By Elizabeth Whitsitt
February 14, 2010
Three highly anticipated decisions permitting three claimants – all former shareholders of Yukos Oil Corporation OJSC (Yukos) – to proceed to the merits phase of their multi-billion dollar expropriation claim against the Russian government have been released to the public.* Similar in content, all three decisions were issued by the same tribunal, composed of L. Yves Fortier (Chairman), Dr. Charles Poncet, and Judge Stephen M. Schwebel, sitting at the Permanent Court of Arbitration in The Hague.
Cypriot companies, Hulley Enterprises Limited (Hulley) and Veteran Petroleum Limited (VPL) along with Yukos Universal Limited (YUL), a firm organized under the laws of the Isle of Man, commenced arbitral proceedings against the Russian Federation in February, 2005.
Problems between the parties arose two years earlier in the summer of 2003. According to the claimants, measures taken by Russia, including criminal prosecutions, tax reassessments, and its annulment of Yukos’ merger with Sibneft, Russia’s fifth largest oil company, left their investment in Yukos virtually worthless. Subsequently, the claimants brought expropriation claims against Russia under the Energy Charter Treaty (ECT).
While addressing various issues related to the tribunal’s jurisdiction, central to the Yukos jurisdictional dispute was the extent to which the ECT applied to Russia. Russia signed the ECT in 1994 but its Parliament never ratified it. Under Article 45(1) a party, like Russia, that has signed but not ratified the ECT is bound “…to apply [the] [t]reaty provisionally…to the extent that such provisional application is not inconsistent with its constitution, laws or regulations.”
Asserting that it was not bound by dispute settlement provisions in the ECT because they were inconsistent with its Constitution and laws, the Russian Federation argued that the tribunal had no jurisdiction to consider the merits of the claims raised in the arbitration.
In response, the claimants raised two principal counter-arguments. First, the claimants argued that Russia could not limit provisional application of the ECT because it had failed to make a formal declaration to that effect under either Article 45(2) or 45(1). In the alternative, Yukos’ former shareholders contended, that the dispute settlement provisions of the ECT were not inconsistent with Russia’s Constitution or laws.
In its decision, the results of which have been widely publicized, the tribunal ultimately sided with the claimants. But it was not a complete victory for the shareholders of what was once considered Russia’s largest oil company.
Focusing on the plain and ordinary meaning of ECT Article 45, the tribunal rejected the claimants’ first argument that would have made a state’s limitation of the ECT’s provisional application dependent on a formal opt-out declaration. Specifically, the tribunal held that “[n]othing in the language of Article 45 suggests that the limitation clause in Article 45(1) is dependent on the mandatory making of a declaration under Article 45(2).” Similarly, the tribunal observed that Article 45(1) did not expressly require any form of opt-out declaration or notification in order for a signatory party to limit the ECT’s provisional application.
Subsequently, the tribunal focused its analysis on whether the dispute settlement provisions of the ECT were inconsistent with Russia’s Constitution or laws. As a preliminary matter, the tribunal clarified when a signatory state could opt-out of the ECT’s provisional application under Article 45(1). On this point, the parties’ positions differed dramatically.
According to Russia, it could be provisionally bound by each provision of the ECT, but only to the extent performance of the obligation created by that provision was not inconsistent with its Constitution, laws or regulations. Based on this “piecemeal” approach, Russia contended that it was not bound by dispute settlement provisions in the ECT.
The claimants, on the other hand, asserted that Article 45(1) operates on an “all-or-nothing basis.” In particular, the claimants argued that each signatory agrees to be bound by the
ECT if the principle of provisional application is consistent with its domestic law. If, on the other hand, a signatory’s domestic law does not allow it to be bound by way of provisional application, it may decline to assume any international obligations under the ECT. Citing Russia’s long-standing practice of provisionally applying international treaties, the claimants challenged Russia’s contention that the dispute settlement provisions of the ECT were inconsistent with its Constitution or laws.
For its part, the tribunal eventually sided with the claimants. Specifically, the tribunal found that “…by signing the ECT, the Russian Federation [had] agreed that the treaty as a whole would be applied provisionally…unless the principle of provisional application itself was inconsistent ‘with [Russia’s] constitution, laws or regulations.’”
There was no significant debate between the parties on the issue of whether the principle of provisional application was inconsistent with Russia’s Constitution, law or regulations. The Tribunal therefore had no difficulty in concluding that the principle of provisional application was perfectly consistent with Russia’s Constitution, laws and regulations. Accordingly, the Tribunal found that the whole of the ECT applied provisionally in the Russian Federation until October 18, 2009 when Russia’s formal announcement terminating its provisional application of the ECT came into effect.
Under Article 45(3) of the ECT, for energy investments made prior to October 18, 2009, Russia remains bound to the treaty for 20 more years, allowing investors to arbitrate disputes with Russia concerning those investments.
The tribunal will now proceed to hear the merits of former Yukos shareholders’ claims.
In a related development, the European Court of Human Rights has postponed hearing the merits of another claim launched against Russia by Yukos. Initially scheduled for January 14, 2010 the hearing has been adjourned until March 4, 2010 due to the unavailability of both Russia’s ad hoc judge, Andrei Bushev, and its representative government agent, Georgy Matyushkin.**
* Interim Award on Jurisdiction in Hulley Enterprises Limited (Cyprus) v. The Russian Federation is available here: http://ita.law.uvic.ca/documents/HELvRussianFederation-InterimAward-30Nov2009.pdf
Interim Award on Jurisdiction in Yukos Universal Limited (Isle of Man) v. The Russian Federation is available here: http://ita.law.uvic.ca/documents/YULvRussianFederation-InterimAward-30Nov2009.pdf
Interim Award on Jurisdiction in Veteran Petroleum Limited (Cyprus) v. The Russian Federation is available here: http://ita.law.uvic.ca/documents/VPLvRussianFederation-InterimAward-30Nov2009.pdf
Previous ITN Reporting on Yukos Dispute:
“The merits of former Yukos shareholders’ expropriation claim will be heard,” By Elizabeth Whitsitt, Investment Treaty News, 13 January 2010, available here:
“Spanish fund to open new front in arbitration against Russia over Yukos,” By Luke Eric Peterson, Investment Treaty News, 19 July 2006, available here:
“More Spanish portfolio investors line up to sue Russia over Yukos,” By Luke Eric Peterson, Investment Treaty News, 13 October 2006, available here: