The Hague District Court has set aside the six awards issued in the Yukos v. the Russian Federation case

The Hague District Court (Commercial chamber) – Judgment of 20 April 2016

The legal fight opposing the former Yukos’ majority shareholders against the Russian Federation has taken a new turn since a judgment issued on 20 April 2016 by the Hague District Court permitted the Russian Federation to mark a decisive victory in this large-scale and long-lasting dispute.

The Russian Federation has obtained the annulment of the six arbitral awards – three awards on jurisdiction and three awards on the merits respectively dated 30 November 2009 and 18 July 2014 – by which it was ordered to pay damages in excess of $50 billion to the three former shareholders of the Yukos oil company (Veteran Petroleum Ltd., Yukos Universal Ltd. and Hulley Enterprises).

In this case, the arbitral tribunal had considered that the tax measures taken by the Russian authorities’ in the early 2000’s against Yukos and its top management amounted to an expropriation which resulted in the bankruptcy and dismantlement of the company to the benefit of other Russian state-owned companies.

In compliance with Dutch arbitration law, the jurisdictional issues were addressed at the end of the arbitration, after the awards on the merits were issued (old Article 1064-4 now Article 1064a-3 of the Dutch Code of Civil Procedure (“DCCP”) which came into force on 1 January 2015).

The several grounds for annulment invoked by the Russian Federation were discussed in a previous post (here). However, the Hague District Court only addressed the first one, that is, absent any valid arbitration agreement (Article 1065-1(a) DCCP), the claims filed by the former Yukos’ shareholders were not arbitrable.

The other grounds, specifically the plea concerning the irregularities in the composition of the arbitral tribunal (Article 1065-1(b) DCCP) based on the alleged extensive role played by its secretary, were left “undiscussed” by the Hague District Court. The Dutch judges had therefore to interpret Articles 26 and 45 of the Energy Charter Treaty (“ECT”) in order to determine if its rights and obligations, such as the unconditional offer for arbitration enshrined in Article 26, were provisionally applicable and binding for the Russian Federation, even if it has signed but never ratified that Treaty.

On 30 November 2009, the Arbitral tribunal ruled that it had jurisdiction relying on Article 45, paragraph 1, of the ECT which states:

Each signatory agrees to apply this Treaty provisionally pending its entry into force for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its constitution, laws or regulations

Thus, the panel of arbitrators considered that the Russian Federation had consented to the provisional application of the entire Treaty pending its entry into force, unless the principle of provisional application itself was contrary to the Constitution, laws or regulations of the signatories. Considering that there was no such incompatibility with the laws of the Russian Federation, the Arbitral Tribunal found that it had jurisdiction to adjudicate the claims.

In its Judgment dated 20 April 2016, the Hague District Court came to a different conclusion by stating that the provisional application of the ECT was only possible if each provision of the Treaty, taken separately, was compatible with the Constitution, laws or regulations of the signatories.

Scrutinizing the provisions of Russian laws on foreign investments, the Hague District Court held that the Russian authorities’ tax measures taken against Yukos’ former shareholders concerned government actions which implied public-law relationships that cannot be arbitrated without legislative authorization. In the absence of such authorization, recourse to arbitration was not available and Russian courts were exclusively competent to hear the case.

The Hague District Court found that the request for arbitration submitted in February 2005 by former Yukos’ shareholders based on Article 26 of the ECT was groundless and, therefore, that the Arbitral tribunal did not have jurisdiction. As a consequence, the awards on jurisdiction as well as the awards on the merits were set aside.

The former Yukos’ shareholders have already announced, first, that they will appeal the judgment of the Hague District Court and, if need be, lodge an appeal before the Dutch Supreme Court.

Second, it has also been declared that enforcement of the awards through seizures of assets performed in Belgium, France, Germany, the US and the UK will be pursued in spite of the annulment decision.

It can be reminded that, concerning French international arbitration law, annulment of the award at the place of arbitration is not a ground for refusal to recognize or enforce a foreign arbitral award (French Supreme Court, First civil chamber, decision of 29 June 2007, n°05-18053). The arbitral awards respectively rendered on 30 November 2009 and 18 July 2014 have actually been recognized in France by a decision dated 1 December 2014. On 3 June 2015, pursuant to Article 1525 of the French Code of Civil Procedure (“FCCP”), the Russian Federation appealed this decision.

On 13 August 2015, pending determination by the Paris Court of appeal on the validity of the awards pursuant to Article 1520 FCCP, the Russian Federation requested a stay of enforcement of the awards in France (pursuant to Article 1526 FCCP). This request was dismissed on 17 December 2015 under the condition that the sums of money which have already been seized by the former Yukos’ shareholders will be held in escrow by the Caisse des Dépôts et Consignations.

The decision of the Paris Court of Appeal as to the validity of the awards is not expected before the end of the year. By then, different solutions may be reached in other jurisdictions which could give rise to conflicting decisions. With the annulment of the awards, the Hague District Court has given a fresh new start to this cross-border dispute. No doubt that a lot remains to be written about it.

The judgment is available here.

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