On 20 April 2016 the District Court of The Hague set aside arbitration awards worth more than US$50 billion granted in favour of the former majority shareholders of the now defunct Yukos Oil Company against Russia. While this will be regarded as a major victory for Russia, the multi-jurisdictional battle continues.

Background

In 2003, the Russian tax authorities concluded that Yukos’ shareholders had been involved in large-scale and systematic tax evasion in Russia, resulting in substantial tax assessments and the seizure and sale of Yukos’ assets, which ultimately led its bankruptcy. Yukos’ shareholders, arguing that the actions of the Russian state constituted an unlawful expropriation of their investments and relying on the Energy Charter Treaty (ECT), initiated arbitration proceedings against Russia in October 2005. The arbitral tribunal eventually awarded Yukos’ shareholders a staggering US$50+ billion in damages in July 2014.

Enforcement of the arbitration awards

Following this decision, Yukos’ shareholders commenced enforcement proceedings in various jurisdictions.

In January 2015, Yukos’ shareholders applied to the English High Court for the recognition of the awards. Russia responded by challenging the English court’s jurisdiction on the basis of the State Immunity Act 1978. A hearing is scheduled for November 2016. In the meantime, Yukos’ shareholders have been busy freezing bank accounts and seizing assets belonging to Russia

located in France and Belgium. In June 2015, over €1 billion of Russian funds were reportedly frozen by the Belgian courts. On a more entertaining note, steps have also been taken to prevent the seizure of Russian space treasures exhibited at the London Science Museum!

However, Russia has been fighting back. President Vladimir Putin, in a “tit- for-tat” move, signed legislation which limits the jurisdictional immunities of foreign states in Russia, if they permit enforcement action against Russia in their territory. Moreover, the application of political pressure by Russia has

also yielded results, for example, diplomatic pressure led to Belgium passing the “Yukos law” in July 2015 preventing the seizure of a foreign state’s assets. Such state intervention due to political pressures is not new: in 2005, Switzerland intervened to lift the arrest by the Swiss company Noga of an €1 billion Russian artwork collection exhibited in Switzerland.

The latest twist

In April 2016 the District Court of The Hague1 set aside the awards made by the arbitral tribunal. In short, they decided that Article 45(1) ECT, which

provides for the provisional application of the ECT to a signatory state until its entry into force, only applied in relation to treaty provisions reconcilable with Russian law. The tribunal concluded that the dispute resolution provision at Article 26 ECT violated the Russian Constitution, holding that the executive could not provisionally bind Russia to settle investment disputes in accordance with Article 26 unless such an act had been ratified by the Russian Parliament. As a result, Article 26 did not apply and the arbitral tribunal lacked jurisdiction.

Although prevented by Dutch law from continuing their enforcement actions in the Netherlands, Yukos’ shareholders will continue their attempts to enforce the awards in other jurisdictions, irrespective of this decision.

Continuance of enforcement proceedings in England

Although the awards have been set aside by the Hague District Court, could the awards still be enforced in England?

The Arbitration Act 1996 (AA96)2 confers discretion on the English courts to refuse to recognise or enforce an award that has been set aside by a competent authority of the country in which it was made. For example, in the recent case Malicorp Ltd v Government of the Arab Republic of Egypt and other3, Mr Justice Walker refused to enforce an award set aside by the Cairo Court of Appeal, holding that effect should be given to the Cairo Court of Appeal’s decision unless it offended “basic principles of honesty, natural justice and domestic concepts of public policy”.

However, under the AA96 the courts may continue with an enforcement action, where an award has been set aside, in certain limited circumstances best summarised by Simon J in Yukos Capital SARL v OJSC Rosneft Oil Company4, a case concerning the recovery of post-award interest on awards set aside by the Russian courts. Simon J stated that, “it would be both unsatisfactory and contrary to principle if the court were bound to recognise a decision of a foreign court that offended against basic principles of honesty, natural justice and domestic concepts of public policy”.

On this basis, it appears that Yukos’ shareholders, would have to demonstrate that the decision of the Hague District Court offended principles of honesty, natural justice or public policy, which, as things currently stand, it would seem to be difficult to do. It is potentially possible that Yukos’ shareholders could try to argue that it is in the interests of public policy to recognise the awards, given the way in which Russia acted against Yukos’ shareholders, however, it is highly unlikely that the English courts would stray into making what would seem to be a politically motivated decision.

HFW’s London perspective

Russia declared in 2009 that it was not going to ratify the ECT. However, this recent judgment creates uncertainty for foreign investors in Russia regarding their investments made prior to 2009 and whether they continue to be protected under the ECT, and as to the interpretation of the treaty. Such investors should therefore be careful if placing any reliance on it. However, the decision of the Hague District Court is subject to appeal and Yukos’ shareholders have made it clear that they will appeal all the way to the Dutch Supreme Court if necessary – this process could take up to five years. Clearly, the Yukos saga is far from over.

Enforcement proceedings in France Jan Paulsson wrote of the impact of France, French law and the conceptual advances of French judges and scholars upon the development of international arbitration that “Nowhere else have the twin lodestars of freedom and internationalisation, combined in the conception of a voluntary process that accommodates the reality of a transnational society, shone so bright”.

Those lodestars risk being sorely tested by the latest twist in the disputes between the former shareholders of Yukos and Russia.

Before the arbitration award was set aside by the recent judgment of the Hague District Court, Yukos’ former shareholders were busy freezing bank accounts and seizing assets belonging to Russia located in France and taking measures to enforce the award in France.

The impact of the recent decision of the Hague District Court is, at least as French law presently stands and is interpreted by the French courts, unlikely to be significant.

French international arbitration law is based upon a conception of arbitration as a truly transnational and supranational process, operating outside any national legal order – whether that be the law of the place or seat of the arbitration or the law of the place where the award is to be enforced. National courts should intervene in arbitral proceedings only for the cooperative purpose of assisting the arbitral process, and awards should be denied enforcement only if the arbitral proceedings involved a clear violation of minimalist due process.

International arbitration is therefore anational, an autonomous legal order, and any award made pursuant to it is “an international decision” detached from national legal systems.

The autonomy of international arbitration makes the law of the place of enforcement equally well positioned to assess whether an award should be enforced as the law of the seat of the arbitration.

Under French law today, accordingly the annulment of an award in its country of origin has no direct impact upon the ability to enforce it in France, and an award can still be enforced in France even if the award has been set aside in its country of origin.

This solution has been reached by French case law through two key cases5 which determined clearly that despite the annulment of the award in the state of the seat of the arbitration, the award could still be enforced in France.

The autonomy of international arbitration makes the law of the place of enforcement equally well positioned to assess whether an award should be enforced as the law of the seat of the arbitration.

French courts will however still exercise some control over the enforceability of a foreign arbitral award but such control will be confined to a limitative list of grounds upon which the enforcement of an arbitration award may be rejected by a French court6, the annulment of an award in the state of the seat of the arbitration not forming part of such list.

On this specific issue, French law differs from the 1958 New York  Convention which rejects the enforcement of an award if it “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, that award was made”7.

Notwithstanding the principle that International Conventions to which France has adhered prevail over the provisions of French law, Article 1520 of the French civil procedure code exceptionally prevails over the New York Convention since Article VII of the Convention provides expressly that the Convention may not “deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon”.

HFW’s French perspective

The recent Hague judgment in the Yukos case should accordingly have no direct consequence in France for the enforcement proceedings that have been commenced.

Nevertheless, the grounds upon which the Hague District Court made its decision may yet have an impact and could become critical. This is because, in the event that no formal order for the enforcement of the award has been granted or if that decision is itself still under appeal, the French court will itself consider whether there are grounds to refuse enforcement of an award on one or more of the bases set out in article 1520 of the French civil procedure code.

The Hague District Court having considered that Russia had not validly agreed to arbitration since the state had signed but not ratified the ECT that provided for arbitration, the French court may itself examine – afresh and without having to recognise or give effect to the findings of the Hague District Court in this respect – whether the arbitrators did have jurisdiction to make their award. The lack of jurisdiction of the arbitrators is one of the grounds set out in Article 1520 of the French civil procedure code upon which an order for enforcement may be refused.

It seems likely therefore that the same argument will be used anew by those representing Russia to seek to prevent enforcement of the award in France.

A pragmatic solution (in itself confirming the reasoning of the Hague District Court on the jurisdictional issue, and thereby refusing enforcement whilst allowing the lodestars, at least at face value, to shine as strongly as ever) usually being regarded as too Anglo-Saxon a quality to be admitted into French national consciousness, it will be interesting to see what position the French courts will adopt. Will they allow the lodestars to continue to shine as brightly and thereby permit enforcement of the award or will the political pressure and threats yet result in those lodestars shining less brightly?

Enforcement proceedings in Switzerland

In seeking to enforce their UNCITRAL arbitration award against the Russian state, the Yukos shareholders would in the first instance look to enforce directly against Russian assets.

However the Civil Code of the Russian Federation sets out limitations in claiming state property located in Russia. Given this difficulty, the Yukos shareholders will have to look to other jurisdictions to enforce their award.

The UNCITRAL arbitration rules give the winning party the right to enforce in states that have ratified the New York Convention, however, the Convention allows states to claim the state immunity defence. The shareholders may look to set aside the state immunity defence, providing they can find assets to pursue.

Enforcement under the New York Convention in Switzerland

In seeking to apply the state immunity defence parties will often rely on Article III of the New York Convention which provides that the parties seeking to enforce a judgment in a country where assets are located must do so in accordance the rules of procedure of the territory in question. In Switzerland, where the domestic law on the doctrine of state immunity is established in case law, the Swiss Federal Supreme Court applies a three limb test to decide whether the defence of state immunity can be set aside:

  1. The foreign state must have acted in a private or commercial capacity (de iure gestionis) rather than in a sovereign capacity (de iure imperii).
  2. The transaction out of which the claim against the foreign state arises must have a qualified connection to Switzerland.
  3. The asset must not be intended for uses incumbent upon the foreign state in the exercise of its sovereign authority. Such assets are excluded from enforcement proceedings pursuant to Article 92(1) of the Swiss Debt Enforcement and Bankruptcy Law.

With regards to the second limb, the necessary connection will not arise where the assets in question are merely located in Switzerland but only where the claim originated, had to be performed in Switzerland, or in cases in which the debtor performed certain acts in Switzerland. The assets referred to in the third limb include buildings used for diplomatic purposes and funds intended to be used in the public interest. 

Practical implications of the three limb test

If you are looking to enforce a judgment in Switzerland, the case of Noga v The Russian Federation8 provides a useful example of the applicability of the state immunity defence in practice. This case also concerned the attempted enforcement of a judgment against the Russian state and attracted considerable media attention. In 2007 the Swiss Federal Supreme Court set aside the defence of state immunity, despite the facts of the case satisfying the three limb test, on the basis of a valid contractual waiver of the defence that was contained in a settlement agreement. But even with a valid award in hand, Noga were unable to enforce against Russian assets held in Switzerland.

They made several failed attempts to do so by targeting the accounts of the Russian Central Bank, Russian military equipment and even artworks by Monet, Picasso and Van Gogh that were owned by the Russian state.

What are the next steps?

The 20 April Hague judgment is subject to appeal, but the question of enforcement will only become relevant to the Yukos case if the award is re-instated on that appeal. Upon re-instatement of the award, the Yukos shareholders are likely to encounter similar difficulties experienced by Noga in the enforcement of an award even with contractual provisions in place to waive the defence.

HFW’s Swiss perspective

The three limb test for state immunity in Switzerland provides some level of clarity as to when state assets may be the subject of enforcement, but the test favours the state. Doubtless this is why Yukos’ shareholders are considering the domestic laws applicable in a number of other states before turning to Switzerland. Although it should be noted that most legal systems prohibit enforcement against the assets of foreign states unless the target falls within the commercial exceptions doctrine or the state has expressly waived its immunity, which is unlikely9. It is clear that enforcement will take significant time and effort; even in the event of a successful appeal, the hard work will be far from over for the Yukos shareholders.