Corporate Sovereignty Tribunal Makes $50 Billion Award Against Russia

[Mike]

Techdirt has been writing about the dangers faced by nations that sign up to treaties containing corporate sovereignty clauses for some time now. These chapters are typically included in so-called trade agreements like TAFTA/TTIP and TPP -- although they actually go far beyond regulating trade -- but are also found elsewhere. For example the Energy Charter Treaty (ECT) includes one, as Germany found to its cost when the Swedish company Vattenfall used the investor-state dispute settlement (ISDS) mechanism to claim €3.7 billion after the Germany state decided to phase out nuclear power stations -- thus reducing Vattenfall's future profits. Now the ECT's corporate sovereignty chapter has struck again on an even more staggering scale:

In an historic arbitral award rendered on July 18, 2014, an Arbitral Tribunal sitting in The Hague under the auspices of the Permanent Court of Arbitration (PCA) held unanimously that the Russian Federation breached its international obligations under the Energy Charter Treaty (ECT) by destroying Yukos Oil Company and appropriating its assets. The Tribunal ordered the Russian Federation to pay damages in excess of USD 50 billion to our clients who were the majority shareholders of Yukos Oil Company.

That comes from a press release issued by the lawyers acting for the Yukos shareholders, who are also doing quite nicely:

The Tribunal also ordered the Russian Federation to reimburse to our clients USD 60 million in legal fees, which represents 75% of the fees incurred in these proceedings, and EUR 4.2 million in arbitration costs.

Even for an oil- and gas-rich country like Russia, this is obviously a massive amount of money. A detailed and insightful post by Kavaljit Singh puts it in context:

In relative terms, the compensation award is equivalent to around 11 per cent of Russia's foreign exchange reserves, 10 per cent of annual national budget and 2.5 per cent of country’s GDP. Given the magnitude of compensation, the Award could be more damaging to the Russian economy than all the economic sanctions imposed by the West against Russia for its actions in Ukraine.

He goes on to point out one of the most worrying aspects of these awards by tribunals:

What is most astonishing is that the arbitral tribunal has not provided any standard or credible rationale behind awarding $50 bn in compensation to claimants. The calculations of total damages put forward by claimants are based on assumptions and hard evidence is lacking. The tribunal found that the claimants contributed to 25 per cent "to the pejudice they suffered at the hands of the Russian Federation." Hence, the amount of damages to be paid by Russia is reduced by 25 per cent to $50 bn from $67 bn. In its lengthy 615-page verdict, no explanation has been given by the tribunal on how did it arrive at 25 per cent of claimants' contributory fault? Why not 30 or 40 or 50 per cent?

The arbitrary nature of these awards, and the fact there seems to be literally no limit to the amount that might be awarded, are just some of the many problems afflicting investor-state dispute settlements. Singh notes another disturbing aspect of the current verdict:

It needs to be emphasized here that Russia only accepted the provisional application of the ECT (pending ratification) in 1994 meaning that the country will only apply the Treaty "to the extent that such provisional application is not inconsistent with its constitution, law or regulations." Same was the approach adopted by Belarus, Iceland, Norway and Australia.

Russia never ratified the ECT and announced its decision to not become a Contracting Party to it on August 20, 2009. As per the procedures laid down in the Treaty, Russia officially withdrew from the ECT with effect from October 19, 2009.

Nevertheless, Russia is bound by its commitments under the ECT till October 19, 2029 because of Article 45 (3) (b) states that "In the event that a signatory terminates provisional application…any Investments made in its Area during such provisional application by Investors of other signatories shall nevertheless remain in effect with respect to those Investments for twenty years following the effective date of termination."

That is, although Russia signed the treaty, it never ratified it. And yet under its terms, it can still be sued, as here -- another good reason never to sign up to these kind of agreements. Whether it will pay up is quite a different matter, of course. As Singh points out:

Shareholders will soon find it extremely difficult to enforce the Award as Russia has already decided to challenge it. The shareholders could seek to seize commercial assets of Russia (owned by country's state-owned corporations and sovereign wealth funds) in 149 countries which are signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Award (popularly known the New York Convention).

In any case, it is going to be a time-consuming and uphill process to enforce the tribunal Award in 149 contracting parties of New York Convention.

As he writes, the enormous award against the Russian government should stand as the starkest warning yet about the dangers of entering into these kinds of agreements:

Even though this Award is related to ECT, it provides important policy lessons to other countries which have already signed or currently negotiating bilateral investment treaties (that allow investor-to-state arbitration -- ISA) without any consideration of consequences and potential costs.

Here's why:

The existing investment protection agreements have failed to address the balance of rights and responsibilities of foreign investors as it offers numerous legal rights for investors without requiring corresponding responsibilities for them.

That's a hugely important point that all those countries taking part in the negotiations for TAFTA/TTIP, TPP and CETA would do well to consider carefully -- or they may find themselves on the wrong end of $50 billion award, as Russia now does.

Originally Published: Tue, 05 Aug 2014 07:37:00 GMT
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