The Hague Court of Appeal reinstates $50 billion ECT award against Russia

On 18 February 2020, the Hague Court of Appeal delivered the latest ruling in the largest-valued international investment arbitration between three former shareholders of Yukos Oil Company (Yukos) and the Russian Federation (Russia).

The Court of Appeal reinstated three arbitral awards by the Permanent Court of Arbitration (PCA),  ordering Russia to pay more than $50 billion to the shareholders for Russia’s breach of the Energy Charter Treaty (ECT). The Hague District Court had annulled the awards in 2016, but that judgment has now been overturned by the Court of Appeal. Despite the outcome of the case, Dutch rules on State immunity may nevertheless challenge enforcement of the awards.

Background:

Three shareholders of Yukos - formerly one of the largest oil and gas companies in Russia -  initiated several proceedings against Russia after a series of tax measures, asset freezes and an internationally condemned auction of one of its subsidiaries resulted in the company being declared bankrupt in Russia. The bankruptcy was refused recognition in the Netherlands after the Dutch Supreme Court confirmed the Amsterdam District Court’s ruling that it violated Dutch public policy. The European Court of Human Rights furthermore awarded Yukos an unprecedented €1,9 billion in damages for Russia’s breach of its right to a fair trial and protection of property. With the latest judgment by the Court of Appeal concerning Russia’s breach of the ECT, Yukos’ have had their previously annulled awards reinstated.

The ECT awards before the Dutch Courts

In 2004 Yukos initiated arbitration proceedings against Russia, alleging that Russia had breached the ECT by unlawfully expropriating its investments. Russia contested the Tribunal’s jurisdiction in the matter, arguing that the ECT, including its arbitration clause did not apply to Russia, since it had only signed the treaty, but not ratified it. The Tribunal nevertheless upheld its jurisdiction, finding that the ECT applied provisionally to Russia from its signature until 2009 when it notified the depository of its intention not to ratify the treaty.

The Tribunal further decided in its final awards that Russia had breached the ECT, ordering Russia to pay more than $50 billion for its indirect expropriation of Yukos’ investments. Following the awards, the shareholders sought enforcement of the awards in several countries, including the Unites States, Belgium, France and the United Kingdom. Russia challenged these enforcement actions, and initiated setting-aside proceedings before the District Court in the Hague

In its judgment of 20 April 2016, the District Court ruled in favor of Russia, finding that the Tribunal did not have jurisdiction over the dispute. The Court held that the ECT applied provisionally only to the extent that its application was compatible with Russian law. In this case, it found that the arbitration clause was incompatible with Russian law since there was no legal basis for it under national law. As such, there was no valid arbitration agreement and the Court consequently set the awards aside.

The shareholders appealed the judgment to the Court of Appeal, which found no incompatibility between the application of the ECT and Russian national law. The Court of Appeal further dismissed the other arguments brought forth by Russia, and reinstated the annulled awards.

Enforcement of the awards

As previously noted, the shareholders had already initiated enforcement actions in several countries following the final awards. These were however temporarily suspended in light of the appeal case. Despite the outcome of the appeal, enforcement of the awards is not a guaranteed success. In the same period as the court proceedings in the Netherlands, France and Belgium adopted so-called “Yukos-laws” concerning seizure of foreign States’ assets. These laws provide that enforcement actions against a foreign State’s assets require that the State has either designated the assets for enforcement of the claims, the assets are used for non-public commercial purposes, or the State has expressly consented to the attachment. Following the adoption of these “Yukos-laws” in Belgium and France, the Dutch Supreme Court clarified the position under Dutch law in its judgments of 30 September 2016 and 14 October 2016. The Supreme Court held that assets of foreign States are not subject to seizure unless it is proven that the assets are not destined for public purposes or if the State has waived its immunity, confirming the general presumption of sovereign immunity. The 14 October judgment further elaborated that a State becoming a party to the ECT does not amount to such waiver of immunity. It therefore remains to be seen how the rules on sovereign immunity will affect the enforcement of the ECT awards.

In the meantime, Russia’s Justice Ministry has said that Russia will appeal the judgment in cassation to the Dutch Supreme Court. Appeals to the Supreme Court may have suspensive effect. However, since in this case the judgment was declared enforceable, appealing the judgment will not necessarily hinder Yukos’ from pursuing enforcement of the awards.