On 1 November 2023, in Hulley v Russian Federation [2023] EWHC 2704 (Comm), Mrs Justice Cockerill in the English High Court (the Court) dismissed a jurisdictional challenge brought by the Russian Federation (Russia) in proceedings for the enforcement of two arbitral awards issued in favour of the former majority shareholders in OAO Yukos Oil Company (Yukos) for an amount exceeding US$50 billion.
The central issue was whether Russia was precluded, on the basis of issue estoppel, from re-arguing that it had not agreed in writing to submit the dispute to arbitration because of previous judgments rendered on the same issue by the Dutch courts in the context of set aside proceedings in respect of the same awards. Russia argued, among other things, that such a determination, based on the decision of a foreign court, would preclude the Court from considering whether Russia benefitted from immunity under the State Immunity Act 1978 (SIA 1978), and whether there is a valid and binding arbitration agreement that curtails immunity pursuant to Section 9 of the SIA 1978.
The Court rejected the argument that state immunity bars issue estoppel, finding that the fact that Russia is a state rather than a company or an individual does not preclude the application of issue estoppel if other conditions, namely identity of issues and finality, are met. The Court then proceeded to consider those conditions. The Court dismissed Russia's argument that the issues in the English and Dutch proceedings were distinct, concluding that "both proceedings are concerned with the central question of whether there was a valid agreement to arbitrate". The Court also ruled that although the Dutch Supreme Court had overturned part of the Hague Court of Appeal's decision in a cassation appeal, it had only done so on one ground (fraud). This did not affect the finality of the remainder of the Hague Court of Appeal's decision relating to the jurisdictional challenge, which overlaps with the English enforcement proceedings. As all the conditions for the application of issue estoppel were met, the Court held that Russia was precluded from raising a jurisdictional challenge, and Russia's application should be dismissed.
Background
In 2005, three former Yukos majority shareholders (the Shareholders, and Claimants) initiated arbitration proceedings in the Permanent Court of Arbitration in The Hague (the Tribunal) under the Energy Charter Treaty 1994 (ECT), alleging that Russia had unlawfully expropriated Yukos' assets. In 2014, the Tribunal found in favour of the Shareholders, awarding them total damages of over $50bn (the Awards). However, in April 2016, the Hague District Court set aside the Awards, and the Shareholders filed an appeal to the Hague Court of Appeal.
On 18 February 2020, the Hague Court of Appeal quashed the Hague District Court's decision and reinstated the Awards. On 15 May 2020, Russia initiated a cassation appeal before the Dutch Supreme Court (the Cassation Appeal). In summary, the set aside grounds for the Cassation Appeal were that:
- The Awards were procured by a fraud on the Tribunal (ground 1);
- The Tribunal had no jurisdiction because Russia had not ratified the ECT, it had only applied it on a provisional basis which excluded an agreement to arbitrate;
- The Shareholders were not 'investors' and their interests in Yukos were not 'investments' and so the Tribunal had lacked jurisdiction;
- The Shareholders had acquired their shares in Yukos illegally and therefore their investments were not protected by the ECT and the Tribunal had lacked jurisdiction;
- The Tribunal failed to refer the dispute to the relevant Competent Tax Authorities under Article 21 of ECT thereby violating its mandate;
- The Tribunal had violated its mandate and been irregularly composed because parts of its role were delegated to a Tribunal Secretary; and
- The Tribunal overlooked evidence that Yukos had used sham companies to evade taxes.
On 5 November 2021, the Dutch Supreme Court handed down its judgment in the Cassation Appeal, rejecting all grounds for appeal except for ground 1 – the fraud ground, which was referred to the Amsterdam Court of Appeal for a decision on the merits.
In parallel, in 2015, the Shareholders had initiated enforcement proceedings in England, which were stayed due to the ongoing Dutch court proceedings. The stay was only lifted in October 2022 by Butcher J (the Butcher judgment) (Henshaw J had previously refused to lift the stay in April 2021 while the decision from the Dutch Supreme Court was pending). Against this background, on 1 November 2023, Mrs Justice Cockerill delivered her decision on the preliminary issues of a jurisdictional challenge, including on immunity grounds, raised by Russia in the English enforcement proceedings.
For further details regarding the Yukos case see our previous blog posts.
Issue estoppel
As stated by the Court, the preliminary issues raised in the case were whether, by reason of the Dutch court judgments, Russia was precluded from "re-arguing the question of whether it has agreed in writing to submit to arbitration the disputes that are subject of the Awards". If so, should Russia's application for a jurisdictional challenge, including on immunity grounds (the Jurisdiction Challenge), be dismissed? The answer given by the Court to both questions was "yes".
Immunity
Russia argued that the English court must uphold the immunity conferred by the SIA 1978, stating that s. 1(2) of the SIA 1978 imposes upon the court "a positive duty to give effect to the immunity conferred" by the Act and this freestanding duty requires the Court to be satisfied on its own analysis of English law whether s. 9 of the SIA 1978 does or does not apply on the facts of any given case. Applying issue estoppel based on a foreign judgment would prevent the Court considering Russia's state immunity argument.
The Court confirmed that foreign judgments can result in issue estoppel, but noted the lack of clear authority on this point when a state is involved. The Court cited two cases, Dallah v Pakistan and Diag Human SE v Czech Republic, which "implicitly recognize the possibility of issue estoppel against a state". After concluding that there are no provisions in the SIA 1978 that would prevent the application of common law doctrines, the Court came to a decision that "there is no reason why, if the relevant hurdles are cleared, there cannot be an issue estoppel arising out of a foreign judgment against a state, just as there can be against an ordinary company or individual".
The question was then whether Russia would have been immune if the Dutch courts had applied rules which corresponded to s. 9 of the SIA 1978 (that the immunity does not apply where the state has agreed to arbitrate) rather than the Dutch law on immunity. Section 2(1) of the SIA 1978 states that a state is not immune if it has submitted to the jurisdiction of the English courts. Under the SIA 1978, a state can submit to court jurisdiction by initiating the proceedings (s. 2(3)(a)) or intervening in the proceedings (s. 2(3)(b)). However, it is not a submission to jurisdiction if a state intervenes in the proceedings under s. 2(3)(b) to claim immunity or to assert an interest in property.
The Claimants, amongst other arguments, stated that Russia had waived its immunity because it had submitted to the jurisdiction in the Netherlands by challenging the awards in the Dutch courts. The Court agreed, noting that if the Dutch courts applied Section 9 mutatis mutandis, there would have been no state immunity. Therefore, subject to identity of issue and finality there was no bar to issue estoppel.
Identity of Issue
Russia argued that while both the English and Dutch proceedings concerned Russia's agreement to arbitrate, the issues raised in those proceedings were distinct. The Dutch proceedings were concerned with the validity and existence of the arbitration agreement (including the fraud allegation), whereas the English proceedings concerned Russia's immunity under the SIA 1978.
The Court dismissed Russia's argument, concluding that "both proceedings are concerned with the central question of whether there was a valid agreement to arbitrate" and that Russia's position had always been both in the Dutch and English proceedings that, if there was a valid agreement, there was jurisdiction to arbitrate. The Court also noted, citing the Butcher judgment, that in previous English enforcement proceedings, Russia had argued that a stay of proceedings was required precisely because of the overlap of issues raised between the Dutch and the English proceedings. The Court, therefore, concluded that there was identity of issues.
Finality
Russia argued that the Dutch judgments lacked res judicata effect under Dutch law because the Dutch decisions were not final. In particular, Russia relied on the fraud ground of challenge pending before the Amsterdam Court of Appeal, and the possibility of a referral to the Court of Justice of the European Union (CJEU).
The Court, relying on expert evidence, ruled that under Dutch law, a case referred from the Dutch Supreme Court to a lower court must be decided in a manner consistent with the Supreme Court's judgment. In this case, the Dutch Supreme Court had dismissed all issues except for the fraud ground, leaving the Amsterdam Court of Appeal to deal with this outstanding issue. The Court also accepted the "Partial Effects Rule" under Dutch law, which states that an annulled judgment remains binding on issues not subject to a cassation appeal or rejected by the Supreme Court. Thus, the Hague Court of Appeal judgment is considered final and binding, subject to the effect of the appeal on the fraud ground before the Amsterdam Court of Appeal, if any, and any potential CJEU referral.
Fraud Ground (ground 1)
The Court decided that the question of the alleged fraud which is pending before the Amsterdam Court of Appeal, would have no impact on the jurisdictional debate, as there was no basis for the Hague Court of Appeal's findings on jurisdiction to be affected by the fraud point pending before the Amsterdam Court of Appeal.
CJEU referral
Russia had requested that the Amsterdam Court of Appeal seek a preliminary ruling from the CJEU on the interpretation of various ECT provisions, arguing that this could affect its jurisdictional arguments and potentially lead to an annulment of the Awards by the Amsterdam Court of Appeal. The Court noted that under EU law, a national court may request a CJEU referral if an EU law question arises. The Elchinov case (on which Russia relied) allows a domestic court to depart from a higher court's ruling if, taking into account the requested CJEU interpretation, the judgment is inconsistent with EU law. However, the Court noted that the Elchinov case has a "narrow target" and applies only when the national court's decision involves the interpretation and application of EU law. As the Amsterdam Court of Appeal only has jurisdiction to decide on the fraud ground, and, with the jurisdiction issues having been finally resolved under Dutch law by the Hague Court of Appeal, there was no issue to be referred to the CJEU.
After the Court determined that the conditions for application of issue estoppel were met, it considered whether there were any special circumstances that might make it appropriate not to uphold a plea of issue estoppel. The Court did not accept that the novelty of applying issue estoppel against a state and the involvement of a multilateral treaty was sufficient for the special circumstance exception to apply. Accordingly, the Court decided that Russia was precluded from pursuing the Jurisdictional Challenge, including on immunity grounds.
Comment
The Court's decision to preclude Russia from re-arguing the jurisdictional points marks a significant advancement for the Shareholders in the nearly decade-long enforcement proceedings. Mrs Justice Cockerill handed down directions for Russia to file its substantive defence to enforcement in January, moving towards a hearing in early summer next year. The potential enforcement of these Awards has moved a considerable step closer (although Russia may apply to the Court of Appeal for permission to appeal). These enforcement proceedings in England are only one of many ongoing legal battles that have continued since the commencement of the arbitration proceedings in 2005. Separate enforcement proceedings are also ongoing in the District of Columbia and in the Netherlands.
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