On July 28, 2014, a tribunal sitting at the Permanent Court of
Arbitration in The Hague awarded the largest arbitral award in
history. In this landmark decision, the tribunal, which was chaired
by Yves Fortier, Canada's former representative on the UN
Security Council, ordered the Russian Federation to pay over US$50
billion in damages to three former shareholders of Yukos Oil
Company (Yukos) for breaching its international obligations under
the Energy Charter Treaty. The tribunal ruled that the
Russian Federation effectively expropriated Yukos' assets, and
by extension the claimants' investments in Yukos, without
fairly compensating them, in violation of Article 13(1) of the
Energy Charter Treaty.
Yukos was Russia's first privately owned oil and gas company
involved in the exploration, production, refining, and marketing
activities of crude oil and natural gas. The company was the
world's fourth-largest private oil producer and the largest in
Russia. Between 2003 and 2004, the Russian Federation sought to tax
Yukos US$27 billion, which Yukos argued was unlawful and arbitrary,
in order to allow the Russian Federation to seize its assets.
Yukos' assets were frozen and sold at undervalued prices to
Russian state-owned oil companies, Rosneft and Gazprom. On August
1, 2006, a Russian court declared Yukos bankrupt.
The tribunal held that "Yukos was the object of a series of
politically-motivated attacks by the Russian authorities that
eventually led to its destruction" and that the Russian
Federation's goal was to "bankrupt Yukos, assign its
assets to a State-controlled company." The tribunal further
found that the Russian Federation intended to incarcerate
Yukos' founder, Mikhail Khodorkovsky, "who gave signs of
becoming a political competitor" and was sentenced to eight
years in prison in 2005 for tax evasion and other offences.
Between 2011 and 2014, a number of court cases involving Yukos
made their way before various courts and tribunals, including a
recent judgment from the European Court of Human Rights (ECHR),
which came three days after the ruling from the Permanent Court of
Arbitration. The ECHR ruling orders the Russian Federation to pay
an additional US$2.6 billion to shareholders of Yukos.
In response to the Permanent Court of Arbitration's
decision, Russia claims the US$50-billion award was politically
biased, suggesting that it was a product of Russia's recent
involvement in the Ukraine. This ruling comes at a time when new
sanctions have been levelled against Russia by the European Union,
the United States, as well as Canada.
The Russian Federation has been ordered to pay the full US$50
billion by January 2015. However, it appears unlikely that the
payment will be made. Accordingly, Yukos' shareholders'
next challenge will be enforcing the award. The Convention on
the Recognition and Enforcement of Foreign Arbitral Awards,
also known as the "New York Convention," provides a
mechanism that Yukos' shareholders may use to enforce its
arbitral award as against the Russian Federation's assets
located outside of Russian borders. Subject to limited exceptions,
the New York Convention will allow Yukos to enforce its award in
any one of the 150 states that are parties to the Convention that
host Russian assets.
The ability of a creditor to enforce an arbitral award against a
sovereign nation has given rise to a series of interesting cases in
recent years. These cases have demonstrated that international
arbitration provides an effective, albeit sometimes controversial,
mechanism to enforce awards. For example, U.S. hedge fund Elliott
Management Corporation obtained an arbitral award against Argentina
for its refusal to repay a bond despite a court order to do so. Its
hedge fund was able to seize an Argentine naval training vessel
that was located in Ghana until the award was satisfied.
Similarly, in late 2013, a consortium led by Emirati firm Dana
Gas indicated its willingness to seize the assets of the Kurdistan
Regional Government that are located in Turkey, which is a
signatory to the New York Convention, if it obtains an award
relating to payments owing for work performed in Kurdish gas fields
that goes unsatisfied.
The ability to seek recourse for an international arbitration
award against the assets of a sovereign nation provides an
effective enforcement mechanism that promotes the resolution of
international disputes. In light of Yukos' recent
groundbreaking award against the Russian Federation, it is likely
that a series of interesting enforcement cases will spring up in
jurisdictions around the world that have signed on the New York
Convention and host Russian assets, including Canada.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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