Canada: No Offer To Arbitrate, No Agreement, No Competence: Hague District Court Reverses Yukos Arbitral Awards

In a decision released on April 20, 2016, The Hague District Court reversed the interim and final awards of an arbitral tribunal in three proceedings against the Russian Federation by shareholders of Yukos Oil Company, which had resulted in orders against Russia totaling over US$50-billion. The court reversed the awards on the basis that the tribunal had wrongly declared itself competent in the arbitration to take cognizance of the claims and issue the awards, highlighting once more the central issue of arbitral jurisdiction in international investor-state arbitration.

Yukos Oil Company (Yukos) was a Russian company. In and after 2003, Russian tax authorities held that Yukos had been involved in tax evasion. This resulted in tax assessments and fines, the seizure of Yukos assets, and eventually the execution sale of Yukos assets and its bankruptcy in August 2006. Yukos's shareholders took the position that this constituted unlawful expropriation by Russia of the company's assets and thereby unlawful expropriation of their investments, and, in three proceedings, requested arbitration under Article 26 of the Energy Charter Treaty (ECT) — a treaty that Russia had never ratified, which became central to the court's decision. The arbitrations were commenced in October 2005 and took place in The Hague before a tribunal comprising Yves Fortier (Chair), Charles Poncet and Justice Stephen Schwebel. The tribunal rendered an interim award on jurisdiction in each of the three parallel cases on November 30, 2009, and final awards in each of the cases on July 18, 2014, awarding the shareholders approximately US$8-billion, US$1.85-billion, and US$39.97-billion respectively. Russia asked The Hague District Court to quash the interim and final awards on the basis that, among other things, there was no valid arbitration agreement and the tribunal was not competent to take cognizance of, and render, an award on the shareholders' claims.

The ECT was signed in December 1994 and entered into force in April 1998. While Russia signed the ECT, it never ratified the treaty, and in August 2009, it gave notice of its intention not to become a contracting party to the ECT.

A central question before the tribunal and subsequently the court was the interpretation of Article 45(1) of the ECT, which provides, "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." Russia's notification of its intention not to become a contracting party to the ECT resulted in its termination of its provisional application of the ECT in October 2009 (on the expiration of the applicable notice period). The initial question for the tribunal and the court, therefore, was the scope of the provisional application of the ECT in Russia, and whether Article 45(1) meant that provisional application depended on the compatibility of separate treaty provisions with national laws (a "piecemeal" approach), or whether it contained an "all-or-nothing" proposition providing that either the entire treaty is applied provisionally, or not applied provisionally at all, which would depend on the consistency of the principle of provisional application with a signatory's domestic law. The tribunal held that it was the latter and that the whole of the ECT applied provisionally in Russia until the provisional application was terminated. The tribunal also held that, in any event, the arbitration provision of the ECT, Article 26, was not inconsistent with the constitution, laws or regulations of Russia. The Hague District Court disagreed with the tribunal on both counts.

First, The Hague District Court interpreted the scope of the provisional application of the ECT as limited to treaty provisions that are not contrary to national law. The second question, then, was whether the ECT arbitration provision was in accordance with Russian law. The court held that Russian law does not provide for the arbitration of disputes arising from a legal relationship between Russia and foreign investors in which the "public-law nature" of Russia's actions was predominant and in which an assessment of the exercise of public-law authorities by Russian state bodies is concerned, which the court held was the case here. The court also found that the Russian Constitution requires that treaties that deviate from or supplement national Russian laws cannot be applied based only on signature, but require prior ratification. The court held that the arbitration provision of the ECT constituted a new form of dispute resolution that did not have an independent legal basis in Russian law, namely one "which limits the sovereignty of the Russian Federation in the settlement of international public-law disputes to such an extent that an international tribunal would be competent to rule on the exercise of public-law government actions rather than a national court". On that basis, the court held that Russia was not bound by the provisional application of the arbitration provision of the ECT based only on signing the ECT. Therefore, according to the court, Russia had never made unconditional offer to arbitrate under ECT Article 26, and as a result, the shareholders' notice of arbitration did not form a valid arbitration agreement and the arbitral tribunal wrongly declared itself competent to take cognizance of the claims and issue the ensuing awards. The court therefore reversed the interim and final awards of the tribunal.

This decision once again illustrates the importance of the question of arbitral jurisdiction in international arbitration, and particularly in investor-state disputes.

According to media reports, the shareholders intend to appeal The Hague District Court's decision to The Hague Court of Appeal, which would involve a de novo hearing in which the court of appeal would re-examine the facts and reach its own conclusions. There are also enforcement proceedings underway in other countries in respect of the arbitral awards. This is therefore likely not the end of the road for Russia and the Yukos shareholders, depending on what appellate and other courts decide.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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