On 20 April 2016 the Hague District Court quashed the largest ever international arbitration award – of US$50bn against the Russian state. The story is far from over, as this decision will almost certainly be appealed, and does not entirely prevent the original award from being enforced in other countries. Nevertheless, the court’s decision emphasises a fundamental feature of arbitration: it is a consensual process.
What was the dispute about?
This decision follows an arbitration between shareholders of Yukos Oil Company, which was a major Russian oil producer, and the Russian state. The shareholders of Yukos claimed that the Russian government, through a series of taxes, asset seizures and other measures, had effectively expropriated Yukos’s assets.
The shareholders commenced arbitration proceedings against the Russian state under the international Energy Charter Treaty (the Treaty), which Russia had signed but not subsequently ratified. The arbitration was subject to the Arbitration Rules of the United Nations Commission on International Trade Law (the UNCITRAL Rules), with the seat of arbitration being the Netherlands.
In November 2009 the arbitral tribunal made an interim award, dismissing Russia’s challenges against jurisdiction and in July 2014 it made a final award (the Award) in favour of the shareholders – awarding them approximately US$50 billion in damages.
In the almost two years since then, the shareholders have taken various steps in different jurisdictions to try to enforce the Award against Russian assets, including in the UK, France, Germany, the US and India. Such enforcement attempts have been doggedly opposed by Russia, both by means of legal challenges and political and diplomatic pressure of various kinds.
Meanwhile, Russia challenged the Award in the Dutch courts (as the courts of the seat of the arbitration), on the basis that the arbitral tribunal lacked jurisdiction to hear the dispute.
What did the Dutch court decide?
The Hague District Court ruled in favour of the Russian state, finding that the tribunal lacked jurisdiction. It therefore quashed the US$50 billion Award against Russia. This was despite the arbitral tribunal having previously decided it did have jurisdiction.
The argument turned on the provisions of the Treaty, and what constituted consent under the Treaty to having disputes decided by way of international arbitration. The key provision was Article 45 of the Treaty, which governed the provisional application of the Treaty to states that had signed it:
“Article 45. Provisional application
1. 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.”
The Yukos shareholders argued that this meant that the Treaty would apply provisionally to Russia once it had signed it, so long as the general principle – of provisional application of the Treaty – was not inconsistent with Russian law. This was described as the “all or nothing” interpretation. Russia, by contrast, argued that each provision of the Treaty would need to be assessed for its compatibility with Russian law, so that certain provisions could apply provisionally, whilst others would not apply unless and until the Treaty came into force.
The crucial wording
Analysing the language of the Treaty, the Dutch court agreed with Russia’s interpretation. The crucial wording was that the Treaty would apply provisionally to the extent that it was not inconsistent with national law. This, the court held, indicated an intention that the treaty could apply provisionally in part, if not in full.
The court then went on to find that an agreement for disputes between an investor and the state to be decided by international arbitration was not compatible with the Russian constitution, laws and regulations in place at the time.
Finally, the court considered whether Russia could have been bound in any event, by virtue of having signed the Treaty, under the Russian Federal Law on International Treaties. The arbitral tribunal had ruled that the Russian law had this effect, but the Dutch court disagreed. The court found that Russian law simply provided that a treaty would be binding upon Russia upon signature if “the treaty provides that signatures shall have that effect”.
This led the court back to the wording of the Treaty, which it had already ruled upon. It followed that by signing the Treaty “the Russian Federation was provisionally bound by the arbitration clause…in so far as this clause could be reconciled with Russian law.” As it could not be reconciled with Russian law, the arbitration clause did not apply, so the tribunal did not have jurisdiction to hear the Yukos shareholders’ claim.
Osborne Clarke comment
This decision will be far from the end of the matter. The Yukos shareholders will appeal this decision to the Dutch Supreme Court, and we may not have a final decision for a couple of years or more. While that appeal is on-going, the worldwide enforcement proceedings are likely to continue, since under the New York Convention for the enforcement of arbitral awards, decisions by the courts of the arbitral seat are not binding (although they will be persuasive).
Adrian Lifely, Head of International Arbitration at Osborne Clarke, commented:
“Russia has deployed every method – legal, diplomatic and political – to thwart efforts to enforce this award globally, with general success to date. In exceptional situations like this, where there is so much at stake besides a very large amount of money, one sees that the legal case is but one track that will decide the final outcome between parties. For now, this court judgment from The Hague tips the balance firmly in favour of Russia, although we can expect an appeal against the decision. Indeed, members of our arbitration group presently working on another case in Moscow report that today there are many smiles in that city at this decision.
The Yukos case highlights some basic truths about arbitration law and practice – you cannot compel a party to arbitrate a dispute. It is a consensual process and all parties must agree. This point is particularly significant in this case, given the amount of time and costs it has taken to complete the arbitration. The Yukos shareholders are now potentially back to square one.”
It is also interesting to note that Russia’s challenge in the Dutch court included several additional grounds that, in light of the court’s decision on the meaning of Article 45 of the Treaty, were not addressed by the court. One such issue that the Dutch court did not rule on was whether the Yukos shareholders should have been allowed to rely on the Treaty, which protects foreign investors against the actions of a state. Russia had argued that the shareholders were in fact Russian nationals, who should not be entitled to rely on the Treaty simply by virtue of their money having been invested through tax havens such as Cyprus. With both tax havens and investor-state arbitration being subject to much criticism recently, a decision on this point would have been received with interest.