Yukos – the saga continues: arbitral awards against Russian Federation annulled by court in The Hague

The following article is taken from Lexology. Click here to go the original article.

On 20 April 2016, the District Court in The Hague (the “District Court”) set aside six arbitral awards rendered by a three-member Arbitral Tribunal in a dispute between former shareholders of Yukos and the Russian Federation. The final awards, rendered in July 2014, attracted significant attention from the general press and the international arbitration community because they ordered the Russian Federation to pay US$ 50 billion for unlawful expropriation of investments in Yukos under the Energy Charter Treaty (“ECT“), making them the largest arbitration awards in history.

According to the District Court, the Russian Federation is not bound by the offer to arbitrate in Article 26 ECT, as the provisional application of this Article is inconsistent with Russian law concerning the arbitration of disputes of a predominantly public law nature. It therefore annulled the interim awards on jurisdiction as well as the final awards without having to address any of the other grounds for annulment that the Russian Federation had raised, including the much debated allegation that the Arbitral Tribunal had not personally fulfilled its mandate but had delegated substantive tasks to the secretary of the Arbitral Tribunal.

The former shareholders have already announced that they will appeal the judgment before the Court of Appeal in The Hague and that they will continue their attempts to enforce the arbitral awards outside of The Netherlands. Accordingly, the end of the “Yukos saga” is not yet in sight.

Background

The “Yukos saga” started in 2003 when the Russian tax authorities accused Yukos of large scale tax evasion. The ensuing dispute resulted in the imprisonment of Yukos owner Mikhail Khodorkovsky, Yukos’ bankruptcy and the transfer of Yukos’ assets to state-owned companies such as Rosneft and Gazprom. The former shareholders of Yukos considered that they did not receive appropriate compensation for the expropriation of their investments and commenced UNCITRAL arbitration proceedings in The Hague under the ECT in February 2005.

In November 2009, the Arbitral Tribunal issued interim awards concluding that it had jurisdiction. The final awards, ordering the Russian Federation to pay damages in the amount of US$ 50 billion, were rendered in July 2014.

In November 2014, the Russian Federation filed its requests for annulment of the arbitral awards with District Court, the competent court of the seat of the arbitration.

The jurisdiction of the Arbitral Tribunal had already been contested during the arbitral proceedings and was again challenged before the District Court, as it is one of the few grounds on which an arbitral award can be set aside by a national court.

Relevant ECT provisions

The Russian Federations’ jurisdictional objections, both during the arbitral proceedings and before the District Court were, among others, based on the interpretation of Articles 26 and 45 ECT.

Pursuant to Article 26 ECT, disputes between a Contracting Party and an Investor are referred to arbitration. Article 45(1) ECT determines that signatories of the ECT will provisionally apply the treaty pending its entry into force “to the extent that such provisional application is not inconsistent with its constitution, laws or regulations.”

The Russian Federation had signed the ECT in December 1994, but the Russian Parliament never ratified it. The question therefore arose as to whether Article 26 ECT provisionally applied pursuant to Article 45 ECT.

The Arbitral Tribunal’s position

According to the Arbitral Tribunal, it was indeed the case that Article 26 ECT provisionally applied pursuant to Article 45 ECT.

In the Arbitral Tribunal’s view, the meaning of the final part of Article 45 (1) (“to the extent that such provisional application is not inconsistent with its constitution, laws or regulations”) refers to the application of the ECT in its entirety (the “all or nothing” approach), and not to specific parts thereof (the “piecemeal” approach). Hence, the offer to arbitrate included in Article 26 ECT would not apply only if the principle of provisional application of treaties as such was contrary to Russian law. Since Russian law generally allows for provisional application of international treaties, the Arbitral Tribunal held that it had jurisdiction.

The District Court’s position

The District Court, in a comprehensive review, emphasised different aspects of Article 45 (1) ECT. It came to the opposite conclusion and ruled that the offer to arbitrate included in Article 26 ECT did not apply provisionally. The District Court therefore annulled the awards on the ground that there was no valid arbitration agreement.

The District Court held that Article 45 requires an assessment whether each individual article of the ECT is compatible with Russian law (“to the extent that such provisional application is not inconsistent with its constitution, laws or regulations”). Accordingly, to assess whether Article 26 ECT is compatible with Russian law, the District Court considered whether the disputes submitted to the Arbitral Tribunal are arbitrable under Russian law.

It concluded that this was not the case, as the disputes arose from the relationship of the former shareholders of Yukos with the Russian tax authorities and thus were of a predominantly public law nature. As the District Court had been advised that under Russian law such disputes are not arbitrable, the District Court held that the Russian Federation is not bound by the provisional application of Article 26 ECT.

Next steps?

Since the arbitral proceedings were completed before 1 January 2015, when the new Dutch Arbitration Act came into force, the annulment proceedings commenced before the District Court (and not before the Court of Appeal, as would be the case pursuant to the new Dutch Arbitration Act). Therefore the judgment is subject to appeal before the Court of Appeal in The Hague and subsequently – albeit on limited grounds – subject to appeal before the Supreme Court. The former shareholders of Yukos have already announced their intention to appeal. In the meantime, they will also continue their worldwide enforcement proceedings. The decision of the District Court might, however, prove a hindrance in these enforcement proceedings particularly in countries which, unlike France for example, take into account that the award has been annulled by a competent authority in the country where the award was made (pursuant to Article V(1)(e) of the New York Convention). Even in countries where the annulment of an arbitral award is not a compelling ground for the refusal of recognition and enforcement, the District Court’s decision, based on one of the most fundamental grounds conceivable (lack of jurisdiction of the Arbitral Tribunal), will be difficult to ignore.

In any case, this is far from the end of the story. The “Yukos saga” is likely to play out in several more episodes, which will be of interest to specialists in both international arbitration and cross-border litigation alike.

Article originally published on 22 April 2016.