The European & Middle Eastern Arbitration Review 2008

Section 3: Regional Overviews

Provisional Application of the Energy Charter Treaty

Andrew Hutcheon, James Spencer

Watson, Farley & Williams LLP

Provisional application

The provisional application of treaties has become a well-established device by which states may undertake to give effect to a treaty notwithstanding that the treaty has not yet entered into force and/or its domestic procedures for ratification are yet to be completed.
Article 25(1) of the Vienna Convention1 allows for the provisional application of treaties in stipulating:
A treaty or a part of a treaty is applied provisionally pending its entry into force if:
(a) the treaty itself so provides; or
(b) the negotiating States have in some other manner so agreed.

Under article 45(1) of the Energy Charter Treaty (ECT), contracting parties agree “to apply this treaty provisionally pending its entry into force for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its constitution, laws or regulations”.
Provisional application was only available to those states that signed the ECT when it was initially opened for signature from 17 December 1994 until 16 June 1995.2 At the time of signature each contracting party was given the option under article 45(2) of filing a declaration to the effect that it was “not able to accept provisional application”.
Since the ECT’s entry into force on 16 April 1998,3 two states, namely the Russian Federation and Belarus, continue to apply the ECT provisionally in accordance with article 45(1). A further six states (Australia, Iceland, Japan, Malta, Norway and Poland), who have signed but not yet ratified the ECT, were among those making declarations under article 45(2).

Issues of interpretation raised by the ECT’s provisional application

While it has been common practice over several decades for intergovernmental treaties to provide for provisional application, the ECT unusually combines provisional application with investment protection provisions for foreign energy sector investors4 and investor-state arbitration of investment disputes.5
Commentators have noted that the ECT’s provisional application terms raise a number of issues of interpretation. The uncertainty as to whether a contracting party, having signed but not ratified the ECT, has consented to international arbitration on the basis of provisional application will be of particular concern to investors.
This issue has been highlighted recently as a result of the arbitration started by the majority shareholders of Yukos to bring claims against the Russian Federation under the ECT. The shareholders allege that a Russian tax investigation bankrupted Yukos, effectively expropriating their investment. Russia has argued that the tribunal lacks jurisdiction to hear the claims as it has not ratified the ECT. A jurisdictional hearing has been scheduled for spring 2008.

Ioannis Kardassopoulos v Georgia

The recent decision in Ioannis Kardassopoulos v Georgia6 has provided the first-known comprehensive interpretation of ECT, article 45. The tribunal in this ICSID arbitration7 upheld jurisdiction to hear claims by Mr Ioannis Kardassopoulos, a Greek national, that the Republic of Georgia had expropriated a concession for the reconstruction of energy pipelines and infrastructure. Mr Kardassopoulos has sought to bring his claims under both the ECT and the bilateral investment treaty (BIT) between Greece and Georgia.8
The original agreements granting the concession to a company in which Mr Kardassopoulos had an indirect interest were made in 1992 and 1993. Georgia and Greece both signed the ECT on 17 December 1994. The alleged expropriatory actions took place between 1995 and 1997. As discussed above, the ECT did not come into force until 16 April 1998.
In objecting to the ICSID tribunal’s jurisdiction to hear the claims, Georgia argued that the acts,9 which caused Mr Kardassopoulos’s alleged loss, occurred prior to the entry into force of both the ECT and the BIT and as a result the tribunal lacked jurisdiction ratione temporis.

Jurisdiction ratione temporis under the ECT

The Arbitral Tribunal’s jurisdiction under the ECT is derived from article 26. Article 26(1) refers to:
Disputes between a Contracting Party and an Investor of another Contracting Party relating to an Investment of the latter in the Area of the former, which concern an alleged breach of an obligation of the former under Part III…

Thus the arbitral tribunal’s jurisdiction to decide the issues in dispute under the ECT depended amongst other things on Mr Kardassopoulos having an ‘Investment’ in Georgia.

Existence of an ‘Investment’

‘Investment’ is defined in article 1(6) of the ECT and covers “every kind of asset, owned or controlled directly or indirectly by an Investor” and includes a wide variety of specified assets. The definition further provides that:
[T]he term “Investment” includes all investments, whether existing at or made after the later of the date of entry into force of this Treaty for the Contracting Party of the Investor making the Investment and that for the Contracting Party in the Area of which the Investment is made (hereinafter referred to as the “Effective Date”) provided that the Treaty shall only apply to matters affecting such Investments after the Effective Date.

Therefore in order to have an ‘Investment’ for the purposes of articles 1(6) and 26(1) as well as the ECT’s investment protection provisions,10 two conditions must be met:
• the investment must have been existing at or made after the ‘Effective Date’; and
• the matter affecting the investment must have occurred after the ‘Effective Date’.

The meaning of the term ‘Effective Date’ is therefore crucial to the operation of articles 1(6) and 26(1).
Firstly, ‘entry into force’ of the ECT is provided for in article 44 and the parties accepted that for the purposes of article 44 the date of entry into force of the ECT was 16 April 1998, following the depositing of the 30th instrument of ratification.
Secondly, Georgia argued that the plain language of the ECT only gave the tribunal jurisdiction over disputes relating to an ‘Investment’ defined in article 1(6) where there were matters affecting such investments after the ‘Effective Date’. ‘Effective Date’ was defined as the later of the dates on which the ECT entered into force for Georgia and for Greece. It was argued that with respect to both Georgia and Greece the date of entry into force was 16 April 1998 and that the alleged expropriatory acts all occurred before this date.
In response, Mr Kardassopoulos argued that by virtue of article 45(1) Greece and Georgia agreed to apply the ECT provisionally and therefore the ‘Effective Date’ was 17 December 1994. The matters affecting the investments all took place after this and therefore the tribunal had jurisdiction.
Finally, Georgia argued that Mr Kardassopoulos could not rely on provisional application of the Treaty under article 45(1) in any event because provisional application is not permitted under Greek or Georgian law.
The major issue on the interpretation of the provisional application terms of the ECT was whether, for the purposes of the definition of ‘Effective Date’ in article 1(6) of the ECT, the date from which the ECT became provisionally applicable could be treated as its ‘date of entry into force’. This issue has two aspects. First, is provisional application of the ECT under article 45(1) equivalent to its entry into force? Second, if so, did the ECT enter into force on that ‘provisional application’ basis for Georgia and Greece on the date of their signature of the ECT?

Is provisional application of the ECT equivalent to its entry into force?

Article 45 does not explain the meaning of the signatory states’ agreement to “apply this Treaty provisionally”. It fell to the ICSID tribunal to determine its meaning by a combination of (i) an interpretation of that phrase through the application of the Vienna Convention11 and (ii) the generally accepted meaning of the concept of provisional application of treaties.
While the ICSID tribunal clearly felt that provisional application was not the same as entry into force, it recognised that it was a matter of legal obligation to which the ECT’s signatories had voluntarily consented. Accordingly, the ICSID tribunal held that the provisional application of the ECT obliged signatory states in principle to apply all of the Treaty’s provisions (including parts III and V) immediately on their signing of the ECT as if they were already in force. This was so even if the ECT’s proper or definitive entry into force had not yet occurred under article 44. As such, the definition of ‘Effective Date’ in article 1(6), particularly through its use of the terms ‘entry into force’, had to be interpreted as meaning the date on which the ECT became provisionally applicable for the signatory states in question.
As neither Georgia nor Greece filed an article 45(2) declaration when signing the ECT on 17 December 1994, the ECT could in principle have become provisionally applicable for both states on their signing of the treaty.

Did the ECT enter into force on a ‘provisional application’ basis for Georgia and Greece on their signing of the ECT?

Having established that the date of the provisional application of the ECT for Greece and Georgia, namely 17 December 1994, could constitute the ‘Effective Date’ for the purposes of article 1(6), it was necessary for the ICSID tribunal to further determine whether in practice the ECT was provisionally applicable for those two states as from that date.
This question arises because article 45(1) of the ECT only requires that signatory states apply the ECT provisionally to the extent that to do so would not be inconsistent with their respective constitutions, laws or regulations. Additionally, the definition of ‘Effective Date’ in article 1(6) also required the tribunal to determine the dates of entry into force of the ECT for Georgia and Greece in order that it could identify the later of the two dates.
Following a detailed examination of both Georgian and Greek law, the ICSID tribunal concluded that neither precluded the provisional application of the ECT. The tribunal noted that the burden of proof was on Georgia to show that provisional application was inconsistent with the constitution, laws or regulations of Greece and/or Georgia. The tribunal’s analysis suggests that, unless there are laws already expressly dealing with provisional application, proof of inconsistency by relying on general provisions may be difficult. Provisions, such as article 28 of the Greek Constitution, which do not deal with provisional application but establish circumstances in which treaties become an integral part of domestic law and requires prior ratification for those purposes, were found not to be inconsistent with provisional application.12
Accordingly, the tribunal found that it did not lack jurisdiction ratione temporis to hear Mr Kardassopoulos’ claims under the ECT as:
• his investment qualified as an ‘Investment’ under article 1(6) of the ECT in that it existed as at the ‘Effective Date’ (being the date on which the ECT became provisionally applicable for Greece and Georgia, namely the date on which they signed the ECT); and
• the acts of the Georgian government, which Mr Kardassopoulos alleges had the effect of expropriating the Investment, occurred after the ‘Effective Date’.

The ICSID tribunal’s comprehensive interpretation of ECT, article 45 is welcomed. The interpretation is entirely consistent with the ECT’s object and purpose of establishing “a legal framework in order to promote long term cooperation in the energy field” and to “promote access to international markets on commercial terms, and generally to develop an open and competitive market”. If the ICSID tribunal had held that ‘entry into force’ in the definition of ‘Effective Date’ was the ECT’s entry into force under article 44 the provisional application regime would not have applied to “matters affecting ... Investments”. This would not only have struck at the heart of the ECT’s clearly intended provisional application but would have defeated the ECT’s overall object and purpose.

The implications of this decision

It is clear that the ICSID tribunal’s decision in Ioannis Kardassopoulos v Georgia could have significant implications for the Yukos arbitration being brought by the majority shareholders of Yukos against the Russian Federation. If the tribunal in Yukos chooses to follow this decision and accordingly adopt the same interpretation of the ECT, the issue of whether it has jurisdiction to hear the majority shareholders’ claims against the Russian Federation under the ECT will be largely dependent on whether the provisional application of the ECT is precluded by Russian law.
More generally, the ICSID tribunal’s decision could also have implications for any aggrieved investor who alleges that his investment in an ECT signatory’s energy sector was adversely effected by actions of that state which took place after the state’s signing of the ECT but before it completed its ratification of the treaty.


Notes

1 The Vienna Convention on the Law of Treaties 1969.
2 Since the end of June 1995, any state wishing to be bound by the ECT has had to accede, a procedure which does not entail signature of the ECT itself and accordingly does not allow for provisional application of its obligations.
3 This date being the 19th day after the ratification of the ECT by 30 states (ECT, article 44(1) of the ECT).
4 ECT, part III, articles 10-17.
5 ECT, part V, article 27.
6 ICSID Case No. ARB/05/18.
7 Comprising Mr L Yves Fortier, Professor Francisco Orrego Vicuna (Mr Kardassopoulos’ party-appointed arbitrator) and Sir Arthur Watts (Georgia’s party-appointed arbitrator).
8 The Agreement between the Government of the Hellenic Republic and the Government of the Republic of Georgia on the Promotion and Reciprocal Protection of Investments, which was signed on 9 November 1994 and entered into force on 3 August 1996.
9 These acts, which included various decrees by the Georgian government in 1995/96 and the Georgian government’s signing of an agreement with third parties in 1996 for the construction of an oil pipeline and the transportation of oil through Georgia, had the combined effect of cancelling the concession previously granted by the Georgian government to the company in which Mr Kardassopoulos had an indirect interest and thus expropriated his investment.
10 These investment protection provisions are commonly found in BITs and include ‘fair and equitable treatment’, ‘most constant protection and security of investments’, ‘most-favoured nation treatment’, ‘prohibition of unreasonable or discriminatory measures’ and ‘no expropriation without prompt, adequate and effective compensation’. In addition, the ECT provides that a contracting party’s breach of an investment agreement made with an investor will also represent a breach of the ECT.
11 Article 31 of the Vienna Convention provides that treaties shall be “interpreted in good faith and in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose”. A treaty’s context includes in particular the text of the treaty as a whole, including its preamble. Any interpretation of a treaty must also take into account of, together with its context, any relevant rules of applicable international law including rules of general customary international law.
12 The tribunal also noted prior public statements made by both the Georgian and Greek governments to the effect that their laws did allow provisional application of treaties.

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Andrew Hutcheon
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