Lexology | 27 May 2021
Court annuls billion-dollar award, finding Crimea investment was made before BIT applied
by Jonathan Brosseau - Freshfields Bruckhaus Deringer LLP
The Paris Court of Appeal has set aside a $1.1 billion award against Russia for the expropriation of the Crimean branch of Ukrainian state-owned bank Oschadbank. The court held that the bank had made its investment in Crimea before the Ukraine-Russia Bilateral Investment Treaty’s (BIT’s) 1992 time limit and that, as such, the tribunal lacked temporal jurisdiction.
In its March 2021 decision,(1) the Paris Court of Appeal accepted Russia’s argument that a condition to a tribunal’s jurisdiction under the BIT was that investments had to be made on or after 1 January 1992. Given that Oschadbank’s Crimean branch had commenced operations before then, the court concluded that the tribunal had wrongly upheld its jurisdiction and thus overturned the award.
The Paris Court of Appeal took a position on a complex issue of temporal jurisdiction following Russia’s occupation of Crimea. As Oschadbank has confirmed its intention to appeal, the Court of Cassation will have to decide whether the decision adds a condition to jurisdiction that is absent from the BIT and whether to quash the decision, as it did in Rusoro and Energoalians.(2)
In the wake of its occupation of Crimea in March 2014, Russia enacted several laws establishing conditions for Ukrainian banks to continue their activities in the territory. Banks failing to meet certain conditions were forced to cease their activities, which was the case for Oschadbank only months later. Oschadbank believed that these measures were part of a campaign to replace Ukrainian banks in Crimea with Russian banks.
Oschadbank launched arbitration under the Ukraine-Russia BIT, alleging that Russia had expropriated its Crimean assets. Similar to the other Crimea-related cases, Russia refused to participate in the proceedings but sent a series of letters to the tribunal contesting its temporal jurisdiction. Russia argued, among other things, that the tribunal’s jurisdiction covered only investments made in Crimea after the 2014 occupation.
In a decision which remains unpublished, but from which details have begun to surface,(3) the tribunal rejected Russia’s argument that the BIT covered only investments made after 2014.
In the BIT:
The tribunal held that the definition of investment in Article 1 of the BIT contains no temporal requirement limiting coverage to investments made after Russia began assuming obligations in Crimea under the treaty. On the merits, the tribunal held that the seizure of Oschadbank’s Crimean branch amounted to an unlawful expropriation.
Russia applied before the Paris Court of Appeal to overturn the award under Article 1520(1) of the Code of Civil Procedure (CCP). This article provides that an arbitral award must be annulled when the tribunal wrongly upholds or declines its jurisdiction.(4) Russia contested the tribunal’s temporal jurisdiction on the ground that the BIT covers only investments made after 1992 and that Oschadbank’s investment had been made before that date.
Waiver of argument
As a preliminary point, Oschadbank contended that Russia’s new argument about the tribunal’s jurisdiction was inadmissible because Russia had not asserted this argument in its letters to the tribunal. Under Article 1466 of the CCP, a party which fails to challenge the tribunal’s jurisdiction in arbitration waives its right to bring the challenge at the annulment stage.
The court allowed Russia’s argument, finding that there was no waiver since Russia had not participated in the arbitration on the ground that the tribunal lacked jurisdiction. Adopting the same approach that the Court of Cassation recently took,(5) the Paris Court of Appeal added that Russia’s general objection to the tribunal’s jurisdiction in its letters would have sufficed in any event to preserve its right to bring new arguments in support of its current objection.
As to whether the date of the investment was a question of jurisdiction which was reviewable under Article 1520(1) of the CCP, Russia argued that it was because it was a condition that determined the BIT’s scope of application. For Oschadbank, the issue related to the BIT’s substantive protections and therefore fell outside the reviewable grounds under French law.(6)
The court, once again, sided with Russia, holding that a tribunal’s jurisdiction under the BIT is conditional on investments being made after 1992.
Next, Russia argued that the temporal limitation in Article 12 of the BIT applies to determine when an asset qualifies as an investment under Article 1, and that Oschadbank’s 1991 investment fell outside the tribunal’s temporal jurisdiction. Oschadbank replied that Russia’s interpretation conflated two notions:
The court held that "only the date on which the investment was made" can be considered to assess the tribunal’s temporal jurisdiction. The court stated that this interpretation was supported by the "ordinary meaning" and the "object and purpose" of Article 12 but did not explain how. The court also noted that its interpretation was confirmed by the BIT’s negotiations, which showed that Ukraine and Russia had envisaged expanding jurisdiction to investments made before 1992 but had decided not to do so.
As the evidence on record showed that Oschadbank’s Crimean branch had begun operations in 1991, the court held that the tribunal had wrongly upheld its jurisdiction and set aside the award.
Law applicable to control of jurisdiction
The Paris Court of Appeal’s decision contributes to the French approach on the law applicable to the control of a tribunal’s jurisdiction.
The decision refers not only to Article 31 of the Vienna Convention, but also to the supplementary means of interpretation in Article 32 therein.(9) This represents a positive development for French jurisprudence because it clarifies that the arbitration agreements in BITs – unlike those in contracts – are subject to the law applicable to the instruments containing them.(10)
Review of tribunal’s jurisdiction
Similar to the nine other Crimea-related arbitrations and their enforcement proceedings in domestic courts,(11) Oschadbank has raised highly political questions and complex issues of temporal jurisdiction relating to the timing of the investments.(12)
Two issues of temporal jurisdiction in this case law may shed light on the matter discussed before the Paris Court of Appeal, which relates to when the investment was made under the BIT.
Investment made in respondent state’s territory
When should the requirement in Article 1 of the BIT that the investment be made "in the territory" of the respondent state be assessed (ie, when Oschadbank acquired its assets in Ukraine in 1991 or when these assets became located in the Russian territory in 2014)?(13)
Arbitral tribunals and domestic courts in the Crimea-related cases have held that the definition of ’investment’ in Article 1 of the BIT does not expressly require that the assets be acquired in the Russian territory from the start. Therefore, the case law supports the argument that the requirement was met in 2014.(14)
Investment made in conformity with respondent state’s law
When should the requirement in Article 1 of the BIT that the investment be made "in conformity" with the respondent’s state law be assessed (ie, in 1991 or 2014)?
In the Crimea-related cases, tribunals have held that whether the investments complied with Russian law should be assessed as of the time when the investments came under the BIT’s coverage in 2014.(15) Otherwise, Ukrainian investors such as Oschadbank would have had to comply with Russian law in 1991 when Crimea was still located in Ukraine’s territory.
Oschadbank plans to appeal the Paris Court of Appeal’s decision to the Court of Cassation and has suggested that it will resubmit its argument about the distinction between assets and investments.(16) For Oschadbank, the court’s interpretation has added a condition to the tribunal’s jurisdiction that is not required by the BIT– namely, that the assets be acquired after 1992 (by applying Article 12 to Article 1 of the BIT), whereas the BIT requires only that the investment be made after 1992 (according to Article 12).
Typically, this distinction would make no difference because Articles 1 and 12 would be in step temporally: the date on which the assets were acquired and the date on which the investment was made would be the same.(17) However, applying this distinction to Russia’s occupation of Crimea means that Oschadbank acquired its assets in 1991 and made the investment in 2014. The Court of Cassation will have to decide whether Oschadbank is right and the Paris Court of Appeal did indeed add a condition to jurisdiction that is not specified by the BIT.
Laure Dupain, trainee, assisted in the preparation of this article.
(1) The decision is available here (in French).
(2) For further details on Rusoro and Energoalians, please see "France’s top court finds that a BIT’s limitation period relates to admissibility, not jurisdiction" and "Paris Court of Appeal may revisit definition of ’investment’ under Energy Charter Treaty", respectively.
(3) J Braun, "Tribunal in previously-unseen award against Russia upheld jurisdiction over Crimea-related claims, and awarded over 1.3 billion USD in compensation", Investment Arbitration Reporter, 2021.
(4) As Paris was the chosen seat of arbitration, any attempt to set aside an award in the case needed to be pursued in the French courts. On the challenge of awards in France, see M Rivoire and C Seraglini "Challenging and Enforcing Arbitration Awards: France", Global Arbitration Review, 2020.
(5) In Schooner, the Paris Court of Appeal took a broad approach to the waiver of arguments in annulment proceedings (for further details please see "Paris Court of Appeal confirms expansive scope of Article 1466 of Code of Civil Procedure"). The Court of Cassation recently quashed this decision, holding that when jurisdiction is disputed before the tribunal, the parties can rely on new arguments to contest the tribunal’s jurisdiction in annulment (for further details, please see "Parties to set-aside proceedings can rely on new arguments that they failed to raise before arbitral tribunal").
(6) Under French law, an award (including a treaty-based award) can be set aside only on the five grounds listed in Article 1520 of the CCP. No ground enables the courts to review a tribunal’s decision on substantive provisions in a BIT, which relates to the merits of a dispute. C Seraglini and J Ortscheidt, Droit de l’arbitrage interne et international (2nd Edition, 2019), p 951.
(7) When exercising the control of a tribunal’s jurisdiction in commercial arbitrations, French courts do not analyse the arbitration agreement under the law of the forum, that of the contract, the law governing the arbitration agreement or that of the arbitration procedure. Rather, courts assess the arbitration agreement "subject to the mandatory rules of French law and the international public order, according to the common will of the parties, without referring to any state law". Cass 1re civ, 30 March 2004, Rev arb 2005, p 959, Note C Seraglini. See also C Seraglini and J Ortscheidt, Droit de l’arbitrage interne et international (2nd Edition, 2019), p 958, Footnote 5666.
(8) See L Gouiffes and L Chatelain, "L’annulation en France des sentences arbitrales rendues sur le fondement de traités d’investissement", Rev arb 2017, Volume 2017, Issue 3, pp 839 to 865, Paragraph 26. See Republic of Moldova v Komstroy Company, Paris Court of Appeal, 12 April 2016, Rev arb 2016, p 839, Note C Fouchard.
(9) It appears that only two other decisions of the Paris Court of Appeal refer to Article 32 of the Vienna Convention: Serafin Garci v Venezuela, 3 June 2020, 19/03588, Paragraph 46 and Ryan v Poland, 2 April 2019, 16/24358, p 6.
(10) On supplementary means of interpretation, see J Brosseau, "Applicable Law", Jus Mundi, 2021, Paragraph 5.3.
(11) While the awards in the Crimea-related cases are not publicly available, details about them have begun to surface in the press and through enforcement proceedings.
(12) On temporal jurisdiction, see B Sabahi, N Rubins and D Wallace Jr, Investor-State Arbitration (2nd Edition, 2019), p 412.
(13) This issue differs from the complex question of whose territory Crimea falls within (ie, Russia’s or Ukraine’s) and according to which law it should be answered (ie, Russian law, Ukrainian law or public international law). As Russia did not participate in the first Crimea-related arbitrations, tribunals could not submit the question to it directly. Tribunals have side-stepped the question in their decisions, opining that the term ’territory’ does not refer to legal sovereignty, but rather to jurisdiction or control. See J Braun, "Tribunal in previously-unseen award against Russia upheld jurisdiction over Crimea-related claims, and awarded over 1.3 billion USD in compensation", Investment Arbitration Reporter, 2021; J Hepburn, "Full jurisdictional reasoning comes to light in Crimea-related BIT arbitration vs. Russia", Investment Arbitration Reporter, 2017; J Hepburn and R Kabra, "Further Russia investment treaty decisions uncovered, offering broader window into arbitrators’ approaches to Crimea controversy", Investment Arbitration Reporter, 2017. It seems that Russia has changed strategy as awards piled up and has now decided to appear in proceedings after all. S Perry, "Russia challenges Crimea awards and changes strategy", Global Arbitration Review, 2019.
(14) See eg J Hepburn, "Full jurisdictional reasoning comes to light in Crimea-related BIT arbitration vs. Russia", Investment Arbitration Reporter, 2017; J Hepburn and R Kabra, "Further Russia investment treaty decisions uncovered, offering broader window into arbitrators’ approaches to Crimea controversy", Investment Arbitration Reporter, 2017; PJSC Ukrnafta v Russia, Swiss Federal Tribunal, 16 October 2018, 4A_396/2017, Paragraph 4.4.2; Everest v Russia, The Hague Court of Appeal, 11 June 2019, PCA Case 2015-36, Paragraph 6.2.
(15) J Braun, "Tribunal in previously-unseen award against Russia upheld jurisdiction over Crimea-related claims, and awarded over 1.3 billion USD in compensation", Investment Arbitration Reporter, 2021; J Hepburn and R Kabra, "Further Russia investment treaty decisions uncovered, offering broader window into arbitrators’ approaches to Crimea controversy", Investment Arbitration Reporter, 2017.
(16) C Kevser, "Paris Court of Appeal overturns decision against Russia on compensation or Ukrainian Oschadbank’s Crimean assets", QHA, 2021.
(17) This is illustrated by considering the same facts but excluding Crimea’s boundary change. In this scenario, a Ukrainian investor would still have acquired assets in Crimea in 1991 when the territory was part of Ukraine and the BIT would still provide upon its entry into force in 2000 that only investments made after 1992 were protected. Using Oschadbank’s distinction between assets and investments, the Ukrainian investor’s assets would requalify in 2000 as an investment made in 1991 because it is then that these assets would have met retroactively the definition of investment under Article 1 of the BIT. The objective of Ukraine and Russia to exclude investments made before 1992 from the BIT’s coverage would then have been achieved.