Awards and decisions

UK firm victorious in dispute with Russia, but damages much less than claimed
RosInvestCo UK Ltd.  v. The Russian Federation, SCC Case No. Arb. V079/2005

Lise Johnson

In an award dated 12 September 2010, the tribunal in RosInvestCo v. Russian Federation issued an award in which it found that the Russian Federation had unlawfully expropriated RosInvestCo’s property, but muted the claimant’s victory by awarding it only US$3.5 million of its US$232.7 million claim.

The award is particularly notable for its treatment of the most-favored nation (MFN) provision, and specifically the degree to which that provision allows investors to “cherry-pick” favorable clauses from bilateral investment treaties (BITs) while disregarding provisions that might narrow the rights granted in those clauses.

The issue of the scope of the MFN provision first arose in the tribunal’s October 2007 decision on jurisdiction. In that decision the tribunal determined that the governing UK-Soviet BIT alone did not grant it the power to hear the dispute. However, the tribunal concluded that RosInvestCo could use the MFN provision in the UK-Soviet treaty to incorporate a broader dispute settlement provision found in the BIT between Denmark and Russia.

In the 2010 award, the tribunal again addressed RosInvestCo’s ability to rely on the broader dispute resolution provision in the Denmark-Russia BIT. This time, the tribunal considered whether it would also have to take into account limitations of the Denmark-Russia BIT’s dispute settlement provisions; specifically the carve-out for disputes related to taxation.

Despite saying that it did not need to definitively resolve the issue, in its award the tribunal effectively disregarded those limitations.

Background

Beginning in December 2003, Russian tax authorities began re-assessing Yukos Oil Corporation’s tax liabilities, eventually claiming billions of dollars in back taxes and penalties against the company. By 16 November 2004, those tax assessments amounted to roughly US$15 billion, and the government had taken steps to collect that sum.

As Yukos’ shares plummeted in value, RosInvestCo, an English corporation, purchased a total of seven million shares in the company in late 2004, allegedly on the basis that the market had overestimated the risks to Yukos.

However, Russia proceeded with its efforts to collect the taxes and associated penalties, which by the middle of December 2004 had grown to an amount of roughly US$20 billion. Russia began by auctioning a key part of Yukos’ business on 19 December 2004. Yukos’ remaining assets were then liquidated in a series of auctions, with the final auction held on 15 August 2007.

RosInvestCo submitted a request for arbitration in October 2005, asserting that the tax assessments, penalties, and enforcement actions expropriated RosInvestCo’s property in violation of the governing UK-Soviet BIT.

On the merits, Russia defended the claim on various grounds, including that the measures were not expropriatory because they were legitimate exercises of its police and taxation powers; and that the government’s actions had not caused the investor any substantial or permanent losses, nor interfered with any legitimate expectations.

Analysis of the award

According to the tribunal, whether Russia’s tax assessments, penalties, and enforcement actions constituted an expropriation depended on whether they were (1) bona fide, (2) non-discriminatory, and (3) non-confiscatory.

The tribunal found that “some of Respondent’s explanations and arguments [justifying its tax assessments and enforcement actions] seemed plausible,”[1] that the 19 December 2004 auction appeared “to have been conducted within the limits of discretion awarded by Russian law,”[2] and that the subsequent bankruptcy auctions seemed consistent with Russian law and even “the higher standards to be applied under the IPPA.”[3]

Ultimately, the tribunal concluded that the “Respondent’s measures, seen in their cumulative effect towards Yukos” did not pass the test of being bona fide, non-discriminatory, and non-confiscatory, and therefore constituted an expropriation.[4] However, the tribunal declined to determine whether any of the challenged measures, taken alone, would constitute a breach of the BIT.

With respect to the Russia’s arguments regarding RosInvestCo’s legitimate expectations and its purported losses (or, more accurately, the lack of either), the tribunal determined that such issues related to the amount of damages that would be awarded, not whether there had in fact been an expropriation. That the tribunal found Russia’s arguments on those points persuasive is reflected in its decision to award RosInvestCo just a fraction of its claimed sum.

The lengthy award’s analysis of the merits is notable for its treatment of such issues as the bounds of legitimate government regulatory freedom, the elements of an expropriation claim, and determinations of damages. Yet the award is particularly remarkable for its treatment of jurisdiction and, within that broad issue, the specific matter of whether and how a clause excepting “taxation” from the scope of the Denmark-Russia BIT might affect the tribunal’s ability to rely on that agreement’s dispute resolution provisions (in conjunction with the UK-Soviet BIT’s MFN article) to hear RosInvestCo’s claims.

Analysis:  tribunal allows the investor to benefit from the MFN provision

As noted above, the tribunal determined in its 2007 jurisdictional decision that the governing UK-Soviet BIT, standing alone, did not grant it the authority to determine whether there had been an expropriation. The tribunal found, however, that it could exercise jurisdiction over the dispute by using an MFN provision in the UK-Soviet BIT to incorporate a broader dispute resolution provision contained in the BIT between Denmark and Russia.

After the decision on jurisdiction was issued, Russia asserted that although the Denmark-Russia BIT contained broader investor-state dispute resolution provisions, those provisions were limited by an exception in Article 11(3) that carved out “taxation” from the scope of the agreement. Thus, according to Russia, because (1) the Denmark-Russia BIT, upon which the tribunal based its jurisdiction, would not allow investor-state arbitration of disputes relating to “taxation,” and (2) RosInvest’s claims were all based on Russian taxation, the tribunal did not have jurisdiction over the dispute.

In response, RosInvestCo attempted to frame its claims so as to remove the tax assessments from the crux of the dispute. It argued that the tax assessments were pretexts for the expropriation, but did not themselves expropriate its property. According to the claimant, its property was expropriated through the auctions held to collect the tax assessments. RosInvestCo also cited the decision in Renta 4 S.V.S.A. v. The Russian Federation for support. In that case, Russia had asserted essentially the same argument regarding the impact of the Article 11 “taxation” exception as it was asserting in RosInvestCo. However, the Renta tribunal rejected it in no uncertain terms, declaring that “[t]o think that ten words appearing in a miscellany of incidental provisions near the end of the Danish BIT would provide a loophole to escape the central undertakings of investor protection would be absurd.”[5]

The RosInvestCo tribunal acknowledged that although it had already determined it had jurisdiction based on Article 8 of the Denmark-Russia BIT, “it could be argued that … [t]he Tribunal is bound to import Article 8 in its context, i.e., subject to Article 11.”[6] Yet instead of accepting or rejecting such an argument, the tribunal opted to leave the issue unresolved with the declaration that its resolution was “irrelevant”.[7] The tribunal explained that, when assessing liability, it would not consider whether there was “an expropriation by way of taxation,” but instead whether the “cumulative combination” of the taxation measures and the consequential auctions expropriated RosInvestCo’s property.[8] According to the tribunal, such a “totality of the circumstances” approach that subsumed the taxation measures within a broader group of challenged conduct obviated the need for it to determine what impact, if any, the Article 11 taxation exception had on its jurisdiction.

The RosInvestCo and Renta cases fuel the debate over the appropriate scope of the MFN clause. In effect, both decisions allow an investor covered under the “basic” UK-Soviet BIT to use that treaty’s MFN provision to enjoy the protections of a non-existent “super treaty”—a treaty composed only of the favorable protections from other available agreements, and not the limitations countries insert in those agreements to balance the rights given to investors with their rights and obligations as governments.

Significantly, by allowing a UK investor to enjoy the more favorable dispute resolution provisions of the Denmark-Russia BIT unhinged from that agreement’s taxation or other exceptions, the UK investor would then enjoy more favorable treatment then a Danish investor covered by the Denmark-Russia BIT. That begs the question: if a Danish investor was to bring a claim under the Denmark-Russia BIT, would the Danish investor be able to cite the treatment actually accorded to UK investors as a basis for bypassing the Article 11 taxation exception?

Arguably, the approach effectively allowed in RosInvestCo (and explicitly sanctioned in Renta) converts the MFN provision from a tool to prevent discrimination between foreign investors from different countries, to one that ratchets up treaty protections in a manner beyond the contracting parties’ intentions.

Panama cleared of claims by US investors over a power plant dispute
Nations Energy Inc., et al. v. Republic of Panama, ICSID Case No. ARB/06/19

Jennifer Donofrio

A group of American investors have been ordered to pay US$4.6 million to Panama as a partial recovery for the costs and expenses Panama sustained in an ICSID dispute.

In its 24 November 2010 award, drafted in Spanish, a majority of the three-member tribunal rejected all claims by Nations Energy Inc., Jaime Jurado, and Electric Machinery Enterprises, Inc—a consortium of US investors in a Panamanian power plant.

The claimants had a stake in COPESA, a Panamanian energy corporation under agreement to construct and operate a power plant. Construction of the COPESA plant began in 1998, when a Panamanian tax law was in effect that was particularly favorable to foreign investors. However, Panama repealed the law in 1999.

Several years later, the investors sought to sell their shares and secure the transfer of the tax credits as well.  According to claimants, correspondence from the DGI (The General Directorate of Intelligence, Panama’s Internal Revenue Service) seemed to indicate—hypothetically—that transferring the tax credits would be permissible. This approval came in response to the claimants’ inquiry regarding tax credits connected to loans issued by a bank. The claimants’ query did not mention indirect investments or the possibility of COPESA issuing the shares and the associated tax credits.

The claimants’ specific request involving COPESA and tax credit transferability was denied in 2005 in accordance with current Panamanian law. Since transferring tax credits was forbidden, according to claimants, selling shares and bonds became nearly impossible, and contributed to COPESA’s financial ruin.

Under the U.S-Panama BIT, the claimants cited unfair and inequitable treatment and indirect expropriation in relation to the refusal to allow the transfer of tax credits to third parties. They sought a US$62 million damages award against Panama in addition to reparations for costs, attorneys’ fees, and interests.

In rejecting the claim of unfair and inequitable treatment, the tribunal noted that the BIT permits claims over “matters of taxation” in just a few narrow circumstances, such as alleged expropriation. Tax policies, the tribunal determined, fell outside the parameters of a fair and equitable treatment claim.

Next, the tribunal discussed whether Panama’s refusal to allow the claimants to transfer tax credits to a third party qualified as an expropriation under the BIT. The tribunal ruled that a “hypothetical right » to transfer tax credits was not a “true attribute” of property ownership that justifies an expropriation claim.  The tribunal therefore rejected the claim of expropriation.

In a dissenting opinion, José María Chillón Medina, the arbitrator appointed by the claimants, expressed his disagreement on some decisions of his colleague arbitrators Claus von Wobeser (Panama appointee) Alexis Mourre (President).  He diverged from the majority’s ruling on fair and equitable treatment, the tax credits, and the arbitration costs.

Medina considered the BIT’s provision on fair and equitable treatment as a requirement for a specific standard of fairness, even in areas that involving taxation. Otherwise, he argued, a large purpose of a treaty—to protect investments—could easily be rendered meaningless.

Furthermore, Medina emphasized that the tax credits were in effect when the claimants initiated their investments.  He acknowledged the importance of State sovereignty over financial policy, but argued that a State can change a law while preserving rights that were granted by a previous regulation.

In addition, Medina reasoned that the claimants held a reasonable expectation of a stable legal framework that would protect against the investment’s loss of value. In his opinion, the tribunal’s decision hindered the investment environment and infringed upon international responsibility.

Finally, Medina disagreed to claimants bearing the full cost of the arbitration. He pointed out that the defendants also brought claims that the tribunal rejected. Therefore, the claimants should not have been burdened for all of the arbitration costs as both parties raised claims that the tribunal ultimately denied.

Dutch claimants clear jurisdictional hurdle in claim against Venezuela
Cemex v. Venezuela ICSID Case No. ARB/08/15

Jennifer Donofrio

A tribunal of the International Centre for Settlement of Investment Disputes (ICSID) has ruled that Venezuela’s 1999 investment law does not indicate consent to ICSID arbitration. Nonetheless, the tribunal found it does have jurisdiction to hear a claim by Dutch investors under the Netherlands-Venezuela BIT.

Cemex Caracas and Cemex Caracas II complain that their indirectly-owned cement plant was expropriated without compensation.

The first claimant, Cemex Caracas Investments BV, and its wholly owned subsidiary, Cemex Caracas II Investments BV, were both incorporated in the Netherlands.

Cemex Caracas II owned 100% of the shares in a Cayman Islands company, Vencement Investments, which in turn owned 75.7% of the shares in Cemex Venezuela (CemVen), a cement company incorporated and operating in Venezuela. (Claimants are hereinafter referred to as “Cemex”).

Cemex claimed that an ICSID tribunal had jurisdiction to hear the case under Venezuelan investment law and under the Netherlands- Venezuela BIT. In particular, the claimants pointed to Article 22 of Venezuela’s investment law, arguing it provided advance consent to international arbitration with foreign investors. Both of these claims were contested by Venezuela.

Venezuela argued that the BIT required that the investment be « of » the claimants.  However, the investment in dispute was held through the intermediary Cayman Islands company; therefore, according to Venezuela, the investment in CemVen did not meet this criterion.

The tribunal sought clarification by examining state intent at the time of the investment law’s enactment. At the time of the law’s adoption, Venezuela had already ratified 17 BITs. The previous BITs, in plain language, offered either unconditional consent to ICSID arbitration or consent to ICSID upon the concerned national’s request.

The tribunal concluded that if Venezuela intended to give advance consent to ICSID arbitration, the drafters of Article 22 would have made it explicit. Thus, it deemed that Venezuela’s investment law does not consent to ICSID jurisdiction.

However, the tribunal reasoned that the BIT covers indirect investments. It cited similar BIT interpretations in preceding cases dealing with indirect ownership, such as Siemens v. Argentina, in determining its jurisdiction over the proceeding.  The tribunal ruled that the BIT entitled Cemex to assert claims for alleged treaty violations of their indirect investments.

This is the second ICSID tribunal to determine that Article 22 does not open the door to ICSID arbitration. A similar conclusion was drawn in a 10 June 2010 jurisdictional decision involving subsidiaries of Exxon-Mobil and Venezuela.[9]

The tribunal deferred determination of the proceeding’s costs to a later stage of the arbitration.

Tajik government breaches Energy Charter Treaty, but investor’s claim is rejected
Mohammad Ammar Al-Bahloul v. Republic of Tajikistan, SCC Case No. V (064/2008) (ECT)

Jennifer Donofrio

A Stockholm Chamber of Commerce tribunal has rejected an Austrian investor’s claims in a dispute with Tajikistan over energy-exploration licenses, despite finding that the Tajik government had breached the Energy Charter Treaty (ECT).

The investor, Mohammad Ammar Al-Bahoul, entered into gas and oil exploration discussions with the Tajikistan government in 1998.  Although the permits were not secured, energy exploration commenced.

Mr. Bahoul claimed he frequently requested, and the Tajik government frequently promised, the necessary licenses and permits.  In the wake of mounting technical and management issues, the claimant ceased operations. The claimant also discovered that other organizations secured access to exploratory areas that had been offered exclusively to him.

A partial award in September 2009—only recently made public—affirmed that the Tajik government violated the ECT when the energy exploration licenses it promised never emerged. That decision was affirmed in an 8 June 2010 final award.

Yet while the claimant had asked the tribunal to order Tajikistan to issue the licenses for exploration, that request was considered unfeasible given Tajikistan’s lack of availability and cooperation in the proceedings, the time that had lapsed since claimant’s initial license requests, and the presence of other companies in the territories linked to the licenses.

In lieu of specific performance, the claimant requested damages of approximately US$230 million and nearly US$240 million in interest.  But the tribunal ruled that the claimant based the figures on hypothetical predictions of profit and it declined the damage request.

However, the tribunal ordered Tajikistan to pay a portion of the claimant’s legal and arbitration costs. It also left open a possibility for the claimant to bring allegations for costs he may sustain “in future circumstances” given Tajikistan’s “ongoing breach” of ECT obligations.