Hulley v. Russia 2014

offered the investor at the time it made its investment.1954 In support of these propositions, Respondent cites Saluka and Duke Energy v. Ecuador.1955

1499. Respondent also refers to the award in M.C.I. v. Ecuador to support the proposition that the obligation to provide an investor with stable, equitable, favorable and transparent conditions cannot be construed as an obligation to refrain from enforcing existing law.1956 Respondent relies on Professor Dolzer’s view that “[t]he pre-investment legal order forms the framework for the positive reach of the expectation which will be protected and also the scope of considerations upon which the host state is entitled to rely when it defends [itself].”1957

1500. Respondent refers to the awards in Lauder v. Czech Republic and Genin v. Estonia in support of its contention that conduct cannot be in breach of the fair and equitable treatment standard if authorities are only taking the actions necessary to enforce the their laws.1958 Respondent also relies on the Genin v. Estonia award for the proposition that where a State’s actions are the justified exercise of its power to enforce its laws, the procedural irregularities complained of by investors must be very severe to amount to a violation of the relevant investment treaty.1959

1501. Moreover, Respondent contends that the fair and equitable treatment standard in Article 10(1) of the ECT―specifically with respect to establishing a denial of justice, or conduct that is otherwise manifestly unfair or unreasonable―corresponds to an international law minimum standard of treatment of foreign investment.1960 This minimum standard, submits Respondent, incorporates the customary international law minimum standard of treatment for alien property, as well as treaty obligations of the host State, but excludes decisions by international organizations, such as the ECtHR.1961

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1502. According to Respondent, Claimants’ burden for showing a violation of the minimum standard is “demanding”.1962 Thus, some tribunals have equated the fair and equitable treatment standard with the Neer standard, which for allegations of due process violations by a host State’s courts would require a showing of outrage, bad faith, willful neglect of duty, or “insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency”.1963

1503. Thus, due process violations in one or more proceedings “do not by themselves establish a treaty violation if the procedures are only part of the judicial process available to the parties.”1964 Citing AMTO v. Ukraine, Respondent argues that the assessment of the conduct of national courts must include the availability of remedies in the host State’s legal system and whether or not such remedies were exercised; and if they were exercised, whether they were exercised fully and wisely.1965 In addition, in order to prove their claim for denial of justice, Claimants must show a “clear and malicious misapplication of the law” based on the content of judicial opinions themselves.1966

1504. With respect to the standard of non-discrimination, Respondent submits that Article 10(1) of the ECT “only prohibits discrimination based on nationality.”1967 Accordingly, it argues that discriminatory measures must have been “taken because of the foreign nationality of the shareholders.”1968

1505. Part VII of the Table of Contents in Respondent’s Rejoinder provides a short list of the conditions that, according to Respondent, Claimants’ claims must meet in order to show a breach of Article 10(1) (in addition to showing that the conduct alleged to be in breach of Article 10(1) is attributable to Respondent and is an exercise of puissance publique, as discussed above in Chapter X.A):

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1.Regardless of the standard of review under Article 10(1), Claimants must establish that the Russian Federation’s actions interfered with Claimants’ legitimate and reasonable expectations based on a full disclosure of the facts relevant to Claimants’ investments and based on operation of the investments in accordance with Russian law

a). . . Claimants must establish . . . specific, legal commitments by Respondent based on a full disclosure of the facts relevant to their investments

b)Claimants also must establish that the Russian Federation’s actions interfered with their expectations that are based on an operation of their investments in accordance with Russian law

2.Claimants must establish a systemic judicial failure, or, at a minimum, that the conduct they attack is otherwise manifestly unfair or unreasonable

a)Claimants must establish that the Russian court decisions they attack constitute a denial of justice or are otherwise manifestly unfair or unreasonable

b)Specifically with respect to the taxation measures Claimants challenge, Claimants must establish a systemic judicial failure or, at a minimum, that the measures are manifestly unfair or unreasonable, and contrary to internationally recognized tax policies and practices

c)Specifically with respect to Yukos’ bankruptcy proceedings, Claimants must demonstrate a systemic failure of the Russian judicial system, or, at a minimum, that the bankruptcy proceedings were manifestly unfair or unreasonable

3.To establish “unreasonable or discriminatory measures” that impaired the management, maintenance, use or enjoyment of their investments, Claimants must prove a systemic judicial failure, or, at a minimum, that the taxation measures complained of are contrary to

international tax practices or treated similar cases differently on the basis of nationality, without reasonable justification.1969

1506. Finally, Respondent submits that in order to substantiate their claim, Claimants must prove a direct causal link between the loss of their shares and measures in breach of Article 10(1) ECT.1970

3.Did Respondent Accord Claimants’ Investments the Standard of Treatment Required by Article 10(1) of the ECT?

(a)Claimants’ Position

1507. Claimants submit that Respondent violated its obligations under Article 10(1) of the ECT by failing to accord Claimants’ investments fair and equitable treatment and by impairing Claimants’ investments by discriminatory measures.

1508. In terms of fair and equitable treatment, Claimants contend that Respondent’s actions, both individually and collectively, constitute breaches of the most basic requirements of procedural

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propriety and due process, as well as a denial of justice.1971 Claimants emphasize that their case is not limited to one of “systematic denial of justice”, as Respondent maintains.1972

1509. Claimants also emphasize that, in considering whether Respondent violated the fair and equitable treatment standard under Article 10(1) of the ECT, the Tribunal should not view each fact in isolation, but rather look at the totality of Respondent’s actions.1973 Thus, Claimants state that, while some of Respondent’s actions could and do, in and of themselves, constitute breaches of Articles 10(1), their position is that “the totality of the Russian Federation’s actions and their cumulative effect” constitute a violation of the fair and equitable treatment standard.1974

1510. Claimants offer a list of specific actions taken by Respondent, or attributable to it, which, they say, demonstrate that Respondent breached the fair and equitable treatment standard.

1511. Firstly, Claimants contend that Respondent breached the fair and equitable treatment standard by the conduct of “over 150 raids . . . in brutal conditions from July 4, 2003 to November 18, 2004, and the innumerable searches and seizures conducted by armed and masked officers at Yukos’ headquarters, the premises of affiliates or entities related to Yukos, or the offices of lawyers acting in Yukos-related cases, leaving neither a copy nor a simple list of the documents and items seized, in breach of even the most basic requirements of Russian law.”1975 Claimants allege that these searches and seizures were part of the Russian Federation’s campaign to destroy Yukos and had a major disruptive effect on the operations of Yukos, reducing the company’s chances of survival in the face of the Russian Federation’s attacks (and, in

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particular, “the accelerated pace in which tax debts were fabricated”).1976 As for the “campaign of harassment” on PwC, and subsequent raid, Claimants allege that it precipitated PwC’s withdrawal of its certification of Yukos’ audits.1977

1512. Secondly, Claimants contend that Respondent did not provide proper notice of administrative actions to be taken by the State.1978 In that regard, Claimants submit that the Tax Ministry, the Russian courts and the bailiffs repeatedly failed to afford Yukos reasonable timeframes in which to pay or challenge the alleged tax reassessments: just two days to voluntarily pay after issuance of the 2000 Decision, and a single day to pay after issuance of each of the 2002 and 2003 Decisions. In addition, Claimants allege that Respondent did not wait for these short time limits to expire before filing a petition for collection with the Moscow Arbitrazh Court, which Claimants allege were swiftly “rubber-stamped” in favor of Respondent.1979

1513. Thirdly, Claimants submit that Respondent did not afford them the opportunity to be heard by an impartial tribunal. Claimants contend that Respondent instead ensured that governmentfriendly judges sanctioned the tax reassessments and that the three judges who failed to rule against Yukos were removed, and their rulings later overturned. Yukos’ requests for interim relief to suspend the effect of the tax reassessment decisions pending appeal on the merits were also systematically rejected. Claimants further submit that hearings on these matters were set, and appeals ruled upon, almost immediately, and that Yukos was not given real access to case materials.1980

1514. Fourthly, Claimants assert that the sale of YNG was a sham auction, orchestrated by Respondent under the pretext of satisfying Yukos’ alleged tax liability for the 2000 Decision; an alleged liability that Claimants submit was fully paid prior to the auction date.1981 With only State-owned Gazprom and Baikal in attendance,1982 Claimants contend that Baikal acquired YNG for a “bargain” price. Claimant also notes that Baikal was purchased by State-owned

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Rosneft shortly following the auction, and that President Putin himself admitted Baikal was used as a front company to shield the future owner – Rosneft – from legal claims.1983

1515. Fifthly, Claimants assert that the initiation of bankruptcy proceedings against Yukos at the behest of Rosneft, the biased conduct of those proceedings by Russian courts, and the sale of Yukos’ remaining assets also violated due process requirements.1984

1516. Claimants submit that the following actions taken by Respondent in breach of due process amount to a denial of justice:

the administration of justice by Russian courts with respect to all Yukos related matters did not meet generally accepted international law standards of due process, impartiality and legitimacy;1985

Russian courts were unduly hasty in their decision-making, refusing to provide Yukos with sufficient time or adequate opportunity to review the evidence on which the tax reassessment payment demands were based which eventually lead to its bankruptcy;1986 and

the systematic removal of judges who ruled in Yukos’ favor and dismissal of Yukos’ challenges against judges who had previously ruled against it in tax proceedings.1987

1517. In their discussion of denial of justice, Claimants invited the Tribunal to note the fact that Yukos lost nearly all of its cases in 2000 against the tax authorities and the statistic put forward by Mr. Konnov that the taxpayer in Russia wins in 75 percent of the cases.1988

1518. Moreover, Claimants argue that even if it purported to discuss denial of justice claims, Respondent has actually failed to defend its conduct, limiting itself to misstating the standard applicable to a claim of denial of justice.1989 According to Claimants, Respondent has “concentrated its energies on urging the Arbitral Tribunal to impose a higher burden on

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Claimants, for the facts of the Russian Federation’s conduct are devastating.”1990 Claimants assert that Respondent’s attempts to elevate the applicable threshold fail because Respondent’s conduct was indefensible under any plausible interpretation of the standards contained in Article 10(1) of the ECT.1991

1519. Claimants also contend that Respondent’s actions were arbitrary, unreasonable, disproportionate, and abusive,1992 in their reference to the following actions of Respondent:

Respondent’s unrelenting campaign of coercion, harassment, and intimidation against Yukos and related persons and entities;1993

the imposition of arbitrarily and disproportionately large payment demands by Respondent under the guise of tax reassessments, enforced within short time periods and accompanied by arbitrary freezing of assets orders;1994 and

Respondent’s unreasonable and arbitrary rejection of Yukos’ proposals to settle or resolve the alleged tax claims.1995

1520. Claimants submit that Respondent failed to ensure a predictable and stable legal and business framework for the Claimants’ investments.1996 They refer as examples to:

Respondent’s reversal of its previous acceptance of Yukos’ tax optimization structure as legal;

Respondent’s reversal of its approval of the Sibneft merger; and

a general lack of transparency on the part of Respondent.1997

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1521. In support of their contention that Respondent discriminated against Claimants’ investments, Claimants rely on the following facts:

Respondent treated Yukos in a significantly different way from other comparable Russian oil companies;

Respondent treated YNG differently before and after its acquisition by Rosneft; and

Respondent ensured differential treatment between creditors related to Yukos or Yukos’ shareholders, and State or State-related creditors in the Yukos bankruptcy proceedings.

1522. In their Reply, Claimants assert that in its Counter-Memorial Respondent does not address Claimants’ claims of discrimination under Article 10(1) of the ECT, except in its assertion that Claimants’ allegations with respect to the Yukos–Sibneft demerger do not involve discrimination based on nationality.1998 Claimants also argue that Respondent improperly invokes its domestic law in defense of its breaches of international law.1999

1523. Also in their Reply, Claimants argue that Respondent’s only defense against the bulk of Claimants’ claims under Article 10(1) is to invoke Article 21(1) ECT. According to Claimants, in providing no other defense, Respondent has conceded that its conduct breached Article 10(1). Claimants view Respondent’s defense as resting

squarely on the theory that Article 21(1) . . . operates as a license to ECT signatories to freely violate their treaty obligations under Article 10(1) . . . so long as they create the appearance that their actions have some connection, however remote and indirect, to taxation.2000

(b)Respondent’s Position

1524. Respondent’s main position is that Claimants have failed to establish any violation of Article 10(1) of the ECT.

1525. In particular, Respondent submits that (a) Claimants have failed to establish that conduct, which is attributable to Respondent and an exercise of its sovereign power, proximately caused

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the loss of Claimants’ investment;2001 (b) Claimants have failed to establish that the measures they challenge interfered with Claimants’ legitimate expectations;2002 and (c) the measures relating to the imposition and enforcement of taxes were well within the range of a State’s generally accepted regulatory powers.2003

1526. Respondent also argues that Claimants have failed to show that the challenged measures constitute a denial of justice or are otherwise manifestly unfair or unreasonable.2004 In particular, Respondent argues that Claimants have failed to establish that the Moscow and Chukotka courts “clearly and maliciously” misapplied Russian law when granting the claims of Gemini Holdings and Nimegian Trading in the context of the Yukos–Sibneft merger.2005

1527. Respondent also asserts that the challenged measures were not discriminatory.2006

C.ARTICLE 13 OF THE ECT 1. Introduction

1528. Article 13(1) of the ECT provides, in relevant part:

Article 13

EXPROPRIATION

(1)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 of law; and

(d)accompanied by the payment of prompt, adequate and effective compensation.

Such compensation shall amount to the fair market value of the Investment expropriated at the time immediately before the Expropriation or impending

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Expropriation became known in such a way as to affect the value of the Investment (hereinafter referred to as the “Valuation Date”).

Such fair market value shall at the request of the Investor be expressed in a Freely Convertible Currency on the basis of the market rate of exchange existing for that currency on the Valuation Date. Compensation shall also include interest at a commercial rate established on a market basis from the date of Expropriation until the date of payment.

1529. The Parties analyze Article 13 in two steps, first by addressing what constitutes expropriation or “measures having effect equivalent to nationalization or expropriation,” and then by discussing what constitutes a legal expropriation, i.e., an expropriation conducted in accordance with the four conditions set out in Article 13(1): that the expropriation be (a) in the public interest; (b) not discriminatory; (c) carried out under due process of law; and (d) accompanied by the payment of prompt, adequate and effective compensation. The Tribunal will summarize first the Parties’ principal arguments regarding the legal standards of Article 13 and will then review the facts of the present case in the light of these standards.

2.Applicable Legal Standards under Article 13 of the ECT

(a)Claimants’ Position

1530. Claimants note that Article 13(1) of the ECT deals with nationalization and expropriation, as well as other equivalent measures. Claimants submit that such equivalent measures include “covert or incidental interference with the use of property which has the effect of depriving the owner . . . of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State.”2007

1531. Claimants submit that the standard for expropriation is objective and that while the showing of intent to expropriate may evidence a measure to be expropriatory, it is not a requirement of expropriation.2008

1532. Claimants emphasize that, in considering whether Respondent expropriated Claimants’ investment within the meaning of Article 13(1), the Tribunal should look at the totality of

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