In a remarkable turn of events the District Court of The Hague has set aside six arbitration awards, including the three final awards in excess of $50bn, in the investment arbitration against the Russian Federation over the change of ownership in the former Yukos Oil Company. The decision (which can be found in full here[1]) was released last Wednesday, 20 April 2016.

The Yukos Investment Arbitration Proceedings

The arbitrations were initiated in 2005 by former Yukos shareholders (Veteran Petroleum Ltd., Yukos Universal Ltd., and Hulley Enterprises Ltd.) against the Russian Federation under the Energy Charter Treaty (ECT).[2] The Permanent Court of Arbitration (PCA) in The Hague administered the proceedings, which were conducted under the UNCITRAL Arbitration Rules. Yves Fortier chaired the Tribunal, with Charles Poncet and Stephen Schwebel serving as his co-arbitrators.

In 2005, when the claimants initiated the arbitration, the Russian Federation had signed the ECT, but not ratified it. Accordingly, the Tribunal’s jurisdiction was dependent on the question whether or not the ECT was provisionally applicable by way of its Article 45 (1):

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.

In its awards on jurisdiction of 30 November 2009, the Tribunal concluded that the ECT in its entirety provisionally applied to the Russian Federation according to Article 45 (1) ECT because such provisional application was not inconsistent with Russia’s constitution, laws or regulations.[3] The Tribunal, thus, read Article 45 (1) ECT in the way that a provisional application of the ECT is only excluded in states where the provisional application of treaties is, in general, inconsistent with that state’s constitution, laws or regulations. The Russian Federation had argued a different interpretation of Article 45 (1) ECT, in that the ECT may only apply to the extent that the provisional application is not inconsistent with a state’s constitution, laws or regulations.[4] This approach would have meant that each provision of the ECT, namely the offer to arbitrate disputes in Article 26 ECT, would have needed to be checked for consistency with Russia’s laws in order to apply. Only where an ECT provision “cleared” the consistency with Russian laws could it apply provisionally. The Tribunal dismissed this approach and concluded that it had jurisdiction: “There are two possible interpretations of the phrase ‘the provisional application of this Treaty’: it can mean either ‘the provisional application of the entire Treaty’ or ‘the provisional application of some parts of the Treaty.’ The Tribunal finds that, in context, the former interpretation accords better with the ordinary meaning that should be given to the terms, as required by Article 31(1) of the VCLT. Indeed, without any further qualification, it is to be presumed that a reference to ‘this Treaty’ is meant to refer to the Treaty as a whole, and not only part of the Treaty.

In its three final awards of 18 July 2014, the Tribunal awarded the claimants total damages in excess of $50bn, holding that the Russian Federation had expropriated the claimants’ assets. This total made the arbitration awards the largest in history. Russia moved to have the awards set aside in the District Court of The Hague.

The Setting-Aside Decision

On 20 April 2016, the District Court of The Hague granted Russia’s application and set aside the awards.

The Court rejected the Tribunal’s reading of Article 45 (1) ECT that the ECT provisionally applied to the Russian Federation in its entirety because Russia’s laws allow for the provisional application of treaties. Instead, the Court followed Russia’s interpretation of Article 45 (1) ECT, that a provisional application is focused and dependent on the compatibility of separate treaty provisions with national laws.[5] Accordingly, the relevant question for the Court was “whether the arbitral provision in Article 26 ECT, from which the Tribunal derived its competence, is in accordance with Russian law.”[6]

From the respective provisions in Russian law, the District Court concluded that Russian legislation “limits the option of arbitration to civil-law disputes”[7]. Disputes related to Russian public law, on the other hand, may not be submitted to arbitration and can only be brought in the Russian national courts.[8] The counter-argument, that the non-arbitrability of Russian public law disputes has no impact on the arbitrability of a dispute with Russia related to public international law, was dismissed.[9] The District Court found that in order to arbitrate a public law dispute with the Russian Federation under Article 26 ECT, consent by the Russian parliament would have been necessary.[10] As such legislative consent did not exist, neither through ratification of the ECT nor through another legal provision, the District Court concluded that arbitrating a dispute such as the one brought by the three claimants was inconsistent with Russian law.[11] For the Court, a provisional application of Article 26 ECT was, therefore, excluded under Article 45 (1) ECT.

The awards had also been challenged on other grounds, e.g. on the basis of the substantial involvement of one of the Tribunal’s secretaries (blogpost by Altenkirch/Schmeil here[12]). However, such other grounds played no part in the District Court’s decision to set aside the awards.[13]

The Saga Continues

Earlier this year, the Svea Court of Appeal had already granted Russia negative declaratory relief in another Yukos arbitration brought by other former Yukos shareholders under the Spain Russia Bilateral Investment Treaty (GAN reported here[14]) and decided that the tribunal in this case had no jurisdiction, either. Now, the setting-aside decision by The Hague District Court of 20 April 2016 forms the latest chapter in the Yukos saga.

Most likely, it will not be the last. Although the awards were set aside, proceedings in several jurisdictions (including France, Belgium, Germany, the US and the UK) over the enforcement of the $50bn final awards are continuing. What is more, GML (for the three claimants) have already declared that they will appeal the setting-aside decision by The Hague District Court.