The $50 BILLION Treaty Interpretation Question: Dutch Court Sets Aside Yukos Award Against Russia

Russia scored a huge victory today when the Hague District Court in the Netherlands court set aside a $50 billion arbitral award in favor of former shareholders of Yukos.  The $50 billion Yukos award (that’s BILLION, with a “B”),  is the largest arbitration award ever issued, was issued under the authority of the Energy Charter Treaty.  The arbitral tribunal (hosted at the Permanent Court of Arbitration) had found that the Russian government was liable for expropriating the former shareholders of Yukos through use of tax laws, harassment, criminal punishments, and other government measure without providing adequate compensation.

The Hague District Court set aside the award on jurisdictional grounds.  According to this English-language summary, the Dutch court held that Russia was not bound to arbitration under the Energy Charter Treaty because it never ratified the ECT.  The arbitral tribunal held in its interim award that Russia was bound under Article 45, which calls for provisional application of the treaty pending ratification.  But the Hague District Court disagreed.

Here is Article 45(1) and (2)(a):

(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. Any such signatory may at any time withdraw that declaration by written notification to the Depository.

Russia did not make such an Article 45(2) declaration, but the Dutch Court held that Article 45(1) still acted as a jurisdictional bar on the arbitral tribunal’s jurisdiction because it requires the arbitral tribunal to go back and assess whether the dispute resolution provision (Article 26) of the Energy Charter treaty is “inconsistent” with Russia’s “constitution, laws or regulations.”  the Dutch court concluded that Russia’s constitution does not permit it to be bound to an arbitration assessing the legality of its tax laws without the consent of its legislature.

I don’t have a strong view on who is right here. I will note that Russia is represented by the well-known New York law firm Cleary Gottlieb (where I once toiled as a young summer associate) and that Russia mustered an impressively long list of international law experts on its behalf such as Martti Koskenniemi, Alain Pellet, and Gerhard Hafner (to list just a few).  The claimants had their own impressive list including James Crawford and my former Yale professor Michael Reisman.  This is a truly difficult treaty interpretation question, which just happens to have $50 billion riding on it.  So we can be sure there will be an appeal of the Hague District Court’s ruling.

It is worth noting that also that Russia has a lot riding on this case, but it also decided to litigate this matter fully even though it believes the tribunal has no jurisdiction.  This turns out to be a smart move, since they seem to have won (for now) and because not litigating would have still subjected them to lots of enforcement actions against them around the world. So litigation seems to have worked out for Russia this time. I wonder if that will encourage Russia  to try its hand at litigation in future cases as well?