Yukos Capital S.A.R.L. v. OAO Samaraneftegaz, 10 Civ. 6147 (S.D.N.Y. Aug. 6, 2013) [click for opinion]
The parties executed two loan agreements totaling RUR 2.4 billion. After Defendant OAO Samaraneftegaz failed to make any of the loan payments, Plaintiff Yukos Capital S.A.R.L. requested arbitration at the International Court of Arbitration of the International Chamber of Commerce ("ICC"). The ICC forwarded notice of the arbitration (as well as subsequent notices) to Defendant’s corporate address in Russia. Defendant did not dispute having received the notices. Still, Defendant did not respond or otherwise participate in the arbitration.
A few months after arbitration began, Defendant's management company, ZAO Yukos Exploration and Production, informed the ICC that on behalf of Defendant it was contesting the validity of the arbitration agreement. With the exception of the Terms of Reference—which summarized the proceedings and identified ZAO Yukos as Defendant’s representative—the ICC sent all subsequent notices to ZAO Yukos’s corporate address. The ICC ultimately awarded Plaintiff the full amount of the loans plus interest and expenses.
Defendant’s sole shareholder then sued Plaintiff and Defendant in Russian court to invalidate the loans, which the shareholder claimed were a sham. The shareholder was successful; a Russian court in Samara invalidated the loans in February 2012, a decision that was upheld on appeal.
Plaintiff filed a petition with the Arbitrazh court in Samara for enforcement of the ICC arbitration award. The Arbitrazh court refused to enforce the award, holding that the Defendant had not received adequate notice of the ICC proceedings.
Plaintiff then sought enforcement of the ICC award in the United States District Court for the Southern District of New York. Under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. § 207, a court with jurisdiction shall confirm an award falling within the scope of the law unless there are statutory grounds not to do so. Defendant cited two such grounds: it lacked proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present its case; and recognizing or enforcing the award would be contrary to United States public policy.
In arguing that the ICC did not provide it adequate notice, Defendant argued that collateral estoppel should apply to the Arbitrazh court’s determination regarding the insufficiency of notice and should therefore preclude Plaintiff from re-litigating the issue. The court declined to apply collateral estoppel for a number of reasons. The Arbitrazh court’s decision did not address all of the notices that the ICC sent to Defendant. Defendant conceded it had received notice. And the Arbitrazh court relied on Russian, not U.S., law, and therefore applied a different legal standard. The court concluded that the form of notice was consistent with the constitutional requirements of Due Process and the notices were reasonably calculated to inform Defendant of the ICC proceeding and provided Defendant an opportunity to be heard.
The court likewise dismissed Defendant’s contention that enforcing the ICC award would violate public policy. Defendant had argued that giving effect to the award would sanction Russian tax fraud and so should be unenforceable. The court concluded that it lacked authority to make this determination; issues relating to the validity of the loans were for the arbitrator to decide, and Defendant was not allowed to revisit those issues. Additionally, the court did not find that there was a well-defined public policy against foreign-tax evasion. While there may be a public policy against violating domestic tax laws, no such policy exists with respect to the tax laws of other nations.