On writs filed by the Russian Federation seeking to annul the awards issued by an international arbitral tribunal in arbitrations commenced against the Russian Federation by the former shareholders of Yukos Oil Company
The Ministry of Finance of the Russian Federation announces that on January 28, 2015, the Russian Federation filed with the District Court in The Hague three writs that seek to annul the awards issued by an international arbitral tribunal in three parallel arbitrations commenced under the Energy Charter Treaty by the former majority shareholders of Yukos Oil Company. The writs were duly served on Yukos’ former majority shareholders on November 10, 2014, thereby commencing legal proceedings to annul all three awards.
In connection with a publication on January 27, 2015 in Global Arbitration Review, a leading international arbitration law journal, of a summary of certain aspects of the Russian Federation’s annulment writs, and in order to facilitate an accurate understanding of the reasons why the awards should be annulled, the Ministry of Finance of the Russian Federation has posted on its official website the following documents: (a) the arbitral award issued in relation to one of the claimants (the other awards are identical in all material respects other than the amount of damages awarded); (b) the Russian Federation’s writ filed with the Hague District Court in relation to that same claimant (the other writs differ only in discussing the amount of damages awarded); and (c) the expert reports filed in support of the Russian Federation’s writs. These materials are available at link
The annulment writs note that the arbitral awards directly contradict two prior decisions issued by separate Chambers of the European Court of Human Rights. Both Chambers unanimously held that Yukos engaged in massive tax evasion, that Yukos’ tax assessments were proper and in accordance with Russian law, that the Russian authorities’ actions were not politically motivated, and that Yukos had not been singled out for discriminatory treatment. The writs further note that Yukos’ tax evasion scheme would be condemned by the tax authorities of virtually all nations.
The writs also note that the claims of Yukos’ former majority shareholders should never have been heard by an international arbitral tribunal, because this was a purely domestic Russian dispute. Under the Energy Charter Treaty, an international arbitration may be commenced only by nationals of a state who have made an investment in a company located in another state. The real claimants in interest in this dispute are all nationals of the Russian Federation, and none of them ever made a foreign investment in Yukos.
The Russian Federation requested in the writs that the awards be annulled citing the following grounds. First, the tribunal did not have jurisdiction to hear the former Yukos shareholders’ claims. Second, the tribunal violated its own mandate. Third, the tribunal either failed to give reasons, or gave inconsistent reasons, for key aspects of its rulings. Finally, the awards violated public policy, including the Russian Federation’s fundamental right to due process in defending itself in economic disputes.
In showing that the tribunal did not have jurisdiction, the writs note that:
- the Russian Federation never ratified the Energy Charter Treaty, and the Treaty provides that in such cases it is to be applied only to the extent it is not inconsistent with Russia’s own domestic law; the arbitration of tax and expropriation disputes has never in principle been permitted by Russian law, and deviations from this principle are permitted only to the extent provided for by an international treaty that, unlike the Energy Charter Treaty, has been ratified by the Russian Federation.
- the Energy Charter Treaty protects only foreign investments in the energy sector of the host State. The parties’ dispute in fact constitutes a purely domestic dispute between the Russian Federation and the Russian nationals who previously owned Yukos and currently control the three offshore shell companies that commenced the international arbitral proceedings under the Energy Charter Treaty; these shell companies were organized in Cyprus and the Isle of Man solely to hold the Russian nationals’ Yukos shares, but never conducted any business there, and none of the shell companies or any of their Russian owners ever made any foreign investment in Yukos.
- under the Energy Charter Treaty, a tribunal may not hear claims involving “taxation measures” with limited exceptions not relevant here; the tribunal in the present case nonetheless heard and ruled on claims that undeniably involved taxation measures, in particular, that the Russian authorities acted improperly in assessing and then attempting to collect Yukos’ taxes.
In showing that the tribunal violated its mandate, the writs note that:
- the Energy Charter Treaty requires, with no exceptions admitted, that any dispute involving a claim that a tax constitutes an expropriation “shall” be referred to the competent tax authorities in the parties’ home countries before a tribunal may rule on the matter; the tribunal nonetheless inexplicably failed to refer the parties’ dispute to their competent tax authorities to obtain their expert views on this issue;
- the tribunal failed to give the Russian Federation an opportunity to be heard on the novel and deeply flawed methodology that it used to calculate the losses allegedly incurred by the claimants; this methodology was developed by the tribunal on its own initiative after rejecting the claimants’ methodology; the tribunal’s inexplicable failure to respect the Russian Federation’s basic due process rights resulted in, among other things, the tribunal’s ignoring a fundamental principle of corporate finance, in particular, that dividend payments always reduce a company’s shareholder value; this failure caused the tribunal to double count claimants’ supposed losses and alone resulted in the awarding of more than USD 20 billion in damages having no economic basis; this erroneously awarded sum is by itself more than eight times larger than the total amount of damages previously awarded in any international arbitration.
- the arbitrators did not personally fulfill their mandate, in violation of Dutch law; in particular, the assistant to the arbitrators, who the tribunal had previously stated would be responsible only for administrative tasks, in fact billed the parties for more hours than did any of the arbitrators; the tribunal must therefore have impermissibly delegated to the assistant certain of the arbitrators’ personal responsibilities, including analyzing the evidence and applicable law, participating in deliberations, and preparing the arbitral awards.
In showing that the arbitrators failed to give adequate reasons (or gave inconsistent reasons) for their rulings, the writs note that:
- the damages methodology developed by the tribunal on its own initiative was internally inconsistent and led to the unwarranted awarding of damages.
- the tribunal gave no reasons at all for the size of the adjustments it made to the amount of Yukos’ hypothetical dividends proposed by claimants’ own damages expert.
the arbitrators found that the Russian Federation had failed to submit “any” factual evidence in support of most of Yukos’ corporate profit tax assessments, even though the Russian Federation undeniably submitted detailed and voluminous factual evidence showing that all of the trading vehicles used by Yukos to implement its tax evasion scheme were sham shell companies.
- the tribunal based many of its key conclusions on its own speculation as to what might have happened, rather than the actual evidentiary record; for example, the arbitrators attributed to the Russian Federation certain actions taken by a State-owned company in respect of Yukos’ assets even though the tribunal acknowledged both that this may be done only if there is “proof of specific State direction” and that there was in fact no such proof in this case.
- the arbitrators concluded that the auctioning of the shares of one of Yukos’ key production subsidiaries was both “rigged” and inevitably led to the company’s bankruptcy; these conclusions were based on the tribunal’s finding that the public auction price for the company’s shares was “far below” their fair value, even though the arbitrators’ own calculations show that the price achieved for the shares was actually higher than their fair value.
In showing that the awards reflect the arbitrators’ partiality and prejudice towards the Russian Federation, and violated public policy, including the Russian Federation’s fundamental right to due process, the writs note that:
- the arbitrators based many of their key rulings on what they openly described as their own speculation as to what the Russian Federation might have done, rather than what the evidence showed the Russian Federation to have actually done; for example, the tribunal concluded that even if Yukos had made the filings that it was legally required to make, but did not in fact make, in order to avoid VAT on the disputed oil sales, the Russian Federation would have somehow found another basis for assessing the challenged VAT.
- the arbitrators relied on their own views as to what Russia’s tax law should provide, rather than what they conceded that law actually does provide; for example, the tribunal excused the company’s failure to comply with VAT refund filing requirements that are applicable to all Russian taxpayers, because the tribunal “found it difficult to understand” why these filing requirements should be applied to Yukos.
- the damages awarded by the arbitrators are not only punitive, but are also not based on the valuation standard prescribed by the Energy Charter Treaty.
As indicated above and as demonstrated in greater detail in the Russian Federation’s annulment writs, the tribunal:
- engaged in a one-sided marshaling of the evidence and legal authorities.
- inappropriately interpreted numerous court rulings issued in the Russian Federation, as if the tribunal was sitting as an appellate Russian court; in doing so without the benefit of Russian legal advice, the arbitrators effectively overruled decisions rendered by Russia’s Supreme Arbitrazh Court (Russia’s highest court for commercial claims) many years before the parties’ dispute.
- repeatedly failed to take account of the necessary consequences of its own findings; for example, the tribunal quoted contemporaneous statements made by senior Yukos officials, warning that the company (and not only its trading shells) “would” suffer serious financial consequences if its tax evasion scheme was uncovered by the Russian authorities, but nonetheless concluded that there was no basis for holding the company liable for the taxes that the tribunal found had actually been evaded by Yukos’ use of sham trading companies.
- issued awards that bear the hallmarks of a tribunal searching for reasons to find the Russian Federation liable when all the grounds cited for doing so are not supported by either the facts or the law, not least in its repeated recourse to impermissible speculation as the grounds for many of its key decisions.