Arbitration clauses: English Court confirms seat is critical

Summary

The English High Court has issued a reminder of the importance of the seat specified in arbitration agreements in Yukos Capital S.a.r.L v OJSC Oil Company Rosneft. Yukos successfully established that arbitral awards set aside by the Russian Courts (Russia having been the seat of the arbitral proceedings) could be enforced at common law. However, the Court made it clear that enforcement in England would only be possible in exceptional circumstances, thereby highlighting the importance of taking care when selecting the seat of an arbitration.

Background

The decision related to arbitral awards made in favour of Yukos, which were subsequently annulled by the Russian Courts (the “Awards”). Yukos identified Rosneft assets within the jurisdiction of the Dutch Courts and the Dutch courts granted leave for enforcement of the Awards which were paid to Yukos. Yukos then claimed post-award interest in the English Courts.

Rosneft pleaded that pursuant to the principle ‘ex nihilo nil fit’, or ‘nothing comes from nothing’, the Awards no longer existed further to the Russian Courts’ annulment of the Awards, and Yukos was therefore prevented from asserting that the Awards were valid and binding on the parties. Yukos contended that the annulment of the Awards by the Russian Courts should not be recognised by the English Court on the basis that the decisions were “(a) tainted by bias, (b) contrary to natural justice, in that the Russian Courts deliberately misapplied the law, (c) procured in circumstances violating Article 6 of the European Convention on Human Rights, and (d) formed part of an illegitimate campaign of commercial harassment waged against the Claimant by the Russian Federation for political reasons.”

Decision

Since the parties had submitted to the supervisory jurisdiction of the Russian Courts in their agreement to arbitrate, the decisions of those courts would normally have been determinative. However, the English Court acknowledged that it should not be bound to recognise a decision of a foreign court which offended against “basic principles of honesty, natural justice and domestic concepts of public policy.” It was therefore open for Yukos to argue that no effect should be given to the annulment of the Awards by the Russian Courts based on those principles. The Court concluded that there was no ‘ex nihilo nil fit’ principle which precluded the enforcement of the Awards and if Yukos’ allegations were proven, the English Court would have the power to enforce the Awards at Common law notwithstanding the annulment of the Awards by the Russian Court.

Comment

This decision should provide a degree of comfort to parties who find that the specific seat of an arbitration equates to a real risk that decisions sought from that jurisdiction’s courts in relation to the arbitration will be partial. However, the decision also highlights the very limited circumstances in which the English Courts are willing to enforce an arbitral award set aside by courts in the seat of the arbitration. Absent exceptional circumstances, i.e. breaches by the foreign court of rules of natural justice and/or fraud and/or for reasons of public policy, the English Courts will not enforce the annulled arbitral award.

As is usually the case, prevention is better than cure. The content of dispute resolution clauses, and how those clauses will operate practically, can be overlooked during the negotiation of transactions when parties are understandably focused on the commercial details of the transaction, rather than a dispute that may or may not arise at some point in the future. Parties should, however, take care to consider how dispute resolution clauses will operate if engaged and, particularly in light of this case, ensure they do not enter into arbitration agreements containing seats where they have real concerns as to whether the local courts will support the arbitral award or process.