Yukos Award – Beginning of a New Enforcement Saga

yukos_1598901cWhile the recent agreement between Yukos shareholders and Rosneft settles all litigation disputes between them, it does not solve the existing disputes between Yukos and Russia as a state, in particular the $50 billion arbitration award made by the PCA in The Hague in 2014.

As Russia refuses to voluntarily comply with the award, Yukos is initiating new legal proceedings.  In an interview with a German newspaper Tim Osborne, a representative of a group of Yukos shareholders, said they were initiating enforcement proceedings against Russian state assets in the UK, France and the USA.

This situation is largely reminiscent of two other similar enforcement cases – Sedelmayer and Noga – which the media and legal community often refer to as “sagas” due to their longevity.

This article looks at those cases in an effort to try to draw conclusions about the Yukos case. It appears that enforcement may prove to be extremely complicated and last for many years because of the doctrine of sovereign immunity.

Sovereign immunity

The doctrine of sovereign immunity is crucial for understanding why enforcement against states is usually so complicated and long.

In its absolute form it means that legal action can only be brought against the state where its consent has been obtained and its property can be arrested only with its consent. However, this doctrine has undergone significant change and the law of some states (most importantly the United States and most European Union countries) state that in some cases its application is restricted only to the property used for performance of official functions of the state. Other assets, used for commercial acts, are not covered by it.

As practice shows even this limited version of this doctrine significantly restricts possibilities for enforcement proceedings.

Franz Sedelmayer v. The Russian Federation

The Sedelmayer enforcement proceedings started after the 1998 award of the Arbitration Institute of the Stockholm Chamber of Commerce (the “SCC“) on the basis of the BIT between the USSR and Germany. In that award the tribunal ordered Russia to pay $2,350,000 plus interest to German citizen Franz Sedelmayer.

As Russia refused to voluntarily comply with the award, Sedelmayer initiated over 80 legal proceedings, in Germany and in Sweden. By 2011 he actually managed to succeed in several of his claims.

Enforcement in Germany

Mr Sedelmayer tried to arrest virtually every type of Russian asset. He started with the payments by Lufthansa to Russia for overflights in Russian airspace. The case reached the German Supreme Court, which refused enforcement due to the sovereign immunity doctrine. The next claim for the Russian embassy’s VAT refunds also failed, this time because of diplomatic immunity.

After that, Sedelmayer successfully arrested an ex-Soviet Trade Office in Cologne, which was largely not used by Russia, and tried to arrest the Russian House of Science and Culture in Berlin, but failed due to the state immunity doctrine.

Finally, in 2006, he attempted to arrest models of satellites during the international aerospace show, exhibits of the Russian pavilion at the Hannover International Exhibition and the Russian TU-204-300 on the International Space Exhibition ILA in 2006 in Berlin. All of this failed under the state immunity doctrine.

Sweden

In addition to the German proceedings, Sedelmayer also initiated enforcement proceedings in Sweden against the building of Russia’s Trade Mission which allegedly was not used for official purposes and therefore was not covered by sovereign immunity. While initially he managed to get a decision in his favour in the Swedish Supreme Court and started the auction proceedings for the sale of the building, the process was later delayed by new court cases (still going through Swedish courts).

Noga v Russian Federation

The next well-known line of cases is connected with the Swiss company Noga. In 1997 Noga won an arbitration case against the Russian Federation in the SCC. After that, similarly to Mr Sedelmayer, it tried to enforce them in different jurisdictions and against various types of assets.

For instance, in France it managed to freeze a significant sum on the bank accounts of Russian state entities (including Rosneft), the Russian embassy and Russian delegation to UNESCO. However, later the French Court of Appeal decided that there was no connection between the Russian government and the state entities and that diplomatic funds were covered by sovereign immunity.

In 2000, Noga even unsuccessfully tried to arrest Russian uranium in the USA and the Russian president’s personal jet in France (the latter was prevented from it by a personal order from the French president). Most famously, in 2005 Noga tried to arrest 54 paintings owned by the Russian government, including works by Pablo Picasso, Vincent Van Gogh and Claude Monet in Switzerland. That was also not approved by the Swiss authorities.

Noga spent years hunting after various types of Russian state assets, including foreign cultural exhibitions, research ship Sedov belonging to a Russian university and fighter jets, all to no avail due to sovereign immunity or lack of connection with the state (in case of the university’s ship).

Conclusion

Both of these cases show that Yukos will face significant problems trying to recover even a small part of the $50 billion award. Some experts predict that this process will last for years (probably even decades). It will also be extremely complicated as many types of assets cannot be arrested due to the doctrines of state sovereignty and diplomatic immunity. The current claims may be only the beginning of the “Yukos enforcement saga”.

The Noga case is a good illustration of the worst case scenario – it lasted for nearly two decades with almost no practical result for the claimant except for intimidation of the Russian authorities. Noga went bankrupt during this dispute. Its owner claims it spent $40 million on court expenses, having to sell its debt to a group of Swiss banks which later also had to resell it.

The Sedelmayer case is a more successful example. Despite all his difficulties and more than 18 years of litigation, Mr Sedelmayer still claims to have recovered $6.8 million from the sale of the Russian state’s buildings.

Ivan Philippov

Ivan is a Russian lawyer based in London

About the Author:

Ivan Philippov is a Russian lawyer, currently going through a qualification process for becoming a solicitor of England and Wales. He specialises in international commercial and investment arbitration and has experience of working or doing internships in Russia, United Kingdom and Sweden. He is a graduate of the School of International Law of Moscow State Institute of International Relations (University) of the MFA of Russia and School of International Arbitration of Queen Mary, University of London.

3 Comments on "Yukos Award – Beginning of a New Enforcement Saga"

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  1. Francis Lévesque says:

    Creativity will be needed. It is really exciting for a lawyer, but less for a client …

    • Looking at the recent freezing of Russian state assets it seems Yukos’ lawyers are creative enough – in Belgium they even tried to arrest assets of Russian orthodox church.

      But, as in Noga case (which in 1993 managed to arrest $1,3 billion of assets in Luxemburg based on a court decision), it is very likely that most of the assets will soon be unfrozen based on the doctrine of state immunity and the fact that state corporations (whose assets also suffered) are normally considered to be separate from the state itself, therefore not answering for its debts (though it can be very different in different jurisdictions).

      • prusak says:

        PUtin was smart enough, here in LIthuania, Yukos was able to sell its assets for 1000% more than it bought Mazeikiu Nafta

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