An Arbitral Tribunal Awards Yukos Shareholders 50 Billion USD in Damages Against the Russian Federation
By Daniel Friedrich Behn, Postdoctoral Fellow, PluriCourts
This is a blog post detailing some of the more important aspects of the Yukos shareholders arbitration and the challenges facing the winning party in enforcing their award against the Russian state in the coming years.
On July 18, 2014, but not released publically until July 28, 2014, an arbitral tribunal seated in the Hague handed down a final award (of over 600 pages) granting Yukos shareholders a victory of monumental proportions. In a legal battle that has spanned close to a decade, Yukos shareholders were awarded in excess of 50 billion USD in compensation against the Russian Federation. While this case is likely to top many lists for the largest monetary judgment ever rendered, it is far and away the largest arbitral award based on an investment treaty to date.
Initiated in 2005 by three subsidiaries of Cyprus-based GML (an entity owning a majority stake in Yukos) against the Russian Federation, this case was brought under the dispute settlement mechanism of the Energy Charter Treaty (ECT) according to the UNCITRAL arbitration rules and administered by the Permanent Court of Arbitration (PCA) in the Hague. These three subsidiaries, Veteran Petroleum, Hulley Enterprises, and Yukos Universal, initially sought compensation of 114 billion USD in damages for losses resulting from Russia’s alleged systematic dismantling of the now defunct oil giant Yukos in the early 2000s.
This arbitral claim was based on Russia’s violation of the substantive provisions in the ECT and concerned a series of abusive and discriminatory tax assessments by the Russian state against Yukos, which led to its bankruptcy and the auctioning off of its assets to the eventual benefit of state-owned enterprises in Russia including Rosneft and Gazprom.
In 2009, the arbitral tribunal issued an interim award on jurisdiction and admissibility upholding jurisdiction over the claim. Russia argued, inter alia, that the tribunal did not have jurisdiction over these claims because Russia had signed but not ratified the ECT and therefore the treaty never entered into force. In the alternative, Russia also argued that the ‘denial of benefits’ clause in the ECT, the tax provision carve-out in the ECT, and the ‘unclean hands’ doctrine under international law barred the claim. While acknowledging that the ECT had not been ratified by Russia, the tribunal upheld jurisdiction based on the provisional application provisions of the ECT that the tribunal determined as binding Russia to the ECT’s provisions prior to ratification. The interim award also addressed Russia’s objection to jurisdiction based on the denial of benefits clause, but ultimately dismissed the objection on the grounds that this clause only ‘reserves the right’ to deny benefits and Russia never did this in regard to the claimants in this case.
The objection to jurisdiction and admissibility based on the tax provision carve-out in the ECT and the unclean hands doctrine were left to determination at the merits stage, but were also eventually dismissed by the tribunal in its final award.
In its final award, the tribunal held that Russia had violated article 13(1) of the ECT. This article states that a host state shall not expropriate the investment of an investor except where such an expropriation is: “(a) for a purpose which is in the public interest; (b) not discriminatory; (c) carried out under due process of law; and (d) accompanied by the payment of prompt, adequate and effective compensation.” In the operative part of its decision on whether Russia had breached the four component parts of an expropriation claim, the tribunals stated:
"1580. Respondent has not explicitly expropriated Yukos or the holdings of its shareholders, but the measures that Respondent has taken in respect of Yukos, set forth in detail in Part VIII, in the view of the Tribunal have had an effect “equivalent to nationalization or expropriation”. The four conditions specified in Article 13 (1) of the ECT do not qualify that conclusion.
1581. As to condition (a), whether the destruction of Russia’s leading oil company and largest taxpayer was in the public interest is profoundly questionable. It was in the interest of the largest State-owned oil company, Rosneft, which took over the principal assets of Yukos virtually cost-free, but that is not the same as saying that it was in the public interest of the economy, polity and population of the Russian Federation.
1582. As to condition (b), the treatment of Yukos and the appropriation of its assets by Rosneft (and to a much lesser extent, another State-owned corporation, Gazprom), when compared to the treatment of other Russian oil companies that also took advantage of investments in low-tax jurisdictions, may well have been discriminatory, a question that was inconclusively argued between the Parties and need not be and has not been decided by this Tribunal.
1583. As to condition (c), Yukos was subjected to processes of law, but the Tribunal does not accept that the effective expropriation of Yukos was “carried out under due process of law” for multiple reasons set out above, notably in Section VIII.C.3. The harsh treatment accorded to Messrs. Khodorkovsky and Lebedev remotely jailed and caged in court, the mistreatment of counsel of Yukos and the difficulties counsel encountered in reading the record and conferring with Messrs. Khodorkovsky and Lebedev, the very pace of the legal proceedings, do not comport with the due process of law. Rather the Russian court proceedings, and most egregiously, the second trial and second sentencing of Messrs. Khodorkovsky and Lebedev on the creative legal theory of their theft of Yukos’ oil production, indicate that Russian courts bent to the will of Russian executive authorities to bankrupt Yukos, assign its assets to a State-controlled company, and incarcerate a man who gave signs of becoming a political competitor.
1584. As to condition (d), what in any event is incontestable is Respondent’s failure to meet its prescription, because the effective expropriation of Yukos was not “accompanied by the payment of prompt, adequate and effective compensation”, or, in point of fact, any compensation whatsoever. In order for the Russian Federation to be found in breach of its treaty obligations under Article 13 of the ECT, the foregoing violations of the conditions of Article 13 more than suffice.
1585. It follows that Respondent stands in breach of its treaty obligations under Article 13 of the ECT. Accordingly Respondent’s liability under international law for breach of treaty is established. The Tribunal reaches this conclusion based on its consideration of the totality of the extensive evidence before it. Having found Respondent liable under international law for breach of Article 13 of the ECT, the Tribunal does not need to consider whether Respondent’s actions are also in breach of Article 10 of the Treaty."
Based on this breach and in light of evidence on the valuation of damages, the tribunal awarded Veteran Petroleum 8.2 billion USD, Hulley Enterprises 40.0 billion USD, and Yukos Universal 1.8 billion USD. Cumulatively, the awards amounted to 50 billion USD in damages. However, this amount was reduced from approximately 68 billion USD. The tribunal reduced the final amount awarded by 25 percent on the basis of contributory fault.
As to the costs of the tribunal and the legal costs of the parties, the tribunal shifted a significant portion of the winning claimant’s costs onto the respondent state. The cost of the tribunal totaled 11.34 million USD. The tribunal ordered Russia to pay its half of the tribunal’s costs as well as the claimant’s half. As to legal costs, the claimants spent over 80 million USD in this litigation, while the respondent spent approximately 27 million USD. The tribunal ordered that the respondent pay 60 million USD (approximately 75 percent) of the claimant’s legal costs.
What comes next? Russia could comply with the award and pay on it within 180 days as is stipulated in the award. However, this is not going to happen. Russia has been quick to criticize the award as politically motivated and biased and promised to ‘appeal’ the decision. However, in terms of judicial review options, Russia may be surprised to find that its options are fairly constrained and that no full appellate review process will be available to them.
As an UNCITRAL arbitration, the award rendered in this case will be capable of very limited review in the domestic courts of the seat of the arbitration according to the obligations that state signatories have made under the New York Convention. This convention on the recognition and enforcement of foreign arbitral awards allows the losing party to seek to have the arbitral award set-aside (or refused recognition) in the Netherlands (the arbitral seat in this case). While having an award successfully set-aside would only bar its enforcement in the Netherlands, it may also play a significant role in determining whether the award is enforced by the winning claimants in other jurisdictions.
The winning claimants, also under the New York Convention, can seek to have the arbitral award enforced in jurisdictions where the losing party has attachable assets. In cases where the state is the losing party, enforcement in that state is usually considered to be a pointless exercise in futility. An enforcement proceeding in Russia is unlikely to occur. A further challenge in enforcing a monetary award against a state is that certain assets of the state are likely to be diplomatically immune from attachment in many jurisdictions. So, while the winning claimants can seek enforcement in any state that is a party to the New York Convention and where Russia has assets, the assets must be commercial in nature.
Considering that the claimants in this case have spent ten years and over 80 million USD in bringing this claim, they will surely not view this as a pyrrhic victory. They are likely to spend the coming years vigorously pursuing the attachment of Russian assets throughout the world.
The final awards are available for download at the website for the PCA: Hulley Enterprises Limited (Cyprus) v. The Russian Federation; Yukos Universal Limited (Isle of Man) v. The Russian Federation; Veteran Petroleum Limited (Cyprus) v. The Russian Federation