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Surprise, surprise: the setting aside of the Yukos awards

“There can never be surprises in logic.”

(Ludwig Wittgenstein, Tractatus Logico-Philosophicus.)

It is fair to say that the decision of the District Court in the Hague setting aside the US$50 billion Yukos awards against Russia has been met with no small measure of surprise by much of the arbitration community. But a logical analysis suggests that perhaps we should not be surprised at all.

As most readers will be aware, the Dutch court disagreed with the tribunal’s interpretation of Article 45(1) of the Energy Charter Treaty (ECT) dealing with provisional application of the ECT. The tribunal had found that the ECT as a whole (including its arbitration provisions) applied provisionally to Russia, on the basis that the principle of provisional application per se was found to be a recognised principle under Russian law.

The District Court in The Hague disagreed with this interpretation, preferring the position submitted by the Russian Federation namely, that Article 45(1) provides for the provisional application of only those ECT provisions that are not incompatible with Russian law. The court found that the arbitration clause of the ECT was contrary to Russian law because, among other things, according to Russian law, investment disputes may only be subject to arbitration if a treaty so provides. Any treaty that purports to so provide would require ratification, since it would run contrary to Russian laws and regulations in their current form. However, Russia never ratified the ECT.

Some consider this finding surprising because “provisional application of the ECT has long ceased to be a talking point”. But perhaps this speaks more to the fact that the issue has simply not arisen and not that it is settled law – after all, there have only been two decisions on the issue, both in favour of provisional application of the ECT as a whole, and both issued by tribunals chaired by the same arbitrator. In investment treaty arbitration terms, that can hardly be termed settled law, as is clear from the incessantly different approaches taken to most favoured nation clauses. In any event, as investment treaty tribunals often remind themselves and the parties in their awards: they are not bound by the decisions of previous international tribunals.

Nor should it be surprising that the issue has been revived. Russia has consistently contested the ECT’s provisional application and it was to be expected that it would seek to set aside the US$50 billion Yukos awards at the seat of arbitration – any rational state would. It was therefore reasonably foreseeable that the UNCITRAL tribunal’s jurisdictional decision (which could not have been set aside at the time it was issued, as a procedural matter) would come to be reviewed once the final award was issued.

The natural consequence of this procedural step is that an equally sharp (if not equally eminent) set of legal minds may take a different view of the legal issues in dispute. Again, nothing new here – we see conflicting investment treaty awards and ICSID annulment decisions all the time.

The fact that an investment treaty award issued after ten years of proceedings can be set aside is of course troubling for both parties, who will have expended small fortunes in presenting and defending the claims. But that’s how ISDS rolls. Anyway, would it not be more troubling if consent, the cornerstone of arbitration, and state sovereignty, an entrenched principle of international law, were left vulnerable so as not to upset an eminent tribunal’s applecart or overwhelming Western public opinion towards one particular state?

Of course, the District Court’s decision is itself subject to two further appeals. If this decision is overturned, it may open the door for discussion of the remaining bases on which the Russian Federation brought its set aside application (but which were not considered by the Dutch court due to its finding), such as the role of tribunal secretaries. Pending an appeal, and even if this decision remains intact, the domestic courts of enforcing countries will quickly need to grapple with whether they take a transnational view of enforcement and exercise their discretion to enforce despite the set aside decision in The Hague, as the Yukos shareholders press on with enforcement proceedings in various jurisdictions.

So, why the surprise? Is it because a local district court at the seat of the arbitration has overturned the largest award in history, rendered by individuals regarded as some of the world’s most eminent arbitrators?

Far more surprising surely, is the fact that a Dutch court has decided in favour of the Russian Federation, the Western world’s current favourite enfant terrible.

Practical Law Arbitration Francesca Albert

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