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Hague District Court has quashed six arbitration awards

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Today April 20, 2016 the Hague District Court made public through a press release that it has quashed six arbitration awards (three interim awards and three final awards) of the Permanent Court of Arbitration in The Hague.
In the final awards, the Russian Federation was ordered to pay damages amounting to 50 billion US dollars to Yukos Universal Limited, Hulley Enterprises Limited and Veteran Petroleum Limited. The three parties had been shareholders of the bankrupted Russian oil company Yukos. With the arbitration awards quashed, the Russian Federation is no longer liable for paying compensation to these parties.

The cases concerned international investment arbitration proceedings brought before the Permanent Court of Arbitration under the Energy Charter Treaty (ECT). Since the arbitrations were conducted in The Hague, the District Court of The Hague is competent to rule on the requested reversal of the arbitration awards.

Explanation of ruling: Permanent Court of Arbitration not competent

The Hague District Court has reversed the awards of the international arbitrators on the grounds that they lacked jurisdiction to arbitrate the cases concerning international investment arbitrations based on the ECT. The Hague District Court included in its assessment the fact that the Russian Federation had signed the ECT, but never ratified it.

The Russian parliament had rejected the legislative proposal for the ratification of the ECT. Against this backdrop, four provisions of the ECT play an important role.

  • Article 26 covers the settlement of disputes between a foreign investor and a contracting party to the ECT.
  • Article 39 stipulates that the treaty must be ratified by the signatories.
  • Article 44 specifies that the treaty’s entry into force is conditional on the ratification by a certain number of states.
  • Article 45 (in the Dutch translation) determines that each signatory agrees to the provisional application pending its entry into force for said signatory, “to the extent that such provisional application is not inconsistent with its constitution, laws or regulations”.

The court finds that the wording of Article 45 necessitates an examination whether or not the provision in each separate article of the ECT is contrary to the constitution or other legislation of the state involved. This interpretation of Article 45 is different from the reading of the arbitrators.

Arbitration option contrary to Russian law

The court concluded that the option of arbitration under Article 26 ECT for disputes such as the ones in these proceedings are contrary to written Russian law. In the arbitral proceedings, the investors mainly opposed the consequences of the tax measures the Russian state had imposed on Yukos. They believed that these measures essentially resulted in an expropriation of their shares without compensation.

The court finds that this dispute warrants a judicial assessment of public-law actions. The court’s examination of Russian legislation resulted in the finding that a legal provision is required for subjecting the Russian state to arbitration in such disputes; one which requires the approval (ratification) of the Russian parliament. Such provision does not exist, neither in a general sense nor in a specific sense for this case, as the Russian legislature has not ratified the ECT.

This means that the arbitral clause of Article 26 ECT does not apply through the provisional application of the treaty. The court finds that the arbitrators did not have jurisdiction to take cognizance of this case and were therefore wrong to declare themselves competent.

Our comment

In an historic arbitral award rendered on July 18, 2014, an Arbitral Tribunal sitting in The Hague under the auspices of the Permanent Court of Arbitration (PCA) held unanimously that the Russian Federation breached its international obligations under the Energy Charter Treaty (ECT) by destroying Yukos Oil Company and appropriating its assets. The Tribunal ordered the Russian Federation to pay damages in excess of USD 50 billion. Today, the relevant arbitral awards are quased.

Under the applicable law, a court may indeed quash an aribitral award (Article 1065 Code of Civil Procedure). The law on arbitration has been amended effective January 1, 2015. As the arbitral procedure has been initiated beforehand, the old law applies to this arbitration and the options to quash arbitral awards. The procedural aspects are also governed by the old law. This means that the decision is subject to appeal before the Court of Appeal in The Hague. Thereafter, one of the parties could bring the matter before the Supreme Court of the Netherlands.

Given the amount of the claim we must anticipate that an appeal will be most probably be lodged. So this is not the end of the story; to be continued.

More information

For further information, please feel free to contact our Arbitration contact person. Your questions are always welcome.

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