Amsterdam Court of Appeal finding that Russian court's annulment of an arbitral award was the result of a "partial and dependent judicial process" gives rise to an issue estoppel in England

In Yukos Capital v OJSC Rosneft Oil Co the English High Court considered two preliminary issues in enforcement proceedings brought by Yukos Capital, in circumstances where the Russian courts (the courts at the seat of arbitration) had annulled the arbitration awards Yukos Capital was seeking to enforce but the Amsterdam Court of Appeal had subsequently given leave to enforce the awards, finding that the Russian annulment decisions (the "Annulment Decisions") were the result of a "partial and dependent judicial process".  The High Court resolved both issues in favour of Yukos Capital.  It first found that the Amsterdam Court of Appeal's decision gave rise to an issue estoppel in England (such that Rosneft would not be able to deny that the Annulment Decisions were the result of a partial and dependent judicial process).  Second, it found that Rosneft could not rely on the Act of State doctrine (the principle that the English court will not adjudicate upon the act of a sovereign government within its own territory) where the validity of the acts of the Russian government were not being called into question.

Background

The dispute related to intra-group loans within the Yukos Group, made by Yukos Capital to a former production subsidiary.  In the forced break up of the Yukos Group, Rosneft, an entity owned and controlled by the Russian government, acquired the majority of the Yukos Group's assets, including the production subsidiary.  In September 2006 Yukos Capital obtained four arbitration awards (the "Awards") against Rosneft for repayment of the loans, totalling over US$400 million.

Yukos Capital began enforcement proceedings in the Netherlands on 9 March 2007, and in May 2007 the Awards were set aside by the Russian Arbitrazh Courts in the Annulment Decisions.  The enforcement proceedings continued, and in April 2009 the Amsterdam Court of Appeal gave leave to enforce the Awards, determining that the Annulment Decisions were the result of a partial and dependent judicial process and should not therefore be recognised.

Rosneft paid the principal sum under the Awards in August 2010.  Yukos Capital is now seeking to recover interest in respect of Rosneft's refusal to satisfy the Awards between 2006 and 2010 in the amount of over US$160 million.

First issue: does the Amsterdam Court of Appeal's finding give rise to an issue estoppel?

In the English proceedings, Rosneft resisted the claim for interest on the basis that the Awards had been set aside by the Annulment Decisions.  In response, Yukos Capital argued that the Annulment Decisions should not be recognised by the English court because they were the product of a judicial process that was partial and dependent and therefore offended English principles of substantial justice.  Yukos also argued that the findings of the Amsterdam Court of Appeal gave rise to an issue estoppel binding upon Rosneft to the effect that the Annulment Decisions were the result of a partial and dependent judicial process.

The Court concluded that the core requirements for the creation of an issue estoppel were fulfilled – the Amsterdam Court of Appeal was a court of competent jurisdiction (Rosneft had submitted to the jurisdiction by participating in the proceedings); its decision was on the merits, with the issue being a "condition necessary" to the cause of action in the Dutch courts; and the decision was final and conclusive.  The parties (Yukos Capital and Rosneft) and the subject matter in both cases were the same.

Rosneft argued that it would be unjust for it to be shut out from denying that the Annulment Decisions were the result of a partial and dependent judicial process for a number of reasons, including that this was a case were serious allegations were made against the government and judiciary of a friendly foreign sovereign state (Russia). However, the court, whilst noting the serious allegations involved, stated that the application of the principle of issue estoppel does not depend on or vary according to the nature or seriousness of the issue involved.  Accordingly this, and a number of other arguments raised by Rosneft, were rejected.

The court therefore concluded that Rosneft was estopped from denying that the Annulment Decisions were the result of a partial and dependent judicial process.

Second issue: act of state/non justiciability

Rosneft also tried to prevent Yukos Capital leading evidence as to the partial and dependent nature of the legal process leading to the Annulment Decisions by arguing that the Court was incapable of considering such issues under the Act of State/non justiciability principles.

The court rejected these arguments.   The court held that the "pure" Act of State principle (that the court will not adjudicate upon the act of a sovereign government within its own territory) would only apply to challenges to the validity of the act of state in question.  It drew a distinction with the earlier case of R (Yukos Oil Company) v FSA [2006] EWHC 2044 (Admin) (the "Yukos FSA" case), where the Act of State principle had applied as it was an essential part of the claimant's case that the corporate assets of Yukos had been wrongfully expropriated, with this case where the claimant's case required only that the court find, as a matter of fact, that "there was co-ordinated activity aimed at re-nationalising Yukos' assets which, in fact, involved the executive intervening in the judicial process".  In this claim, whether or not that intervention was "valid", "invalid", "lawful" or "unlawful" was not something the court needed to decide.

The case did not engage the judicial abstention principle (that the court will not assess or determine issues which depend upon acts of a foreign sovereign, if there are no measurable standards by which such assessment or determination can be made) or the political embarrassment principle (whereby a court will not determine issues if so to do would embarrass the government of the UK).  The latter would usually require a certificate or indication to that effect from the Foreign and Commonwealth Office, and none was provided here.

Comment

If the English court does enforce the Awards, despite the Annulment Decisions, it will give rise to the unusual situation of the English Courts enforcing an Award despite its being set aside in the courts of the place of arbitration.  Following on from the decision of the Dutch courts to do so, this may give some comfort to international parties who, as a result of the relative bargaining powers of the parties, are forced to agree to on-shore arbitration despite concerns as to the independence of local courts.

The discussion of the Act of State principle shows how narrow its application is, and that it will only be in limited circumstances where foreign states will be able to rely on the principle before the English courts to resist proceedings brought against them.  The result also suggests that in deciding whether the principle applies, the type of remedy sought may in practice be more important than the nature of the alleged act(s) of State.  The fact that different outcomes have resulted from two cases relating to the break-up of Yukos shows that an earlier finding that the principle does apply in the context of one type of claim will not prevent the same factual allegations being raised with respect to a later claim where the validity of the Act of State is not at issue.

Yukos Capital S.a.r.L. v OJSC Rosneft Oil Company [2011] EWHC 1461 (Comm)