On the 18th of February, the Court of Appeal in The Hague reversed the lower court’s decision annulling the award rendered against the Russian Federation in the Yukos case. The award ordering the Russian Federation to pay more than USD 50 billion is therefore revived.
Background.
In July 2014, a PCA tribunal ordered Russia to pay damages in excess of USD 50 billion to the former majority shareholders of Yukos Oil Company, which was once the largest oil company in Russia. The award was rendered under the provisions of the Energy Charter Treaty (ECT).
Russia challenged the award before the Hague District Court being the court of the seat of arbitration. The Hague District Court ruled on 20 April 2016 to reverse a PCA tribunal’s award on grounds that there was no valid arbitration agreement because Russia signed, but never ratified the ECT and therefore, the PCA tribunal did not have jurisdiction in the arbitration brought against Russia under the ECT.
The decision of the Hague District Court was challenged to the Court of Appeal in the Hague which squashed the decision of the lower court and revived the PCA tribunal’s award.
Findings of the Court of Appeal
The Court of Appeal concluded that there was a valid arbitration agreement and that the tribunal had jurisdiction under the ECT, even though Russia has never ratified it. The court decision is based on the consideration of two ECT provisions related to its entry into force. Thus, according to Articles 39 and 44 ECT the treaty will not enter into force until the State has deposited an instrument of ratification, acceptance or approval. On the other hand, pursuant to Article 45(1) ECT – the Limitation Clause – each State that signed the treaty will apply the treaty in a provisional way, “to the extent that such provisional application is not inconsistent with its constitution, laws or regulations”.
The Court hold that Russia signed the ECT on the 17 December 1994 and thus it accepted to comply with those obligations to establish conditions for investment immediately upon the signing of the treaty. Moreover, in the case at hand, the Court found that the provisional application of Art. 26 ECT – despite resolution clause – does not violate constitution, laws or regulations of the Russian Federation.
Relying on the provisions of the Vienna Convention on the Law of Treaties, the Court of Appeal took a firm pro-investor stance. It pointed out that Russia signed the ECT in its own interest: to attract investments and to lower the cost of capital. One observes that states sign on willingly but resist being held accountable under those treaties when they violate them.
The Russian Federation had also argued ‘unclean hands’: enforcement of the Yukos Awards would lead to violation of public policy with respect to fraud, corruption and other serious irregularities. The Court dismissed these claims, holding that the illegal acts were not relevant for granting the claims in the arbitration because (i) only an illegal act at the time of investing would be relevant for protection under the ECT and (ii) the alleged illegal acts were committed by others, not the claimants and (iii) the shares were acquired in Yukos legally.
Perspectives of the enforcement
Not surprisingly, the Russian Federation has announced that it will be filing an appeal with the Supreme Court of the Netherlands. Russia will obviously argue that the enforcement proceedings should be stayed pending the appeal procedure under Article VI of the New York Convention, which allows to the court entertaining the enforcement application to adjourn the decision on the enforcement the outcome so that there is time to await the setting aside proceedings.
The rational of Article VI was to facilitate procedural efficiency. The enforcement court therefore must establish a bona fide intention to set aside the award, rather than the use of setting aside procedures as a mere delaying tactic. One indicator for delaying tactics is if the losing party would wait with the filing of a setting aside request until the successful party had commenced enforcement proceedings. In the Yukos case the Russian Federation filed the request for setting aside in a timely manner by complying with the statute of limitations under Dutch law.
All of this is against the background of an enforcement effort against a sovereign which begs the question whether those assets in a given forum, protected by immunity. If so, none of the above doesn’t even matter.
In the meanwhile, for this monumental case, after this week’s decision, the enforcement actions will be picked up at full speed, whilst we await the undoubtedly intense unfolding of the cassation procedure.