Yukos Universal v. Russia

"Since the Russian Federation opposes a total or partial division of the appeal proceedings, the usual proceedings of one Statement of Appeal and one Defence on Appeal will be followed. The fact that the Russian Federation submitted a large number of exhibits to the District Court at a late stage does not constitute a reason for the Court of Appeal for the time being to deviate from the normal conduct of proceedings, also in view of the explanation given in this respect by Mr Van den Berg during the personal appearance of the parties.

This does not detract from the fact that the Court of Appeal considers it its duty to ensure that the principle of hearing both sides of the argument is fully respected at all times. This will mean, among other things that, after submission of the Defence on Appeal, the Court of Appeal will verify on the basis of the content of that Defence on Appeal and after the parties have been given the opportunity to express their opinion on it, whether due process entails that HVY must be given the opportunity to, apart from a response to any exhibits submitted with the defence on appeal, respond to the content of this defence on appeal in another written statement."

"1. The Court of Appeal sees no reason in advance to deny HVY the right to submit a document containing an objection to the (alleged) increase of (the basis of the) claim as referred to in Article 130(1) DCCP. HVY will be given the opportunity to do so.

2. The question whether, as HVY argue, the grounds for setting aside advanced by the Russian Federation must be left out of consideration because they were not advanced in the summons is so closely related to the assessment of the objection to the (alleged) increase of (the basis of the) claim, that it is difficult to decide on both subjects separately from each other. HVY will therefore be given the opportunity to explain their position regarding the grounds for setting aside in the document referred to under 1.

3. The Court of Appeal sees no reason to decide on the subject referred to in Mr Van den Berg's letter dated 12 January 2018 in footnote 10 at this stage of the proceedings. This is too far removed from the objection to the increase of (the basis of the) claim."

(I) unclean hands;

(II) deceit committed by HVY in the arbitration;

(III) Article 1(6) and (7) of the ECT and the question of whether HVY's shares in Yukos can be construed as an "Investment" within the meaning of the sixth paragraph and whether HVY can be construed as "Investor" within the meaning of the seventh paragraph.

In the assessment of HVY's objections, the Court of Appeal will maintain this classification.

‘We briefly considered submitting the matter on whether the unclean hands argument could in fact be addressed in these proceedings to this Court of Appeal separately, but decided not to do so.’

However, this statement does not entail a waiver of rights and the Russian Federation could not reasonably have deduce this from this either. This statement, which was apparently made in view of the state of affairs at the time, does not demonstrate that HVY waived its right to raise motion proceedings about this subject in the future. It appears that HVY, in response to the positions adopted by the Russian Federation in the Defence on Appeal, saw cause to raise motion proceedings. It should be noted that it is not clear what interest the Russian Federation has in this argument. It does not argue that HVY also waived its right to take the position in the procedural documents that the unclean hands argument cannot be addressed anymore. Incidentally, the Court of Appeal considers it important in connection with due process of law that a decision is currently rendered on this question.

In this part of the Defence on Appeal, the Russian Federation discusses the 28 cases of unlawful conduct of HVY and the "Russian Federation", which have already been advanced in the arbitrations and specified in the Defence on Appeal in footnotes 760 through 763. The latter are described in the Defence on Appeal (under 13) as "the Russian persons who have founded, own and control HVY". The alleged unlawful acts are subdivided into four phases in the Defence on Appeal, which phases are described as follows: the Russian Oligarchs acquired the Yukos shares from HVY by fraud, bribery and conspiracy: bribes were paid by YUL (phase 1), the Russian Oligarchs founded Hulley, YUL and VPL to conceal control over their Yukos shares and to evade dividend taxes (phase 2), the Russian Oligarchs abused shell companies to commit tax fraud in the low-tax regions of the Russian Federation (phase 3), the Russian Oligarchs obstructed tax collection while at the same time they withdrew billions of dollars from Yukos via HVY (phase 4).

The Russian Federation has further elaborated this assertion in the Defence on Appeal with the following arguments: (i) HVY are sham companies that are beneficially owned and controlled by Russian citizens for illegal purposes - in this context the Russian Federation relies partly on new documents disclosed since 2015; (ii) HVY are not ‘Investors" and did not make any "Investments" within the meaning of the ECT because the ECT does not offer protection for U-turn investments by citizens of a host country via sham companies; (iii) HVY have not made any "Investments" under the ECT because they have not made an economic contribution in the host country; and (iv) the abuse of HVY's corporate structure by the Russian Oligarchs for illegal purposes justifies piercing the corporate veil to reveal the Russian citizens behind HVY.

In support if this assertion, the Russian Federation invokes the illegal nature of both making and executing the "alleged investment" of HVY, including the fraudulent acquisition by the Russian Oligarchs of the Yukos shares. According to the Russian Federation, HVY acquired their investments in Yukos by means of widespread violations of the law, whereby the Russian Federation refers to chapter H1 of the Defence on Appeal (see 4.1.1 in this respect). According to the Russian Federation, HVY were directly involved in the illegal acquisition of the Yukos shares. Furthermore, the Russian Federation argues in this context that: (i) the Russian Oligarchs obtained and retained beneficial ownership, control and power over Yukos via (predecessors of) HVY through deceit, corruption and fraud, (ii) HVY were incorporated and used by the Russian Oligarchs to evade tax, to obscure the Russian Oligarchs and to be able to submit claims under the ECT and (iii) HVY are only sham companies that do not engage in any business activity.

The Russian Federation argues in this context that the outcome of the Awards amounts to a justification and maintenance of HVY's fraudulent, corrupt and illegal activities, which in itself - and certainly in connection with the way in which the arbitrations were conducted - is contrary to the fundamental principles of public policy and common decency mentioned in Article 1065(1)(e) DCCP. With regard to the alleged misconduct of HVY, the Russian Federation refers to chapters III.B, III.C and IV.C under c. With ‘the way in which the arbitrations were conducted’ the Russian Federation apparently refers to its assertion that the Tribunal arrived at its findings in breach of the principle of hearing both sides of the argument and equality of arms as well as in a speculative, subjective and inconsistent manner.

(a) the assertions were not put forward in the arbitration in due time, as required on the basis of Article 1052(2) and Article 1065(2) DCCP;

(b) the Tribunal's decision in question has not been contested in the summons in accordance with Supreme Court 22 March 2013, ECLI:NL:HR:2013:BY8099 (Bursa/Güris) and the assertions concerned have not been advanced in the initiating summons as required by Article 1064(5) DCCP;

(c) the assertions are in violation of due process of law as referred to in Article 130 DCCP;

(d) the Russian Federation has waived its right to base its claim on the unclean hands argument, or has forfeited this right.

"(c) CONFIRMS that its decision on the objections to jurisdiction and/or admissibility involving the Parties’ contentions concerning "unclean hands" and Respondent’s contention that "Claimant’s personality must be disregarded because it is an instrumentality of a criminal enterprise" is deferred to the merits phase of the arbitration, consistent with Procedural Order No. 3;"

In the "Respondent’s Skeleton Argument" of 1 October 2012, the Russian Federation argued the following under 96 in Chapter VUI ("The Tribunal Lacks Jurisdiction Over Claimants’ Claims, Or Must Dismiss Them, Because They Are Based On Illegal Conduct By Claimants And The Yukos Managers They Installed And Controlled"):

"96. The history of repeated illegal conduct by Claimants (...) deprives the Tribunal of jurisdiction over Claimants’ claims, because ECT protection does not extend to illegal investments, or requires that the Tribunal dismiss those claims under the principle of unclean hands. (..)"

In the Final Award the Tribunal treated the unclean hands argument as an argument that could lead to one or more of the following decisions: "(a) the Tribunal does not have jurisdiction over Claimants’ claims; (b) Claimants’ claims are inadmissible; and/or Claimants should be deprived of the substantive protections of the ECT" (Final Award nos. 1273, 1280, 1313, 1349, 1373). The Tribunal was of the opinion that it did not have to decide what legal effect the acceptance of the unclean hands argument would have (Final Award no. 1353). Finally, the Tribunal decided the following in the operative part of the Final Award:

"(b) DISMISSES the objections to jurisdiction and/or admissibility, pertaining to Respondent’s contentions concerning "unclean hands" and "illegal and bad faith conduct;"

"3.4.1 (....) This combination of provisions [Article 1052(1) and (2), Article 1065(1) preamble and under a, Article 1065(2), Court of Appeal] seeks to ensure that, if a party wishes to contest the Tribunal’s jurisdiction on account of the lack of a valid arbitration agreement, the Tribunal can decide on its jurisdiction at an early stage in the proceedings, thus preventing as much as possible that unnecessary procedural steps would be taken should a reliance on the lack of a valid arbitration agreement at a later stage of the proceedings (during the arbitration proceedings or before the ordinary court) result in the decision that the Tribunal has no jurisdiction."

3.4.2 (....) In view of the mutual interests in dispute, it cannot be accepted as a general rule that this is never allowed. For instance, it is conceivable that a party which relied on the lack of a valid arbitration agreement before all defences saw no reason to support its reliance on this ground with new factual or legal positions until after the other party advanced a defence against it (at a later stage of the arbitration proceedings or before the ordinary court). On the other hand, it also cannot be accepted as a general rule that there are no limits on advancing entirely new factual or legal positions in support of a timely raised ground at a later date, because this could undermine the statutory arrangement too gravely. Consequently, whether a new factual or legal position violates the purport of the statutory arrangement, given also the requirements of due process of law, will have to be assessed in each concrete case. Other relevant factors may be the extent to which the new positions align with the positions adopted earlier on in the arbitration proceedings, the reason why the new positions were not advanced sooner, and whether the party in question was supported by a lawyer in the arbitration proceedings."

".... that the legal defects concerning the incorporation of Yukos is not one of the grounds on the basis of which the Russian Federation claims the setting aside of the Yukos Awards." (summons no. 27)

(i) the late change of claim is of a very far-reaching nature because entirely new subjects are put up for discussion; this is unacceptable, also because in these proceedings the Russian Federation is assisted by lawyers specialised in arbitration law;

(ii) allowing the unclean hands argument will lead to a very considerable and unreasonable delay of the proceedings; allowing the unclean hands argument means that 13 witness and expert statements with 554 accompanying exhibits must be handled, which HVY would then have to respond to with the prospect of a further debate on this matter;

(iii) by advancing the unclean hands argument for the first time in its Defence on Appeal, HVY is deprived of the right to a full assessment of the case in two instances and the Russian Federation tries to prevent HVY from being able to respond to that argument in a complete written statement;

(iv) the Russian Federation completely disregards the safeguards applicable within criminal proceedings, such as the presumption of innocence;

(v) most of the acts on which the unclean hands argument is based were committed by third parties that are no parties to these proceedings;

(vi) the manner in which the unclean hands argument is explained in the Defence on Appeal is unsound, because this argument is based on extensive references to "new" witness and expert statements which in turn refer to other material, whereas sound assertions in the Defence on Appeal itself are lacking.

(i) the Russian Federation relies on 13 witness and expert statements with 554 accompanying exhibits, in respect of which the materials cover almost 10,000 pages for four of these thirteen statements;

(ii) the Russian Federation has announced its intention to introduce new witnesses for this subject, to use an ongoing criminal investigation on Yukos and to respond in a written statement to the written statement in which HVY will respond to the exhibits submitted with the Defence on Appeal.

"II. BACKGROUND

26. Part A of this chapter provides a brief description of (a) the circumstances surrounding the acquisition of the control of Yukos by the same Russian oligarchs - particularly, Mikhail Khodorkovsky, Leonid Nevzlin, Vladimir Dubov and Platon Lebedev - who now control the Claimants [taken to mean HVY, Court of Appeal], (b) the principal features of Yukos’ tax evasion scheme, which constitutes the basis of the parties’ dispute, and (c) the Russian authorities’ efforts to collect the corporation tax and VAT imposed on Yukos.

27. In establishing this summary, the Russian Federation is aware that the District Court, in its assessment of the Yukos Awards, does not act as a court of appeal and that the legal defects concerning Yukos’ incorporation do not constitute one of the grounds on which the Russian Federation claims the setting aside of the Yukos Awards. The Russian Federation nonetheless believes that this background information may be useful for the District Court to understand the actions taken by the Claimants since the incorporation of Yukos.

(underlining Court of Appeal)

(i) the Yukos Awards are contrary to public policy due to the fraud committed by HVY during the arbitration, comprising the submission of false statements and the withholding of documents (Defence on Appeal, Chapter VII.G);

(ii) there is no valid arbitration agreement because HVY and their shares in Yukos do not fall within the scope of protection of the ECT (the ECT does not protect HVY’s investments because, ultimately, they are investments of Russian citizens in the Russian Federation), since (a) HVY are sham companies under the beneficial ownership and control of Russian citizens for illegal purposes - in this context the Russian Federation relies partly on new documents disclosed since 2015 - and (b) the abuse of HVY’s corporate structure by the Russian Oligarchs for illegal purposes justifies piercing the corporate veil to reveal the Russian citizens behind HVY (Defence on Appeal, Chapter IV.C under b (i) and (iv) respectively);

(iii) Contrary to the Procedural Order no. 12 dated 16 September 2011 in the arbitration, HVY have neglected to submit the documents mentioned in the Defence on Appeal, marginal 637 under (a) through (d), and the agreement from 2011 between GML Limited on the one hand and the directors of the Stichting Administratiekantoor Yukos International and the Stichting Administratiekantoor Financial Performance Holdings on the other hand (described in the Defence on Appeal, marginals 637 and 640), the further correspondence regarding this agreement and the minutes of meetings of the bodies of these foundations (mentioned in the Defence on Appeal, marginal 640) (Defence on Appeal, Chapter III.C).

(i) HVY lied to the Tribunal by submitting false statements and withholding documents that are relevant to crucial points in dispute in the arbitration, primarily by claiming with a straight face that HVY were controlled not by the Russian Oligarchs but by the trustees (Defence on Appeal no. 1197);

(ii) HVY concealed their true relationship with the Russian Oligarchs and the wide-spread crime in which their alleged investment in Yukos is steeped, and they violated the Document Production Orders of the Tribunal (Defence on Appeal no. 1198 (a));

(iii) HVY neglected to submit the 2011 letter from GML Limited and the ‘responsive documents and notices that should probably exist’ regarding the participation of the Russian Oligarchs in the decision-making within HVY in relation to important business transactions, such contrary to a Document Production Order of the Tribunal (Defence on Appeal no. 1198 (b));

(iv) HVY withheld documents on the full chain of transactions regarding the Yukos shares, thereby concealing HVY’s direct connection with the Russian Oligarchs and the illegal acquisition of the shares in Yukos by the Russian Oligarchs, such contrary to a Document Production Order of the Tribunal (Defence on Appeal no. 1198 (c));

(v) HVY made false statements in the documents they submitted to the Tribunal by arguing a divide between them and the Russian Oligarchs and emphasising the legality of their acquisition of shares in Yukos, despite the fact that documents in their possession showed otherwise, because the acquisition of the shares was unlawful, invalid and therefore void (Defence on Appeal no. 1198 (d));

(vi) the Russian Oligarchs made secret payments to Andrei Illarionov, one of HVY’s main witnesses in the arbitration (Defence on Appeal no. 1198 (e)).

(a) the change of claim is contrary to Article 1064(5) DCCP: the Tribunal's decisions regarding ownership and control of HVY were not challenged by the Russian Federation in the initiating summons and according to the Bursa/Güris ruling (Supreme Court 22 March 2013, ECLI:NL:HR:2013:BY8099) this may not be done at a later stage of the proceedings;

(b) the change of claim is contrary to Article 1068 DCCP: the Russian Federation should have brought the revocation proceedings of Article 1068 DCCP or submitted its change of claim within three months after it became aware or should have been aware of the facts underlying its assertion that fraud was committed or that documents were withheld;

(c) the change of claim is contrary to the requirements of due process of law (Article 130 DCCP).

(i) the assertion in the Reply that HVY’s shares in Yukos are not an ‘Investment’ within the meaning of Article 1(6) ECT;

(ii) the substantiation of assertion (i) in the Defence on Appeal with the arguments (a) that an injection of foreign capital is required to qualify as an ‘Investment’ within the meaning of the ECT, and (b) that HVY made no ‘economic contribution in the host country’ (Defence on Appeal, Chapter IV.C under b (iii));

(iii) the assertion that HVY and the Russian Oligarchs should be considered one and the same (Defence on Appeal, Chapter IV.C under b (iv)) and that HVY are therefore not investors within the meaning of Article 1(7) ECT.

(a) the Russian Federation in the summons did not contest with substantiation the decisions of the Tribunal to the extent that these pertained to Article 1(6) ETC, in particular the decision of the Tribunal that an injection of foreign capital is not required to qualify as an Investment within the meaning of the ECT, so that it is contrary to Article 1064(5) DCCP and the Bursa/Güris ruling to contest that decision still at a later time; it is also contrary to the requirements of due process of law within the meaning of Article 130 DCCP;

(b) the argument that HVY made no ‘economic contribution in the host country’ is (a) inadmissible under Article 1052(2) and Article 1065(2) DCCP, because the Russian Federation did not include that assertion in the arbitration in its Statement of Defence, (b) contrary to Article 1064(5) DCCP and the Bursa/Güris ruling, because that assertion was not raised in the initiating summons, and (c) contrary to the requirements of due process of law within the meaning of Article 130 DCCP;

(c) the assertion that HVY and the Russian Oligarchs should be considered one and the same is contrary to Article 1064(5) DCCP and the Bursa/Güris ruling, because that assertion was not raised in the initiating summons.

In that context, the Russian Federation also argued the following in the summons:

(a) in particular, the (Russian) Oligarchs attempted to convert their domestic dispute with the Russian tax department into an international investment treaty arbitration by submitting their claims through HVY, three offshore shell companies that the Oligarchs created specifically to hold their Yukos shares (no. 5);

(b) the Tribunal started from too literal an interpretation of the definition of ‘Investment’ in Article 1(6) ECT (summons no. 256,263); the Russian Federation also argued elsewhere in the summons that there was no valid arbitration agreement because HVY’s shares are not protected by Article 1(6) ECT (no. 30 under (b) and no. 106 under (b));

(c) the Tribunal lacks jurisdiction under Article 1(6) and (7) ECT because HVY’s shares in Yukos are not protected by the ECT; the present case is a domestic Russian dispute, HVY are sham companies, Russian subjects are the beneficial owners of HVY, and therefore this is not a truly international case within the scope of application of the ECT, but a domestic Russian dispute between Russian subjects and the Russian Federation; the Tribunal therefore lacks jurisdiction on the basis of Article 26 ECT in conjunction with Article 1(6) and (7) ECT (no. 248);

(d) HVY are just sham companies under the beneficial ownership and control of Russian subjects (heading for no. 257);

(e) to the extent that HVY paid anything for their shares in Yukos, they did so with financial means of Russian origin (no. 258); HVY invested no foreign capital in the territory of the Russian Federation (no. 220);

(f) the ECT does not protect the investments made by HVY in Yukos because these investments were made by subjects of a contracting party in the territory of and using resources from that contracting party; investment treaties focus entirely on promoting and protecting foreign investments, not domestic ones (no. 262).

- declares HVY's objection to the assertions of the Russian Federation as stated under 5.1 sub (i) and further elaborated under 5.2 and 5.1 sub (iii) above to be well-founded;

- declares the objection unfounded in all other respects and accordingly rejects all other claims of HVY;

- refers the case to the cause list of 23 October 2018 for filing a document containing comments within the meaning of point 7.7 of this ruling, first on the part of HVY;

- stays the decision with regard to the costs of the motion proceedings until the final ruling; stays all further decisions.

This ruling was rendered by S.A. Boele, C.A. Joustra and J.J. van der Helm and was pronounced at the public hearing of 25 September 2018 in the presence of the court clerk.