On 30 November 2009, an international ad hoc arbitral tribunal
sitting at the Permanent Court of Arbitration in The Hague ruled
that Russia is bound by the provisions of the Energy Charter Treaty
(ECT), an international treaty that Russia has signed but not
ratified. The preliminary ruling was made in arbitration
proceedings underway against the Russian Federation for the alleged
expropriation of the assets of the former Yukos Oil
Company.1
The claimants, the majority shareholders of the former Yukos Oil
Company – Hulley Enterprises Ltd. (Cyprus), Yukos
Universal Ltd. (UK - Isle of Man) – as well as Veteran
Petroleum Ltd. (Cyprus), a pension fund established for the benefit
of former Yukos employees, allege that the Russian Federation
unlawfully expropriated their investment in the Yukos Oil Company
through the bankruptcy and forced sale of its main assets by the
Russian government. The claimants are seeking compensation in an
amount near US $100 billion, making this claim one of the largest
in the history of international arbitration.
The Energy Charter Treaty
The ECT is a multilateral instrument that, among other things,
provides substantive protections to investors in the energy sector,
including protection against unlawful expropriation and
discrimination against energy investments. The ECT also contains
dispute resolution provisions allowing investors to bring
arbitration claims against ECT contracting states for violations of
the investors' rights under the ECT. In the event of breach of
those provisions, Article 26 of the ECT provides for binding
investor/state arbitration. The investor can elect to submit the
dispute for international arbitration under the Rules of the
International Centre for the Settlement of Investment Disputes
(ICSID), the ICSID Additional Facility Rules, to a tribunal
established under the UNCITRAL Rules or to the Arbitration
Institute of the Stockholm Chamber of Commerce.
Ratification and Provisional Application
The process of concluding an international treaty generally
involves three stages: signature, ratification and entry into
force. Signature by a state usually expresses the intention of that
state to be bound by the treaty, subject to domestic ratification
procedures. Ratification is an international act whereby the state
establishes its consent to be bound by the treaty2, but
for most states, this requires authorisation of the treaty by the
legislature, for example by passing a bill.
Russia signed the ECT in 1994 but has never ratified it (pending
negotiation of additional areas of regulation on the trade of
nuclear material, an additional investment protocol and a transit
protocol). However, Article 45(2) of the ECT provides that each
signatory state agrees to apply the ECT provisionally pending its
entry into force for that state (known as "provisional
application"), to the extent that provisional application is
not inconsistent with that state's own constitution, laws or
regulations.3 Although the ECT permits signatories to
make a declaration not to accept provisional application pending
ratification,4 Russia made no such reservation upon
becoming a signatory.
Provisional application, although commonly provided for in
intergovernmental treaties, is unusual in this context because of
the significant investment protection provisions in the ECT. If the
ECT is interpreted as having its full effect before ratification,
it means that a state may be fully bound by the treaty, including
the investment protection provisions, without the treaty having
been approved by the legislature of that state. Provisional
application of the ECT has caused particular uncertainty in
relation to whether a state that has not ratified the ECT could be
bound by the international arbitration clause in Article 26.
Decisions on Provisional Application
The first known award addressing the interpretation of the
provisional application provisions in the ECT was made in an
arbitration in which DLA Piper acted, Ioannis Kardassopoulos v
Georgia.5 In this case, an ICSID tribunal held that
Article 45 should be interpreted as meaning that each signatory
state is obliged, even before the ECT has formally entered into
force, to apply the whole ECT as if it had already done so.
At the time of writing, the text of the preliminary ruling of 30
November 2009 in the Yukos case is not publicly available,
but it reportedly deals with issues relating to the Tribunal's
jurisdiction and the admissibility of the claims. The claimants had
argued that as a signatory Russia was bound to observe the ECT and
its rules on protecting investments. Russian officials have
repeatedly stated that the Yukos case was a simple tax
matter and that in any event the ECT is not enforceable against
Russia. According to the claimants, the tribunal ruled that in
signing the ECT Russia had accepted provisional application and at
the time the events giving rise to the Yukos dispute
occurred, Russia was fully bound by its provisions including those
relating to arbitration. Having found that it has jurisdiction to
hear the dispute, the tribunal will now proceed to consider the
merits of the claimants' expropriation claim.
The tribunal's decision follows in the wake of Russia's
announcement in August 2009 that it would withdraw from the ECT
with effect from 18 October 2009. Russia's withdrawal will have
no bearing on the Yukos case, because the events giving
rise to the dispute predate Russia's withdrawal.
A further issue is whether Russia will continue to remain bound in
respect of certain provisions of the ECT despite its recent
withdrawal. The ECT provides that in the event that a signatory
terminates provisional application, "its obligation to apply
Parts III and V with respect to any Investments made in its Area
during such provisional application by Investors of other
signatories shall nevertheless remain in effect with respect to
those Investments for twenty years following the effective date of
termination..."6
In addition, by clarifying the effect of provisional application,
the 30 November decision could have significant implications for
energy investments made in Russia, as well as in other countries
that have signed but not ratified the ECT.
Footnotes
1. Yukos Universal Ltd. (UK – Isle of Man) v. Russian Federation; Hulley Enterprises Ltd. (Cyprus) v. Russian Federation; Veteran Petroleum Trust (Cyprus) v. Russian Federation. Ad hoc UNCITRAL Arbitration Rules; arbitration administered by the Permanent Court of Arbitration (PCA) in The Hague. Arbitrators: L. Yves Fortier (chair); Charles Poncet (replacing Daniel Price); Stephen Schwebel.
2. Article 2(1)(b) of the Vienna Convention on the Law of Treaties
3. ECT, Article 45(1)
4. ECT, Article 45(2)
5. Ioannis Kardassopoulos v Georgia, ICSID Case No. ARB/05/18
6. ECT, Article 43(3)
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