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Last week the Supreme Court set aside the judgments of the Court of Appeal of The Hague. Both the Russian Federation and the former Yukos shareholders qualify the Supreme Court ruling as a victory. What is this about?
The former shareholders of Yukos initiated arbitral proceedings against the Russian Federation based on Article 26 of the Energy Charter Treaty (the ECT) in 2004. The place of arbitration is The Hague. In the arbitral proceedings they claimed that the Russian Federation should be ordered to pay compensation because it had expropriated their investments in Yukos in violation of the ECT and had failed to protect those investments. The arbitral tribunal ruled in favour of the former Yukos shareholders and ordered the Russian Federation to pay the former shareholders damage compensation of approximately 50 billion USD.
The Russian Federation then initiated setting aside proceedings to annul the arbitral awards (vernietigingsprocedure) before the Dutch courts. The old Arbitration Act applies to the setting aside proceedings as the arbitration was initiated before 1 January 2015. In the first instance, the District Court of The Hague awarded the claim of the Russian Federation and set aside the arbitral awards due to non-existence of a valid arbitration agreement (Article 1065(1)(a) of the Dutch Code of Civil Procedure, the DCCP). The shareholders lodged an appeal against this decision before the Court of Appeal of The Hague. In appeal, the Russian Federation argued, inter alia, that the arbitral awards were contrary to public policy due to fraud committed by the shareholders during the arbitration, consisting of submitting false statements and withholding documents. The shareholders objected thereto, by contending, inter alia, that the fraud should have been raised in separate revocation proceedings (herroepingsprocedure, based on article 1068 DCCP) and not in the ongoing setting aside proceedings. By interim judgment of 25 September 2018, the Court of Appeal upheld the shareholders’ objection and ruled – in short – that the alleged fraud could only be invoked in revocation proceedings and not (as yet) in the setting aside proceedings. Admitting such new allegations in the setting aside proceedings would lead to the undesirable consequence that the time limit for submitting a claim for setting aside would be circumvented, according to the Court of Appeal. Under the old arbitration law, a claim for revocation had to be filed within three months (i) after filing the award with the court registry, (ii) after service of the certificate of enforcement of the award, or (iii) after the fraud has become known or a party has obtained the new documents. Under the new arbitration law, there is a single time limit for filing a revocation claim: three months after becoming aware of the facts giving rise to revocation. There is no such time limit for the setting aside proceedings. In addition, this would circumvent the exclusive jurisdiction of the Court of Appeal as the only factual authority. Under the old arbitration law, the setting aside proceedings had to be brought before the disctrict court. By allowing arguments that imply fraud in these proceedings, there would be a risk that the setting aside proceedings would be used as a disguised revocation proceedings.
In its final judgment of 18 December 2018, the Court of Appeal of The Hague assessed the merits of the case and rejected the requested of setting aside the arbitral awards. In summary, the Court of Appeal ruled, inter alia, that (i) the Russian Federation had to provisionally apply the ECT, the dispute falls within the scope of the ECT and the arbitration agreement is valid, (ii) there is no sufficiently serious breach of the mandate by the arbitral tribunal or a violation of the rules on the composition of the arbitral tribunal (the failure by the arbitral tribunal to submit the dispute on the tax measures imposed in Russia to the Russian tax authorities or that the assistant to the arbitral tribunal had performed substantive work are insufficient in this regard); (iii) the relevant parts of the arbitral award cannot be seen as a wholly unreasoned decision; and (iv) the fraudulent, corrupt and illegal activities of Khodorkovsky et al. alleged by the Russian Federation – the so-called ‘unclean’ hands argument – do not lead to a violation of public order.
The Russian Federation appealed both the interlocutory judgment and the final judgment of the Court of Appeal in cassation. It submitted grounds of cassation (cassatiemiddelen) against all the court’s decisions. The Supreme Court rejected seven of the eight grounds of cassation by the Russian Federation. Only the first ground, which concerns the relationship between the settings aside and the revocation proceedings, was successful. We discuss this part in more detail hereafter.
The first cassation ground is directed against the decision of the Court of Appeal that the objections of the Russian Federation can only be raised by means of a claim for revocation. The Supreme Court correctly holds that the grounds that can lead to revocation can also be used as a basis for a claim for setting aside based on a breach of public order. Therefore, the view of the Court of Appeal that the Russian Federation could only have raised the allegations of fraud in the arbitration in revocation proceedings and could therefore not base its claim for setting aside on these grounds is incorrect. So far, the Supreme Court follows the conclusion of Advocate General Vlas (A-G Vlas).
A-G Vlas subsequently held that the cassation ground nevertheless fails because the ultimate decision of the Court of Appeal – the fraud alleged here could only be raised in revocation proceedings – is correct. According to A-G Vlas, the rule of article 1065, paragraph 5 (old) DCCP (all grounds for setting aside must be submitted in the writ of summons, otherwise the right to do so would be forfeited) implies that the fraud alleged here could only be raised in revocation proceedings, and not in the statement of defence in the setting aside proceedings.
The judgment of the Supreme Court deviates on this point from the opinion of A-G Vlas. The Supreme Court considered that article 1065 paragraph 5 (old) DCCP does not preclude that, if setting aside proceedings are already pending in which it is argued in the writ of summons in first instance that the arbitral award, or the manner in which it was rendered, is contrary to public policy, the reliance on public policy can, in principle, be further elaborated by invoking fraud in the course of the setting aside proceedings. However, the possibility to elaborate on the grounds already stated in the writ of summons or to present new factual arguments is not unlimited. This possibility is limited, among others, by the principles of due process (Article 130 DCCP ) and by specific provisions that prescribe when a certain ground for setting aside must be invoked (for the first time) (for example, Article 1052, paragraph 2 DCCP). If such a provision is invoked, it must be assessed in each specific case whether a new factual or legal position introduced in the course of the setting aside proceedings, also in view of the requirements of due process, conflicts with the purport of such a provision. The Supreme Court then held that the three-month term of Article 1068(2), first sentence (old) DCCP for lodging a revocation claim serves the purpose of legal certainty. However, according to the Supreme Court, legal certainty is not at stake when an appeal to public order is further elaborated by invoking fraud in the course of the setting aside proceedings. In such a situation the opposite party could consider that the arbitral award can be annulled on this ground. Back to the case: according to the Supreme Court, the Court of Appeal should have assessed whether the further elaboration of the ground for setting aside – that was already invoked in the writ of summons by the Russian Federation – in the statement of defence is contrary to the requirements of the due process (Article 130 DCCP). As the Court of Appeal did not answer this question, the cassation ground succeeded and the Supreme Court referred the case back to the Court of Appeal of Amsterdam.
How should we view this judgment and what conclusions can be drawn? It is still too early for either party to claim a (definitive) victory. However, the important arguments of the Russian Federation – regarding the interpretation of the ECT or the ‘unclean hands’ argument – have been (definitively) rejected by the Supreme Court. The Supreme Court also did not find it necessary to submit preliminary questions on the interpretation of the ECT to the Court of Justice of the EU. These parts can no longer be raised with the Court of Appeal after referral. That constitutes a victory for the former shareholders of Yukos.
On the other hand, the Court of Appeal will of course decide whether the Russian Federation’s further elaboration of the ground for setting aside in the statement of defence is contrary to the requirements of due process. If the Court of Appeal is of the opinion that this is not the case, it will have to assess whether the arbitral awards must be set aside because they are contrary to public order due to fraud committed by the shareholders during the arbitration. The interesting question here is which standard the Court of Appeal will apply. The Supreme Court has repeatedly emphasised that, in principle, a state court must exercise restraint when reviewing an arbitral award. After all, setting aside proceedings may not be used as a disguised appeal (verkapt appel). The Supreme Court has only made two exceptions to this restraint and the prohibition of disguised appeal: the question whether a valid arbitration agreement exists (article 1065 (1) under a DCCP ) and the question whether the right to be heard has been violated (article 1065 (1) under e DCCP). Recently, the Court of Appeal of The Hague accepted a third exception to this principle in the so called Bariven case, namely if the question arises whether an arbitral award confirms an agreement that would have been entered into under the influence of corruption. This is a far-reaching interpretation, and it is also debatable whether such an exception to the restrictive review is justified. The Supreme Court did not address this point at all in the Bariven case. This is a missed opportunity and also creates uncertainty. Therefore, it will not surprise us if the question of the correct standard for the assessment of public policy grounds is put to the Supreme Court in the Yukos case. In fact, it can even be argued that in cases of alleged fraudulent conduct during the arbitral proceedings (as in Yukos), it is even less obvious to exercise restraint when reviewing an arbitral award than in a case like Bariven where the alleged corruption took place before the arbitral proceedings. Although we doubt that the final decision on this point will be in favour of the Russian Federation, this dispute will in all likelihood take years before this long lasting procedure comes to a definitive end. In the short term at least, this is a victory for the Russian Federation.
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