RosInvest v. Russian Federation: Arbitral Tribunal uses Most Favoured Nation (MFN) clause to rule that it has jurisdiction over RosInvest's expropriation claims against Russia.
Summary and business impacts
In October 2007, a Tribunal constituted under the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) ruled in favour of English company RosInvest. It held that RosInvest could use the MFN clause of the UK-Soviet Bilateral Investment Treaty (BIT), read with the wider arbitration clause contained in the Denmark-Russia BIT, to argue that the Tribunal should accept jurisdiction. In contrast to previous arbitral decisions, the Tribunal in this case found no difference between a procedural and a substantive protection in a BIT in terms of the extent of the MFN clause.
MFN clauses automatically and directly incorporate any more favourable treatment granted to third parties into the more limited BIT in question. This interpretation of an MFN clause therefore potentially affords investors the full range of protections provided in all BITs signed by the host state in question. Parties should nevertheless be careful to approach the question of whether an MFN clause will be applicable to procedural clauses on a case-by-case basis, as each BIT should be interpreted according to its own wording.
In November and December 2004, RosInvest purchased seven million shares in Yukos. RosInvest alleges that the Russian Federation, through discriminatory and expropriatory actions, rendered its investment in Yukos nearly valueless. Russia denies expropriation, and sought, in preliminary proceedings, to challenge the Tribunal's jurisdiction.
Considerations of the Tribunal regarding Jurisdiction
(a) Jurisdiction under the UK-Soviet BIT
The Tribunal agreed with Russia that Article 8 of the UK-Soviet BIT (the dispute resolution provision) alone did not confer jurisdiction on the Tribunal over the occurrence of expropriation. The qualifications contained in Article 8(1), limiting the jurisdiction of an international arbitral tribunal to matters which regard the determination of the amount of compensation for or the consequences of an expropriation were held to be clear and unambiguous. An alternative basis for jurisdiction was required.
(b) Jurisdiction based on the MFN Clause
RosInvest contended that the Tribunal had jurisdiction under the wider arbitration clause of the Denmark-Russia BIT which is deemed to be incorporated into the UK-Soviet BIT by way of the MFN clause contained in Article 3. Russia rejected these assertions alleging that, the MFN clause only addresses substantive protections, not procedural ones such as the dispute resolution mechanism itself.
The Tribunal looked at each subsection of the MFN clause in the UK-Soviet BIT in turn:
- Article 3(1) confers MFN protection on 'investments' to the effect that they shall not be subject to 'treatment less favourable than that which it accords to investments… of any third state' [emphasis added].
- Article 3(2), on the other hand, confers protection on 'investors', protecting 'their management, maintenance, use, enjoyment or disposal of their investments'.
The Tribunal held that an arbitration clause affects the 'procedural rights of the investor', rather than the 'treatment' of an investment, and consequently only Article 3(2) of the MFN clause in the UK-Soviet BIT could be applicable. The Tribunal also agreed with RosInvest that the failure to include arbitration within the exceptions to MFN protection contained in Article 7 of the UK-Soviet BIT was 'further confirmation that the MFN-clauses in Article 3 are also applicable to submissions to arbitration in other Treaties.'
This case suggests a significant adoption of the 'wide' MFN approach, running against the grain of recent MFN awards which have reduced the scope of MFN protection(eg, Salini v. Jordan and Plama Consortium v. Bulgaria). The decision will be of particular interest to Chinese investors and foreign investors in China, whose most recent BITs (including the China–Germany BIT of 2005), contain much broader dispute settlement provisions than Chinese BITs which came into force prior to that date. China has entered into BITs with more than one hundred States, so the reliance on MFN clauses is an area of huge potential significance.