In a judgment handed down on 20 April 2016, The Hague District Court set aside the awards in three arbitrations rendered against the Russian Federation in investment treaty cases brought by former shareholders in Yukos.

On 20 April 2016, The Hague District Court handed down a judgment in the joined cases of Russia v (1) Veteran Petroleum Limited; (2) Yukos Universal Limited; and (3) Hulley Enterprises Limited, setting aside three interim awards and three final awards rendered against Russia in July 2014 (the Interim Awards and the Final Awards, respectively). The Final Awards, delivered by a panel of arbitrators appointed in accordance with the Energy Charter Treaty (the ECT) and the UNCITRAL Rules, and seated in The Hague, awarded the Yukos shareholders USD 50 billion in damages (plus USD 60 million in legal fees) for Russia's breaches of its international obligations under the ECT. Allen & Overy previously reported on the Final Awards: [here].

The Hague District Court set aside all six awards on grounds of lack of jurisdiction. This judgment could have a significant impact on the Yukos shareholders' attempts to enforce the USD 50 billion Final Awards which are underway in several jurisdictions.

Background

In November 2009, the arbitral Tribunal rendered the Interim Awards upholding its jurisdiction under the ECT. Russia raised numerous jurisdictional objections, including in respect of the "provisional application" (Article 45) of the ECT and the effect of this provision on Russia's consent to international arbitration under the ECT dispute resolution provision (Article 26). Russia objected to the Tribunal's jurisdiction on the basis that, while Russia had signed the ECT, the Russian Parliament had not ratified it.

The Tribunal held that by signing the ECT, Russia had agreed that the ECT would apply provisionally as a whole pending its entry into force, including its dispute resolution provisions. The consent to arbitrate expressed therein was not found to be inconsistent with Russia's Constitution, laws or regulations.

In July 2014, the Tribunal rendered the Final Awards, finding that Russia's actions against the Yukos shareholders were part of a targeted effort to bankrupt Yukos and appropriate its assets. The Tribunal held that Russia had unlawfully expropriated the Yukos shareholders' assets in breach of Article 13(1) of the ECT and awarded them USD 50 billion as compensation.

The Yukos shareholders sought to enforce the Final Awards in several jurisdictions, including, inter alia, France, Belgium and the United States. In some jurisdictions, they have enjoyed certain successes (most recently, freezing USD 1 billion of Russia’s assets in France). In response, Russia enacted new legislation on sovereign immunity which came into effect in January 2016. This new legislation contains a "reciprocity clause", which means that the jurisdictional immunities of a foreign State and its property (including State-owned banks) may be limited if that foreign State imposes limitations on the jurisdictional immunities accorded to Russia and its property in that foreign State.

Russia also pursued annulment proceedings in respect of the Interim and Final Awards in the Dutch courts (The Hague being the seat of the arbitration). In February 2016, The Hague District Court held a highly publicised hearing, during which Russia argued, inter alia, that the Tribunal lacked jurisdiction because: (i) Russia had not ratified the ECT and therefore there was no valid arbitration agreement; (ii) the investment was made fraudulently and was therefore illegal; and (iii) the Tribunal was improperly constituted.

Arbitral Tribunal lacked jurisdiction – The Hague District Court's judgment

The Hague District Court only addressed the first argument raised by Russia. Accepting Russia's arguments, The Hague District Court found that the provisional application of the ECT must be considered in light of Russian law. Diverging from the Tribunal's position in the Interim Awards, The Hague District Court held that Russia "was only bound by the treaty provisions reconcilable with Russian law". The Hague District Court concluded, following its analysis of evidence of Russian law, that because the ECT had never been ratified by the Russian Parliament, "the arbitration clause of Article 26 ECT does not have a legal basis in Russian law and is incompatible with the starting points laid down in that law".

Accordingly, The Hague District Court declared that the six awards be set aside for lack of jurisdiction and ordered the Yukos shareholders to pay the costs of the set aside proceeding.

Comment

The judgment of The Hague District Court is not the first court judgment vacating arbitral awards from the Yukos saga. Earlier this year, the Swedish Court of Appeal set aside the SCC award related to the claims brought by Spanish investors in Yukos, also on grounds of lack of jurisdiction (albeit under a different investment treaty), overturning a previous Stockholm District Court judgment in the investors' favour.

It is highly likely that The Hague District Court judgment will be appealed. The Yukos shareholders have three months to lodge an appeal with The Hague Court of Appeal, which will result in a full de novo hearing. If the judgment is overturned on appeal, the Interim and Final Awards will be reinstated.

In terms of enforcement, under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), courts may refuse to enforce an arbitral award where the award was set aside by the courts of the seat. It is unclear precisely what impact The Hague District Court judgment will have on the enforcement proceedings underway in several jurisdictions, including France, Belgium and the United States. Indeed, the impact of The Hague District Court's decision may vary depending on the jurisdiction where enforcement is being pursued.

There are jurisdictions, including France, the Netherlands and to a large extent the United States, which may grant enforcement of arbitral awards despite the fact that those awards have been set aside by the courts of the seat of the arbitration. This is because such judgments are not automatically recognised. In this instance, however, enforcement of the Yukos arbitral awards will not occur in the Netherlands, since the judgment of The Hague District Court is binding in the Netherlands (subject to the outcome of any appeal).

Other jurisdictions may adopt a more conservative approach by refusing to enforce and recognise the set aside PCA Awards. For example, where a foreign arbitral award has been annulled by a court of the seat (in this instance, The Hague), the English courts often refuse to recognise or enforce that award since the act of annulment creates an "issue estoppel". Under English law, provided certain criteria are met, the English courts may be estopped from deciding on an issue where that same issue has been decided upon in earlier proceedings between the same parties by a foreign court. This applies save in exceptional circumstances where recognition of the foreign court's decision would offend basic principles of honesty, natural justice and domestic concepts of public policy.

The ECT does not apply to any investments made in Russia after October 2009 because Russia made a declaration under Article 45(3) of the ECT that it did not wish to be a Contracting Party to the ECT. However, The Hague District Court judgment should be borne in mind by any investors who made investments in Russia before October 2009 and who are considering bringing investment claims against Russia under the so-called sunset clause in Article 45(3)(b) of the ECT (which allows investors who made their investments before Russia’s declaration to bring claims under the ECT over a period of 20 years – i.e., until October 2029).

We will report on the outcome of the appeal proceedings in The Hague in due course.