Hulley v. Russia 2014

(c)Would any Instances of Claimants’ Alleged “Bad Faith and Illegal” Conduct be Caught by a Legality Requirement Read into the ECT?

1364. To summarize, the Tribunal accepts that a claimant may be barred from seeking relief under the ECT if its investment was made in bad faith or in violation of the laws of the host state.

1365. It follows that the alleged instances of “unclean hands” listed in Subsections IX.B.2(b), (c) and

(d) above––specifically, the instances related to the alleged abuse of the Russia–Cyprus DTA, the tax optimization scheme and the obstruction of Russia’s enforcement of tax claims against Yukos, all of which relate to actions that were taken after the making of Claimants’ investment, cannot have any impact on the availability of ECT protection for Claimants.

1366. This leaves for the Tribunal’s consideration Respondent’s allegations of bad faith and illegal conduct in the acquisition of Yukos and the subsequent consolidation of control and ownership over Yukos and its subsidiaries, set out in Subsection IX.B.2(a) above.

1367. It is common ground between the Parties that these actions were taken before Claimants became shareholders of Yukos in 1999, 2000 and 2001 and, consequently, were not taken by Claimants themselves, but by other actors, such as Bank Menatep and the Oligarchs.1779 Claimants submit that these actions are thus irrelevant to these arbitrations, as the conduct complained of was not that of Claimants’ themselves and, in any event, pre-dates Claimants’ investment.1780

1368. Respondent replies that, on the contrary, the process of the acquisition of the Yukos shares by Claimants should not be seen in isolation but as an integral part of the “making of the investment” by Claimants. Respondent’s argument was most convincingly put by Dr. Claudia Annacker during the Hearing. Dr. Annacker argued as follows:

Contrary to Claimants’ position, the serious illegalities that infect the entire process of the acquisition of the Yukos shares by Claimants cannot simply be ignored because the transfer of the shares to the Claimants . . . viewed in isolation, is asserted to be legal. These illegalities cannot somehow be cured through multiple transfers within this network of the oligarchs’ offshore companies from one shell company to another.

Indeed, the making of an investment is often a process rather than an instantaneous act, and often comprises a number of diverse transactions. These transactions must be treated as an

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integrated whole. The transactions may have a separate legal existence, but they have a common economic aim . . .

Indeed, it would be incompatible with economic reality and undermine the integrity of the legal process if serious irregularities – illegalities – infecting the process of the making of the investment would not affect the availability of investment treaty protection, whether or not a specific transaction, part of the process, if viewed in isolation, might be legal.

Now, this conclusion applies a fortiori where a claimant is not unrelated to the persons or entities that committed these illegalities, but is an investment vehicle owned and controlled by the same persons who committed the illegalities . . . Otherwise, investment treaty protection could be achieved simply by shifting investments through layers of ownership and control to launder illegal investments . . .

While Claimants’ acquisition of their shares may be a separate legal transaction, there is a common economic aim pursued by the same oligarchs . . .1781

1369. The Tribunal agrees with Respondent that an examination of the legality of an investment should not be limited to verifying whether the last in a series of transactions leading up to the investment was in conformity with the law. The making of the investment will often consist of several consecutive acts and all of these must be legal and bona fide.

1370. In the present case, however, Respondent has failed to demonstrate that the alleged illegalities to which it refers are sufficiently connected with the final transaction by which the investment was made by Claimants. The transactions by which each Claimant acquired its investment were their purchases of Yukos shares. As established in the Interim Award, these purchases were legal and occurred starting in 1999.1782 On the other hand, the alleged illegalities connected to the acquisition of Yukos through the loans-for-shares program occurred in 1995 and 1996, at the time of Yukos’ privatization. They involved Bank Menatep and the Oligarchs, an entity and persons separate from Claimants, one of which––Veteran––had not even come into existence.1783 With respect to Respondent’s other allegations, regarding profit skimming and the oppression of minority shareholders, it is also clear to the Tribunal that they are not part of the transaction or transactions by which each Claimant acquired their interest in Yukos.

1371. Respondent relies on Anderson for the proposition that “illegalities infecting an investment that pre-date a claimant’s acquisition of the investment are not irrelevant or outside the tribunal’s jurisdiction ratione temporis.”1784 However, the tribunal in that case examined and found to be

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illegal the very transaction through which the claimants obtained their investment, not any prior transactions made by other persons. 1785

1372. While it is true that the claimants in Anderson were not blamed for the illegality that tainted their investment, nevertheless it is the very transaction by which their respective investments were obtained that was considered illegal by the tribunal, and led it to decline jurisdiction.

(d)Conclusion

1373. The Tribunal concludes that Respondent’s “unclean hands” argument fails as a preliminary objection. It does not operate to deprive the Tribunal of its jurisdiction in this arbitration, render inadmissible any of the Claimants’ claims or otherwise bar Claimants’ from invoking the substantive protections of the ECT.

1374. However, as will be seen in Chapter X.E and Part XII, some of the instances of Claimants’ “illegal and bad faith” conduct complained of by Respondent in the context of this preliminary objection, could have an impact on the Tribunal’s assessment of liability and damages.

C.RESPONDENT’S OBJECTIONS UNDER ARTICLE 21 OF THE ECT

1.Introduction

1375. Another important threshold issue in this arbitration arises from Respondent’s objection under Article 21 of the ECT. Respondent argues that, pursuant to this complex provision (containing a “carve out” from the ECT for “Taxation Measures” at Article 21(1) and a “claw back” for Article 13 of the ECT in relation to “taxes” at Article 21(5)), the Tribunal lacks jurisdiction over claims with respect to “Taxation Measures” other than those based on expropriatory “taxes”.1786 Claimants argue that the objection is without merit since, inter alia, Article 21 does not apply to actions—including expropriations—carried out “under the guise of taxation.”1787

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1376. The relevant provisions of Article 21 of the ECT for present purposes are paragraphs 1 (the “carve-out”), 5 (the “claw-back”) and 7 (definitions), which in the English version1788 read as follows:

(1) Except as otherwise provided in this Article, nothing in this Treaty shall create rights or impose obligations with respect to Taxation Measures of the Contracting Parties. In the event of any inconsistency between this Article and any other provision of the Treaty, this Article shall prevail to the extent of the inconsistency.

. . .

(5)(a) Article 13 shall apply to taxes.

(b)Whenever an issue arises under Article 13, to the extent it pertains to whether a tax constitutes an expropriation or whether a tax alleged to constitute an expropriation is discriminatory, the following provisions shall apply:

(i)The Investor or the Contracting Party alleging expropriation shall refer the issue of whether the tax is an expropriation or whether the tax is discriminatory to the relevant Competent Tax Authority. Failing such referral by the Investor or the Contracting Party, bodies called upon to settle disputes pursuant to Article 26(2)(c) or 27(2) shall make a referral to the relevant Competent Tax Authorities;

(ii)The Competent Tax Authorities shall, within a period of six months of such referral, strive to resolve the issues so referred. Where nondiscrimination issues are concerned, the Competent Tax Authorities shall apply the non-discrimination provisions of the relevant tax convention or, if there is no non-discrimination provision in the relevant tax convention applicable to the tax or no such tax convention is in force between the Contracting Parties concerned, they shall apply the non-discrimination principles under the Model Tax Convention on Income and Capital of the Organisation for Economic Co-operation and Development;

(iii)Bodies called upon to settle disputes pursuant to Article 26(2)(c) or 27(2) may take into account any conclusions arrived at by the Competent Tax Authorities regarding whether the tax is an expropriation. Such bodies shall take into account any conclusions arrived at within the six-month period prescribed in subparagraph (b)(ii) by the Competent Tax Authorities regarding whether the tax is discriminatory. Such bodies may also take into account any conclusions arrived at by the Competent Tax Authorities after the expiry of the six-month period;

(iv)Under no circumstances shall involvement of the Competent Tax Authorities, beyond the end of the six-month period referred to in subparagraph (b)(ii), lead to a delay of proceedings under Articles 26 and 27.

. . .

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(7)For the purposes of this Article:

(a)The term “Taxation Measure” includes:

(i)any provision relating to taxes of the domestic law of the Contracting Party or of a political subdivision thereof or a local authority therein;

and

(ii)any provision relating to taxes of any convention for the avoidance of double taxation or of any other international agreement or arrangement by which the Contracting Party is bound.

(b)There shall be regarded as taxes on income or on capital all taxes imposed on total income, on total capital or on elements of income or of capital, including taxes on gains from the alienation of property, taxes on estates, inheritances and gifts, or substantially similar taxes, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.

(c)A “Competent Tax Authority” means the competent authority pursuant to a double taxation agreement in force between the Contracting Parties or, when no such agreement is in force, the minister or ministry responsible for taxes or their authorized representatives.

(d)For the avoidance of doubt, the terms “tax provisions” and “taxes” do not include customs duties.

1377. Respondent’s objection under Article 21 of the ECT was originally addressed by the Parties during the jurisdictional phase of the arbitration. In its Interim Awards, the Tribunal observed that some of the arguments raised by the Parties under Article 21 went to the heart of the merits of the dispute, in that they related to the background to and motivation behind Respondent’s tax assessments, enforcement measures and other conduct, and that the Tribunal would not rule on these issues in a vacuum.1789 As a consequence, the Tribunal decided “to defer its definitive interpretation of Article 21, and its characterization of [Claimants’] claims for purposes of Article 21, to the next phase of the arbitration.”1790

1378. As a consequence, the Parties had a further opportunity to develop their positions under Article 21 of the ECT during the merits phase of the present proceedings. Claimants’ and Respondent’s arguments are now summarized in turn.

2.Claimants’ Position

1379. Claimants argue that Article 21 of the ECT does not apply to the case at hand since Respondent’s actions were “actions under the guise of taxation” rather than “bona fide taxation

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actions”1791 and merely a tool “to achieve a purpose that had nothing to do with taxation: the elimination of a potential opponent and the appropriation of Yukos’ assets.”1792 According to Claimants, “[i]t is no answer for a state to say that its courts have used the [word] ‘taxation’ . . .

in describing judgments by which they effect the dispossession of foreign investors. If that were enough, investment protection through international law would likely become an illusion, as states would quickly learn to avoid responsibility by dressing up all adverse measures, perhaps expropriation first of all, as taxation.”1793 Claimants refer in particular to the decisions of the Quasar and RosInvestCo tribunals to support their view that in a case such as this one a carve-out with regard to taxation measures cannot apply.1794

1380. In addition, Claimants suggest that the carve-out under Article 21 of the ECT is narrower than that in other treaties in that it only applies to the enactment of “provisions” relating to taxes, but not to the application of these provisions and the “collection and enforcement” of taxes.1795 Claimants refer to the ECT’s travaux préparatoires in this regard.1796 In particular, they point out that during the negotiations of the ECT, the French delegation, in response to a memorandum of the Legal Sub-Group noting that “taxation measures” were identified in an illustrative manner, took the view that Article 21(7) of the ECT would constitute a definition and that, therefore, “includes” in that provision would have to be replaced by “means”.1797

1381. Claimants say that they “have no issue with the right of the Russian Federation to enact tax provisions or with the content of Russian tax law,” but only with “the manner in which Russian tax law was grossly distorted, misapplied and abused to effect the destruction of Yukos.”1798

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Accordingly, Claimants take the view that for this reason alone Article 21 of the ECT cannot apply.1799

1382. Claimants also take the view that, in any event, the ECT’s protection would still apply with regard to the expropriation standard under Article 13 of the ECT, due to the claw-back provision in Article 21(5) of the ECT, which they say must have the same scope as Article 21(1) of the ECT.1800 Claimants suggest that Respondent’s interpretation (according to which the claw-back provision would be narrower in scope than the taxation carve-out) would lead to “a gaping hole in the ECT where investors would stand completely unprotected from expropriatory taxation,” thus “defeat[ing] the object and purpose of the ‘claw-back’ and of the ECT itself.”1801 Claimants also dispute Respondent’s argument that Russian law should determine the meaning of “tax” under Article 21(5) of the ECT, since “for the interpretation of a treaty, you do not look at domestic law of one of the States parties to a treaty.”1802

1383. In any event, Claimants argue that many of Respondent’s actions that they complain of have nothing to do with taxation and thus fall outside of the scope of Article 21 of the ECT.1803 In this regard, Claimants state that “the attacks on Yukos and related persons involved all of the following organs and entities: the Presidential Administration, the Russian courts, Ministry of Justice, Federal Bailiff Service, Penitentiary Service, Ministry of Natural Resources, Internal Affairs, FSB, Prosecutor General’s Office, Federal Property Fund, Rosneft” and included “freezes, searches and seizures,” the auctioning of YNG and the forcing of Yukos into bankruptcy, all of which would “have nothing to do with taxation.”1804

1384. Finally, Claimants assert that referring any questions with regard to taxation measures to the Russian Federation’s tax authorities as envisaged under the claw-back provision of Article 21(5) of the ECT would be an exercise in futility, as the relevant Russian authorities would already have looked at the issues, the Parties’ submissions would be too voluminous to be considered by any of the relevant authorities and the Tribunal would, in any event, not be

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bound by any comments of these authorities.1805 As a consequence, Claimants argue that, even if the Tribunal were to find that Article 21(5) of the ECT applies, it should still proceed with its examination of the case without any referral to the Russian authorities.

3.Respondent’s Position

1385. Respondent argues that most of the actions complained of by Claimants are outside the scope of the Tribunal’s scrutiny due to the taxation carve-out provision in Article 21(1) of the ECT.

1386. Respondent points out that taxation carve-outs have a number of functions, which include preserving States’ sovereignty in fiscal matters, the coordination of obligations under investment treaties and double taxation treaties, and assuring that complex tax issues are addressed with the necessary expertise.1806 To achieve these functions, taxation carve-outs would typically be “broad, covering all aspects of the tax regime.”1807 Respondent refers to a number of instances where investment treaty tribunals gave effect to taxation carve-outs in international investment treaties, namely the decisions in Duke Energy v. Ecuador, EnCana v. Ecuador, El Paso International Company v. The Argentine Republic (“El Paso”), Burlington v. Ecuador and Nations Energy v. Panama.1808

1387. With regard to the wording of Article 21(1) of the ECT, Respondent argues that the term “measures” is given a broad meaning throughout the ECT, in contradistinction to the narrower term of “laws and regulations”.1809 As a consequence, says Respondent, an interpretation of Article 21(1) of the ECT in accordance with recognized principles of treaty interpretation shows that the provision “covers all measures taken by the legislative, executive, and judiciary in the field of taxation, whether of general or individual application.”1810 Respondent refers to the ICJ’s judgment in Fisheries Jurisdiction (Spain v. Canada) to support its view that

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“measures” has a broad ordinary meaning and that, contrary to Claimants’ suggestion that “Taxation Measures” only refer to legislative “provisions”, legislation and implementing measures cannot be dissociated.1811 According to Respondent, such a dissociation would be absurd, since “[e]very time a contracting State enforces tax legislation that is carved out, but would be inconsistent with the treatment standards in Part III, the State would incur international responsibility for breach of Part III of the Energy Charter Treaty.”1812

1388. Respondent disputes Claimants’ argument that Article 21(7) of the ECT, properly interpreted, applies only to the enactment of “provisions” relating to taxes. Respondent points out that the word “includes” used in Article 21(7) of the ECT stands in contrast to the word “means” used elsewhere, thus suggesting that the enumeration in that provision is not exhaustive.1813 Respondent also argues that, if the term “Taxation Measure” were limited to provisions relating to taxes, the use of the word “includes” would not make sense, since Article 21(7) of the ECT specifically refers to both “any provision relating to taxes” in “the domestic law of the Contracting Party” and “any provision relating to taxes” in an “international agreement . . . by which the Contracting Party is bound.”1814 Since “all provisions relating to taxes are either contained in domestic law or in international treaties,” Respondent claims that there would be nothing left to add.1815

1389. Respondent rather suggests that “[t]he term ‘Taxation Measure’ has a meaning in itself” and that “it provides a benchmark to determine which measures or categories of measures, in addition to those expressly listed, constitute ‘Taxation Measures’ for purposes of Article 21 of the ECT.”1816 Respondent refers to the ECT’s travaux préparatoires to support its view that the list in Article 21(7) of the ECT is “illustrative” and “not a definition”.1817 In particular, Respondent points out that, during the negotiations of the ECT, the Canadian delegation, in

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response to a memorandum of the Legal Sub-Group noting that “taxation measures” were identified in an illustrative manner, remarked that this was intentional and that “it would be counterproductive to come up with anything more precise.”1818 It also suggests that, while the French delegation expressed a preference for an exhaustive definition and for the word “includes” to be replaced by “means”, by not proceeding with the suggested replacement, the “negotiating States chose to maintain an illustrative list.”1819

1390. In addition, Respondent refers to Article 21(2)(b) and (3)(b) of the ECT as implying that the term “Taxation Measure” includes the generic term “measure” “as consistently used throughout the Energy Charter Treaty.”1820 According to Respondent, “Claimants would have this Tribunal rewrite Article 21(7)(a) to read: ‘The term ‘Taxation Measure’ only includes provisions relating to taxes.’”1821 In reality, according to Respondent, “[t]he purpose of Article 21, paragraph 7(a) ECT is not to replace the term ‘measures’ with the term ‘provisions’, but to clarify that the carve-out extends to both domestic and international taxation measures.”1822 This would be in line with general treaty practice, which would show that “there is not a single taxation carve-out that is limited in scope to tax legislation.”1823

1391. The result of this interpretation, according to Respondent, is that “the core allegations on which Claimants base their claims are squarely within the taxation carve-out of Article 21(1)” of the ECT.1824

1392. With regard to Claimants’ argument that Article 21(1) of the ECT should be inapplicable to the present case, since the measures adopted by Respondent were taken, according to the Claimants, under the guise of taxation (rather than constituting “real” taxation measures),

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