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From Russia with Love: MFN Clauses Revisited

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Summary: The dispute between RosInvestCo and the Russian Federation is another case in which a limited interpretation has been applied to MFN clauses to restrict the scope of a tribunal’s jurisdiction. The case also has implications for parties involved in arbitrations in Sweden where a judgment of the court on the competence of the tribunal will also be determinative in any parallel appeal proceedings against the tribunal's award.

Introduction

MFN clauses link investment agreements by ensuring that parties to one BIT provide treatment that is no less favourable than the treatment they provide to investors under other BITs. Claimants often try to broaden the dispute resolution procedures available to them under a specific BIT by using an MFN clause to invoke broader provisions available in other BITs.

What has happened?

The Swedish Court of Appeal, in Svea hovrätt case T10060-10, has annulled an award issued by the Stockholm Chamber of Commerce in 2010 in a dispute between RosInvestCo and the Russian Federation arising out of the collapse of the oil company, Yukos. In 2005, RosInvestCo commenced an arbitration against the Russian Federation under the UK-Russia BIT claiming that there had been an expropriation by the Russian Federation of Yukos’ principal asset. The Russian Federation denied the competence of the Tribunal to hear the case. The Tribunal disagreed and, in October 2007, confirmed its jurisdiction.

The arbitration had its seat in Stockholm and proceeded under the SCC Rules. Section 2 of the Swedish Act on Arbitration provides that an arbitral tribunal may rule on its own competence (kompetenz-kompetenz), that a party may also submit the issue of the tribunal's competence to a court despite pending arbitration proceedings and that the finding of the arbitral tribunal is not final.

Section 34(1) of the Swedish Arbitration Act provides that an arbitral award will be wholly or partially set aside on the request of a party, if it is not covered by a valid arbitration agreement.

In December 2007, the Russian Federation commenced proceedings in the Stockholm District Court challenging the jurisdiction of the tribunal and seeking a declaration that the arbitration agreement in the UK-Russia BIT did give the tribunal jurisdiction to determine whether the Russian Federation had taken expropriation measures.

In an award dated 12 September 2010, the tribunal confirmed its earlier decision on jurisdiction and awarded RosInvestCo US$3.5 million plus interest. In December 2010, the Russian Federation appealed the award to the Svea Court of Appeal.

On 9 November 2011, before the arbitration appeal was heard, the Stockholm District Court issued a default judgment in favour of the Russian Federation on the issue of competence of the tribunal. The default judgment was not appealed by RosInvestCo.

On 5 September 2013, the Svea Court of Appeal allowed the Russian Federation's appeal and set aside the SCC award. The court found that the tribunal first had to decide whether the Russian Federation had undertaken expropriation measures and, only then, decide the amount of compensation due. The court held that the tribunal did not have jurisdiction under the arbitration clause in the UK-Russia BIT to determine whether expropriatory measures had been taken. The Court of Appeal held that the award was not covered by a valid arbitration agreement and the award of the tribunal was annulled.

What are the key points?

Claimants often try to broaden the dispute resolution procedures available to them under a specific BIT by using an MFN clause to invoke broader provisions available in other BITs. Prior to the annulment of the award, the RosInvestCo case had been one of those cases in which the claimant had successfully persuaded the tribunal to expand its jurisdiction.

In contrast, the case of Vladimir Berschander and Moïse Berschander v Russia (SCC Case No 080/2004, Award, 21 April 2006) involved a dispute under the Belgium-Russia BIT. Under the terms of the BIT international arbitration was limited to determining "the amount or mode of compensation to be paid" after a breach of the treaty's expropriation provision had been established. The claimants argued that the BIT's MFN clause should allow them to import the broader dispute resolution provision from the Denmark-Russia BIT, which allowed for "any dispute in connection with an investment" to be submitted to international arbitration.

The tribunal rejected the claimants' argument, even though the MFN clause purported to apply to "all matters covered by the treaty." The tribunal held that this phrase could not be read literally relying on evidence of the negotiations of the Belgium-Russia BIT, which demonstrated that Russia did not intend the MFN clause to extend to dispute resolution provisions.

The tribunal applied the principle that “an MFN provision in a BIT will only incorporate by reference an arbitration clause from another BIT where the terms of the original BIT clearly and unambiguously so provide or where it can otherwise be clearly inferred that this was the intention of contracting parties

Similarly, in Renta 4 SVSA et al v Russia (SCC Case No V 024/2007, Award, 20 March 2009) the tribunal held that the MFN clause in the Spain-Russia BIT did not allow the claimant to invoke the broader dispute resolution provisions in other Russian BITs.

How will this affect me?

The judgment of the Swedish Court of Appeal is quite brief and was based on the default judgment of the District Court. However, the decision is very much in line with the restrictive approach that has been adopted by tribunals in their interpretation of MFN clauses and suggests that, absent very clear indications to the contrary, it will be difficult to rely on an MFN clause to import into a BIT more favourable dispute resolution provisions from other treaties.

If you are party to an arbitration in Sweden it is important to be aware that, where the question of the tribunal's competence is submitted to the courts, a final judgment by the court will also be determinative in any parallel appeal proceedings against the tribunal's award.

BLP Perspective

The RosInvestCo award was the first decision on the merits in a series of arbitrations brought against Russia by former shareholders in the Yukos oil company. The annulment of the award on the basis that the tribunal had no jurisdiction to determine whether an expropriation had taken place is likely to be a significant setback for claimants in other arbitrations who had been hoping to rely on the tribunal’s findings.

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