Round 2 to Russia: the battle continues as the largest arbitration awards in history are set aside by the Hague District Court

In a long-awaited decision published yesterday, the Hague District Court ("Court") has set aside the US$ 50 billion awards in favour of the former majority shareholders of Yukos on the basis that the Tribunals lacked jurisdiction to hear the disputes. 

The Court accepted the Russian Federation's contention that, pursuant to Article 45 of the Energy Charter Treaty ("ECT"), its decision not to ratify the ECT meant that it was only bound by provisions which were compatible with Russian law.  The dispute in question, which concerned relations of a public-law nature, could not be referred to international arbitration under Russian law. 

This high-profile decision may have implications on the enforcement proceedings against Russia's assets currently pending in at least seven jurisdictions and also raises questions about the effectiveness of the ECT for investors in Russia.

Background

The factual background to this case is summarised in detail in our previous blog posts.  In summary, the Claimants, three former shareholders of the OAO Yukos Oil Company ("Yukos"), formerly the largest oil company in post-Soviet Russia, alleged that the Russian Federation ("Russia") had taken a broad range of State measures intended to bring about the financial collapse and dismantling of Yukos.  In particular, the Russian tax authorities had seized Yukos' assets based on the allegation that Yukos had been involved in large-scale tax evasion.  These measures eventually resulted in Yukos' bankruptcy.  The Claimants commenced three related arbitrations alleging that the Russian federation had unlawfully expropriated their investments. 

The arbitrations, brought under the 1994 Energy Charter Treaty ("ECT") and administered under the 1994 UNCITRAL Rules, were all heard by the same arbitrators and were seated in The Hague.  In the largest monetary arbitration awards to have ever been made public, the Tribunals decided the claims together in three awards issued in 2014, and ruled that the Russian Federation had unlawfully expropriated the assets of Yukos through a series of measures taken between 2003 and 2007, and awarded the Claimants damages of more than US$ 50 billion.

One of the key issues in the arbitrations was the fact that, although Russia had signed, and thereby agreed provisionally to apply, the ECT in 1994, it had decided not to ratify it.  Indeed, in 2009, Russia formally gave notice of its intention not to become a party to the ECT.  This had the effect of terminating Russia's provisional application of the ECT going forward, but the ECT provides that investments made prior to the effective date of the notice (October 2009) continue to be covered for a period of 20 years.  Although Russia had challenged the Tribunals' jurisdiction to hear the Claimants' claims, arguing that its consent to arbitration could not be invoked through its mere signature but non-ratification of the treaty, the Tribunals rejected this argument in preliminary decisions rendered on 30 November 2009.

Subsequently, Russia advanced set-aside proceedings in the Hague District Court, requesting that both the interim awards rendered in 2009 and the final awards rendered in 2014 be quashed. 

Basis of the set-aside

Russia argued that, as it had not ratified the ECT, the ECT only applied provisionally, and only to the extent that its provisions were not inconsistent with Russian law.  Its argument was based on its interpretation of the following key provisions of the ECT: 

• Article 26, which addresses the settlement of disputes between a foreign investor and a contracting party of the ECT;
• Article 39, which stipulates that the treaty is subject to ratification by its signatories;
• Article 44, which specifies that the treaty's entry into force is conditional on the ratification by a certain number of states; and
• Article 45 entitled "provisional application", which states that each signatory agrees to the provisional application of the ECT pending its entry into force "to the extent that such provisional application is not inconsistent with its constitution, laws or regulations".  The Court referred to this provision as the "Limitation Clause".

Russia argued that the Limitation Clause in Article 45 necessitated an examination of whether or not each Article of the ECT was compatible with national laws.  In other words, Russia was only bound by the treaty provisions reconcilable with Russian law.  The Court agreed with this interpretation.

The question was then whether Article 26 was compatible with Russian law.  Russia put forward the opinion of two experts on Russian law, both of whom opined that under Russian law, relations of a public-law nature cannot be referred to international arbitration.  In this case, it was said that the underlying dispute between the parties had arisen from a public-law legal relationship and involved an assessment of the exercise of public-law authorities by Russian state bodies (in particular, the Russian tax authority).  Therefore, Article 26 of ECT had no legal basis in Russian law.

The Court dismissed the Yukos shareholders' contention that provisionally applicable treaties formed part of the Russian legal system: it held that international treaties such as the ECT which have not been ratified cannot take priority over federal law, as such an interpretation would be contrary to the principle of separation of powers between the legislative, executive and judicial authorities.

The Court found that, as Russia never made an unconditional offer to arbitrate in the sense of Article 26 of the ECT, the notice of arbitration did not form a valid arbitration agreement.  Accordingly, the Court reversed the awards on the grounds that the arbitrators lacked jurisdiction and ordered the Yukos shareholders to pay the costs of the set-aside proceedings.

Comment

This decision will leave investors in Russia once again uncertain as to how the ECT should be interpreted and whether in fact their pre-2009 investments continue to be protected under the ECT (provided other conditions are met).  This is not the end of the matter, however.  The Yukos shareholders have already made it clear that they will appeal this decision all the way to the Dutch Supreme Court if needs be, a process which could take up to five years. 

In the meantime however, this decision could have an impact on the enforcement proceedings that the Yukos shareholders have initiated against Russian assets in various other jurisdictions.  To date, proceedings are reportedly afoot in at least Belgium, France, the Netherlands, the UK, the US, Germany and India. 

The issue of the enforceability of arbitral awards which have been annulled or set-aside at their seat is a complex question which depends on the approach of the particular court that hears the matter.  Under Article V(1)(e) of the New York Convention, enforcement may be refused if the award has been set aside.  Therefore, each court seized with enforcement proceedings under the New York Convention will have discretion as to whether or not to refuse enforcement on the basis of this decision.

This discretion has led to contrasting approaches in the past. In the recent case of Malicorp Ltd v Government of the Arab Republic of Egypt and others, the English Commercial Court refused to enforce a Cairo Regional Centre for International Commercial Arbitration award on the ground that it was set aside by the Cairo Court of Appeal.  The judge held that the decision of the Cairo court should be given effect unless it offended basic principles of honesty, natural justice and domestic concepts of public policy.  However, the French courts have taken a different approach: holding that the setting aside of an award at the seat is not, in and of itself, a ground for denying enforcement – awards are decisions of international justice, and so should be examined according to the laws of the country in which they are being enforced (see, for example, PT Putrabali Adyamulia v. Rena Holding, Cour de Cassation, Ie Civile (29 June 2007)).

Accordingly, while it further complicates the battle between Russia and the Yukos shareholders, this decision is likely to lead to useful jurisprudence on the approach of different domestic courts to the enforcement of awards which have been set aside at their seat.

For further information, please contact Andrew Cannon, Partner, Nicholas Peacock, Partner, Elizabeth Kantor, Associate or your usual Herbert Smith Freehills contact.