UNCITRAL arbitration proceedings and setting-aside proceedings
Possible impact on setting-aside proceedings in appeal
On May 9 2017 the Amsterdam Court of Appeals(1) ruled that the Russian liquidation order of August 1 2006 regarding OAO Yukos Oil Company is contrary to Dutch public order and therefore null and void (for further information please see "Amsterdam Court of Appeals denies recognition of Yukos bankruptcy based on public order exemption"). An interesting question is whether the judgment will have a bearing in the appeal of the annulment proceedings concerning the $50 billion Energy Charter Treaty (ECT) arbitration case between former Yukos shareholders and Russia, which is pending before The Hague Court of Appeal.
Yukos, established by Mikhail Khodorkovsky and at the time Russia's largest oil company, was declared bankrupt on August 1 2006 by the Moscow City Arbitrazh Court. Rebgun was appointed as Yukos's bankruptcy trustee. Important Yukos assets, such as a refinery in Lithuania and a pipeline operation in Slovakia, were held by a 100% Dutch subsidiary, Yukos Finance BV. Rebgun, in its role as representative of Yukos Finance's 100% shareholder, Yukos, dismissed Yukos Finance directors David Godfrey and Bruce Misamore and appointed new directors. On September 10 2007 Rebgun sold the shares in Yukos Finance in an auction to Russian investment company Promneftstroy for $307 million.
UNCITRAL arbitration proceedings and setting aside proceedings
On July 18 2014 the arbitrators in the United Nations Commission on International Trade Law (UNCITRAL) arbitration proceedings administered by the Permanent Court of Arbitration between Russia and the former Yukos shareholders on the basis of the ECT ruled that Russia must pay a record-breaking $50 billion in damages to the shareholders.(2) The tribunal held that Russia had breached Articles 10 (fair and equitable treatment of investors) and 13 (wrongful expropriation) of the ECT. Subsequently, Russian assets were seized in various countries, including the United Kingdom, France, Belgium, Germany, the United States and India.
Russia initiated annulment proceedings before The Hague District Court and succeeded in setting aside the arbitration awards. The district court agreed with Russia that the arbitral tribunal was incompetent because Russia was not bound by the ECT. Russia had signed the ECT, but never ratified it. In such case, Article 45 of the ECT provides that the treaty will apply provisionally, pending its entry into force, "to the extent that such provisional application is not inconsistent with its constitution, laws or regulations." The Hague District Court held that Article 45 required the arbitral tribunal to verify the consistency with each and every section of the treaty (the so-called 'piecemeal' approach), dismissing the so-called 'all or nothing' approach defended by the former Yukos shareholders which has been applied by various tribunals in investment treaty cases, whereby the provisional application of the treaty as a whole is tested against Russia's constitution, laws or regulations. On the basis of the piecemeal approach, The Hague District Court held that Article 26 of the ECT – the arbitration clause – was incompatible with Russian law, leaving the arbitral tribunal incompetent to rule on the matter.
Possible impact of decision on setting-aside proceedings in appeal
The Amsterdam Court of Appeals recently denied recognition of the Russian bankruptcy proceedings because the Russian liquidation order is contrary to Dutch public order. This decision could affect the proceedings regarding the setting aside of the UNCITRAL arbitral award, which are currently in the appeal phase before The Hague Court of Appeal. The Amsterdam Court of Appeals' decision that the Russian bankruptcy trustee was not competent to sell the Dutch Yukos assets and replace the directors of the Dutch Yukos subsidiary could play a role in this regard.
In setting aside the awards, The Hague District Court attached great importance to the fact that the disputes before the arbitral tribunal had dealt with reviewing government acts pertaining to public law. Russian law provides that such disputes can be brought only before a Russian court (and not before an arbitral tribunal), making part of the ECT incompatible with Russian law. As the Amsterdam Court of Appeals established that the acts of the Russian tax authorities had been performed in order to deliberately cause Yukos's insolvency, the limit of legitimately exercising Russia's authority under public law may have been exceeded. This raises the question of whether it can be maintained that the disputes before the arbitral tribunal had in fact dealt with acts of Russia pertaining to public law, which shall be dealt with exclusively in the Russian courts.
If The Hague Court of Appeal disagrees with Russia and holds that the arbitral tribunal was competent to rule on the matter, the court will need to decide on the other grounds for overturning the arguments raised by Russia. In the first instance, these included that:
- the arbitral tribunal exceeded its assignment;
- the arbitral tribunal was composed irregularly because its secretary played too big a role;
- the arbitral awards were insufficiently reasoned; and
- the arbitral awards are contrary to Dutch public order – in particular, Russia's fundamental right to a fair trial – because they show that the arbitral tribunal failed to act impartially and without prejudice.
It remains to be seen whether the third and fourth grounds may be more difficult for Russia to prove after the Amsterdam Court of Appeals' ruling that the Russian bankruptcy proceedings were contrary to Dutch public order.
Further, the former Yukos shareholders could, on the basis of the Amsterdam Court of Appeals decision, file claims against Rebgun and Russia to be compensated for any damages caused by Rebgun's annulled actions to sell the Dutch assets and replace the directors of the Dutch Yukos subsidiary, to the extent these were not compensated in the European Court of Human Rights case. The Dutch courts may assume competence now that the sale has taken place in the Netherlands before a Dutch notary and the directors were dismissed and replaced in the Netherlands.
For further information on this topic please contact Michael Broeders or Ulrike Verboom at Freshfields Bruckhaus Deringer LLP by telephone (+31 20 485 7000) or email ([email protected] or [email protected]). The Freshfields Bruckhaus Deringer LLP website can be accessed at www.freshfields.com.
(1) Amsterdam Court of Appeals, May 9 2017, ECLI:NL:GHAMS:2017:1495.
(2) Yukos Universal Limited (Isle of Man) v The Russian Federation, PCA Case AA 227, UNCITRAL; Hulley Enterprises Ltd v The Russian Federation, PCA Case AA 226, UNCITRAL; and Veteran Petroleum Ltd v The Russian Federation, PCA Case AA 228, UNCITRAL.