Canada: Permanent Court Of Arbitration Grants Largest Arbitral Award In History

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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