It is often an issue as to what types of investors’ rights are protected under the Investor-State Dispute Settlement (“ISDS”) scheme. It certainly depends on the definition of a protected investor and investment under the applicable investment protection agreement (“IPA”), but given the general inclusiveness of this definition in the IPAs, it is important to consider how various ISDS tribunals have ruled with respect to their jurisdiction over particular types of investments.
When it comes to financial institutions and their investments (e.g., project finance, long-term loans, etc.), these financial institutions have preferred domestic court litigation over ISDS arbitration for their dispute resolution forum because of the ISDS tribunal’s reluctance to recognise these investments as a protected investment under IPAs. However, there have been significant changes in ISDS practise in favour of financial institutions, and we have witnessed these changes in the two recent ISDS cases under the Energy Charta Treaty (“ECT”) – Yukos Capital vs Russia; Portigon AG vs Spain.

Yukos Capital vs Russia
: Intercompany loans within the company group are protected under the IPAs
The recently concluded ISDS case between Yukos Capital and the Russian Federation is an interesting case where the creditor/lender (Yukos Capital) has successfully claimed its creditor/lender rights by interference by the State (Russia) which has led the debtor (Yukos) to the bankruptcy. As this case is known as the “second wave of lawsuits” against the Russian Federation initiated by former shareholders of Yukos and persons affiliated with Yukos, a brief understanding of the first Yukos case seems necessary.

Brief Background of Yukos vs Russia
The Yukos arbitration started in 2005 when three former shareholders of Yukos filed a request for arbitration against Russia pursuant to the ECT under the UNCITRAL Arbitration Rules administered by the Permanent Court of Arbitration seated in The Hague, the Netherlands. In 2014, the arbitral tribunal ruled that Russia, by expropriating Yukos’s major assets which had led to Yukos’s bankruptcy, had breached Articles 10 (fair and equitable treatment of investors) and 13 (wrongful expropriation) of the ECT. The award was about US$50 billion compensation, around half of the claimants’ claim yet 20 times the previous record for an arbitration ruling. The tribunal found that an unlawful expropriation of Yukos’ assets had taken place, by a series of unlawful actions taken by Russia including taxation measures amounting to indirect or “creeping” expropriation.
Russia commenced set-aside proceedings before the District Court of The Hague, and in 2016, the District Court of The Hague quashed the arbitral award. The court accepted Russia’s argument that the arbitral tribunal had erred in ruling it had jurisdiction on the basis of the provisional application of the ECT.
The former shareholders of Yukos appealed the first-instance decision, and in 2020, The Hague Court of Appeal overturned the District Court’s decision and thereby reinstated the arbitral award.
Russia appealed The Hague Court of Appeal’s decision to the Supreme Court of the Netherlands. In April 2021, the Advocate General of the Supreme Court advised the Supreme Court to dismiss Russia’s appeal and uphold the Yukos award. As this is non-binding advise, the Supreme Court does not have to adopt the Advocate General’s opinion. The Supreme Court is expected to render its final decision as early as September this year.

Yukos Capital vs Russia: The Second Arbitration
Yukos Capital was a subsidiary and financial arm of Yukos Group. Yukos Capital extended two loans to Yukos Oil – one for about US$3 billion and the other for US$350 million. As explained earlier in this paper, Yukos went bankrupt due to a series of unlawful actions by the Russian government.
In 2013, Yukos Capital commenced an arbitration proceeding against Russia pursuant to the ECT under the UNCITRAL Arbitration Rules administered by the Permanent Court of Arbitration seated in The Hague, the Netherlands.
In July 2021, the arbitral tribunal ruled that Russia had illegally expropriated Yukos Capital’s loans to its former parent company and denied it justice in Russian courts. The tribunal also noted that the measures taken by the Russian Federation, namely the initiation of criminal proceedings, were intended to intimidate Yukos Capital and its lawyers and that the expropriation and pressure on the lawyers were part of a broader and wider framework orchestrated campaign to seize the Yukos Group’s assets. The award made in favour of Yukos Capital is known to be approximately US$5 billion.

Portigon AG vs Spain
: Project finance lenders are protected under the IPAs
This case is known to be the first ISDS arbitration case where a tribunal found that project finance constitutes a protected investment under the IPAs and therefore a financial institution may seek investment protection under the IPAs for project finance. Just like the two Yukos arbitration cases, this case also involved a dispute between a European investor and European State under the ECT.
In the early 2000s, Spain established a renewable energy regulatory framework to attract foreign investments. This framework included long-term feed-in tariffs and an offtake guarantee for renewable energy projects was designed to attract both equity and debt capital investments. Portigon AG, a German financial services provider, provided hundreds of millions of euros in order to finance a number of renewable energy projects in Spain. From 2013, Spain started to make adverse changes to the framework due to a significant tariff deficit, which subsequently had a detrimental impact on the projects Portigon AG was financing. Portigon AG brought an ISDS proceeding against Spain, but whether its investment, project finance, would be considered as a protected investment was a critical issue as there had been no ISDS case recognising project finance as a protected investment.
In August 2020, for the very first time in ISDS arbitration, the tribunal in Portigon v Spain ruled that a financial institution may seek protection under an investment treaty for project finance because project finance, in the form of long-term loans and swaps, constitutes a protected investment under the ECT.

Important considerations financial institutions to take into account
Since it is expected that much wider investment protection for financial institutions and their finance will be provided, they should carefully consider what kind of investment protection is available before they decided to invest in certain countries. These considerations would include an assessment of whether one or more IPAs exist between the host country and the investor’s home country, and whether the definition of protected investment under the relevant IPA would likely give protection to the planned finance. It is also desirable to choose a more proper ‘nationality’ of the investment in order to receive the most preferred investment protection.

VCI Legal international arbitration team provides dispute resolution services as well as investment advisory services.


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