Paris court confirms state companies’ use of investment arbitration under Russia-Ukraine BIT (Ukraine v Tatneft)

On 29 November 2016 the Paris Court of Appeal (the Court) decided to uphold the arbitration award in the
long-lasting dispute between Russian oil firm PJSC Tatneft (the Tatneft) and Ukraine. In this case, Ukraine unsuccessfully tried to set aside the $112m investment treaty awards in favour of Tatneft.

The main issue in the case was whether state-owned companies or companies with a significant state shareholding can use international arbitration. The court’s decision may further increase the number of arbitration claims between Russia and Ukraine as it shows that even companies with large state shareholding and state’s officials on the board can gain access to arbitration under the Russia-Ukraine BIT.

How did the dispute arise?

The origins of the dispute come from Ukraine’s decision to assume control over the shares of the PJSC Ukrtatnafta (the Ukrtatnafta), one of Ukraine’s largest oil refining companies, in 2007.

Ukrnafta was a joint venture of Ukraine and one of the Russian regions—the Republic of Tatarstan. In this venture, Tatarstan initially had a shareholding of 55.66% directly, through Tatneft or its affiliated companies. Ukraine had 43.05% of the remaining shares, with the remaining 1.1% being under control of the Ukranian oligarch Ihor Kolomoyskyi’s Privat Group.

The first signs of the internal struggles between the shareholders started to emerge in 2000–2006 with the series of lawsuits in Ukrainian courts. Eventually, this resulted in the total dissipation of Tatarstan’s stake in the company and its acquisition by the shareholders close to Privat Group. The takeover included physical removal of the directors close to Tatneft from the factory by a group of former managers with the help of the armed police in 2007.

What was the background to the Russia-Ukraine investment treaty arbitration?

Immediately after the conflict Tatneft’s management called Ukrainian actions ‘a lawless raid’ and on 21 May 2008 the company filed an UNCITRAL arbitration claim against Ukraine based on the 1998 Russian Federation – Ukraine BIT. Tatneft alleged that this constituted breach of the principles of fair and equitable treatment and the minimum standard of treatment, including denial of justice.

The initial size of the claim was $520m for the arrears of oil supplies and $610m for the loss of the shareholding in the company, in 2009 Tatneft further increased the amount of claim to $2.4bn.

On 29 July 2014, the UNCITRAL Arbitral Tribunal based in France, which included Francisco Orrego Vicuña, Charles N Brower and Marc Lalonde issued a $112m award against Ukraine. It established that Ukraine had violated its obligations under the Russia-Ukraine BIT through the forced takeover of the refinery by state bailiffs and court proceedings resulting in losing Tatneft’s shares in Ukrtatnafta.

After the defeat, in August 2014 Ukraine filed a claim in the Paris Court of Appeal to set aside the award. The primary grounds for the challenge were the lack of jurisdiction of the arbitral tribunal and the lack of impartiality and independence of the presiding arbitrator, Francisco Orrego Vicuña. The Paris Court of Appeal has, however, rejected both arguments.

What did the Paris Court of Appeal decide?

Not an investor

Ukraine’s main argument was that Tatneft did not qualify as an ‘investor’ under article 1.2 of the 1998 Russia-Ukraine BIT and was a state entity with Russian region, the Republic of Tatarstan as its principal shareholder.

The court, however, pointed out that article 1(2)(b) speaks only about ‘any legal entity, set up or instituted in conformity with the legislation prevailing on the territory of the given Contracting Party’, without specifying whether such an entity must be private or public.

After that the Court referred to Art.31(1) of the Vienna Convention on the law of treaties 1969 which states 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. Therefore, article1(2)(b) of the BIT cannot be interpreted as limiting access to arbitration only about private companies.

The court also noted that although Tatarstan’s government had a ‘golden share’ in the firm and its president and prime minister were on the company’s board, this did not necessarily mean that the company did not have structural, organic and decisional autonomy. Tatneft is a public company listed on the Moscow and London Stock Exchanges with only 36% of its shares owned by Tatarstan and remainder being dispersed among more than 50,000 other shareholders.

Impartiality of arbitrators

In relation to the challenge of the president of the tribunal, Ukraine alleged that the previous appointment of the arbitrator by the law firm representing Tatneft in another dispute in 2011 constituted a reasonable doubt in his independence and impartiality. The court rejected this argument stating the single appointment in seven years was not enough to prove any lack of impartiality of the arbitrator.

Another of Ukraine’s arguments related to the fact that Orrego Vicuña did not disclose to the parties that he and his co-arbitrator, Brower were both members of the same barrister chambers, 20 Essex Street Chambers in London. The court decided that this was irrelevant as the fact was already disclosed by the Brower and known to the parties.

What are the practical implications?

The outcome of this case can potentially open the way for further claims by state-owned enterprises from Russia and Ukraine against both countries. However, its overall effect on the complicated issue of whether state-owned enterprises can use arbitration may be limited.

There is no single answer to the question of whether state-owned enterprises can use investment arbitration protection. This largely depends on the text of the treaty which is used for making a claim. While some BITs (like article 1.2 of Russia-Ukraine 1998 BIT) simply omit this distinction or directly allow state-owned companies to make claims (article 201(1) of NAFTA, 2004 Model US BIT) other treaties and, most noticeably ICSID, significantly restrict it.

In ICSID there is a so-called Broches’s test, developed by its first Secretary-General stating that a state-owned entity would have standing ‘unless it is acting as an agent for the government or is discharging an essentially governmental function’. ICSID tribunals have used this test in cases such as CSOB v Slovakia where the tribunal also checked whether CSOB’s activities were commercial rather than governmental in nature.

About the Author:

Ivan Philippov is a Russian lawyer, currently going through a qualification process for becoming a solicitor of England and Wales. He specialises in international commercial and investment arbitration and has experience of working or doing internships in Russia, United Kingdom and Sweden. He is a graduate of the School of International Law of Moscow State Institute of International Relations (University) of the MFA of Russia and School of International Arbitration of Queen Mary, University of London.

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