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October 08, 2016

Yukos: Worth the Wait for the Dutch Appeal

Just when you thought you knew what you needed to know about enforcement (or not) of annulled foreign awards, along comes the Yukos case in yet another chapter. This one is entitled What to Do While We Wait for the Dutch Appeal?. It is written by a US District Court judge in Washington DC. And the Answer is: Just Wait! (Hulley Enterprises Ltd. v. Russian Federation, 2016 WL 5675348 (D.D.C. Sept. 30, 2016)).

In case you are recently returned from the Gulag, here are the basics: tagged with a $50 billion award by a Dutch-seated Tribunal, for carrying out a tax-based vengeance scheme against the politically hostile oligarchs who came to control the denationalized petrol colossus Yukos, Tsar Vladimir sent his lawyers to a Dutch first instance court to get the Award annulled for lack of jurisdiction. There Vlad won on a point he had lost before the Tribunal: that Russia never validly adopted the arbitration scheme of the Energy Charter Treaty (ECT) — no arbitration agreement=no valid award. The Dutch first instance court, unimpressed with the analysis given by a cobbled-together Tribunal of international law neophytes named Schwebel, Poncet and Fortier, bought this argument, and consumed all the Ossetra Caviar and Stolichnaya-laced Kool-Aid that Vlad presented with it.

America being a land teeming with Russian Federation assets,  Ossetra Caviar being perhaps the most delectable, the Yukos shareholders sought confirmation of the Award in a federal court in Washington D.C.– making their filing in 2014 hard on the heels of Russia’s filing of the annulment case in The Hague. Subject matter jurisdiction of the DC confirmation case was alleged to be based on the Foreign Sovereign Immunities Act (FSIA) — and, for our simple-story purposes, on the FSIA’s “arbitration exception” to sovereign immunity.  That “exception” applies, and permits US courts to exercise jurisdiction over an action against a foreign sovereign, in an action to confirm a foreign arbitral award that “is or may be governed by” the New York Convention. (28 USC §1605 (a)(6)).

The first 18 months or so of this US confirmation action need not concern us here. But once the first instance Dutch Court had annulled the Award , as it did to much consternation in April 2016, the Award-winning Yukos shareholders asked the US Court to stay their own US enforcement case pending an appeal in the Dutch judicial system that might undo the first instance set aside judgment. Putin & Co., Bearish, opposed the motion to stay and insisted that the Court should proceed to address the threshold issue of its subject matter jurisdiction, meaning that the Court should decide upon the applicability or not of the arbitration exception to sovereign immunity under the FSIA with regard to proposed confirmation of an award lawfully judicially annulled at the arbitral seat. Understandably, Russia expected to argue that, with deference to the first instance court in the Hague, the US court should find subject matter jurisdiction absent if, on the view that Russia never signed up for arbitration under the ECT, there would be no possibility of enforcement under the New York Convention.

As a District Court judge concerned with efficiency, comity, and eventually an orderly and thoughtful adjudication, if required, under the New York Convention and the FSIA, to decide as she did in favor of a stay appears to have been an inevitable conclusion. But we should observe closely, and perhaps marvel a bit in this instance, at the method and the analysis. The key points in the view of this observer are these:

1) The proper legal framework for analyzing the stay-versus-adjudicate issue is not Article VI of the New York Convention – which permits the enforcement cofht at the seat. Instead the legal frame of reference is the discretion afforded the court in the exercise of its “inherent power” to manage its own docket, a power well established in American law. That is the situation here because the applicability of the New York Convention is a merits question, and so Article VI may not be invoked as the basis for adjourning the enforcement action in advance of a judicial determination that subject matter jurisdiction exists. Like a dismissal on the basis of the doctrine of forum non conveniens, a stay of proceedings based on the Court “inherent powers to manage its docket” is one of the rare significant adjudications that a federal court may make before its subject matter jurisdiction is determined.

2) Comity, that is to say deference to the adjudicatory power and action of a foreign court, may, and in this case did, favor a stay of the US confirmation of the Yukos award, because the eventual Dutch appellate court judgment sustaining either the Award or the annulment judgment would, under the US case law on enforcement of foreign awards and non-enforcement of annulled foreign awards, decide or substantially influence the eventual decision in the confirmation case. The Court rightly reasoned that if the Dutch appellate courts uphold the annulment as a lawful annulment, the Award-winning Shareholders might well find the chances of confirmation in the US to be so remote that the confirmation case might be withdrawn.  If the Dutch courts reinstate the award, the Court noted, there could be arguments both ways as to whether Russia is entitled under the New York Convention to a de novo examination of the arbitral jurisdiction/ECT issue in the US Court, but even if such de novo review were required the Court might find the Dutch court’s analysis to be helpful and persuasive.

3) An analysis of whether the Shareholders would be entitled to a stay of the confirmation action under NY Convention Article VI served as a useful as a cross check (in dictum) on the court’s “inherent power” analysis — with the Court here finding that the same outcome would have been reached had the Convention been applied.

It is difficult to know from the opinion how extensively the parties briefed the question that is presented in the Dutch courts, that is to say, how much weight the Shareholders placed on the argument that the Dutch appeal was likely to result in reinstatement of the Award. Many sources in the arbitration community have expressed the view that the appeal has a significant chance of success. It would have been a possible outcome for the Court to deny the stay, deny subject matter jurisdiction under the FSIA, dismiss the enforcement action, and leave the Shareholders with the option to apply for reconsideration in case of a reversal in the Dutch courts. This was the outcome sought by the Russian Federation, which made little effort to conceal its desire for the immediate political victory of a US judgment rejecting US jurisdiction over the Russian State. The Court here determined that, on balance, there was more hardship involved for the Shareholders in requiring them potentially to apply for reconsideration than there was for Russia in having the inert confirmation case remain pending during the estimated 2-3 years needed for the Dutch appellate proceedings to be completed.