In the case of PAO Tatneft v. Ukraine,  EWHC 1797 (Comm), the English Commercial High Court (QB), dealt with the issues related with the interpretation of BIT between Russia and Ukraine. In this case, an application was filed by a Ukrainian company under Section 101 of the English Arbitration Act (the Act) to stop the enforcement of an arbitration award passed against it for US$112 million plus interest. On careful perusal of the provisions of BIT and application of principles governing the interpretation of BIT’s, the Court dismissed the application of the Ukrainian Company. Read the case analysis below:
Tatneft, a Russian oil producing company, purchased shares in Ukrtatnafta, a Ukrainian company, along with the Republic of Tatarstan (a constituent republic of the Russian Federation) and Ukraine. Ukrtatnafta owned and operated the Kremenchug Refinery, which was the largest oil refinery in Ukraine. Later on, Seagroup, a US company and Amruz, a Swiss company acquired shareholdings in Ukrtatnafta in return for promissory notes. This acquisition was challenged in courts of Ukraine. Thereafter, Ukrainian courts declared the share purchase agreements invalid and Amruz’s and Seagroup’s shares were ultimately returned to Ukrtatnafta, and sold to a third party. During this time, the Kremenchug Refinery was seized by force, under the direction of a Ukrainian court. It is due to this reason, that Tatneft issued a Notice of Dispute under Article 9 of the Agreement between the Government of the Russian Federation and the Cabinet of Ministers of Ukraine on the encouragement and mutual protection of investments dated 27 November 1998 (the BIT). Tatneft bought just under 50% of the shares in Amruz, and all the shares in Seagroup. These share purchase agreements were invalidated pursuant to various Ukrainian court decisions, and Tatneft’s shares were returned to Ukrtatnafta and sold to a third party.
Tatneft served Ukraine with a Notice of Arbitration under the BIT pursuant to the UNCITRAL Rules. Tatneft alleged that it had been deprived of its entire shareholdings in Ukrtatnafta, in particular as a result of the seizure of the Kremenchug Refinery and by the series of the unlawful orders of the Ukrainian Courts purporting to invalidate Tatneft’s, as well as Amruz and Seagroup’s, purchases of shares in Ukrtatnafta and depriving them of their shares. More specifically, Tatneft alleged that Ukraine had violated its obligations under the BIT: (i) to encourage and protect investments (Article 2); (ii) not to expropriate investments (Article 5); and (iii) to treat investors fairly and equitably (an obligation which it contended was incorporated by reason of Article 3). Ukraine raised objections to the Tribunal’s jurisdiction under the BIT and the admissibility of the claims, which were the subject of written submissions and a jurisdiction hearing in The Hague.
The Tribunal issued an award and held that Ukraine had breached the obligation to treat Tatneft fairly and equitably, its actions resulting in a “total deprivation of [Tatneft’s] rights as a shareholder of Ukrtatnafta”. It ordered that Ukraine pay Tatneft US $112 million plus interest as compensation for that breach. Tatneft’s other claims were dismissed. Following the Merits Award, proceedings have taken place in the courts of France, the United States and Russia.
Thereafter, Tatneft issued an arbitration claim form applying for an ex parte order for permission to enforce the Merits Award under Section 101(2) of the Act and for judgment to be entered in the amount of the Merits Award.
Applicable Legal Principle
Section 101 of the English Arbitration Act
“101 Recognition and enforcement of awards.
(1) A New York Convention award shall be recognised as binding on the persons as between whom it was made, and may accordingly be relied on by those persons by way of defence, set-off or otherwise in any legal proceedings in England and Wales or Northern Ireland.
(2) A New York Convention award may, by leave of the court, be enforced in the same manner as a judgment or order of the court to the same effect.
As to the meaning of “the court” see section 105.
(3)Where leave is so given, judgment may be entered in terms of the award.”
Section 1 of the State Immunity Act 1978 (the SIA)
“(1) A State is immune from the jurisdiction of the courts of the United Kingdom except as provided in the following provisions of this Act.
(2) A court shall give effect to the immunity conferred by this section even though the State does not appear in the proceedings in question.”
Section 9 the SIA
“Where a State has agreed in writing to submit a dispute which has arisen, or may arise, to arbitration, the State is not immune as respects proceedings in the courts of the United Kingdom which relate to the arbitration.”
The parties agreed on following grounds
- That Ukraine is entitled to state immunity pursuant to Section 1 of the SIA unless s. 9 of the SIA applies.
- That BIT can give rise to an agreement in writing between the state and an investor for the purposes of Section 9 of the SIA.
- That enforcement proceedings are “proceedings … which relate to the arbitration” for the purposes of Section 9 of the SIA.
- That the principles governing the construction of a treaty such as the BIT, including its arbitration provision, were as set out in the decision of Bryan J in GPF GP v Poland  EWHC 409  – . They can be summarised as follows:
- It is for the Court to interpret the BIT in accordance with international law, and the principles of interpretation contained in Articles 31 and 32 of the Vienna Convention on the Law of Treaties (1969) (“the Vienna Convention”), which codifies customary international law (GPF, ).
- Article 31 sets out the primary rule of interpretation:
- A treaty shall be interpreted 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.
- The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:
- any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty;
- any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.
- There shall be taken into account, together with the context:
- any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;
- any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;
- any relevant rules of international law applicable in the relations between the parties.
- A special meaning shall be given to a term if it is established that the parties so intended.
Ukraine had following two claims:
- The successful claim by Tatneft for breach of the fair and equitable treatment (FET) standard in relation to its own shares in Ukrtatnafta. Ukraine did not agree to submit to arbitration any claim for breach of the FET standard because the BIT does not itself include that standard and it is not incorporated by means of the Most Favoured Nation provision in the BIT.
- The successful claim by Tatneft for breach of the FET standard in relation to Amruz’s and Seagroup’s shares in Ukrtatnafta (the Amruz/Seagroup shares claim). Ukraine did not agree to submit to arbitration the Amruz/Seagroup shares claim i. because it did not relate to an investment by Tatneft in Ukraine and Tatneft only acquired its shares in Amruz and Seagroup after the dispute relating to Amruz’s and Seagroup’s shareholding in Ukrtatnafta had arisen or at a time when that dispute was reasonably foreseeable and for the purpose of bringing that dispute within the scope of the BIT (Timing Point).
- That its current application is not, a challenge under Section 67 Arbitration Act, but is a challenge to this Court’s jurisdiction based on the provisions of the SIA. There is nothing in the SIA which in any way resembles Section 73 of the Act or otherwise suggests a similar philosophy. On the contrary, Section 1(2) SIA requires the Court to give effect to the immunity accorded by s. 1(1) even if the state does not appear. Because of the special position of sovereign states they will not be subject to the type of points which might be taken against a private party and which can prevent such a party from deploying a case which would otherwise have been open to it.
Tatneft contended as follows:
- That the applicability of Section 9 SIA depends on whether there was an agreement to arbitrate the relevant dispute, or, in other words, it depends on whether the Tribunal had jurisdiction over the dispute. Accordingly the points which Ukraine now seeks to take went to the jurisdiction of the Tribunal.
- That if Ukraine had wished to raise any of these points they should have been taken as jurisdictional objections before the Tribunal and therefore, Ukraine should not be able to raise new jurisdictional objections now. In cases in which a State failed to take a jurisdictional point in front of the arbitrators, then it had waived that point; and specifically that Ukraine had waived the points on which it now sought to rely
- That the Court should apply an approach similar to that applicable in the context of challenges to awards under Section 67 Arbitration Act, and to give effect to the policy reflected in Sections 31 and 73(1) of that Act.
With regard to Construction of the BIT, the Court relied on the case of GPF (Supra) and held that the text is presumed to be the authentic expression of the intention of the parties and is not to be substituted for or overridden by the presumed intention of the parties.
On the issue of issues on State Immunity the Court noted that the FET point cannot be characterised as a jurisdictional issue. The question of whether the claim for breach of an FET obligation fell within the scope of the arbitration agreement is a question of construction of Article 9 of the BIT. Applying the principles of construction of the BIT, as mentioned above, the Court held that an ordinary meaning is to be given to this provision. Further, the question of whether Ukraine owed Tatneft a duty of fair and equitable treatment is a “dispute” “in connection with” the investments in Ukrtatnafta.
On the issue of Amruz and Seagroup shares claim, the Court held this claim did not relate to qualifying “investments”. Ukraine therefore did not agree to submit that claim to arbitration under Article 9 of the BIT. It is therefore entitled to assert (and has not waived) state immunity in relation to it. For adopting the correct approach for construction of “investment”, the Court relied on Saluka Investments BV v The Czech Republic (Award of Sir Arthur Watts KCMG QC, Maitre Yves Fortier CC QC and Prof Peter Behrens dated 17 March 2006), Mytilineos Holdings SA v (1) The State Union of Serbia and Montenegro (2) Republic of Serbia (Award of Tribunal consisting of Prof. August Reinisch, Prof. Stelios Koussoulis and Prof Dobroslav Mitrovic dated 8 September 2006), and Fedax N.V. v The Republic of Venezuela (ICSID Case No. ARB/96/3) (Award dated 11 July 1997). The Court distinguished the case of Gold Reserve Inc. v Bolivarian Republic of Venezuela  EWHC 153 (Comm),  1 WLR 2829 with the present case, commenting that Gold Reserve (Supra) was concerned with the meaning of “investor”, and not, at least directly, with the meaning given to the term “investment”.
Based on approaches adopted in these cases, the Court held that the meaning of “investments” is intended to be the assets and intellectual property of all kinds that are invested into by an investor. This conclusion is also supported by the provision at the end of Article 1(1), which states that “no alteration of the type of investments in which means are invested shall affect their character as investments…”. That provision indicates that it is not the “means” (ie funds or other resources) which are the investment, but what they are invested into, and its purpose is to make it clear that an alteration of the character of the investment does not prevent a party from claiming the protection of the BIT.
On Timing Point issue, the Court relied on Philip Morris Asia Limited v The Commonwealth of Australia (PCA Case No. 2012-12) and held that the offer to arbitrate contained in Article 9 of the BIT should be construed as one subject to a temporal limitation by reference to the relationship between the date on which a protected investment was acquired and the date of the occurrence of the breaches of the BIT complained of. Therefore, the Tribunal did not lack jurisdiction ratione temporis.
The Court dismissed the Ukraine’s application and concluded as follows:
- By reason of Section 1(1) SIA Ukraine is immune from the jurisdiction of the Court unless an exception provided for in the SIA applies, and indeed the Court is obliged to give effect to that immunity even if the state does not appear.
- That the Court would have to give effect to the immunity unless it is satisfied that the State has agreed in writing to submit a dispute to arbitration and the proceedings relate to the arbitration. If there is an issue which is either apparent to the Court of its own motion or is raised by the state and which goes to the question of whether there was such an agreement in writing in relation to the relevant dispute, then the Court is obliged to consider it and can only exercise jurisdiction over the state if satisfied that the Section 9 exception is nevertheless applicable.
- That there is nothing in the SIA which suggests that there can be a foreclosure of the points which the State may raise as to the applicability of the immunity afforded by the SIA by reason of what may have occurred in front of an arbitral tribunal in a way similar to that provided for by the Act, particularly Section 73.
- That the FET point is not one which goes to the jurisdiction of the Tribunal and thus to whether Ukraine had submitted the dispute to arbitration under Section 9 of the SIA, but is instead a point on the merits which was for the Tribunal to decide.
- That the critical date on which there can be said to have occurred the “adoption” of the “disputed measures” occurred only after the acquisition by Tatneft of the Amruz and Seagroup shares. Therefore, the Tribunal did not lack jurisdiction ratione temporis.
- That the issue of abuse of right is not jurisdictional, but is instead a matter going to admissibility, and is one for the Tribunal to decide.
Indian Courts and BIT Arbitration
In the recent case of Union of India vs Vodafone Group Plc United Kingdom & Anr (CS(OS) 383/2017 & I.A.No.9460/2017, Date of Decision: 07th May, 2018), the Delhi High Court dealt with a dispute arising out of Bilateral Investment Treaties. The case involves various crucial aspects of Indian law on jurisdiction of national courts, private international law, Bilateral Investment Treaties etc. The case analysis is available at following link: Delhi High Court: Whether there is a threshold bar or inherent lack of jurisdiction with Indian courts to deal with BIT arbitrations; Whether the BIT arbitrations and suits relating to BIT arbitrations are governed by private international law or any other system of law including domestic law?