A-List Celebrity No. 3: The YUKOS case

This article is part of the series A-List: The Celebrities of Arbitration Cases. A series delving into the most renowned cases that have shaped the landscape of international arbitration.

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Case(s):

• Hulley Enterprises Limited (Cyprus) v. The Russian Federation, UNCITRAL, PCA Case No. 2005-03/AA226

• Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. ‎2005-04/AA227

• Veteran Petroleum Limited (Cyprus) v. The Russian Federation, UNCITRAL, PCA Case No.‎2005-05/AA228

Decided by: Arbitral Tribunal composed by The Hon. L. Yves Fortier PC CC OQ QC, Dr. Charles Poncet, and Judge Stephen M. Schwebel

Date: 18 July 2014

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Why is this case famous?

The Yukos case constitutes what I would call one of the most epic sagas of international arbitration. A blockbuster that checks the box of dramatic circumstances: a once-dominant oil company, Yukos, getting dismantled by the Russian government. The case involved allegations of politically motivated expropriation, and a jaw-dropping USD 50 billion decision against Russia, which became the largest amount ever awarded in arbitration history. It is a landmark case displaying an intersection between arbitration and global politics and economics. Most definitely a "rock star" of arbitration cases.

Overview of the dispute

Yukos, also known as OAO Yukos Oil Company, was a joint stock company incorporated in Russia in 1993. In the decade following Yukos incorporation, the company became one of the largest and most successful Russian companies in the world. As described in the final award, Yukos reached its peak in 2003, when it had around 100,000 employees, six main refineries and a market capitalisation estimated to surpass USD 33 billion.

However, due to a series of circumstances that took place starting in October 2003, Yukos’ situation began to significantly change, leading to its bankruptcy in August 2006.

Believing those circumstances were attributable to the Russian government, in February 2005, three controlling shareholders of Yukos (namely, Hulley Enterprises Limited and Veteran Petroleum Limited, two Cypriot companies, as well as Yukos Universal Limited, a company from the Isle of Man) initiated PCA arbitrations against Russia under the Energy Charter Treaty arguing that Russia would have expropriated and failed to protect their investments in Yukos in violation of its obligations under international law.

Even though each of the arbitrations led to the issuance of a separate award, the three cases were heard in parallel and the tribunal – which was the same in all three instances, discussed these arbitrations as a single set of proceedings.

The numbers in these cases are quite impressive. Together, the claimants' request for relief amounted to no less than USD 114,174 billion. In the awards’ procedural history, the tribunal described the occurrence of five procedural hearings,18 procedural orders, more than 4,000 pages of written submissions, a ten-day hearing on jurisdiction and admissibility, 200 pages of interim awards, a twenty-one day hearing on the merits, more than 2,700 pages of the hearing transcripts and around 8,800 exhibits filed. No wonder that in the final award the arbitral tribunal called these cases “mammoth arbitrations”.

The claimant's claims

A summary of the claimant’s allegations in these cases would be grounded on Russia’s alleged violation of Articles 10(1) and 13(1) of the Energy Charter Treaty, which read as follows:

Article 10(1). "Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment. Such Investments shall also enjoy the most constant protection and security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal. In no case shall such Investments be accorded treatment less favourable than that required by international law, including treaty obligations. Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party."

Article 13(1). "Investments of Investors of a Contracting Party in the Area of any other Contracting Party shall not be nationalised, expropriated or subjected to a measure or measures having effect equivalent to nationalisation or expropriation (hereinafter referred to as “Expropriation”) except where such Expropriation is: (a) for a purpose which is in the public interest; (b) not discriminatory; (c) carried out under due process of law; and (d) accompanied by the payment of prompt, adequate and effective compensation. Such compensation shall amount to the fair market value of the Investment expropriated at the time immediately before the Expropriation or impending Expropriation became known in such a way as to affect the value of the Investment (hereinafter referred to as the “Valuation Date”).  Such fair market value shall at the request of the Investor be expressed in a Freely Convertible Currency on the basis of the market rate of exchange existing for that currency on the Valuation Date. Compensation shall also include interest at a commercial rate established on a market basis from the date of Expropriation until the date of payment.  

The Final Award

In their decision on the merits, the tribunal concluded that:

"Respondent has not explicitly expropriated Yukos or the holdings of its shareholders, but the measures that Respondent has taken in respect of Yukos, set forth in detail in Part VIII, in the view of the Tribunal have had an effect “equivalent to nationalization or expropriation”. The four conditions specified in Article 13 (1) of the ECT do not qualify that conclusion." (§ 1580)

On that qualification, the tribunal found that:

• It was profoundly questionable that the destruction of Russia’s leading oil company and largest taxpayer could have been done in the public interest (§ 1581).

• The treatment of Yukos when compared to the treatment of other Russian oil companies may well have been discriminatory, (although that question was not decided by the tribunal) (§ 1582).

• The effective expropriation of Yukos was not “carried out under due process of law”, citing as examples the harsh treatment accorded to the CEO of Yukos (remotely jailed and caged in court), the mistreatment of counsel of Yukos, the pace of the legal proceedings, etc. (§ 1583).

• The incontestable fact that Respondent’s effective expropriation of Yukos was not “accompanied by the payment of prompt, adequate and effective compensation” (§ 1584).

It followed that Russia was found to be in breach of its treaty obligations under Article 13 of the ECT. Accordingly, the Tribunal did not need to consider whether Respondent’s actions are also in breach of Article 10 of the Treaty.

Following the decision on liability, and after a considerable portion of the awards dealing with the quantification of the Claimants’ damages, the tribunal ordered Russia to pay:

Hulley Enterprises Limited:

a.  damages in the amount of USD 39,971,834,360, b. arbitration costs in the amount of EUR 3,388,197, and c.  legal representation costs in the amount of USD 47,946,190;

Yukos Universal Limited:

a.    damages in the amount of USD 1,846,000,687, b.    arbitration costs in the amount of EUR 156,476, and c.     legal representation costs in the amount of USD 2,214,277; and

Veteran Petroleum Limited:

a.     damages in the amount of USD 8,203,032,751,

b.    arbitration costs in the amount of EUR 695,327, and

c.     legal representation costs in the amount of USD 9,839,533; and

Doing the math, we are talking about values exceeding USD 50 billion in damages,

EUR 4.2 million in arbitration costs, and USD 60 million in legal representation. In other words, A LOT!

Given the complexity of the case, a book could be written about the parties’ arguments, the development of these 10-year long arbitrations, as well as about the political theories behind Russia’s actions. Actually, if I’m not mistaken, a book was published in 2012 about the whole Yukos-Russia saga. But that story, much like any more about this A-list celebrity case, will just have to be left for another day.

Curiosity: A (hearing) room full of (arbitration) celebrities

Because of the values at stake, there should have been no doubt that both counsel and arbitrators in this case were some of the biggest guns in the international arbitration world.

As mentioned above, the arbitral was chaired by the Honourable Louis Yves Fortier PC CC OQ QC and the co-arbitrators were Dr. Charles Poncet and Judge Stephen Myron Schwebel. The tribunal was also assisted by Mr. Martin J. Valasek (Assistant to the tribunal), Mr. Brooks W. Daly (Secretary to the Tribunal), and Ms. Judith Levine (Assistant Secretary to the Tribunal).

Over the course of the hearing on the merits, which took place at the Peace Palace, in The Hague, from 10 October to 9 November 2012, the tribunal reports the attendance – on the claimants' side only – of no less than 21 counsel, 3 party representatives, 7 fact witnesses, and 1 expert. On the respondent’s side, the number of counsel reaches the 27 mark, plus 2 party representatives, and 2 experts.

Among some of the remarkable names in the list of attendance, we can find Dr. Yas Banifatemi, Professor Emmanuel Gaillard, Mr. Philippe Pinsolle, Ms. Jennifer Younan, Dr. Claudia Annacker, Mr. Lawrence Friedman, Mr. David Sabel, and Mr. Matthew Slater.

Simply stellar!