The English Court (the “Court“) has dismissed an application by Ukraine to set aside a court order permitting Russian investor, PAO Tatneft, to enforce an arbitral award against Ukraine. Ukraine argued that it was immune from the Court’s jurisdiction by virtue of the State Immunity Act 1978. The Court found that Ukraine had not waived its right to rely on state immunity arguments, despite not having raising them in the arbitration. However, it found that Ukraine had agreed to submit the disputes in question to arbitration under the Russia-Ukraine Bilateral Investment Treaty (the “BIT“) and was therefore not immune from proceedings in connection with the arbitration by virtue of s9(1) of the State Immunity Act 1978 (“SIA“).
In May 2008, Tatneft commenced proceedings against Ukraine under the BIT, alleging that it had effectively been deprived of its shareholdings in CJSC Ukrtatnafta Transitional Financial and Industrial Oil Company (“Ukrtatnafta“), which owned and operated the largest oil refinery in Ukraine. Tatneft claimed, amongst other things, that Ukraine had failed to accord Tatneft fair and equitable treatment (“FET“) in accordance with a FET clause incorporated via the Most-Favoured Nation (“MFN“) provision in the UK-Ukraine BIT. A few days after it issued the Notice of Dispute, Tatneft purchased shareholdings in a US company and a Swiss company, which led to Tatneft being indirect owner of further shares in Ukrtatnafta.
In 2010, the Tribunal issued a partial award which confirmed jurisdiction and rejected Ukraine’s objections. In the merits award in July 2014 (Award) the Tribunal found that Ukraine had breached its FET obligation and ordered that Ukraine pay Tatneft US $112 million plus interest. Tatneft’s other claims were dismissed.
The English court proceedings
In April 2017, Ukrtatnafta was granted an ex parte order from the English court to enforce the Award. Ukraine sought to set aside the order on the ground that it was immune from the proceedings before the English court pursuant to s1 of the SIA, which provides that a State is immune from the jurisdiction of the English courts except as provided elsewhere in the SIA.
S9(1) of the SIA however provides that 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 English courts which relate to the arbitration. Ukraine argued that s9(1) did not apply on the basis that:
- it did not agree to submit to arbitration any FET claims because the BIT does not itself include that standard, nor was it incorporated via the Most Favoured Nation clause (the FET point); further or alternatively
- it did not agree to submit to arbitration the Swiss/US shares claim because (i) it did not relate to an investment by Tatneft in Ukraine (the No Investment point), and (ii) because Tatneft only acquired the Swiss/US company shares after it had commenced proceedings (the Timing point), and at a time when the dispute was reasonably foreseeable deliberately to gain the protection of the BIT, and thus the Swiss/US claim fell outside the scope of the BIT (the Abuse of Rights point).
The Court’s decision
Was Ukraine’s state immunity argument open to it?
Under s1(1) of the SIA, the Court has a duty to give effect to immunity
The Court held that there was nothing in the SIA (either expressly or impliedly) which precluded Ukraine from running its state immunity argument before the Courts by reason of what occurred before the Tribunal. The Court rejected Tatneft’s argument that the Court should adopt an approach similar to s67 of the Arbitration Act 1996 in considering whether a State was foreclosed from raising points as to the applicability of immunity. Under s1(1) of the SIA, the Court has a duty to give effect to immunity unless it is satisfied that the State has agreed in writing to submit a dispute to arbitration and that the proceedings relate to the arbitration. Whilst a State could theoretically waive arguments on applicability of s9(1) of the SIA in the course of an investment treaty arbitration, this would require clear conduct that the State intended to forego reliance on a particular point, not just for the arbitration but for wider purposes including any subsequent issues as to state immunity before a national court. Here, the Court found that there was no such conduct by Ukraine. The Court nonetheless found that Ukraine had indeed submitted to arbitration and by virtue of s9 of the SIA was not immune from the proceedings.
The FET point
Notwithstanding the Tribunal’s Award, Ukraine argued that the BIT does not include the FET standard, nor was it incorporated via the Most Favoured Nation clause and that, having not agreed to any FET claims, it had not agreed to arbitrate claims for breach of the FET standard. It argued that this point went to the issue of jurisdiction and thus to the issue of whether it had submitted such disputes to arbitration for the purposes of s9(1) of the SIA.
The Court rejected the characterisation of the FET point as going to jurisdiction, finding that the existence and breach of an FET obligation was a point for the Tribunal to determine on the merits. It found that, applying principles of construction to the BIT, Ukraine had agreed in the BIT to arbitrate “any dispute” in connection with the relevant investment, and one type of dispute which it had agreed to arbitrate was that as to the protections afforded by the BIT.
The No Investment point
Ukraine contended that the ‘investment’ in the Swiss/US companies’ shares did not qualify for the purposes of the BIT as they were not investments made by Tatneft in Ukraine because they did not involve contribution of capital or putting other resources into Ukraine’s economy. Therefore, it argued that any dispute in connection with those shares was not agreed to be referred to arbitration and so Ukraine could claim immunity.
it may be difficult to establish that it has not submitted in writing to arbitrate the dispute
The Court concluded that the meaning of “investments” in Article 1(1) of the BIT was intended to be the “assets and intellectual property of all kinds that are invested by an investor“. The phrase “are invested by” did not create a requirement for an active process of the commitment of resources by the investor in the sense of having acquired an interest in the asset in return for a contribution of resources into the host state (or making such resources available for the host state to use) in order to qualify as an investment. Ukraine was granted permission to appeal on this point.
The Timing point
Ukraine argued that it did not agree to submit the Swiss/US companies’ shares claim to arbitration because a state’s offer to arbitrate should be construed as limited to disputes in respect of events that arose after the claimant made a qualifying investment protected by the BIT. The Court accepted that the offer to arbitrate in Article 9 of the BIT is subject to temporal limitation. However, the critical date was when the relevant breach occurred. This was in late 2008 at the earliest, and thus after Tatneft’s acquisition of the shares in the US/Swiss companies. The Court concluded that the Tribunal had not lacked jurisdiction ratione temporis.
The Abuse of Rights point
The Court agreed with Tatneft that the abuse of rights point was a question of admissibility for the Tribunal to decide, and not a matter of jurisdiction. It had no bearing on applicability of s9 of the SIA.
the position on immunity may vary between jurisdictions
The case demonstrates that, while it is open to a State embroiled in an arbitration to seek state immunity before the English court in respect of proceedings in relation to the same arbitration, in reality it may be difficult to establish that it has not submitted in writing to arbitrate the dispute and that s9 of the SIA does not apply. This is particularly so where, as in the case of the Ukraine-Russia BIT, the arbitration agreement is broadly worded, for example agreeing to arbitration of “any dispute” in connection with the relevant investment. It may be easier to claim that a state has not lost its immunity under s9 of the SIA in the case of investment treaties with a particularly narrow definition of ‘disputes’ that the states have agreed to arbitrate and where the dispute in question can be argued to fall outside this scope. Examples of narrower dispute settlement clauses are those which provide only for the settlement of disputes over the amount and method of compensation in the case of expropriation, such as the early Chinese BITs and some of the USSR BITs.
It is also important to bear in mind that the position on immunity may vary between jurisdictions, including amongst jurisdictions which embrace a doctrine of restrictive immunity. There are also jurisdictions, such as Hong Kong, which still embrace absolute immunity. If there is no provision which resembles s9 of the SIA or if such a provision is not interpreted as including enforcement proceedings, then a State’s immunity arguments may be more successful.
IAIN MAXWELL, HANNAH AMBROSE, VANESSA NAISH and NATALIE YARROW of Herbert Smith Freehills: further details here.
Editors’ Note: This post first appeared on the Herbert Smith Freehills PIL Notes blog, and is reproduced with permission and thanks.