On 5 November 2021, the Dutch Supreme Court partly upheld an appeal filed by the Russian Federation (“Russia”) against a previous decision of The Hague Court of Appeal to reinstate three landmark arbitral awards ordering Russia to pay approximately USD 50 billion in total in damages to three former shareholders of Yukos Oil Company (“Yukos”). The decision will be of intense interest to investors with pre-2009 investments in the Russian energy sector with potential claims against Russia (whether arising pre or post 2009) on the basis of the Energy Charter Treaty (the “ECT”), as well as investors with energy-related investments in Belarus, the one State which continues to apply the ECT provisionally.
The Dutch Supreme Court annulled the Court of Appeal’s decision and remanded the case to the Amsterdam Court of Appeal on the basis that The Hague Court of Appeal had erred in not allowing Russia to raise allegations of fraud as a ground for annulment.
However, the Supreme Court dismissed all other grounds of appeal proffered by Russia. Those concerned, among other issues, the provisional application of the ECT, the validity of U-turn corporate structures under the ECT and whether, to qualify for protection under the ECT, investments must make a net economic contribution to the host State.
The decision of the Dutch Supreme Court is available here (in Dutch). A short press release by the Dutch judiciary on the decision can be found here (in English). See also Volterra Fietta’s previous client alerts on the Yukos litigation before the Dutch courts here and here.
Yukos used to be one of the largest oil and gas companies in the world. In 2014, in three parallel arbitral awards, an UNCITRAL arbitral tribunal seated in The Hague held that Russia, by forcing Yukos into bankruptcy, had expropriated the Claimants’ interests in Yukos in violation of the ECT. It therefore ordered Russia to pay an unprecedented USD 50 billion in compensation (the “2014 Awards”).
Notably, Russia had signed but never ratified the ECT. Therefore, the tribunal’s finding that it had jurisdiction over Russia, embodied in interim awards on jurisdiction and admissibility (the “2009 Interim Awards”), was necessarily based on provisional application under Article 45 of the ECT.
Russia then challenged the tribunal’s finding that it had jurisdiction pursuant to Article 45(1) of the ECT, together with certain other jurisdictional findings, before the Dutch courts. In 2014, Russia initiated proceedings before the District Court of The Hague to set aside the 2009 Interim Awards and the 2014 Awards, including on the ground that the tribunal was not entitled to assert jurisdiction because Russia had never ratified the ECT.
In 2016, the District Court of The Hague agreed with Russia on this issue, setting aside the 2009 Interim Awards and the 2014 Awards on the basis that the tribunal did not have jurisdiction under the ECT’s provisional application clause. The former Yukos shareholders appealed that decision to The Hague Court of Appeal, and in February 2020, all three arbitral awards were reinstated. Russia then filed an appeal in cassation before the Dutch Supreme Court on a number of grounds. In April 2021, Supreme Court Advocate General, Paul Vlas, opined that the appeal should be denied.
The Dutch Supreme Court is a court of cassation. As such, it only determines whether the relevant Dutch Appeal Court interpreted and applied the law correctly.
Russia succeeded on one ground of appeal
Overturning the finding of The Hague Court of Appeal on this point, the Supreme Court ruled that, as a matter of Dutch procedural law, fraud can be invoked as a basis to annul an arbitral award. As The Hague Court of Appeal had failed to consider this issue correctly, the Supreme Court remanded Russia’s appeal to the Amsterdam Court of Appeal so that this point could be considered afresh.
The former Yukos shareholders prevailed on other key issues
The Supreme Court decided most of the other key issues in favour of the former Yukos shareholders. In summary:
1. The ECT was provisionally applicable to Russia. Under Article 45(1) of the ECT, non-ratifying signatories such as Russia agree to apply the ECT provisionally to the extent that such provisional application is not inconsistent with their constitution, laws or regulations. In a nutshell, The Hague District Court had held that this meant that an obligation to apply the ECT provisionally could only exist where a signatory’s domestic law itself contained provisions analogous to those of the ECT. The Hague Court of Appeal rejected this view and, like the arbitral tribunal, held that a signatory could only resist provisional application pursuant to Article 45(1) of the ECT where the signatory’s domestic law excluded the provisional application of treaties per se or at least of the relevant category of treaty provision. The Supreme Court upheld this interpretation of Article 45(1) of the ECT.
Volterra Fietta’s client alert on The Hague Court of Appeal’s decision, available here, analyses that court’s interpretation of Article 45(1) of the ECT in more detail.
2. The ECT protects investments in a signatory State even where the ultimate beneficial owners are nationals of that State. The Supreme Court agreed with the Court of Appeal’s finding that neither the ECT nor customary international law prohibited foreign entities from making claims against a host State simply because some or all of their ultimate beneficial owners were nationals of that State (so-called U-turn corporate structuring). The facts that a number of parties to the ECT have subsequently agreed investment treaties expressly precluding U-turn corporate structuring, and have proposed that the ECT be reformed in this sense, did not affect this.
3. The ECT does not require that an investment, in order to be protected, represent an economic contribution to the host State. The Supreme Court held that the attribution of specific meanings to the terms “investment” and “investor” by Articles 1(6) and 1(7) of the ECT excluded the application of the Salini criteria, which require that, in order to qualify for protection under the ICSID Convention, an investment represent a net economic contribution to the host State.
Implications of the Supreme Court decision
The Amsterdam Court of Appeal will now analyse Russia’s fraud allegations in order to ascertain whether they constitute grounds to annul the 2009 Interim Awards and the 2014 Awards.
The recent Dutch Supreme Court decision is final in relation to the other grounds presented by Russia, including the issue of provisional application of the ECT.
The Dutch Supreme Court decision is authoritative with respect to future non-ICSID ECT arbitrations seated in the Netherlands (where Dutch courts are exclusively competent to set aside any award). It may also have persuasive authority with respect to ICSID ECT arbitrations and to non-ICSID ECT arbitrations seated in other countries. The decision will therefore likely increase the appetite of investors, with pre-2009 investments in the Russian energy sector and potential claims against Russia (whether arising pre or post 2009), as well as investors with energy-related investments in Belarus – which still applies the ECT provisionally – to bring claims on the basis of the ECT with increased confidence that the key issues referred to above, including provisional application, will not derail their claims.
For further information, please contact Graham Coop (Graham.Coop@volterrafietta.com), Robert Volterra (Robert.Volterra@volterrafietta.com) or Florentine Vos (Florentine.Vos@volterrafietta.com).