In the recent case of Yukos Capital SARL v OJSC Rosneft Oil Company1,the Court of Appeal ruled on two preliminary issues in arbitration enforcement proceedings:
English courts are entitled to assess the substantial justice in decisions of foreign courts when they are asked to recognise and enforce the decision of a foreign court, because court decisions are not regarded as acts of state for the purposes of the acts of state doctrine.
English courts are not prevented from forming their own view on a public policy issue previously decided by a foreign court because public policy is different in each country.
This decision has implications for parties on the receiving end of politically motivated or biased decisions by foreign courts, because it confirms the ability of the English courts to examine these decisions when the matter falls within the jurisdiction of the English courts.
In 2006, the claimant (Yukos), an oil trading entity incorporated in Luxembourg, obtained four Russian ICC arbitration awards totalling US$245 million against the defendant (Rosneft), a Russian government-controlled entity.
Rosneft applied to the Russian courts for the awards to be annulled, based on allegations that the contract under which the awards had been made was part of an unlawful tax scheme operated by the original parties to the contract. The Russian courts granted orders annulling the awards in 2009.
Despite this, Yukos began proceeding to enforce the arbitration awards in Amsterdam. The Amsterdam Court of Appeal decided that the Russian annulment decisions were the result of a "partial and dependent judicial process" and refused to recognise the annulment of the awards by the Russian courts.
As a result of the Dutch court decision, in 2010 Rosneft paid Yukos the value of the awards. However, it did not pay the US$160 million post-award interest that had accrued since 2006. Therefore, Yukos brought enforcement proceedings in the Commercial Court in London against Rosneft for payment of the interest.
The enforcement proceedings in London raised two preliminary issues, which in summary were:
Whether Rosneft was prevented in light of the judgment of the Amsterdam Court of Appeal from denying that the Russian court decision to annul the awards was the result of a "partial and dependent" judicial process (i.e., whether there was an issue estoppel in respect of that question).
If there was no issue estoppel, then whether the act of state doctrine or associated non-justiciability principle meant that the English court could not adjudicate on whether the Russian court was partial and dependent (which was part of Yukos' argument in support of the enforcement proceedings).
In June 2011, the English Commercial Court decided both issues in favour of Yukos, and Rosneft appealed to the English Court of Appeal. The English Court of Appeal upheld Rosneft's appeal on the question of issue estoppel, but dismissed it on the act of state doctrine issue.
The issue estoppel in this case is known as foreign issue estoppel, which means that parties are unable to argue an issue in the courts of one country if this issue has already been decided in court proceedings in another country. The Commercial Court held that Rosneft was not issue estopped because the issue to be decided by the English court was not the same as that which was decided by the Amsterdam Court of Appeal.
The issue decided by the Amsterdam Court of Appeal was whether the annulment decisions setting aside the arbitration award were "partial and dependent" and should not be recognised under Dutch public policy. The decision sought from the English court, however, was that the Russian courts were "partial and dependent" and that their decision should not be recognised as a matter of English public policy. The court considered that public policy is different in each country and the standards by which a country decides that the courts of another are "partial and dependent" can differ between countries. Cogent evidence is required before a court will decide that a foreign court's decision is partial, and the degree of cogency may vary between countries. The court therefore decided that this issue must be determined by the English court according to its own concept of public policy and there was no issue estoppel.
Act of state doctrine
The court then considered Rosneft's arguments that the English courts were prevented from examining the Russian court's decision on the basis that it was contrary to the act of state doctrine. The act of state doctrine means that an English court is not permitted to adjudicate on cases raising issues about the acts of a foreign government within its own territory. The associated principle of non-justiciability means that the English court will not adjudicate on the transactions of foreign sovereign states.
The court considered the act of state doctrine and its various limitations and held that this doctrine did not bar any part of Yukos' case. This was because the central issue was whether the annulment decisions of the Russian courts should be recognised. This question related to the judicial acts of the foreign state rather than to legislative or executive acts. Judicial acts are generally not regarded as acts of state for the purposes of the acts of state doctrine.
The reason for this is that when an English court is asked to recognise and enforce a decision of a foreign court, it must have the right, subject to treaty or convention, to examine the question of substantial justice of the foreign court. English courts cannot be expected to support corrupt decisions of foreign courts. However, the courts must act within the restraints of judicial respect and will require cogent grounds to support any such allegations of impropriety. Yukos was therefore entitled to submit evidence to support its allegations that the Russian courts' decision to set aside the arbitration award was "partial and dependent" and the court was entitled to hear and decide these allegations in the enforcement proceedings.
The effect of this decision is that the issue decided by the Amsterdam Court of Appeal - that the annulment of the arbitration awards by the Russian courts was biased and should not be recognised under Dutch law - will be re-litigated before the English courts under English law. Yukos will be permitted to adduce evidence before the English courts to show bias by the Russian courts in order to try to establish its entitlement to enforce the arbitration awards against Rosneft.
If the English courts find that the decision of the Russian courts annulling the awards was biased, it would mean that an English court is ultimately able to give leave to enforce an international arbitration award that has been set aside by the court of the seat of arbitration.
For more information about this decision, please contact Maria Alcalde.