Department of Law Spring Term 2019
Master Programme in Investment Treaty Arbitration Master’s Thesis 15 ECTS
Article 13 of the ECT in practice and its role in expropriation disputes
What is the scope of Article 13 of the ECT with respect to expropriation disputes?
Author: Valeri Dimitrov Supervisor: Joel Dahlquist
1 List of abbreviations
AB BIT EC ECT EU FET IIA Ltd.
NAFTA OECD PCIJ S.A.
SCC UK
UNCITRAL US
USSR
Aktiebolag (Limited company; Sweden)
Bilateral Investment Treaty European Communities Energy Charter Treaty European Union
Fair and equitable treatment
International investment agreement Limited company (United Kingdom) North American Free Trade Agreement
Organization for Economic Co-operation and Development Permanent Court of International Justice
Société anonyme (Public limited company; France, Belgium)
Stockholm Chamber of Commerce United Kingdom
United Nations Commission on International Trade Law United States
Union of Soviet Socialist Republics
2
Contents
1. Introduction...3
1.1. Purpose ...3
1.2. Methodology ...4
2. The Energy Charter Treaty ...6
2.1. The history and the negotiation process of the Treaty ...6
2.2. The purpose of the ECT for investor-state dispute resolution ...8
2.3. The ECT and its expropriation regime ... 10
2.4. Direct and indirect expropriation ... 11
2.5. The first expropriation arbitrations involving Article 13 of the ECT ... 15
i. Nykomb v. Latvia and the concept of regulatory takings ... 16
ii. Petrobart Ltd. v. Kyrgyzstan and the scope of Article 13 ... 18
3. The purpose of Article 13 of the ECT ... 20
3.1. Article 13 and its ‘supportive provisions’ under the ECT ... 20
i. Public interest... 22
ii. Non-discrimination ... 23
iii. Due process of law ... 24
iv. Compensation ... 26
3.2. Yukos Universal Ltd. v. Russian Federation and Article 13 ... 28
3.3. Article 13’s scope in light of Articles 21 and 24 of the ECT ... 30
4. Standards of investment protection ... 31
5. The relationship between Article 13 of the ECT and the standards of protection . 34 5.1. Ioannis Kardassopoulos v. Georgia and the relation of FET to expropriation. 35 5.2. Breach of a standard, without expropriation in Nykomb v Latvia ... 37
5.3. The Yukos tribunal’s decision on the standards of protection ... 38
6. The application and scope of Article 13 of the ECT ... 40
Concluding remarks ... 43
Bibliography ... 48
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1. Introduction
The topic of expropriation is one of the most important concepts of investor-state arbitration and it is of particular interest for both investors and the host states of their investments. This thesis will focus on expropriation under the Energy Charter Treaty, which is one of the most significant multilateral investment protection treaties. The research question of the thesis is the following: “What is the scope of Article 13 of the ECT with respect to expropriation disputes?” Article 13 of the ECT provides for a prohibition against expropriation and measures of equivalent effect, directed towards investments of investors in the Contracting States.1 Its scope however is often the subject of debate and in order to answer the research question, the following related sub-questions and topics will be examined:
What is the role of Article 13 of the ECT when tribunals are deciding on claims of expropriation?
How is Article 13 applied in practice by arbitral tribunals?
Does Article 13 need to be applied in conjunction with other provisions, principles or standards of investment protection, such as fair and equitable treatment, in order to be effective?
What is Article 13’s impact with respect to the concept of expropriation?
Answering those questions will lay down the necessary background, needed to answer the research question of the thesis. The aim of the sub-questions is also to provide for a better understanding of the concepts involved in the thesis.
1.1. Purpose
With respect to the four sub-questions mentioned above, the following explanation should be taken into consideration: Examining the role of the provision is essential in order to gain a better understanding of its objectives. Looking at arbitral practice, or in other words decisions rendered under Article 13 of the ECT will provide support for
1 Article 13 of the ECT.
4 the conclusions of the thesis. Observing how the article is applied in practice will present a view on how tribunals are employing the provision. Another interesting aspect, which will be examined, is whether arbitral tribunals need to supplement Article 13 with other provisions or principles, like the standard of fair and equitable treatment, in order to be able to decide on issues of expropriation. It could be the case that support from other principles is not necessary and the provision is applied in an autonomous manner. The impact of Article 13 of the Treaty is another significant question, which will also be examined in light of arbitral case law and scholarly writings.
All of the abovementioned questions and their examination will ultimately lead to the answer of what the scope of Article 13 of the ECT is with respect to the issue of expropriation. In other words, the focus of the thesis is on analysing the relevance of Article 13, when tribunals are deciding on expropriation claims in investor-state arbitrations. This, in turn, touches upon the application of Article 13 in practice and involves an analysis of the arbitral awards and legal publications, dealing with the concept of expropriation under the ECT.
Other relevant topics, such as the concepts of direct, indirect expropriation and of measures having equivalent effect to expropriation will also be analysed and explained, in order to provide the reader with a better understanding of the concepts covered and their relevance with respect to Article 13 of the ECT.
1.2. Methodology
The thesis will start with a chapter2, concerning the history and the purpose of the Energy Charter Treaty, as well as an analysis of its expropriation regime. This chapter will include a more general sub-chapter, examining the notion of expropriation and its various manifestations. The chapter will be concluded with an examination of two of the first awards rendered under the ECT after its entry into force and the manner, according to which the tribunals have tackled the claims invoking Article 13 of the Treaty. These older awards are of particular interest, because they deal with the topic
2 Chapter 2 of the thesis.
5 of expropriation under the Treaty and include early analyses of the issues, without having any prior ECT arbitral decisions.
The third chapter’s emphasis will be on the aspects of Article 13 of the ECT, which essentially covers the scope of the provision, as well as the exceptions provided within.
The arbitral awards analysed will be supported by scholarly writings, further explaining the methods used by the arbitrators in light of the principles of public international law and of customary international law.
The fourth and fifth chapters will examine the standards of protection, in particular the fair and equitable treatment standard and will observe their relationship with the concept of expropriation. This evaluation will again include arbitral case law and academic writings. The sixth chapter will explain the scope of Article 13 of the ECT and its application, in light of the background provided in the previous chapters.
The conclusion of the thesis will essentially aim at summarising the answers of the questions, raised in this introductory chapter, as well as the research question of the thesis. The abovementioned roadmap of the chapters and topics concerned can be relied upon by the reader whenever necessary.
The selection of ECT cases included in this thesis can be divided in two groups, in particular older cases and established, already decided, cases. The focus is initially on older cases, since they could be regarded as pioneering in ECT jurisprudence, with respect to the topic of expropriation. It is important to see how the first ECT tribunals have decided on claims, before the existence of any other decisions rendered under this Treaty. The focus then shifts to cases, which are already decided and their decisions accepted. Cases that are still pending are omitted from the present thesis, since they cannot be realistically relied upon before their respective awards are rendered.
Another important remark is that the cases chosen for the purposes of this thesis represent a balanced view on the topic of expropriation and do not aim to favour any specific approach, chosen by the tribunals. The approaches are thus presented in an impartial way. That being said, one can move to the analysis of the Treaty itself.
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2. The Energy Charter Treaty
This chapter starts with a brief examination of the history of the Energy Charter Treaty and explains the idea, based on which the Treaty was created. The chapter examines the necessity and the reason for the negotiation of the Treaty, and proceeds with an analysis of its purpose with respect to the topic of investor-state arbitration. The chapter also includes a sub-chapter on the topic of expropriation with respect to the ECT, followed by a more general sub-chapter on the topics of direct, indirect expropriations and measures equivalent to expropriation. An examination of the topics, covered in this chapter, is required in order to provide the necessary background, which will help in answering the questions of the thesis, mentioned in the introductory chapter. The two main research questions concerned in this chapter are those of the role and of the impact of Article 13 of the ECT. The chapter concludes with a sub-chapter which examines two of the first ever arbitral awards rendered under the ECT, after its entry into force and looks at their relevance with respect to the issue of expropriation.
2.1. The history and the negotiation process of the Treaty
The Energy Charter Treaty is a multilateral treaty, which concerns the energy sector and provides for regulation on matters of international investment and trade. The Treaty has provisions ensuring the enforcement of the legal rights established within it. The ECT was negotiated between 1991 and 1994 at the Conference on the European Energy Charter, in which the European Communities (EC), the predecessor of the European Union, was present alongside many other states of Europe and Asia. The Treaty’s negotiation process concluded on the 17th of December 1994 and the ECT was open for signature.3 In the following six months, the Treaty remained open for signature and 49 states have signed it, including the European Communities. The signatories were mostly European nations, all of the newly established states of the recently dissolved Soviet Union, as well as non-European states, such as Japan and Australia.4 The Treaty
3 Craig S. Bamberger, ‘Chapter 1. Overview’ in Thomas W. Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade, (Kluwer Law International 1996), p. 1.
4 Ibid, p. 2.
7 entered into force in April 1998 and the aspect of it that is most relevant for the present thesis revolves around the topic of settlement of disputes between investors and host states, with respect to the investors’ investments.5
It should be taken into consideration that the academic source used above is from 1996 and the present status with respect to signature and ratification of the Treaty is slightly different. The full list of Signatories and Contracting Parties is on the official website of the ECT, according to which there are currently 56 signatories, out of which Australia, Belarus, Iceland, Norway and the Russian Federation have not ratified the Treaty, but Belarus applies it on a provisional basis.6
The Energy Charter Treaty’s negotiation process was completed after the dissolution of the Soviet Union and the collapse of the Eastern Bloc in the 1990s. The Treaty paved the way for multinational companies from Western Europe to make safer investments in the countries of the former Eastern Bloc and the former USSR.7 The Preamble of the Energy Charter Treaty states that the Contracting Parties to the Treaty have subscribed to promote economic growth by way of undertaking measures, aimed at liberalising investments and trade in the energy sector. The Preamble also recognises that there is a necessity to make energy exploration, production, transport and use more efficient.8 It should be noted that the ECT has been negotiated during the 1990s and therefore the language used within reflects the issues at stake that were prevalent back then at economic, political and international dimension. In light of the situation in Europe in the mid to late 90s, investors having interest in this new opportunity could now rely on the guarantees and the regime offered by the Energy Charter Treaty.
5 ECT Secretariat, ‘The Energy Charter Treaty’ (International Energy Charter, 18 February 2019) <https://energycharter.org/process/energy-charter-treaty-1994/energy-charter- treaty/> accessed 19 May 2019.
6 ECT Secretariat, ‘ECT Signatories / Contracting Parties’ (International Energy Charter, 18 February 2019) <https://energycharter.org/process/energy-charter-treaty-1994/energy-charter-
treaty/signatories-contracting-parties/> accessed 19 May 2019.
7 Andrew Seck, ‘Chapter 4. Investing in the Former Soviet Union's Oil Industry: The Energy Charter Treaty and its Implications for Mitigating Political Risk’ in Thomas W. Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade, (Kluwer Law International 1996), p. 110.
8 Preamble to the Energy Charter Treaty.
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2.2. The purpose of the ECT for investor-state dispute resolution
Article 2 of the Treaty states in brief the purpose of the ECT is that it establishes a legal framework for the promotion of lasting energy sector collaboration, based on complementarities and mutual benefits.9 The Energy Charter Treaty imposes a set of responsibilities on the participating States with respect to the way foreign investments are to be treated. The Treaty provides the option for private companies and nationals to bring disputes concerning their investments before international arbitral tribunals, for breaching the investment regime of the ECT.10 Article 26 of the ECT is the provision, which provides for the settlement of disputes between a foreign investor and the host state.11
The Treaty mainly concerns the areas of investment, transfer, trade and energy efficacy.
The domain of foreign investments is the aspect of the Energy Charter Treaty that is relevant for the purposes of investor-state arbitration and for the present thesis.12 Investment disputes between investors and the host State of their investments can be resolved by different methods, such as mediation, negotiation, judicial proceedings or arbitral proceedings.13 The focus of this thesis is on arbitration, as means of dispute resolution, with respect to investor-state disputes. Consent to arbitration in investment disputes is usually provided for in a party agreement, in the domestic law or within an investment protection treaty. Treaties of this kind could be bilateral investment protection treaties (BITs), binding two states or multilateral investment protection treaties, binding more than two states, such as the Energy Charter Treaty.14 The ECT
9 Article 2 of the ECT.
10 Thomas W. Wälde, ‘Chapter 13. International Investment Under the 1994 Energy Charter Treaty’ in Thomas W. Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer Law International 1996), p. 252.
11 Article 26 of the ECT.
12 Eric de Brabandere, ‘Foreign Investment in the Energy Sector: Balancing Private and Public Interests’ (2014) in Tarcisio Gazzini (ed), ProQuest Ebook Central (BRILL 2014)
<https://ebookcentral.proquest.com/lib/uu/detail.action?docID=1730275> accessed 17 May 2019, p.
107.
13 Ibid, p. 131.
14 Ibid.
9 offers the option for arbitration in investor-state disputes with respect to investments in the energy sector of the host state.15
One of the ECT’s aims is to provide for fairness through the establishment of a level playing field for investments in the energy sector. The Treaty offers certain legally binding rights for the investors with respect to their investments in the host Contracting State. The binding guarantees for foreign investors include protections, offered in cases of political instability, expropriation, discriminatory measures, breach of investment agreements, damage caused by conflict and other events. It should be taken into consideration that not only the investors are afforded legal rights under the Energy Charter Treaty, but also the governments of the participating states. They are allowed, provided that they comply with the requirements of the provisions of the Treaty, to seize foreign-owned private property in certain circumstances, which will be analysed in Chapter 3 on Expropriation further below.16
It is important to mention that arbitral tribunals are not bound by previous awards from other tribunals and it is possible to have conflicting decisions from different tribunals, deciding on cases, having similar facts and involving comparable issues. For instance, tribunals elaborating on cases, where Article 13 of the ECT is invoked, may refer to prior similar arbitrations and could consider these decisions when deciding on the award, but are not obligated to reach the same conclusion. This indicates that there is no unified approach on the issue of expropriation in international arbitration and since arbitral tribunals include arbitrators, coming from various legal traditions, it could be that their interpretation on the issue could result in different outcomes.17
The Energy Charter Treaty and its Article 13 are subject to the interpretation of the arbitral tribunal, sitting at a specific case. This indicates that the application and the scope of Article 13 of the ECT will depend on the way the arbitrators see the facts and apply the provision in practice. This chapter explains the aim of the expropriation
15 Ibid, p. 132.
16 Energy Charter Secretariat, Expropriation Regime under the Energy Charter Treaty (Energy Charter Secretariat 2012), p. 6.
17 Ibid, p. 15.
10 article of the ECT, namely Article 13 and if read together with chapter 2.1, which states the Contracting States to the ECT, answers the question on the impact of the provision, mentioned in the introduction. In essence, the impact of Article 13 is wide and covers investors and their investments in all Contracting States to the ECT.
2.3. The ECT and its expropriation regime
Article 13, paragraph 1 of the Energy Charter Treaty states that investments of a national of a Contracting State, located in another Contracting State should not be the subject of expropriation, or to measures equivalent to expropriation. The provision provides for an exception if the measures fulfil a public interest purpose, are not discriminatory, are executed in compliance with the due process of law and are followed by a ‘prompt, adequate and effective’ payment of compensation. The Article also encompasses the notion of nationalization as part of the concept of expropriation.
Including the concepts of nationalization, expropriation and measures equivalent to expropriation in one article facilitates the tribunals, having to interpret and apply it, because it removes the ambiguity and the possible debates that could arise in the process of interpretation of the provision, as to whether a measure of nationalization is also covered by Article 13 of the ECT.18 Under ‘measures having effect equivalent to nationalization or expropriation’, the provision includes measures of indirect expropriation and creeping expropriation, the latter of which encompasses actions, which gradually seize the investment over a certain period of time.19
Article 13 of the ECT also provides that an investment, subjected to a measure of expropriation, should be afforded an effective and reasonable compensation. This requirement is similar to those found in most bilateral investment protection treaties as well as to those BITs to which the ECT signatory states participate. The concept of
18 Patrick M. Norton, ‘Chapter 16. Back to the Future: Expropriation and the Energy Charter Treaty’ in Thomas W. Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer Law International 1996), p. 367.
19 Ibid, p. 368.
11 compensation of foreign investors in the event of expropriation by the host state has been one of the major concerns for each foreign investor.20
Investment protection treaties worldwide usually include a provision on investment protection against all forms of expropriation, of both direct and indirect nature. They are often worded in a way that the host state is prohibited from undertaking measures of expropriation directly or indirectly, unless the measures are not serving a public purpose, are performed under the due process of law, are done in a non-discriminatory manner and are accompanied by adequate and fair compensation. These four requirements are found in most expropriation provisions of the BITs between states across the world. Article 13 of the ECT follows the exact same pattern and reflects the wording of many other expropriation provisions of investment protection treaties worldwide.21
An important aspect of the Energy Charter Treaty are its articles on investment treaty arbitration, providing for binding investment protection guarantees through investor- state arbitration. The Treaty aims to provide for a feasible legal protection of foreign investments in another Contracting State when cases of expropriation are at stake. It should be noted that the Energy Charter Treaty does not provide for a genuine prohibition on all forms of expropriation and lays down certain requirements, which if fulfilled, expropriation could be undertaken.22 The four requirements are examined in chapter 3.1 of the thesis. This sub-chapter describes the role of Article 13 of the ECT and essentially answers the respective sub-research question on role of the provision, stated in the introductory chapter.
2.4. Direct and indirect expropriation
Before delving into the case law under the Energy Charter Treaty, it is important to clarify the definition of the concepts of direct expropriation, indirect expropriation,
20 Energy Charter Secretariat, Expropriation Regime under the Energy Charter Treaty (Energy Charter Secretariat 2012), p. 8.
21 Ibid, p. 10.
22 Ibid, p. 3.
12 creeping expropriation and measures having effect equivalent to expropriation. It is ultimately up to the Arbitral Tribunal, sitting before a certain case to decide whether expropriation exists and this chapter will attempt to define which type of conduct is tantamount to expropriation or is expected to result in a decision of expropriation, based on its characteristics.
There is a difference between direct and indirect expropriation and it primarily concerns the question of whether the legal title to the property is seized from the owner by the measure. Direct expropriation is a measure which deprives the owner from his or hers legal entitlement to the property. The owner loses control and ownership of the property, which is transferred to another entity or to the state itself. Such measures of direct expropriation are no longer preferred by the states as a choice of action, because they carry a large negative impact on the expropriating State due to publicity and damage the state’s reputation. These measures have an adverse impact on the State’s investment climate.23
States nowadays prefer to conduct indirect expropriations in order to achieve the same or a similar goal. Indirect expropriation, on the other hand, does not seize the legal title of ownership from the foreign investor, but it deprives the investor from using his or hers investment in a meaningful and fruitful manner. By letting the owner keep his legal title, it appears to the public that no expropriation has taken place, but as a matter of fact the property is impacted and does not function in the same way as it was initially supposed to. Usually the state undertaking indirect expropriation will argue that no expropriation had taken place, mainly because the foreign investor still has a “hold”
over the legal entitlement to the property.24
There are also other forms of expropriation, like creeping expropriation, which could be treated as a form of indirect expropriation. Creeping expropriation occurs when a measure is divided into several separate actions, which constitute a series of steps, which cumulatively affect the investor in the exact same way as if his investment has
23 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2nd edn, Oxford University Press 2012) p. 101.
24 Ibid.
13 been expropriated. Creeping expropriation could be described as an act of expropriation taken gradually, in steps.25
Professors L. B. Sohn and R. R. Baxter of Harvard University have elaborated on what constitutes expropriation in the non-binding Draft Convention on the International Responsibility of States for Injuries to Aliens of 1961.26 Their definition states that a seizure of property includes an “outright taking of property, as well as any unreasonable interference with the use, enjoyment, or disposal of property”, which renders the owner of the property unable to use it.27 This definition encompasses both direct expropriation under the wording of an “outright taking”, as well as indirect expropriation under the wording of “unreasonable interference” with respect to the property in question. Both are characterised as “a taking of property”, which essentially means expropriation.
Their definition could be used as a model, based on which a clearer picture on what expropriation is could be drawn. In essence, it could be stated that it does not matter much whether expropriation is direct or indirect, since both actions are qualified as expropriation.
As already mentioned, it is up to the arbitral tribunals, reading the case facts to interpret and decide exactly what type of conduct amounts to expropriation and what is simply a measure of a regulatory nature. The description above of what direct and indirect expropriation is sheds light to the question of what sort of behaviour is expected to result in a positive finding of expropriation in international arbitration. For instance, if the state authorities seize the ownership and control of an investment, previously owned by a foreign national and transfer it to a state owned company or entity, this would likely be treated as a case of direct expropriation by most arbitral tribunals. If the state authorities undertake measures that deprive the foreign investment of its capacity to function in the manner it is supposed to function, but let the investor keep the title of ownership over the investor, then the arbitrators will elaborate on whether an indirect expropriation had taken place. In both situations, this could amount to a
25 Ibid, p. 125.
26 Ibid, p. 103.
27 L Sohn and R Baxter, Responsibility of States for Injuries to the Economic Interests of Aliens (1961) 55 AJIL 545, 553, Art 10 (3) (a).
14 finding of expropriation and under the Energy Charter Treaty, the facts of the case will have to be evaluated in light of Article 13 of the Treaty.
Article 13 of the ECT concerns direct and indirect expropriation, as well as measures amounting to expropriation, as stated in its wording. The provision’s language aims to cover all forms of interference with property of a foreign investor in the host state. It might also be of interest to note that the expropriation provision of the ECT is not covered by the exceptions mentioned in Article 24 of the ECT, according to which states may adopt measures required to protect human, animal or plant life, emergency situations or to benefit disadvantaged persons. Article 24 (1) of the ECT states that it excludes Article 13 of the ECT and therefore Article 13 should be interpreted independently.28
It is essential to mention, as will also be observed later, that when arbitral awards are being analysed for expropriation, state interference with the property is what matters.
Even if there is no complete overtaking of the foreign investment, a certain measure may still be considered expropriatory by an arbitral tribunal, because it adversely affects the investment and renders it incapable to function or to be used in a proper manner. If the state interferes to a certain extent with the functioning of the property, the tribunal might rule that an expropriation had occurred, in breach of the Energy Charter Treaty’s provision on expropriation. One of the questions that arises here is which type of governmental actions amount to expropriation and require compensation and which ones are simply non-compensable state regulatory actions.29
Customary international law allows countries, hosting investments, to perform expropriation, if it complies with the requirements of having a public purpose, is done under the due process of law, is of a non-discriminatory nature and is followed by compensation. If a state intervenes with the use, enjoyment or benefits provided by the
28 Energy Charter Secretariat, Expropriation Regime under the Energy Charter Treaty (Energy Charter Secretariat 2012), p. 11.
29 Ibid, p. 12.
15 property in question, this could also amount to a deprivation, even if the legal title to the property stays with the owner.30
International investment instruments include provisions on protection against state measures of expropriation. The expropriation provisions are very similar to each other and can be found in the various bilateral investment treaties, concluded between two countries, as well as multilateral treaties such as the Energy Charter Treaty’s Article 13 and the NAFTA’s Article 1110.31 Both expropriation provisions of the ECT and the NAFTA include a prohibition against direct, indirect expropriations or measures tantamount to expropriation, unless the four conditions of public purpose, due process of law, no discrimination and compensation, also found in customary international law, are fulfilled. This makes the expropriation provisions of investment treaties near identical to each other for their purposes, and it could be helpful for tribunals to look at awards rendered under other investment protection treaties to support their decisions.
2.5. The first expropriation arbitrations involving Article 13 of the ECT
This sub-chapter will analyse two of the first arbitral awards rendered under the Energy Charter Treaty and will examine their relevance with respect to the topic of expropriation. The two arbitral awards, which will be examined are the ECT arbitrations of Nykomb Synergetics Technology Holding AB (Sweden) v. Latvia and Petrobart Ltd. (Gibraltar) v. Kyrgyzstan. The focus of the analysis will lie on Article 13 of the ECT and the issue of expropriation, which is necessary in order to uncover how the first tribunals, applying the ECT, have handled the topic of expropriation.
These awards and methods applied within could be regarded as of pivotal nature for the development of the ECT jurisprudence and that is why they are selected for the purposes of the present thesis. The findings in those two cases are important for the
30 OECD (2004), "Indirect Expropriation" and the "Right to Regulate" in International Investment Law, OECD Working Papers on International Investment, 2004/04, OECD Publishing.
http://dx.doi.org/10.1787/780155872321, pp. 3 and 4.
31 Ibid, pp. 6, 7.
16 question concerning the role of Article 13 of the ECT, mentioned in the introductory chapter of the thesis.
i. Nykomb v. Latvia and the concept of regulatory takings
Article 13 of the Energy Charter Treaty had been invoked by the claimant in the arbitration that resulted in the very first arbitral award rendered under the Energy Charter Treaty.32 The claimant, the Swedish company Nykomb, in the Nykomb Synergetics Technology Holding AB (“Nykomb”) v. Republic of Latvia arbitration,33 based one of its main claims on Article 13 of the ECT and demanded from the tribunal to examine the issue of expropriation with respect to its investment in Latvia.34
Nykomb, a Swedish company, was the sole shareholder of its subsidiary, SIA Windau, incorporated in the Republic of Latvia. The subsidiary was in control of a power plant in Latvia. It is important to mention that the Latvian government had implemented a legal framework, which offered foreign investors the right to claim a double tariff for electric power sold to the Latvian state-owned company Latvenergo. This tariff regime was created in order to incentivise investments into the power generating capacity of the country. The companies Windau and Latvenergo concluded agreements for the building of the plants, according to which Latvenergo agreed to pay the double tariff.
The buyer, however, rejected payment of the double tariff and later proceeded to pay three quarters of the normal tariff. The Latvian authorities also decided to amend the rules on double payment for electricity, a decision in favour of Latvenergo.35
The claimant contended that the non-payment of the double tariff amounted to expropriation or to a measure having an equivalent effect to expropriation under Article 13 of the ECT, with respect to Nykomb’s subsidiary Windau.36 The claimant also
32 Ibid, p. 14.
33 Nykomb Synergetics Technology Holding AB (Sweden) v. Latvia, SCC Case No 118/2001.
34 Ibid, Award, p. 31.
35 Energy Charter Secretariat, Expropriation Regime under the Energy Charter Treaty (Energy Charter Secretariat 2012), p. 14.
36 Nykomb Synergetics Technology Holding AB (Sweden) v. Latvia, SCC Case No 118/2001, Award, p. 31- 32.
17 further argued that Latvia did not accord fair and equitable treatment and constant protection and security for investments of this type, claimed discrimination and a violation of the most favoured treatment obligation and also stated that the State-owned company Latvenergo was legally bound to buy electricity from the power plant at the agreed double tariff, both by law and by the mutual contract.37
The claimant contended that the non-payment of the double tariff amounted to an indirect expropriation or a creeping expropriation, because Windau’s income from sales had been substantially affected, in a negative way, and this rendered the entire enterprise economically not practicable and Nykomb’s investment in Latvia futile.38 The arbitral tribunal examined the claim of expropriation in light of the legal opinions and awards rendered under the treaties, which share similarities with the Energy Charter Treaty. The tribunal found that under certain circumstances “regulatory takings” could constitute expropriation or measures equivalent to it. The tribunal stated that the factor, deciding the borderline of expropriation, lies in the degree of possession seizure or control taking from the company, by the measures in question. The tribunal found that there is no such taking of possession with respect to the company Windau and there was no interference with the rights of the shareholders or the management over the enterprise. The only interference had been with respect to the regulatory provisions of the license and the agreement. The arbitrators concluded that, with respect to the issue of the payment withholding of the tariff, there was no expropriation or equivalent measures to it under Article 13 of the ECT.39
In essence, the breach of agreement between the two entities did not constitute expropriation under the ECT, according to the tribunal. The Nykomb v. Latvia decision reveals that a breach of contract between the parties to the dispute cannot amount to expropriation under Article 13 of the ECT. If, however the functioning of the investment was substantially dependent on the contract and if the breach of it resulted in a severe financial damage to the foreign investment or its complete closure, then the
37 Ibid, Award, p. 32.
38 Ibid, Award, p. 33.
39 Ibid.
18 decision might have been different.40 The decision was different with respect to the claimant’s argument on discrimination. There, the tribunal concluded that the state violated Article 10 (1) of the ECT by affording the double tariff to other entities and not justifying why these companies are enjoying a treatment, different from that afforded to the claimant.41
ii. Petrobart Ltd. v. Kyrgyzstan and the scope of Article 13
The Petrobart Ltd. (Gibraltar) v. Kyrgyzstan arbitration42 led to another early award under the Energy Charter Treaty, which concerns the application of Article 13 of the ECT in light of a claim for expropriation. Petrobart is a company incorporated in Gibraltar and KGM is a state-owned joint stock company of Kyrgyzstan. The two entities have concluded a contract, according to which Petrobart would sell KGM gas condensate over a year period.43 KGM did not pay three of the five invoices issued by Petrobart, after the gas had been delivered, under the agreement.44 In the meantime, the government decided to restructure the gas sector and create a new state-owned company. Petrobart commenced proceedings before the Bishkek Court, demanding KGM’s remaining debt, but the Court responded that KGM did not have enough money to cover that claim.45 On 15 April 1999, the Bishkek Court declared KGM bankrupt.46 In 2003, Petrobart initiated arbitration against the Kyrgyz Republic, before the Arbitration Institute of the Stockholm Chamber of Commerce.47 One of Petrobart’s arguments was that it had been subjected to expropriation, or to measures of equivalent effect under Article 13 (1) of the ECT, because of the governmental actions ordering the transfer of the assets of KMG, but not the liabilities. Petrobart claimed that it had
40 Kaj Hobér, Selected Writings on Investment Treaty Arbitration (Studentlitteratur 2013), p. 280.
41 Nykomb Synergetics Technology Holding AB v. the Republic of Latvia, SCC Case No 118/2001, section 4.3.2. (a).
42 Petrobart Ltd. (Gibraltar) v. Kyrgyzstan, Arb. No. 126/2003.
43 Ibid, Arbitral Award, p. 4, section I., I.1.
44 Ibid, section II, p. 5.
45 Ibid, p.6.
46 Ibid, p. 8.
47 Ibid, p. 15.
19 suffered a creeping, gradual expropriation.48 When examining Article 13 of the ECT, the tribunal took into consideration that the provision guarantees against both expropriation and measures having equivalent effect. This could be considered an indirect, creeping or de facto expropriation, often regarded as formal expropriation with respect to its legal effect. The tribunal referred to a R. Dolzer and M. Stevens’ Bilateral Investment Treaties book of 1995 when defining the notion of expropriation in its award.49 The tribunal then moved to the analysis of Article 13 of the ECT and stated that there was no expropriation, because the governmental measures were not directly aimed at Petrobart’s investment, or undertook a transfer of value from Petrobart to the State. The measures disregarded the investor’s legitimate interests, but did not amount to expropriation.50
In both Nykomb and Petrobart arbitrations, the claimants’ arguments for a breach of Article 13 of the ECT and the existence of expropriation did not succeed before the arbitral tribunals. The tribunals’ reasoning in both awards was brief and straightforward. It appears that the arbitrators did not put that much accent on elaborating on the issue of expropriation in the application of Article 13 of the ECT.
They have in fact done a more extensive examination of the other arguments put forward by the parties in other aspects of the Energy Charter Treaty.
With respect the question of the application of Article 13 of the ECT, it can be said that in those two early arbitrations the facts of the cases did not provide the arbitrators with enough support to make them elaborate more on the matter. It could be argued however, that in the Petrobart arbitration, Kyrgyzstan and more specifically the actions of its authorities by intervening in the judicial proceedings, with respect to the stay of the execution of the court decision, and by the asset drain from KGM, both of which negatively affected Petrobart, could have tipped the balance to existence of a measure of indirect expropriation.51
48 Ibid, p. 29, point (g) of subsection (C).
49 Petrobart Ltd. (Gibraltar) v. Kyrgyzstan (Arb. No. 126/2003), Arbitral Award, p. 77, section 8.
50 Ibid.
51 Ibid, p. 76, section 8.
20
3. The purpose of Article 13 of the ECT
Article 13 of the Energy Charter Treaty is one of the most important provisions, concerning the investment regime of the Treaty. This article is important, because it offers protection against various types of expropriation, including not only direct expropriation, but also the other forms of indirect and creeping expropriations. Such forms of indirect takings could include unjustified state regulations or measures of taxation, which amount to a confiscation. The article affects both lawful, or executed according to its requirements, and unlawful expropriations, with respect to compensation. In either situations, Article 13 of the ECT offers the investor the right to claim “prompt, adequate and effective compensation”.52 This chapter will examine the purpose of the provision in light of certain academic writings and ECT cases, and will offer a clearer picture of the manner of its application. This chapter is important for answering the sub-research question on the role of Article 13, when tribunals are presented with expropriation claims, mentioned in the introduction of the thesis. The cases examined in this chapter are also of relevance for answering the other sub- research question of the introduction, concerning the practical applicability of Article 13 of the ECT.
3.1. Article 13 and its ‘supportive provisions’ under the ECT
Article 13, paragraph 1 of the Energy Charter Treaty states the following:
“Investments of Investors of a Contracting Party in the Area of any other Contracting Party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation (hereinafter referred to as “Expropriation”) except where such Expropriation is: (a) for a purpose which is in the public interest; (b) not discriminatory; (c) carried out under due process
52 Kaj Hobér, The Energy Charter Treaty - An Overview, 8 J. World Investment & Trade 323 (2007) pp.
332, 333.
21 of law; and (d) accompanied by the payment of prompt, adequate and effective compensation.”53
The Energy Charter Treaty includes definitions for investments and investors. Article 1 (6) of the ECT describes an investment as “every kind of asset” held by an investor, including property, property rights, business enterprise, shares, stock, bonds, debt, money claims, performance claims, intellectual property and contract rights. In addition, the provision states that an investment relates to “any investment associated with an Economic Activity in the Energy Sector”, as well as “Charter efficiency projects”.54 The provision is fairly detailed and describes the varieties of assets, which constitute an investment for the purposes of the Treaty.
The Treaty also offers a definition for “investor” in its Article 1, paragraph 7. An investor is described as a natural person, who is a citizen or is permanently residing in the Contracting Party, or a company organized under the laws of the Contracting Party.55 The definitions of the concepts, mentioned in Article 13 of the ECT can be found in Article 1 of the Treaty. The definition of the concept of expropriation, as explained in sub-chapter 2.4 of the thesis, is up to the tribunal’s interpretation of the case files and consideration of other rules, principles and academic works.
The exceptions of Article 13, where expropriatory measures are allowed under the ECT, if done for “public interest”, are “not discriminatory”, are performed “under due process of law” and are “accompanied by the payment of… compensation” are of particular interest. Those exceptions relate to the legality of the expropriation and can be found in most bilateral and multilateral investment protection treaties. They are also considered part of the customary international law and must be cumulatively fulfilled.
The requirement of public interest is broad and corresponds to the concept of public purpose of the measure in question. The question that could be asked is whether the expropriatory measure fulfils a public purpose. The requirement that the measure should not be discriminatory entails that it should not be targeting a certain investment
53 Article 13 of the ECT.
54 Article 1 (6) of the ECT.
55 Article 1 (7) of the ECT.
22 or an individual. The other requirement, that expropriation must be performed following due process of law, is related to the minimum standard of protection according to customary international law, as well as the concept of fair and equitable treatment. The last requirement concerns the quick, adequate and effective compensation for the losses suffered, which should correspond to the fair market value of the investment, subjected to expropriation.56
At first sight, it appears that Article 13 of the ECT has a broad scope with respect to the issue of expropriation. When read in conjunction with the definitions contained in Article 1 of the Treaty, Article 13 provides for a considerable protection against adverse measures targeting investments of foreign investors within the Contracting States. It should be kept in mind that Article 13 of the ECT follows closely the language of other investment protection treaties and that could prove useful for arbitral tribunals applying it, since they could take into consideration the cases dealt under other investment treaties as support for their decisions.
i. Public interest
The first requirement under Article 13 (1) of the ECT, requirement “a”, states that investments should not be expropriated, unless the expropriation is performed for a public interest purpose.57 This point will examine the meaning of the requirement of public interest and its function in expropriation disputes.
In Ioannis Kardassopoulos v. Georgia, an ECT case the facts of which are examined in depth in sub-chapter 5.1 of the thesis, the tribunal examined the respondent’s argument that “the development of Georgia’s oil pipeline infrastructure was of crucial national importance to the country’s political independence in the region and its economic development”.58 The tribunal decided that the state’s decision, preformed even at the cost of the claimant, could be regarded as a measure adopted in the public
56 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2nd edn, Oxford University Press 2012), pp. 99, 100.
57 Article 13 (1) (a) of the ECT.
58 Ioannis Kardassopoulos (Greece) v. Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, para. 391.
23 interest of the country. The arbitrators concluded that Georgia did not breach the public interest condition of Article 13 of the ECT.59 This case reveals that the requirement of public interest could not be breached if the state undertakes a measure, which inflicts harm on the investment of a foreign investor, if the measure serves the national interest and is of great importance for the respondent.
In theYukos Universal Ltd. v. Russian Federation case, the tribunal also examined the requirements of Article 13 of the ECT one by one.60 The Yukos arbitration’s case facts are examined in detail in sub-chapter 3.2. With respect to condition (a) of Article 13 of the ECT, concerning measures taken in the public interest, the tribunal was of the opinion that the destruction of the largest Russian oil company and taxpayer were not in the public interest. It was in the interest of Rosneft, a state-owned Russian company, involved in the oil sector, which absorbed the main assets of Yukos for a very low price. The tribunal therefore concluded that the measures were not in the national interest of the Russian Federation’s economy and people.61
The condition of public interest of Article 13 of the ECT essentially means that a state measure should serve the public interest of the state adopting it, which could manifest itself in a measure favouring its political independence or economic development, as seen in the Kardassopoulos case. The measure should not however be in the interest of a state-owned company or other entity, as observed in the Yukos arbitration.
ii. Non-discrimination
The second criterion of Article 13 (1) of the ECT states that a measure of expropriation should not be discriminatory.62
In Kardassopoulos v. Georgia, the tribunal stated that it might “in certain circumstances, be the case that a taking can be considered discriminatory absent an
59 Ibid, para. 392.
60 Yukos Universal Ltd. (UK - Isle of Man) v. Russian Federation, PCA Case No. AA 227, Final Award.
61 Ibid, para. 1581.
62 Article 13 (1) (b) of the ECT.
24 intention to discriminate against an investor on the basis of nationality”.63 In other words, a measure could be discriminatory if the state had no intention to discriminate the foreign investor by adopting it, compared to the state’s treatment of other foreign investors. In this case, the tribunal did not find a breach of the non-discrimination requirement of Article 13 of the ECT and stated that the government did not discriminate against the claimant, but that there was a more beneficial agreement with another investor.
In Yukos,64 the tribunal also examined the requirement of non-discrimination of the measures taken. The tribunal compared the treatment afforded to other oil companies in Russia to the treatment afforded to Yukos and its assets’ appropriation by the companies Rosneft and Gazprom. The tribunal stated that the measures could have been discriminatory, but did not decide on that issue, because the parties had inconclusively argued upon it.65
With respect to the topic of non-discrimination, a measure can be considered discriminatory even if the state did not have the intention for it to be discriminatory, as seen in the Kardassopoulos case. This condition will likely be breached if the state subjects the foreign investment to measures, which are clearly different from the treatment afforded to other foreign investments.
iii. Due process of law
The third requirement of Article 13 (1) of the ECT stipulates that expropriation should be carried out in compliance with the due process of law.66 In the Kardassopoulos case, both parties have put forward the definition in the OECD’s Draft Convention on the Protection of Foreign Property, which states the following:
“In essence, the contents of the notion of due process of law make it akin to the requirements of the “Rule of Law”, an Anglo-Saxon notion, or of “Rechtsstaat”, as
63 Ioannis Kardassopoulos (Greece) v. Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, para. 393.
64 Yukos Universal Ltd. (UK - Isle of Man) v. Russian Federation, PCA Case No. AA 227, Final Award.
65 Ibid, para. 1582.
66 Article 13 (1) (c) of the ECT.
25 understood in continental law. Used in an international agreement, the content of this notion is not exhausted by a reference to the national law of the parties concerned. The
“due process of law” of each of them must correspond to the principles of international law.”67
The Kardassopoulos tribunal agreed with the claimants’ submission of the analysis by the arbitrators in the ADC v. Hungary case,68 most notably with the statement that the legal procedure afforded “must be of a nature to grant an affected investor a reasonable chance within a reasonable time to claim its legitimate rights and have its claims heard”.69 The tribunal concluded that Georgia did not provide for a legal mechanism before and after the measures of expropriation and the claimant could not have his claims adjudicated within a reasonable time. The tribunal also stated that the whole process of expropriation was not executed under due process of law and Georgia’s refusal to provide the claimant with a chance within a reasonable period of time to have his claims heard breached Article 13 (1) of the ECT.70
In Yukos,71 with respect to condition (c), dealing with the due process of law, the tribunal considered that the process of law, upon which Yukos was subjected was not
“carried out under due process of law”. The reasons are stated in Section VIII C 3 of the Award. The officers of the company were subjected to a harsh treatment and had been jailed, the counsel of Yukos had been mistreated, and the pace of the proceedings did not correspond to due process. The Courts of Russia imposed their own will on the authorities and made them proceed with bankrupting the company, distributing its assets to a State company and jailing a person who was interested in political competition.72
Due process of law concerns the procedure, according to which expropriation is carried out. This procedure should comply with the rule of law, as well as with the principles
67 Ioannis Kardassopoulos (Greece) v. Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, para. 394.
68 ADC v. Hungary, ICSID Case No. ARB/03/16, Award, 2 October 2006.
69 Ioannis Kardassopoulos (Greece) v. Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, para. 396.
70 Ibid, para. 404.
71 Yukos Universal Ltd. (UK - Isle of Man) v. Russian Federation, PCA Case No. AA 227, Final Award.
72 Ibid, para. 1583.
