On 20 April 2016 a Dutch court made an order quashing certain arbitration awards which had been made by an arbitral tribunal seated in the Hague. Why should this be of interest?
It might be that anything is interesting if there is enough money involved. The arbitral awards in question are (of course) the record-breaking awards made pursuant to the Energy Charter Treaty in the long-running dispute between Russia and foreign investors in the "Yukos Oil Company" ("Yukos"), whom the tribunal awarded more than 50 billion US dollars in damages.
The value of the awards aside, the decision is interesting insofar as it serves to highlight some elements of the Netherlands' arbitration law which will surprise those who are familiar with the broadly pro-arbitration regime which applies in England. Questions of how the English court might approach the same issues are also not a mere hypothetical. The shareholders have reportedly taken steps to enforce the Yukos awards in England, and other awards made under the ECT may also come to be considered by the English courts.
The Energy Charter Treaty
In the early 1990s the end of the Cold War raised the prospect of increased trade with and investment in the former Soviet Union by the West. The former Soviet Union had enormous, but underexploited energy resources, due to a lack of investment and a lack of access to the latest oil & gas technology (supply of which to Russia had previously been embargoed).
The Netherlands' then Prime Minister, Ruud Lubbers, launched an initiative to establish an international framework for energy trade, transit and investment. The first step, in 1991, was an international declaration called the "Energy Charter", signed in the Hague. The signatories, including Russia, agreed that they were: "determined to create a climate favourable to the ... flow of investments ..." affirming "it is important for the signatory states to negotiate and ratify legally binding agreements on promotion and protection of investments which ensure a high level of legal security ...".
The signatories duly negotiated a "legally binding agreement" known as the "Energy Charter Treaty" ("ECT"). This was opened for signature in Portugal in December 1994.
Article 10 of the ECT obliges "Contracting Parties" to treat investments of foreign investors fairly and equitably and refrain from taking discriminatory measures which hamper the use of those investments. Article 13 requires that such investments not be nationalised, expropriated or subject to measures with a similar effect, except "for a purpose which is in the public interest; ... not discriminatory; ... carried under due process of law; and ... accompanied by the payment of prompt and adequate compensation". Article 21 provides that this Article 13 "shall apply to taxes".
Article 26 of the ECT concerns disputes between a Contracting Party and an investor of another Contracting Party. By Article 26, each Contracting Party "gives its unconditional consent to the submission of a dispute to international arbitration". The investor is given the option of submitting the dispute either to ICSID, to a tribunal established under the UNCITRAL rules, or to an arbitral proceeding under the Arbitration Institute of the Stockholm Chamber of Commerce.
Background to the arbitration
Yukos was a Russian company and a major oil producer. In 2003 the Russian tax authorities took the position that Yukos had been involved in large scale tax evasion, imposing substantial tax assessments and fines. Enforcement of the authorities' claims resulted in the sale of Yukos assets and, in August 2006, in Yukos's bankruptcy.
Three Yukos shareholders took the position that, by doing this, the Russian Federation had breached the Energy Charter Treaty ("ECT"), which contained a provision for disputes between investors to be resolved by way of arbitration. Each of the shareholders therefore made a request for arbitration under the UNCITRAL Rules. The same three member tribunal was appointed in each of the three arbitrations. The parties agreed on the Hague as the legal seat. From the outset Russia objected to the Tribunal's jurisdiction. The Tribunal determined that it had jurisdiction. The Tribunal went on to find that there had been a breach by Russia of Article 10 (the prohibition on expropriation) and awarded the shareholders nearly 50 billion US dollars.
On 10 November 2014, Russia commenced proceedings in the Hague, seeking "reversal" of the award on six grounds under Article 1065 of the Dutch Civil Code. On 20 April 2016 the Dutch court gave a 63 page judgment quashing the Final Awards.
Time limits for challenges in Dutch law
Dutch law evidently allowed Russia to challenge the Final Awards almost four months after they were made. This can be compared to English law, where the time limit for bringing a challenge is just 28 days from the date of the award.
It turns out that Dutch law imposes an obligation on arbitral tribunals to "ensure that without delay ... the original of the ... award is deposited with the Registry of the District Court within whose district the place of arbitration is located" (Dutch Civil Code Article 1058, English translation from dutchcivillaw.com). The Dutch Civil Code then provides (Article 1061 and 1063):
"Enforcement in the Netherlands of [an arbitral award] can take place only after the Provisional Relief Judge of the District Court with whose Registry the original of the award shall be deposited by virtue of Article 1058(1), has, in pursuance of a request of one of the parties, granted permission for enforcement ..."
"An application for a reversal may be made as soon as the award has acquired the force of res judicata. The right to make an application shall be extinguished three months after the date of deposit of the award with the Registry of the District Court. However, if the award together with leave for enforcement is officially served on the other party, that party may make an application for a reversal within three months after the said service, irrespective of whether the period of three months mentioned in the preceding sentence has lapsed.".
Presumably, the reason Russia was able to raise challenges almost four months after the date of the Final Awards was either because the Tribunal delayed depositing the original of the award or the shareholders had sought leave for enforcement against the shareholders in the Netherlands, thus causing the three month time period for challenging the award to start again.
The Dutch approach seems surprising, and not particularly arbitration friendly. Why should a party who has allowed the time limit for challenging an award to lapse be given a second chance to bring a challenge simply by reason of the fact that another party has sought to enforce it?
Undecided issues
In its judgment, the Dutch court only discussed the first of the six grounds relied on by Russia: "absence of a valid arbitration agreement". The court held that there had been no valid arbitration agreement, and so made an order quashing the Final Awards.
The other grounds relied on by Russia included (for example) an allegation that the shareholders were simply "letterbox companies", through which Russian oligarchs had made "U-turn investments" back into Russia - they were not foreign investors of the kind the ECT was intended to protect. Russia also alleged that the award had been written, or largely written, by the tribunal's assistant, and not by the tribunal itself.
Unfortunately, the Dutch court did not discuss these (arguably more interesting) grounds of appeal. This approach seems surprising given that the decision is, inevitably, going to be the subject of an appeal. Suppose the appellate court finds there was an arbitration agreement - the appellate court then has to consider the other grounds without the assistance of any findings from the first instance judge - including on factual issues (like: who wrote the award?). Presumably, all this will have to be (re)heard on the appeal. This can be contrasted with the approach of the English courts, which will usually set out what their findings would have been even on issues which do not strictly require to be decided.
Provisional application
On 17 December 1994 OD Dalyov (then Russia's prime minister) signed the ECT on behalf of the Russian Federation. The Russian Federation was, therefore, a "signatory" to the ECT. The ECT provided:
"Article 39. Ratification, acceptance or approval
This Treaty shall be subject to ratification, acceptance or approval by signatories. Instruments of ratification, acceptance or approval shall be deposited with the Depositary."
"ARTICLE 44
ENTRY INTO FORCE
(1) This Treaty shall enter into force on the ninetieth day after the date of deposit of the thirtieth instrument of ratification, acceptance or approval thereof, or of accession thereto, by a state ... which is a signatory to the Charter as of 16 June 1995.
(2) For each state ... which ratifies, accepts or approves this Treaty or accedes thereto after the deposit of the thirtieth instrument of ratification, acceptance or approval, it shall enter into force on the ninetieth day after the date of deposit by such state ... of its instrument of ratification, acceptance, approval or accession ..."
On 26 August 1996, the government of the Russian Federation presented a legislative proposal to the Duma (part of the Parliament of the Russian Federation) seeking "ratification" of the ECT. The Duma never ratified the ECT and so Russia never "deposit[ed] ... its instrument of ratification". Russia, then, was a "signatory" to the ECT but, for Russia, the ECT never "entered into force" in accordance with this Article 44.
The ECT, however, also contains the following provision:
"ARTICLE 45
PROVISIONAL APPLICATION
(1) Each signatory agrees to apply this Treaty provisionally pending its entry into force for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its constitution, laws or regulations.
(2) (a) Notwithstanding paragraph (1) any signatory may, when signing, deliver to the Depository a declaration that it is not able to accept provisional application. The obligation contained in paragraph (1) shall not apply to a signatory making such a declaration. ..."
Some ECT signatories made "declarations" that they were not able to accept provisional application. Austria, Luxembourg, Italy, Romania, Portugal and Turkey all made such declarations.
Russia made no such declaration. Russia, therefore, agreed "to apply this Treaty provisionally pending its entry into force ... to the extent that such provisional application is not inconsistent with its constitution, laws or regulations".
The central issue in the dispute between Russia and the investors was whether provisional application of the arbitration provisions in Article 26 of the ECT was inconsistent with Russian law, with the that Russia was not bound to submit to arbitration of the investors' claims.
What does Article 45(1) mean?
The investors argued, and the Tribunal held, that by Article 45(1) each signatory agreed to apply the entire treaty pending its entry into force, unless the principle of provisional application itself was contrary to the signatory's constitution, laws or regulations - in which case the signatory would not apply the treaty. This was referred to as the "all or nothing" approach.
It was clear that the principle of provisional application itself was not contrary to Russia's constitution, laws or regulations. The evidence had been that, at the time of the arbitration, there were some 45 treaties being applied provisionally by Russia, and provisional application was expressly permitted by Article 23(1) of the Russian Federal Law on International Treaties ("FLIT"):
"An international treaty or a part thereof may, prior to its entry into force, be applied by the Russian Federation provisionally if the treaty itself so provides or if an agreement to such effect has been reached with the parties that have signed the treaty."
Russia's argument was that instead Article 45(1) required an assessment as to whether each individual article of the ECT was compatible with Russian law - if so, it applied. If not, it did not. This was referred to as the "piecemeal" approach. If the piecemeal approach was right then the relevant question would not be whether provisional application of treaties was permitted in Russian law. The relevant question would be whether Article 26, which allowed investors to refer disputes to arbitration, was "inconsistent with [Russia's] constitution, laws or regulations".
Where the Tribunal had favoured the "all or nothing" interpretation, the Dutch Court came to the opposite conclusion and favoured the "piecemeal" interpretation.
As the Dutch Court put it "the ordinary meaning of phrases is paramount" and "to the extent in common parlance signifies a degree of application ...". This is really the most persuasive argument for the "piecemeal" interpretation - it is simply the natural reading.
Also relevant (according to the Dutch Court) was the fact that the ECT referred to incompatibility with "constitution, laws or regulations". One can imagine that the principle of provisional application might be prohibited by the constitution or enshrined in primary legislation. The Dutch court considered it "inconceivable" that a ban on provisional application of treaties could be laid down in delegated legislation (i.e. "regulations"). That is probably putting it too high, but one can see it is at least unlikely that a state's law with respect to the effect of treaties would be set out in delegated legislation.
The formalism of the Dutch approach
Both before the arbitrators, and before the Dutch Court, the investors had also made another argument - that, when read together, the effect of paragraphs 45(1) and (2) was in fact that the treaty was always to be given provisional application unless the signatory had submitted a declaration that it did not consent to provisional application. Of this, the Dutch Court said:
"The court is inclined to follow the reasoning of the Russian Federation when it argues that this issue cannot be raised in the current reversal proceedings. The Tribunal did not follow the reasoning of the defendants and therefore did not base its competence on the absence of such a declaration. In accordance with the legal system of reversal proceedings, from which it follows that the grounds for reversal are stated in the summons and which has determined that a ground for reversal can only be directed against a positive arbitral decision on jurisdiction ... there appears to be no room in these proceedings to form an opinion on the question whether or not the Tribunal could have assumed its jurisdiction based on another argument it rejected. Nevertheless, the court will discuss this issue for the sake of completeness."
The court went on to find that the Tribunal had been correct to reject the investors' argument on this point. But the passage highlights a further difference between the Dutch and English approaches. In English law, when an award is challenged for want of jurisdiction, the question for the court under section 67 of the Arbitration Act 1996 is simply: did the tribunal have substantive jurisdiction? It seems that in Dutch law, the question arises differently. The tribunal makes an award determining that it has jurisdiction, and it is that award which is subject to challenge. The question is not whether the tribunal had jurisdiction, but whether the tribunal: (i) had jurisdiction; and (ii) followed the correct reasoning in order to arrive at that conclusion.
Again, this is not a particularly arbitration-friendly approach. If an arbitrator decides, correctly that he has jurisdiction, but arrives at that conclusion for the wrong reasons, why should that result in his award being set aside?
Is Article 26 "inconsistent"?
Article 26, provided for disputes about alleged breaches of the ECT to be referred to arbitration. Given the court's preference for the "piecemeal" interpretation, the issue was whether this provision was "inconsistent" with Russian law.
The Tribunal had heard extensive evidence from a large number of experts in Russian law, and formed a conclusion as to what that law was. The Tribunal had determined, in its awards on jurisdiction, that "Article 26 of the ECT [is] consistent with Respondent's Constitution, laws and regulations".
The investors argued that a provision of the ECT, such as Article 26, could only be inconsistent with Russian law if the Treaty provision concerned is actually prohibited in national law. It was not enough to establish incompatibility if Russian law simply made no express provision for the arbitration of such disputes.
The Dutch Court rejected this as "too limited" and held that "the provisional application of the arbitral provision contained in Article 26 is ... contrary to Russian law if there is no legal basis for such a method of dispute settlement, or – when viewed in a wider perspective – if it does not harmonise with the legal system or is irreconcilable with the starting points and principles that have been laid down in or can be derived from legislation."
For the investor, such an approach is evidently problematic. In order to find out whether it would enjoy the right to arbitrate breaches of the ECT (or any other treaty which provides for provisional application) it is insufficient for the investor to check that the signatory's laws do not expressly prohibit the arbitration of such disputes. The investor would also have to consider whether there was any "legal basis for such a method of dispute resolution" and whether the arbitration of such disputes "harmonised with the legal system" or was "irreconcilable" with that legal system's "starting points and principles".
When Russia's government had submitted the ECT to the Duma for ratification, it had also provided an explanatory memorandum, which stated:
"The provisions of the ECT are consistent with Russian legislation."
"The legal regime of foreign investments envisaged under the ECT is consistent with the provisions of the existing Law [...] on Foreign Investment in [Russia], as well as with the amended version of the Law currently being discussed in the State Duma".
[The regime of the ECT for foreign investments] "does not require the acknowledgement of any concessions or the adoption of any amendments to the abovementioned Law".
The Dutch Court was unimpressed with this, dismissing it as essentially irrelevant being "the opinion of the executive aimed at prompting the Duma, as part of the legislature, to ratify the ECT" stating that it "cannot be ascribed to the legislature and the government's standpoint therefore does not have independent meaning".
Russia's 1993 International Arbitration Law provided (emphasis added):
"The following kinds of disputes shall be submitted for international commercial arbitration by agreement between the parties: disputes arising from contractual and other civil law relationships arising from the maintenance of foreign trade and other international economic relations, if the commercial enterprise of at least one of the parties is located abroad (...)"
It was said, by Russia's legal experts, to follow from this that "if relations between the parties are of a public law nature, then a dispute arising out of such relations cannot be referred to international commercial arbitration". The Dutch court accepted this. The Russian law did not actually say that public law disputes were not arbitrable, but it did not say that they were. Silence on the question of whether such disputes could be arbitrated was, it seems, sufficient to establish that they could not.
The investors relied upon Russia's Law on Foreign Investments 1991, as providing a legal basis for the arbitration. Article 9 provided:
"Investment disputes, including disputes over the amount, conditions and procedure of the payment of compensation, shall be resolved by the Supreme Court of the RSFSR or the Supreme Arbitrazh Court of the RSFSR, unless another procedure is established by an international treaty in force in the territory of the RSFSR.
Disputes of foreign investors and enterprises with foreign investments against RSFSR State bodies, disputes between investors and enterprises with foreign investments involving matters relating to their operations, as well as disputes between participants of an enterprise with foreign investments and the enterprise itself shall be resolved by the RSFSR courts, or, upon agreement of the parties, by an arbitral tribunal, or, in cases specified by the laws, by authorities authorized to consider economic disputes."
One can easily see why the tribunal was persuaded, based on this, that Russian law did permit the arbitration of disputes under the ECT.
The Dutch court disagreed, finding that there was a fundamental distinction in Russian law between investment disputes of a civil nature and those of a public nature, which appeared from (amongst other things) the 1993 Arbitration Law. It followed that "investment disputes" in the Law of Foreign Investments 1999 should be read as meaning only "investment disputes of a predominantly civil law nature".
Russia's Law on Foreign Investments 1999 provided (Article 10):
"A dispute of a foreign investor arising in connection with its investments and business activity conducted in the territory of the Russian Federation shall be resolved in accordance with international treaties of the Russian Federation and federal laws in courts, arbitrazh courts or through international arbitration (arbitral tribunal)."
This too had persuaded the Tribunal that the arbitration of the dispute in accordance with Article 23 of the ECT was not contrary to Russian law.
Again, the Dutch court disagreed. The Dutch court's reasoning is not easy to précis or, indeed, to follow. In essence, the Dutch court accepted the position advanced by Russia's legal experts: that this was a purely "declaratory", "generic" passage "an 'empty blank, a reference to a certain type of rule" and that "Article 10 therefore does not create a direct legal basis for arbitration of disputes over obligations of Part III of the ECT, but rather makes the option of arbitration conditional on the existence of a provision in treaties and federal laws to that effect".
Effect of a foreign set aside decision in England
The tribunal's awards against Russia would be "New York Convention" awards for the purposes of the Arbitration Act 1996, since they were made by a tribunal seated in the Hague, and the Netherlands is a New York Convention state.
Section 103(2) of the Arbitration Act 1996 provides:
"(1) Recognition or enforcement of a New York Convention award shall not be refused except in the following cases.
(2) Recognition or enforcement of the award may be refused if the person against whom it is invoked proves—
...
(f) that the award ... has been set aside ... by a competent authority of the country in which, or under the law of which, it was made."
The word "may" in s.103(2) of the 1996 Act confers a discretion on the English court to enforce an award even though the award has been set aside.
The approach of the English court is only to exercise this discretion, however, if the set aside decision "offends basic principles of honesty, natural justice and domestic concepts of public policy". See Dicey, Morris & Collins, 15th edition, at Rules 50-5 and paragraph 16-148, Simon J in Yukos Capital S.a.r.L v OJS Oil Company Rosneft [2014] EWHC 2188 (Comm) at paragraph 20 and Walker J in Malicorp Limited v Government of the Arab Republic of Egypt [2015] EWHC 3610. As Walker J put it in the latter case (concerning enforcement in England of an award by a tribunal seated in Egypt which had been set aside by an Egyptian court):
"an assertion that a foreign judgment is "wrong" is not a sufficient basis to refuse to recognise it. When considering whether to recognise a foreign judgment this court acknowledges that the determination of foreign law is a matter for the foreign court. Thus evidence relied on by Malicorp that the 2012 Cairo Court of Appeal decision is wrong does not address the relevant issues. As Egypt points out, there is no suggestion in that evidence that the 2012 Cairo Court of Appeal decision is perverse. Allegations that there was a failure "to take account of" Malicorp's submissions merely because those submissions were not repeated in the judgment, or that the judgment gave reasons which were "insufficient and contradictory" do not assist Malicorp in this regard."
The Dutch court's decision to set aside the Yukos awards was not, of course, based on a determination of Dutch law. It was based on the Dutch court's determinations as to: (i) the meaning of the ECT; and (ii) the law of Russia. Could it be argued that the rationale for deferring to the foreign court is therefore weaker in the case of the Yukos awards, because the Dutch court is no better qualified than the English court is to decide what the ECT means or what Russian law is? This is true, but in response it can simply be said that the parties chose to have their arbitration seated in the Hague – it was they who agreed that it should fall to the Dutch courts (not the English courts) to decide any such questions.
The Dutch court's decision is the subject of an appeal. If the set-aside decision stands then, to enforce the awards in England, the investors will have to show some dishonesty on the part of the Dutch courts, some breach of natural justice, or perhaps persuade the English court that the Dutch judgment is so obviously wrong as to be "perverse".
Conclusion
The latest decision in the Yukos saga has been widely reported – the setting aside of a $50bn award, and Russia's scandalous (but undetermined) claim that the arbitrators had the award written by an assistant make for a good news story. If the Dutch court's findings on Russian law are right, then it certainly serves to underline just how hostile and opaque the Russian legal system is for a foreign investor – though this is hardly news. More surprising perhaps, is the insight the case gives into some of the arbitration-unfriendly rules which apply in the Dutch legal system.
Of course, the case also provides yet another reminder of the importance of the seat. Whatever seat parties agree to, they are in effect agreeing that they are ultimately happy to have the courts of that country decide whether the award the arbitrators make will be allowed to stand. It is, for example, surprisingly common that foreign investors and contractors (who do not wish to expose themselves to the courts of their counterparty's home country) will require that disputes be resolved by arbitration, but then still agree to its being seated in the counterparty's home country, subject to that country's laws and the supervisory jurisdiction of its courts.
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