Russian Federation loses appeal concerning the Yukos arbitration

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The Hague, 18 februari 2020

In an arbitration award of 2014 the Russian Federation was ordered to pay billions of dollars in damages to several shareholders of Yukos. In response the Russian Federation submitted a claim with the Dutch court to overturn the Yukos arbitration award. The District Court in The Hague awarded the claim of the Russian Federation, but in a ruling today the Court of Appeal in The Hague has decided that the judgment of the District Court was not correct. This means that the arbitration award has been reinstated.

Yukos Oil Company, or Yukos, was one of the biggest oil and gas companies in the Russian Federation and was privatized in the 1990s. Mikhail Khodorkovsky was CEO of Yukos and one of its shareholders.
In the period 2003-2006 the Russian Federation imposed several substantial tax levies on Yukos, and auctioned off a key production company of Yukos to cover the tax payments. Yukos was ultimately declared bankrupt in 2006.

Three large shareholders in Yukos – Veteran Petroleum Ltd., Yukos Universal Ltd. and Hulley Enterprises Ltd. – initiated arbitration proceedings against the Russian Federation. Arbitration is a form of private dispute settlement in which three independent arbitrators – the arbitration tribunal (the Tribunal) – rule on a case. In this matter, the arbitration proceedings took about 10 years. In a ruling dated 18 July 2014 the Tribunal ordered the Russian Federation to pay to the three shareholders a total sum in the range of $ 50 billion in damages. The Tribunal was of the opinion that the Russian Federation’s real motive was not to collect taxes from Yukos, but to eliminate Khodorkovsky as a potential rival of President Putin and expropriate Yukos’ assets.

The Tribunal based its jurisdiction to rule on the shareholders’ claims on Article 26 of the Energy Charter Treaty (ECT), which states that a dispute between a contracting party and a foreign investor may be settled through arbitration. Although the ECT had been signed by Russian Federation, it never ratified this treaty. However, the ECT did provisionally apply to the Russian Federation for several years.

Since the arbitration proceedings took place in The Hague, the Russian Federation was able to submit a claim before the Dutch court to have the arbitration award overturned. The grounds for overturning an arbitration award are limited. One of the grounds is that the arbitration tribunal lacks jurisdiction.

In its judgment of 20 April 2016 the District Court in The Hague quashed the award of the Tribunal on the ground that the Tribunal was not competent to hear the case. The district court was of the opinion that the ECT did not provide a legal basis for the Tribunal’s jurisdiction.

The Hague Court of Appeal has overturned this judgment of the District Court in The Hague, ruling that the Tribunal does have jurisdiction under the ECT. When the Russian Federation signed the ECT it undertook to provisionally apply the treaty unless it was incompatible with Russian law. The Court of Appeal is of the opinion that the ECT is not incompatible with Russian law. The Russian Federation had also submitted several other arguments why the arbitration award should be overturned, which the Court of Appeal has also dismissed.

The outcome is that the arbitration award of 18 July 2014 has been reinstated. The Russian Federation may lodge a cassation appeal with the Supreme Court of the Netherlands against today’s ruling of the Court of Appeal.