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Largest Energy Charter Treaty award ever leaves provisional application for Gibraltar in limbo

Volterra Fietta Client Alert
12 June 2014

Largest Energy Charter Treaty award ever leaves provisional application for Gibraltar in limbo

On 19 December 2013 a tribunal constituted under the auspices of the Stockholm Chamber of Commerce (the “Tribunal”) ordered Kazakhstan to pay damages amounting to $506 million plus interest to Moldovan investors Anatolie and Gabriel Stati and their companies, Moldova’s Ascom Group and Gibraltar-registered Terra Raf Trans Traiding (together the “Claimants”), for violations of the investor protection provisions of the Energy Charter Treaty (the “ECT”). The Tribunal, chaired by German arbitrator Karl-Heinz Böckstiegel, found that Kazakhstan had violated its obligations to treat the Claimants’ investments fairly and equitably. The award, which represents only around 10 per cent of the $5 billion claimed, is the third largest investment treaty arbitration award in history and the largest-ever award under the ECT.

Background

The Claimants had invested hundreds of millions of dollars in two Kazakh oil fields. In late 2008, various government agencies carried out a number of inspections and audits of the companies’ business which led to criminal charges against three company executives and the prosecution of one. On this basis, in 2010 Kazakhstan seized the petroleum operations by cancelling the companies’ contracts and giving control of their assets to a state entity, KazMunaiGas. This treatment was held to be unfair and unequitable by the Tribunal:
“[Kazakhstan’s] measures, seen cumulatively in context to each other and compared to the treatment of Claimants’ investments before the Order of the President of the Republic on 14/16 October 2008, constituted a string of measures of coordinated harassment by various institutions of [Kazakhstan]. These measures must be considered as a breach of the obligation to treat investors fairly and equitably, as required by Art. 10(1) ECT.”1

The interest of this case goes well beyond the record-breaking amount awarded by way of damages. Given that one of the Claimants is incorporated in Gibraltar, the Tribunal was given a rare opportunity to consider and rule on provisional application of the ECT in relation to Gibraltar. However, the award avoided tackling this issue head on and consequently shed little additional light on the existing jurisprudence on this controversial issue.

Rule of plurilingual treaty unity

The Tribunal took the opportunity to clarify a linguistic ambiguity in relation to the international arbitration options offered by Article 26 of the ECT. Kazakhstan argued that the Russian version of the ECT did not provide for arbitration under the rules of the Arbitration Institute of the Stockholm Chamber of Commerce (the “SCC”). The Tribunal was not persuaded by Kazakhstan’s linguistic analysis of the Russian ECT, and held that under the rule of treaty unity, treaty terms should be presumed to have the same meaning in each authentic text. The Tribunal concluded that the Russian ECT should be interpreted consistently with the five other versions of the treaty, thereby confirming its jurisdiction under Article 26 ECT and under the SCC rules.

Provisional application of the ECT

Like many treaties, the ECT is subject to provisional application pending its ratification. Pursuant to Article 45 of the ECT, signatories to the ECT have agreed to apply it provisionally pending its entry into force to the extent that such provisional application is not inconsistent with their constitution, laws or regulations.

The concept of provisional application is not novel and it is recognised by Article 25 of the 1969 Vienna Convention on the Law of Treaties (“VCLT”). However, and contrary to the general rule in the VCLT from Articles 27 and 46 which give priority to treaty law over municipal law, Article 45 of the ECT allows national law to prevail over the provisional application of the ECT. According to Article 45(1), each signatory is obliged to apply the ECT provisionally only “to the extent that such provisional application is not inconsistent with its constitution, laws or regulations”. The question whether Article 45(1) requires each ECT provision to be subject to a comparison against the State’s constitution, laws or regulations (a piecemeal approach) or whether it is the concept of provisional application per se which needs to be consistent with those rules (an all-or-nothing approach) was answered by the arbitration tribunal in Yukos Universal Limited v. Russian Federation. It held that the provisional application of the ECT as a whole depends on whether the principle of provisional application is consistent with the State’s constitution, laws or regulations. In short, the entire ECT is applied provisionally or it is not applied provisionally at all.

Provisional application with respect to Gibraltar

The controversy surrounding provisional application of the ECT with respect to Gibraltar is a result of the inconsistent approach in relation to signature and ratification of the ECT taken by the United Kingdom (“UK”) in the mid-1990s. On 17 December 1994, Gibraltar was included by the United Kingdom at the time of signature of the ECT among the territories to which the ECT would apply provisionally under Article 45(1). Provisional application is generally intended to be effective until the Treaty enters into force.
However, in light of its territorial dispute with Spain, the UK when ratifying the ECT in 1997 did not include Gibraltar in the list of territories covered by the ECT. Instead, it ratified the ECT in respect of the UK, Jersey and the Isle of Man only. It appeared that the UK deliberately elected not to extend the entry into force of the ECT to Gibraltar. This gave rise to doubts as to whether Gibraltar-based investors enjoy protection under the ECT. It did not take long for this issue to reach a tribunal.

The jurisprudence

The issue of provisional application of the ECT in relation to Gibraltar firstly arose in the Petrobart Ltd. v. The Kyrgyz Republic case (“Petrobart”) where the tribunal was faced with the question whether provisional application continued in Gibraltar and whether investors from that jurisdiction could bring a claim under the ECT against another contracting party.

The tribunal in Petrobart responded in the affirmative to both questions. It held in that case that if the UK had wished to terminate the provisional application of the ECT with respect to Gibraltar, it would have done so and that the UK’s political reasons for not extending its ratification of the ECT to Gibraltar did not justify the conclusion that the UK intended to terminate the provisional application of the ECT with respect to Gibraltar.2

This is consistent with the approach adopted in Ioannis Kardassopoulos v. The Republic of Georgia (“Kardassopoulos”). The ECT formally entered into force with respect to Greece, of which Mr Kardassopoulos was a national, and Georgia, the Respondent, on 16 April 1998. Georgia challenged the Tribunal’s jurisdiction mainly on the basis that the acts of expropriation of Mr Kardassopoulos’ investments had occurred prior to the date of the entry into force of the ECT. The Tribunal was satisfied that the language used in Article 45(1) was to be interpreted as meaning that each signatory State was obliged to apply the whole ECT, even before it had formally entered into force, and that the term “entry into force” should for this purpose be interpreted as the date on which the ECT had become provisionally applicable for Georgia and Greece. Neither of these States had made a declaration under Article 45(2) excluding the operation of the provisional application provision in Article 45(1). The Tribunal therefore concluded that it had jurisdiction on the basis that the ECT provisionally applied to both States as of the date in which they signed it, 17 December 1994, and that the alleged breaches of treaty obligations had occurred since that date.3

These two cases have thus confirmed that although provisional application is intended to be temporary, it might continue in relation to some states or territories well beyond the entry into force of the treaty. Given that Article 45 provides that provisional application terminates through either the entry into force of the ECT for the relevant territory or through the express termination of the provisional application regime and, considering that the UK has shown no indication to do either in respect of Gibraltar, it is likely that the ECT will continue to be applied provisionally in Gibraltar in its entirety for the foreseeable future.
On the issue of provisional application, the Tribunal in this most recent case against Kazakhstan referred to Petrobart (although not to Kardassopoulos) but chose to adopt the simplistic argument of the Claimant that on the basis of Article 52 of the Treaty on the European Union and Article 355 of the Treaty on the Functioning of the European Union, Gibraltar is part of the European Community which is itself a contracting party to the ECT. Accordingly, the Tribunal ruled that the ECT applied to Gibraltar. This is surprising given that the provisions relied upon merely define the territorial scope of the application of EU treaties and only do so on the basis of the explicit declaration by Spain and the UK. In other words, together with Spain the UK has explicitly extended the application of the ratified EU treaties to Gibraltar. The same has not been done in respect of the ECT after its ratification by the UK. With this decision, Gibraltar has been returned to the limbo between provisional and full application of the ECT and is likely to remain there until some tribunal decides to cut the Gordian knot with a persuasive decision founded on a sound interpretation of law.

(1) Anatolie Stati, Gabriel Stati, Ascom Group S.A., Terra Raf Trans Traiding Ltd. v. The Republic of Kazakhstan, SCC Arbitration No. 116/2010, Award, 19 December 2013, paragraph 1095.
(2) Petrobart Ltd. v. The Kyrgyz Republic, SCC Arbitration No. 126/2003, Award, 29 March 2005, Section VIII.2.
(3) Ioannis Kardassopoulos v. Georgia, ICISD Case No. ARB/05/18, Decision on Jurisdiction, 6 July 2007, paragraph 223.