The landmark Yukos decision has forced governments to consider the consequences of entering into international treaties that allow foreign investors to take disputes to arbitration. With the likes of Indonesia and South Africa having already torn up agreements, Russia having withdrawn from the Energy Charter Treaty that gave the Yukos shareholders jurisdiction and India mulling an exit from bilateral investment treaties, could the $50bn award lead more states to withdraw their consent to arbitration?
Emmanuel Gaillard, the founder and head of Shearman & Sterling’s international arbitration practice, who spearheaded the claimant’s victory, thinks not. He told Legal Business: ‘The award will not put countries off treaties as arbitration mechanisms in international treaties are very powerful and very effective, and the magnitude of the award is a function of the magnitude of the events. It takes extraordinary events to create an extraordinary award. It shows that the system works for small or for big cases.’
There are two reasons why Gaillard may be right. The first is that the Permanent Court of Arbitration, which made the award in late July, explained its decision with clarity in a 579-page award that was ten years in the making and took into account 6,500 pages of submissions covering the imposition of a $24bn tax bill, which pushed Yukos into bankruptcy, and the transfer of the company’s assets to Rosneft and Gazprom. The second is that the award is public, dispelling some of the claims of secrecy and overreach of tribunals. Gaillard, who’s ‘in favour of that, but it’s a choice that belongs to states’, says the trend is ‘towards an even more transparent process’ being driven by the likes of the US and Canada.
$70m so far generated for Shearman & Sterling from Yukos dispute
But ultimately for states, it is a question of whether they want to attract foreign capital by protecting investment. Gaillard adds: ‘I don’t think these instruments of investment protection will disappear – they will be there for a long time, even if they may include certain provisions to rebalance the system to make it more transparent. Investors need some kind of protection.’
The size of the Yukos award will be seen as justification for many firms’ push to grow their arbitration groups in recent years. The case has generated over $70m in legal fees for Shearman and that gold rush may continue if Russia, which has already indicated it will attempt to strike out the award, has not paid in full by 15 January 2015, when interest will start accruing and be compounded annually. Gaillard and co will then be tasked with enforcing the award against commercial assets deemed to be controlled by the state in jurisdictions across the world. The agitation of states and the growing damages at stake mean that legal fees from arbitration will only grow as post-award wrangling increases.
tom.moore@legalease.co.uk