On July 18th, 2014, a tribunal formed by the Permanent Court of Arbitration (PCA) in Hague (“Tribunal”) rendered a largest-ever award (“Award” or “Yukos Award”) which required Russia to pay damages more than USD 50 billion to the shareholders of the defunct Yukos Oil Company (“Yukos”) on the basis that Russia breached its obligations under the Energy Charter Treaty (“ECT” or “Treaty”) by forcing Yukos into bankruptcy and illegally expropriating the latter’s assets. The story does not end there, as Russia immediately indicated that it would fight to set aside the Award. On April 20th, 2016, the Hague District Court (“Hague Court” or “Court”) set aside the Award with the reason that the tribunal lacked jurisdiction to arbitrate the dispute. This article will briefly introduce this historic case and analyze some typical issues thereof from the perspective of international investment dispute resolution.
I Review of Yukos Case - from $50 Billion Award to Quash
Yukos was Russia’s largest oil company and was listed as one of the world’s top ten oil and gas companies. However, starting in July 2003, the tax and finance supervision authority of Russia took a series of investigation measures against Yukos, and the president and several senior managers of Yukos were sentenced to prison terms for various offences such as tax evasion, fraud, money laundering and so on. Yukos was eventually declared bankrupt on August 1st, 2006 and its huge assets were nationalized.
Yukos’ shareholders then submitted the disputes with Russia for ad hoc arbitration under the UNCITRAL Arbitration Rules provided in Article 26 of the ETC and claimed that Yukos was arbitrarily, unfairly and discriminatorily treated and its assets were illegally expropriated. A three-arbitrator tribunal consisting of the Chief Arbitrator Mr. Yves Fortier, Mr. Stephen Schwebel appointed by Russia, and Mr. Charles Poncet appointed by Yukos shareholders (“Tribunal”) was constituted to hear the case.
2. Jurisdiction of Tribunal
Russia raised a series of objections to the Tribunal’s jurisdiction, inter alia, the major objection related to the “provisional application” of the ETC which provided an ad hoc arbitration clause. Though the ETC was signed but was not ratified by Russia, the ETC required that the ECT signatories to provisionally apply the treaty “to the extent that such provisional application is not inconsistent with its constitution, laws or regulations” before its ratification, in accordance with Article 45(1). But Russia argued that the ETC was inconsistent and in conflict with its domestic laws.
The Tribunal, after examining the case, eventually found that the principle of provisional application of the ETC had not violated Russia’s constitution, laws and regulations. Therefore, the Tribunal dismissed Russia’s jurisdictional objection and ruled its jurisdiction over the case.
3. $50 Billion Award
On July 18th, 2014, the Tribunal rendered its final award. The Tribunal found that the arrests, tax reassessments, fines and the forced sale of main production facility, among other measures imposed on the claimants, amounted to an indirect expropriation of Yukos, in breach of Russia’s obligations under the ECT during the provisional application of the Treaty in Russia. Due to Russia’s breach of the ECT, the Tribunal awarded the Yukos’ shareholders more than USD 50 billion as damages. It also addressed that Russia’s oversea assets were available for enforcement of the Award.
4. Hague Court Set Aside Award
However, on April 20th, 2016, the Hague Court set aside the Yukos Award finding that the Tribunal “wrongly declared itself competent” which may lead to the reversal of the Award in accordance with Section 1065.1(1) of the Dutch Code of Civil Procedure – “absence of valid arbitration agreement”.
First of all, the Court confirmed its jurisdiction on the basis that Hague is the place of arbitration and it has competence to review the Award in accordance with the Dutch Law.
Then the Court assessed the Tribunal’s jurisdiction holding that the “provisional application” under the Article 45 (1) of the ETC is applicable on the premise that individual ETC’s provision is consistent with Russia’s constitution, laws and other regulations. Basing on two expert reports, the Court found, however, that Russia’ constitution, law and other regulation does not provide a legal basis for submitting a dispute between foreign investors and the government for arbitration. Thus, the arbitration clause in Article 26 of ETC shall not be provisionally applied. Thus, the Court arrived at the opinion that the Tribunal lacked jurisdiction and the Award should be quashed under Dutch Law due to “absence of valid arbitration agreement”.
II Some Insights into Yukos Case
The Yukos case has drawn a great deal of attention not only due to damages awarded being the largest-ever, but also the widespread political impact around the world. However, this section will focus on some important issues that arise in regard to international investment arbitration versus international commercial arbitration.
1. Arbitration without Privity
In international commercial arbitration, an arbitration agreement between parties is necessary. However, international investment arbitration adopts the principle of “arbitration without privity” which sets forth the right of the investor to initiate arbitration against the host state without a previous arbitration agreement as long as the host state has signed an international treaty with an arbitration clause or made a unilateral statement to arbitration. The Yukos case is a case where the principle of arbitration without privity exactly applied. There was no previous arbitration agreement between Yukos and Russia. It was on the basis of the arbitration clause contained in the ETC that Yukos initiated the arbitration against Russia.
2. Host State’s Obligations under International Law
In the Yukos case, Yukos’s shareholders argued that Russia breached its obligations of ETC, inter alia, protection of investors from nationalization, expropriation or any other measures having effect equivalent to nationalization or expropriation. This argument is tenable because, under international law, a signatory state is bound by treaties it signed (paeta sunt senvanda) and individuals are entitled to the benefits, rights and guarantees established in international law. In this regard, international law was often applied in the international investment arbitration, for example, the Tribunal and Court both applied the Vienna Conventional on the Law of Treaties to interpret the ETC. However, in commercial arbitration, the parties are usually limited to recourse to the contents of the contract signed by and between them and the international law is rarely applied.
3. Judicial Review of Award
Presently, the international investment arbitration has developed into two different forms, one is arbitration under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID Convention”) (“ICSID Arbitration”), and the other is non-ICDIS Arbitration which is usually ad hoc arbitration or institutional arbitration under UNCITRAL Rules or rules of specific arbitral institutions, such as ICC, SCC and LCIA (“Non-ICSID Arbitration”).
The Yukos arbitration is a typical Non-ICSID Arbitration, i.e. an ad hoc arbitration conducted under UNCITRAL Arbitration Rules with the support of PCA as the appointing authority. The Award rendered by the Tribunal is final but subject to lex loci arbitri and the judicial review of the court at the arbitration place. Therefore, it gives an opportunity for Russia to challenge the Award in Hague. Eventually the Court in Hague did set aside the Award according to the Dutch Law.
ICSID Arbitration, however, proceeds under an autonomous system of ICSID Convention and is managed by the International Centre for the Settlement of Investment Disputes (“ICSID”) establish under the ICSID Convention. The ICSID awards are final and binding and not subject to any remedy, except as provided for in the ICSID Convention. Under the ICSID Convention, the parties could apply for the annulment of an award under certain narrowly defined circumstances before a separate ad hoc committee of the ICSID. Therefore, an award by the ICSID Arbitration is immune from the national court’s judicial review.
4. Recognition and Enforcement of Award
When it comes to enforcement of an award by the ICSID Arbitration, the Contracting State of ICSID Convention should recognize and enforce the awards “as if it were a final judgment of a court in that State”. And the ICSID is the only authority to review and set aside its arbitral awards. The reference to “a final judgment of a domestic court” puts ICSID awards on the same footing with a final domestic judgment that is no longer subject to judicial review by the state court for enforcement.
However, an award rendered in the Non-ICSID Arbitration usually need to recourse to Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) for recognition and enforcement. Under the New York Convention, the state court to which the recognition and enforcement of the award is applied for has authority to review the award. This judicial review by the state court may make the enforcement of the Yukos Award complicated and uncertain. Because, in accordance with Article 5.1(5) of the New York Convention, recognition and enforcement of the award “may” be refused where the award has been set aside by a competent authority of the country in which, or under the law of which, that award was made. Nonetheless, the enforcement proceedings of the Yukos Award were initiated in 2014 in France, Belgium and other countries. Theoretically, the courts in those countries have the discretion to decide on whether or not to recognize and enforce the Award.
The Yukos case has drawn great deal of attention due to the amount being the largest-ever damages awarded and the widespread impact around the world. The set-aside judgment by the Hague Court further spurs international investors to carefully consider the choice of dispute resolution in international investment, i.e. ICSID Arbitration or Non-ICSID Arbitration in particular in terms of the state court’s judicial review of a final award.
The shareholders of Yukos have expressed their intent to appeal the judgment of the Hague Court and have simultaneously initiated the application for enforcement of the Yukos Award with the authorities of various jurisdictions where Russia has overseas assets, including the USA, UK, France, Belgium and India. Developments in both the appeal and the enforcement proceedings deserve our continuous attention.