Quite a lot has happened since my last post about Yukos investors’ attempts to enforce a $50 billion Energy Charter Treaty (ECT) award from the Permanent Court of Arbitration in The Hague, Netherlands. With that in mind, this post will cover some of the more notable developments that highlight the major fault lines in the law of recognition and enforcement of foreign awards/judgments.
1. Local district court in the Netherlands sets the arbitral award aside, leaving enforcement actions in limbo
In April 2016, the Hague District Court agreed with Russia’s lawyers and ruled that the country was not bound by ECT Article 26’s unconditional offer to arbitrate disputes. Therefore, Russia had never consented to the arbitration that took place before the Permanent Court of Arbitration and the panel of arbiters was not competent to hear the case. The reasoning of the court focused on whether ECT Article 45’s carveout from provisional application applied to the treaty as a whole, or if the carveout could be applied piecemeal, provision by provision. In general, ECT Article 45 provides that the treaty is to be applied provisionally after a nation signs it, even before the agreement is ratified domestically. Paragraph 1 of Article 45, however, contains a carveout from such provisional application where doing so would be “inconsistent with [a signatory nation’s] constitution, laws or regulations.” Russia signed but never ratified the ECT, so that clause is especially important to the Yukos case.
In the underlying arbitration, the tribunal ruled that the carveout in Article 45(1) could only be applied if provisional application of the treaty would be – as a whole – inconsistent with Russia’s constitution, laws or regulations. Guided by this “all or nothing” approach, the tribunal found that provisional application of the ECT was not inconsistent with Russian law generally.
In the set aside proceeding before the Hague District Court, however, the court disagreed with the tribunal, finding that the Article 45(1) carveout must be applied provision by provision. Following such view, the court then looked at ECT Article 26 to see if the unconditional offer to arbitrate disputes was consistent with Russian law. Ultimately, because Russian law did not provide for arbitration as set out by Article 26, the Hague court determined that the provisional application of Article 26 to be inconsistent with Russian law. As a result, the tribunal never had jurisdiction and the $50 billion award was nullified.
Of course, the Yukos shareholders are appealing the decision before the Hague Court of Appeal. Even though the set aside ruling technically only has force in the seat of the arbitration (the Netherlands), the ruling has, nonetheless, thrown numerous enforcement actions winding their way through courts around the world into some doubt (but, as detailed below, it really depends on each nation’s view on recognition and enforcement of set-aside foreign awards).
2. DC District Court stays enforcement proceedings until Yukos appeal of Hague set aside
On September 30, 2016, the US District Court for the District of Columbia granted the Yukos shareholders’ request for a stay of enforcement proceedings. In issuing the stay, the court rejected Russia’s argument that the court must first determine whether it has subject matter jurisdiction before addressing any potential stay of the proceedings. More importantly, however, the DC court went on to decide that the persuasive value of the Dutch ruling was such that it made sense to wait until all appeals are finalized before progressing in the US.
Somewhat counterintuitively, for the purposes of the motion to stay proceedings, the parties seemed to argue the opposite of what one would expect as concerns the importance of the Hague District Court set aside. Most glaringly, Russia argued that no stay was warranted because the Dutch set aside ruling has no bearing on the DC District Court’s analysis. The irony of such an argument was not lost on Judge Beryl A. Howell, who noted, “[T]he Russian Federation’s current position regarding the virtual irrelevance of the Dutch proceedings is difficult to reconcile with its arguments for dismissing the action for lack of subject matter jurisdiction and declining to confirm the Awards.” Hulley Enterprises v. Russian Federation, No. 14-1996, at *15 (D. D.C. Sept. 30, 2016) (order granting motion to stay).
Ultimately, the court sided with the Yukos shareholders, finding that a stay was warranted until the final disposition of the set aside appeals. Specifically, the court cited TermoRio v. Electranta, 487 F.3d 937 (D.C. Cir. 2007), for the proposition that “when an ‘arbitration award was lawfully nullified by the country in which the award was made,’ parties seeking to enforce the award ‘have no cause of action in the United States to seek enforcement of the award under the FAA or the New York Convention’” Hulley Enterprises, No. 14-1996, at *17 (quoting TermoRio, 487 F.3d at 930). Further, the court cited New York Convention Article V(1)(e), which states that recognition and enforcement of an arbitral award “may be refused” if the award is set aside by courts of the seat of arbitration. Hulley Enterprises, No. 14-1996, at *19–20.
While the stay is good news for Yukos shareholders for the time being, if they fail in their appeal to overturn the set aside in the Netherlands, the persuasive value the DC court appears ready to assign to the Dutch proceedings could prove fatal.
3. Paris court allows enforcement actions to go ahead despite Hague set aside
Evidencing a substantially different view on the effect of set aside decisions in the seat of arbitration, a Paris court recently (early November 2016) ruled that the decision of the Hague District Court did not affect enforcement actions pending before it. Crucially, the Paris Tribunal de Grande Instance reportedly declined to lift several attachments against Russian assets in France. The decision wasn’t all that surprising though, because France has a long history of viewing seat-of-arbitration set aside rulings as entirely separate from enforcement proceedings within its borders (see the Norsolor, Hilmarton and Chromalloy cases).