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Russia fails to suspend enforcement of Crimea award

Sebastian Perry

12 June 2019

Russia fails to suspend enforcement of Crimea award

Crimea (Credit: gon4/istockphoto)

The Hague Court of Appeal has rejected an application by Russia to suspend enforcement of a US$159 million award compensating Ukrainian investors for expropriated real estate in Crimea – finding the state had not shown that its bid to set aside the award had a high probability of success.

In a decision published today, the court refused to suspend enforcement of the UNCITRAL award in favour of Everest Estate and 18 other claimants or compel them to post security. Russia’s request to set aside the award is pending before the same court.

The Everest claimants used NautaDutilh in the Dutch courts, having relied on Hughes Hubbard & Reed in the arbitration. Russia, which did not participate in the arbitration, is using Houthoff for the Dutch proceedings.

The claimants, some of whom are affiliated to Ukrainian billionaire Igor Kolomoisky, were the owners of various real estate properties in Crimea that were expropriated following Russia’s annexation of the peninsula in 2014.

They brought an arbitration against Russia in the following year under the Ukraine-Russia bilateral investment treaty, which was administered by the Permanent Court of Arbitration. The dispute was heard by an UNCITRAL tribunal seated in The Hague, consisting of Andrés Rigo Sureda of Spain, Michael Reisman of the US and Rolf Knieper of Germany.

The tribunal issued a decision in March 2017 upholding its jurisdiction and a final award in May last year, requiring Russia to pay US$159 million. It marked the first time Russia had been held liable by a BIT tribunal for seizing assets in the territory.

Russia applied last August to the Dutch court to set aside the jurisdictional and final awards. The state argues there is no valid arbitration agreement and that the claimants obtained their investment through fraud, corruption and violence.

After the Everest claimants enforced the award in the Ukrainian courts and succeeded in freezing Russian banking assets in the country, Russia applied to the Dutch court last December to suspend enforcement of the award or require that the claimants post security. An oral hearing on the request took place in April.

In the latest decision, the Dutch court said for the purposes of deciding on suspension an important factor was whether there was a high probability that Russia’s grounds for setting aside the award would succeed.

Among its arguments for why the BIT does not apply to the dispute, Russia says the claimants did not make investments in Russian territory within the meaning of the treaty as Crimea was part of Ukraine at the time the investments were made.

The Dutch court acknowledged this is a new area in the field of investment treaty law but noted that at least five arbitral tribunals in seven separate arbitrations have considered similar arguments and concluded that the BIT applies – as has the Swiss Supreme Court in reviewing two of those awards.  

As for Russia’s argument that the investments were unlawfully obtained, the court said Russia’s allegations of corruption, fraud and violence on their face only related at most to investments obtained by three of the claimants. Even if this argument was upheld, the court said it could only give rise to a partial annulment of the award or remission to the arbitral tribunal, and was not a sufficient basis to suspend enforcement.

Russia also maintains that the tribunal lacked jurisdiction because it was first necessary to resolve a dispute over the territorial status of Crimea pursuant to the state-to-state arbitration clause in the BIT. However, the court said the state-to-state arbitration clause did not apply to the investors’ dispute nor prescribe that a state-to-state proceeding must take place first.

Turning to Russia’s argument that the tribunal was not competent to deal with the claims of 19 claimants in a single proceeding, the court said it believed the BIT allowed multiple investors to jointly file a claim against a contracting state. It observed that this was a common phenomenon in comparable BIT cases.

Russia also maintains that the claimants relied on forged documents during the arbitration and that it only began investigating the case file after the final award was rendered. But in view of the fact that Russia had received the documents during the arbitration, the court said it was likely that this argument would be rejected as raised too late.

Ukraine’s Supreme Court upheld the enforcement of the award in January this year, at the same time limiting the scope of the attachments previously granted.

Russia recently applied to the Swiss courts to set aside a pair of BIT awards worth a combined US$80 million in favour of Kolomoisky-linked oil and gas companies including Stabil and Ukrnafta, concerning the expropriation of petrol stations and related assets in Crimea.

The Russian minister of justice also announced last month that the state has changed its strategy with regard to Crimea-related BIT cases and will participate in such arbitrations in future.

The ruling comes in the midst of hearings this week before a five-member arbitral tribunal at the PCA, which is considering Russia’s preliminary objections to a claim by Ukraine under the UN Convention on the Law of the Sea. The case concerns coastal rights in the Black Sea, the Sea of Azov and the Kerch Strait.

In the UNCLOS case, Russia is using a team including Alain Pellet, Samuel Wordsworth QC and lawyers from Curtis Mallet-Prevost Colt & Mosle in Milan in those proceedings, while Ukraine is represented by Covington & Burling, former US State Department legal adviser Harold Koh and others. The PCA has published documents, photos and video of the oral arguments on its website.

Before the Hague Court of Appeal

Counsel to Russia

  • Houthoff

Partners Marielle Koppenol-Laforce and Rob Meijer, counsel Remme Verkerk and senior associate Glenn Hoek

Counsel to Everest Estate et al

  • NautaDutilh

Partners Gerard Meijer (no longer with the firm) and  Mirjam van de Hel-Koedoot and associates Pieter Fritschy and Tanya Schasfoort in Amsterdam

Everest Estate LLC et al v Russian Federation (PCA case no 2015-36)

UNCITRAL Tribunal

  • Andrés Rigo Sureda (Spain) (President)
  • Michael Reisman (US) (appointed by claimants)
  • Rolf Knieper (Germany) (appointed by appointing authority Michael Hwang SC on Russia’s behalf)

Counsel to Everest Estate et al

  • Hughes Hubbard & Reed

Partners John Townsend and James Boykin, counsel Vitaly Morozov and associates Alexander Bedrosyan and Eleanor Erney in Washington, DC; partner Marc-Olivier Langlois (no longer with the firm) and counsel Leon Ioannou in Paris

Counsel to Russia

Russia did not participate in the proceedings

Expert witnesses

For the claimants

  • Peter Maggs of the University of Illinois (on Russian law)
  • Brent Kaczmarek of Navigant (on damages)

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