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Comparative Law Review 18 2014 Nicolaus Copernicus University
http://dx.doi.org/10.12775/CLR.2014.015
Marcin Kałduński
SOME REFLECTIONS ON ARBITRATION
IN THE YUKOS V. THE RUSSIAN FEDERATION CASE
Abstract
In an extraordinary arbitration proceedings recently concluded, the Tribunal found that
the respondent State breached its obligations under the Energy Charter Treaty and ordered Russia
to pay damages in excess of USD 50 billion to the former Yukos shareholders. This article considers
the application of the principle of clean hands in the Yukos v. The Russian Federation case.
The arbitral Tribunal held that the said principle does not form a part of positive international
law and therefore it was not applicable in the present dispute. The principal aim of the article
is to critically analyze the arbitral Award concerning the principle of clean hands. Additionally,
the contribution also discusses the costs of the Yukos arbitrations.
Keywords
principle of clean hands – costs of arbitration – Energy Charter Treaty
International Law Department; Nicolaus Copernicus University.
142 | Marcin Kałduński
1. INTRODUCTION
In the arbitration under the Energy Charter Treaty (ECT) Yukos
shareholders have triumphed in a ten-year dispute with the Russian
Federation. In a soon-to-be famous Award rendered on 18 July 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 ECT
by expropriating Yukos Oil Company and, therefore, it ordered
the Respondent to pay damages in excess of USD 50 billion to the former
Yukos shareholders and USD 60 million of legal fees.
The Tribunal was chaired by Yves Fortier. The Russian Federation
appointed Judge Stephen Schwebel, former President of the International
Court of Justice, Chile. The Claimants appointed Dr. Charles Poncet.
The proceedings in the case were enormous arbitrations and,
at the highest, the Claimants were claiming damages from the Respondent
of “no less than US$ 114 174 billion”
1
. Since the beginning of the
arbitrations, the Tribunal has held five procedural hearings with the Parties
and issued 18 procedural orders. In 2008 the Tribunal held a ten-day
hearing on jurisdiction and admissibility and, in November 2009, issued
three Interim Awards, each over 200 pages. In 2012, a twenty-one day
Hearing on the merits was attended by over fifty party representatives.
The written submissions of the parties span more than 4000 pages and
the transcripts of the hearings more than 2700 pages. Over 8800 exhibits
have been filed with the Tribunal
2
.
The purpose of this contribution is to reflect on a certain aspect
of the Awards, to wit, the application of the principle of clean hands
by the Arbitral Tribunal. To this end, the article starts with the factual
background of the case, while section 3 is devoted to the main issue
1
Hulley Enterprises Limited (Cyprus) v. The Russian Federation, UNCITRAL, PCA Case
No. AA 226; Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL,
PCA Case No. AA 227; Veteran Petroleum Limited (Cyprus) v. The Russian Federation,
UNCITRAL, PCA Case No. AA 228; Final Awards of 18.07.2014, at para. 4 (hereinafter:
Awards). The proceedings in the above cases were joined and decided by the same Tribunal,
which delivered three virtually identical Awards in all three cases on the same day.
2
Ibidem, at para. 4.
143 | Some Reflections on Arbitration in the Yukos v. The Russian Federation Case
discussed in the article. Section 4 contains a brief summary on the costs
of the Yukos case. A set of concluding remarks are contained in section 5.
2. FACTUAL BACKGROUND
It is exceptionally difficult to summarize the facts of such a complex
case in a few paragraphs, but an outline of the facts is necessary
for the purpose of this contribution, in order to understand the reasoning
of the Tribunal. At the beginning, it should be recalled that in 2003 Yukos
was the largest oil company in Russia. It had around 100 000 employees,
six main refineries and a market capitalization of about USD 33 billion.
The Russian Federation created the company in 1993 as part of a large-scale
reorganization of the oil production and processing industry into vertically
integrated oil companies. The shareholders of Yukos and, especially,
Mr Khodorkovsky, fell into conflict with the Russian authorities, including
the President of the Russian Federation, Mr Putin. The conflict concerned
also the political issues, including the policy goals pursued by the Russian
Federation and the support for political opposition to Mr Putin. The record
of the arbitral case were also replete with evidence pertaining to the events
underlying the so-called campaign of harassment and intimidation
3
.
According to Claimants, Mr Khodorkovsky’s participation in the social
policy and political spheres in Russia, coupled with Yukos’ growing
economic power, came to be perceived as a threat by the Russian
authorities. The turning point was to be a meeting at the Kremlin between
President Putin and the Russian Union of Industrialists end Entrepreneurs
on 19 February 2003, at which Mr. Khodorkovsky delivered a speech about
corruption in Russia which was negatively received by the President
4
.
From June 2003, the Office of the Prosecutor General launched a series
of investigations against various members of Yukos’ management,
including Mr. Khodorkovsky. The authorities seized key documents
of the company creating difficulties in managing Yukos and preparing
the annual financial statements. Mr Khodorkovsky was arrested
at gunpoint on 25 October 2003 and convicted of theft and tax evasion
3
Ibidem, at paras. 794, 813.
4
Ibidem, at paras. 766-768, 783-784, 788.
144 | Marcin Kałduński
in 2005. The Tribunal found that the investigation had been carried
out with excessive harshness
5
. The Respondent’s aggressive campaign
against Yukos impacted significantly on the management of the company.
The intimidation and harassment disrupted the operations of Yukos
and contributed to its demise
6
.
The Russian authorities considered the conduct of Yukos to be tax
abuse or tax evasion as they were questioning the legality of Yukos’ tax
optimization scheme
7
. In the Tribunal’s view, the Russian tax authorities
used the “re-attribution” formula not only so as to be able to collect
the revenue-based taxes against Yukos, but also so as to establish a basis
for imposing on Yukos the massive VAT liability and excessive fines
that followed. The overall amount of re-assessed tax liabilities imposed
upon Yukos by the Russian Federation, including interest and fines,
amounted to USD 10,589 billion
8
. While Yukos was vulnerable on some
aspects of its tax optimization scheme, principally because of the sham-like
nature of certain elements of its operations in at least some of the low-tax
regions, and could have faced some legitimate claims relating to revenue-
based taxes had the Russian Federation limited itself to bona fide taxation
measures, the State apparatus decided to take advantage of that
vulnerability; it did so by launching a full assault on Yukos and its
beneficial owners in order to bankrupt Yukos and appropriate its assets
while, at the same time, removing Mr. Khodorkovsky from the political
arena
9
. In 2004 the core asset of Yukos, YNG (Yuganskneftegaz, Yukos’
core production subsidiary) was auctioned
10
. The auction took place
on 19 December 2004
11
. The asset of YNG was acquired by Rosneft,
a state-owned company, through an intermediary, Baikal
12
. The latter firm
was obviously a vehicle created solely for the purpose of bidding
5
Ibidem, at para. 811.
6
Ibidem, at paras. 819-820.
7
See: ibidem, at paras. 272-502. Very shortly, the tax optimization scheme was employed by
Russian oil companies in a similar fashion. The key features of their operations
were firstly: vertical integration; secondly transfer pricing; and thirdly the use of low-tax
regions to mitigate tax burdens.
8
Ibidem, at para. 581.
9
Ibidem, at para. 1404.
10
Ibidem, at paras. 981, 988
11
Ibidem, at para. 1003.
12
Ibidem, at paras. 1004-1006.
145 | Some Reflections on Arbitration in the Yukos v. The Russian Federation Case
at the auction
13
. The price of US 9,35 billion paid at the auction for
the 76,79 shares of Yukos in YNG was far below the fair value of those
shares
14
. Therefore, the auction was rigged
15
. In the Tribunal’s view,
the auction was not driven by motives of tax collection but by the desire
of the State to acquire Yukos’ most valuable asset and bankrupt Yukos.
It was in effect a devious and calculated expropriation
16
. As the European
Court of Human Rights pointed out, the choice of YNG as the first Yukos
asset to be auctioned to satisfy Yukos’ tax debts was “capable of dealing
a fatal blow to its ability to survive the tax claims and to continue
its existence”
17
. Subsequently, the Moscow Arbitrazh Court announced
bankruptcy on 4 August 2006 and the company was struck off from
the registry on 21 November 2007
18
. The Tribunal held that the totality
of the bankruptcy proceedings had not been part of a process
for the collection of taxes, but rather indeed the final act of the destruction
of the company by the Russian Federation and the expropriation
of its assets for the sole benefit of the Russian State and State-owned
companies Rosneft and Gazprom
19
.
The Tribunal concluded that “the primary objective of the Russian
Federation was not to collect taxes but rather to bankrupt Yukos
and appropriate its valuable assets”
20
. The PCA Tribunal held that
the Russian Federation expropriated the Claimants’ investment in violation
of Article 13 of the ECT
21
. Moreover, the Russian Federation breached
13
Ibidem, at para. 1024.
14
Ibidem, at para. 1020
15
Ibidem, at para. 1036. See: RosInvestCo UK Ltd. v. The Russian Federation, SCC Case
No. V079/2005, Final Award of 12.09.2010, at para. 620(d); Quasar de Valors SICAV S.A.,
Orgor de Valores SICAV S.A., GBI 9000 SICAV S.A. v. The Russian Federation, SCC No. 24/2007,
Award of 20.07.2012, at para. 110.
16
Award, at para. 1037.
17
OAO Neftyanaya Kompaniya Yukos v. Russia, Application no. 14902/04, Judgment
of 20.09.2011, at para. 653. See: Award, at para. 1043.
18
Ibidem, at paras. 1045, 1069, 1090, 1099.
19
Ibidem, at para. 1180, quoting in part the statement of Claimants. See: RosInvestCo UK Ltd.
v. The Russian Federation, SCC Case No. V079/2005, Final Award of 12.09.2010,
at para. 620(e); Quasar de Valors SICAV S.A., Orgor de Valores SICAV S.A., GBI 9000
SICAV S.A. v. The Russian Federation, SCC No. 24/2007, Award of 20.07.2012, at paras 141,
157-158.
20
Awards, at para. 756.
21
Ibidem, at paras. 1548-1549, 1580-1585.
146 | Marcin Kałduński
the fair and equitable treatment standard covered by Article 10(1)
of the ECT
22
, as well as the obligation not to impair by any unreasonable
or discriminatory measures management, maintenance, use, enjoyment,
or disposal of investment as required by Article 10(1) of the ECT
23
.
The Tribunal awarded to the Claimants the total damages of
USD 50,020,867,798 and the interest thereof
24
.
3. PRELIMINARY OBJECTIONS RAISED BY THE RESPONDENT.
THE PRINCIPLE OF CLEAN HANDS
3.1. INTRODUCTION
The Tribunal addressed three preliminary objections made
by the Respondent in its Final Award. The first objection concerned
the fork-in-the road provision embodied in Article 26(3)(b)(i) of the ECT;
the second objection related to the “unclean hands” of the investor, and
the last referred to the relevance of Article 21 of the ECT.
The Tribunal dismissed the objection based on Article 26(3)(b)(i)
of the ECT
25
. It also rejected an objection based on the complex provision
embodied in Article 21 of the ECT (a carve out clause from the ECT
for “taxation measures” and a “claw back” for Article 13 of the ECT
in relation to “taxes”)
26
. The most interesting point was the submission
by the Respondent that the Claimants had come to the Tribunal with
unclean hands that resulted in “one or many of the following
consequences: (a) the Tribunal does not have jurisdiction over Claimants’
claims; (b) Claimants’ claims are inadmissible; and/or (c) Claimants should
be deprived of the substantive protections of the ECT”
27
. Since the principle
of clean hands has been extensively discussed in investment jurisprudence
and forms a subject of controversy among arbitrators and scholars,
22
Ibidem, at paras. 1511-1516.
23
Ibidem, at paras. 1519.
24
Ibidem, at para. 1827.
25
See: ibidem, at paras. 1256-1272.
26
Ibidem, at paras. 1375-1447.
27
Ibidem, at para. 1273.
147 | Some Reflections on Arbitration in the Yukos v. The Russian Federation Case
it is worth focusing on this issue and reflecting upon the decision
of the Arbitral Tribunal.
The principle of clean hands has been discussed by a number
of investment tribunals. It has also been dealt with under the “investment
made in accordance with law” clause
28
. None of the tribunals has expressly
accepted the contention that the said principle forms a part of positive
international law. Nonetheless, the Respondent alleged that the Claimants
were an instrumentality of a “criminal enterprise”. It listed 28 instances
of alleged illegal and bad faith conduct by Claimants or attributable
to Claimants involving a variety of actors and spanning over ten years,
including (a) conduct related to the acquisition of Yukos and subsequent
consolidation of control over Yukos and its subsidiaries (e.g. skimming
28
See, e.g.: Saluka Investments BV (The Netherlands) v. the Czech Republic, PCA, UNCITRAL,
Partial Award of 17.03.2006, at para. 174; Inceysa Vallisoletana, S.L. v. Republic of El Salvador,
Award of 2.08.2006, ICSID Case No. ARB/03/26, at paras. 230-252; World Duty Free Company
Limited v. The Republic of Kenya, Award of 4.10.2006, ICSID Case No. ARB/00/7. See:
Metal-Tech Ltd. v. Republic of Uzbekistan, Award of 4.10.2013, ICSID Case No. ARB/10/3,
passim, and, especially, paras. 110 (iii), 373-373; Fraport AG Frankfurt Airport Services
Worldwide v. Republic of the Philippines, Award of 16.08.2007, ICSID Case No. ARB/03/25,
at paras. 397-404; Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon
Hizmetleri A.S. v. Republic of Kazakhstan, Award of 29.07.2008, ICSID Case No. ARB/05/16,
at paras. 235, 310, 320-322; Plama Consortium Limited v. Republic of Bulgaria, Award
of 27.08.2008, ICSID Case No. ARB/03/24, at para. 138; Waguih Elie George Siag and Clorinda
Vecchi v. The Arab Republic of Egypt, Award of 1.06.2009, ICSID Case No. ARB/05/15,
at para. 163; Gustav F W Hamester GmbH & Co KG v. Republic of Ghana, Award of 18.06.2010,
ICSID Case No. ARB/07/24, at para. 123; Niko Resources (Bangladesh) Ltd. v. Bangladesh
Petroleum Exploration & Production Company Limited (“Bapex”) and Bangladesh Oil Gas
and Mineral Corporation, Decision on Jurisdiction of 19.08.2013, ICSID Case No. ARB/10/11,
at paras. 477-483. See also: Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom
of Morocco, Decision on Jurisdiction of 23.07.2001, ICSID Case No. ARB/00/4, at para. 45;
Tokios Tokelés v. Ukraine, Decision on Jurisdiction of 29.04.2004, ICSID Case No. ARB/02/18,
at para. 84; Desert Line Projects LLC v. The Republic of Yemen, Award of 6.02.2008,
ICSID Case No. ARB/05/17, at para. 104; Phoenix Action Ltd. v. The Czech Republic, Award
of 15.04.2009, ICSID Case No. ARB/06/5, at para. 101; Railroad Development Corporation
v. Republic of Guatemala, Second Decision on Objections to Jurisdiction of 18.05.2010, ICSID
Case No. ARB/07/23, at para. 146; Saba Fakes v. Republic of Turkey, Award of 14.07.2010,
ICSID Case No. ARB/07/20, at para. 119; Alpha Projektholding GmbH v. Ukraine, Award
of 8.11.2010, ICSID Case No. ARB/07/16, at paras. 298-302; SAUR International SA v. Republic
of Argentina, Decision on Jurisdiction and Liability of 6.06.2012, ICSID Case No. ARB/04/4,
at paras. 310-312; Quiborax S.A., Non Metallic Minerals S.A. and Allan Fosk Kaplún
v. Plurinational State of Bolivia, Decision on Jurisdiction of 27.09.2012, ICSID Case
No. ARB/06/2, at para. 266; Ambiente Ufficio S.p.A. and others v. Argentine Republic,
Decision on Jurisdiction and Admissibility of 8.02.2013, ICSID Case No. ARB/08/9,
at para. 517.
148 | Marcin Kałduński
profits of Yukos and its production subsidiaries for their own
self-enrichment); (b) conduct related to the Cyprus-Russia Agreement
for the Avoidance of Double Taxation with Respect to Taxes on Income
and on Capital of 5 December 1998 (e.g. evading hundreds of millions
of dollars in Russian taxes on profits from transactions in and profits from
sales of Yukos shares); (c) conduct related to the tax optimization scheme
(e.g. concealing Yukos’ continued control of its trading shells by resorting
to call options or other artifices and by fabricating corporate and other
transactional documents); (d) action taken in hindrance of the enforcement
of Russia’s tax claims (e.g. concealing the share registers’ of Yukos’
subsidiaries to obstruct the bailiffs’ enforcement of Yukos’ tax obligations).
The Claimants rejected all allegations underlining that the Respondent’s
claims amounted to nothing more than an attempt to shift blame
for the actions of the Russian Federation to the Claimants
29
.
The Respondent’s position was as follows. It submitted, consistently
with international case law and the doctrine of international law, that
the unclean hands of Claimants deprived the Tribunal of jurisdiction,
and rendered the investment claims inadmissible and/or deprived
the Claimants of the substantive protections of the ECT
30
. According
to the Respondent, the ECT protects only bona fide and lawful investments
and the Respondent’s consent to arbitrate extends only to such
investments. A treaty must be interpreted in good faith and in accordance
with its object and purpose. Consequently, the Respondent argued that
the object and purpose of the ECT does not include the promotion
and protection of illegal investments. Rather, as stated in the Treaty’s
introductory note, “[t]he fundamental aim of the [ECT] is to strengthen
the rule of law on energy issues”. The Russian Federation further argued
that, even in the absence of an express legality requirement clause
in an investment treaty, to which belongs the ECT, illegal investments
will not be protected
31
. The protection must be denied both in the case
29
Awards, at paras. 1275, 1278, 1281, 1283-1310.
30
Ibidem, at para. 1313.
31
The Respondent referred to Plama Consortium Limited v. Bulgaria, ICSID Case
No. ARB/03/24, Award, 27.08.2008; Phoenix Action Ltd. v. Czech Republic, ICSID Case
No. ARB/06/5, Award, 15.04.2009; SAUR International S.A. v. Argentina, ICSID Case
No. ARB/04/4, Decision on Jurisdiction and Liability, 6.06.2012.
149 | Some Reflections on Arbitration in the Yukos v. The Russian Federation Case
of illegality in the making of an investment and in the case of its
performance
32
.
What is more, the Respondent submitted that a claimant who is guilty
of illegal conduct is deprived of the necessary ius standi to complain
of corresponding illegalities by the State. This requirement of “clean
hands”, argued Respondent, is a “general principle of law” within
the meaning of Article 38(1)(c) of the ICJ Statute. Respondent cited
the ICJ’s decision in the Case Concerning the Gabčíkovo-Nagymaros Project
33
and various dissenting opinions by ICJ judges, including the dissenting
opinion of Judge Schwebel in the Case Concerning Military and Paramilitary
Activities in and against Nicaragua
34
, as well as a number of decisions
of mixed claims commissions rendered in cases of diplomatic protection
35
.
In response to the Claimant’s contention that the Respondent
was estopped from raising matters of which it had long been aware of,
but had never challenged, the Respondent asserted that it was not estopped
from invoking the Claimants’ unclean hands in this arbitration by any
failure to take prompt action. The Claimants failed to satisfy the legal
standard for estoppel
36
. This standard, argued the Respondent,
was confirmed by the ICJ in the North Sea case: “it appears to the Court
that only the existence of a situation of estoppel could suffice to lend
substance to this contention, – that is to say if the Federal Republic were
now precluded from denying the applicability of the conventional regime,
by reason of part conduct, declarations, etc., which not only clearly
and consistently evinced acceptance of that regime, but also had caused
32
Awards, at paras. 1317-1319.
33
Gabčíkovo-Nagymaros Project (Hungary/Slovakia), Judgment of 25.09.1997, I.C.J. Reports
1997, at para. 133. However, the Court mentioned only the principle ex iniuria
ius non oritur and did not discuss, even indirectly, the principle of clean hands.
34
Dissenting opinion of Judge Schwebel, Military and Paramilitary Activities in and against
Nicaragua (Nicaragua v. United States of America), Merits, Judgment of 27.06.1986, I.C.J.
Reports 1986, at para. 268.
35
See: Awards, at para. 1315, note 1714.
36
Ibidem, at paras. 1322, 1338-1339. Claimants argued that acquiescence, or the silence
or absence of protest in circumstances which generally call for a positive reaction signifying
an objection, may in and of itself result in estoppel, where the other elements of estoppel
are not made out. It relates especially to Respondents allegations with respect to the creation
and original acquisition of Yukos 1995 and with respect to the alleged violation
of Cyprus-Russia Agreement. The Respondent must have had knowledge of the alleged
violations and did not take any actions.
150 | Marcin Kałduński
Denmark or the Netherlands, in reliance on such conduct, detrimentally
to change position or suffer some prejudice. Of this there is no evidence
whatever in the present case”
37
.
In the end, the Respondent added that informal or contra legem
acceptance of an investment by the host State that is illegal under the host
State’s domestic law cannot provide a basis for estoppel
38
.
On their part, the Claimants rejected the Respondent’s allegations
and objected that their “unclean hands”, even if proved by the Russian
Federation, “could have no impact on their claims in these arbitrations
because: (a) the ECT does not contain any principle of «unclean hands»;
(b) no principle of «unclean hands» has been recognized as a general
principle of law; and (c) the instances of «unclean hands» alleged
by Respondent are «collateral illegalities» that do not fall within
the parameters of any «unclean hands» doctrine”
39
. The Claimants
underlined that the ECT remains silent with respect to the legality
requirement and contains no such clause. Nonetheless, even when
interpreting treaty provisions expressly requiring compliance with host
State laws, investment tribunals have strictly construed such provisions.
Moreover, the alleged illegalities must be related to the making
of an investment or have an immediate and necessary relation
to a claimant’s cause of action. Therefore, none of Respondent’s allegations
are covered by any principle of clean hands
40
. Last but not least,
the Claimants submitted that, even if the general principle of clean
hands existed, it would not confer upon States the right to violate
investors’ rights
41
.
The Arbitral Tribunal ultimately rejected all of the Respondent’s
arguments. It started its consideration by recalling the text of the relevant
Articles of the ECT and the VCLT essential to resolving the issue
in question
42
. It noted that the ECT contains neither any express reference
37
North Sea Continental Shelf (Federal Republic of Germany/Netherlands) (Federal Republic
of Germany/Denmark), Judgment of 20.02.1969, I.C.J. Reports 1969, at para. 30.
38
Awards, at para. 1325.
39
Ibidem, at para. 1326.
40
Ibidem, at paras. 1334-1336.
41
Ibidem, at para. 1340.
42
Ibidem, at paras. 1343-1344. Article 26(6) of the ECT provides that “[a] tribunal established
under paragraph (4) shall decide the issues in dispute in accordance with this Treaty and
151 | Some Reflections on Arbitration in the Yukos v. The Russian Federation Case
to the principle of clean hands nor an express requirement that investments
be made in accordance with the laws of the host State. Having in mind
the need to interpret treaties in good faith and to take their object
and purpose into consideration, the Tribunal opined that the ECT
as a whole may be understood as conditioning the protection granted
to investments on their legality, or on the good faith of the investor. It may
also be the case that the principle of clean hands, as a general principle
of law, could be relevant pursuant to Article 26(6) of the ECT which
states that the Tribunal shall decide the present dispute in accordance
with the Treaty and applicable rules and principles of international law
43
.
In order to decide on this preliminary objection, the arbitrators
considered it appropriate to discuss the principle of clean hands
in the three sections: (a) can a principle of clean hands or a legality
requirement be read into the ECT?; (b) does the clean hands doctrine
constitute a general principle of law?; (c) would any instances
of the claimants’ alleged “bad faith and illegal” conduct be caught
by a legality requirement read into the ECT? Each of them will be dealt
with below under the separate headings.
3.2. THE PRINCIPLE OF CLEAN HANDS OR LEGALITY REQUIREMENT AND THE ECT
It has already been indicated that the question concerning the legality
of investments and the related principle of clean hands has been discussed
by investment tribunals in a number of cases
44
. For example, in Hamester,
the Tribunal considered whether the conduct of the investor falls within
the scope of investment protection granted under the Ghana-Germany BIT.
It made a general observation that: “an investment will not be protected
if it has been created in violation of national or international principles
of good faith; by way of corruption, fraud, or deceitful conduct; or if its
creation itself constitutes a misuse of the system of international investment
applicable rules and principles of international law”. Article 31(1) of the VCLT provides
that “[a] treaty shall be interpreted in good faith in accordance with the ordinary meaning
to be given to the terms of the treaty in their context and in the light of its object
and purpose”.
43
Ibidem, at paras. 1345-1347.
44
See above, the quoted case law, supra note 28.
152 | Marcin Kałduński
protection under the ICSID Convention. It will also not be protected
if it is made in violation of the host State’s law”
45
. Similarly, the Saur
Tribunal stated that: “the finality of the investment arbitration system
is to protect only lawful and bona fide investments. Whether or not the BIT
between France and Argentina mentions the requirement that the investor
act in conformity with domestic legislation does not constitute a relevant
factor. The condition of not committing a serious violation of the legal
order is a tacit condition, inherent to any BIT as, in any event, it is
incomprehensible that a State offer the benefit of protection through
arbitration if the investor, in order to obtain such protection, has acted
contrary to the law”
46
.
In the context of the principle of clean hands and the ECT, the Plama
Consortium Limited case seems to be of particular importance
47
. This case
was discussed at length by the parties and the Tribunal itself devoted
one paragraph highlighting thus its relevance to the present case
48
.
The Plama Tribunal expressed the view that even though the ECT remains
silent on the principle of clean hands, it did not mean that the protections
provided for by the ECT cover all kinds of investments, including those
contrary to domestic or international law. Having in mind the rules
concerning the application and interpretation of treaties as well as the
introductory note to the ECT which states that “[t]he fundamental aim
of the Energy Charter Treaty is to strengthen the rule of law on energy
issues” the Tribunal found that the ECT should be interpreted in a manner
consistent with the aim of encouraging respect for the rule of law.
Therefore, the Plama Tribunal concluded that “the substantive protections
of the ECT cannot apply to investments that are made contrary to law”
49
.
As a consequence, the Tribunal, having previously established that
the investment had been “the result of a deliberate concealment amounting
45
Gustav F W Hamester GmbH & Co KG v. Republic of Ghana, Award of 18.06.2010,
ICSID Case No. ARB/07/24, at para. 123.
46
SAUR International SA v. Republic of Argentina, Decision on Jurisdiction and Liability
of 6.06.2012, ICSID Case No. ARB/04/4, at para. 308.
47
Plama Consortium Limited v. Republic of Bulgaria, Award of 27.08.2008, ICSID Case
No. ARB/03/24.
48
Awards, at para. 1350.
49
Plama Consortium Limited v. Republic of Bulgaria, Award of 27.08.2008, ICSID Case
No. ARB/03/24, at para. 139.
153 | Some Reflections on Arbitration in the Yukos v. The Russian Federation Case
to fraud, calculated to induce the Bulgarian authorities to authorize
the transfer of shares”
50
and in the light of the ex turpi causa defence, could
not lend its support to the Claimant's request and could not grant
the substantive protections of the ECT
51
. It should be stressed that
the Plama Tribunal considered and applied the ex turpi causa defence
even though the ECT does not contain an explicit “investment made
in accordance with law” clause. However, by employing the rules
concerning the application and interpretation of the treaties the Tribunal
came to the reasonable conclusion that despite the language of the ECT
each investor has to abide by domestic and international law. Thus,
it might be fairly concluded that the “investment made in accordance
with law” clause is a general principle of international investment law
which does not allow for granting legal protection to investments made
contrary to law.
Thus, the Yukos Tribunal correctly noted that: “even where
the applicable investment treaty does not contain an express requirement
of compliance with host State laws (…), an investment that is made
in breach of the laws of the host State may either: (a) not qualify
as an investment, thus depriving the tribunal of jurisdiction; or (b) be
refused the benefit of the substantive protections of the investment
treaty”
52
. Consequently, the Tribunal held that an investment may not be
protected, if it has been made in violation of host State’s law or by
an investor acting in bad faith. This principle exists independently
of specific language in an investment treaty. These treaties impose
obligations on States to treat investors in a fair and transparent fashion
while at the same time they seek to encourage legal and bona fide
investments
53
.
In response to the Respondent’s argument that the right to invoke
the ECT must be denied altogether to an investor in the case of illegality
in the performance of an investment, the Tribunal found the argument
unpersuasive and was of the view that the essence of the investment
regime was to protect investors against host State actions, even when
50
Ibidem, at paras. 128-129, 134-135.
51
Ibidem, at para. 149.
52
Awards, at para. 1349.
53
Ibidem, at paras. 1351-1352.
154 | Marcin Kałduński
this State deems an investor to have breached the law of the host
State, because by virtue of this regime the investor may challenge
the actions of States in accordance with an investment treaty. Accepting
the Respondent’s contention would amount to a priori deprivation
of investment treaty protection granted to foreign investors. In the
Tribunal’s view: “[t]here is no compelling reason to deny altogether
the right to invoke the ECT to any investor who has breached the law
of the host State in the course of its investment. If the investor acts illegally,
the host state can request it to correct its behavior and impose upon
it sanctions available under domestic law, as the Russian Federation indeed
purports to have done by reassessing taxes and imposing fines. However,
if the investor believes these sanctions to be unjustified (…), it must
have the possibility of challenging their validity in accordance with
the applicable investment treaty. It would undermine the purpose
and object of the ECT to deny the investor the right to make its case before
an arbitral tribunal based on the same alleged violations the existence
of which the investor seeks to dispute on the merits”.
In addition, the Respondent could not cite any decision in support
of its argument. According to the Yukos Tribunal, the statements
of investment tribunals relied on by the Respondent were all made
obiter and are too vague to allow any certain conclusions to be reached
as to their intended meaning
54
. Having also that in mind, the Arbitral
Tribunal decided that it would not read any legality requirement with
respect to the conduct of the investment into the ECT. A contrario, it may
seem that the Tribunal would read into the Treaty the legality requirement
with respect to the making of the investment.
The Tribunal decision may be regarded in part as controversial.
The Tribunal prudently noted that illegal or mala fide investment should
not be allowed to benefit from investment protection. However, it further
decided that in the case of performance of an investment the legality
requirement cannot be read into the ECT and, thus, only explicit treaty
language may exclude such investments from the investment protection.
This part of the Tribunal’s reasoning cannot be endorsed. As the Tribunal
itself stated, investment treaties seek to encourage legal investments.
54
Ibidem, at para. 1356.
155 | Some Reflections on Arbitration in the Yukos v. The Russian Federation Case
If an investor has made its investment in accordance with the host State
law, but then, subsequently, has breached that law and the State reacted
by imposing upon it sanctions provided for in domestic law, it may
be the case that the substantive treaty protection cannot apply to such
an investment. Depending upon the circumstances of a given case,
a tribunal should either deprive the investor of investment protection
(e.g. breaches of fundamental human rights) or find that the host State
has not breached any of substantive provisions of the BIT. Therefore,
in the second alternative and as the Fraport Tribunal decided, the breach
of the host State’s law may be a defence to claimed substantive violations
55
.
3.3. THE PRINCIPLE OF CLEAN HANDS AS A GENERAL PRINCIPLE OF LAW
The Respondent argued that the principle of clean hands is a general
principle of law within the meaning of Article 38(1)(c) of the ICJ Statute
and, thus, because of the “unclean hands” of the investor, it bars
an investor from making a claim before a tribunal. The Tribunal was
not convinced by the argument and decided that the principle in question
is not a general principle of law
56
. While the Tribunal’s decision is correct,
its reasoning remains to some extent doubtful and, to say the least,
too concise and inconsistent.
The first controversy arises with the statement that “[g]eneral
principles of law require a certain level of recognition and consensus”
57
.
The Tribunal did not explain what level is required and used only the term
“certain” which remains, in this context, vague and imprecise. Secondly,
the Tribunal again did not explain who should recognize a general
principle and whether the recognition should be given by “civilized
nations” as provided for in Article 38. Thirdly, the Tribunal once more
was esoteric when it spoke of “consensus”. It did not point out who
should express this consensus and whether the consensus as opposed
to recognition, should be expressed by other subjects than civilized nations.
Instead of shedding some light on the terms employed in its decision,
55
Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, Award
of 16.08.2007, ICSID Case No. ARB/03/25, at paras. 354, 395.
56
Awards, at para. 1358.
57
Ibidem, at para. 1359.
156 | Marcin Kałduński
the Tribunal decided to state that “there is a significant amount
of controversy as to the existence of an «unclean hands» principle
in international law”. While it may be considered as a correct statement,
it needs to be noted that the Tribunal itself created another controversy
with respect to the general principles of law and the principle of clean
hands by deciding not to make clear what are the reasons for rejecting
the principle of clean hands as a general principle of law. In short,
its reasoning remains disappointing and unsatisfactory. Such abstinence
should disappoint those observers who might have expected some
illuminating words on a rather controversial and much-discussed question
of law at the present stage of development of international law.
The second controversy concerns the authorities referred to by
the Tribunal. The Respondent demonstrated that “certain principles
associated with the «clean hands» doctrine, such as exceptio non adimpleti
contractus and ex iniuria ius non oritur have been endorsed by the PCIJ
and the ICJ”
58
. It further relied on the separate opinion of Judge Simma
which raises serious doubt as to the continuing existence of the exception
in international law
59
. However, the Tribunal did not give any reasons
whatsoever as to why the separate opinion should be followed
60
.
The Respondent also relied, inter alia, on the dissenting opinion
of Judge Schwebel, an arbitrator in the current arbitration, to conclude
that the principle of clean hands forms part of international law. However,
the Tribunal pointed out that: “[r]espondent has been unable to cite a single
majority decision where an international court or arbitral tribunal
has applied the principle of «unclean hands» [sic] in an inter-State
or investor-State dispute and concluded that, as a principle of international
law, it operated as a bar to a claim”
61
.
58
Ibidem, at para. 1360, referring to Individual Opinion by Mr. Hudson, Diversion
of Water from the Meuse, Judgment of 27.06.1937, PCIJ Publ., Series A/B, No. 70, at 77;
Gabčíkovo-Nagymaros Project (Hungary/Slovakia), Judgment of 25.09.1997, I.C.J. Reports 1997,
at para. 133.
59
Separate opinion of Judge Simma, Application of the Interim Accord of 13 September 1995
(the former Yugoslav Republic of Macedonia v. Greece), Judgment of 5.12.2011, at paras. 19-20.
60
Awards, at para. 1360.
61
Ibidem, at para. 1362.
157 | Some Reflections on Arbitration in the Yukos v. The Russian Federation Case
For the above reasons, the Tribunal concluded that the principle does
not exist as a general principle of international law which would bar
a claim by an investor, and the Claimants in the present case
62
.
First of all, the Tribunal could not discuss the associated principles,
since they do not reflect the proper principle of clean hands. Second,
the opinion of Judge Simma gives an excellent resume of the principle
of reciprocity and exceptio non adimpleti contractus, but it still does not
amount to be a persuasive authority in international law. A single
and separate opinion cannot be regarded as a source of law which forms
the basis of the Tribunal’s decision. The Tribunal did not event deem
it necessary to quote some of Judge Simma’s arguments or develop
its own reasoning. Such abstinence is again disappointing as it needs
to be underlined that a court or tribunal should fully present reasons
for a decision it delivers.
The third point refers to the opinion of Judge Schwebel. In the
Nicaragua v. USA case, Judge Schwebel held that the Court should have
rejected Nicaragua’s claims because it did not go to the Court with clean
hands. Therefore, the principle of clean hands should have been applied
by the ICJ: “(…) as the aggressor, indirectly responsible – but ultimately
responsible – for large numbers of deaths and widespread destruction
in El Salvador apparently much exceeding that which Nicaragua
has sustained, Nicaragua’s hands are odiously unclean. Nicaragua has
compounded its sins by misrepresenting them to the Court. Thus both
on the grounds of its unlawful armed intervention in El Salvador,
and its deliberately seeking to mislead the Court about the facts of that
intervention through false testimony of it Ministers, Nicaragua’s claims
against the United States should fail”
63
.
According to Judge Schwebel, exceptio non adimpleti contractus
is a general principle of law
64
. Judge Schwebel invoked, inter alia, the Claims
of Clark and Daniels case
65
, Pelletier’s case
66
, the opinions of Judges Hudson,
62
Ibidem, at para. 1363.
63
Dissenting Opinion of Judge Schwebel, supra note 34, at para. 268.
64
Ibidem, at para. 269.
65
Opinion of Mr. Hassaurek, Claims of Clark and Danels: Cases of “La Constancia”, “Medea”,
and “Good Return”. The Ecuadorian-United States Claims Commission, 8.09.1865,
158 | Marcin Kałduński
Anizlotti and Morozov
67
, the Diversion of Water from the Meuse case
68
,
the Mavrommatis Jerusalem Concessions case
69
and the Factory at Chorzów
case
70
. He also quoted well-known international lawyers, including
B. Cheng and G. Fitzmaurice
71
. Judge Schwebel recalled especially
the Diversion of Water from the Meuse case, and found that Nicaragua
was similarly asking the Court to decree a kind of specific performance
of a reciprocal obligation which it was not performing, and which
the Court should have refused
72
. Judge Schwebel concluded that
if Nicaragua was guilty of illegal conduct, its conduct: “(…) should have
been reason enough for the Court to hold that Nicaragua had deprived
itself of the necessary locus standi to complain of corresponding illegalities
on the part of the United States, especially because, if these were illegalities,
they were consequential on or were embarked upon in order to counter
Nicaragua’s own illegality – in short were provoked by it”
73
.
Judge Schwebel’s dissenting opinion thus underlines both the
reciprocal nature of the obligation held by Nicaragua, as well as its lack
of standing to bring a claim. Judge showed a sort of judicial activism,
since the United States had not itself invoked the doctrine as a ground
[in:] J.B. Moore, History and Digest of the International Arbitrations to Which the United States
Has Been a Party, Washington: Government Printing Office 1898, vol. III, p. 2738-2739.
66
Pelletier’s Case, 1885, Papers Relating to the Foreign Relations of the United States:
The Executive Documents of the House of Representatives for the Second Session of the Forty-Ninth
Congress, 1886-1887, Washington 1887, p. 607.
67
Individual Opinion by Mr. Hudson, supra note 58, at 77; Dissenting Opinion by M. Anzilotti,
Legal Status of Eastern Greenland, Judgment of 5.04.1933, PCIJ Publ., Series A/B, No. 53, p. 95;
Dissenting Opinion of Judge Morozov, United States Diplomatic and Consular Staff in Tehran
(United States of America v. Iran), Judgment of 24.05.1980, I.C.J. Reports 1980, par. 3.
68
Diversion of Water from the Meuse, Judgment of 27.06.1937, PCIJ Publ., Series A/B, No. 70,
p. 25. „[L]a Cour estime difficile d'admettre que les Pays-Bas soient fondés à critiquer aujourd'hui la
construction et le fonctionnement d'une écluse dont eux-mêmes avaient antérieurement donné
l'exemple”.
69
Mavrommatis Jerusalem Concessions, Judgment of 25.03.1925, PCIJ Publ., Series A, No. 5,
p. 50.
70
Factory at Chorzów (Claim for Indemnity) (Jurisdiction), Judgment of 26.07.1927, PCIJ Publ.,
Series A, No. 9, p. 31.
71
B. Cheng, General Principles of Law as Applied by International Courts and Tribunals, London:
Stevens & Sons Limited 1953, p. 155; G. Ftizmaurice, The General Principles of International
Law, Recueil des cours (RCADI) 1957, vol. 92, p. 119.
72
Dissenting Opinion of Judge Schwebel, supra note 34, at para. 269.
73
Ibidem, para. 272.
159 | Some Reflections on Arbitration in the Yukos v. The Russian Federation Case
of inadmissibility at the jurisdiction and admissibility stage
74
. Therefore,
his opinion at this point was to some extent unexpected. However, it could
have been expected that Judge Schwebel would follow his opinion
in further cases and, especially, in the Yukos cases.
The Respondent followed a similar pattern of reasoning relying heavily
on jurisprudence, dissenting opinions where the principle of clean hands
was invoked
75
. However, Judge Schwebel made a volte-face and agreed
with other two arbitrators that the principle of clean hands does not exists
in international law. The present Award remains in contradiction with
his dissenting opinion in Nicaragua v. USA. It is rather disappointing
when a lawyer inexplicably changes his views in similar cases as it may
put in question his reputation.
3.4. WAS THE INVESTMENT MADE IN BAD FAITH OR CONTRARY TO THE LAWS
OF THE RUSSIAN FEDERATION?
The PCA Tribunal held that a claimant may be barred from seeking
relief under the ECT if its investment was made in bad faith are in violation
of domestic law
76
. Thus the legality of the investment in its performance
was outside the scope of the Tribunal’s purview, although it pointed
out that “some of the instances of Claimants’ «illegal or bad faith» conduct
(…) could have an impact on the Tribunal’s assessment of liability
and damages”
77
. Having reviewed the position of the parties,
the arbitrators agreed with the Respondent that an examination
of the legality of the investment may 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
74
Military and Paramilitary Activities in and Against Nicaragua (Nicaragua v. United States
of America), Jurisdiction and Admissibility, Judgment of 26.11.1984, I.C.J. Reports 1984,
at paras. 86-103.
75
Awards, at paras. 1361-1362. And the Tribunal correctly opined that “despite what
appears to have been an extensive review of jurisprudence, Respondent has not been able
to cite a single majority decision where an international court or arbitral tribunal has applied
the principle of «unclean hands» in an inter-State or investor-State dispute and concluded
that, as a principle of international law, it operated as a bar to a claim”, since indeed there
has been no decision in which a court or tribunal referred to the principle of clean hands.
76
Ibidem, at para. 1364.
77
Ibidem, at para. 1374.
160 | Marcin Kałduński
of several consecutive acts and all of these must be legal and bona fide”
78
.
However, the arbitrators had already established in its Interim Awards
that the purchases of Yukos shares had been legal
79
. Therefore, the Tribunal
concluded that the Respondents “unclean hands” argument failed
as a preliminary objection
80
.
3.5. THE PRINCIPLE OF CLEAN HANDS AND CONTRIBUTORY FAULT
As noted, in the Tribunal’s view, the breach of a host State’s
law may be a defence to claimed substantive violations
81
. It may exonerate
or attenuate responsibility (l'atténuation ou l'exonération de la responsabilité)
as well as exclude or reduce the obligation to pay reparation. Hence,
the principle of clean hands, while not being a proper legal principle
in international law, may be embodied in certain legal concepts.
The principle finds its emanation in those concepts, a fine example
of which is contributory fault. This was, indirectly, the argument
of the Respondent contending that Claimants may not recover from
the Russian Federation the fruits of their own wrongdoing since it did not
establish that their loss had been caused by the Russian Federation’s
actions in violation of its obligations under the ECT
82
.
There are two Articles in ILC Articles on State Responsibility which
deal with the question of contributory fault and which were quoted
by the Tribunal. They provide as follows:
Article 31. Reparation
1. The responsible State is under an obligation to make full reparation
for the injury caused by the internationally wrongful act.
2. Injury includes any damage, whether material or moral, caused
78
Ibidem, at para. 1369.
79
Yukos Universal Limited (Isle of Man) v. The Russian Federation,UNCITRAL, PCA Case
No. AA 227, Interim Award of 30.11.2009, at para. 431; Hulley Enterprises Limited (Cyprus)
v. The Russian Federation, UNCITRAL, PCA Case No. AA 226, Interim Award of 30.11.2009,
at para. 430; Veteran Petroleum Limited (Cyprus) v. The Russian Federation, UNCITRAL,
PCA Case No. AA 228; Interim Award of 30.11.2009, at para. 474.
80
Awards, at paras. 1370, 1373.
81
Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, Award
of 16.08.2007, ICSID Case No. ARB/03/25, at paras. 354, 395.
82
Awards, at paras. 1594-1595.
161 | Some Reflections on Arbitration in the Yukos v. The Russian Federation Case
by the internationally wrongful act of a State
83
.
Article 39. Contribution to the injury
In the determination of reparation, account shall be taken
of the contribution to the injury by wilful or negligent action
or omission of the injured State or any person or entity in relation
to whom reparation is sought
84
.
The Tribunal observed, on the basis of the above provisions, that
it must determine whether there was a sufficient causal link between
a wilful or negligent act or omission of the Claimants and the loss
the Claimants ultimately suffered at the hands of the Russian Federation
through the destruction of Yukos. Only contribution that is material
and significant will trigger a finding of contributory fault. The PCA
Tribunal underlined that it had a wide margin of discretion in apportioning
the fault
85
. Regrettably, it did not, however, explain why and to what extent
it had a wide margin of estimation. Such a general statement prescribing
for a court or tribunal a significant competence without any justification
should not be welcomed.
The Tribunal reviewed the investment case law in order to reach
three conclusions which informed and assisted its subsequent analysis
of contributory fault. First, the legal concept of contributory fault must
not be confused with the investor’s duty to mitigate its losses
86
. Second,
in certain cases the contributory fault of the investor, while it may have
increased the loss which it sustained, was unrelated to the wrongdoing
83
The ILC Commentary to this Article includes the following: “[i]t is true that cases
can occur where an identifiable element of injury can properly be allocated to one of several
concurrently operating causes alone. But unless some part of the injury can be shown
to be severable in causal terms from that attributed to the responsible State, the latter is held
responsible for all the consequences, not being too remote, of its wrongful conduct”.
84
The ILC Commentary to Article 39 states that: “Article 39 deals with the situation where
damage has been caused by an internationally wrongful act of a State, which is accordingly
responsible for the damage in accordance with Articles 1 and 28, but where the injured
State, or the individual victim of the breach, has materially contributed to the damage
by some wilful or negligent act or omission”.
85
Awards, at paras. 1599-1600.
86
Ibidem, at para. 1603, referring to EDF International S.A. and Ors v. Argentine Republic,
ICSID, ARB/03/23, Award of 11.06.2012, at para. 1301. See also: Middle East Cement Shipping
and Handling Co. S.A. v. Arab Republic of Egypt, ICSID, ARB/99/6, Award of 12.04.2002;
AIG Capital Partners, Inc and Anor v. Republic of Kazakhstan, ICSID, ARB/01/6, Award
of 7.10.2003.
162 | Marcin Kałduński
of the State. The fault of the investor contributed to the losses which flowed
from the wrongful act of the State
87
. Last, there have been certain decisions
where the tribunals found that the victim contributed to the State’s
wrongdoing
88
.
As earlier stated, the Respondent alleged 28 instances of illegal and
bad faith conduct of the Claimants. The Tribunal found four of them
to be wilful or negligent conduct which must be considered as potentially
constituting fault that may have contributed to the destruction of Yukos.
There were the following:
1. Yukos’ conduct in some of the low-tax regions,
2. Yukos’ use of the Cyprus-Russia DTA,
3. Yukos’ conduct in connection with the YNG auction, notably
the procuring of a Temporary Restraining Order by a Texas court
and the published threat of a “lifetime of litigation”, and
4. Yukos’ conduct in connection with its bankruptcy, notably
the non-payment of the A Loan
89
.
Having reviewed those instances, the Tribunal came to a conclusion
that there was a sufficient causal link between Yukos’ abuse of the system
in some of the low-tax regions and its demise which triggered a finding
of contributory fault on the part of Yukos
90
. In the case of Yukos’ use
of the Cyprus-Russia DTA the Tribunal was of the opinion that such
conduct was subsumed into and enlarged the abuse of low-tax regions
91
.
The remaining two instances were recognized as not constituting
contributory fault. Consequently, the Tribunal went on to decide
on the extent of contributory fault on the part of the Claimants, to wit,
“whether Claimants’ and Yukos’ tax avoidance arrangements in some
of the low-tax regions, including their questionable use of the Cyprus-
87
Ibidem, at para. 1604, referring to MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic
of Chile, ICSID Case No. ARB/–1/07, Award of 25.05.2004, and Iurii Bogdanov,
Agurdino-Invest Ltd. and Agurdino-Chimia JSC v. Republic of Moldova, SCC Rules, Award
of 22.09.2005.
88
Ibidem, at para. 1605, referring to Antoine Goetz & Consorts et S.A. Affinage des Metaux
v. Republique du Burundi, ICSID, ARB/01/2, Award of 21.06.2012, and Occidental Petroleum
Corporation and Occidental Exploration and Production Company v. Republic of Ecuador,
ICSID, ARB/06/111, Award of 5.10.2012.
89
Ibidem, at paras. 1607-1608.
90
Ibidem, at paras. 1610-1632.
91
Ibidem, at para. 1621.
163 | Some Reflections on Arbitration in the Yukos v. The Russian Federation Case
Russia DTA (…), contributed to their injury in a material and significant
way”
92
. The Tribunal took also into consideration the subsequent
disproportionate and tantamount to expropriation conduct of Russia
of the Claimants’ investment
93
. Having considered and weighed all
the arguments, it found that, as a result of the material and significant
misconduct by the Claimants and by Yukos, the Claimants contributed
to the extent of 25% to the prejudice which they suffered. Thus,
the resulting apportionment of contribution to the injury as between
the Claimants and the Respondent, namely 25% and 75%, was regarded
by Tribunal as fair and reasonable in the overall circumstances of the case
94
.
4. COSTS
Both US law firms representing parties in the present dispute collected
tens of millions of dollars in billings. Shearman & Sterling LLP, acting
for the Claimants, ended up billing about USD 79,628,055 in fees
and expenses for its representation. Shearman’s lawyers charged hourly
rates ranging from $ 235 to $ 1,065 and billed more than 130 000 hours.
Moreover, its costs included another USD 10,020,275,57 and GBP 1,066,462
in expert fees and expenses, including USD 7,370,493 million for Navigant,
the damages expert for Yukos’s shareholders
95
. According to the Claimants,
these costs are “reasonable” taking into account the circumstances
of the case
96
.
The Claimants noted that the Respondent should bear all the costs,
since the Respondent was the unsuccessful party in the jurisdiction
and admissibility phase and the Claimants should prevail at the merits
stage
97
. According to the Claimants, the Tribunal should take into account
the circumstances of the case, in particular, the obstructionist conduct
of the Respondent vis-à-vis the investor before and during the arbitration,
the parties’ success in the arbitrations, their conduct during
92
Ibidem, at para. 1633.
93
Ibidem, at para. 1635.
94
Ibidem, at para. 1637.
95
Ibidem, at para. 1847.
96
Ibidem, at para. 1872.
97
Ibidem, at paras. 1838-1840.
164 | Marcin Kałduński
the proceedings, and the actual measures of the Respondent which
gave rise to the dispute
98
. Therefore, the Respondent should bear all
of Claimants’ costs of legal representation and assistance. The Russian
Federation was represented by Cleary Gottlieb Steen & Hamilton LLP
and Baker Botts LLP. They submitted that they had incurred USD
27,000,000 in legal costs, plus another USD 4,500,000 in experts’ fees
and expenses
99
. The Respondent contested the Claimants’ costs submission,
calling it “plainly excessive and unprecedented in its amount” that “raises
serious questions of credibility”
100
.
The Tribunal noted that the ECT contains no provisions
on the allocations of costs of arbitration. However, Articles 38 to 40
of the UNCITRAL Rules contain provisions with respect to the allocation
of costs
101
. Article 38 states as follows: “[t]he arbitral tribunal shall fix
the costs of arbitration in its award. The term “costs” includes only:
(a) the fees of the arbitral tribunal to be stated separately as to each
arbitrator and to be fixed by the tribunal itself in accordance with article 39;
(b) the travel and other expenses incurred by the arbitrators; (c) the costs
of expert advice and of other assistance required by the arbitral tribunal;
(d) the travel and other expenses of witnesses to the extent such expenses
are approved by the arbitral tribunal; (e) the costs for legal representation
and assistance of the successful party if such costs were claimed during
the arbitral proceedings, and only to the extent that the arbitral tribunal
determines that the amount of such costs is reasonable; (f) any fees
and expenses of the appointing authority as well as the expenses
of the Secretary-General of the Permanent Court of Arbitration
at The Hague”.
Article 40 provides that: “1. Except as provided in paragraph 2,
the costs of arbitration shall in principle be borne by the unsuccessful party.
However, the arbitral tribunal may apportion each of such costs between
the parties if it determines that apportionment is reasonable, taking into
account the circumstances of the case. 2. With respect to the costs of legal
representation and assistance referred to in Article 38, paragraph (e),
98
Ibidem, at paras. 1842-1846.
99
Ibidem, at para. 1856.
100
Ibidem, at para. 1857.
101
Arbitration Rules of the United Nations Commission on International Trade Law, 1976.
165 | Some Reflections on Arbitration in the Yukos v. The Russian Federation Case
the arbitral tribunal, taking into account the circumstances of the case, shall
be free to determine which party shall bear such costs or may apportion
such costs between the parties if it determines that apportionment
is reasonable”.
As regards the costs of arbitration pursuant to Article 40(1),
the Tribunal observed that the costs are to be awarded to the successful
party and against the unsuccessful party, unless the circumstances justify
a different approach. Therefore, the Respondent was ordered to bear
these costs
102
. Regarding the costs for legal representation and assistance
pursuant to Article 40(2), the Tribunal ordered the Respondent
to reimburse to Claimants USD 60,000,000 as part of their costs, since
it would be “fair and reasonable in the circumstances” of the case
103
.
The Tribunal underlined that it had “unfettered discretion to fix and decide
in what proportion the costs for legal representation and assistance shall
be borne by the parties”
104
. The Claimants, as the successful party, should
be awarded a significant portion of their costs. The portion should
be reasonable
105
. In determining the reasonable portion the Tribunal took
under consideration the following relevant factors:
the egregious nature of many measures of Respondent which were
in breach of the ECT
106
,
the prayer for relief
107
,
the limited assistance of Claimants’ experts to the Tribunal
in the determination of damages
108
,
the considerable and outstanding work of the lawyers.
The Tribunal observed that the stakes were high and the parties
attached significant importance to the arbitration. It was evidenced
by: “[t]he thousands of pages of written pleadings and exhibits
submitted by the Parties, the myriad requests for production
of documents, the Tribunal’s lengthy procedural orders, the ten
102
Awards, at paras. 1868-1869.
103
Ibidem, at para. 1887.
104
Ibidem, at para. 1875.
105
Ibidem, at para. 1876.
106
Ibidem, at para. 1886.
107
Ibidem, at para. 1877.
108
Ibidem, at para. 1884.
166 | Marcin Kałduński
days of hearings in The Hague in the fall of 2008 on Respondent’s
objections to jurisdiction and admissibility, the 21 days of Hearings
on the Merits in The Hague in the fall of 2013 (…). The Parties
litigated vigorously. Each Party was represented by eminent
counsel. The quality of the written and oral pleadings was
outstanding. Counsel of both Parties are commended for their high
professionalism”
109
.
The Tribunal observed that in these circumstances it was unsurprising
that the costs reflected very considerable work. However, it agreed with
the Respondent the some of the fees of Claimants’ experts were “plainly
excessive”
110
. Having in mind the contributory fault of the Claimants,
the Tribunal concluded that USD 60,000,000 is approximately 75%
of Claimants’ total of the costs.
5. CONCLUDING REMARKS
The Tribunal ordered Russia to pay damages in excess of
USD 50 billion to the former Yukos shareholders and said they would
be entitled to interest if the amounts were not paid up by 15 January 2015.
It should be underlined that the Tribunal correctly noted that the principle
of clean hands does not form a part of positive international law. Although
the above reasoning of the Tribunal remains doubtful, its decision to find
breaches of the ECT was correct as it confirmed that each State, including
a powerful State, is responsible under international law for the violations
of investment treaties. It may be reasonably expected that efforts to collect
the Award will drag on for years. The Russian Federation, whose
economy is on the brink of recession, denounced the award and said
it would appeal against the ruling by the Dutch courts. In its view:
“[i]nstead of an objective, impartial consideration of the case, the
arbitration court ruled based on current developments and as a result
adopted a politically biased decision”
111
. Therefore, the Russian Federation
109
Ibidem, at paras. 1879-1880.
110
Ibidem, at paras. 1881-1882.
111
Reuters, 28.07.2014, http://uk.reuters.com/article/2014/07/28/uk-russia-yukos-
idUKKBN0FX08M20140728 [last accessed: 10.10.2014].
167 | Some Reflections on Arbitration in the Yukos v. The Russian Federation Case
seems to be planning to challenge enforcement claims in the many national
courts around the world where such proceedings would be certainly
instituted by the Claimants. It remains to be seen whether the former
Yukos shareholder will successfully collect the damages from
the Respondent in the years to come.
