Shearman secures record $50bn arbitration award against Russia

Shearman & Sterling has secured the largest award ever handed out by an arbitration tribunal, with the Russian Federation asked to pay out $50bn (£ in damages to shareholders of oil company Yukos.

The award, rendered on 18 July in the Hague, also sees Russia ordered to pay $60m in legal fees after a decade of wrangling. The fees represent 75 per cent of the $80m in fees charged by Shearman over the course of the arbitration. Russia must also pay out €4.2m (£3.3m) in arbitration costs.

Shearman was first instructed on the arbitration claim by Yukos’ majority shareholders in 2004. It notified Russia of the claim in October of that year. The arbitration began in February 2005 and dragged on through several stages before last week’s decision.

The claims, brought by shareholders Hulley Enterprises, Yukos Universal and Veteran Petroleum through Gibraltar-based holding company GML, were heard in parallel.

The claim followed the dissolution of Yukos by Russian authorities after the 2003 arrest of its founder and owner Mikhail Khodorkovsky. The claimants said that Russia had breached its international obligations under the Energy Charter Treaty (ECT) by a series of actions which eventually saw the transfer of Yukos’s assets to state-owned energy giants Rosneft and Gazprom and the “complete and total deprivation” of their investments.

The arbitral tribunal, sitting in the Hague under the auspices of the Permanent Court of Arbitration, held in November 2009 that Russia was bound by the ECT although the treaty had not been ratified by the Russian Duma, or parliament. Accordingly the shareholders were protected investors under the ECT.

The tribunal was chaired by Yves Fortier, formerly Canada’s representative on the UN Security Council. The Russian Federation appointed Judge Stephen Schwebel, former President of the International Court of Justice, and the claimants appointed CMS von Erlach Poncet partner Charles Poncet.

The proceedings involved a 10-day hearing on jurisdiction and admissibility in 2008 and a 21-day hearing on the merits in 2012. The parties’ written submissions exceeded 6,500 pages and the transcript of the hearings was over 3,300 pages long.  Over 11,000 exhibits were filed with the tribunal.

In its decision the tribunal held that Russia’s actions amounted to an “unlawful expropriation” and that the country had breached its obligations under Article 13(1) of the ECT. The claimants will be entitled to post-award interest if the Russian Federation fails to pay the amounts due by 15 January 2015.

However the total damages were reduced by 25 per cent from $66.7bn after the tribunal found that the claimants “contributed to the extent of 25 percent to the prejudice they suffered at the hands of the Russian Federation”.

In a statement Shearman partner Emmanuel Gaillard said: “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 damages awarded in the Yukos arbitration dwarf the previous arbitration award record, $2.1bn awarded to Dow Chemical following a dispute with Kuwait-owned Petrochemical Industries Company. Shearman also represented the successful claimants in that case.