Enforcing the Yukos arbitral award: overcoming the state immunity defense


Yukos-Logo_lat.svg (1)Recently, it was reported that bank accounts belonging to the Russian Federation had been frozen in Belgium and France after requests to this effect from shareholders of the now defunct Yukos corporation, which had been dismantled by Russia in 2001 (The Economist). Belgian authorities rather swiftly lifted the enforcement measures following fierce Russian protests and threats of retaliation. This post is in favor of taking creditors’ interests seriously, and recommends limiting the circumstances in which the state could invoke immunity from execution.

It is recalled that on 18 July 2014, an international arbitral tribunal, established in The Hague, ruled that Russia had violated the Energy Charter Treaty by breaking up the Yukos Oil Corporation (controlled by the well-known Mikhail Khodorkovsky) and subsequently transferring its assets to Russian state-owned companies Rosneft and Gazprom (Yukos Universal Limited (Isle of Man) v. The Russian Federation (PCA Case No. AA 227)). The tribunal then ordered Russia to pay Yukos’s shareholders more than 50 billion dollars in damages – the largest arbitral award ever. As Russia refused to pay, the shareholders (represented by the director of the holding company that indirectly owned the majority of Yukos’ shares) sought to enforce the award against Russian-held assets in Belgium, France, the United Kingdom, and the United States (Financial Times). French and Belgian authorities have proceeded to freeze bank accounts of the Russian Federation (with Belgium lifting the measure rather soon). In the US and the UK, no enforcement measures have yet been taken. In other jurisdictions, such as the Netherlands, no proceedings have yet been initiated.

The enforcement of the arbitral award finds its legal basis in the 1958 New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. This Convention applies to all arbitral awards using the rules of the United Nations Commission on International Trade Law (UNCITRAL), including awards against states, such as the Yukos award. The problem with enforcement procedures against states, however, is that foreign states are normally entitled to immunity from enforcement in domestic legal orders pursuant to customary international law, as also laid down in Article 19 of the UN Convention on Jurisdictional Immunities of States and their Property (not yet entered into force). Nevertheless, as the International Court of Justice confirmed in the 2012 Jurisdictional Immunities Case (Germany v Italy), measures of constraint can be taken against property belonging to a foreign State, insofar as the property in question is in use for an activity not pursuing government non-commercial purposes, the state which owns the property has expressly consented to the taking of a measure of constraint, or that state has allocated the property in question for the satisfaction of a judicial claim (para 118).

The first scenario is especially relevant as regards the enforcement measures sought against Russia; where proof is adduced that Russia uses a foreign property essentially for commercial purposes, attachment of this property would be lawful. That being said, an exception is made for specific categories of property, such as bank accounts used in the performance of the functions of the diplomatic mission, military property, property of the central bank, cultural heritage, and objects of scientific, cultural or historical interests forming part of an exhibition (Article 21 of the UN Convention). This exception seriously circumscribes enforcement options. Domestic courts have notably given a broad interpretation to the exception for (embassy) bank accounts, basically assuming that such accounts are used, or intended for use, for government non-commercial purposes, and are accordingly not amenable to attachment. I have criticized this creditor-unfriendly interpretation in an earlier article (Ryngaert, Leiden JIL 2013; in this piece I also discuss the relevant domestic court decisions), which was triggered by worldwide enforcement actions initiated by an investment fund against Argentine properties, including bank accounts. I am still of the view that individuals’, including creditors’, right to a remedy, as enshrined in Articles 6 and 13 of the European Convention on Human Rights, mandates an accountability-friendly interpretation of exceptions to the principle that enforcement action cannot be taken against government property. This implies that government bank accounts cannot just be presumed to be used for government non-commercial purposes. Using the presumption, indeed, will almost inevitably result in a finding of immunity: it is almost impossible for creditors to discharge the burden of proving that the property was indeed used for commercial purposes, as normally only the state itself will be privy to the exact purposes of the property. Instead, I suggest splitting the burden of proof: where creditors make a prima facie case that funds in these accounts are used for commercial purposes, the government should rebut this claim by giving strong evidence of their non-commercial purposes.

For the Dutch reader who may wonder whether the Yukos award could also be enforced in the Netherlands, reference is made to Article 3a of the Gerechtsdeurwaarderswet (Bailiff’s Law), which authorizes the Minister to order a bailiff not to take enforcement action in violation of the state’s obligations under international law. I expect that, the Minister of Justice, invoking this article, will normally block enforcement measures against most state properties, including Russian properties sought to be attached in the context of the Yukos litigation. In a well-publicized incident, the Minister has recently invoked it to block the enforcement of a judgment against an international organization, the European Patent Organization (a measure which I have criticized in an earlier article: NJB). Also as far as state immunity is concerned, there is little reason to expect ‘progressive’ ministerial action. Most recently, for instance, on 9 June 2015 the Minister ordered a bailiff to lift the attachment of Iraqi state property, on the ground that the creditors had not established that the property was only used for commercial purposes.

Concluding, I am not saying that Belgium should not have lifted the attachment of Russian bank accounts. Where such accounts were indeed used for non-commercial purposes, the Russian claim that the attachment by Belgian authorities was illegal under international law holds water. I am, however, warning that a blanket lifting of all enforcement measures against Russian government property, without inquiring into the actual use of such property, is unwarranted, as it shortchanges the legitimate interests of creditors.


Cedric Ryngaert