The Yukos saga continues

On 20 April 2016,
The Hague District Court rendered a long-awaited judgment in the so-called Yukos case, The Russian Federation v Hulley Enterprises Ltd, Veteran Petroleum Ltd,
and Yukos Universal Ltd (C/09/477160/HA ZA 15-1,
15-2 and 15-112).

The saga started over 13
years ago when the Russian tax authorities took the view that Yukos, a major Russian oil company, had been involved
in large-scale tax evasion and imposed substantial tax assessments. These subsequently resulted in the auction sale
of Yukos assets and the imprisonment of its CEO. Former majority shareholders of Yukos argued that those measures violated various provisions of the Energy Charter Treaty (ECT) and, in particular, constituted expropriation of Yukos assets. In 2009, an
arbitral tribunal recognised its jurisdiction over the dispute, and in July 2014, issued three final awards, ruling that Russia had violated the ECT. It ordered the state to pay the extraordinary amount of $50bn in damages to the former Yukos shareholders.

The place of arbitration was The Hague, and Russia applied to set the interim and final awards aside before The Hague District Court on the following grounds:

• The lack of jurisdiction of the arbitral tribunal under article 45 of the ECT;

• The lack of jurisdiction given that the investment in question was a domestic mala fide investment and therefore not protected under the ECT; and

• The dispute concerned
  tax measures which were excluded from the scope
  of the ECT.

Russia further argued that the arbitrators did not comply with their mandate by:

• Failing to refer the dispute on expropriation to the competent tax authorities;

• Determining the damages using their own method; and

• Not fulfilling their mandate personally as the awards were primarily drafted by the tribunal's secretary.

Only the first ground, based on article 45 ECT, was considered by the court. Article 45(1) provides as follows: '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.'

In 2005, when the Yukos shareholders commenced arbitration, Russia had signed but not ratified the ECT. However, in its 2009 interim awards the tribunal found that the ECT provisionally applied to the Russian Federation under article 45(1) because such provisional application was not inconsistent with Russia's constitution, laws, or regulations. The tribunal interpreted article 45(1) as requiring that the provisional application of treaties, as a concept, should not be inconsistent with the state's constitution, laws, or regulations.

By contrast, The Hague District Court followed Russia's approach, which consisted in saying that each of the ECT provisions to be provisionally applied should be consistent with the country's constitution, laws, and regulations. The court therefore assessed whether the provisional application of article 26 ECT, allowing the investors to bring their claims in arbitration, was consistent with Russia's constitution, laws, and regulations.

The court concluded that the relevant Russian legislation did not allow for arbitration of public law disputes. The Yukos dispute had arisen from a public law legal relationship and centred on compensation for damage caused by the actions of the government. Accordingly, article 26 was inconsistent with the legislation. To arbitrate a public law dispute, a legislative consent (given, for example, through ratification of the ECT) was necessary and was lacking in this particular case. The court therefore annulled the interim and final awards, without considering the other five grounds.

The story continues, as
the claimants have already announced that they will appeal the judgment. Further, the reversal of the awards does not necessarily mean that they can
no longer be enforced. Indeed, article V(1)(e) of the New York Convention provides that recognition and enforcement of the award may be refused if the party proves 'that the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, it was made'.

The Yukos shareholders
have brought enforcement proceedings in a variety of jurisdictions, including England, France, the US, Germany, and Belgium. Each of these countries will demonstrate more or less deference to The Hague judgment. For example, English courts will generally recognise the decision of a foreign court setting aside an award, unless such decision 'offended against basic principles of honesty, natural justice, and domestic concepts of public policy'. (Yukos Capital S.a.r.L v OJSC Oil Company Rosneft [2014] EWHC 2188 (Comm)).

It remains to be seen how national courts view The Hague judgment and what would be the consequences for the claimants' ability to collect any of the $50bn awarded.

Maria Gritsenko is counsel in the commercial litigation and international arbitration practice of Bryan Cave @BryanCaveLLP www.bryancave.com