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The Empire Strikes Back: Yukos-Russia, 1-1

Published on May 26, 2016        Author: 

In the latest chapter to the ever fascinating Yukos dispute, Russia recently secured a victory in the District Court of The Hague, which set aside the US $ 50 billion awards issued two years ago by an arbitral tribunal constituted under the Energy Charter Treaty (ECT). The crucial issue was whether Russia was bound to arbitrate under the ECT’s provisional application clause. The arbitral tribunal, comprised of Y. Fortier, C. Poncet, and S. Schwebel, said ‘yes’; three Judges of The Hague District Court, D. Aarts, I.A.M. Kroft and H.F.M. Hofhuis, said ‘no’. It will be argued here that the District Court put too much emphasis on the domestic constitutional legality of the ECT’s provisional application, at the expense of investors who were entitled to believe that Russia had agreed to such provisional application.

Earlier Episodes of the Dispute

The dispute between the now defunct oil company Yukos and Russia has grown into a protracted legal battle, involving a number of investment arbitration tribunals, the European Court of Human Rights, and domestic courts in various jurisdictions. At one point the largest oil company in Russia, Yukos was liquidated in 2006 by the Russian authorities in the process of enforcing tax reassessments, which allegedly demonstrated that Yukos had engaged in large-scale tax evasion. According to Yukos and many international observers, the tax reassessments were a pretext for regaining control over the Yukos imperium and bringing down its influential CEO Mikhail Khodorkovsky.

Foreign shareholders of Yukos have brought investment arbitration claims against Russia under various treaties, including the 1989 UK-Russia BIT (award), the 1991 Spain-Russia BIT (award), and the ECT. The investors have been largely successful, obtaining their biggest win on 18 July 2014, when a tribunal constituted under the auspices of the Permanent Court of Arbitration issued three awards granting a total of US $ 50 billion to the claimants, on the ground that Russia had breached the expropriation provision of the ECT (Article 13). These awards have now been set aside by The Hague District Court (some reactions here and an analysis of the consequences here).

Provisional Application

Whereas previous battles focused on whether the Russian tax reassessments and subsequent enforcement measures were mala fide, the crucial issue at the current stage is whether the arbitration clause of the ECT (Article 26) was actually applicable with regard to Russia, which signed but never ratified the treaty, and withdrew from it in 2009 (not the only Member State to do so).

Pursuant to Article 45 ECT, a signatory State agrees to apply the treaty provisionally ‘pending its entry into force’, ‘to the extent that such provisional application is not inconsistent with its constitution, laws or regulations’ (para. 1) and if that State had not objected to provisional application at the moment of signing (para. 2(a)). Given the fact that Russia had not issued such an objection (unlike Norway, Iceland and Australia), the dispute focused on whether a provisional application of the ECT was consistent with Russian law.

Consistency of What: the Piecemeal v. the All-or-Nothing Approach

In spite of its apparently casual wording, Article 45(1) or ‘the Limitation Clause’ raises complicated questions of interpretation. A first point of disagreement between the arbitral tribunal and the Hague District Court is what exactly needs to be consistent with Russian law: the idea of provisional treaty application as such, or the provisional application of specific treaty provisions. According to the court (5.18), the issue of consistency should be assessed separately for any treaty provision to be applied provisionally (‘piecemeal approach’), and not for the entire treaty as a whole (‘all-or-nothing approach’), as the tribunal had found (like the tribunal in Kardassopoulos v. Georgia). While the tribunal and the court emphasized different textual elements of Article 45(1), their conclusions also demonstrate different preoccupations. According to the tribunal, the piecemeal approach would ‘create unacceptable uncertainty in international affairs’, allowing a State to opt out of provisional application at any time, in particular after a dispute had arisen (para. 315 Interim Awards). The court, on the other hand, emphasized that Article 45(1) serves to avoid conflicts between domestic law and international obligations (5.19). The provision might indeed cause some uncertainty, but this was the choice of the States party to the ECT and apparently justified by the wish to prevent inconsistencies between international and domestic law.

What Constitutes an Inconsistency?

On the basis of its piecemeal approach, the Hague District Court focused on whether the arbitration clause of the ECT was consistent with Russian law. In this context, the Yukos shareholders argued that an inconsistency between Article 26 and domestic law could only exist in the form of an explicit prohibition under Russian law. The court took a wider approach, ruling that a provisional application of the ECT’s arbitration clause would also be inconsistent with Russian law if there would be no legal basis for this type of dispute settlement. The court would also find an inconsistency if investor-state arbitration did ‘not harmonise with the legal system’ or if it were ‘irreconcilable with the starting points and principles that have been laid down in or can be derived from legislation’ (5.33).

Applying this framework of analysis, the court found that Russian law did not provide ‘a separate legal base’ for investor-State arbitration (5.58). It did not attach much weight to the fact that in 1996 the Russian government had stated that the provisions of the ECT were ‘consistent with Russian legislation’ (5.60). Instead, the court pointed at the history of the ratification of some other investment treaties, demonstrating a parliamentary concern that Russian law did not contain a legal basis for investment arbitration (5.64).

State Sovereignty v. the Legitimate Expectations of the Investor

Provisional application is an exception to the normal rules on how treaties enter into force (reports of the ILC’s Special Rapporteur here). Whereas the period between signing and ratifying normally allows States to reconsider the matter and verify whether domestic law needs to be adapted, a provisional application provision purports to bind States already while these assessments are being made. This is a serious intrusion into State sovereignty, which explains why the ECT contains a Limitation Clause and why it allows signatories to opt out by means of a declaration.

State sovereignty, however, is not the only interest at stake in the context of provisional application, and needs to be balanced against the legitimate expectations of other parties and, in the case of the ECT, investors. When Russia signed the ECT without making a declaration under Article 45(2), it might be thought that it created a presumption of compatibility between the ECT and domestic law. Neither the tribunal nor the court followed the shareholders’ argument that the absence of a declaration under Article 45(2) precluded Russia from invoking the Limitation Clause. However, Russia’s choice not to signal any objections to provisional application but to wait until a claim was filed, sheds doubts on the credibility of the defence. This is even more problematic because the alleged inconsistency concerns ambiguous provisions that seem to allow for legitimate disagreement as to whether they allow investor-State arbitration.

The Hague District Court put a strong emphasis on the importance of the domestic separation of powers. Noting that only the Russian Parliament possesses legislative powers, the court concluded that parliamentary approval was necessary for the creation of a form of dispute resolution which did not have a legal basis in Russian law (5.93). This argument seems to revert back to the question of whether the principle of provisional application is acceptable as such. One could reply that the choice to adopt a provisional application provision in a treaty already means that the signatory States temporarily circumvent the domestic separation of powers, and that they may have good reasons to do so.

Tribunals v. Courts

It is tempting to consider other, more fundamental reasons why the Hague District Court might have decided to set aside the awards. First, since Article 45(1) makes provisional application conditional on domestic law, the court may have felt a need to defer to Russia’s interpretation of its own laws and to follow its argument of inconsistency. Second, it is probable that a court in the Netherlands – with its strong tradition of parliamentary sovereignty – is relatively susceptible to Russia’s arguments concerning the domestic separation of powers. Third, and perhaps most importantly, it is striking that the arbitral tribunal on the one hand and the District Court on the other seem to approach the State in a different manner. The court appears well-disposed towards the State, sharing Russia’s alleged concern over the domestic constitutionality of the provisional application of the ECT, whereas the tribunal is more critical, suggesting doubts as to whether Russia’s invocation of Article 45(1) is sincere and credible. Arguably, the different approaches demonstrate differences between the preoccupations of arbitral tribunals and courts (not only within host states) and the ways in which they balance State sovereignty against investor interests.

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CETA’s New Domestic Law Clause

Published on March 17, 2016        Author: 

The recent, widely-reported ‘legal scrub’ of the Canada-EU Comprehensive Economic and Trade Agreement (CETA) has drawn attention for its endorsement of a radical shift away from the model of investor-state dispute settlement that has prevailed in investment agreements to date. The new text indicates that Canada has agreed to the EU’s proposals on an investment court system, with a permanent roster of arbitrators appointed by Canada and the EU, rather than ad hoc tribunals whose members are appointed by the disputing parties themselves. In another innovation, CETA will also include an appeals mechanism, which will have power to review the merits of first-instance rulings, going beyond the limited grounds for annulment of awards in the existing ICSID system.

Alongside these revolutions, the new CETA text also contains another change from the earlier text. Under the heading of ‘Applicable law and interpretation’, Article 8.31(2) of the new text provides:

The Tribunal shall not have jurisdiction to determine the legality of a measure, alleged to constitute a breach of this Agreement, under the domestic law of the disputing Party. For greater certainty, in determining the consistency of a measure with this Agreement, the Tribunal may consider, as appropriate, the domestic law of the disputing Party as a matter of fact. In doing so, the Tribunal shall follow the prevailing interpretation given to the domestic law by the courts or authorities of that Party and any meaning given to domestic law by the Tribunal shall not be binding upon the courts or the authorities of that Party.

Although the provision is new in CETA, it has also recently appeared in the EU-Vietnam FTA and in similar language in the EU’s November 2015 TTIP proposals. While this might suggest that the provision is a recent invention of the EU, its inspiration in CETA could equally have come from Canada, which included a similar provision in its 2008 FTA with Colombia. In fact, Colombia itself appears to have first spearheaded the provision, including language on domestic law broadly similar to the provision’s first sentence in its 2007 Model BIT and in agreements signed as far back as 2006 with Japan, the UK, India, Belgium, China, Peru and Switzerland. Read the rest of this entry…

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Trade Agreements, EU Law, and Occupied Territories (2): The General Court Judgment in Frente Polisario v Council and the Protection of Fundamental Rights Abroad

Published on December 11, 2015        Author: 

This is a follow-up to my July post on Action for Annulment Frente Polisario v Council (Case T-512/12), a case before the General Court of the European Union (GC) in which Frente Polisario – the National Liberation Movement for Western Sahara – seeks the Annulment of the EU Council decision adopting the 2010 EU-Morocco Agreement on agricultural, processed agricultural and fisheries products. The GC delivered its judgment yesterday, both recognizing the standing of Frente Polisario and granting the (partial) annulment of the decision, with implications for EU-Morocco relations and for EU external relations law more broadly.

(1) Standing of Frente Polisario under Article 263 TFEU

As regards standing, the most striking aspect of the judgment is that the Court accepted the Frente’s entitlement to plead as a ‘moral person’, with the ‘necessary autonomy’ to challenge a decision of the EU legislator (paras. 50-53), without reference to the sui generis character of Frente Polisario or to the unique situation of Western Sahara. This would seem to open the door for other ‘autonomous entities’, even those with no claim to international legal personality, to challenge EU decisions under Article 263 TFEU.

By the same token, the Court fell short of recognizing the Frente’s legal personality under international law. Read the rest of this entry…

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Claims by Dual Nationals under Investment Treaties: A New Form of Treaty Abuse?

Published on December 9, 2015        Author: 

The issue of treaty abuse (or ‘treaty shopping’) has received heightened attention recently in the context of the on-going negotiations for the conclusion of the Transatlantic Trade and Investment Partnership (TTIP). In a public consultation on the potential inclusion of an investor-State arbitration clause in TTIP, the European Commission (EC) has raised concerns regarding the investors’ manipulation of corporate nationality through the so-called “shell” or “mailbox” companies in order to take advantage of the protection afforded by investment treaties (See Public consultation on modalities for investment protection and ISDS in TTIP, Question 1, p. 18). In line with the contributions made by many of the participants involved in the consultation process, the EC has stated that these companies should be excluded from the scope of TTIP. Accordingly, the EC has proposed to narrow the definition of the term ‘investor’ by requiring that a juridical person must have ‘substantial business activities’ in the territory of a signatory State (See Public consultation on modalities for investment protection and ISDS in TTIP, Question 1, pg. 18).

The foregoing requirement certainly responds to the criticisms of inappropriate treaty shopping, and it may be considered as a useful tool to prevent corporate investors from obtaining treaty protection by illegitimate means. Yet, the EC overlooks the fact that, in addition to corporations, investment treaties might also be subject to abuse by individual investors. In this context, a new type of BIT claim is now emerging in the field of investor-State arbitration, whereby investors who hold the nationality of both contracting parties to the treaty (i.e. dual nationals) make their own State a respondent before an international tribunal. Read the rest of this entry…

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Beneficial Ownership and International Claims for Economic Damage: Occidental Petroleum v. Ecuador and Restoring Limits to Investor-State Arbitral Tribunals’ Jurisdiction Ratione Personae

Published on November 16, 2015        Author: 

On 2 November 2015, the ICSID ad hoc Committee composed of Prof. Juan Fernandez-Armesto (Committee President), Justice Florentino Feliciano, and Mr. Rodrigo Oreamuno in Occidental Petroleum Corporation v. The Republic of Ecuador (ICSID Case No. ARB/06/11) partially annulled the massive US $1.769 Billion award of damages issued on 5 October 2012 by the majority of the arbitral tribunal (Mr. Yves Fortier, President, and Mr. David A.R. Williams) over the strong dissent of arbitrator Prof. Brigitte Stern. Agreeing with arbitrator Stern’s position that Occidental Petroleum had split its ownership to give a 40% ownership interest to a Chinese company Andes/AEC (Committee decision, para. 204), the ICSID ad hoc Committee whittled down the damages awarded to only reflect the actual 60% ownership of claimant Occidental Petroleum in the assets that Ecuador expropriated. The Committee’s decision significantly brought down the compensation value for the expropriation to the 60% as owned by Occidental Petroleum to US$1.061 Billion (Committee decision, paras. 586 and 590). The Committee treated the Chinese company Andes/AEC’s beneficial ownership of 40% of the expropriated assets as outside the scope of its jurisdiction over covered investors protected under the US-Ecuador BIT.

In issuing its landmark decision, the Committee stressed proscribed limits under the law of investor-State claims; the distinct confined mandate and authority of arbitral tribunals as derived from the creation and consent of States; and the ensuing narrow availability of the investor-State treaty arbitral system only to treaty-covered investors: Read the rest of this entry…

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China’s View of International Litigation: Is the WTO Special?

Published on November 13, 2015        Author: 

Yesterday, Geraldo Vidigal put up a really interesting post looking at recent patterns of use of the World Trade Organization’s dispute settlement system. One thing that was particularly striking to me was the extent to which China has participated in the WTO dispute settlement system given its previous position on resolution of disputes by international tribunals. Geraldo’s chart of the latest 100 disputes at the WTO shows that only the United States, the EU and Japan have initiated more cases at the WTO in recent years than China (with Japan initiating just one more case than China in this period). Given that the WTO system is the most widely used inter-state dispute settlement system, it might not even be an exaggeration to say that: in terms of numbers of cases brought before international tribunals by states, China is one of the most enthusiastic state users of international tribunals! Of course, that enthusiasm is only before one particular system.

In October 2010 I posted here on EJIL:Talk a piece titled “Is China Changing its View of International Tribunals?“in which I noted that China’s view on international tribunals more broadly seemed to be changing. At the time, I noted China’s participation in the Kosovo Advisory Opinion at the ICJ, which was the first time that the People’s Republic appeared in oral hearings before the ICJ. I also pointed out China’s participation, around the same time, in the written and oral phases of International Tribunal for the Law of the Sea’s (ITLOS) first advisory proceedings –  the Responsibilities and obligations of States sponsoring persons and entities with respect to activities in the Area (Request for Advisory Opinion submitted to the Seabed Disputes Chamber). In 2014, China submitted a substantial written statement in the Request for an advisory opinion submitted by the Sub-Regional Fisheries Commission (SRFC) though it did not take part in the oral hearings.

Of course, we have non-participation by China with respect to the United Nations Convention on the Law of the Sea Annex VII arbitration initiated by the Philippines (in respect of which the tribunal issued an award on jurisdiction a couple of weeks ago). Read the rest of this entry…

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WTO: The First 500 Disputes and the Last 100 Disputes

Published on November 11, 2015        Author: 

Yesterday, the WTO dispute settlement system received its 500th formal request for consultations. Because members may only request a WTO panel after unsuccessful consultations, filing such a request is the first step in the initiation of WTO disputes. For this reason, the request for consultations, without being per se a contentious act, signals the willingness of the member requesting consultations to take a dispute to adjudication. Between 1995 and 2015, therefore, the WTO received almost 24 disputes a year – an impressive amount for a purely inter-state dispute settlement system. Confirming the tendency of increased participation of developing countries, the 500th request was filed by Pakistan and targeted a measure imposed by South Africa.

I took this opportunity to undertake a small and very simple (some might say crude) quantitative exercise: who are currently the main WTO litigators? If we go back to 1995, the US and the EU will clearly dominate (the WTO helpfully provides a map of disputes). However, China only joined the WTO in 2001, and Russia in 2012. Thus, a more helpful exercise is to look at the last few disputes. Read the rest of this entry…

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Nein!

Published on November 4, 2015        Author: 

I invited our Book Review Editor, Professor Isabel Feichtner, to write a Guest Editorial, which was published on the blog in July. As the reader will immediately note it would have been foolish, given the circumstances addressed in that Editorial, to wait for the next issue of EJIL and so I proposed that it be posted immediately on EJIL: Talk! where it was widely read and justly applauded. Given its importance, going well beyond the so-called Greek Crisis, we republish it in the current issue of the Journal as an official EJIL Editorial – which of course, as is the case with all Editorials in this Journal, represents the views of the author, not of EJIL as such.

It is our hope that this Editorial will stimulate a broader discussion on our role as international lawyers in today’s world of politics. To this end, let me make an open call for contributions, to the Journal and to EJIL: Talk!, on the role of international law scholarship in making sense of questions of how the refugee crisis, austerity politics, megaregionals, security politics, and so on interrelate, and how we as international lawyers can usefully intervene.

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Filed under: Editorials, EJIL, Financial Crisis
 
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A Bacon Dispute at the WTO? International Trade Regulation and the WHO Decision on Red Meat and Processed Meat

Published on October 28, 2015        Author: 

To the chagrin of meat-eaters worldwide, the International Agency for Research of Cancer (IARC) – the cancer agency of the World Health Organization – has just published a summary of over 800 studies, some of which decades-long, on the link between consumption of red meat and processed meat and cancer. The summary concludes that consumption of red meat is probably linked to cancer, and that consumption of processed meat is demonstrably linked to bowel cancer. Specifically, every 50 gram portion of processed meat consumed daily increases the risk of bowel cancer by a significant 18%. An average sausage weighs about 70-80 grams.

On the basis of this research, IARC experts decided to add red meat and processed meat to the list of potential cancer-inducing agents. Red meat, i.e. ‘all mammalian muscle meat, including, beef, veal, pork, lamb, mutton, horse, and goat’, was classified under Group 2A, as ‘probably carcinogenic to humans’. More worryingly, processed meat, including all red meat ‘that has been transformed through salting, curing, fermentation, smoking, or other processes to enhance flavour or improve preservation’, was classified as ‘carcinogenic to humans’ (Group 1).

With this decision, processed meat now ranks together cancer-wise not only with the usual suspects against which healthcare professionals advise us – alcoholic beverages, tobacco smoking, and solar radiation – but also with less pleasant substances such as mustard gas, arsenic, and plutonium. To leave no room for doubt, the Q&A clarifies that among the new known carcinogens are ‘hot dogs (frankfurters), ham, sausages, corned beef, and biltong or beef jerky as well as canned meat and meat-based preparations and sauces’. (Surprisingly, bacon was left out of this particular clarification.)

Few people, of course, were under the illusion that these products were good for your health. However, their classification as known carcinogens has significant public health implications, which may lead governments worldwide to consider adopting measures to prevent consumption, or at least excessive consumption, of processed red meat. As with regulatory measures aimed at lowering consumption of tobacco and alcohol, we can expect the new anti-bacon measures to become the subject of international litigation under trade and investment dispute settlement.

The question of how to give weight to health and other public interest concerns under investment law is still a tricky one. Under the law of the World Trade Organization (WTO), on the other hand, I believe the issue is essentially settled: once a decision of an internationally recognized scientific body such as the IARC exists to ground policies, WTO law will in principle pose no obstacle to even-handed measures aimed at reducing consumption or even removing the product from the market entirely. Read the rest of this entry…

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Authors’ Concluding Response: Assessing the Case for More Plurilateral Agreements

Published on October 2, 2015        Author: 

Editor’s Note:  This is the authors’ concluding response in a series of posts discussing the article in the current issue of EJIL Vol. 26 (2015) No 2, by Bernard Hoekman and Petros Mavroidis. The original post is here. See also the  posts  discussing the article by Junji Nakagawa, Diane Desierto, and Geraldo Vidigal.

We have profited a lot reading the responses to our article by our three colleagues. Undoubtedly, this discussion will help us streamline our thinking going forward, since we believe the discussion regarding the institutional design of the WTO is about to start. Indeed, the passage from the Tokyo round ‘GATT clubs’ approach to the ‘WTO single undertaking’ was not discussed in depth among the institutional stakeholders. It is high time it takes place now, and this is what we hope our contribution will help happen.

We would like at the outset to set the record straight regarding property rights on this issue. We claim no originality in making a case for more plurilateral agreements (PAs). The main contribution on this front is a paper by Robert Z. Lawrence (2006), to which we refer a number of times in our article, and which, surprisingly had been left unanswered. Lawrence brought together discussion that preceded him, and provided a clear framework to think in concrete policy terms about clubs within the multilateral system. Academic literature on ‘clubs’ or ‘codes’ (the term used during the Uruguay round, in the GATT, and more generally, “minilateral” liberalization and cooperation goes back to the 1980s). A notable contribution on this score is B. Yarborough and R. Yarborough (1992), Cooperation and Governance in International Trade: The Strategic Organizational Approach.

Our basic point, simply put is that there are three factors that all bolster the case for PAs, and the ensuing ‘club of clubs’ approach originally advocated by Lawrence almost ten years ago. These factors are:

  • the proliferation of PTAs (preferential trade agreements) following the advent of the WTO, that is, at a time when tariffs are at an all-time low. Modern PTAs deal to a significant extent with regulatory matters;
  • the geo-political dynamics associated with the rise of China and other emerging economies; and
  • the fact that the trade agenda increasingly centers on regulatory differences, an area where the ‘single undertaking’ approach has not proved to be much of a success.

Read the rest of this entry…

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