity and the Yukos Loans should be respected as separate transactions.”218
164. In his Report and analysis, Professor Lys loosely refers both to rules of accounting and to principles applied by tax authorities. So as to leave no ambiguity, Claimant has engaged Andrew Grantham of AlixPartners to consider the proper accounting treatment of the Yukos Oil Loans. Mr Grantham explains that, as both Russia and
(Cont'd from previous page)
havens. See Misamore Statement, ¶ 11 citing Record of Interview of B. Misamore by Y. Leonidovna Levina, 9 March 2009 (Exhibit R39); Second Misamore Statement, ¶¶ 16, 22. If the regulatory landscape had changed, Claimant would have adjusted its business accordingly to ensure that the loans it was making were treated as such by all relevant tax authorities.
217 Respondent suggests Claimant had no intent to make profits (see Resp. Reply, ¶ 297). This is demonstrably false as a matter of fact and, indeed, an intent to make profits was required as a matter of law. ↩
218 Shay Rep., ¶¶ 77-78 (emphasis added). ↩
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Luxembourg applied “form over substance” rules during the relevant time periods, there is no proper accounting basis on which to suggest the Yukos Oil Loans are anything other than loans.219
165. Moreover, and in any event, even if US GAAP “form over substance” principles were applicable, the answer would be the same. From a strict accounting standpoint:
“US GAAP stipulates that a liability has three essential characteristics: (i) it is a present duty that entails settlement by probable transfer of assets on a specified or determinable date; (ii) the obligated entity has little or no discretion to avoid the obligation; and (iii) the obligating event has already happened.
From Yukos Oil's perspective, the Loans constituted a liability at the 2003 and 2004 year ends as the three ‘essential characteristics' were met: Yukos Oil had an obligation to Yukos Capital that would be settled by payment of cash on the specified repayment date; Yukos Oil had no discretion to avoid the obligation; and the obligating event (signature of the loan agreement) had already happened. If Yukos Oil had prepared company financial statements under US GAAP, the Loans should therefore have been recorded therein as liabilities.”220
166. With respect to substance over form:
“In summary, I consider that, in substance, the Loans provided by Yukos Capital to Yukos Oil were loans, and not dividends. The key factors indicating that the Loans were, in substance, loans are:
(a) The Loans were the subject of fully executed loan agreements;
(b) The Loans were for relatively short defined periods, evidencing an expectation that the Loans would be repaid. The repayment obligations were also supported by: (i) a right to charge penalty interest in the event of late repayment; and (ii) a right to accelerate repayment in the event that Yukos Oil's financial position caused concern;
(c) The Loans were granted at a market rate of interest, and Yukos Oil made interest payments as required by the 2003 Yukos Oil Agreement until Russia imposed restrictions on payments out of its bank accounts; and
219 Expert Report of Andrew Grantham of AlixPartners UK LLP dated 15 June 2015 (the “Grantham Rep.”), ¶¶ 4.3.2-4.3.5, 4.5.2, 4.6.1. ↩
220 Grantham Rep., ¶¶ 4.4.6-4.4.7. ↩
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(d) On 11 November 2005, Yukos Capital sent a formal notice of default to Yukos Oil. Yukos Capital also took subsequent steps to accelerate repayment of the 2003 and 2004 Yukos Oil Agreements, and sought to recover the loans as a creditor in the bankruptcy of Yukos Oil that commenced in 2006 and concluded with the dissolution of Yukos Oil in November 2007.
Further, the Yukos Group established Yukos Capital specifically for the purpose of acting as a Group financing company. During 2003 and 2004, Yukos Capital entered into at least 40 loan agreements, including the two that are the subject of the current dispute, with various Group companies. The use of group finance companies registered in countries with favourable tax regimes is common practice for multinational companies seeking to move funds around the group in a tax-efficient manner. Professor Lys concludes that, because Yukos Capital had no economic purpose in the Brittany and Hedgerow Transactions, the Loans should be considered to be dividends. If this is correct, I consider it would have significant ramifications on the financial statements of other multinational companies using a similar group financing structure and who are (or have) reported loans with similar characteristics as loans and not dividends.”221
167. As Mr Gleichenhaus observes on this latter point:
“Professor Lys is silent on the role of intercompany loans and the wide use of such intercompany loans. In a wider application of Professor Lys's interpretation of the substance over form doctrine to reclassify intercompany loans through intermediate finance companies as dividends, the commonplace practices of many multinational corporations and their corporate finance departments would be undermined. The use of intercompany debt is ubiquitous. Frequently, international corporations go further and set up in-house finance entities to facilitate such cost-effective and tax-efficient intercompany debt. Whether for administrative, tax or other reasons, when done according to applicable legal and regulatory requirements, intercompany loans are to be treated no differently than loans received from non-affiliated, third-party lenders.”222
168. Indeed, “most United States-based international companies employ similar intercompany loan structures and [Professor Lys's] interpretation of the substance over form doctrine would likely cripple the corporate finance structures at these international companies”.223
221 Grantham Rep., ¶¶ 2.3.3-2.3.4. ↩
222 Supplemental FTI Rep., ¶ 16. ↩
223 Supplemental FTI Rep., ¶ 19. ↩
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169. Professor Lys's reference to U.S. accounting rules on “deferred tax liability”224 is irrelevant. As Mr Grantham explains:
“The US GAAP requirement that a deferred tax liability be recognised in respect of unremitted earnings from subsidiaries does not disallow a subsidiary from making a loan to its parent; nor does it alter the nature of intra-group transactions; i.e. it does not mean that a loan to a parent is deemed to be a dividend. As such, I do not consider that this GAAP supports Professor Lys' conclusion that the funds received by Yukos Oil are dividends.”225
170. In sum, for the above reasons, Claimant submits that Respondent's contention that the Yukos Oil Loans are, in fact, dividends, is made in bad faith and on the basis of fundamentally flawed and unprincipled reasoning. The Yukos Oil Loans are loans. It is very much that simple.
171. Pursuant to Article 1(6) ECT, “debt of a company” is a protected Investment. The Yukos Oil Loans are unquestionably indebtedness of the borrower, Yukos Oil. The inquiry should stop there.
172. Respondent astonishingly maintains that the Loans are not “debt of a company”, arguing that “debt of a company" covers only equity and debt interests “in” companies not financing extended “to” companies.226 Claimant dispatched this argument at ¶¶157-158, 160-161 of its Counter-Memorial.
173. Respondent submits that the Yukos Oil Loans are solely “claims to money” that are not associated with an “Investment" and therefore cannot be covered by Article
225 Grantham Rep., ¶¶ 5.3.5-5.3.6. ↩
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1(6)(c).227 As Claimant observed in its Counter-Memorial, Respondent thus “seeks to equate loans with “claims to money.””228 Respondent here confuses the asset which gives rise to the “claim to money” with the “claim to money.” As Claimant observed in its Counter-Memorial, there is a fundamental distinction between a “claim to money” and a “loan”.229
174. Respondent relies on the effet utile principle to suggest that if loans were included in “other debt” in (b), there would be no need to refer to “claims to money” in (c), because an interpretation should be preferred which gives meaning to every element of a treaty's text. Respondent's argument in fact distorts the principle of effectiveness, by denying the treatment of money as an asset within the ECT capable of investment and failing to distinguish between the (in common law terms) intangible property right or chose in action, and the action to enforce it.230 It is clear from reading Article 1(6) ECT that the list is supposed to be a broad, illustrative, non-exclusive list of the examples of assets considered by the parties to be investments, and that "other debt” and “claims to money” are broad, catch-all terms which may refer to a variety of transactions, in line with the treaty's purpose and the broad definition in Article 1(6).
175. No contracts in practice are typically entitled “debt", but that does not stop typical transactions incorporating one or both of these elements, e.g. those typically titled "loan agreements”, “debentures”, “debt instruments”, “credit rate swaps", etc., none of which are referred to by name in Article 1(6). Further, a claim to money or performance of a contract is in itself an asset distinct from the asset which is the subject of the claim or contract. There is no reason why a particular “loan agreement” cannot comprise or give rise to more than one of the assets listed in Article 1(6), depending on the circumstances of the case. Similarly, it is readily apparent that there may exist “claims to money” that do not arise from and have nothing to do with loan agreements.
228 Counter-Memorial, ¶ 159. ↩
229 Counter-Memorial, ¶¶ 161-162. ↩
230 Bridge M. et al., The Law of Personal Property (OUP: 2013), ¶ 21-007 (CL64). ↩
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176. Respondent cites from differently worded treaties such as the German Model BIT231 or awards considering loan transactions under differently worded investment treaties.232 But these authorities, as Respondent concedes, confirm that loans are considered to be "claims to money” only “when investment definitions do not expressly mention loans.”233 ECT Article 1(6)(b), on the other hand, has a specific protected category for "debt of a company”. The notion that “debt of a company” does not include loans is, again, preposterous.
177. Indeed, to Claimant's knowledge, no investment treaty tribunal has ever interpreted a definition of “investment” vis-à-vis debt obligations to the exclusion of loan agreements.234
178. Further support is found Article 14(1)(c) ECT, “Transfers related to investments", which provides that:
“(1) Each Contracting Party shall with respect to Investments in its Area of Investors of any other Contracting Party guarantee the freedom of transfer into and out of its Area, including the transfer of:
[...].
(c) payments under a contract, including amortization of principal and accrued interest payments pursuant to a loan agreement[...]”235
This makes clear that “interest payments pursuant to a loan agreement” are payments under a contract considered to be an “Investment in its Area", that is, the loan agreement itself.
231 Germany Model BIT (2005) (RL200). ↩
232 See Sanum v Laos (RL198) which considered a definition of investment under China-Laos BIT different to the ECT. ↩
234 See e.g. RL160, ¶ 215; Alpha Projektholding Gmbh v Ukraine, ICSID Case No. ARB/07/16, Award, 8 November 2010 (Robinson, Alexandrov, Turbowicz), ¶ 273 (CL57); Abaclat and Others v. Argentine Republic, ICSID Case No. ARB/07/5 (formerly Giovanna a Beccara and Others v. The Argentine Republic), Decision on Jurisdiction and Admissibility, 4 August 2011 (Tercier, van den Berg, Abi-Saab), ¶ 355 (CL55). ↩
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179. While not necessary to reach the point, Respondent seeks to deny jurisdiction by linking its flawed “claim to money” argument with the submission that providing financing to a company engaged in oil and gas exploration, production and sale in Russia's energy sector is not an Investment “[a]ssociated With An Economic Activity in the Energy Sector” on the ground that “Claimant has cited no authority for this proposition and...there is none".236 With respect, the proposition so obviously flows from the wording and object and purpose of the treaty that no authority is needed. For the reasons set out in the Counter-Memorial,237 any investment of capital in an energy company whether by way of loans or shareholding must constitute an Economic Activity Associated with the Energy Sector, regardless of how those funds are spent by the company.
180. As the Tribunal in BCB v Belize238 explained in language apropos here:
“The Tribunal is of the view that the benefit of a loan agreement is to be found in the location to which the funds were disbursed. The record shows that with respect to the Telemedia Facility, Sunshine Facility, and Sunshine Overdraft Facility, the Claimant in each instance concluded a loan agreement with a company incorporated in Belize. The disbursements under the Loan and Security Agreements were thus for the benefit of a company in Belize. As the Claimant's interest concerns the loan itself, the Tribunal need look no further down the chain of how those funds were deployed by Telemedia and Sunshine.”239
181. Although, for the reasons given, the use of funds invested in an energy company is not a relevant factor in determining whether it is an Investment associated with the energy sector, Claimant nevertheless explained in the Counter-Memorial that the Loans were intended for use by Yukos Oil (i) to fund the planned merger between Sibneft and Yukos Oil, (ii), to fund continuing operations and, (iii) pay hefty tax bills reassessed by Russia.
237 Counter-Memorial, ¶¶ 224-225. ↩
238 British Caribbean Bank Limited (Turks & Caios) v The Government of Belize, PCA Case No. 2010-18, Award, 19 December 2014 (van den Berg, Beechey, Oreamuno) (CL58). ↩
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182. Respondent (ignoring Claimant's refutation of its reading of the bank account extracts as supporting the conclusion that the funds were used for payment of dividends), has challenged the payment of dividends on the basis that the planned merger between Yukos Oil and Sibneft was called off.240 It also says that Claimant has provided no evidence of (ii) and (iii).
183. As regards the allegation that Claimant has failed to provide evidence supporting its statement as to the use of the loans, this is incorrect. The witness statements of Bruce Misamore attest to the use of the loans, Yukos Oil's practices and the impossibility of tracing funds in and out of Yuko's Oil's account, and refer to various supporting documents which are exhibited. Claimant further notes that, if there was a burden on Claimant to establish the exact use of the funds by Yukos Oil (which there is not), and if this was possible (which it is not, given the fungible nature of cash241), in circumstances where Respondent not Claimant has control of the relevant documents (having seized Yukos Oil's records), the burden shifts to Respondent.242
184. As regards the allegation that the 2003 Loan was used to pay dividends notwithstanding that the Sibneft merger had been called off, as explained by Bruce Misamore in his Second Witness Statement, reversal of the Sibneft transaction:
“would have required the approval of both the YUKOS Board of Directors and YUKOS shareholders. At the time the December 2003 Loan was executed, no such approval had been given nor was it intended. YUKOS Oil Company had not agreed to put the transaction on hold, nor to suspend or waive its performance. On the contrary, YUKOS Oil insisted on adherence to the transaction agreements as evidenced by its LCIA claim for the repudiatory breach of these agreements by Sibneft shareholders, and YUKOS Oil intended to fully meet all of its obligations and exercise its rights under the merger agreements.
I note that the YUKOS Statement of Claim in the LCIA arbitration that I have been shown also confirms that any discussions to unwind the transactions were likely taking place between certain shareholders of YUKOS and Sibneft. It also emphasises that: “[t]he Yukos Shareholders Group did not, and did not
240 Cf., Resp. Reply, ¶ 319. ↩
241 Second Misamore Statement, ¶¶ 37-41. ↩
242 See Caratube International Oil Company LLP v. Republic of Kazakhstan (RL59), ¶ 368: “The burden may shift with regard to issues reflected in documents that have been seized by Respondent from CIOC"; see also ¶ 394. ↩
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purport to, act for Yukos itself." Thus, even if some agreement existed between the two sets of majority shareholders, it did not impact YUKOS Oil Company, which was the signatory to the transaction agreements. It certainly did not mean that the transaction was called off and whatever deal the YUKOS Oil majority shareholders were negotiating with their Sibneft counterparts, it had no effect on YUKOS Oil Company before the December 2003 Loan was executed. As far as YUKOS Oil Company was concerned, the Sibneft transaction remained alive until the second tranche of the share exchange was invalidated by the Russian courts in October 2004 as part of an extensive campaign launched by the Sibneft majority shareholders.
The press release issued by the Yukos majority shareholder, GML, on 2 December 2003 further attests to the fact that the merger agreements remained in full effect at the time. Accordingly, Respondent's claim that the merger was called off before the December 2003 Loan was executed is incorrect.”243
185. Moreover, and as explained above and previously, no more than one-third of the 2003 Loan proceeds can be attributed to the payment of dividends on any theory.244 But even if the entire Loan was used for this purpose, the payment of dividends is part of the normal and necessary activities of an energy company and, in this instance, was “an integral part of YUKOS Oil's transaction with Sibneft".245 Mergers, like dividends are normal business activities. Respondent alleges that payment of dividends is a “disinvestment". This is absurd. Payment of dividends is associated with the investment of shareholders and reflects growth of the company, not divestment of its assets or “disinvestment” in a country.246 Indeed, one of the standard provisions of investment agreements is that investors be entitled to freely transfer their profits, which term includes share dividends, out of the jurisdiction.
186. Respondent repeats its argument that "[t]he term ‘investment' has an inherent meaning" and that the elements of the so-called Salini test should therefore be incorporated into the Article 1(6) ECT definition.247 The argument is without merit.
243 Second Misamore Statement, ¶¶ 37-39. ↩
246 “Disinvestment” is defined by the Oxford English Dictionary as “[t]he consumption, realization, or reduction of investment; a diminution of capital goods" (Exhibit C216). ↩
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187. As a threshold matter, it is disingenuous for Respondent to preach with respect to Article 45 ECT that “[i]t is not for an interpreter to resort to policy considerations to revise the actual terms of a treaty and attribute to them a meaning that would be contrary to their letter and spirit”248 but then ask this Tribunal to “revise the actual terms of the treaty” for the purposes of Article 1(6) ECT.
188. As demonstrated by Claimant in its Counter-Memorial, no ECT tribunal has ever applied Respondent's “inherent meaning” test to determine whether a claimant possessed an Investment as defined in Article 1(6) ECT. And each such tribunal has found the definition of “Investment” to be “wide” and/or “broad”.249 Moreover, whenever Respondent's argument has been advanced—including on one occasion by Respondent itself—it has been rejected.
189. While seeking to avoid repetition, given Respondent's assertion that it is “not true” that its argument has been rejected previously,250 we set out again paragraphs 184-87 and 190-91 from the Counter-Memorial (citations omitted):
“Amto was followed by a case Respondent knows well: Veteran Petroleum v. Russia. Veteran Petroleum is the companion case to Hulley Enterprises and, like this case, concerned Respondent's expropriation of Yukos Oil. Respondent made the very same argument it now makes to this Tribunal, i.e., that ‘under the rules of treaty interpretation, Article 1(6) of the Treaty itself needs to be interpreted in accordance with general international law'.
The argument was flatly rejected by the Veteran Petroleum Tribunal:
'The Tribunal finds that the ECT, by its terms, applies to an ‘Investment' owned nominally by a qualifying ‘Investor,' and that nothing more is required. Respondent's submission that simple legal ownership of shares does not qualify as an Investment under Article 1(6) of the ECT finds no support in the text of the Treaty. The breadth of the definition of Investment in the ECT is emphasized by many eminent legal scholars. As defined in Article 1(6) of the ECT, an‘Investment' includes‘every kind of asset' owned or controlled, directly or indirectly, and extends not only to share of a company but to its debt (Article 1(6)(b) of the ECT), to monetary claims and contractual performance as well as ‘any right conferred by law' (Article 1(6)(f) of the ECT, emphasis added). The Tribunal recalls again that,
248 Resp. Reply, ¶ 76 and the cases cited in fn. 65 thereto. ↩
249 Counter-Memorial, ¶¶ 178-193. ↩
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according to Article 31 of the VCLT, a treaty is to be interpreted in good faith in accordance with the ordinary meaning of its terms. The Tribunal reads Article 1(6)(b) of the ECT as containing the widest possible definition of an interest in a company, including shares (as in the case at hand), with no indication whatsoever that the drafters of the Treaty intended to limit ownership to beneficial' ownership'.
For the same reasons, the Veteran Petroleum Tribunal found that:
'[It] cannot accept Respondent's argument that an ‘Investment,' to qualify under the ECT, requires an injection of foreign capital. Indeed, as already explained above, the definition of investment in Article 1(6) of the ECT does not include any additional requirement with regard to the origin of capital or the necessity of an injection of foreign capital.[...] The Tribunal cannot in effect impose upon the parties a definition of ‘Investment' other than that which the parties to the ECT, including Respondent, have agreed'.
The Veteran Petroleum Tribunal thus concluded as follows: ‘Claimant is organized ‘in accordance with the law applicable' in the Republic of Cyprus and owns shares of Yukos. Thus, Claimant owns an ‘Investment' protected by the ECT and the Tribunal so finds. The Tribunal is not entitled, by the terms of the ECT, to find otherwise'. Replacing‘Cyprus’with‘Luxembourg' and ‘shares’ with 'debt' yields the correct (and only possible) result here—‘Claimant owns an ‘Investment' protected by the ECT’”251
-- and --
“The most recent in the line of relevant authorities (none, of course, discussed by Respondent and most not even mentioned), is Stati v. Kazakhstan. In that case, Kazakhstan made the same unsuccessful argument made by Russia in Veteran Petroleum—and relied upon the same, largely irrelevant, authorities cited by Respondent here.
The argument met with the same fate:
'By this extremely broad definition [in Article 1(6) ECT], particularly as extended by its section (f) quoted above, it stands in contrast to the ICSID Convention which contains no definition of ‘investment' and thus needs further interpretation as regularly done by ICSID tribunals. Guidelines and tests of criteria developed in this jurisprudence on the ICSID Convention and similar treaties, therefore, cannot be used as long as any right or activity is clearly covered by the wording of the above definition in ECT cases. Therefore, the so-called Salini test, controversial and much discussed both by the Parties in this case and otherwise in ICSID and similar arbitrations, even if applied as a flexible guideline rather than
251 Counter-Memorial, ¶¶ 184-187 (emphasis added). ↩
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as a strict jurisdictional requirement, cannot be used for the definition of investment under the ECT or, likewise, in the present case. The Tribunal, thus, sees no need to examine the various criteria discussed for the Salini test'”252
190. That Respondent can suggest its argument was not considered and rejected by these eminent tribunals defies belief.
191. On the plain language of Article 1(6) ECT and for the reasons expressed by all tribunals to have interpreted it, this Tribunal should not read any “inherent meaning” into the definition of Investment agreed by the signatories to the Treaty.
192. Nonetheless, Respondent's “general principles”, “inherent meaning” or “objective” approach is discussed in detail in Claimant's Counter-Memorial, including discussion on the irrelevance of and/or flaws found in the authorities on which it relies.253 It is largely an ICSID-driven debate founded on the lack of any definition of “investment” in the ICSID Convention. It remains controversial even in the ICSID context. For the reasons set forth in the Counter-Memorial and below, there is no reason for this Tribunal to enter the fray.
193. Respondent's “inherent meaning” approach draws its inspiration from Professor Douglas's comments regarding the ICSID Convention's notion of investment. The argument is that “the term “investment' whether employed in the ICSID Convention or an investment treaty, is 'a term of art” so that ‘objective elements' allegedly must be present.254
194. After emphasizing that the ICSID Convention does not include a definition of investment, Professor Douglas clarifies that:
“[t]he proprietary nature of the examples of assets or rights over assets listed in investment treaties serves as a means to distinguish, for example, the
252 Id., ¶¶ 190-191 (emphasis added). ↩
253 Counter-Memorial, ¶¶ 193-201. ↩
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rights to performance arising out of a concession contract and rights to performance embodied in a metro ticket.”255
195. The above paragraph represents the essence of Professor Douglas's view on what should constitute an investment256 and emanates from his identification of categories of investments adopted in many investment treaties. Professor Douglas regards:
“rights in property as the common denominator of all categories of investments enumerated in investment treaties”[...] The attributes of property are essential to the functioning of the investment protection mechanism encapsulated in the treaty”.257
196. This is consistent with the efforts of the investment treaty tribunals relied upon by Respondent (discussed further below) to develop a set of criteria to ensure that treaty definitions referring to “every kind of asseť" protect only property rights in an asset rather than claims arising out of “ordinary commercial transactions”, a term which, it is suggested, takes its meaning from commercial practice, e.g., a sale of goods or services contract, or a voyage charter, or an insurance contract. In part this concern of some tribunals has arisen due to specific treaty provisions, such as Article 1139 of NAFTA which excludes claims to money that “arise solely from commercial contracts for the sale of goods or services” or “the extension of credit in connection with a commercial transaction, such as trade financing”, and the early practice of the ICSID Secretariat in rejecting claims based on sales of goods contracts because they “manifestly could not be considered an investment'’258.
197. Insofar as this Proceeding is concerned, the important points are two. First, the concern identified above, which motivated the tribunals in the cases relied upon by Respondent for its so-called “inherent meaning” position, does not exist here. The Yukos Oil Loans are not an ordinary commercial transaction as that term is properly
255 Ibid. (emphasis added); see also RL64 ¶ 343. ↩
256 I.e. his "Rule 22: The legal materialisation of an investment is the acquisition of a bundle of rights in property that has the characteristics of one or more categories of an investment defined by the applicable investment treaty where such property is situated in the territory of the host state or is recognised by the rules of the host state's private international law to be situated in the host state or is created by the municipal law of the host state" (RL64, p.170). ↩
257 Douglas Z., The International Law of Investment Claims (CUP: 2009), ¶ 353 (CL69). ↩
258 Shihata I. & Parra A., 'The Experience of the International Centre for Settlement of Investment Disputes", (1999) ICSID Review – Foreign Investment Law Journal, 299, at p. 308 (CL73). ↩
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understood. Second, and following from the first, it therefore is not necessary for this Tribunal to express a view on the question of whether it is ever proper for an investment treaty tribunal to effectively legislate treaty meaning through the vehicle of so-called “inherent” or “general” principles.
198. Before proceeding further, we pause to address Respondent's assertion that “according to Claimant”, “even a lottery ticket might be protected” and “any one-off sales transaction would be a protected investment".259 Respondent misrepresents Claimant's arguments, as a reading of Claimant's pleadings makes clear. Claimant's point260 is that each investment treaty has to be interpreted according to its terms and “any asset” may contribute to the ECT's object and purpose of attracting investment to develop the energy sector of Russia and the CIS countries. It is arguable that one-off sale of goods transactions can never be an investment. Whether a lottery ticket can be an investment will turn on the particular case.261 But this case concerns neither a one-off sale of goods transaction, nor a lottery ticket. Respondent's analysis is, accordingly, of no relevance to this case.
199. Claimant notes further in this regard that the definition of Investment in Article 1(6) ECT (i) requires that any “claims to money and claims to performance pursuant to contract having an economic value” be specifically associated with an Investment and (ii) includes separate categories of assets encapsulating the Yukos Oil Loans (specifically in Article 1(6)(b) as “other debt of a company or business enterprise”) which lacks this requirement and thereby identifies these categories as Investments proper. Whatever the category, all Investments under Article 1(6) ECT must be associated with an “Economic Activity in the Energy Sector”. Therefore, an ordinary commercial transaction would not be protected under Article 1(6) unless it is also associated with an Investment and an Economic Activity in the Energy Sector. These
259 Resp. Reply, ¶¶ 255-256. ↩
260 Counter-Memorial, ¶ 201. ↩
261 The approach of the tribunal in Nova Scotia Power Incorporated v. Venezuela (RL179) is instructive: "[a]s a general proposition, sale of goods agreements have been repeatedly rejected as investments by commentators and tribunals alike. In this particular case, the question merits deeper analysis[...]" (at ¶ 113, emphasis added). ↩
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differences in treaty language further distinguish the ECT from the authorities relied upon by Respondent.
200. Throughout its submissions Respondent consistently accuses Claimant of proposing an interpretation “rendering meaningless the distinction between investments, on the one hand, and ordinary commercial transactions, on the other.”262 Respondent's complaint, therefore, appears to be that the Loans represent an “ordinary commercial transaction” or, in common law terms, a contract that concerns or gives rise only to claims of rights in personam and not claims of rights in rem. Respondent abjectly fails, however, to address what tribunals mean by “ordinary commercial transaction” and whether the Loans can be said to fit this label—they manifestly cannot.
201. While not advocating or endorsing the approach, guidance may be found in Emmis v Hungary,263 a recent ICSID award where the tribunal succinctly summarised the issue as follows:
“The need to identify a proprietary interest that has been taken is confirmed by the definition of ‘investment' in the Treaties. In each case, the Treaty refers compendiously to ‘every kind of asset[s]'. The Oxford English Dictionary definition of ‘asset' is:
(usually assets) an item of property owned by a person or company, regarded as having value and available to meet debts, commitments or legacies.
The definitions in the Treaties go on to provide particular examples of types of property or rights that may constitute an asset for this purpose. But these examples are not exhaustive
[...]
A right conferred by contract may therefore constitute an asset for this purpose. Article 1(2)(e) of the Swiss BIT expressly so states. The position is in
262 Resp. Reply, ¶ 256; Resp. Mem., ¶¶ 155, 156; see also Resp. Reply ¶¶ 275, 304; and ¶ 316 where Respondent is citing from Amto v Ukraine (RL77) that “it is not the object and purpose of the ECT to extend investment protection to ordinary commercial transactions". ↩
263 Emmis International Holding, B.V., Emmis Radio Operating, B.V., MEM Magyar Electronic Media Kereskedelmi és Szolgáltató Kft. v. The Republic of Hungary, ICSID Case No. ARB/12/2, Award, 16 April 2014 (McLachlan, Lalonde, Thomas) (CL59). Please note that the applicable BITs in the case i.e. Netherlands- Hungary BIT and Swiss-Hungary BIT both defined investment as “every kind of asset, more particularly, title to money, goodwill and other assets and to any performance having an economic value”, see ¶¶ 135, 138. ↩
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any event well established in customary international law, and has been followed by investment arbitral tribunals.
But it is important to emphasise that the protection from expropriation in relation to rights conferred under contract still requires identification of a property interest or asset held by the claimant. As the Iran-US Claims Tribunal put it in Amoco:
Expropriation, which can be defined as a compulsory transfer of property rights, may extend to any right which can be the object of a commercial transaction, i.e., freely sold and bought, and thus has a monetary value. [...] It is because Amoco's interests under the Khemco Agreement have such an economic value that the nullification of those interests by the Single Article Act can be considered as a nationalization.
[...] In its full analysis of the issue in Waste Management II, the Tribunal [...] said:
In such cases, simply to assert that “property rights are created under and by virtue of a contract” is not sufficient. The mere non-performance of a contractual obligation is not to be equated with a taking of property, nor (unless accompanied by other elements) is it tantamount to expropriation[...]”264
202. The Tribunal then explained that:
“[...] the loss of a right conferred by contract may be capable of giving rise to a claim of expropriation but only if it gives rise to an asset owned by the claimant to which a monetary value may be ascribed. The claimant must own the asset at the date of the alleged breach. It is the asset itself - the property interest or chose in action - and not its contractual source that is the subject of the expropriation claim. Contractual or other rights accorded to the investor under host state law that do not meet this test will not give rise to a claim of expropriation.”265
203. This was the issue in the authorities relied upon by the Respondent.
204. Thus, in Romak v Uzbekistan, the claim arose out of the non-performance of a wheat supply transaction by an Uzbek state entity. The Swiss – Uzbekistan BIT included a definition of investment referring to “every kind of asset" in particular “claims to
264 Ibid., ¶¶ 161-166 (emphasis added). ↩
265 Id., ¶ 169 (emphasis added). ↩
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money or to any other performance having an economic value.”266 The UNCITRAL Tribunal determined that:
“[...] interpretation [based on the treaty text] would eliminate any practical limitation to the scope of the concept of “investment.” In particular, it would render meaningless the distinction between investments, on the one hand, and purely commercial transactions, on the other.”267
205. In other words, the Romak Tribunal excluded series of contracts for the supply of grain which were purely commercial in nature from the treaty protection of “every kind of asset". The Tribunal found further support for its reasoning in the fact that a trade agreement between Switzerland and Uzbekistan had been signed on the same day as the BIT which, in the Tribunal's view, constituted an indication that the two negotiating states desired to distinguish between sales of goods and investments, thus informing an interpretation of the BIT's object and purpose.268
206. Similarly, Joy Mining v Egypt269 (which formed the basis of Romak Tribunal's principal conclusions) involved a contract for the provision of mining systems and supporting equipment and non-performance by a contractual counterparty, an Egyptian state entity. In declining to assume jurisdiction over the claim, the ICSID tribunal said:
“if a distinction is not drawn between ordinary sales contracts, even if complex, and an investment, the result would be that any sales or procurement contract involving a State agency would qualify as an investment. International contracts are today a central feature of international trade and have stimulated far reaching developments in the governing law, among them the United Nations Convention on Contracts for the International Sale of Goods, and significant conceptual contributions. Yet, those contracts are not investment contracts, except in exceptional circumstances, and are to be kept separate and distinct for the sake of a stable legal order. Otherwise, what difference would there be with the many State contracts that are submitted every day to international arbitration in connection with contractual performance, at such bodies as the International
267 Id., ¶ 185 (emphasis added). ↩
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Chamber of Commerce and the London Court of International Arbitration?”270
207. Like Romak, the BIT by its terms extended protection to “every kind of asset” and “claims to money or to any other performance under contract having a financial value".271 The Joy Mining Tribunal thus distinguished a sales contract – par excellence an “ordinary commercial transaction” - and non-performance thereof from an investment transaction. It did so by resorting to some of the criteria suggested by Respondent.272
208. Respondent relies as well upon Alps Finance v Slovak Republic.273 Alps Finance involved an assignment of receivables contract with the claim brought under the Swiss-Slovak Republic BIT. The claimant relied on the definition of investment (similar to Romak), including “claims to money or to any other performance having an economic value”.274 The tribunal's reasoning is not a model of clarity, but starting from the premise that “when the claim rises from a contract, the contract itself should qualify as an investment”,275 it concluded that the Assignment Contract:
“is not a contract with an ongoing duration. It is rather a contract which exhausts its object and purpose by its sole stipulation by the parties and effects – the assignment – take place immediately. In substance, it is a mere purchase-sale contract [...]”276
209. Nova Scotia v Venezuela does not deviate from the above.277 In that case, the Tribunal determined that a coal supply agreement constituted an ordinary commercial transaction.278
270 Ibid., ¶ 58 (emphasis added). ↩
273 Resp. Mem., ¶88, fn. 104; Resp. Reply, ¶ 259. ↩
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210. Respondent misrepresents the findings of GEA v Ukraine279 as confirming “that Claimant’s equation of ‘investment’ with ‘asset’ is inconsistent with the ordinary or inherent meaning of the term ‘investment.’”280 In fact, the tribunal merely discussed the jurisprudence in favour of and against the “objective meaning” of investment and observed that:
“[i]n the circumstances of this case, this is a controversy that need not be resolved. Out of an abundance of caution, the Tribunal has considered all potentially applicable criteria and, as set out below, each leads to the same conclusion with respect to each of the alleged ‘investments’ in question.”281
211. The tribunal then embarked on an analysis separating the different tests for jurisdiction under the BIT and the ICSID Convention.
212. In sum, in the cases relied upon by Respondent where an “inherent meaning” test has been applied, it has been to decline jurisdiction over claims arising (i) from one-off sale of goods contracts or transactions considered by the tribunal to have the same characteristics as a sale of goods contract, i.e. an “ordinary commercial transaction,” (ii) in circumstances where the applicable definition of investment was “any asset”.
213. We emphasize again that Claimant does not endorse the use of such a test even in the limited circumstances where it has been employed, nor does Claimant suggest the tribunals in the above-discussed cases were correct to analogize the investments at issue therein to “ordinary commercial transactions”. The important point is this: on any definition, the Yukos Oil Loans are not “ordinary commercial transactions” and they bear no resemblance to sale of goods contracts or anything similar. Accordingly, the authorities relied upon by Respondent are clearly distinguishable and therefore irrelevant, even if they were the product of sound reasoning which Claimant disputes to varying degrees.
214. The argument here comes full circle, ending where it began with Professor Douglas:
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“The provision of credit by the investor to an entrepreneur or enterprise engaged in commercial activities in the host state qualifies as an investment. The investor acquires rights to a debt, which can be assigned and thus has the feature of a right in rem. Credit can take the form of a loan, be part of a sales transaction or be provided by finance leasing.
[...] A loan is the form of credit that features most prominently as an investment in the corpus of investment treaty precedents.”282
215. As discussed above, the Yukos Oil Loans are loans. They are an asset on Claimant’s balance sheet. They are rights to a debt. They are, again, “debt of a company” and they are, therefore, Investments under Article 1(6) ECT.
216. And as aptly noted by the Tribunal in AES Corporation v Argentina, quoted incompletely by Respondent in its Reply:
“[...] each BIT has its own identity; its very terms should consequently be carefully analyzed for determining the exact scope of consent expressed by its two Parties.
This is in particular the case if one considers that striking similarities in the wording of many BITs often dissimulate real differences in the definition of some key concepts, as it may be the case, in particular, for the determination of “investments” or for the precise definition of rights and obligations for each party.
From the above derive at least two consequences: the first is that the findings of law made by one ICSID tribunal in one case in consideration, among others, of the terms of a determined BIT, are not necessarily relevant for other ICSID tribunals, which were constituted for other cases[...]”283
217. Claimant could not have said it better.
3. The Yukos Oil Loans Would Satisfy the Salini Test
218. As set forth in the Counter-Memorial, the Yukos Oil Loans satisfy the Salini test in any event.284 Respondent adds little new to this debate in the Reply. To summarise, the Salini test is not imported into the definition of investment in ECT Article 1(6); other tribunals, e.g. those in Tokios Tokelés and Romak, which have adopted an
282 Counter-Memorial, ¶ 162; RL64, ¶ 381 (emphasis added). ↩
284 Counter-Memorial, ¶¶ 202-216. ↩
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“objective approach” have not followed the Salini test but have taken a less formalistic or formulaic approach,285 which simply assesses whether there was a “commitment of funds or other assets with the purpose to receive a profit, or ‘return’, from that commitment of capital”, which is met where there is “[a]ny dedication of resources that has economic value”.286 Even if the Salini test were imported into Article 1(6), the Loans meet that criteria. Not only did Claimant risk losing the profit from the interest rate spread vis-à-vis its source of funds,287 and jeopardising its purpose as an intra-group financing company,288 but in fact these risks did materialise.289
219. The fact that Claimant effectively hedged much of its risk through back-to-back, non-recourse lending arrangements290 is of no moment. The risks mentioned above (i.e., loss of profits and existence as a going concern) were not hedged,291 despite Respondent’s allegations to the contrary.292
220. Moreover, the hedging or transfer or risk does not strip an asset of investment protection. In Hochtief v Argentina,293 claimant Hochtief had secured political risk insurance from Germany and received an indemnification when the risk was realised. Argentina argued that Hochtief’s recovery should be precluded or limited by its recovery under the political risk insurance policy from Germany. The Tribunal disagreed:
“The insurance payment is a benefit which Claimant arranged on its own behalf, and for which it paid. It does not reduce the losses caused by
285 The tribunal in Romak refers to this approach as the “pragmatic approach” (RL54, at ¶¶199, 200), and distinguishes this from the “conceptualist approach”, which espouses the Salini approach but “refuse[s] to endorse all of the conceptualist elements invoked in that award” at ¶ 201. ↩
286 Counter-Memorial, ¶¶ 204 and fn.214. ↩
289 Ibid.; see also Supplemental FTI Rep., ¶¶ 28-29. ↩
290 See FTI Rep., ¶¶ 46-47 and Supplemental FTI Rep., ¶ 30. ↩
291 See Second Misamore Statement, ¶¶ 24-25. ↩
292 Resp. Reply, ¶¶ 216-217. ↩
293 Hochtief AG v. The Argentine Republic, ICSID Case No. ARB/07/31, Decision on Liability, 29 December 2014 (Lowe, Brower, Thomas) (CL60). ↩
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Respondent’s actions in breach of the BIT: it is an arrangement that had been made by Claimant with a third party in order to provide a hedge against potential losses. The Tribunal does not consider that any principle of international law requires that such an arrangement, to which Respondent was not a party, should reduce Respondent’s liability. It may be that under such insurance policies the protected investors are obliged to hand over to the insurer all or part of any sums recovered as damages: but that is a matter of private contract, into which the Tribunal has no cause to inquire.”294
221. Much of Respondent’s “inherent meaning” argument may be placed under the heading of “Contribution,” including Respondent’s allegations that: (i) the Loan proceeds were not Claimant’s funds; (ii) the Loan proceeds were part of a circular flow of cash originating in Russia; and (iii) the Loans did not contribute to Respondent’s economy. We address each below, again referring the Tribunal to the relevant sections of the Counter-Memorial.295
222. When Claimant borrowed funds to lend them, those funds became its funds.296 In this regard it may be helpful to consider Société Générale, the entity Respondent appears to hold out as a “genuine” lender making “genuine” loans. As explained by Mr Gleichenhaus in his First Report, it is a common practice for commercial lenders to borrow funds in order to lend them.297 Moreover, if one also considers the origin and fundamental business principle of lending institutions, deposits are obtained from customers and some percentage of those funds are then loaned to third parties while “on deposit” with the banks. In this sense, the funds loaned by the banks are not their own. And, of course, another fundamental business principle of lending is to hedge risk, sometimes in a way that leaves only a very small expected margin or return.
223. All of which is to say that Respondent’s conception of whether the funds advanced pursuant to the Yukos Oil Loans were Claimant’s funds makes little sense in the
294 Ibid., ¶ 309 (emphasis added). ↩
295 Counter-Memorial, ¶¶202-216. ↩
296 See Second Misamore Statement, ¶¶ 19-20 and FTI Rep., ¶¶ 35-40. Despite Respondent’s assertions to the contrary (see Resp. Reply, ¶¶ 211, 287), Claimant thereby also obtained “control” over those funds (see Second Misamore Statement, ¶¶ 19-20), although Claimant here notes that Respondent offers no authority for the proposition that control over investment decisions is a requirement for an “investment,” even “inherently”. ↩
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context of commercial lending. It would effectively require tribunals to make detailed forensic examinations into the source of funds to determine on some unarticulated test whose funds were loaned. Depending on the test applied, it could be presumed that many if not most commercial lending arrangements would fall outside the protection of investment treaties, a result inconsistent with every investment treaty award to have considered loan arrangements and assuredly with the legitimate expectations of the international commercial lending industry. That cannot be right and tribunals cannot be expected to conduct forensic “source of funds” inquiries to determine jurisdiction. Here, having borrowed the funds, they became Claimant’s funds on any reasonable test and they permitted Claimant to enter into a contractual arrangement whereby it assumed obligations as a lender to Yukos Oil in exchange for the right to receive repayment of principal plus interest pursuant to the terms of the Loan Agreements.
224. Respondent relies on Standard Chartered v. Tanzania.298 It is difficult to see how the award advances Respondent’s case. First, the tribunal specifically distinguished the Kardassopoulos award from its own on the basis that the ECT “has a broader definition of investment covering assets controlled, directly or indirectly by a national of a contracting state. Article 1(6) of the ECT” did not “speak to”, inter alia, the “treaty text at issue in this case”, namely the BIT between Tanzania and the United Kingdom.299 Second, the facts were entirely different. There, the claimant owned, directly and indirectly a company, SCB UK, which had in turn purchased, with its own funds, loans made by a third party (a consortium of Malaysian banks) as part of a debt restructuring to a joint venture company which had entered into an agreement with a Tanzanian state company to construct and operate an electricity generating facility. SCB UK had itself brought ICSID proceedings. The tribunal’s finding on the evidence before it was that the claimant “made no contribution to any relevant loans, taking no action to constitute the making of an investment” and it did not exercise “any control over any credit to the Tanzanian debtor” and did not provide “any direction to SCB HK related to the making of the Loans”.300 All it did was
298 Resp. Reply, ¶ 282, citing Standard Chartered Bank v. The United Republic of Tanzania, ¶ 200 (RL193). ↩
299 RL193, ¶ 255(i) and ¶ 256. ↩
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passively own shares.301 By contrast, in this case Claimant made the Loans. Third, the facts in Standard Chartered were evidently complex and the outcome turned on the particular treaty. It is not at all clear – as that tribunal acknowledged – that passive ownership of shares in a company buying or extending loans to companies engaged in infrastructure development would not be protected investments in other circumstances. The transferability of investments is part of their attraction to investors.
225. The remaining investment treaty awards cited by Respondent in support of its lack of “contribution” allegations are readily distinguishable, as addressed in Claimant’s Counter-Memorial.302
302 Counter-Memorial, ¶ 208. ↩
306 Ibid., ¶ 198; see also Saluka v Czech Republic, ¶¶ 71-72 (CL20). ↩
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226. Here, on the other hand, the Yukos Oil Loans were valid and enforceable loans made pursuant to intercompany lending practices used by energy companies all over the world. Claimant committed significant funds to Yukos Oil for a period of years accompanied by an intent that the funds be repaid per the terms of the Loan Agreements, which Agreements were entered into on arms’ length terms in accord with all legal and other requirements.
227. Respondent complains that the funds loaned to Yukos Oil by Yukos Capital were “profits generated...in Russia”.309 This is said to have been part of a circular flow of funds that must exclude the Loans from the definition of Investment in Article 1(6) ECT. Three points may be made here.
228. First, the flow of funds was not circular. Yukos Oil never owned the funds at issue until it received them in its capacity as a borrower from Yukos Capital. While the funds were at various times owned by other companies within the Yukos group, Respondent has articulated no theory to suggest this should deprive the Loans of investment protection under Article 1(6) ECT.
229. Indeed, and this is the second point, even under the objective, or “inherent meaning” approach (which should not be applied to the ECT), the source of funds is irrelevant. Respondent is plainly wrong to suggest otherwise.310 The awards relied upon by Claimant to support this proposition of law (ADC v Hungary, CME Czech v Czech
308 RL59 referred to in Resp. Reply, ¶ 280. ↩
309 Resp. Reply, ¶¶ 285, 289-290. ↩
310 Id., ¶¶ 285-287; Counter-Memorial, ¶ 206. ↩
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Republic, and Rompetrol311), contrary to Respondent’s argument,312 quite clearly do support this proposition and are “apposite”.
230. As explained by the tribunal in Saipem S.p.A. v. Bangladesh:
“[...]it is true that the host State may impose a requirement that an amount of capital in foreign currency be imported into the country. However, in the absence of such a requirement, investments made by foreign investors from local funds or from loans raised in the host State are treated in the same manner as investments funded with imported capital. In other words, the origin of the funds is irrelevant. This results from the drafting history of the ICSID Convention and is confirmed by several arbitral decisions relating to BITs.”313
231. The third point, which cuts across this issue and a number of others, is that the ECT is not a standard BIT. The ECT is a multilateral treaty born out of the European Energy Charter process. Its object and purpose is to help foster, support and promote a common energy market functioning within Europe and beyond. The Concluding Document of The Hague Conference on The European Energy Charter set the objectives of the Treaty very clearly:
“The signatories are desirous of improving security of energy supply and of maximising the efficiency of production, conversion, transport, distribution and use of energy, to enhance safety and to minimise environmental problems, on an acceptable economic basis. Within the framework of State sovereignty and sovereign rights over energy resources and in a spirit of political and economic co-operation, they undertake to promote the development of an efficient energy market throughout Europe, and a better functioning global market, in both cases based on the principle of non-discrimination and on market-oriented price formation, taking due account of environmental concerns. They are determined to create a climate favourable to the operation of enterprises and to the flow of investments and technologies by implementing market principles in the field of energy.”314
232. We also note the following words of the Electrabel v Hungary Tribunal (noted in relation to link between EU law and the ECT):
311 Counter-Memorial, fn. 217 to ¶ 206. ↩
312 Resp. Reply, ¶¶ 283-285. ↩
313 RL95, ¶ 106 (emphasis added). ↩
314 Concluding Document of The Hague Conference on The European Energy Charter, Title I, Objectives (Exhibit C1, p. 214) (emphasis added). ↩
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“[t]he ECT is largely a product of EU external political, economic and energy policy. It is meant to integrate the formerly Communist countries, provides an ante-chamber and preparation area for EU accession for many of them; it is intended to promote EU investment in these countries and energy flows from these countries to the EU. It is therefore linked more closely to EU integration, accession to the EU and EU external relations law than the ‘run-of the mill’ BIT.”315
233. While not an issue this Tribunal needs to resolve, Claimant submits that if one considers the goal of constructing and developing an energy sector and what that entails (“the exploration, extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing, or sale of Energy Materials and Products”316), and the scale of that task when viewed from the perspective of the ECT negotiators between 1991 and 1994 given the dilapidated and undeveloped state of the energy industry in Russia and the CIS countries at the time, it is not unreasonable to conclude that every kind of contract, or economic operation undertaken towards that end, was intended to be a covered investment.317
234. As emphasized elsewhere, intercompany lending is an integral part of the business of virtually all large multinational companies.318 Respondent itself relies upon intercompany lending for the growth and development of its energy companies, including Gazprom, and therefore its energy sector.319 In this sense, intercompany lending “promote[s] the development of an efficient energy market throughout Europe” and is part of “creat[ing] a climate favourable to the operation of enterprises and to the flow of investments ...”320 Thus, where intercompany loans such as the Yukos Oil Loans satisfy the ECT requirements for investment protection (as they clearly do here), the object and purpose of the ECT strongly counsel against any
316 ECT Article 1(5) (Exhibit C1). Article 1(4) defines “Energy Materials and Products” as those “based on the Harmonized System of the Customs Co-operation Council and the Combined Nomenclature of the European Communities, means the items included in Annex EM”. ↩
317 See the reasoning in Electrabel, RL76), at ¶¶5.47, 5.50 and 5.55. ↩
318 See Second Misamore Statement, ¶¶ 5, 11, 14; Grantham Rep., ¶¶ 2.3.4, 3.2.2, 5.2.9(e), 5.4.2; FTI Rep., ¶¶ 20-23; and Supplemental FTI Rep., ¶¶ 9, 16. ↩
319 See discussion supra at ¶¶ 133 to 138. ↩
320 Concluding Document of The Hague Conference on The European Energy Charter, Title I, Objectives (Exhibit C1, p. 214). ↩
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restrictive reading that might deprive them of such protection. Certainly, there is nothing in the language, object or purpose of the ECT that suggests otherwise.
235. Seemingly recognizing this, Respondent claims that “in an effort to distract attention from the economic substance of the ‘Loans,’ Claimant alleges, without supporting evidence, that they (along with the back-to-back agreements with Brittany and Hedgerow) are vaguely comparable to ‘ubiquitous’ ‘intercompany debt.’”321 Claimant does not need to “allege” that the Loans are “vaguely comparable to ‘ubiquitous’ ‘intercompany debt’ and ‘intercompany loans’”; it is clear and straightforward that they are “intercompany loans” made in a similar fashion to those of major energy companies the world over, as Respondent well knows.
236. In fact, while relying on the Compass Lexecon Report it has placed before the Tribunal, Respondent omits the following findings from that Report:
“During 2003-2004, an OAO NK Yukos Luxembourg daughter company, Yukos Capital S.a.r.l. signed 14 loan agreements with OAO NK Yukos Oil and its related entities, including YNG, SNG, TN, OAO NK Yukos, Energotrade, and Yukos Vostok Trade (collectively, the “Yukos Borrowers”). These agreements represent inter-company loans. Intercompany loans are customary and usual practice in multinational companies. For example, a widely accepted textbook points out:
‘A principle means of financing foreign operations and moving funds internationally is to engage in intercompany lending activities. The making and repaying of intercompany loans is often the only legitimate mechanism available to the MNC [multinational corporation]’”322
237. Respondent wrongly maintains that “Claimant must establish that it made an active contribution of money or other assets to Respondent’s economy” and that such contribution is “indeed a quid pro quo of its right to resort to international arbitration.”323
322 Compass Lexecon Report (Exhibit R38) (emphasis added), ¶ 26. quoting Alan Shapiro, Multinational Financial Management Seventh Edition (Hoboken, NJ: John Wiley & Sons, 2003), p. 692 (emphasis added). ↩
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238. Nowhere in the authorities cited by Respondent or the ECT is there a mention of “an active contribution”. As Roe & Happold (oft-cited by Respondent in its submissions) opine, so far as the ECT is concerned, there is no need to consider whether the alleged 'Investment' contributes to the economic development of the host state as a jurisdictional requirement:
“It simply does not follow from the fact that a treaty seeks, for a particular purpose, to protect a particular category of interest that it only protects interests which can be specifically proved to advance that purpose. It is no more logical than arguing that the right to move capital freely within the EU may only be exercised if in the particular case the movement can be proved to promote the 'constant improvements of the living and working conditions of [European] peoples' which the right was created in order to further?
A further reason why the criterion of promotion of development ought to play no part in the definition of 'Investment' under the Energy Charter Treaty is that the Treaty is a multilateral one, many of whose contracting parties are states which already have a high level of economic development. Disputes which may fall to be determined under Article 26 will not necessarily conform to the pattern, familiar in international investment law generally, of developed-state investor versus developing state [...]”324
239. In any event, it is incontestable that the principal amounts lent under the two Loans – USD 2.7 billion and USD 335 million – were in fact disbursed into the Respondent’s economy and used for Yukos Oil’s business in Russia’s energy sector.325 In this regard, while ample evidence exists in the record, Respondent again selectively omits the following from the Compass Lexecon Report: “...the IC case materials in fact support the conclusion that these funds remained within the OAO NK Yukos consolidated company structure where they were available to further the business activities of companies within the OAO NK Yukos group of companies.”326
240. In a new argument, Respondent cites a passage from Romak v. Uzbekistan and then relies on specific wording employed by the tribunal in that passage to, seemingly, add an additional criterion to the inherent characteristics of investments under the
325 Misamore Statement, ¶¶ 24-38. ↩
326 Compass Lexecon Report (Exhibit R38), ¶ 10. ↩
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objective approach, i.e. that the contribution be “in furtherance of a venture”.327 Respondent takes the passage out of context. The argument the tribunal was addressing was the question of whether execution of a supply contract for the sale of 40,581.58 tons of wheat was in furtherance of a Protocol of Intention on mutual cooperation between Romak and an Uzbek state company. The tribunal, based on its conclusions of fact, considered that it was not.328 It was therefore a standalone sale of goods contract which the tribunal had “noted above”, are regulated by different legal regimes329 and, for that reason – irrespective of the application or non-application of the objective approach - would not constitute an investment in the absence of express wording otherwise.330 In any event, Yukos Oil Company was undoubtedly a “venture” until its destruction at the hands of Respondent.
241. Respondent’s emphasis on matters post-dating its expropriation of Yukos Oil Company331 is of no relevance. As explained by Mr Misamore:
“Respondent suggests the 2010 Fair Oaks Agreement establishes that ‘Yukos Capital had no economic interest in the ‘Loans’. This is not a fair conclusion and ignores the effects of the expropriation of YUKOS Oil. By 2010 Fair Oaks was financing actions to recover on the YUKOS Oil Loans because (i) unlike Yukos Capital, it had the resources available to do so, (ii) Yukos Capital did not have resources because it had been deprived of the margins on the loans due to Russia’s expropriation of YUKOS and the unexplainable, but likely politically commanded, denial of Yukos Capital’s status as a creditor in the YUKOS bankruptcy and (iii) with Russia’s destruction of YUKOS Oil’s business, any amounts recovered, whether by Yukos Capital or any other surviving group entity, will accrue to the benefit of the Yukos International and/or Financial Performance Stichtings, which are charged with marshalling assets for ultimate distribution to the former minority shareholders of YUKOS Oil. Stated differently, the legal relations and business purposes of Yukos Capital and other surviving Yukos entities has fundamentally changed from when the Loans were made by Yukos Capital in 2003-04. Those changes were brought about by Russia’s illegal
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expropriation of YUKOS Oil, which culminated with its complete destruction/dissolution in late 2007”.332
242. One final point. Respondent suggests for the first time in its Reply that this case involves a request for the Tribunal to “accord Treaty protection to the rights associated with Yukos Oil Company’s shareholdings in its Russian subsidiaries” and that “[t]hese rights are not protected under the ECT”.333 As support for this proposition, Respondent cites Phoenix v Czech Republic,334 which “involved a restructuring of domestic Czech investments that resulted in ‘a rearrangement of assets within a family” and ST-AD v Bulgaria,335 which stands for the proposition that “’a national of a State, whether a natural or a legal person, cannot, in principle, sue its own State in an international arbitration’”.336
243. This case has nothing to do with Yukos Oil’s shareholdings in its Russian subsidiaries, all of which have been illegally expropriated and either destroyed or gifted to Rosneft. Nor does it have anything to do with the restructuring of domestic investments. Nor, of course, does this case involve a Russian national suing its own State. This case instead involves the former non-Russian subsidiaries of Yukos Oil and, in particular, the protection of substantial investments made by one of them, Claimant, in the form of the Yukos Oil Loans.
244. While this is a wholly meritless argument, Claimant further notes that, to the extent Respondent is suggesting Claimant is not a qualifying investor under Article 1(7) ECT, that objection has not been raised previously and to do so now would violate Procedural Order No. 1.
332 Second Misamore Statement, ¶ 27. ↩
335 RL194; see also authorities cited in fn 447 in ¶ 293 of the Resp. Reply. ↩
336 Resp. Reply, ¶¶ 291-293. ↩
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245. Claimant refuted Respondent’s objections under Article 17(1) in its Counter-Memorial on Jurisdiction, based on three alternative threshold grounds, namely that:
246. Respondent has failed to rebut any of Claimant’s above complaints in its Reply, and the arguments raised in the Reply are largely repetitious of Respondent’s Memorial on Jurisdiction, which have already been addressed in Claimant’s Counter-Memorial on Jurisdiction.
247. Respondent still maintains that, “pursuant to the ordinary meaning of Article 17(1), a Contracting Party may exercise the right to deny [...] when it deems expedient to do so.” In this respect, it insists (wrongly) that there are no prior notification requirements for the state in Article 17, and a denial at the jurisdictional objections stage fully accords with (allegedly) relevant non-ECT treaty jurisprudence.
248. As a threshold matter, it should be remembered that Article 17(1) allows denial of advantages under Part III of the ECT, in which the substantive investment
337 Counter-Memorial, ¶¶ 229-304. ↩
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protections are set out. Part III does not cover any agreement to arbitrate; rather, this dispute resolution provision is contained in Part V of the ECT (at Article 26). Accordingly, Claimant can only deny benefits pursuant to Article 17 in relation to the substantive protections in Part III, and the interpretation of Article 17(1) is only relevant to the effectiveness of the protections set out in Part III. Article 17(1) has no effect on the provisions contained in Article V, and thus no bearing on the determination of jurisdiction pursuant to Article 26.338
249. Respondent’s position is not assisted by the fact that the Parties have agreed that Respondents’ challenge under Article 17 should be determined by this Tribunal as a preliminary matter in the interests of procedural economy. This does not make such challenge right or signify any concession that Article 26 in Part V is subject to Article 17 in Part III, which it plainly is not. Moreover, Claimant’s construction of Article 17 on the plain wording of the clause is supported by consistent ECT jurisprudence, which remains unrefuted by Respondent.
250. Rather than addressing the relevant ECT decisions (which contradict Respondent’s case), Respondent repeats its reliance on non-ECT cases such as Ulysseas v Ecuador, Pac Rim v El Salvador, Guaracachi v Bolivia and Empresa v Ecuador, which are easily distinguishable on the provisions of their treaties. If the relevant treaty provisions were analogous, (and Article 17(1) purported to cover the agreement to arbitrate) these cases would lend some support for the proposition that denial of benefits after commencement of arbitration by an Investor is a timely denial. However, if (as in the present case) the denial of benefits provisions do not extend to the jurisdiction regime, this is an obviously sterile debate.
251. Thus, all of the cases cited by Respondent are irrelevant, as in each case the denial of benefits provisions expressly applied to the contracting parties’ consent to arbitrate:
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“Each Party reserves the right to deny to any company the advantages of this Treaty if nationals of any third country control such company and, in the case of a company of the other Party, that company has no substantial business activities in the territory of the other Party or is controlled by nationals of a third country with which the denying Party does not maintain normal economic relations.”341
“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 (a) the denying Party does not maintain normal economic relations with the third country; or (b) the company has no substantial business activities in the territory of the Party under whose laws it is constituted or organized.”343
“Subject to Articles 18.3 (Notification and Provision of Information) and 20.4 (Consultations), a Party may deny the benefits of this Chapter [which contains the offer of the State to arbitrate] 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.”345
252. As the highlighted words demonstrate, in these cases, the denial of benefits provisions expressly encompass the dispute resolution provisions, by reference either to the entire treaty, or, in the case of CAFTA, to the chapter in which the agreement to arbitrate is contained. Thus, in these cases, the right to arbitrate investment disputes and consequent jurisdiction bestowed upon a tribunal is expressly one of the benefits
(Cont’d from previous page)
345 CAFTA Article 10.12.2, as cited in RL82, ¶ 4.1 (emphasis added) ↩
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that a state can deny to a covered investor, with the result that the interpretation of the denial of benefits provision may give rise to questions of jurisdiction.
253. It is on this basis that the Ulysseas346 and Empresa347 Tribunals both considered, as a matter of jurisdiction, whether the respondent state had complied with the time limit prescribed by the UNCITRAL Rules Article 21(3) requiring a jurisdictional objection to be raised not later than in the statement of defence.348
254. This was also the basis for the Guaracachi Tribunal’s finding that:
“The consequence of the denial of benefits is that the Tribunal (which forms part of the package of benefits afforded under the BIT) will be deprived of jurisdiction over the present dispute. Accordingly, as a jurisdictional issue, it must be raised at the latest in the respondent’s statement of defence, as it was here. Although it is perhaps unusual for both the fact that leads to a lack of jurisdiction and the submission of the related jurisdictional objection to arise at the same time, nothing prevents both (the act that forms the basis of the plea and the plea itself) from coinciding as they do here.”349
255. The Guaracachi Tribunal expressly reasoned that “the consequence of the denial of benefits is that the tribunal will be deprived of jurisdiction” was because the denial of benefits “forms part of the package of benefits afforded under the BIT” that a state can deny. It was on this basis that the Guaracachi Tribunal found there to be a “conditional” consent to arbitration.
256. However, this context does not apply in the present case, and Respondent’s reliance on Guaracachi Tribunal’s words that “consent by the host state to arbitration itself is conditional”350 is inapposite here. Consent to arbitrate under ECT Article 26 is not part of the “package of benefits” that a host state could deny under Article 17, as clarified by the Guaracachi Tribunal itself in the next paragraph of Respondent’s quotation (tellingly omitted from Respondent’s submission):
346 RL84, ¶ 172, cited in fn 500 of the Resp. Reply. ↩
347 RL85, ¶ 71, cited in fn 503 of the Resp. Reply. ↩
348 Resp. Reply, ¶¶ 324, 326. ↩
349 RL80, ¶ 381 quoted in Resp. Reply, ¶ 325. ↩
350 Id., ¶¶ 371-372 quoted in Resp. Reply, ¶ 342. ↩
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“[...][t]he reservation of the right of denial of benefits contained in Article XII operates on the Contracting Parties’ offer of consent to arbitration as much as every other benefit conferred by the BIT. Hence, any US investor who invests in Bolivia already knows in advance of the possibility of a denial of benefits by Bolivia—as long as the Article XII requirements are met—and, if it decides to accept the offer of arbitration made by Bolivia in the BIT, it accepts it at face value.”351
257. Accordingly, none of the cases cited by Respondent above are “on point.”352 Contrary to Respondent’s assertions, consent to arbitration under Article 26 is not made “subject to” or “conditional” on Article 17. Article 26 merely requires “a dispute between a Contracting Party and an Investor relating to an Investment of the latter [...] which concern an alleged breach of an obligation of the former under Part III.”
258. This is further confirmed by the fact that the definition of “Investor” in Article 1(7) (expressly referenced in Article 26) is not made subject to Article 17. Had the Contracting Parties to the ECT intended to uniformly impose the substantive requirements in Article 17 as a prerequisite to arbitration of Treaty disputes, they would have incorporated these substantive requirements into the definition of Investor or the scope of Article 26 more generally. But they have done neither. Yukos Capital is an entity organised in accordance with the laws of a Contracting State within the meaning of Article 1(7), and is accordingly an Investor covered by the arbitration provision. This is the end of the question on jurisdiction.
259. Respondent’s argument on timing of the denial and its consent under the ECT being “conditional” on such denial also runs counter to Article 26(3) and 26(5) of the Treaty. By Article 26(3), each Contracting State gives its unconditional consent to the submission of a dispute to international arbitration (subject to subparagraphs (b) and (c) which are inapplicable in this case). Article 26(5) further confirms that once
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an Investor has provided its written consent to UNCITRAL arbitration of the dispute, an arbitration agreement is perfected.353
260. In Respondent’s interpretation, however, the host state can retrospectively limit the scope of its consent contrary to Article 26(3) and after the arbitration agreement vesting jurisdiction in this Tribunal has been perfected. It purports to retrospectively introduce conditions to its unconditional consent to arbitrate, which is neither supported by the text of the Treaty, nor by its consistent jurisprudence, which Respondent has failed to rebut (see paragraphs 270 to 278 below).
261. Put simply, the exercise of a contracting party’s right to deny benefits in the way Respondent suggests constitutes “a retrospective withdrawal of previously existing consent to arbitrate”,354 which is not allowed under Article 26 of the ECT.
262. Respondent’s interpretation leads to the absurd proposition that, as soon as a denial of benefit provision is invoked by a host state, no tribunal is entitled to determine whether such invocation was rightful because allegedly, “an investor that has been denied the advantages of Part III is not owed any obligations under Part III”355. On Respondent’s construction, liability of any host state under the ECT is automatically disavowed as long as that state retrospectively invokes the denial of benefits provisions (even after a claim has been brought) and no tribunal has jurisdiction to determine whether “the facts alleged to constitute a breach of Part III falls under the relevant provisions of Part III”.356 It is supposedly enough that a host state decides that the substantive requirements of Article 17 are satisfied; no tribunal can have jurisdiction to scrutinize that decision.
263. Such an interpretation does not follow on any reading of Article 17.
353 Yukos Capital has submitted its written consent to arbitrate with its trigger letter in 2008 (Exhibit C103) which perfected the arbitration agreement with Respondent having unconditionally consented to arbitration under Article 26(3). ↩
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264. Even if it might be correct that “a contracting party’s obligations under Part III are a corollary of an investor’s advantages,”357 it does not follow that such obligations automatically evaporate once advantages are unilaterally denied, nor that the host states are the judges of this determination. If it were the case, no state would ever have to defend a treaty claim before an arbitral tribunal – it would be entitled to deny the benefit of arbitration as soon as any claim was brought. Undoubtedly, this is “a license for injustice; and it treats a covered investor as if it were not covered under the ECT at all.”358
265. Moreover, a denial of benefits provision cannot deprive a covered Investor of its right to have its ECT dispute with a host state resolved by an arbitral tribunal without a provision to that effect in the Treaty. Nor does Respondent answer the critical question:
“[i]n the absence of Article 26 as a remedy available to the covered investor (as the Respondent contends), how are such disputes to be determined between the host state and the covered investor, given that such determination is crucial to both?”359
266. Respondent has ignored Claimant’s request that Respondent explain the relevance of the cases it cites which deal with a tribunal’s mandate to determine facts pertaining to merits at the jurisdiction stage, and are plainly not pertinent to the construction of Article 17(1) in the context of Article 26.360
267. As a jurisdictional requirement, ECT Article 26 requires there to be a “dispute between a Contracting Party and an Investor relating to an Investment of the latter [...] which concern an alleged breach of an obligation of the former under Part III.” There is no disagreement between the Parties that this is a dispute falling within the remit of Article 26. Claimant has already set out the facts in its Notice of Arbitration that “concern the alleged breach” under Part III of the Treaty.361 Hence, Claimant has
358 Plama, ¶ 149 (Exhibit RL88) as cited in Counter-Memorial, ¶ 234. ↩
360 Resp. Reply, ¶ 332; Resp. Mem., ¶ 187. ↩
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made a prima facie case that its factual allegations (if proven to be correct) constitute a breach of Part III Treaty obligations.362 Russia also does not contest that Yukos Capital’s claim under its Loans is a dispute “concerning an alleged breach” of Part III obligations by Russia, and these obligations do not automatically vanish just because Respondent purports to unilaterally deny benefits under Article 17, and unilaterally decides that Yukos Capital fulfils the substantive conditions under Article 17. It is a Tribunal constituted under Article 26 that must decide these issues.
268. Accordingly, Respondent’s assertion that “the facts alleged by Claimant are not capable of coming within the reach of Articles 10(1) and 13 ECT, because Respondent denies Claimant the advantages of Part III”363 is an absurd suggestion. Respondent cannot be allowed to deny jurisdiction to this Tribunal based on its arbitrary self-judgment of Claimant’s standing.
269. In any event, Respondent has failed to rebut the consistent and persuasive ECT jurisprudence cited by Claimant that contradicts Respondent’s position.
270. Claimant cited Plama, Hulley Enterprises and Stati in its Counter-Memorial,364 all of which considered an objection based on the timing and effect of the denial of benefits clause on party consent to arbitrate. Claimant also specifically referred to Libananco, Petrobart and Amto in footnote 269 as well as discussing Liman Caspian Oil in paragraph 251 of its Counter-Memorial, clarifying that none of the Libananco, Petrobart and Amto tribunals had to deal with the specific question on the facts of these cases. Hence, these decisions were not “ignored” by Claimant in contrast to Respondent’s assertion.365
271. Respondent has no answer to the fact that every ECT tribunal to have considered the issue has found against Respondent’s case. It vaguely dismisses Hulley Enterprises and Stati as not good authority worth discussing because they followed Plama
362 As supported by the cases cited by Respondent in its Reply, ¶ 332; Resp. Mem., ¶ 187. ↩
363 Resp. Mem., ¶ 187; Resp. Reply, ¶ 331. ↩
364 Counter-Memorial, ¶¶ 235-237. ↩
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“without further analysis”366 or any good reason. Respondent also disingenuously seeks to portray Libananco, Liman Caspian Oil and Petrobart as supporting its case,367 notwithstanding that none of these decisions specifically address the issue.
272. Respondent speciously claims that the Libananco, tribunal “addressed Turkey’s Article 17 objections as ‘Preliminary Jurisdictional Objections (i.e. certain of the Respondent’s Jurisdictional objections which the Tribunal determined were appropriate for preliminary determination)”.368 First, it is evident from the description of Turkey’s objection in the award that this was actually an admissibility challenge (rather than a jurisdiction challenge in the technical sense).369 Second, it is obvious from the passage quoted above that the Article 17 objection was addressed at an initial stage because it was “appropriate for preliminary determination”. The Libananco Tribunal did not engage in a discussion of whether the denial of benefits provision affected Turkey’s consent under Article 26, and hence the jurisdiction of the tribunal, and the decision is of no assistance on this point.
273. Similarly, in Liman Caspian Oil, as Respondent admits, the tribunal did not specifically address the question of jurisdiction or admissibility.370 Indeed, whilst not directly on point, the decision is in fact unhelpful to Respondent. As expressly cited in Claimant’s Counter-Memorial,371 the Liman Caspian Oil Tribunal gave a reading of Article 17 that: (a) required an express notification by the host state to exercise its right; and (b) confirmed that an express exercise of a right to deny benefits could only have prospective not retrospective effect which follows from the principle of legal certainty;372 i.e., rendered a decision entirely consistent with Claimant’s interpretation of Article 17.
371 Counter-Memorial, ¶ 251. ↩
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274. Respondent’s unwarranted emphasis on Petrobart is also unpersuasive. Respondent misleadingly depicts this case as one discussing the precise issue in question and concludes that Article 17 could nullify the consent of a host state retrospectively, denying a tribunal jurisdiction under Article 26. The reality is that the tribunal made no mention of this issue and proceeded to an immediate examination of the substantive conditions of Article 17.373 Similarly, the Amto Tribunal considered that Article 17 requires active exercise of the right to deny, and found it unnecessary to address the question of when the Contracting Party must exercise its right.374
275. In sum, none of the cases cited by Respondent casts any doubt on the consistent interpretation of ECT tribunals highlighted by Claimant, and Respondent cannot point to a single ECT tribunal which has interpreted Article 17 so as to limit the consent to arbitration of the host state in the way Respondent proposes or to allow a retrospective denial of benefits.
276. Furthermore, Respondent is mistaken in asserting that the Plama Tribunal based its conclusion on “wrong premises”.375 The Plama Tribunal expressly based its conclusion on the ordinary language of Article 17 and the object and purpose of the ECT, wholly disregarded by Respondent. As briefly alluded in Claimant’s Counter-Memorial, the tribunal explained that:
“In the Tribunal’s view, the Respondent’s jurisdictional case here turns on the effect of Articles 17(1) and 26 ECT, interpreted under Article 31(1) of the Vienna Convention. The express terms of Article 17 refer to a denial of the advantages “of this Part”, thereby referring to the substantive advantages conferred upon an investor by Part III of the ECT. The language is unambiguous; but it is confirmed by the title to Article 17: “Non-Application of Part III in Certain Circumstances” (emphasis supplied). All authentic texts in the other five languages are to the same effect. From these terms, 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. Nonetheless, the Tribunal has considered whether
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any such manipulation is permissible in the light of the ECT’s object and purpose.
Article 26 provides a procedural remedy for a covered investor’s claims; and it is not physically or juridically part of the ECT’s substantive advantages enjoyed by that investor under Part III. As a matter of language, it would have been simple to exclude a class of investors completely from the scope of the ECT as a whole, as do certain other bilateral investment treaties; but that is self-evidently not the approach taken in the ECT. This limited exclusion from Part III for a covered investor, dependent on certain specific criteria, requires a procedure to resolve a dispute as to whether that exclusion applies in any particular case; and the object and purpose of the ECT, in the Tribunal’s view, clearly requires Article 26 to be unaffected by the operation of Article 17(1). As already noted above, for a covered investor, Article 26 is a very important feature of the ECT.
In the Tribunal’s view, 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. A Contracting State can only deny these advantages if Article 17(1)’s specific criteria are satisfied; and it cannot validly exercise its right of denial otherwise[...]”376
277. The tribunals in Hulley Enterprises and Stati agreed with the above analysis, and adopted similar interpretations in light of the text, object and purpose of the ECT in accordance with the Vienna Convention Article 31.377 They fully considered the arguments now raised by Respondent (indeed, in the case of Hulley Enterprises identical arguments were raised by the current Respondent), and in both cases reached the same conclusion: namely, that Respondent is wrong. The fact that Respondent does not like their conclusions, does not mean that the tribunals failed to address the issue effectively.
278. Since the submission of Claimant’s Counter-Memorial, another relevant ECT decision has been made public, Khan v Mongolia378 as referred to above. This decision follows the same reasoning adopted by all other ECT tribunals that have considered this issue.
377 Hulley Enterprises Jurisdiction Award, ¶ 440 (CL9); Stati, ¶ 745 (CL3). ↩
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There are accordingly now four consistent awards that address the issue under the ECT directly, and all agree with Claimant’s position. The Khan Resources Tribunal even expressed the hope of “contributing to the formation of a consistent interpretation of the ECT capable of enhancing the ability of investors to predict the investment protections which they can expect to benefit from under the Treaty.”379 Hence, it noted that:
“At the outset, it must be stated that in the Tribunal’s view, the Respondent’s argument cannot affect the Tribunal’s jurisdiction over Khan Netherlands’ claims under the ECT. The introductory section of Article 17 of the ECT specifies that it concerns the denial of advantages of ‘this Part,’ that is, Part III of the Treaty, which is titled ‘Investment Promotion and Protection’ and sets forth the substantive protections that each Contracting Party shall accord to investors of other contracting parties. Article 26 of the ECT, on which the Claimants rely to establish the Tribunal’s jurisdiction, is found in Part V, which is dedicated to ‘Dispute Settlement.’ Thus, on a reading of the ordinary meaning of the terms of Article 17, this provision can operate to deny Khan Netherlands the benefit of the substantive protections it would otherwise be entitled to under the Treaty, but not to deny it the advantage of arbitrating its dispute with the Respondents before this Tribunal. The question of the application of Article 17 is therefore one for the merits, not jurisdiction.
The Tribunal’s views on this point concord with those of the tribunals in Yukos and Plama.”380
279. In conclusion, Respondent’s claim that it can deny benefits at any time so that its invocation of Article 17 in this arbitration was timely, finds no support in the ECT jurisprudence, and runs contrary to the express language of the ECT.381
280. Respondent does not appear to dispute that a positive exercise of the right under Article 17 is necessary. However, it does not agree that such exercise has only
381 For the purposes of this discussion, it is also irrelevant if Respondent “sought or gained any advantage over Claimant by invoking Article 17 at the outset of the present arbitral proceedings” as claimed in its Reply, ¶ 340. ↩
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prospective effect because allegedly: (i) there are no prior notification or consultation requirements; and (ii) Yukos Capital’s “rights under Part III are qualified by Respondent’s right to deny it those rights.” Therefore, “Yukos Capital could have no legitimate expectations that could have been frustrated by Respondent’s [retrospective] denial of benefits.”382
281. As explained in Claimant’s Counter-Memorial, both of these responses have no merit.
282. First, Respondent’s claim that there are no prior notification or consultation requirements unlike other US BITs or NAFTA383 is inapposite. Respondent conveniently fails to mention that the notification and consultation requirements prescribed in these instruments are not for host states to notify or consult with investors but to notify and consult with the other contracting state so to “seek a mutually satisfactory solution”384 before denying benefits. This is clearly different to the requirement to expressly exercise the right vested under Article 17. It is correct that Article 17 does not impose a requirement to consult or negotiate with other ECT Contracting States before any denial of benefits is invoked, but that does not mean that Russia is exempt from properly exercising the right vis-à-vis foreign investors.
283. Respondent further argues that the “absence of any advance notification in Article 17 ECT stands in marked contrast with” ECT Articles 7(10)(a)(ii) and 26(3)(b)(i) and (c).385 The alleged “notice requirement” in ECT Article 7(10)(a)(ii) relied on by Respondent is the requirement on Contracting States to list under Annex N if they agree not to apply the definition of transit in that paragraph.386 ECT Article 26(b)(ii) and (c) concern listing in Annexes ID and 1A at the time of signature or ratification,
384 See US BITs cited in Resp. Reply, fn. 496. ↩
385 Resp. Reply, ¶ 323 and fn. 497. ↩
386 The full provision reads: “The carriage through the Area of a Contracting Party of Energy Materials and Products originating in the Area of another Contracting Party and destined for the Area of that other Contracting Party, unless the two Contracting Parties concerned decide otherwise and record their decision by a joint entry in Annex N. The two Contracting Parties may delete their listing in Annex N by delivering a joint written notification of their intentions to the Secretariat, which shall transmit that notification to all other Contracting Parties. The deletion shall take effect four weeks after such former notification.” (Exhibit C1) ↩
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which enable Contracting States to limit their unconditional consent to arbitration in certain circumstances.387
284. Quite obviously, none of these provisions contain a notification requirement as suggested by Respondent’s submissions. Insofar as it may be argued that the provisions properly interpreted may allow States to enter a listing under Annexes N, 1D and 1A after signature, ratification, acceptance, approval or accession and that the wording of Article 7(10)(a)(ii) and 26(3)(c) leaves this open, any such listing could only take effect from the date of listing, in accordance with the principles of non-retroactivity388 and legal certainty, and could not apply to transits or disputes arising before the listing date.
285. Second, Respondent is wrong to assert that Yukos Capital’s “rights under Part III are qualified by Respondent’s right to deny it those rights.” As discussed in detail above, the right to deny benefits under Article 17 is not a “conditional” right, and Article 17 itself does not constitute a notice of denial of benefits. Respondent is mistaken in arguing that an Investor fulfilling the substantive conditions of Article 17 is on notice that states may deny benefits “at any time”.
286. It is the optionality expressed by the use of “may” in Article 17 that commands positive action by states to afford legal certainty in international affairs. If the signatories had intended that all investors arguably falling within Article 17 should “expect” to be denied the benefits by all contracting parties, Article 17(1) would have been drafted as an exception to the wide definition of Investor in Article 1(7), or expressly embedded in Article 26, which is not the case.
287. Why should states’ reserved rights be able to be exercised with a retrospective effect that completely denies any protection whatsoever? That is the same as having no legal (as distinct from political or hortatory) protection at all, but that clearly is not the
387 That is, “where the Investor has previously submitted the dispute under subparagraph (2)(a) or (b)” (Article 26(3)(b)(i)) and, under Article 26(3)(c), “[a] Contracting Party listed in Annex IA does not give such unconditional consent with respect to a dispute arising under the last sentence of Article 10(1).” ↩
388 See for example, Vienna Convention Article 28, which applies mutatis mutandis to amendments to treaty obligations (RL49). ↩
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intention either and is inconsistent with a treaty creating legal rights. If states extended the protection to attract the investment to start with, why should a denial of benefits provision be interpreted to allow them to disavow it completely, just because investors may be “aware of the possibility of such a denial” that might be exercised in the future? The principles of certainty and good faith plainly favour investors having a legitimate expectation that they are covered by the Treaty until such time as the reserved right of denial is exercised,389 as confirmed by the most recent ECT tribunal in Khan v Mongolia390 (discussed further below).
288. Respondent’s argument that it is entitled to invoke its reserved right under Article 17(1) in the course of arbitral proceedings misses the point. Claimant is not arguing that Respondent cannot exercise its right now, but rather that (a) Respondent must positively exercise the right because Article 17(1) only “reserves the right”;391 and, (b) the exercise of the right only operates prospectively, from the date of the exercise, i.e., only has a forward-looking effect, and has no retrospective effect.
289. Moreover, the ECT does not impose generic standing requirements as to ownership, control and substantial business activities for Treaty protection, because different states take different approaches to international investment structures. For example, Claimant’s home state, Luxembourg, has a generous approach to investment structuring because it derives significant economic benefit therefrom, being a premier private banking centre in the Eurozone and the second-largest financial centre for investment funds.392
290. The right to deny benefits under the ECT is not automatic, but rather left to the option of each state. It is open to a state that does not wish to extend protection to certain investors to make a declaration to that effect, so that investors may then choose to structure their investments accordingly.
391 Counter-Memorial, ¶ 246; and Resp. Reply, ¶ 329. ↩
392 See LuxembourgforFinance, Agency for the Development of the Financial Centre website available at: http://www.luxembourgforfinance.lu/why-luxembourg-0 accessed on 15 June 2015 (Exhibit C217). ↩
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291. Without such legal certainty, investors could be lured into making investment decisions on the understanding that the Treaty protections apply, only to have the host state deny Treaty protections after a breach when such protections matter most. This is clearly against fundamental principles of good faith treatment of investors and legal certainty, as confirmed by the latest ECT tribunal in Khan Resources:
“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 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.”393
292. As explained in Claimant’s Counter-Memorial,394 such a one-sided interpretation would also be inconsistent with the ECT’s stated purpose under Article 2. In the words of the Khan Resources Tribunal:
“The interpretation that Article 17 requires an active exercise of the Contracting Party’s right to deny the benefits of Part III of the ECT is in line with the Treaty’s object and purpose. Article 2 of the ECT describes its purpose to establish ‘a legal framework in order to promote long-term cooperation in the energy field, based on complementarities and mutual benefits.’ The provision of an option to deny the benefits of Part III of the ECT furthers this goal of ‘longterm cooperation,’ as it creates an incentive to join the Treaty for states with a variety of policies with respect to legal entities that fall within the definition of Article 17(1). Thus, both states that wish to attract the investment of such legal entities, and those that do not wish to extend investment protections to such entities, are encouraged to become Contracting Parties. The expression ‘mutual benefits’ of Article 2 of the ECT refers to the receipt of a benefit by each Contracting Party, but does not imply that such benefits must be coextensive.”395
293. The Khan Resources Tribunal also underscored the importance of a predictable legal framework, consistent with all tribunals that have interpreted ECT Article 17:
394 Counter-Memorial, ¶¶ 250-256. ↩
395 CL61, ¶ 421 (emphasis added). ↩
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“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 such as Khan Netherlands, 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.”396
294. This decision vindicates the decision in Plama, and underlines that Respondent’s criticism of Plama Tribunal’s alleged disregard for the object and purpose of the Treaty is wholly misconceived. Respondent is unable to point to a single ECT tribunal that has adopted an interpretation contrary to prospective effect. All of the ECT tribunals that have considered the issue after Plama to date (i.e. Liman Caspian Oil,397 Hulley Enterprises,398 Stati399 and now Khan Resources400) have followed the footsteps of Plama and concluded that prospective effect provides the necessary certainty that best serves the integrity, object and purpose of the ECT.
295. Respondent’s baseless suggestion that Yukos Capital “was not upfront and did not seek any representation from Respondent that it would not be denied the advantages of Part III”401 is also completely against the spirit and the language of the ECT. Investors cannot be expected to seek express assurance from host states as to the application of Article 17 as Russia contends since this would require a revision of the whole structure of the ECT and, as Professor Crawford aptly summarised in his expert opinion in the Hulley Enterprises case:
“[...] change the ECT from a general framework for investment in the energy sector to an invitation to establish, case-by-case, bilateral
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relations between the investor and the host state. This was plainly not the intention.”402
296. In this respect, the obviously wrong rehashed argument that “Claimant, and the Plama tribunal, would require the ECT Contracting Parties in effect to attempt to monitor, on a continuing basis, the ownership and control structures and extent of business activities of foreign investors in the territories of 48 States, rendering their right to deny benefits pursuant to Article 17(1) ECT nugatory”403 misconstrues Article 17. It rests on two unfounded propositions: (a) that Russia needs to investigate all foreign investors “in the territories of 48 states” rather than the ones that have invested in its territory which are the only ones relevant; but more importantly (b) that the right would only be exercised toward each investor individually, thus requiring the host states to investigate all foreign investors individually.
297. As Claimant has already explained, a state could deny the benefits to a whole class of investors at once by “a general declaration in a Contracting State’s official gazette...or a statutory provision”.404 Even a statement published to the Energy Charter Secretariat could potentially promulgate a state’s policy in this respect. The fact that Article 17 does not specify a method of notice for the exercise of the right, in no way signifies that notice is not required.
298. Unassisted by the relevant jurisprudence, Respondent relies heavily on the work of four commentators (Professors Douglas,405 Wälde,406 Ben Hamida,407 and Chalker408) who criticize the approach of the Plama Tribunal (and, implicitly, the other ECT tribunals that have been persuaded by and followed the same approach).
404 RL88, ¶ 157; Counter-Memorial, ¶ 258. ↩
405 Resp. Reply, ¶¶ 330, 348. ↩
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299. For the reasons discussed above, Professor Douglas’s criticism of Plama is entirely misconceived and his assertion that “it is very difficult to accept... that a ‘general declaration’ in a gazette... will greatly assist a putative investor in its investment planning” is highly doubtful. A notice in a gazette (or any other public statement referred to in paragraph 297 above) would alert existing or potential investors to the fact that they will not enjoy any Part III rights and benefits after that date, which would allow investment planning such as seeking assurances, or reducing or restructuring the investment. Further, such a publication is likely to become notorious to practitioners who, even if their client is not focussing on investment per se, are likely to note such a fact when advising generally on the benefits and disadvantages of particular multinational structures.
300. Professor Wälde’s criticism of the Plama award is equally unavailing, and no doubt informed by the fact that Professor Wälde gave an expert opinion on behalf of the respondent state on Article 17(1) in the Plama case, which was rejected by the tribunal.409 If anything, that factor strengthens the authority of the Plama award: the eminent tribunal, Mr Carl Salans, Mr Albert Jan van den Berg, and Mr V.V. Veeder were presented with, considered and addressed, in detail, a comprehensive argument on the interpretation of Article 17(1), and were unpersuaded.
301. Professor Ben Hamida’s comment on Plama and Hulley Enterprises relied on by Respondent410 does not, with respect, add anything new in terms of argument to those reflected in the reasoning of the non-ECT tribunals or other commentators relied on by Respondent. Claimant relies on the arguments set out above mutatis mutandis accordingly.
302. Mr James Chalker’s commentary does not advance the critique of Plama either. Mr Chalker’s criticism is that that the Plama Tribunal “elevate[d]” investor planning above other important considerations of long term cooperation.411 With respect, this criticism is unmerited. It is undeniable that a key object and purpose of the ECT was
409 See ¶ 153 of the Plama award (RL88). ↩
411 RL222, p. 447 referred to in Resp. Reply, ¶ 354. ↩
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to facilitate and promote investment in the energy sector of Russia and the CIS States. Mr Chalker completely fails to explain how government regulators’ knowledge of the precise identity of the owners and controllers of investors providing, inter alia, the capital necessary to develop a sustainable and environmentally safe energy sector, assists regulators avoid the “potentially direful impact that energy materials, facilities and operations can have on the environment”.412 There is no necessary connection between the source of funds and the safety and environmental friendliness of the facilities, etc., they are spent on, whatsoever.413 The territorial sovereignty of states means “energy materials, facilities and operations” are within their means to control. Moreover, even he acknowledges that, to introduce the transparency scheme he advocates would require treaty amendment, i.e. is not a current requirement of the ECT.414
303. In any event, even if Plama was “incorrect”, from its publication in 2005 ECT Contracting States were themselves on notice that they should make proactive use of their rights under Article 17, otherwise they might lose the benefit of this right. Of all Contracting States, Respondent should have known and did know this when it was raising the same objections before the Hulley Enterprises Tribunal from 2005 when that claim was brought. Yet, it opted not to exercise its right even after it was first notified of Claimant’s claim in 2008, until its letter of April 2014.
304. In light of the above, Claimant repeats its submission that: (a) Respondent has failed to exercise its right under Article 17 (which cannot deprive this Tribunal of its jurisdiction in any event); and (b) Respondent’s purported exercise of such right in 2014 cannot be afforded retrospective effect contrary to the ordinary meaning of the ECT, the object and purpose of the ECT, and uniform ECT jurisprudence.
413 Ibid. Claimant observes that Chalker seeks amendment to the ECT to promote his vision of necessary transparency (an express disclosure obligation) and certain assumptions concerning how investors and investment operate and “inexperienced regulators” in developing countries (at RL222 pp. 449-550). It may be pointed out that his suggested solution – to cut off the investor at the point of jurisdiction of a dispute (see p. 449) - does not achieve his desired outcome, because it would then be too late to prevent the harm to the environment that he is trying to stop. Nor does it address the fact that the extent to which such harm has been caused is likely to be a consideration in such an investment arbitration. ↩
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305. As Claimant established in its Counter-Memorial,415 Respondent bears the full burden of proof in cumulatively establishing that Claimant falls within the category of Investors that: (i) has no substantial business activities in the state where it is organized; and (ii) is owned or controlled by citizens or nationals of a third state.
306. On the face of ample evidence submitted by Claimant, Respondent has wholly failed to do so in its Reply.
307. Claimant has already established that Article 17(1) stipulates two cumulative requirements that must both be met before Respondent can exercise any reserved right under Article 17. In its Counter-Memorial, Claimant further established that it has had substantial business activities in Luxembourg throughout its corporate existence, all the more so taking into account its business as a group financing company,416 and that any reduction and change in such business activities was the result of Respondent’s expropriation.
308. As a preliminary point, it is inexplicable why Respondent claims that Claimant has attempted “to assimilate itself to a traditional holding company that actively holds shares in subsidiaries which employ personnel and produce goods or services to third parties,”417 when Claimant has in fact made no such assertion.418 Claimant has been clear at all times that it is an “intra-group financing company”419 holding debt obligations vis-à-vis other companies in the group structure, and has never portrayed itself as a “traditional holding company [holding] shares in subsidiaries.”
415 Counter-Memorial, ¶¶ 262-264. ↩
416 Counter-Memorial, ¶¶ 269- 290. ↩
418 Indeed, Respondent neglects to footnote any part of Claimant’s pleadings where it is supposed to have made such a statement. ↩
419 Counter-Memorial, ¶ 215, see also ¶¶ 282, 287(b), 289(a), 290; Notice of Arbitration, ¶¶ 15, 17; FTI Rep., ¶¶ 16, 35; First Misamore Statement, ¶¶ 8, 24. ↩
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309. Respondent now claims incorrectly that, following the document disclosure stage of proceedings, “Yukos Capital’s concessions and documents confirm its status as a mere shell company.”420 This is far from the case, and Respondent has conveniently omitted to address the documents disclosed by Claimant that illustrate the level of its day-to-day business activities in Luxembourg. In particular, Respondent has simply ignored the evidence that Yukos Capital’s director, TMF Luxembourg carried out substantial everyday business activities in Luxembourg on behalf of Yukos Capital, as well as in its capacity as administrative manager. And there can be no question that all actions taken by TMF Luxembourg in the name of Yukos Capital were taken in Luxembourg.
310. In particular, on behalf of Yukos Capital, TMF Luxembourg:
424 Exhibit R78-257; Exhibit C167. ↩
428 Exhibit R78-257; Exhibit C167. ↩
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311. On any view, this indicates “substantial business activities” in Luxembourg, and there is no merit in Respondent’s assertion that Claimant can have had no substantial business activities in Luxembourg due to the fact that “the funds involved in the back-to-back, intra-Yukos-group ‘loans’ were the proceeds of Yukos Oil Company’s activities – the sale of oil and gas in Russia and the sale of a Russian company”.431 The origin of funds received by Yukos Capital has no bearing on whether Yukos Capital has undertaken substantial business activities in Luxembourg.
312. As observed above,432 the Noguera Report does not assist Respondent’s case. Mr. Noguera concedes that the “applicable Luxembourg administrative circulars” (upon which he bases his entire opinion) were not in force “at the time the ATAs were issued,”433 i.e. at the time Claimant’s Investments were made. The majority of the Noguera Report is concerned with administrative practices and regulations introduced in 2011 (Circulars No. 164/2 and No. 164/2bis issued by the Luxembourg tax authorities, the “2011 Circulars”); which (a) did not come into force until 28 January 2011 and 8 April 2011;434 and (b) did not negate the binding effect of any advance tax agreements issued by the Luxembourg authorities before 28 January 2011 until as of 31 December 2011,435 several years after the Loans were due to expire.436 The 2011 Circulars have no application before 2011, and no application in the context of the Loans. Moreover, the 2011 Circulars have no relevance to Claimant after the event of
436 The December 2003 Loan (Exhibit C9) was due to expire on 31 December 2008, and the August 2004 Loan (Exhibit C30) was due to expire on 30 December 2009. ↩
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Respondent’s expropriation, as a result of which Claimant’s business activities were reduced to seeking recovery of repayment under its loans.437
313. Respondent’s expert does not allege that Claimant did not have “substantial business activities” for the purposes of Luxembourg tax before the 2011 Circulars were issued. To the contrary, Mr. Noguera concedes that, according to the regulations in force at the time the Loans were issued, the amount of margin earned by Yukos Capital on its Loans was perfectly acceptable to the Luxembourg tax authorities as evidence of intercompany transactions on arm’s length terms. Mr. Noguera confirms that regulations in force at the time the Loans were issued (Circular 120 of 14 July 1989 and Circular 1120 of 20 February 1996) “prescribed ‘safe harbor’ rules that set minimum margins that would be deemed to be ‘arm’s length,’ depending on the level of financing activity”;438 and further confirms that, following the issuance of Circular 1120 on 20 February 1996, “the administrative practice allowed for such ‘safe harbor’ minimum margins to drop......to as low as 1/32nd of 1% for the highest level of expected volume of outgoing funds” and that it was “on the basis of this practice that the ATAs were granted to Yukos Capital in 2003 and 2004.”439
314. Mr. Noguera’s flawed approach rests on the following irrelevant propositions:
“The fact that the tax authority confirmed the tax treatment described in the ATAs does not mean that the statements in them are true because the Luxembourg tax authorities do not systematically verify that all representations made by a company were true and accurate.”440
“It follows that the ATAs obtained by Yukos Capital under the old safe harbour practice, and relied upon in these proceedings, no longer have any effect under Luxembourg law or administrative practice.”441
“It appears that Yukos Capital has never met the minimum equity requirement in item (vi) above [i.e., the requirements in the 2011 Circulars] [...]. As these are minimal criteria concerning business
437 See ¶¶ 17-18 below regarding the hypothetical nature of Mr. Noguera’s application of the 2011 Circulars to Yukos Capital. ↩
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activity and substance, Yukos Capital’s failure to meet them is indicative of the absence of substantial business activity (if business activity at all) in Luxembourg.”442
315. The first contention is entirely beside the point given that Yukos Capital’s “representations” to the tax authorities in 2003 and 2004 were true. There is no basis for casting any doubt on the representations made to the Luxembourg tax authorities, and the fact remains that the Luxembourg tax authorities confirmed, on the basis of those representations, that Yukos Capital was carrying on intra-group financing business activities in Luxembourg. Claimant was “complete, clear and loyal in the presentation of its situation”443 to the Luxembourg tax authorities in the Loyens February 2003 Letter and Loyens April 2004 Letter (the “Loyens Letters”).444 Further, on Mr. Noguera’s own reasoning, the factual representations made were sufficient to “bind the Luxembourg tax authorities” to the Loyens Letters.445 Respondent has never suggested that the factual representations set out in the Loyens Letters were not true, and any such allegation would be incorrect.
316. As to the second contention, there is no ability to invalidate the Luxembourg tax authorities’ recognition of Claimant’s substantial business activities in Luxembourg by reference to regulations that were not in force at the relevant time, and such proposition must obviously fail. As a matter of legal principle, in most jurisdictions including Luxembourg, tax law is penal in nature and may not be applied retroactively in any event.446 Thus, Mr. Noguera’s conclusion that “[b]ased on the evidence I have reviewed, Yukos Capital could not satisfy these minimal criteria for business activity in Luxembourg’”447 can have no relevance to Yukos Capital’s affairs before 2011, or to the Loyens Letters.
446 Luxembourg Civil Code, Article 2: “La loi ne dispose que pour l'avenir; elle n'a point d'effet rétroactif” (CL79); Luxembourg Penal Code, Article 2: “Nulle infraction ne peut être punie de peines qui n'étaient pas portées par la loi avant quel'infraction fût commise” and “Si la peine établie au temps du jugement diffère de celle qui était portée au temps de l'infraction, la peine la moins forte sera appliquée” (CL80). ↩
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317. Moreover, an examination of Appendix 2 to the Noguera Report reveals that Mr. Noguera has not “examined [or] relied upon”448 several categories of documents disclosed by Claimant evidencing its business activities in Luxembourg, such as the day to day activities conducted by Yukos Capital in Luxembourg and the loan agreements executed by Claimant. It is also telling that the only requirement of the 2011 Circulars that Mr Noguera categorically states was not complied with by Yukos Capital (item (vi) in respect of the minimum equity requirement)449 is the one requirement that has no bearing on whether Yukos Capital had substantial business activities in Luxembourg.
318. Further, it is irrelevant whether or not Yukos Capital fulfilled the requirements of the 2011 Circulars at the time the Loyens Letter were affirmed by the Luxembourg tax authorities; whether or not the Loyens Letters would be accepted by the Luxembourg tax authorities today; and whether or not such letters are binding today.450 The fact remains that, when the Loans were made, and for the term of such Loans, the Luxembourg tax authorities accepted that Yukos Capital was carrying on valid business activities in Luxembourg in its role as intra-group financing company. The following trite but important points should also be noted: (a) neither the pre-2011 Luxembourg tax regulations, nor the post 2011 Luxembourg tax regulations, constitute the applicable test for substantial business activities under the ECT; and (b) the fact that Yukos Capital satisfied the Luxembourg tax regulations for substantial business activities prior to 2011, is not altered by any subsequent change in the regulations.
319. Respondent’s attempt to defeat jurisdiction by arguing that Claimant’s “litigation efforts to recover ‘loans,’ including those at issue in this arbitration, did not involve
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‘business activities’ in Luxembourg”451 is unconscionable. From late 2004 onwards, as a result of Respondent’s expropriatory actions against Yukos Capital’s investments (which lasted several years and culminated in the conclusion of Yukos Oil’s bankruptcy in November 2007), Claimant’s main business activity has by necessity consisted in the enforcement and recovery of debts deprived by Respondent’s expropriatory actions, and the defence of further attacks by Respondent.452 It does not lie in the mouth of Respondent to argue that Claimant should be denied benefits as a consequence of Respondent’s breach.
320. Moreover and in any event, Claimant has already explained that the pursuit of Yukos Capital’s claims for recovery under the loans generated substantial business activity by Yukos Capital in Luxembourg through the actions of TMF Luxembourg.453 The documents evidencing this are of course privileged; however, in connection with its disclosure on 10 February 2015, Claimant provided Respondent with a privilege log showing extensive communications by Yukos Capital/TMF Luxembourg in relation to litigation proceedings arising from Respondent’s expropriation of Yukos Oil and refusal to recognise Yukos Capital as a creditor. Respondent is therefore fully aware that Claimant has been involved in numerous court proceedings involving TMF Luxembourg, whose activities are all undertaken in Luxembourg.
321. As Respondent is also well aware, Respondent requested mutual legal assistance from the Luxembourg authorities in October 2005 and August 2009. The first request resulted in a raid on TMF Luxembourg in January 2006 and the second request resulted in a raid and seizure of documents from TMF Luxembourg’s office in February 2012. Yukos Capital has gone to considerable efforts in Luxembourg to have both raids annulled, including instructing local lawyers in connection with the applications to the Luxembourg District Court (which subsequently annulled both searches and the seizure on the ground that the Russian authorities’ letters of request
452 Counter-Memorial, ¶¶ 288, 289(g). ↩
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contained insufficient evidence).454 Claimant notes that Respondent evidently deemed it to have business activities in Luxembourg “substantial” enough to warrant not only one but two raids on its offices at TMF Luxembourg.
322. Mr. Noguera boldly asserts that, since 1 January 2012, “Yukos Capital's failure to meet [the minimal criteria under the 2011 Circulars] is indicative of the absence of substantial business activity (if business activity at all) in Luxembourg.”455 However, he fails to appreciate that, by the time these circulars had been issued, four or five years had passed since Respondent had seized Yukos Oil and its assets. Had there been no expropriation of its investments by the Russian State, Claimant would have been in a position to satisfy any new requirements of Luxembourg tax law.456
323. Furthermore, Mr Noguera's application of the 2011 Circulars is entirely misplaced given that, by the time such regulations came into force, the focus of Claimant's business had necessarily shifted, as a result of Respondent's expropriation, from making intercompany loans to seeking to enforce its contractual debts via litigation and arbitration. According to Mr Noguera, the 2011 Circulars only apply “to all entities principally engaged in intra-group financing (i.e. any activity consisting in granting of loans or cash advances to related companies, financed by instruments such as public offerings, private loans, cash advances or bank loans) in Luxembourg.”457 While Claimant indisputably carried out these activities prior to Respondent's expropriation, the dismantling of Yukos Oil undermined the entirety of Claimant's business, so that it was no longer possible for Claimant to engage in “intra-group” financing as defined by the 2011 Circulars. Mr Noguera's comments accordingly miss the point completely.
324. Furthermore, while the 2011 Circulars are not applicable to the position of Yukos Capital prior to Russia's expropriation of Yukos Oil, Yukos Capital in fact fulfilled
454 Counter-Memorial, ¶ 289(g);Translated extract from the Luxembourg Court of Appeal decision of 13 February 2007 (Exhibit C176); Decision of the Luxembourg District Court annulling order of 10 December 2009 dated 12 July 2012 (Exhibit C177). ↩
456 See Misamore Statement, ¶ 11 citing Record of Interview of B. Misamore by Y. Leonidovna Levina, 9 March 2009 (Exhibit R39); Second Misamore Statement, ¶ 16. ↩
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the five requirements of the 2011 Circulars which have any bearing on “business activities” prior to expropriation. It is further submitted that but for Respondent's expropriation of Yukos Oil, Yukos Capital would have ensured fulfilment of all six requirements, as and when required to do so from 2011 onwards.
325. In this context, it is important to remember that the 2011 Circulars do not define the test for substantial business activities for the purposes of Article 17 of the ECT, and the ongoing conduct of litigation by Yukos Capital involved and involves “substantial business activities” in Luxembourg in any event.458
c) Yukos Capital undertook substantial business activities in Luxembourg
326. Respondent erroneously approaches the question of whether Yukos Capital had substantial business activities from the premise that this standard requires Yukos Capital to prove that all of its business activities were conducted in Luxembourg. This is plainly not the test. Yukos Capital has already presented ample evidence that it conducted substantial activities in Luxembourg, and has no need to be apologetic that business activities were also conducted outside of Luxembourg. Given Yukos Capital's corporate purpose (that of an intra-group financing company of an international group of companies none of which is based in Luxembourg, save for Claimant), it would indeed be surprising if that was not the case. Respondent's specific complaints are addressed below.
(1) Source and destination of loan funds
327. Respondent repeats its fallacious complaint that Yukos Capital did not make any loans to, or receive any loans from, any Luxembourg companies.459 Claimant has already explained in its Counter-Memorial why this objection is irrelevant to whether it had substantial business activities in Luxembourg,460 particularly as Yukos Capital's stated business purposes was to provide intra-group financing, and no other companies within the group were or are located in Luxembourg. If the making and
458 Counter-Memorial, ¶ 289(g). ↩
459 Resp. Mem., ¶¶ 18, 171; Resp. Reply, ¶ 376. ↩
460 Counter-Memorial, ¶¶ 265-290. ↩
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receiving of loans from Luxembourg companies is the relevant test for “substantial business activities,” Yukos Capital would never have satisfied it, even if Yukos Capital had 1,000 direct full-time employees located exclusively in Luxembourg.
328. However, Respondent goes even further in its latest pleadings, claiming that Yukos Capital is not a “‘financing' company” at all.461 Not only is this reasoning entirely illogical, but it is also contrary to the opinion of Respondent's own expert, Mr. Noguera, who confirms that the relevant tax regulations in force (in the years when Yukos Capital was able to provide and receive loans) stipulated that, in order to qualify as a “financing compan[y] of international groups,” for tax purposes, “a significant portion of the loans granted by the Luxembourg financing company should be granted to group companies located outside of Luxembourg.”462
329. Consistent with these tax regulations and the group structure, Yukos Capital's articles preclude any financing to companies within Luxembourg. Moreover, the role of a Luxembourg group financing company is well known to Respondent. According to PWC, Gazprom, which is 50% owned by the Russian State, incorporated Gazprom ECP as an “orphan entity” and a “fully taxable resident company in Luxembourg with a share capital amounting to EUR 31,000.”463 The ECP notes issued by Gazprom ECP were apparently deliberately matched to the loans issued to Gazprom, with “the same interest rate,” “the same maturity date,” and “the same foreign exchange rate”;464 and Gazprom ECP was never intended to undertake more than “financial on-lending” activities.465
(2) Role of TMF
330. Respondent also rehashes its complaint that “Yukos Capital's sole manifestation in Luxembourg has been as a client of the Luxembourg subsidiary of the TMF Group, headquartered in the Netherlands, a domiciliation agent and corporate services
462 Noguera Rep., ¶ 11 (emphasis added). ↩
463 Exhibit C212, p. 3, ¶ 2; see also ¶ 133 above. ↩
464 Exhibit C212, p. 5, ¶ 10; p. 12, Appendix 2, ¶ 19. ↩
465 Exhibit C212, p. 5, ¶ 11. ↩
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provider that offers corporate services to shell companies.”466 Claimant has already addressed this obviously meritless point in its Counter-Memorial,467 and repeats that it is completely irrelevant whether Yukos Capital's business activities were carried out by direct employees or agents or a Luxembourg corporate director – the question is whether Yukos Capital conducted substantial business activities in Luxembourg, which it plainly did.
331. Following document disclosure, Respondent now erroneously claims that Claimant is “[u]nable to point to actual day-to-day activity conducted by any Yukos Capital employee” and is “forced to retreat to the actions of its domiciliation agent and corporate services provider because it is undisputed that Claimant did not have its own office space, telephone or fax number, or even a letterbox in Luxembourg.”468
332. This is not correct. Yukos Capital did indeed have an address, telephone number and fax number in Luxembourg, and correspondence was received by Yukos Capital in Luxembourg and telephone discussions were held with Yukos Capital in Luxembourg. The fact that such correspondence and calls were handled by Luxembourg agents or Yukos Capital's Luxembourg corporate director in Luxembourg, rather than direct employees in Luxembourg, is entirely beside the point. Respondent cannot disregard the fact that TMF Luxembourg was Yukos Capital's sole manager and corporate director, and that TMF's employees were undertaking Yukos Capital's business activities in Luxembourg.469 Respondent's complaint that “none of the letters about the ‘loans' was signed by Yukos Capital personnel; they were all signed by employees of TMF”470 is disingenuous: the letters were signed in Luxembourg in Yukos Capital's name by TMF employees acting on behalf of Yukos Capital.
467 Counter-Memorial, ¶¶ 269, 287, 289(e)-(f). ↩
469 Exhibits R78-181, R78-182, R78-183, R-78-257 and C167. ↩
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333. On Respondent's own case, one of the criteria for “substantial business activities” is that the company “engage in procurement locally of inputs for the business.”471 Yukos Capital through TMF Luxembourg did just this, procuring auditors, accountants and lawyers in Luxembourg as needed.472
334. Respondent also makes the misleading observation that “a February 6, 2007 ‘resolution' [...] delegated certain responsibilities to TMF and made clear that TMF was not to perform substantive or substantial tasks in Luxembourg but only ‘purely administrative matters in order to ensure the good standing of the company.'”473
335. Claimant was clear in its Counter-Memorial that “TMF Corporate Services S.A. in Luxembourg was appointed as the sole director (gérant) of Yukos Capital, and remained Yukos Capital's sole director until 6 February 2007” and that “[f]ollowing its resignation as sole director, TMF Luxembourg was appointed an attorney-in-fact with authorization to handle day-to-day administrative matters on Yukos Capital's behalf in Luxembourg.”474 TMF Luxembourg's voluntary resignation as sole manager of Yukos Capital was the direct consequence of Respondent's expropriation of Yukos Oil, and in particular the raids on TMF's Luxembourg office at Respondent's behest.475
336. Thus, commensurate with the inevitable depletion and change in Claimant's business activities following Respondent's expropriatory actions,476 the significant change in Yukos Capital's relationship with TMF was yet another consequence of Russia's expropriation. Respondent cannot avail itself of a denial of benefits defence premised on the effects of its own breach.
475 Second Misamore Statement, ¶ 28. ↩
476 See ¶ 323 above; see also Second Misamore Statement, ¶ 27. ↩
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(3) Board meetings
337. Respondent bases its claim that “[t]he documents adduced by Yukos Capital to evidence corporate activities in Luxembourg establish, if anything, the absence of ‘substantial business activities'”477 on the following misleading comments:
“[...] Claimant agreed to produce voluntarily all of ‘the board minutes of Yukos Capital from [its] date of incorporation [...] up to November 2007.' It produced no such minutes, thus indicating that Yukos Capital held no board meetings before November 2007.”478
“Similarly, although Yukos Capital implies that ‘Shareholders' Meetings' were routinely conducted in Luxembourg, it has produced minutes of only three shareholder meetings – one each in 2012, 2013, and 2014.”479
338. First, as Respondent cannot fail to have appreciated, TMF Luxembourg was Yukos Capital's sole director up until 6 February 2007. As a sole director located in Luxembourg at all times, TMF Luxembourg did not need to hold and document formal board meetings with itself in Luxembourg. All its decisions and actions were taken in Luxembourg in any event.
339. Moreover, as Respondent also knows (but chooses to ignore), Claimant produced further shareholder meeting minutes in the form of Exhibit C174 to Claimant's Counter-Memorial. These are minutes of an extraordinary general meeting, which took place in Luxembourg on 21 September 2004.
340. Yukos Capital also performed activities such as filing accounts, board resolutions, board meeting and shareholder meetings, which have all been held to establish a close and permanent connection between a company and its state of incorporation.
341. Furthermore, the position of Yukos Capital is no different to the Respondent's own company Gazprom, which represented to the Luxembourg authorities that Gazprom ECP “is effectively managed from Luxembourg and qualifies as Luxembourg tax
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resident entity”480 purely on the basis that “[a]ll board meetings and most of the shareholders meetings of Gazprom ECP will be physically held in Luxembourg,” that “[a]ll corporate secretarial records are kept in Luxembourg” and that “[r]egular meetings in Luxembourg through which all the important and strategic decisions are taken are physically made in Luxembourg.”481
342. Further, Respondent makes the curious complaint that the board minutes disclosed by Yukos Capital have been redacted on grounds of “an unspecified assertion of privilege.”482 This complaint is not understood given that, on 10 February 2015, Claimant provided to Respondent a privilege log evidencing that Yukos Capital was involved in substantial amounts of litigation.483 It is unsurprising that there was extensive discussion regarding such litigation at board meetings, which were often attended by external counsel for the purposes of providing legal advice.
343. Respondent's comment that “Yukos Capital's account with Citibank Luxembourg was opened before this ‘resolution' [dated 3 February 2003] and, indeed, before Yukos Capital was incorporated” and that “the February 2003 ‘resolution' appears to have been signed to create a post hoc paper trail for something that had already happened”484 is equally nonsensical. It is often the case that corporate actions are ratified after the event; and a period of a few weeks between decision and ratification is not worthy of comment. Respondent's attempt to imply some dramatic wrongdoing is absurd.
(4) Bank accounts
344. On the issue of Claimant's bank accounts, Respondent asserts that:
“Yukos Capital also cannot dispute that it did not even use a Luxembourg bank account for its ‘financing' activity. [...] the funds ‘loaned' under Yukos Capital's other ‘loan' agreements likewise flowed through non-Luxembourg banks. Claimant's only bank account
480 C212, p. 10, Appendix 2, ¶ 2. ↩
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in Luxembourg, held with Citibank's Luxembourg branch, was effectively inactive”;485
“All authority to operate the bank accounts through which the funds involved in the ‘Loans' flowed was outside of Luxembourg, and Yukos Capital's banking was not conducted from Luxembourg”;486
“[...] a power of attorney was given to TMF Netherlands delegating to that entity the authority to ‘open and operate any number of bank accounts in any currency with Citibank N.A.” and “[...]a power of attorney was given to Mr. Pavel Vladimirovich Shelepin, a Russian resident employed by the law firm ALM Feldmans in Moscow”;487 and that
“[...] Yukos Capital specifically ‘exclud[ed]' from tasks that TMF Luxembourg could perform the ‘execution of wire instruction, unless specific authorisation is granted.'”488
345. These comments do not withstand scrutiny. It is hardly surprising that Yukos Capital had numerous foreign bank accounts, given its multinational function as a group financing entity serving group companies. There is no reason why any funds loaned to or by Yukos Capital should have been sent by or received into Luxembourg bank accounts; to the contrary, none of the other companies in the group were based in Luxembourg, and Yukos Capital had no ability to lend to entities outside the group; i.e. no ability to lend to any entity within Luxembourg.
346. Similarly, there is nothing nefarious regarding TMF Luxembourg's delegation of account management to TMF Netherlands, which had a larger operational capacity than TMF Luxembourg, and also already acted on behalf of Yukos Capital's parent company, Yukos International. This decision was a practical business decision taken by Yukos Capital and implemented in Luxembourg,
347. As regards Respondent's complaint that “the decision to close [Claimant's Luxembourg] account was made in the United States,”489 Respondent relies on
487 Resp. Reply, ¶¶ 387-388 (emphasis in original). ↩
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minutes of a Yukos International resolution of 2006, which it presumably obtained illegally through its raids on the Yukos group companies. Respondent's comments are misconceived. First, the resolution is a decision of Yukos International that states that Yukos International supports that Yukos Capital close the account. It is not a decision of Yukos Capital. Secondly, the closure of Citibank accounts was in fact initiated by Citibank.490
(5) Business decisions
348. It is also unsurprising that TMF Luxembourg received significant guidance from Yukos Capital's shareholder, and the wider Group, as would be the case with any multinational group financing company.491 But this does not mean that TMF Luxembourg was not undertaking substantial business activities in Luxembourg. Moreover, contrary to Respondent's assertions, Yukos Capital both signed and reviewed loan documentation relating to loans it was to issue or receive. By way of example, an email thread between Jana Strischek of TMF Luxembourg and Yukos International in February 2006 shows Yukos Capital being consulted in respect of and making detailed comments on a draft credit facility between Yukos International and Yukos Capital.492 All of which took place in Luxembourg.
349. As regards Claimant's turnover and profits, there is no doubt that Claimant accounted for its turnover and profits in Luxembourg and has been liable to pay taxes on its profits in Luxembourg. It is also not in dispute that Claimant's tax affairs are handled by a leading Luxembourg law firm, Loyens Loeff. The documentary record further confirms that Claimant expected to make a very significant volume of exceptionally high value loans and to receive significant interest payments thereon, which would all have been accounted for in Luxembourg and would have been subject to Luxembourg tax.493 As matters transpired, as a result of Respondent's expropriatory actions,
490 See email dated 21 December 2005 stating that “Citibank London is closing accounts to all Yukos group companies as of 13.01.06” (Exhibit R78-181). ↩
492 Exhibit C218. The loans referred to in this email were ultimately never executed. See also Second Misamore Statement, ¶ 20. ↩
493 See Loyens Letters (Exhibits C128 and C129). ↩
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Claimant's profits were never significant, and its lending business could not survive Respondent's expropriation.
(6) Signing of loan agreements
350. Respondent's claim that there is no evidence that Claimant executed its loan agreements in Luxembourg is frivolous. The loan agreements were signed by TMF Luxembourg on behalf of Yukos Capital, and Respondent cannot seriously be suggesting that TMF Luxembourg employees would have routinely travelled abroad in order to sign loan agreements that had been faxed to their office address in Luxembourg.
(7) Profits and Luxembourg tax
351. The Respondent is incorrect to claim that Yukos Capital was not intended to make profits,494 or had no ability to make profits.495 To the contrary, as shown above, Yukos Capital was always intended to make a profit margin on its lending, and such profits should have been considerable over time.496 In respect of the two Loans which are the subject of this arbitration alone, Yukos Capital stood to make approximately USD 1.76 million in annual profit over the term of the Loans.497 Given the volume of loans and the high value of loans that Yukos Capital was expected to make,498 its profit on interest rate margins would have been very significant, and the only reason that such profit was not realised was the effect of Respondent's expropriation on Yukos Capital's business activities. There is no question that Yukos Capital would have had to pay tax on such profits. It is accordingly not open to Respondent to take advantage of Claimant's lack of realisation of profits as a result of Respondent's expropriation.
352. The case of Gazprom ECP is also instructive in this context. Due to the fact that the ECP Notes and the Gazprom Loans bore the same interest rate, they were not expected to earn any margin: “from an accounting point of view, no margin will be
496 See above ¶ 151 (quoting Supplemental FTI Rep., ¶ 29), ¶ 218, fn. 217. ↩
497 Supplemental FTI Rep., ¶ 29. ↩
498 See Loyens Letters (Exhibits C128 and C129). ↩
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reflected in the commercial accounts of Gazprom ECP.”499 However, in order to avail itself of the tax benefits offered by Luxembourg, Gazprom ECP had to be “for tax purposes, deemed to realize an appropriate and acceptable profit on its financial on-lending activity with respect to articles 56 and 164(3) LITL” and “[t]his profit should constitute the minimum taxable margin that should be recognized in Luxembourg at the level of Gazprom ECP.”500 The taxable spreads to be earned by Gazprom ECP were as low as 1.5, 05 or 0.1 basis points; far lower than Yukos Capital's 6.25 or 3.125 basis points.501
353. Thus it appears that Gazprom ECP intended to earn “no margin,” and only accepted to earn 0.1 to 1.5 basis points in order to be in a position to avail itself of the withholding tax exemption under articles 56 and 164 LITL.502 By comparison with Gazprom ECP, Yukos Capital earned higher margins and clearly intended to make a profit.
354. Equally disingenuous is Respondent's comment that “[t]he record shows that no taxes related to actual operations, in particular social taxes in connection with employees, ‘have been paid' by Yukos Capital.”503 As Claimant had no employees of its own, it unsurprisingly that it did not pay social taxes in connection with any employees. However, this does not signify that Luxembourg nationals were not conducting business activities on behalf of Claimant in Luxembourg; they were, through TMF Luxembourg, who paid social taxes due in connection with the Luxembourg nationals conducting business activities on behalf of Yukos Capital.
355. Respondent again seeks to benefit from its own wrongdoing when it observes that “Yukos Capital's activities in Luxembourg were so low that the Luxembourg tax authorities concluded it ‘does not fulfil [sic] the turnover conditions for VAT
499 Exhibit C212, p. 5, ¶ 10. ↩
500 Id., p. 5, ¶ 11 (emphasis added). ↩
501 See Loyens Letters (Exhibits C128 and C129). ↩
502 Exhibit C212, p. 5, ¶ 11; p. 11, Appendix 2, ¶ 9. ↩
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registration'.'”504 If Claimant had “no taxable outputs”505 by January 2006, this is because of Respondent's expropriatory actions against Yukos Oil, which resulted in Yukos Capital's inability to continue its original business purpose of extending loans to Yukos Group companies: by 2006, Respondent's attack on Yukos Oil meant that Claimant could not advance any new intragroup loans.
(8) Luxembourg certificate of residency
356. Respondent and Mr Noguera claim that neither the certificate of residency, nor the Loyens Letters, are evidence of substantial business activities because the former “in no way reflects a finding or adjudication that Yukos Capital was engaged in ‘substantial business activities' in Luxembourg” and the latter “do not establish ‘substantial business activities' there because the Luxembourg authorities made no inquiry into the company's level of activity in granting them.”506
357. Whether or not the Luxembourg authorities chose to investigate Yukos Capital's business activities in detail is irrelevant here, and Respondent cannot seek to undermine the significance of the Luxembourg tax authorities' approval by complaining that their practice was not to instigate inquiries or issue formal decisions. That is a matter for Luxembourg tax rules; all that can be said in the present case is that the Luxembourg authorities did approve Yukos Capital's business activities in Luxembourg on the basis of full and honest disclosure by Claimant.
358. Moreover, Respondent's complaints regarding the Luxembourg tax rules ring hollow given that Gazprom itself “elected Luxembourg” for the incorporation of Gazprom ECP for tax reasons,507 representing to the Luxembourg authorities that Gazprom ECP “should be considered as Luxembourg tax resident entity”508 in order to take advantage of Luxembourg's low tax rates.
504 Ibid.; Exhibit R184, p.2. ↩
506 Resp. Reply, ¶ 391; see also ¶ 393. ↩
507 Exhibit C212, p. 9, Appendix 1, ¶ 4. ↩
508 Id., p. 6, ¶ 18; see also p. 10, Appendix 2, ¶ 3. ↩
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359. In conclusion, there is no merit in Respondent's continued assertion that Yukos Capital had no substantial business activities in Luxembourg. To the contrary, the documentary record is clear that extensive business activities were conducted by and on behalf of Yukos Capital in Luxembourg. It is irrelevant that Respondent can point to aspects of Yukos Capital's business activities that were conducted outside of Luxembourg, and it would indeed be surprising if this was not the case. There is certainly no requirement pursuant to Article 17 to show that all Claimant's business activities were and are conducted in Luxembourg.
360. Respondent's arguments on “control” by citizens of third states continue to be based on the following incorrect propositions:
a. that Claimant conflates “ownership” and “control” and fails to show that in investment treaty awards control over a legal person is exercised exclusively through the ownership of a shareholder interest;
b. members of the Stichting's Board are vested with powers equivalent to combined powers of a company's directors and shareholders; and
c. shareholders also act collectively as the general shareholders' meeting and must also comply with the law so are not different to the Stichting's Board.
And from the above, Respondent concludes that “it is the nationality of the majority members of the Stichting Board that determines whether the Stichting is controlled by citizens of a third state.”509
361. Not only are all three propositions incorrect, but there is also no basis or logic for Respondent's unwarranted leap to the wrong conclusion.
362. In relation to the first proposition, Claimant did not and does not conflate ownership and control. To the contrary, Claimant has recognised such distinction in its Counter-Memorial, and discussed the interpretations of previous tribunals on the
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basis of both “legal control” as a consequence of legal ownership and “de facto” control. The relevant cases cited by Claimant determine that “control” over a corporate entity prima facie lies in the ownership of a majority of such entity's shares with voting rights, but that, in the absence of such majority control, other factors that would complement a minority interest with the power to influence the decisions made by the corporate entity, can be considered i.e., to establish de facto control. Nowhere has Claimant conflated ownership with control.
363. All the cases previously cited by Claimant and revisited by Respondent do not allow a different interpretation. For example, in:
Generation Ukraine, the tribunal considered a ‘clear manifestation of control' by a US national where he owned 100% of the share capital of the claimant.510
Mobil v Venezuela, the tribunal concluded that a 100 % ownership by Venezuela Holdings (Netherlands) in its subsidiaries resulted in a possible exercise of control over such subsidiaries. Thus, it did not have to consider whether or not such control was exercised in fact.511
Swisslion v Macedonia, a 50% beneficial ownership of equity interest coupled with the power to legally direct claimant's actions were sufficient for a finding that control was exercised.512
AIG v Kazakhstan, the tribunal described that “voting control of the stock held is generally determinative of control- whomsoever may own that stock [...] is covered by the BIT.”513
Vacuum Salt v Ghana, the tribunal remarked that in general “interests sufficiently important to be able to block major changes in the company could amount to a ‘controlling interest'”514 and found that in the case of the minority shareholder
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that Respondent also refers to, it was the power to influence decision making “as holder of 20 % of Vacuum Salt.”515
Thunderbird v Mexico, the NAFTA tribunal held that, in Respondent's words: “a minority shareholder controls a company if it has the ‘the power to effectively decide and implement the key decisions of the business activity of an enterprise.'”516
364. As evident from all of these examples (including those relied on by Respondent517), no tribunal has ever found “control” in the absence of a certain participating interest. The article by Amerasinghe cited by Respondent in support of the contention that “a tribunal or commission may regard any criterion based on management, voting rights, shareholding or any other reasonable theory as being reasonable”518 is taken out of context, since the discussion following this statement in the article concerns a minority shareholding supported by these additional criteria. This article fully accords with Claimant's arguments and relevant jurisprudence.
365. The underlying reason for the conclusions of the above tribunals is clear: without any participating interest, none of the individuals/entities in question are the real investors behind the claimant entity claiming the benefits of a treaty. In other words, without such participating ownership interest, none would (or could) draw any benefits of the kind that Article 17 is trying to protect. They also would not have the standing to bring a claim on behalf of the entities under their “control” to pursue the benefits breached. This was expressly confirmed by the Thunderbird v Mexico tribunal in its finding that Thunderbird exercised control over the minority entities: “in a manner sufficient to entitle it to bring a claim on behalf of those entities under said provisions.”519
516 Resp. Reply, ¶ 400; RL230, ¶ 106. ↩
517 See also Guaracachi (¶ 370 read in conjunction with ¶ 126) (RL80), where the tribunal equated control for the purposes of Article XII of the treaty with 100% and majority shareholdings. ↩
518 Resp. Reply, ¶ 401; RL231, ¶ 263. ↩
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366. Respondent is accordingly not assisted by any of the authorities it cites, none of which refute Claimant's position. Rather, these decisions support Claimant's arguments, and it is telling that Respondent has not been able to point to a single award where a tribunal found “control” to be exercised independently of any ownership interest.
367. In Ulysseas v Ecuador,520 the tribunal refused to divorce “control” from ownership interests, and rejected arguments that contractual veto power and de facto control over a business coupled with a 40% shareholding in a joint venture was sufficient to signify control,521 finding that “control” was in fact exercised through the majority legal ownership interest held by the claimant entity.522 Respondent's futile attempt to distinguish this case on the facts is unavailing.523 Whatever the dissimilarities on the facts, the tribunal's conclusion on the law is clear.
368. That “control” cannot be construed independent of any other participation in an entity is reinforced by the object and purpose of Article 17(1). In Respondent's words, the purpose of the denial of benefits provision is to ensure there is “mutuality”, and that mutuality is lost where a shell company is owned or controlled by nationals of a third state because a “third State owes no obligations under the ECT to the host State, and investors from the host State do not enjoy the advantages of Part III of the ECT when they invest in the third State.'”524 In other words, the mischief that Article 17(1) is designed to prevent is where the “real” investor is from a third state which benefits from the Investment but would not afford the same protection to the Investors of the host state. Here, the US, as a third state, does not benefit from an Investment under the ECT from the fact that some of its nationals are directors of the Yukos Stichting.
369. Equally, the US directors are very obviously not the “real” Investors. They do not indirectly own the Investment, nor do they own the Yukos Stichting. The directors
520 Counter-Memorial, ¶ 302. ↩
521 RL84, ¶¶ 181, 185, 188. The basic premise of Ecuador's arguments that “the line of control between Ulysseas and Elliot Associates is broken” that Respondent refers to in ¶ 405 of its Reply, was its objection that “control as legal capacity to direct the actions of a company is not limited to ownership. It may be exercised through contractual rights” as confirmed by the tribunal in ¶ 181 (RL84). ↩
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have no rights in the Investment indirectly owned by the Yukos Stichting or in the profits flowing therefrom. Directors benefit no more from the Yukos Stichting's Investment than do its employees - indirectly, through the remuneration they receive for their services.
370. If an Investment fails because of actions by the host state, the directors and employees of the entity owning the investment may lose their jobs, but they do not lose their investment or capital. For this reason, the directors would have no standing themselves to bring an investment treaty claim and could not argue that they have suffered any loss beyond that as an employee. It cannot be the case that the benefit of an Investment for the purposes of Article 17(1) is determined by reference to the nationality of the employees of the entity that holds (directly or indirectly) the Investment. Such an absurd conclusion neither reflects economic realities nor separate corporate identity.
371. Thus, Respondent's first proposition is plainly erroneous.
372. In relation to the second proposition, the fact that the Stichting Board has corporate powers similar to those held by shareholders under Dutch law, does not transform the directors of such Board into pseudo-shareholders within the meaning of Article 17.
373. Respondent and its expert Professor Tjittes argue that “the powers vested in the [Yukos Stichting] Board include all of those normally vested in the general shareholders' meeting of a Dutch company.”525 From this statement, it allegedly follows that individual directors on the Stichting Board should be assumed to “control” Yukos Stichting, and thus Yukos Capital.526
374. This is clearly wrong. First, nothing said in Professor Tjittes report in relation to the powers of the Stichting Board supports a conclusion that individual board members can be deemed to “control” Yukos Stichting, so that “it is the nationality of the majority of the Stichting Board members that determines whether the Stichthing is
525 Expert Report of Professor Dr. Riemert Pieter Jan Lucris Tjittes dated 2 March 2015 (the “Tjittes Rep.”), ¶¶ 11-15; Resp. Reply, ¶ 407. ↩
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controlled by citizens of a third state”.527 Second, Respondent and its expert ignore a crucial principle of Dutch law: board members are under a fiduciary duty to act in the best interests of the Stichting (and other stakeholders identified in its Articles), and may not pursue their own interests; whereas a shareholder is prima facie entitled to pursue his own interests, provided this does not harm other shareholders.
375. Similar to many modern corporate laws, under Dutch law, the directors of any corporate entity are in a position of trust and they are not at liberty to further their own interests when making decisions. They have fiduciary duties to the company and cannot put their personal interests before the entity's in a way a shareholder can. A shareholder in a joint-stock company can simply exercise the rights bestowed upon him that would best serve his own interests. The fact that a shareholder has to remain within the bounds of law when exercising his rights in his own interests528 is fundamentally very different to the fiduciary duty imposed on a director by law that it may not pursue its own interests, in breach of which he would be liable to the company and its shareholders.
376. As Claimant's expert Professor Willems further explains in his second report529:
“Prof. Tjittes does not give an accurate account where he describes that the board of the Yukos Stichting has the power to conduct the affairs of the stichting ‘at its own discretion'. This does not mean that the board can act ‘at will'. This is a standard term used to describe that the board is not compelled to follow instructions of certain stakeholders and that it is exclusively authorised to judge and weigh in its decision-making-process the interests of the stichting and its stakeholders. But in doing so the board is bound by the goal and purpose of the stichting and certainly it has no ability to pursue the interests of any individual board members. The board is therefore, for instance, not allowed to alter the Articles of Association in a manner that goes against the reasons why the stichting has been founded and its purpose as set out in article 2 of its Articles of Association.”530
529 Second Expert Report of Professor Justice J.H.M. (Huub) Willems LLM dated 15 June 2015 (“Second Willems Rep.”). ↩
530 Second Willems Rep., ¶ 12. ↩
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377. Accordingly, Professor Tjittes' claim that the “directors of a stichting are subject to the same restrictions as the shareholders of a company” is incorrect.531
378. Professor Tjittes also argues that Claimant and its expert have placed excessive emphasis on the fact that the Board is required to fulfil the purpose of the Yukos Stichting and to consider the interests of interested parties. He argues that “the existence of those limitations is not critical” when comparing the powers of shareholders of a company and the Board of the Yukos Stichting, and goes on to say: (1) that shareholders have the power to amend the Articles of Association, and so does the board of the Yukos Stichting, and (2) the fact that a company's shareholder may be required to act in somebody else's interest does not extinguish the shareholder's ability to control the company.532
379. Both of these conclusions are inapposite, as Professor Willems clarifies:
“As to the first contention, i.e. that the board of the Yukos Stichting has equal powers to amend the Articles of Association as shareholders do, this is incorrect.
Even if a board of a stichting by virtue of the articles of association has to power to amend the objects clause of the stichting, the board of the stichting - unlike the general meeting of shareholders of a company - is very much restricted in using that power, as can be demonstrated by reference to case law and literature. Prof. Maeijer in the leading handbook on corporate law points out that, even if the articles of a stichting provide for the possibility of an amendment of the objects clause, the objects may only be changed if a change of circumstances requires such (e.g. if the objects of the foundation have been fulfilled or can no longer be fulfilled). A less strict opinion is advocated by Quist, who however still argues that the allocation of the stichting's assets may not be changed by amendment of the objects clause. And again, the goal of the stichting could never be amended to include the members of the board as beneficiaries of any distribution of the assets of the stichting.
Case law shows that courts, at the request of interested parties, indeed limit the authority of the board of a stichting in amending the objects clause. I refer for example to the decision of the Court of Appeal of Arnhem : the resolution of the board of the stichting to alter the
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articles of association – which decision was in itself within the exclusive authority of the board of the stichting – was annulled on grounds of reasonableness and fairness since the board failed to observe the interests of some minority holders of depository receipts against whom the resolution was disadvantageous.
As to the second contention of Prof. Tjittes, where he seems to argue that shareholders, too, act in the interest of others: this is clearly wrong and is at the heart of the matter. There is a fundamental difference between the board of a stichting, which is never allowed to act in its own interest, and the shareholder of a company, who in principle can and may act in his own interest. The voting right of a shareholder in a joint-stock company is not a right entrusted to him in the interests of others, but his own right bestowed upon him to serve his interest in the company, from which it follows that a shareholder, although he has to a certain extent a duty not to harm other stakeholders, in using his rights may put in the first place his own interest – which is mainly aimed at realising profit. This is well-established case law.
This is fundamentally different for a board. Unlike the shareholders in a company, a board is fundamentally prohibited from serving its own interests. The fiduciary duty of a board is to serve the interests of the company or the stichting as such and of all the stakeholders who have an interest in the company or the stichting, and to pay attention to the way it functions and operates in this respect. A board may only take into consideration the interests of the stakeholders and notably not its own interests, and even less so the interests of the individual members of the board. In addition, the board of a stichting cannot have the stichting make a distribution to its board members. Such is strictly prohibited and would be a void legal act pursuant to Article 2:285 section 3 Dutch Civil Code. I refer to my First Expert Report.”533
380. In sum, Respondent's second proposition is also incorrect.
381. In relation to the third proposition, Respondent and Professor Tjittes misconstrue Claimant's argument on the necessity of the Stichting Board members to act collectively. Respondent claims that the “shareholders of a company also act collectively as the general shareholders' meeting”534 and it is an irrelevant if the Stichting Board also does. Respondent illogically contends that, if control is established by virtue of a shareholding interest, it is the nationality of the company's controllers, and, since Yukos Stichting does not have any shareholders, it must be the
533 Second Willems Rep., ¶¶ 7- 11. ↩
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nationality of the majority of the members of the Stichting Board that determines control by citizens of third state.535
382. This is a fallacious argument. As discussed above, shareholders do not act and do not have to act collectively when making decisions or exercising their rights. They are at liberty to act individually and to cast their votes in pursuit of their own interests. In contrast, directors cannot take decisions on their own when performing their duties to the Yukos Stichting. Any decision they take has to be taken collectively by either the majority or (in the case of dissolution of the Stichting) unanimous vote of the Stichting Board members, and this is confirmed by Professor Tjittes.536 Moreover, while individual Board members can be removed by the Board, a shareholder cannot be removed by other shareholders. There is also no “fiduciary duty” on a shareholder, and any requirement to act in accordance with the law does not preclude his ability to act in his best interests (it merely places some requirements on how such interests may be pursued).537
383. Furthermore, Claimant does not conflate beneficial ownership and control just because the Stichting Board has to act in the best interests of the Yukos Stichting and its stakeholders.538 This is a complete non sequitur, and Respondent is not at all assisted by the decision in Hulley Enterprises, which if anything, supports Claimant's case.
384. Respondent seeks to rely on the finding in Hulley Enterprises that the Guernsey trustee company legally “controlled” the claimant entity and was also required to exercise its powers for the benefit of the beneficiaries of the Guernsey trust.539 This submission misses the point. The deciding factor in the Hulley Enterprises case was the fact that the corporate trustee company held the legal title to the GML shares (i.e. had legal control) – the fact that the trustee was under a duty to act for the benefit of
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the beneficiaries did not defeat such legal control. The tribunal's decision certainly does not lend any support for the notion that individual directors on a board exercise control, as they plainly have no ownership interest and are under a duty to act for the benefit of the company.
385. More apposite is that the position of the trustee company holding the legal title to the GML shares in Hulley Enterprises is analogous to Yukos Stichting's position holding the legal title to the Yukos Finance shares for the benefit of the Yukos Stichting stakeholders in return for the Depository Receipts. At no point in Hulley Enterprises was it suggested that the individual directors behind the Guernsey trustee company were the true “controllers” of the trustee company or the relevant GML shares; nor could this be suggested, as those directors held no ownership interest in the Trust or the shares. The question as to who controlled the Guernsey trustee company (and whether this was its shareholders or directors) was simply never raised; and on no view could it have been suggested that control lay in the hands of the individual board directors of the Trust. Such a proposition is equally absurd in the present case.
386. The tribunal in Hulley Enterprises found that the Trusts vested ownership and control to the trustee company within the framework of the trust instruments and “control” was exercised through legal ownership of shares.540 Similarly, in the current case, the Yukos Stichting instruments vest ownership and control of the Yukos Finance assets to Yukos Stichting, which is the legal owner of Yukos Finance shares.
387. For this reason, Russia's contention that “Hulley Enterpises concluded that the control lied with the trustee company even though it was required to exercise its powers for the benefit of its beneficiaries” is wholly beside the point. Yukos Stichting is the entity that is entitled to exercise control over Yukos Capital through its legal ownership of Yukos Finance shares, therefore an analysis of control for the purposes of Article 17(1) must stop at the Yukos Stichting. As in Hulley Enterprises, there is no basis for piercing the corporate veil, and the nationalities of the Yukos Stichting's individual directors have no bearing whatsoever on the question of “control” under Article 17(1).
540 CL9, ¶¶ 518, 527, 530, 535, 536. ↩
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388. In conclusion, Respondent's third proposition is wrong, and its control argument pursuant to Article 17 must accordingly fail in its entirety.
389. For the above reasons, and those set forth in Claimant's Counter-Memorial, Claimant respectfully requests the Tribunal to dismiss the jurisdictional objections raised by Respondent and proceed to the merits stage of the proceedings.
Dated: 15 June 2015
Respectfully submitted,
Signature
Cyrus Benson
Penny Madden
Ceyda Knoebel
Piers Plumptre
Sophy Cuss
GIBSON, DUNN & CRUTCHER LLP
Telephone House
2-4 Temple Avenue
London EC4Y 0HB
United Kingdom