Client Alerts

European Court of Human Rights orders Russia to pay record sum to Yukos shareholders

Volterra Fietta Client Alert
8 August 2014

Summary

On 31 July 2014, the European Court of Human Rights (the “ECtHR” or the “Court“) rendered its decision in the proceedings instituted by OAO Neftyanaya Kompaniya Yukos (“Yukos“) on behalf of Yukos’s former shareholders against the Russian Federation, ordering the latter to pay the record sum of €1.86 billion in damages.
The ECtHR judgment comes only thirteen days after an arbitral tribunal awarded the former Yukos majority shareholders approximately US$50 billion in compensation for Russia’s breaches of the provisions of the Energy Charter Treaty.

The 2011 Judgment

In 2011, the ECtHR found that Russia had committed two violations of the 1950 Convention for the Protection of Human Rights and Fundamental Freedoms (the “ECHR“).

First, the Court found that Russia had violated Yukos’s right to a fair trial under Article 6 of the ECHR on the basis that it had undertaken unduly hasty tax proceedings against Yukos in 2000 and 2001. These had resulted in the retroactive imposition of tax penalties as well as a 7% enforcement fee.

Second, the Court found that the Russian authorities had breached the principle of property protection, which provides that the government may only deprive individuals or companies of their possessions if this is in the public interest and subject to the conditions provided for by law and the general principles of international law.1 In particular, the authorities had failed to strike a fair balance between the aim of the tax enforcement proceedings and the measures adopted by (i) being inflexible regarding the pace of the proceedings, (ii) obliging Yukos to pay excessive fees and (iii) failing to take explicit account of all of the relevant factors.

The 2014 Judgment

In last week’s judgment, the ECtHR addressed Yukos’s former shareholders’ request for compensation for the violations found in the 2011 Judgment. This judgment addresses the quantification of damages payable to Yukos’s former shareholders as compensation for Russia’s breach.
The ECtHR did not award damages for Russia’s breach of Article 6 of the ECHR (the violation of the right to a fair trial on the basis of the hasty tax proceedings) as it found that there was “insufficient proof of a causal link between the violation found and the pecuniary damage allegedly sustained by Yukos”.2

However, the Court awarded compensation for the second breach, the retroactive imposition of penalties for the years 2000 and 2001 and the corresponding 7% enforcement fee. The Court concluded that the sums paid by Yukos during the tax enforcement proceedings led to a clear pecuniary loss that warranted compensation.

Having heard expert evidence from both Parties, the Court assessed the amount of pecuniary damage suffered by Yukos at €1,866,104,634. Yukos had claimed €37,981,000,000. When calculating the amount of damages, the Court attempted to restore the injured Party to its position before the injury was sustained, which resulted in the lower, though still significant, sum.

Payment of damages

Yukos had requested that the damages be paid to a foundation (the Yukos International Foundation) set up to distribute funds to Yukos shareholders after the payment of creditors. The Court rejected this proposal because there were concerns as to the identity of the beneficiaries. Instead, it found that the awarded amount should be paid by Russia directly to Yukos’s shareholders and their legal successors and heirs, in proportion to their nominal participation in the company’s stock at the time of the company’s liquidation. The Court also decided that Yukos was entitled to the reimbursement of an additional €300,000 for legal fees and other costs incurred during the Court proceedings.

Commentary

While the award is significantly less than the €38 billion sought by Yukos, it remains the largest compensation ever awarded by the ECtHR. The ECtHR’s previous damages record of €90 million was awarded to Cyprus earlier this year as compensation for Turkey’s 1974 military intervention.3

Despite failing to recognise any link between the breach of Article 6 of the ECHR (the right to a fair trial) and the pecuniary damages sustained by Yukos, the Court nonetheless awarded the company significant damages for Russia’s misconduct in relation to the retroactive penalties and tax enforcement fee.

This decision by the ECtHR comes only days after an arbitral tribunal constituted under the auspices of the Energy Charter Treaty and pursuant to the UNCITRAL Arbitration Rules awarded Yukos’s majority shareholders approximately $US50 billion for Russia’s breaches of the provisions of the Energy Charter Treaty.

The Court has ordered Russia to work with the Committee of Ministers of the Council of Europe to produce within six months a comprehensive plan, including a binding time frame, for the satisfaction of this award.
The Court’s judgment illustrates the potential relevance of human rights law to situations falling outside the traditional parameters of human rights abuses, including to high-value businesses such as Yukos.


(1) ECHR, Protocol 1, Article 1.
(2) Yukos v. Russia, ECtHR, Application No. 14902/04, 31 July 2014, paragraph 19
(3) Cyprus v. Turkey, ECtHR, Application No. 25781/94, 12 May 2014.