Shearman & Sterling Secures Historic US$50 Billion Award for Yukos Majority Shareholders
In an historic arbitral award rendered on July 18, 2014, an Arbitral Tribunal sitting in The Hague under the auspices of the Permanent Court of Arbitration (PCA) held unanimously that the Russian Federation breached its international obligations under the Energy Charter Treaty (ECT) by destroying Yukos Oil Company and appropriating its assets. The Tribunal ordered the Russian Federation to pay damages in excess of USD 50 billion to our clients who were the majority shareholders of Yukos Oil Company. The Tribunal also ordered the Russian Federation to reimburse to our clients USD 60 million in legal fees, which represents 75% of the fees incurred in these proceedings, and EUR 4.2 million in arbitration costs. This is by far the largest award ever rendered by an arbitral tribunal.
“This award is a major victory for us. After intense scrutiny, the Tribunal confirmed what the Claimants have been saying all along, namely that Yukos was destroyed, and its assets expropriated, for political reasons”, said Tim Osborne, director of GML, the holding company that indirectly owned the majority of Yukos’ shares.
According to Emmanuel Gaillard, Head of Shearman & Sterling’s International Arbitration Group, “this is a great day for the rule of law: a superpower like the Russian Federation is held accountable for its violations of international law by an independent arbitral tribunal of the highest possible calibre”.
“The award is final and binding, and is now enforceable in 150 States under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards”, said Yas Banifatemi, International Arbitration partner in charge of the Shearman & Sterling LLP’s Public International Law practice.
The Tribunal was chaired by Yves Fortier, formerly Canada’s Representative on the UN Security Council and President of the Council. The Russian Federation appointed Judge Stephen Schwebel, former President of the International Court of Justice, and the Claimants appointed Dr. Charles Poncet, partner at CMS von Erlach Poncet Ltd. in Geneva.
The proceedings were, in the Tribunal’s words, “mammoth arbitrations”. They involved a ten-day hearing on jurisdiction and admissibility in 2008 and a 21-day Hearing on the Merits in 2012, attended by over 50 party representatives as well as fact witnesses and experts. The parties’ written submissions exceeded 6,500 pages and the transcript of the hearings is over 3,300 pages long. Over 11,000 exhibits were filed with the Tribunal.
The dispute attracted massive media attention, as it involved the Russian Federation’s attack on Yukos, which led to the destruction of the company and the expropriation of its assets. In the words of the Tribunal, “Yukos was the object of a series of politically-motivated attacks by the Russian authorities that eventually led to its destruction”, the Russian Federation’s aim being “to bankrupt Yukos, assign its assets to a State-controlled company, and incarcerate [Mikhail Khodorkovsky] who gave signs of becoming a political competitor”.
It should be recalled that, in 2003, Yukos was the largest oil company in Russia in terms of daily crude oil production. It had around 100,000 employees, six main refineries and a market capitalization of about USD 33 billion.
The expropriation of our clients’ investment in Yukos was achieved through a series of steps, which included paralyzing the Company (notably through the arrest, imprisonment and harassment of its management and employees), manufacturing a pretext for the taking of the Company’s assets (namely, the fabrication of over USD 24 billion in tax debt), using that pretext to take Yukos’ assets piece by piece (beginning with Yuganskneftegaz, Yukos’ crown-jewel asset), and later transferring all of the Company’s assets to Russian State-owned companies Rosneft and Gazprom. This in turn allowed Rosneft to become the nation’s largest oil producer whose current market capitalization is at USD 67 billion. The Russian Federation’s actions culminated in the liquidation of Yukos in November 2007, and the complete and total deprivation of our clients’ investments.
We notified the Russian Federation of the claims in October 2004 and the arbitration started in February 2005. On November 30, 2009, the Arbitral Tribunal issued a decision on jurisdiction, holding that the Russian Federation was bound by the ECT by virtue of its provisional application, despite the fact that the Treaty had not been ratified by the Russian Duma, and that our clients were protected investors under the ECT.
In its July 18, 2014 Final Award, the Tribunal held that the Russian Federation’s actions amounted to an “unlawful expropriation”, that the Russian Federation had breached its obligations under Article 13(1) of the ECT, and that our clients were entitled to “reparation for the injury they suffered as a result of those of [Russian Federation’s] measures that the Tribunal has found to be internationally wrongful”.
The Tribunal also held that our clients will be entitled to post-award interest if the Russian Federation fails to pay the amounts due by January 15, 2015.
Yukos’ majority shareholders were represented in the arbitration proceedings by partners Emmanuel Gaillard, Head of Shearman & Sterling’s International Arbitration Group, and Yas Banifatemi, International Arbitration partner in charge of the Firm’s Public International Law practice, as well as counsel Jennifer Younan (Paris-International Arbitration). A team comprising a total of over 20 international arbitration lawyers worked on the matter over the years, including partners Coralie Darrigade (Paris-International Arbitration), Mark McNeill (London-International Arbitration), associates Ilija Mitrev Penusliski, Lara Kroop, Elise Edson, Ketevan Betaneli, Dimitrios Katsikis and Benjamin Siino (Paris-International Arbitration), Ximena Herrera-Bernal (London-International Arbitration), and Emmanuel Jacomy (Singapore-International Arbitration).
In 2013, Shearman & Sterling also secured what is now the second largest award ever issued by an arbitral tribunal, in the dispute between The Dow Chemical Company and Kuwaiti Petrochemical Industries Company over a failed joint venture.
The USD 50 billion award rendered in the present arbitration further consolidates Shearman & Sterling’s standing as the go-to-firm for sensitive and high-stake international disputes.
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