Award - Russian courts - Claimant seeking interest payments in England

Yukos Capital SARL v OJSC Rosneft Oil Company: Queen’s Bench Division, Commercial Court (Mr Justice Hamblen): 14 June 2011

The claimant company was a member of the Yukos Group (Yukos), a well-known Russian group of companies involved in oil production and trading.

After the forced break-up of Yukos in Russia, the respondent company, Rosneft, acquired the majority of its assets.

At that time, Rosneft was ­wholly owned and controlled by the Russian government.

On 19 September 2006, a tribunal acting under the rules of the International Commercial Arbitration Court of the Chamber of Trade and Industry of the Russian Federation, made four awards in favour of the claimant (the awards).

The awards related to certain intra-group loans made between the claimant and a (former) production subsidiary of Yukos (YNG).

By the time that the awards were made, and the Russian Arbitrazh Courts came to consider them, YNG had been acquired by Rosneft as part of the renationalisation of Yukos’ assets.

The Arbitrazh Courts were therefore considering awards which required Rosneft (then wholly state owned) to pay the claimant (still controlled by Yukos and its shareholders) a sum in excess of US$400m The awards were subsequently set aside by the Russian Arbitrazh Courts on Rosneft’s application (the annulment decisions).

The decision to set aside the awards was upheld on appeal, and permission to appeal to the highest Arbitrazh court was refused.

The awards were, however, paid in August 2010 following enforcement proceedings in the Netherlands (the Dutch enforcement proceedings) in which the Amsterdam Court of Appeal determined in April 2009 (the appeal decision) that the annulment decisions should not be recognised as they were the result of a partial and dependent judicial process.

The claimant sought, in the English courts, to recover interest in respect of Rosneft’s refusal to satisfy the awards between 2006 and 2010.

The interest claimed (at Russian central bank rate) amounted to over US$160m.

The claimant contended that the annulment decisions should not be recognised by the English court because they were the product of a judicial process that was partial and dependent and therefore offended against English principles of substantial justice, and that Rosneft was estopped from contending otherwise (the issue estoppel argument).

If, however, there was no issue estoppel, then the claimant sought to make good its case that the annulment decisions were the result of a partial and dependent legal process by reference to evidence to which objection was taken by Rosneft on the grounds of act of state/non-justiciability.

In outline, the claimant relied, in part, on the alleged perverse application of Russian law within the annulment decisions themselves, supported by the evidence of its Russian expert witness.

It also sought to rely on various circumstances surrounding the annulment decisions.

In particular, it alleged, among other things, that there was, from December 2003 a concerted campaign against Yukos with the twin aims of destroying a political adversary and renationalising the assets of Yukos, which involved unfair and partial judicial proceedings in which the courts were led by the executive in numerous respects.

Preliminary issues arose for consideration.

The two preliminary issues were: (i) whether Rosneft was issue estopped by the appeal decision from denying that the judgments of the Russian civil courts annulling the arbitral awards were the result, or likely to be the result, of a partial and dependent judicial process; and

(ii) whether the relevant parts of the claimant’s re-amended reply having regard to the principals of the act of state/non-justiciability, should be struck out (the strike out issue).

Rosneft submitted that caution was required before concluding that a foreign court had made a clear decision on the relevant issue.

It further submitted, among other things, that the issue had to be necessary to the original decision; that there needed to be full contestation of the issue in question and the application of the principle of issue estoppel was subject to the overriding consideration that it had to work for justice and not injustice.

On that basis, Rosneft disputed that there was an issue estoppel.

In relation to the strike-out issue, Rosneft contended that the allegations made by the claimant engaged, among other things, the act of state principle.

That principle applied to the legislation or other governmental acts of a recognised foreign state or government within its own territory. The English courts would not adjudicate on, or call into question, any such acts.

They could be pleaded and relied on by way of defence without being subjected to that kind of judicial scrutiny.

It submitted that the essence of the allegation required the English court to adjudicate on and call into question the legitimacy and legality of the acts of a recognised (and friendly) foreign state or government within its own territory, including the legitimacy and legality of the decisions of its courts.

The claimant submitted that, while it was ­it accepted that certain limitations applied where the English court was asked to consider allegations involving foreign sovereign states, those limitations, like any limitation on the court’s ability to ascertain the truth, should be kept strictly circumscribed, that they should not be allowed to extend beyond the purpose which they serve and that none of them applied in the present case.

Consideration was given to the case of Kirkpatrick v Environmental Tectonics Corporation Intl 493 US 400, 110 Sup Ct Rptr 701 [1990] (Kirkpatrick).

The court ruled: (1) It was established law that to create an issue estoppel, three requirements had to be satisfied.

First, the judgment in the earlier action relied on as creating an estoppel had to be (a) of a court of competent jurisdiction, (b) final and conclusive and (c) on the merits.

Second, the parties in the earlier action relied on as creating an estoppel, and those in the later action in which that estoppel was raised as a bar, had to be the same.

Third, the issue in the later action, in which the estoppel was raised as a bar, had to be the same issue as that decided by the judgment in the earlier action (see [42] of the judgment).

In the present case, Rosneft’s defence to the enforcement claim and the claimant’s answer to that defence were the matters in issue in the enforcement proceedings; those were the issues which the court had to decide if it was to reach a decision.

Further, the finding that the annulment decisions had been the result of a partial and dependent legal process had been both necessary and fundamental to the original decision.

The fact that the Amsterdam Court of Appeal had determined that issue in the context of a different legal question made no difference.

Contestation was not relevant in the present circumstances.

It was clear that the issue had been decided by the Court of Appeal; that it had been a necessary part of its decision; that it had been a decision ‘on the merits’, and that it would have the force of res judicata in the Netherlands.

The factors relied on by Rosneft did not amount to the requisite ‘special circumstances’ as would exceptionally lead a court to refrain from finding an issue estoppel (see [91], [94], [95] [103], [104], [106] of the judgment).

Rosneft was issue estopped by the appeal decision from denying that the annulment decisions were the result of a partial and dependent judicial process (see [107] of the judgment).

DSV Silo-und Verwaltungsgesellschaft mbH v Sennar (Owners), The Sennar [1985] 1 WLR 490 applied; Carl Zeiss Stiftung v Rayner and Keeler Ltd (No 2), Rayner and Keeler Ltd v Courts [1966] 2 All ER 536 considered.

(2) In relation to act of state/non-usticiability, there were three potentially relevant principles in issue: first, the pure ‘act of state’ principle whereby the court would not adjudicate on the act of a sovereign government within its territory.

Second, the judicial abstention principle whereby a court would not assess or determine issues which depended on certain acts of a foreign sovereign, either within or without its territory, if there were no measurable standards by which such assessment or determination could be made.

Third, the political embarrassment principle whereby a court would not determine issues if to do so would embarrass the government of our own country.

Where, however, there had been a flagrant breach of international law or of human rights the court could in appropriate circumstances consider those breaches as an exception to the act of state doctrine (see [113], [138] of the judgment).

In the light of established authority, the pure act of state principle only applied to challenges to the validity of the act of state relied on.

That approach was consistent with principle.

The principle should not be treated as generally preventing any enquiry into, or criticism of, the behaviour of a foreign state or of its organs where it was relevant to some issue which the court had to decide.

In line with guidance to be found in the case of Kirkpatrick, as a general rule ‘validity’ in that context meant determining that the act was of no legal validity or effect and that ‘challenges’ to such validity meant that it was an issue which the court had to decide in order to reach its decision in the case before it (see [113], [131], [135], [139] of the judgment).

(3) Applying established principle, none of Rosneft’s pleas of act of state or non-justiciability in relation to the claimant’s allegations were valid, and accordingly the court declined to strike out the relevant paragraphs of the claimant’s pleading (see [205] of the judgment).

For the reasons set out, the court would rule in favour of the claimant on both preliminary issues and declarations would be made accordingly (see [207] of the judgment).

Gordon Pollock QC, Jonathan Nash QC and James Wilan (instructed by Byrne Partners) for the claimant; Anthony Trace QC, Benjamin John and Ciaran Keller (instructed by Travers Smith) for the respondent.