Dutch court to decide whether international law protects shareholders of defunct oil company
Editor’s note (February 18, 2020): Since the publication of this article, a Dutch court of appeal has decided in favor of Yukos shareholders, restoring the order for Russia to pay them $ 50 billion in compensation. The court held that the expression “such provisional application” refers to the application of the whole of the treaty, and not of separable parts of it (as explained below). The Russian state will appeal the decision to the Supreme Court of the Netherlands.
Rarely are the stakes of a single word in a legal dispute as big as that of the shareholders of Yukos, a former Russian oil company. On February 18, a Dutch court of appeal will rule on whether the Russian state should compensate shareholders for the bankruptcy of Yukos using false charges of tax evasion. In 2014, the Permanent Court of Arbitration (CPA), an international dispute settlement tribunal in The Hague, awarded them $ 50 billion, one of the largest awards ever granted. But in 2016, a Dutch district court overturned this decision, finding that the PCA did not have jurisdiction. The question of jurisdiction is based on a single clause in an international energy treaty – in particular on how to interpret its use of the word “such”.
The takeover of Yukos marked a turning point in the consolidation of President Vladimir Putin’s power and the rise of authoritarianism in Russia. In 2003 Mikhail Khodorkovsky, then CEO of Yukos and main shareholder (and the richest man in Russia), had started funding opposition political parties and had alluded to running for president. Putin confronted him angrily and the government began accusing the company of $ 27 billion in tax irregularities. Mr. Khodorkovsky was arrested and sentenced to a decade in prison. Yukos was dismantled and its assets sold to state-controlled companies at incendiary prices.
As the business was devoured, its owners and managers began to sue. They no longer included Mr. Khodorkovsky, who during his trial transferred his actions to a Russian-Israeli partner, Leonid Nevzlin. Yukos leaders won a $ 1.9 billion judgment in the European Court of Human Rights, which Russia never paid for. Two foundations registered in the Netherlands, representing thousands of Yukos employees and shareholders, have successfully protected a small part of the company’s assets and won various proceedings in national courts.
But the biggest case of arbitration was that of the PCA in The Hague. It was launched by a holding company called GML, including Mr. Nevzlin and a few other large shareholders who together controlled 60% of Yukos. They said the Russian seizure of the company had violated the Energy Charter treaty, an international investor protection agreement. This treaty allows foreign investors to file an arbitration file in several places, including the APC, in the event of a dispute. Russia signed the TCE in 1994 but has never ratified it. However, the treaty stipulates that the signatories agree to apply it provisionally until it is ratified, “insofar as this provisional application is not incompatible with [their] constitution, laws or regulations.
This is where things get complicated. Russian law, like that of many countries, does not normally allow arbitration of disputes between private entities and the state. Counsel for Russia therefore argued that the parts of the TEC providing for arbitration did not apply and that the CPA was not competent. But the CPA ruled that it did, because when the treaty speaks of “such” provisional application, it means that of the treaty as a whole, including the elements of arbitration.
As for the merits of the case, the PCA noted that Russia had prepared the tax charges to take back Yukos and therefore owed $ 50 billion to GML for its actions. But Russia has appealed to the Dutch courts. A district court ruled that the “all or nothing” approach to provisional application made no sense, as it would render the phrase “to the extent” meaningless. He canceled the price. GML then appealed this decision.
Whatever the decision of the court of appeal, the loser will almost certainly appeal to the Supreme Court of the Netherlands, which could take a year or more. If GML eventually wins, its lawyers will still have to recover the money. Their efforts to achieve this in 2015, after the initial decision of the CPA, did not go well. In Belgium, GML attempted to seize bank accounts of the Russian Embassy and government-owned buildings, but the accounts were not frozen due to diplomatic immunity. In France, when GML attempted to demand payment from the French government of $ 700 million from Roscosmos, the Russian space agency, the courts ruled that it was a private enterprise unrelated to the debts of the Russian state. Since then, Belgium and France have adopted “Yukos laws” making it more difficult to seize the assets of sovereign states. They may have been influenced by Russian threats of asset foreclosures from all countries that allow GML to enforce its claims.
For its part, Russia is pushing through constitutional changes that remove the primacy of international decisions, treaties and conventions over Russian law. Even if Dutch courts decide on the jurisdiction of the CPA, lawyers for Russia have several other arguments. Since individual shareholders are Russian, they say, they should not be protected by a treaty for international investors. They argue that Yukos’ business practices were shady and that shareholders with “unclean hands” should not be compensated for ill-gotten gains. They claim that the CPA did not consult the Russian and other tax authorities and that its method of estimating damages was arbitrary.
The CPA rejected the first argument, finding that the shareholder holding companies, registered in Cyprus and the Isle of Man, are international. But the Dutch court will consider the argument of “unclean hands”. He will also consider a Russian allegation that the three PCA arbitrators have assigned too much of the work on the case to an assistant.
Yukos shareholders hope the foreclosures will be more resilient in America and Britain. They say that the appeal court hearings went well and are optimistic about the victory of this round. A loss, they say, would damage the reputation of the CPA: the plaintiffs would be reluctant to take the cases to a court where the decisions that take years for international arbitrators to reach are summarily quashed by a local district court.
It would be a blow to The Hague, which calls itself the “international city of justice”. The PCA and the World Court both have their headquarters in the Peace Palace (photo), the city’s emblematic building. But Dutch courts will base their decisions on their reading of the law, not on what is best for the CPA. In any case, the risk for PCA may be overestimated. “Yukos is an exceptional case,” notes Eric De Brabandere, professor of arbitration law at the University of Leiden. Most of the cases that the CPA hears do not relate to unratified treaties with provisional application or to tax judgments rendered by authoritarian states whose legal decisions are not reliable. Most parties seeking arbitration may be less concerned that the Dutch courts set aside judgments which do not involve such unusual circumstances – and which are not crucially dependent on the interpretation of a single adjective.