Summary

23 april 2021 (Press release) - Advocate General Vlas today advised the Supreme Court that the 2014 arbitral awards ordering the Russian Federation to pay approximately USD 50 billion in compensation for failing to protect the investments of three major shareholders in Yukos Oil Company can be upheld.

The case

Yukos Oil Company was one of the biggest oil and gas companies in the Russian Federation. In the 1990s it was privatised. In the period from 2003 to 2006 the Russian Federation imposed several substantial tax demands on Yukos and, in that connection, subsequently auctioned off one of Yukos' main production companies. Yukos was eventually declared bankrupt in 2006.

Three major shareholders (Veteran Petroleum Ltd, Yukos Universal Ltd and Hulley Enterprises Ltd) then initiated arbitration proceedings against the Russian Federation. Arbitration is a form of private dispute resolution in which independent arbitrators rule on a case. The arbitration proceedings were held in The Hague and lasted about 10 years. In its award of 18 July 2014, the arbitration tribunal ordered the Russian Federation to pay the three shareholders a total of USD 50 billion in compensation. Because the arbitration proceedings had been held in the Netherlands, the Russian Federation then applied to a Dutch district court to set aside the award. The court found in favour of the Russian Federation but, on appeal, the appeal court ruled that the district court's judgment was incorrect. This meant that the arbitral award again took effect. The Russian Federation then lodged an appeal in cassation with the Supreme Court.

Cassation proceedings

The Russian Federation wants the Supreme Court to quash the appeal court's judgment and has submitted a large number of grounds to substantiate its appeal in cassation.

In preliminary proceedings before the Supreme Court the Russian Federation applied for suspension of the enforcement of the arbitral awards. The Supreme Court dismissed the application for suspension on 4 December 2020.

Advocate General's advisory opinion

Many of the grounds for the appeal in cassation concern the manner in which the appeal court interpreted the Energy Charter Treaty (ECT). The arbitration tribunal based its authority to rule on the shareholders' claim on article 26 of the ECT. The ECT provides that a dispute between a Contracting Party and a foreign investor can be resolved by means of arbitration. The Russian Federation signed the treaty but never ratified it. There are a limited number of grounds on which arbitral awards can be set aside. One such ground is that the arbitral tribunal did not have the authority to rule on the case. The appeal court found that the arbitration tribunal derived its authority from the ECT. This treaty is subject to provisional application. Upon signing the ECT, the Russian Federation undertook the obligation to apply it provisionally to the extent that this would not be inconsistent with Russian law. The appeal court found there to be no such inconsistency. In the Advocate General's opinion, the many grounds for cassation concerning the reasons given for the standard applicable to provisional application and concerning an alleged misunderstanding of international state practice are also unfounded. The same applies to the grounds for cassation concerning the concepts `investment' and `investor' within the meaning of the ECT and those concerning an alleged misunderstanding of the legality requirement in relation to investments. In the Advocate General's opinion, the appeal court applied the concepts in question correctly and the ECT does not stipulate a legality requirement; there is no general principle of international investment law that requires an arbitration tribunal to declare that it does not have authority in the case of an illegal investment and under the ECT illegality can (at most) play a role in the arbitration tribunal's assessment of the merits of the case. The grounds for appeal in cassation also complain about the (alleged) role of the arbitration tribunal's secretary and about the reasons given for the arbitral awards. The Russian Federation argues that the secretary played the de facto role of fourth arbiter. In its judgment the appeal court ruled that the arbitration tribunal ought to have informed the parties about the secretary's role but that this failure was not serious enough to warrant setting aside the arbitral awards. In the Advocate General's opinion, this ruling correctly reflects the law. The Advocate General also believes that sufficient reasons were given for the arbitral awards. In the Advocate General's opinion, all other grounds for appeal in cassation are also unfounded.

The Russian Federation asked the Supreme Court to refer questions on the interpretation of the ECT, in particular on provisional application, to the Court of Justice of the European Union for a preliminary ruling. In the Advocate General's opinion, this will not be necessary in order to dispose of the grounds for appeal in cassation.

The Advocate General recommends that the Supreme Court dismiss the appeal in cassation, thereby upholding the appeal court's judgment.

Supreme Court judgment

It is not yet known when the Supreme Court will rule.

The Advocate General's advisory opinion is an independent recommendation to the Supreme Court, which is free to decide whether or not to follow it. The Advocate General is a member of the Procurator General's Office at the Supreme Court, which is an autonomous and independent part of the judiciary. The Office is not part of the Public Prosecution Service.