On 27 June 2012, the English Court of Appeal issued the latest judgment arising out of the Yukos/Rosneft dispute, which has given rise to proceedings in numerous jurisdictions and forums since the controversial acquisition of Yukos Oil’s assets by Rosneft in 2004.
The Court of Appeal’s decision should be of interest to international businesses resolving disputes in foreign seats. It deals with the circumstances in which the English court can review the decision of a foreign court when enforcing a foreign arbitral award even when that award has been set aside in the jurisdiction in which it was made.
In these proceedings between Yukos Capital S.A.R.L. (Yukos) and OJSC Rosneft Oil Company (Rosneft), the key question was whether the decision of the Russian court to set aside four arbitral awards could be investigated by the English court to determine whether the decision was the product of corruption.
The current litigation has its origins in four arbitral awards dated 19 September 2006 (the Awards). The Awards were issued by a tribunal in arbitration proceedings administered by the International Commercial Court at the Chamber of Commerce and Industry of the Russian Federation. The effect of the Awards was that OJSC Yuganskneftegaz was ordered to pay US$425 million to Yukos, pursuant to loan agreements between the parties.
The Awards were set aside by the Russian Arbitrazh courts in May 2007. Nevertheless, Yukos sought to enforce the Awards in the Netherlands pursuant to Dutch law and the New York Convention. Although unsuccessful at first instance, the Awards were enforced by the Amsterdam Court of Appeal, which was prepared to disregard the Russian Arbitration courts’ annulment decision as lacking impartiality and independence. The Awards were subsequently paid, but Yukos continued to pursue Rosneft for payment of the post-award interest, which was US$160 million by the time the current English proceedings were commenced.
Before the English Commercial Court two preliminary issues were raised, upon which Hamblen J gave judgment in 2011. They concerned two related points. First, whether the Amsterdam Court of Appeal’s judgment that the Russian annulment decisions lacked impartiality and independence created an issue estoppel binding the English court. Secondly, whether Yukos was prohibited from pursuing the allegations relating to the Russian annulment decisions because of the doctrines of act of state, non-justiciability and/or comity.
The Commercial Court decided at first instance that Yukos succeeded on both issues: there was an issue estoppel preventing Rosneft from denying that the annulment decisions lacked impartiality and independence and none of Yukos’ allegations was covered by the act of state doctrine (or the other related concepts). Rosneft appealed.
The Court of Appeal devoted most of its time to the question of whether the Russian annulment decisions were subject to the act of state doctrine. The doctrine provides that the English court cannot sit in judgment upon the acts of a sovereign state (including, it was argued here, decisions made by its courts).
The conduct of the Russian court is central to the enforceability of the Awards. Under section 103(2)(f) of the Arbitration Act 1996 (which largely mirrors Article V(1)(e) of the New York Convention), it is a basis for refusal of recognition or enforcement of an arbitral award if the award has been set aside by a competent authority of the country in which the award was made. Since the seat of the arbitrations was Russia, the setting aside of the Awards potentially undermined their enforcement in England and Wales. However, both the Arbitration Act and the New York Convention provide that enforcement may be refused if the award has been set aside, thereby allowing some discretion on the part of the court in the state where enforcement is sought. It is therefore permissible for the English court to investigate the reason for a decision, but only if it is not prevented from doing so by the act of state doctrine.
After grappling with case law from England and the United States, the Court of Appeal reached the conclusion that the act of state doctrine (which it held was very closely linked to the concepts of non-justiciability, state immunity and comity) only applies to legislative and executive acts and not to judicial acts. In principle, therefore, the annulment decisions were capable of adjudication by the English court.
However, in itself this finding did not dispose of the issue, since Yukos’ case went further than the decisions themselves. Yukos claimed they formed part of a campaign by the Russian state involving the deliberate misapplication of Russian law. This campaign allegedly included unwarranted tax assessments, the misconduct of bailiffs, which was aimed at forcing Yukos into insolvency, and rigged auctions for the Yukos shares. Yukos argued that it followed that it was likely the Russian courts were subject to improper influences (known colloquially as “telephone justice”), which contributed to the annulment decisions. The English court was therefore asked to undertake a wider investigation into the lawfulness of these actions, some of which included acts that could be considered executive (the tax assessments). Nevertheless, the Court of Appeal maintained its view that none of Yukos' allegations was barred by the act of state doctrine.
Apparently, by reverse-engineering the outcome it saw as desirable, the Court of Appeal came to the view that such tax assessments, whilst “probably” executive in nature (and therefore in principle covered by the doctrine), could still be investigated because they functioned within a tax code designed to operate according to law and subject to judicial rulings. The Court also made a broader point regarding the need for states to adhere to international judicial standards required by the rule of law. It should be noted that Yukos will still have to make the case that such acts were indeed unlawful in order to pursue its case for enforcement.
Issue estoppel was dealt with more briefly by the Court of Appeal, although ultimately it found in favour of Rosneft on the point. The Court noted that a requirement for issue estoppel in relation to foreign judgments is that the point before both courts must be exactly the same. Overturning Hamblen J, the Court determined that, whilst the principal issue was the same (namely whether the annulment decisions were partial and dependent), in the Netherlands this was to be determined by reference to Dutch principles of public policy and public order, which are different from those in England. The question to be determined by the English court was therefore not exactly the same and no issue estoppel arose.
This judgment lends further support to the view that English courts are now amongst the most arbitration-friendly in the world. The key point to take from the Court of Appeal’s decision is the principle that the English court may sit in judgment upon the decisions of foreign courts. Whilst this follows from the principles that apply to, for example, forum non conveniens, it is helpful to have it confirmed that judicial acts are not acts of state. This should provide some comfort to those seeking to challenge the decisions of foreign courts on their arbitral awards. However, it remains to be seen whether Yukos will be successful in showing that those decisions indeed lacked impartiality and independence and that they should therefore be disregarded for the purposes of the post-award interest claimed.