ABOUT THE AUTHOR: Bianca Vasilache is an Associate at Allen & Overy
The High Court decision in (1) Hulley Enterprises Limited, (2) Yukos Universal Limited, (3) Veteran Petroleum Limited v The Russian Federation [2021] EWHC 894 is yet another step in the proceedings that have followed the 2014 Yukos arbitral awards. Providing an in-depth analysis of the English law rules on staying enforcement of arbitral awards and requiring security, the High Court maintained the stay of the English enforcement proceedings without security. Notably, it disagreed with the Hague Court of Appeal and considered that Russia has a realistic prospect of success in its Dutch Supreme Court appeal to set aside the Yukos arbitral awards. The High Court’s decision was made pursuant to its general case management powers rather than its powers under section 103(5) of the Arbitration Act 1996. The court held that, as long as Russia’s objection to the jurisdiction of the English courts was pending, it could not exercise its section 103(5) powers.
Background
The Claimants were majority shareholders in OAO Yukos Oil Company (“Yukos”), a Russian oil company, whose ultimate beneficial owners are a number of Russian individuals.
In February 2005, following the sale of Yukos, the Claimants initiated arbitration proceedings against the Defendant in the Permanent Court of Arbitration under the Energy Charter Treaty (the “ECT”). In July 2014, they were awarded over USD50 billion in compensation (together with the interim awards, the “Awards”).
In November 2014, the Defendant started proceedings in the Dutch courts, as the courts of the arbitral seat, to set aside the Awards (the “Set Aside Proceedings”).
In January 2015, the Claimants started proceedings to enforce the Awards in England and Wales (the “English Enforcement Proceedings”). In September 2015, the Defendant challenged the English courts’ jurisdiction and claimed state immunity on the basis that the arbitral tribunal did not have jurisdiction to render the Awards (the “Immunity Jurisdictional Objection”). The Defendant’s grounds for the Immunity Jurisdictional Objection overlapped with three of its grounds in the Set Aside Proceedings.
In April 2016, the Defendant was successful in the Set Aside Proceedings before the Hague District Court. The Claimants appealed.
In June 2016, the English courts stayed the English Enforcement Proceedings pending the Claimants’ appeal (the “Stay”).
In February 2020, the Claimants were successful against the Set Aside Proceedings before the Hague Court of Appeal. In June 2020, the Defendant was allowed to appeal to the Dutch Supreme Court.
In April 2020, the Claimants received leave to enforce the Awards in the Netherlands. This was upheld both by the Dutch Procurator General and by the Dutch Supreme Court in late 2020.
In July 2020, the Claimants applied to the English courts to use their powers under section 103(5) of the Arbitration Act 1996 (the “1996 Act”) to lift the Stay or, alternatively, make any continuation of the Stay conditional on security from the Defendant.
The Defendant argued that: (i) section 103(5) of the 1996 Act does not apply unless and until the Immunity Jurisdictional Objection has been considered and rejected; and (ii) the English courts should use their general case management powers under the Civil Procedure Rules (the “CPR”) to continue the Stay without security pending the final outcome of the Set Aside Proceedings.
The High Court agreed with the Defendant and, exercising its general case management powers under the CPR, maintained the Stay without security.
Decision
No powers under section 103(5) of the 1996 Act; only general case management powers
The High Court held that:
- any exercise of powers under section 103(5) of the 1996 Act amounts to an assertion of adjudicative jurisdiction over the Defendant;
- such jurisdiction does not yet exist because the Immunity Jurisdictional Objection is pending; and
- the High Court can only assume such jurisdiction and exercise such powers if and when the Immunity Jurisdictional Objection has been considered and rejected.
The High Court explained that, instead, it was exercising its general case management powers under the CPR. It also acknowledged the parties’ agreement that the case law on section 103(5) of the 1996 Act was relevant at least by way of analogy or guidance when considering the Stay.
Stay continues until the final outcome of the Set Aside Proceedings
After a detailed analysis of ten factors, the High Court decided to continue the Stay until the final outcome of the Set Aside Proceedings (including any reference to the Court of Justice of the European Union and remittance to the Hague Court of Appeal).
In favour of lifting the Stay, the High Court identified five factors:
- The Claimants have secured Awards for very large sums, which have been upheld by the Hague Court of Appeal.
- There is a pro-enforcement philosophy underlying the 1996 Act and the 1958 New York Convention.
- The Claimants are prejudiced by being kept out of their money, or at least delayed in the enforcement steps they could otherwise take in England and Wales (or overseas but in reliance on an English judgment), possibly for several more years. However, the High Court commented that:
- delay of a few years would not be inordinate in the context of investor-state arbitrations generally, or in the context of the overall duration of this case;
- delay can, to a degree, be compensated by an award of interest;
- there is no suggestion that the Claimants are lacking in means such that the delay would cause hardship; and
- there is no evidence that the delay would cause specific business opportunities to be irretrievably lost.
- While there is a risk of dissipation by the Claimants if the English Enforcement Proceedings are allowed and the Awards are later vacated in the Set Aside Proceedings, this could probably be overcome by paying any enforced amounts into court or escrow.
- The Claimants lack the element of protection or advantage resulting from a stay because the High Court cannot and would not order security as a condition to continue the Stay (as explained below).
In favour of continuing the Stay, the High Court also identified five factors:
- Continuing the Stay will not create or materially increase the risk of:
- dissipation of assets by the Defendant: (i) there is no evidence of any such dissipation to date; and (ii) the Claimants’ arguments actually seem to suggest that the risk would increase once the Stay is lifted; or
- other events, such as international sanctions against the Defendant, likely making enforcement more difficult, although it is always possible that events over time could have such an effect.
- The Defendant’s appeal before the Dutch Supreme Court has a realistic prospect of success and is not being pursued merely as a delaying tactic. Considering the Defendant’s grounds of appeal before the Dutch Supreme Court, the High Court held as follows:
- First ground: While the High Court should be particularly reluctant to express a view on foreign procedural law, especially if local courts have already reached a decision, it is possible that the Hague Court of Appeal was overly restrictive in its application of Dutch procedural law to dismiss the Defendant’s allegations of fraud on the arbitral tribunal.
- Second ground, first issue: It might be argued cogently that Article 45(1) of the ECT prevents the provisional application of the ECT if it is inconsistent with national laws more generally rather than, as the Hague Court of Appeal decided, with national laws on the provisional application of treaties.
- Second ground, second issue: Even though the Hague Court of Appeal’s conclusions on Russian law are issues of fact and, thus, not typically susceptible to further challenge, there is a realistic prospect that they will be overturned for circularity, logical fallacy and reliance on an overly narrow interpretation of the test for inconsistency under Article 45(1) of the ECT.
- Third ground: Contrary to the judgment of the Hague Court of Appeal, it is arguable that, in light of its object and purpose of protecting cross-border investments, the ECT does not apply to investments that in commercial substance are made by nationals in their own state through corporate entities located elsewhere but which have no other business of their own. That is so even in circumstances where, on a strict application of the law of trusts, such entities are not owned by the nationals in question.
- Other grounds: Since the Defendant has a realistic prospect of success based on its first three grounds of appeal, there is no need to assess the remaining four grounds.
- The Defendant only seemed to lack good faith in the broader sense. After a careful review of the evidence, the High Court found indications that:
- The Defendant believes its Set Aside Proceedings are justifiable and have prospects of success. Therefore, the Defendant is pursuing them in good faith and not simply by way of delaying tactics.
- Nonetheless, the Defendant is unlikely to offer payment if unsuccessful and may even retaliate in the event of enforcement measures. Therefore, while the Defendant wishes to pursue what it considers to be a well-founded challenge by legal process, it is unwilling to accept the result if it loses.
- Where a challenge in the curial court has a realistic prospect of success, there are advantages in allowing that process to run its course, in the interests of comity, avoidance of inconsistent decisions and efficiency.
- Given the overlap between the Defendant’s grounds for the Immunity Jurisdictional Objection and its grounds in the Set Aside Proceedings, there is a specific risk of unfairness if the Defendant was unable to advance (or failed in) the Immunity Jurisdictional Objection due to the binding effect of the Hague Court of Appeal’s decision, only for such decision to be later reversed by the Dutch Supreme Court.
The High Court then assessed the issue in the round and found that the prejudice to the Claimants arising from further delay in potential enforcement measures, without security in the meantime, was outweighed by the advantages, referred to in the fourth and fifth factors in favour of continuing the Stay, of awaiting the final outcome of the viable challenge brought by the Defendant in the Set Aside Proceedings.
No security from the Defendant
Despite continuing the Stay, the High Court held that the Defendant did not need to provide any security.
First, the High Court observed that the Claimants applied for security only on the basis of section 103(5) of the 1996 Act. However, as explained above, the High Court lacked any power under the 1996 Act because the Immunity Jurisdictional Objection was pending.
Second, the High Court commented that, even if it did have powers under section 103(5) of the 1996 Act, it would not have required security from the Defendant for broadly similar reasons it ordered the continuation of the Stay. The High Court also made three further points:
- Given the low to no risk of dissipation by the Defendant, security would probably in effect give the Claimants the bonus of a significant enforcement advantage.
- Security would in substance force the Defendant to pay in order to be able to have a ‘clean slate’ for the Immunity Jurisdictional Objection, i.e., unhindered by the binding effect of the Hague Court of Appeal’s decision, which might be later reversed by the Dutch Supreme Court.
- There appears to be an analogy between this case and a challenge under section 67 of the 1996 Act. This analogy seems to further validate the decision not to order security because, under section 67 of the 1996 Act, security: (i) should only be ordered where the challenge is ‘flimsy’ and any delay caused by the challenge will prejudice enforcement of the arbitral award; and (ii) should not be used simply to help the claimant enforce the arbitral award. However, as the Defendant did not raise the point, it need not be decided.
Comment
In this lengthy and thorough decision, the High Court provided a helpful analysis of the English law rules on stay of enforcement of arbitral awards and requiring security, and how they would be applied in the context of set aside proceedings elsewhere. Furthermore, it confirmed that jurisdictional objections must be resolved before it can exercise its powers under section 103(5) of the 1996 Act. Until then, it can only exercise its general case management powers under the CPR.
The High Court’s decision is not surprising given: (i) the size and importance of the Awards; (ii) the low to no risk of asset dissipation; and (iii) the overlap between the Defendant’s grounds for the Immunity Jurisdictional Objection and its grounds in the Set Aside Proceedings. However, the High Court’s departure from, and criticism of, the judgment of the Hague Court of Appeal (albeit only on a provisional basis) is noteworthy, especially with regard to matters of Dutch procedural law. In these circumstances, if the Dutch Supreme Court upholds the judgment of the Hague Court of Appeal and the Awards, it will be interesting to see whether and to what extent the High Court will set aside its criticism and follow the same approach for the purposes of the Immunity Jurisdictional Objection and the English Enforcement Proceedings.
Finally, the High Court’s conclusion that the Defendant has a realistic prospect of success in setting aside the Awards emphasises the complexity of the Awards, as each court seems to take a different approach with each decision. It remains to be seen whether this will change after the conclusion of the Set Aside Proceedings, in the inevitably long series of enforcement proceedings that will follow around the world.
Bianca Vasilache is an Associate at Allen & Overy, London, practising international commercial and investment-treaty arbitration. She is the creator and host of Allen & Overy’s graduate podcast, ‘Launch: The Careers Podcast’. Bianca is passionate about legal tech and has helped develop several internal legal tech tools.
