Yukos Universal v. Russia (PCA Case No. AA 227)
Summary by Natalia Charalampidou, citation details below.
Two decisions were rendered in this proceeding: the interim award on jurisdiction and admissibility of November 30, 2009; and the final award issued on July 18, 2014. The interim award was quashed by The Hague District Court, whereas currently, the Court of Appeal of The Hague is considering whether to reinstate the award.
Invoked instruments, purported breaches & administering institution:
This was an arbitration under the ECT, in particular arising out of an alleged breach of the standards of fair and equal treatment, non-discriminatory measures (Art. 10(1) of the ECT) (¶¶ 25, 27, 108.63, 108.64 of the final award) and expropriation (Art. 13(1) of the ECT) (¶¶ 63, 108.67 of the final award). The dispute was submitted to a PCA arbitral tribunal established under the UNCITRAL Arbitration Rules according to Art. 26(4)(b) of the ECT.
Any third parties or parallel proceedings:
This arbitral proceeding, along with Hulley Enterprises v. Russia (PCA Case No. AA 226 - see below under No 5.) and Veteran Petroleum v. Russia (PCA Case No. AA 228 - see below under No 6.) were heard in parallel with the full participation of all parties at all relevant stages of proceedings and discussed as a single set of proceedings. Yet, the tribunal noted that each of the three claimants maintained separate claims in separate arbitrations that required separate awards (¶ 2 of the final award). Mention to "claimants" herein indicates Yukos Universal, Hulley Enterprises and Veteran Petroleum.
Claimant was Yukos Universal Limited ("Yukos Universal"), a company incorporated on September 24, 1997 under the laws of the Isle of Man, a dependency of the United Kingdom. Respondent was the Russian Federation ("Russia") (¶¶ 1, 404-405).
The factual matrix of this mammoth arbitration was far from straightforward. As it was established during the phase of the merits, this was described in the final award and not in the interim award. Briefly, it involved a vertically integrated energy entity, a "tax optimization" scheme, massive tax reassessments, VAT charges, fines, criminal investigations, the unwinding of a merger, bankruptcy proceedings and withdrawal of Yukos' audits (¶ 64 of the final award).
At the center of this dispute lay OAO Yukos Oil Company ("Yukos"), a fully privatized, vertically integrated group engaging in exploration, production, refining, marketing and distribution of crude oil, natural gas and petroleum products. Yukos had three main production subsidiaries: Yuganskneftegaz ("YNG"), Samaraneftegaz and Tomskneft (¶¶ 1, 71 of the final award). In 2003 Yukos had around 100,000 employees, six main refineries and a market capitalization of over USD 33 billion. At the same time its merger with Russia's fifth largest oil company Sibneft was projected (¶ 64 of the final award). At the outset of the dispute, Mr Mikhail Khodorkovsky was the principal shareholder and CEO of Yukos (¶ 5 of the final award). Yukos' outstanding shares were held by Yukos Universal (approximately 2.6%), Hulley Enterprises Ltd (approximately 56.3%) and Veteran Petroleum Ltd (approximately 11.6%) (¶ 69 of the final award).
Yukos had put into effect a "tax optimization" scheme, taking advantage of the legislation in place in low-tax regions of Russia, a kind of "domestic-offshore territories", according to claimant's arguments, whereas respondent claimed that this was aimed to evading taxes and thus abusing the law (¶¶ 78, 79, 277 of the final award). In late 2003 Russia's tax authorities performed tax re-audits of Yukos and issued five tax reassessments for the years 2000 to 2004 resulting into tax bills of more than USD 24 billion (¶¶ 88, 92, 517 of the final award). It was established that within Yukos there was at least some awareness that the company's tax optimization was vulnerable and that a successful challenge to its tax structure could result in substantial tax claims and possibly even criminal liability (¶ 513 of the final award). At the time of the reassessments, Yukos' assets, as well as YNG's assets, in Russia and abroad were frozen, and applications to release assets in order to meet its tax liabilities as well as proposals to settle the tax claims were ignored (¶¶ 94, 95 of the final award). The tax reassessments were followed by VAT for 2000 to 2004 for a total of USD 13.59 billion (¶ 589 of the final award) and by "willful offender" and "repeat offender" fines for a total of USD 8.5 billion (¶¶ 599, 601 of the final award).
In July 2003 a series of criminal investigations were initiated by Russian authorities against Yukos management and activities. Claimant purported that Yukos' employees, auditors, in-house counsels, lawyers were targeted in a discriminatory manner (¶ 81 of the final award), an argument that respondent denied (¶ 86 of the final award). Still, it was established that late in 2002 a special unit was put up at the General Prosecutor's office exclusively to the purpose of "fabricating evidence" against Mr Khodorkovsky and Yukos (¶¶ 767, 799 of the final award). The events that took place included arresting senior members of Yukos' management while hospitalized or at gunpoint by armed special forces unit, raiding the office of the registrar of Yukos' shares, confiscating "lorry loads of documents" of Yukos without leaving copies or any record of the documents seized and confiscation of computer servers (¶¶ 771, 773, 778, 784 of the final award). Following a trial, which was criticized for lack of due process, members of Yukos' management were sentenced to imprisonment of nine years for fraud and tax evasion (¶ 785 of the final award), whereas later the same persons in a separate trial received a sentence of imprisonment for 13.5 years for theft, embezzlement and money laundering. The second trial was described as "travesty of justice" by the International Bar Association (¶ 790 of the final award). Mid-level managers and employees of Yukos were investigated, whereas during one interrogation they were presented with questions for which the investigator had already prepared their answers (¶ 788 of the final award). Another executive of Yukos after having been arrested at his home and charged with embezzlement, he was kept in pre-trial detention for almost three years in "simply monstrous" conditions (¶ 789 of the final award). Claimant also argued that respondent's actions constituted harassment and intimidation that was intended to lead to the expropriation of Yukos' assets. Respondent contended that same actions were triggered by illegal acts committed by Yukos and its officers and shareholders and were in line with the authorities' normal practice and under the appropriate procedural protection (¶¶ 81, 83, 86 of the final award). Respondent further admitted that this was a large-scale fraud investigation, where "not everything [was] pretty" (¶ 811 of the final award).
Turning to the merger between Yukos and Sibneft, in late 2003, shortly before the approval of the merger's final details and after the arrest of senior members of Yukos' management, Sibneft shareholders announced their intention to halt the merger process (¶¶ 823, 839 of the final award). The merger was invalidated through court judgments annulling the share issue. In 2005 Sibneft was acquired through the state-owned Gazprom (¶¶ 824, 845, 848 of the final award).
Consequently to the failure to set the tax debts, YNG, Yukos' main oil production subsidiary, underwent forced sale (¶¶ 88, 98 of the final award). Many aspects of this sale were "more than suspect", constituting one of the most striking episodes in the saga of Yukos' demise (¶ 986 of the final award). On October 6, 2004, YNG was valued between USD 18.6 and 21.1 billion by investment bank ZAO Dresdner Bank and by JP Morgan (¶¶ 88, 98, 993 of the final award). On October 11, 2004 bailiffs recommended YNG to be sold at a price reflecting 60% discount of said valuation. Later same month YNG received a tax reassessment for the year 2001, a tax penalty for the year 2002 and a tax assessment for the year 2003 in total of USD 4.62 billion (¶¶ 994, 996 of the final award). The auction of YNG was set for December 19, 2004, a Sunday, with the opening price set at USD 8.65 billion (¶ 997 of the final award). Two companies registered at the auction: Gazpromneft and Baikal. The latter was a company incorporated on December 6, 2004 with capital of USD 359, which did make the required deposit of USD 1.77 billion (¶¶ 999, 1002, 1024 of the final award). On the day of the auction Baikal opened the bidding at USD 9.35 billion. The representative of Gazpromneft asked for a recess and left the room to make a call. Upon his return, Baikal was declared the winner with its opening bid (¶ 1003 of the final award). Three days later, on December 22, 2004, Baikal was bought by the state-owned company Rosneft (¶ 1006 of the final award). Very soon thereafter, a significant proportion of the tax assessments levied against YNG were set aside or vastly reduced by Russian courts (¶ 1009 of the final award).
Thereafter, a syndicate of foreign bank creditors initiated bankruptcy proceedings against Yukos. These proceedings were interweaved with two loan agreements in total of USD 2.6 billion that Yukos made in September 2003 in connection with the Sibneft merger (¶¶ 1047-1049 of the final award). YNG, by then owned by Rosneft also filed a bankruptcy application. As a result, Yukos was declared bankrupt by August 4, 2006 and its assets were nearly all acquired by state energy entities (¶¶ 88, 101, 102 of the final award).
Finally, in June 2007 the auditors of Yukos, PwC, withdrew all of its audits from 1995 to 2004 on the basis of "new information" that caused it to lose confidence in Yukos' management (¶¶ 88, 104, 1207 of the final award). This was preceded by PwC's decision to no longer audit Yukos in April 2004, initiation of court cases against PwC for tax violations in 2006, police raid of its Moscow offices in March 2007, imposing fines and bringing criminal charges against its employees also in March 2007 (¶¶ 1197, 1199, 1200, 1203 of the final award). One day after the public announcement of the audits' withdrawal criminal charges were dropped, whereas later court cases were resolved in PwC's favor and its fines were refunded (¶¶ 1210, 1217 of the final award).
A. Interim Award on Jurisdiction and Admissibility dated November 30, 2009
The issues that arose for analysis and decision at this stage of the proceedings were the following: (a) whether the provisional application of the ECT in Russia (Art. 45 of the ECT) provided a basis for the tribunal's jurisdiction in this arbitration; (b) whether claimant was a protected investor with an investment under the ECT; (c) whether claims were barred by the denial of benefits clause (Art. 17 of the ECT); (d) whether all or some of the claims were barred by the taxation measures carve-out (Art. 21 of the ECT); and (e) whether all or some of the claims were barred by the fork-in-the-road provision (Art. 26(3)(b)(i) of the ECT).
Interpretation of Art. 45 of the ECT was the central issue in the first phase of the arbitration (¶ 244). The tribunal first considered whether the declaration under Art. 45(2) of the ECT had to be made in order for a signatory to benefit from the limitation clause of Art. 45(1) of the ECT (¶ 249). Having regard to Arts. 31 and 32 of the VCLT and in view of the plain ordinary meaning of the provisions in question, the tribunal decided that the declaration referred to in Art. 45(2) of the ECT is not linked to Art. 45(1) of the ECT (¶¶ 260-264), in line with Kardassopoulos (¶ 269). Further, it applied the same rules of interpretation and concluded that no prior notification is required under Art. 45(1) of the ECT (¶ 283), whereas respondent was not estopped from seeking to rely on said provision. An estoppel, the tribunal underscored, requires both consistent and clear support (North Continental Shelf Cases), and in the present case the latter was missing (¶¶ 286, 287). The tribunal then considered the effect of the limitation clause in Art. 45(1) of the ECT. It applied the same rules of interpretation and opined that, by signing the treaty, respondent agreed that the treaty as a whole would be provisionally applied, once again in line with Kardassopoulos (¶¶ 290, 301, 309, 311). It added that the pacta sund servanda rule and Art. 27 of the ECT strongly militate against an interpretation of Art. 45(1) of the ECT that would open the door to a signatory to avoid provisional application on the ground that one or more provisions of the treaty is contrary to its domestic law (¶ 313). In addition, this would undermine the principle that provisional application creates binding obligations (¶ 314). Regarding the matter of inconsistency of provisional application with Russian law, the tribunal concluded that the principle of provisional application is recognized in the respondent, as it was in the Soviet Union (¶¶ 331, 338, 370). In this regard, the tribunal also addressed the temporal issue, that being the moment in time at which a signatory's domestic legal system should be examined in order to determine said inconsistency. It found that this moment should be the time of signature of the ECT (¶¶ 340, 343). Any other interpretation, the tribunal reiterated, would allow a state to modify its laws in order to escape an obligation that it has assumed by agreeing to the provisional application of the treaty. That was not acceptable by the tribunal (¶ 344). Consequently, the tribunal concluded that the ECT in its entirety applied provisionally in Russia until October 19, 2009 and that Parts III and V of the Treaty remain in force until October 19, 2029 for any investments made prior to October 19, 2009. Thus, respondent was indeed bound by the investor-state arbitration provision invoked by claimant (¶ 395).
Then, the tribunal addressed the issue of whether claimant is a protected investor with an investment under the ECT. It clarified that for a company to qualify as a protected investor under Art. 1(7) of the ECT, it is merely required to be organized under the laws of a Contracting Party (¶ 411), citing Saluka v. Czech Republic, Tokios Tokelés v. Ukraine and Plama. Assertions regarding ownership and control were to be examined in the context of Art. 17 of the ECT (¶¶ 414, 416, 412). Regarding the notion of investment, the tribunal did not accept respondent's argument that simple legal ownership of shares did not qualify as an investment under Art. 1(6) of the ECT, as it found no support for such an interpretation in the text (¶ 430).
Turning to the denial of benefits clause (Art. 17 of the ECT), the tribunal stressed that the text of this provision refers to "this Part". As the provision for dispute settlement is found in Part V of the treaty and not "this part", the tribunal noted that the arguments of the parties were not on the point and adopted the reasoning of Plama (¶¶ 441-443). It proceeded with accepting that Art. 17(1) of the ECT reserves such a right and, thus, exercise of this right is necessary for it to effect denial. In the present case, respondent did not do so (¶ 456). Retrospective denial was considered inacceptable in view of the objectives and principles of the ECT (¶ 458). The tribunal, after examining the raised trust issues, found that companies of Gibraltar (GML Limited) and Guernsey (Palmus Trust Company Limited), which were UK nationals, owned and controlled claimant. Hence, Art. 17(1) of the ECT was not applicable to claimant (¶ 537).
The tribunal decided to defer its definitive interpretation on both the taxation measures carve-out (Art. 21 of the ECT) and the "clean hands" objection to the phase of the merits, when it would have a fuller understanding of the facts (¶ ¶ 585, 601). However, it found respondent's argument regarding the fork-in-the-road provision unconvincing, as the national courts apply domestic law and the present proceedings the ECT (¶ 600).
B. Final award dated July 18, 2014
The tribunal reached the following factual conclusions. The tax optimization scheme was examined solely as a matter of fact and not as if it were a Russian court of appeal (¶ 276). In this regard, the contested issue was the "anti-abuse" doctrine as established and applied by federal courts in Russia (¶ 280). More specifically, crucial was the question whether said doctrine existed at the time relevant to Yukos' tax optimization scheme (¶ 293). The tribunal took the view that good faith is presumed (¶ 306). Should the tax authorities establish bad faith by a taxpayer in a particular case, then this tax payer may lose specific statutory benefits, such as tax deductions or exemptions. However, he may not lose his constitutional rights, the tribunal noted (¶ 307). Following examination of the history of the Yukos trading entities (¶¶ 326-483), the tribunal concluded that said doctrine did in fact exist. Thus, parties acting unreasonably and not in good faith constituted a ground for reassessment of their tax liabilities (¶¶ 497-498, 611).
Thereafter, the tribunal addressed the specific tax assessments made, the manner in which they were made, their reasoning and the manner of their enforcement (¶ 503). Having already noted that Yukos was aware of the vulnerability of its tax optimization and the possibility of substantial tax claims (¶ 513), it focused on the question, whether claimant established that the tax assessments, including their enforcement, were more consistent with the conclusion that they evidence a punitive campaign against Yukos and its principal beneficial owner with sanctions entirely disproportionate to the company's tax liability (¶ 514). Regarding the taxes, the tribunal concluded that the re-attribution of taxes was linked to respondent's determination to impose "a massive VAT liability" on Yukos. It reached this conclusion on two grounds. Firstly, as Yukos' files were in the tax authorities' hands, respondent had the burden to prove that all Yukos' entities were abusing the low tax regime and it failed to meet said burden. Secondly, re-attribution of taxes was unprecedented at that time (¶ 648). The tribunal then observed with reference to the VAT, that there was no element in Yukos' scheme suggesting that it benefitted improperly or illegally from a VAT exception or a 0% rating (¶ 651). Further, the denial of Russian authorities to exempt VAT was beyond necessary to the purpose of attaining a legitimate objective of collecting taxes (¶ 678). Thus, VAT liabilities did constitute adverse treatment (¶ 700). Thereafter, the tribunal held that the imposed "willful offender" fines, were clearly improper, insofar related to VAT due to the lack of basis for VAT imposition (¶ 728). Same was the conclusion on the "willful offender" fines that were related to revenue-based taxes and the "repeated offender" fines (¶¶ 729, 744). These findings led the tribunal to the conclusion that respondent's primary aim was not to collect taxes but "to bankrupt Yukos and appropriate its valuable assets" (¶ 756). This was the tribunal's central and important conclusion (¶ 759).
The tribunal then turned to Yukos' attempts to settle the tax debts. It did not consider unreasonable Yukos' decision to delay payment of its tax debts until the appeals decisions in its challenge proceedings were issued (¶ 945). It did find bailiff's failure to respond to Yukos' settlement offers in July 2004 to be inexcusable (¶ 955). In fact, the tribunal decided that Yukos' settlement offers represented a good faith attempt to initiate a dialogue with respondent regarding payment of its tax arrears (¶ 975). It was further convinced that respondent neither showed any interest in Yukos' offers (¶ 978), nor considered seriously any of Yukos' proposals (¶ 979). Hence, the tribunal had doubts as to whether respondent's concern was indeed the collection of taxes (¶ 980).
With regard to the criminal investigations, the tribunal was convinced that respondent carried a campaign of intimidation and harassment under the cloak of "investigative activities" with the objective to bankrupt Yukos and appropriate its valuable assets (¶¶ 759, 757). Respondent's power to conduct searches and seizures in Yukos' premises during ongoing criminal investigations was not questioned. Yet, in the particular case, the tribunal found that investigation was carried out with excessive hardness. The treatment of persons of and associated with Yukos supported claimants' assertion that respondent was conducting a "ruthless campaign to destroy Yukos, appropriate its assets and eliminate Mr Khodorovsky as a political opponent" (¶ 811). The tribunal concluded that the evidenced intimidation and harassment disrupted Yukos' operations, contributed to its demise and thereby damaged the investment of claimants (¶ 820).
Having said that, the tribunal decided that the unwinding of the merger with Sibneft was not caused by respondent (¶¶ 845, 846, 884). For the tribunal, it was perfectly understandable for Sibneft to have second thoughts about the merger under the leadership of Mr Khodorovsky, who at the time was under arrest and embroiled in controversy (¶ 888). Hence, claimants established no basis to claim damages based on the assumption that said merger would have been successful (¶ 889).
However, the auction of YNG provided yet more compelling evidence that respondent was not engaged in a true, good faith tax collection exercise. Rather, respondent intended to confiscate the most valuable asset of Yukos and transfer it to the state (¶ 985). The tribunal found that this auction qualified as a devious and calculated expropriation of YNG by respondent (¶ 1037). Similar was the conclusion on Yukos' bankruptcy proceedings. The tribunal found that these proceedings had as a primary objective to bankrupt Yukos and appropriate its valuable assets (¶¶ 759, 756), despite the initiation by the syndicate of foreign bank creditors. This conclusion found support in the role of Rosneft and respondent in creating the conditions for Yukos' bankruptcy (¶ 1141), that being the auction of YNG (¶ 1143). The totality of the bankruptcy proceedings were the final act of Yukos' destruction and the expropriation of its assets (¶ 1180). In truth, the tribunal was convinced that the highly unusual manner of the bankruptcy proceedings against Yukos was a cover for respondent's involvement (¶ 1149).
Finally, with reference to the withdrawal of PwC's audits, the tribunal concluded that PwC was clearly pressed by respondent to find grounds for withdrawing its audits of Yukos (¶ 1247). However, the tribunal underscored that no conclusions on PwC's professional conduct were drawn from said finding (¶¶ 1188, 1253).
The tribunal then proceeded with considering the preliminary objections of claimant's "unclean hands" and the taxation measures carve-out (Art. 21 of the ECT) (¶ 1255). With reference to the fork-in-the-road provision (Art. 26(3)(b)(i) of the ECT) the tribunal reiterated in the present phase of the proceedings that on the ground of the "triple identity" test the Russian court proceedings and the applications to the ECtHR failed to trigger this provision (¶¶ 1257, 1271). It then examined the objection of "unclean hands" that according to respondent deprives the tribunal of its jurisdiction or claimants of substantive protection under the ECT or submitted claims of their admissibility. The tribunal observed that this treaty does not contain any explicit reference to a principle of "clean hands". Also, it does not foresee that investments are to be made in accordance to the laws of the host country (¶ 1345). Thereafter, it examined whether said principle exists as a general principle of international law recognized by civilized nations (Art. 38(1)(c) of the IC J Statute) (¶ 1347). After citing Plama, Hamester v. Ghana, Phoenix and SAUR v. Argentina, it generally agreed with the proposition that investments created in violation of national or international principles of good faith shall not be protected under an investment treaty. This general principle exists independently of specific language in such a treaty, it concluded (¶¶ 1350-1352, 1364). Yet, it was not persuaded to altogether deny the right to invoke the ECT to any investor who has breached the law of the host state in the course of its investment (¶ 1355). Equally, it was not persuaded of the existence of an "unclean hands" principle resulting into barring an investor from making a claim before an arbitral tribunal, as a recognized general principle in the meaning of Art. 38(1)(c) of the ICJ Statute (¶¶ 1358, 1362, 1363, 1373). Regarding the objection under Art. 21 of the ECT, the tribunal first noted its earlier conclusion that the re-attribution formula was used in order to establish a basis for imposing on Yukos the massive VAT liability and excessive fines that followed (¶ 1404). The tribunal rejected the carve-out objection on two grounds. Firstly, it decided that any measures excluded by the "carve-out" under Art. 21(1) of the ECT, would be brought back within its jurisdiction under the "claw-back" of Art. 21(5) of the ECT (¶ 1406). Secondly, in view of the extraordinary circumstances of the present case, it found that the "carve-out" of Art. 21(1) of the ECT could apply only to bona fide taxation actions and not actions taken only under the guise of taxation (¶ 1407), citing RosInvestCo v. Russia, Quasar v. Russia and EnCana v. Ecuador (¶¶ 1437-1440). Thus, the tribunal decided that it had jurisdiction to consider the merits of this case (¶ 1446).
Thereafter, the tribunal addressed liability (¶ 1448). Beginning with the issue of attribution, it clarified that the parties' differences in this respect related to two questions: whether actions of Rosneft in the acquisition of YNG, in precipitating and participating in the bankruptcy proceedings can be attributed to respondent; and whether the course of the bankruptcy proceedings and the actions in respect of them by the bankruptcy administrator were attributable to respondent (¶ 1465). It then decided that respondent was responsible for its organs in the actions that they took against and in relation to Yukos and its stockholders. It further concluded that Russia, speaking through its President, accepted responsibility for Rosneft's acquisition of YNG and for the auction that underlay it. Also, it found that, in respect of other actions of Rosneft that bear on the destruction of Yukos, despite lack of proof of specific state direction, it could reasonably be held that the highest officials of Rosneft, who at time served as officials of respondent in close association with President Putin acted in implementation of respondent's policy. Still, the actions of the bankruptcy administrator were not attributed to respondent (¶ 1480). Turning to the claims for breach of the ECT, the tribunal ruled that the measures taken in respect of Yukos by respondent had had an effect "equivalent to nationalization or expropriation" (¶ 1580). Further, it noted that the destruction of Russia's leading oil company and largest taxpayer was not in the public interest of respondent (¶ 1581) and that the effective expropriation of Yukos was neither carried out under due process of law (¶ 1583), nor accompanied by the payment of prompt, adequate and effective compensation (¶ 1584). It refrained from deciding whether the treatment of Yukos, compared to the treatment of other Russian oil companies, was discriminatory (¶ 1582). Thus, breach of treaty obligations under Art. 13 of the ECT, and therefore respondent's liability under international law, was established. In view of this, the tribunal did not consider, whether respondent's actions were in breach of Art. 10 of the ECT (¶¶ 1585, 1449).
The tribunal then determined whether the damages caused to claimants by respondent's wrongful acts should be reduced, as the latter invoked the legal principle of contributory fault (¶¶ 1594, 1595). It took into consideration Arts. 39 and 31 of the ILC Articles, as well as EDF v. Argentina, Middle East Cement v. Egypt, AIG v. Kazakhstan, MTD v. Chile, Bogdanov v. Moldova (I), Goetz v. Burundi (II) and Occidental v. Ecuador (II) (¶¶ 1595-1605) and identified four instances of alleged willful or negligent conduct by claimants and/ or Yukos that had to be considered as potentially constituting fault that may have contributed to the destruction of Yukos. These were the conduct of Yukos in some low-tax regions, Yukos' use of the Cyprus-Russia DTA, Yukos' conduct in connection with the YNG auction, that being the threat of "lifetime of litigation" and Yukos' non-payment of the loan to the Western Banks (¶ 1608). The tribunal found that claimants contributed to the extent of 25% to the prejudice they suffered as a result of respondent's destruction of Yukos (¶ 1637). Regarding the issue of interest, the tribunal noted that neither the ECT nor the ILC Articles provide specific rules regarding its determination, while practice of past tribunals offered little guidance as it is inconsistent and varied. Hence, the tribunal has wide discretion to determine the rate of interest (¶¶ 1677-1678). It found pertinent the tribunal's decisions in the cases Siemens v. Argentina and Santa Elena v. Costa Rica, and in the exercise of its discretion, concluded that it would be appropriate to award to claimants interest at a rate based on 10-year U.S. treasury bond rates (¶¶ 1682-1685). With reference to the valuation date, the tribunal explained that it needed to address two issues: (a) the date of the expropriation; and (b) whether claimants were entitled to choose between a valuation based on that date of expropriation and a valuation based on the date of the award (¶ 1759). In order to find said date, the tribunal observed that in the event of an expropriation through a series of actions, the date of expropriation is the date on which the incriminated actions first led to a deprivation of the investor's property that crossed the threshold and became tantamount to an expropriation (¶ 1761). In the present case this was the date of the YNG auction, December 19, 2004 (¶ 1762). Then the tribunal, after noting that the text of the ECT is silent on the second issue, decided to address it by considering which party should bear the risk and enjoy the benefits of unanticipated events leading to change in the value of the expropriated asset between the time of the expropriatory actions and the rendering of the award. Under the principles enshrined in Arts. 35 and 36 of the ILC Articles and finding support in ADC v. Hungary, Siemens and Amoco, the tribunal affirmed that an investor is entitled to choose between a valuation as of the expropriation date and as of the date of the award (¶¶ 1766-1769). Consequently, the tribunal considered causation. It found it instructive to look into Art. 31 of the ILC Articles and noted that respondent had to establish that a particular consequence of its actions was severable in causal terms or too remote to give rise to respondent's duty to compensate. As respondent did not succeed in this, the tribunal held that causation existed between the damage and respondent's expropriation of claimant's investment (¶¶ 1774-1775). Finally, regarding the methodology of establishing the damages, the tribunal noted that there were no comparable transactions and therefore no basis that would allow a useful comparison (¶ 1785). In the circumstances, it found that the comparable companies' method was the most tenable approach to determine Yukos' value (¶ 1787).
Respondent's primary aim was to bankrupt Yukos and appropriate its valuable assets, as evident from the re-attribution of taxes that was used in order to impose a massive VAT liability, "willful offender" fines and "repeated offender" fines. This was also supported by the lack of interest to Yukos' settlement proposals and the auction of Yukos' most valuable asset, YNG, which qualified as a "devious and calculated expropriation". Regarding the provisional application (Art. 45 of the ECT), paras 1 and 2 are not interlinked and para. 1 requires no prior notification. The ECT is provisionally applied as a whole, whereas any inconsistency with domestic law is to be determined having regard to the laws at the time of signature of the ECT. The denial of benefits (Art. 17 of the ECT) refers only to Part III of the ECT and conditions exercise of this right that respondent in the present case had not done. In the final award, the tribunal reiterated that unlawful investments are not protected under an investment treaty, whereas the "clean hands" principle, as portrayed by respondent, is not a recognized general principle (Art. 38(1)(c) of the ICJ Statute). Under the extraordinary facts of this case, the taxation measures "carve-out" provision (Art. 21 of the ECT) did not apply, as it relates only to bona fides taxation actions. In this case, claimants' contributory fault was affirmed. Finally, claimants had the option to choose between valuation as of the expropriation date and as of the date of the award.
This summary comes from the following paper:
The paper is part of the joint OGEL/TDM/ArbitralWomen Special Issue:
TDM 7 (2018) - OGEL/TDM/ArbitralWomen - Strategic Considerations in Energy Disputes