"A Delicate Matter": English Court considers enforcement of awards set aside by the courts of the seat and ability to claim post-award interest in those circumstances

In the case of Yukos Capital SARL v OJSC Rosneft Oil Company [2014] EWHC 2188 (Comm) the English Court considered two preliminary issues relating to the long-running dispute between Yukos Capital SARL ("Yukos Capital") and OJSC Rosneft Oil Co. ("Rosneft"). The issues were as follows:

1. Whether enforcement of arbitral awards that have been set aside by the courts of the seat is precluded under common law; and
2. whether, in principle, interest could be recovered on such arbitral awards under either Russian and/or English law.

In relation to the enforcement issue, the Court considered the "test" was whether it could (in particular and identifiable circumstances) treat an award as having effect notwithstanding a later decision of a court annulling the award. The Court found that, as a general position, it would be unsatisfactory and contrary to principle if a Court were bound to recognise a decision of a foreign court which offended against basic principles of honesty, natural justice and domestic concepts of public policy.

It is clear therefore that, in general terms, the Court has the power to enforce the Awards at common law notwithstanding the set-aside decisions of the courts of the seat. However, it now remains for Yukos Capital to prove the allegations which it has made as to why those set aside decisions should not be recognized by the English Court.

Whilst the claim to interest under Russian law was unsuccessful (as a matter of Russian law), the Court concluded that, in principle, interest on the sums claimed in the English proceedings could be recovered under Section 35A of the Senior Courts Act 1981, notwithstanding the fact that interest had not been awarded by the tribunal.

Background

As set out in our earlier blog post, in September 2006, Yukos Capital obtained four arbitration awards (the "Awards") against Rosneft totaling over US$400 million. Yukos Capital began enforcement proceedings in the Netherlands on 9 March 2007. In May 2007, the Awards were set aside by the Russian Arbitrazh Court. Despite this, enforcement proceedings continued. In April 2009, the Amsterdam Court of Appeal gave leave to enforce the Awards, deciding that the annulments were a result of a partial and dependent judicial process and should not be recognised. Despite the Dutch court's decision, payment was not forthcoming and Yukos Capital therefore commenced further actions in the English High Court in March 2010, seeking to enforce the Awards at common law and under the New York Convention. The principal sums were finally paid by Rosneft in June 2010, and the English proceedings continued regarding Yukos Capital's claim for post-award interest of $857,507 and Rbs 12,935,858,470 for the period between 2006 and 2010.

As part of these proceedings the English Court was asked to address two preliminary issues.

First, due to the Russian set-aside decisions, did the Awards no longer exist in a legal sense, thus precluding the enforcement of the Awards, and second, was it open to the English Court to award interest on the Awards under either Article 395 of the Russian Civil Code and/or Section 35A of the Senior Courts Act 1981?

The issues were characterized respectively as the 'Enforcement Preliminary Issue' and the 'Interest Preliminary Issue'.

The Enforcement Preliminary Issue

Rosneft asserted that the Awards no longer existed as a matter of Russian law, and that there was no obligation to comply with them under Russian law. It was argued that, as a result, there was no longer any extant obligation on which Yukos Capital could bring an action in the English Court.

Yukos Capital argued that it was not necessary for an award to be enforceable under the law governing the arbitration. Moreover, Yukos Capital pleaded facts in its Re-Re-Re-Amended Reply which (if proved at trial) would sustain an argument that the annulment decisions should not be recognised by the English Court on the basis that they were tainted by bias, contrary to natural justice, violated Article 6 of the ECHR, and formed part of an illegitimate campaign of commercial harassment against Yukos Capital by the Russian Federation for political reasons.

The Court considered argument based on the principle ex nihilo nil fit ('nothing comes of nothing'). In particular, it considered Professor Albert Jan Van den Berg's statement in the article, 'Enforcement of Annulled Awards' (1998) ICC International Court of Arbitration Bulletin 15 that "When an award has been annulled in the country of origin, it has become non-existent in that country… How then is it possible that courts in another country can consider the same award as still valid?"

Simon J held that the question was not answered by a theory of legal philosophy but by a "test": whether the Court, in considering whether to give effect to an award, can (in particular and identifiable circumstances) treat it as having effect notwithstanding a later order of a court annulling the award. He found that in applying this test, it would be both unsatisfactory and contrary to principle if the court were bound to recognise a decision of a foreign court which offended against basic principles of honesty, natural justice and domestic concepts of public policy.

Simon J held that, in the circumstances of this case, the ex nihilo nil fit principle did not preclude the Court giving effect to the Awards at common law and, if Yukos Capital were to prove the allegations made in its Re-Re-Re-Amended Reply, the Court would have power to enforce the Awards, notwithstanding the set-aside decisions of the Russian courts.

The interest preliminary issue

The claim for interest under Article 395 of the Russian Civil Code

Each side called expert evidence on Russian law regarding the right to interest under the Russian Civil Code. Yukos Capital contended that interest accrued automatically on an unsatisfied award under Article 395 of the Russian Civil Code without the need for a court order enforcing the award. Rosneft contended that interest under Article 395 only begins to accrue once a court order enforcing the award comes into effect.

Having reviewed Russian law, Simon J concluded that interest was not recoverable on the principal sum as a matter of Russian law.

English law – the issue

In respect of English law, Rosneft argued that the English Court had no power to award interest as the parties had excluded such a power by agreeing that their disputes, including a dispute as to post-award interest, should be referred to arbitration in Russia; a Russian tribunal had no power to award interest under Section 35A of the 1981 Act.

Simon J held that the claim to enforce the Awards in the English action was a claim to enforce a debt. Although the circumstances in which the arbitrators declined to award interest may be relevant to the exercise of the Court's discretion to award interest, there was no absolute bar to an award of interest in respect of the late payment of a foreign award. The Court therefore concluded that, in principle, interest on the sums claimed in the English proceedings could be recovered under Section 35A of the Senior Courts Act 1981. However, whether it should be awarded as a matter of discretion would be a question for later determination.

Comment

Whether a court should ever enforce an award that has been set aside at the seat of the arbitration has been the subject of much debate. In Dallah Estate and Tourism Holding Companyv The Ministry of Religious Affairs of Government of Pakistan [2009] EWCA Civ 755, in considering the position under the New York Convention, Rix LJ described this as a "delicate matter", concluding that "the improper circumstances would… have to be brought home to the court asked to enforce in such a way as… to prevent an issue estoppel arising out of the judgment of the courts of the country of origin." Simon J's reasoning in relation to the enforcement preliminary issue in the present case accords with the decision in Dallah, allowing a court to take into consideration principles of honesty, natural justice and public policy which may taint a set-aside decision of a foreign court.

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