Matthew Belz, Provisional Application of the Energy Charter Treaty: Kardassopoulos v. Georgia and Improving Provisional Application in Multilateral Treaties

• Publication year: 2008

PROVISIONAL APPLICATION OF THE ENERGY CHARTER TREATY: KARDASSOPOULOS V. GEORGIA AND IMPROVING PROVISIONAL APPLICATION IN MULTILATERAL

TREATIES^*

INTRODUCTION

The largest arbitration in history is currently pending against the Russian Federation.¹Majority shareholders of Yukos Oil Company (Yukos) brought three parallel claims under the Energy Charter Treaty (ECT),²a multilateral agreement on energy trade and investment, against the Russian Federation (Yukos-Russia dispute).³The shareholders asserted that the Russian Federation wrongfully expropriated Yukos's main production unit, Yuganskneftegas, to offset a significant and phony back tax bill.⁴The Russian Federation, however, argues that it is not bound by the ECT because it has not yet ratified it, but rather applies it provisionally.⁵At stake in this dispute are not only three claims valued in total at over $50 billion,⁶but also the future utility of provisional application clauses in multilateral treaties.

While provisional application is a relatively common practice for treaties demanding immediate enforcement,⁷it is a new development in investment agreements.⁸Traditionally, a treaty is concluded in three steps: signature, ratification, and entry into force.⁹A multilateral treaty typically provides for states to express their consent to be bound by signature "subject to ratification, acceptance or approval."¹⁰Once a certain number of signatories, often specified in the treaty, have ratified the agreement, it definitively enters into force.¹¹Following entry into force, the signatories become parties to the treaty and incur the full rights and obligations outlined in the agreement.¹²Often, however, there is a significant delay between the time of signature and entry into force.¹³Provisional application eliminates this gap in time.¹⁴It gives effect to the treaty's obligations pending its entry into force even though a signatory state's domestic procedural requirements for ratification have not yet been fulfilled.¹⁵Once a signatory state's domestic procedural requirements for ratification have been completed, it is generally the intention of the signatory state to ratify, approve, or accept the treaty.¹⁶Article 25 of the 1969 Vienna Convention on the Law of Treaties (VCLT) supports the use of provisional application; however, the text of Article 25 leaves great discretion to the negotiating states of a treaty to determine how it will apply in practice.¹⁷The extent to which provisional application grants legal rights and imposes obligations on states is still developing in international law, particularly through international arbitration.¹⁸

The ECT dispute resolution process provides a unique forum for the evolving interpretation of provisional application.¹⁹The ECT is a multilateral investment treaty, which opened for signature in December 1994 and entered into force in April 1998 after the first 30 signatories ratified the treaty.²⁰It was created to "promote long-term cooperation in the energy field, based on complementarities and mutual benefits."²¹The ECT offers "binding protection for energy investors against non-commercial risks such as discriminatory treatment, direct or indirect expropriation, or breach of individual investment contracts" in the state where the investment is made.²²In doing so, it affords an interface for dispute resolution between private investors and host governments.²³Uniquely, it provides for the provisional application of the whole treaty upon signature so long as provisional application is not inconsistent with the signatory state's domestic law (the "domestic law exception").²⁴However, at signature, states were granted the right to declare²⁵that they were "unable" to accept provisional application of the ECT.²⁶

Interestingly, yet problematically, there is no textual link or correlation between a signatory state asserting the domestic law exception and declaring its inability to accept provisional application at signature in the language of the ECT's provisional application clause.²⁷This raises the question: may a signatory that provisionally applied or currently provisionally applies the ECT and did not declare its inability to accept it at signature later assert that provisional application conflicts with its domestic law, or did the signatory waive this right?²⁸

A recent arbitral decision on jurisdiction argued at the International Centre for the Settlement of Investment Disputes (ICSID) in the matter between Ioannis Kardassopoulos and Georgia purports to answer this question and several others regarding provisional application of the ECT, albeit controversially.²⁹Kardassopoulos held that the Republic of Georgia and

Greece incurred the full rights and obligations of the ECT by accepting provisional application upon signature.³⁰Therefore, the tribunal had jurisdiction under the ECT to decide expropriation claims made by a private Greek investor against Georgia for investments made after December 1994, when both Georgia and Greece signed the ECT, but before April 1998, when it entered into force.³¹The tribunal reasoned that a signatory's failure to declare its inability to accept provisional application at signature does not imply that the signatory acknowledged no inconsistency between provisional application and its domestic law.³²Ultimately, the tribunal denied Georgia's position that provisional application is inconsistent with its domestic law.³³However, by entertaining Georgia's argument, the tribunal implied that a state may raise the domestic law exception in arbitration despite having accepted provisional application of the ECT at signature.

This interpretation of the ECT's provisional application clause is incorrect because it fails to consider the object and purpose of the treaty: to increase efficiency, strengthen rule of law, and minimize the risk of investments in the energy field.³⁴Furthermore, this interpretation violates customary international law.³⁵Article 27 of the VCLT prohibits states from invoking their internal laws as justification for their failure to perform a treaty.³⁶

Nevertheless, the Kardassopoulos tribunal permitted Georgia to invoke its

Id. internal law as justification for its failure to perform under the ECT, despite the fact that Georgia accepted provisional application upon signature.³⁷

While Kardassopoulos is the first arbitral ruling to substantially interpret the provisional application clause of the ECT,³⁸it will not be the last.³⁹The tribunal's interpretations likely will prove controversial in future ECT arbitrations involving provisional application questions. Two of 53 signatories still apply the ECT provisionally: the Russian Federation and Belarus.⁴⁰

Therefore, any current or future ECT investment arbitrations involving either of these countries will inevitably include a debate over jurisdiction, as long as they still provisionally apply the ECT. This is best exemplified by the Yukos- Russia dispute. Furthermore, provisional application will be an issue if disputes arise out of the time when other members of the ECT provisionally applied it before ratification. For these reasons, it is imperative to clarify multilateral rules for provisional application not just for the ECT, but also for all current and future multilateral treaties containing provisional application clauses.

This Comment begins by discussing the general concept of provisional application and the reasons it is utilized in treaty practice. Part II focuses more narrowly on the dispute resolution mechanisms provided by the ECT and closely examines its provisional application clause, Article 45. Part III analyzes the recent arbitral decision on jurisdiction in Kardassopoulos v. Georgia, which provided the first substantive analysis of the ECT's provisional application clause. This Part also unpacks the parties' contentions for and against jurisdiction under the ECT and summarizes the tribunal's conclusions. The tribunal in Kardassopoulos correctly held that the ECT's provisional application clause imposes on the signatories the full legal rights and obligations of the treaty upon signature. However, Part IV illustrates why the tribunal incorrectly interpreted other parts of the clause by failing to analyze ECT Article 45 in light of the treaty's object and purpose. Part IV also demonstrates how these interpretations violate international law. The concluding section, Part V, addresses the implications Kardassopoulos will have on the Russian Federation, Belarus, and future arbitrations conducted under the auspices of the ECT, especially in light of the Yukos-Russia dispute. It does not, however, predict the outcome of the Yukos-Russia arbitration. Part V also recommends actions the Energy Charter Conference and Secretariat may take to resolve controversial interpretations of ECT provisional application. Finally, Part V uses Article 45 of the ECT as a template to propose drafting solutions to remedy the shortcomings of provisional application clauses in multilateral treaties.

I. PROVISIONAL APPLICATION OF MULTILATERAL TREATIES

States agree to apply multilateral treaties provisionally for several reasons, the most common of which is to resolve urgent international matters.⁴¹As mentioned above, there is often a significant delay between the date of signature and the entry into force of a treaty.⁴²This delay prevents states from reacting immediately to urgent issues through treaty obligations. Provisional application, which is usually binding upon signature,⁴³resolves this problem and enables states to avert or respond to international crises quickly.⁴⁴

Commentary on the precursor to Article 25 of the VCLT confirms that states use provisional application to respond to "the urgency of the matters dealt with in the treaty."⁴⁵An early, well-known example of a treaty utilizing provisional application was the Convention for European Economic Cooperation, which expedited the implementation of the Marshall Plan after World War II in

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