Crimea Investment Disputes: are jurisdictional hurdles being overcome too easily?

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In February-March 2014, Crimea experienced what is here neutrally referred to as a ‘change of effective sovereign’ (as conceded by Ukraine itself). Subsequent events have given rise to at least nine investment claims by Ukrainian nationals against Russia in connection with their investments in Crimea made prior to the ‘change of effective sovereign’. Substantively, all cases pivot on alleged violations of the expropriation and FET (fair & equitable treatment) clauses of the 1998 Russia-Ukraine BIT. Before getting there, however, a series of jurisdictional hurdles need to be overcome. Firstly, whether the scope of the BIT covers also de facto (as opposed to de jure) territory. Thus, whether under the BIT, Crimea may be understood as Russian territory. Secondly, the BIT’s temporal and personal ambit of application. That is to say, whether Ukrainian nationals and their businesses existing in Crimea prior to the ‘change of effective sovereign’ may qualify, respectively, as foreign Ukrainian investors and investments in Russia. It is doubtful that these questions which, are inevitably intertwined with the public international issue of the legality of the ‘change of sovereign’, can be satisfactorily answered through ‘effective interpretations’ and/or drawing analogies from human rights law. The scope and rationale of investment law differs from that of the latter; the promotion and protection of bilateral business is pursued for the benefit of economic growth, while the protection of fundamental rights and freedoms of persons is undertaken for the good of human kind.  In fact, it is reflected in the standard dispute settlement mechanism envisaged i.e. private ad hoc arbitration v standing international court.

Jurisdictional decisions in five proceedings have recently been rendered. To date, none of these have been made public. Nevertheless, important passages of their reasoning have been uncovered by trusted sources. These allow for a preliminary review of the tribunals’ assessment of the key legal issues involved.

Preliminarily, with two letters addressed to the PCA (first called to designate the appointing authority in all proceedings, then appointed registrar by all tribunals) Russia refused to participate in all arbitrations. Russia argued that the “[Ukraine-Russia BIT] cannot serve as a basis for composing an arbitral tribunal to settle [the Claimants’ claims]”, and that it “does not recognize the jurisdiction of an international arbitral tribunal at the [PCA]”. This stance mirrors China’s conduct vis-à-vis UNCLOS’ South-China Sea arbitration in 2013-2015, where broader thorny issues of territorial sovereignty were also at stake. In contrast to China, however, Russia has not issued a ‘position paper’, which could be used by the arbitral tribunals to support a consideration that the letter constitutes a proper jurisdictional objection.

A preliminary note about the investors and the lawyers involved in these disputes is necessary. Of the nine claims so far publicly known, six descend from two Ukrainian billionaires (five from Mr. Komoloiski, one from Mr. Akmenhov). One law firm (Hughes & Hubbard) represents the claimant in five cases, with another law firm (Covington & Burling) representing the claimant in the other two disputes, as well as Ukraine’s third-party intervention in all nine cases. The arbitral tribunals hearing the disputes feature internationally renowned experts, but their composition is quite repetitive: two cases share the same bench (respectively, Dupuy – Bethlehem – Mikulka and Kaufmann-Kohler – Price – Stern). Two of the other arbitrators, Simma and Rigo-Sureda, first acted as appointing authorities before accepting appointment themselves. Also, two arbitrators, Rigo-Sureda and Stern, decided Sanum v. Laos in 2013 (pivoting on the territorial extension of the China-Laos BIT to Macao – extension that the tribunal granted). Another arbitrator, Bethlehem, acted as an expert for the claimant in that same case.

In the first half of 2017, the first five jurisdictional decisions were rendered: the tribunals in the two pairs of cases with identical composition (here referred as the ‘Dupuy’ and ‘Kaufmann-Kohler’ decisions, with reference to their president), and one other (the ‘Rigo-Sureda’ decision), unanimously affirmed their jurisdiction. In a sixth case (McRae – Simma – Zuleta), the tribunal, adopting a fresh approach, issued a ‘jurisdictional letter’ illustrating that it intends to uphold jurisdiction but will explain the reasons in the final award.

Firstly, it emerged that the outlined commonalities between the claimants (and their lawyers) resulted in the first two jurisdictional decisions (Dupuy) being shared with the second tribunal (Rigo-Sureda). These were all subsequently submitted to the third (Kaufman-Kohler) tribunal. It may not then come as a surprise that while possibly leveraging on slightly different arguments, the decisions do not contradict each other – becoming, rather, progressively more articulated.

With due respect to the difficult task carried out by the renowned arbitrators, and while we await public disclosure of the full decisions, the following touches upon three issues that seemingly underpin, or have constituted part of, their rationale.

1. Investment arbitration as a means to protect Ukrainian businesses in Crimea.

The Rigo-The Sureda and Kaufmann-Kohler decisions found that to exclude territory transferring from Ukrainian to Russian control from the application of the Russia-Ukraine BIT, independently from the legality of said control, would discriminate against Ukrainian investments in Crimea.

In principle, this is to say that in the presence of a BIT, to exclude from its application territory whose control switches between the parties, independently from the legality of said switch and/or control, ipso facto discriminates against those domestic investors whose State no longer controls the territory where they invested. However, the ipso facto treatment of what was at one time domestic as something foreign (i.e., treating domestic Ukrainian investment in Crimea made prior to the establishment of Russian control as foreign Ukrainian investment in Russia) seems to conflict with the good faith understanding of the terms ‘foreign investment’, especially if read through the scope and purpose of a BIT (i.e. to increase foreign investment).

The arbitrators backed this finding through ‘effective interpretation’ of the BIT’s purpose of encouraging investments. Since Ukrainian investment in Crimea ipso facto currently brings benefits to Russia, to deny the Ukrainian investors BIT coverage (thus the possibility of resorting to ISDS) breaches the ‘synallagmatic relationship’ (encouragement <–> protection) the treaty seeks to establish between foreign investors and the host State. A contrario, Russia is to be considered ipso facto bound by the Russia-Ukraine BIT even with respect to Ukrainian investments made in Crimea prior to the change of effective sovereign.

Arguments grounded on BITs’ ‘effective interpretation’ are routinely used by investment tribunals. Regarding investor-State dispute settlement (ISDS), they reflect a view which, starting with Maffezini, progressively gained traction and, accepts that today ISDS is the key element of a BIT; the only independent and impartial (and, often, confidential) forum of experts to which foreign investors can turn. While the argument is logically correct, its legal axiomaticity is less certain. Both investment treaty practice up until the early 1990s (with arbitration either absent or limited to a review of the appropriateness of the compensation granted by the State in case of expropriation), as well as that of the last decade (with arbitration of ‘any dispute’ effectively reduced by all sorts of roadblocks, constraints, exceptions and exclusions), offer normative evidence to the opposite effect. Moreover, the debate over use and extent of ‘effective interpretation’ in investment law, especially with regard to jurisdiction, is ongoing (e.g., §63 of the 1988 jurisdictional decision in Southern Pacific Properties v. Egypt; more recently, Schreuer and Waibel).

In the case of Ukrainian investors in Crimea, a systemic effective interpretation approach (with regard to ISDS especially) is perhaps even less convincing. Investment arbitration is not the best setting to face complex questions of public international law (the effects of Crimea’s change of sovereign, let alone its legality). It is also not the only forum available to Ukrainian investors, or Ukraine itself.

Firstly, Ukraine called for Ukrainian businesses in Crimea to actively engage in ISDS against Russia (Art. 9 BIT), seemingly overlooking the BIT’s State-State dispute resolution mechanism on questions of “interpretation and application” of the treaty (Art. 10 BIT). It would have been more difficult for Russia not to participate in an arbitration on the question of the BIT’s scope regarding Crimea. Also, such a decision would have offered a firmer ground to all subsequent investor-State disputes.

Secondly, Ukrainian businesses in Crimea have the ECtHR to turn to in case of expropriation. Perhaps the ECHR’s standards of indemnification/compensation are not as generous as those of some BITs/investment tribunals, nor its protection for businesses as extensive. Nevertheless, to adopt an expansive jurisdictional approach through sector-specific treaties (BIT) because of other mechanisms’ alleged limitations (ECHR), all the while circling around the elephant in the room (the public international law question over the legality of the “change of sovereign”), entails considerable risks at the enforcement stage.

2. The unique in casu intertwine between the temporal, personal and legal BIT ambits of application.

All tribunals have grounded the inclusion of Crimea in the territorial scope of the Russia-Ukraine BIT in light of Russia’s conduct and effective sovereignty (side-stepping the question of legality). The tribunals offered two reasons for Ukrainian nationals to qualify as foreign investors under the Russia-Ukraine BIT. As mentioned, the Rigo-Sureda tribunal considered that these would otherwise be unfairly excluded vis-à-vis all other foreign investors in Crimea (from States with which Russia concluded BITs). The Kaufmann-Kohler tribunal argued additionally that the BIT refers solely to ‘territory’ -as opposed to ‘sovereign territory’- and features no requirement that the investment be made ab initio in the territory of the other contracting party. Both arguments may not be entirely persuasive:

  1. Investment in Crimea has always been limited in absolute terms, and the part that is neither Ukrainian nor Russian is very modest (before 2014, over 60% of Crimean inward FDI was of Russian origin). Moreover, there is no known cases from those other foreign investors that fled (e.g., McDonalds, Radisson) or stayed (e.g., Auchan, Italian construction companies);
  2. As mentioned, pre-2014 Ukrainian investment in Crimea is domestic in nature, thus genetically not made intuitu personae in Russia.
  3. While the BIT practice on the expression ‘sovereign territory’ is inconsistent, in treaties concluded after the entry into force of the Charter, the concept of ‘lawful sovereignty’ is nevertheless included in that of ‘territory’.
  4. A critical aspect of the tribunals’ assessment pivots on the analysis of the requirement that the investment must be made “in accordance with the laws of the host State”. Both Rigo-Sureda and Kaufmann-Kohler tribunals determined that because Russia’s transitional law preserved the rights of all Ukrainian-registered businesses in Crimea (pending re-registration as Russian businesses), these operated in accordance with Russian law. The opposite, however, could be argued as well. The proper translation of the BIT’s personal scope provides that a covered investor is:

any legal entity, established in accordance with the law in force in the territory of that contracting Party, provided that the legal entity is entitled, in accordance with the legislation of its own Contracting Party, to invest in the territory of the other Contracting Party.

With respect to the peculiar circumstances of the case, the investment temporal scope is here consubstantial to the corresponding BIT requirement that the investment be made in accordance with the domestic law of the host State. Hence, Ukrainian investments in Crimea are covered under the Russia-Ukraine BIT from the moment they comply with the transitional law requiring re-registration (provided, of course, that the process is fair). The point is strengthened (not weakened) by the fact that Ukraine acknowledged the effectiveness of Russia’s sovereignty over Crimea. It could be argued that until re-registration (or at least the beginning of the re-registration iter), pre-2014 Ukrainian investments in Crimea are not covered under the Russia-Ukraine BIT, because genetically not foreign and not made in Russia intuitu personae.

3. Assessment and relevance of States’ treaty practice 

Tribunals have long relied on States’ treaty practice to draw conclusions as to the proper interpretation of the in casu BIT. The approach is in principle impeccable, but its application has occasionally proved perfunctory (e.g., Maffezini).

With reference to Russia’s BIT practice concerning the presence (or lack thereof) of the locution “in accordance with international law” attached to the definition of “territory”, the Kaufmann-Kohler tribunal seemingly held that the wording only appeared in investment treaties concluded by Russia with States sharing maritime borders with it (see here). However, Russia’s BITs with Japan, Kazakhstan, and the US feature no definition of territory at all. And while those with Norway and Turkey do, there is a ‘famous comma’ difference (to clarify, see here), in that in neither case the definition clearly sets apart –i.e., between commas- the legality requirement from the wording referring to EEZ and continental shelf – like, instead, in the case with Ukraine:

The term ‘territory’ means the territory of the Russian Federation or the territory of Ukraine, as well as their respective exclusive economic zone and continental shelf, defined in accordance with international law.

This express difference (i.e., the presence of the two commas), featured in the Russian authoritative text, could be all the more significant given the specific use of commas in Russian to qualify a dependent clause. It seems difficult to offer a good faith interpretation of the text other than ‘territory defined in accordance with international law’. Here, it has been already considered that, when the definition of territory is complemented by the phrasing ‘in accordance with international law’, it is implausible that the BIT coverage may go beyond de jure territory (see Costelloe, here). Hence, a preliminary assessment on the legality of the status of Crimea as part of the Russian territory would become necessary. Yet, this was not the case in any decision so far.

This post aims only at sketching out the three topics. As the decisions may not become public soon, additional thoughts on the basis of what is known, and on the issues raised, are welcome.

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Monica Garcia-Salmones says

May 9, 2018

Thank you for this great post, very informative of the complexity of the situation.

I wonder whether it is necesary to assess the legality of the status of Crimea, or whether it would be enough, or at least less problematic, to deal with the issue outside the BITs. Perhaps a third impartial state, (if there is such a thing in this case) since as you mentioned, there is an elephant, which is quite big.

Matteo Vaccaro-Incisa says

June 8, 2018

Thank you Monica for your comment.
The answer to your question I believe is two-fold (of course):

1. In the context of investment law, where the focus is the (business) relationship between investor and State (and not grand issues of public international law) it may be considered that the BIT extent ratione personae may cover Ukrainian businesses (i.e., they properly qualify as 'foreign investors' in Crimea) as soon as they complete the re-registration process in accordance with Russian law, thus signaling their individual acceptance of Russia's potestas as the new sovereign. This could be a sufficient subjective basis for Ukrainian investors to qualify as foreign investors under the Ukraine-Russia BIT. That is why I wrote that the BIT applicability ratione temporis in this specific case is directly dependent ("consubtantial") on the investor respecting the BIT ratione legis requirement (on (re-)establishment). What I do not share with the decisions is the ipso facto 'reverse application' of the BIT.

2. Outside of the BIT, Ukrainian investors in Crimea have the ECtHR. But again, that avenue cannot seal the underlying question in public international law (it's not the scope of that discipline).
Within the BIT, I think Ukraine did not resort to State-State arbitration on the BIT ratione loci re Crimea as it sensed there was the risk to lose (by the same token, Russia possibly made a mistake in not spontaneously engaging in an arbitration as such before any jurisdictional decision was rendered - possibly asking in the meantime for the stay of those proceedings).
Outside of dispute settlement mechanisms in law there is, of course, politics. That is where the issue will be probably solved (in a not foreseeable future though). And I believe many of us have a rough idea of the terms of the future treaty normalizing again the relations between Russia and Ukraine.