Shearman & Sterling

As the Yukos battle rumbles on, the prestigious practice helped Algeria to defeat a US$4 billion treaty claim

Shearman & Sterling’s huge renown for international arbitration grew after its 2014 win against Russia for the former majority shareholders in Yukos Oil Company. In monetary terms, the award surpasses by 20 times the previous record, which was also won by Shearman – the US$2.47 billion commercial award in Dow Chemical v Kuwait. It also dwarfs the US$1.7 billion that Ecuador was ordered to pay US oil company Occidental Petroleum in 2012.

Yukos is just the tip of the iceberg. A 2015 arbitration scorecard showed Shearman handled three of the 10 largest arbitrations listed in the survey, ranked by the amount in controversy.

Shearman & Sterling’s huge name for international arbitration started in the mid 1980s, when professor Emmanuel Gaillard joined from Bredin Prat. Originally hired for litigation, Gaillard opted instead to focus on international arbitration, of which he’d done a little for Algeria’s Sonatrach. And so Shearman became one of the first firms with a bespoke international arbitration team (along with Gide Loyrette Nouel, Coudert Brothers and, soon, Freshfields).

The gamble paid off. In 1992, Gaillard landed two huge cases – a billion-dollar construction dispute and a series of eight arbitrations for the same energy firm. The burgeoning team then appeared on a series of seminal cases in the mid-to-late 1990s in the energy and construction areas and a (new) discipline called investment arbitration.

In 1998, the team acted for a British investor against Egypt in Wena Hotels. It won both phases of the case – defeating Freshfields and winning US$20 million. It later blocked Egypt’s annulment request, obtaining the first decision on interpretation in ICSID history. Wena is often described as the first significant ICSID case of the modern era.

A year later, Gaillard published Fouchard, Gaillard, Goldman on International Commercial Arbitration, at the time the most comprehensive volume available on the practice of arbitration, and still a seminal work.

Today, Gaillard is a totemic figure in international arbitration, well known for his musings on the philosophical ideas underpinning international arbitration and more recently, its sociological significance. Over the years, other members of the team have gained recognition in their own right. Many have gone on to create arbitration boutiques or lead a practice – Peter Griffin, Eric Teynier, John Savage, Philippe Pinsolle and Todd Wetmore come to mind.

Others remain at the firm and have carved out niches. Yas Banifatemi, who joined in 1997, co-developed the firm’s investment arbitration practice and leads its public international law work.

Mark McNeill, who returned to the firm in 2007 after four years with the NAFTA division of the US Department of State, is now leading the team in London and focuses on investment arbitration, project and IP work.

The 2000s saw the practice cement its reputation in investment arbitration. It acted on the first cases involving serious argument about umbrella clauses (SGS v Pakistan and SGS v Philippines) and most-favoured-nation and denial-of-benefits clauses (Plama v Bulgaria).

Then, in 2003, Gaillard and Banifatemi landed the instruction in the Yukos case, which generated over US$70 million in fees. The case was quite a fight – taking eight years to reach a final hearing (five weeks in 2012) and nearly 10 years until the issuance of an award in 2014. Two years later, the shareholders found themselves back at square one when a court in The Hague set aside the award on the jurisdictional ground that Russia is not bound by the provisional application of the Energy Charter Treaty.

Despite the setback, the firm has not backed down: an appeal is pending in the Dutch courts.

Network

The team in Paris is one of the largest collections of arbitration specialists under one roof, with over 50 lawyers as well as legal assistants, trainees and support staff. The office enjoys the pick of the recruitment market and serves as a training ground for many who go on to great things.

Towards the end of the 1990s, the practice began to branch out from Paris, opening in London (1999), various German cities (2001), Singapore (2002), Abu Dhabi (2008) and Milan (2011).

In 2003, it also created a Spanish-language and Latin America team, run from Paris by Colombian partner Fernando Mantilla-Serrano. He left the firm for Latham & Watkins in 2014 but the focus on Latin American work survives.

The New York practice run by Henry Weisburg boosted its profile thanks to the Dow Chemical win, achieved through collaboration with the London and Paris teams. There is also a team in Washington, DC.

It should be said that not all forays into new regions have worked. The German practice, for example, is no more: in 2013, following a restructuring that saw the firm’s three German offices consolidated, Richard Kreindler went to Cleary Gottlieb Steen & Hamilton while others moved to Latham & Watkins. A Frankfurt office remains with one counsel specialising in arbitration.

The London team has had a couple of false starts but was rejuvenated by the relocation of McNeill from Paris in 2013. The office now hosts 15 international arbitration lawyers, including new partners Alexander Uff and Jeremy Sharpe, counsel Ximena Herrera and associates trained in Paris.

Most recently, the firm has been expanding its offering in Asia. In 2015, it established a practice in Hong Kong with the recruitment of partner Nils Eliasson. The Asia team also includes lawyers in Singapore led by partner Daryl Chew. Emmanuel Jacomy, a French-trained lawyer fluent in Mandarin, was promoted to partner in 2016 and is now leading the launch of the firm’s international arbitration practice in Beijing.

In the Middle East, there is a construction arbitration-focused Abu Dhabi team led by Alex Bevan. The firm’s significant caseload relating to North Africa is mainly handled by the Paris team which includes eight Arabic speakers.

Who uses it?

The most regular corporate clients include Sonatrach, EDF and Thales. Some other clients include Groupe Casino, Dow Chemical Company, Enka, General Electric, Credit Suisse First Boston, Orascom, Linde, Daimler Chrysler and IPIC – and, of course, the Yukos majority shareholders.

Scotland’s Cairn Energy has instructed the firm for an investment claim against India over retrospective taxation, with McNeill as lead counsel.

The team has been doing an increasing amount work for states in recent years – handling multiple matters for Algeria, Egypt, Lithuania and Venezuela. It is also advising Croatia in an ICSID arbitration brought by an Austrian investor and South Korea on public international law matters. China named the firm its preferred counsel in investment treaty matters in 2015. Angola’s national oil and gas company Sonangol is another recent client.

Track record

Shearman’s more noteworthy international arbitration successes have been mentioned in the history of the practice’s development above. Even more than Freshfields, the firm has earned a reputation as the place to go when defeat would be intolerable: the proverbial bet-the-company case.

It has secured the dismissal of a US$100 million claim brought against PetroVietnam by three international oil companies in relation to tax on an offshore concession. It also settled an ICC claim brought by the Goodyear tyre company against Sumitomo to dissolve a 1999 alliance.

More recently, in 2017, the firm helped settle a US$400 million ICSID claim against Egypt brought by a petrochemicals company owned by Kuwait’s wealthy Al-Kharafi family. It also defeated a US$270 million contractual claim against two Egyptian state entities, which had been brought by Unión Fenosa Gas (a joint venture between Spain’s Gas Natural and Italy’s Eni).

It helped French client EDF defeat claims of more than €4.6 billion in an ICC arbitration brought by the German federal state of Baden-Württemberg, concerning the sale of a stake in a power company. (On that matter, it co-counselled with Cleary Gottlieb Steen & Hamilton, its old adversary in the Yukos saga.)

In the realm of arbitration-related litigation, it defeated Hungary’s challenge to a €107 million award obtained by EDF before the Swiss Federal Tribunal. Hungary had argued that the award constituted illegal state aid under EU law. The state was ordered to bear all the costs of the Swiss court proceeding, including those incurred by EDF.

Recent events

As mentioned, the firm has appealed the decision of the District Court of The Hague to set aside the Yukos award. A team of over 40 lawyers has been working on the case, including five partners, three counsel and 35 associates in Paris, London, Hong Kong and the US. The award holders have, however, abandoned enforcement efforts in other jurisdictions pending the outcome of that appeal.

The firm’s biggest success of 2017 was arguably helping Algeria defeat a US$4 billion treaty claim in an ICSID arbitration brought by Orascom, a company owned by the family of Egyptian billionaire Naguib Sawiris. The tribunal threw out the claim at the jurisdictional stage after describing it as an abuse of rights. Shearman continues to defend the award in annulment proceedings.

In another Algeria-related dispute, the firm helped regular client Sonatrach settle a pair of ICC arbitrations with France’s Total, one of which related to a US$400 million tax on “exceptional profits”.

It negotiated another settlement for Angolan state entity Sonangol, bringing to a halt a pair of ICC arbitrations worth a combined US$2 billion that had been brought by distressed US energy company Cobalt. The deal, under which Cobalt agreed to sell its stake in two offshore oil blocks for US$750 million, was approved by a bankruptcy judge.

As counsel to one of the Micula brothers, Shearman successfully defended a US$250 million ICSID award from an annulment application by Romania, despite arguments by the European Commission that it violates EU state aid rules. The firm continues to act in enforcement proceedings pending the outcome of EU court proceedings.

Along with Freshfields Bruckhaus Deringer, Shearman helped nine power producers win a US$130 million LCIA award against a Pakistani state-owned electricity company after persuading a sole arbitrator that the respondent had colluded in third-party litigation to thwart compliance with an expert determination.

The firm also continued its representation of Egypt in four politically sensitive cases concerning the termination of a deal to supply gas to Israel in the wake of the Arab Spring, under ICC, ICSID, UNCITRAL and Cairo Centre rules. All those cases have now resulted in findings of liability against Egypt and its state entities, in favour of East Mediterranean Gas (EMG), an Egyptian company with an array of foreign shareholders. Damages have been awarded in the ICC and Cairo centre cases but not the other two, which are treaty-based.

The firm told GAR that, although the findings on liability went against Egypt, various victories along the way reduced the UNCITRAL claim by more than two thirds, from US$1.2 billion to a maximum of US$400 million – with the fight continuing in respect to that amount. And in the Cairo centre case, the US$1 billion damages awarded to EMG corresponded to one fifth of the original claim of US$4.8 billion.

Shearman also complains the tribunals in the Egypt cases failed to take into account “the abuse of the process consisting in bringing multiple parallel arbitration based on the same contract and facts, and seeking overlapping damages for the benefit of the same economic players”, which was recognised in the ICSID award in Orascom v Algeria.

The firm continues to act for Scotland’s Cairn Energy in treaty claim against India over a US$1.6 billion tax bill. In 2017, a tribunal dismissed the state’s application to stay proceedings, but denied Cairn’s request for bifurcation and and order restraining India from taking steps to enforce the bill.

Alongside Three Crowns, it continues to defend Areva in a monumental ICC arbitration brought by Finnish utility TVO concerning work on a nuclear power plant in Finland. The dispute, valued at almost US$6 billion, has had 48 days of hearings over the past two years. Two partial awards were issued in 2017 and the tribunal is now expected to move towards a final award on quantum.

A new instruction came from Luxembourg-based steelmaker ArcelorMittal, which is pursuing Bosnia and Herzegovina over government plans to sell an interest in a mining joint venture to a competitor.

The firm promoted Daniel Reich in New York to the partnership, while Alexander Marcopoulos, Ilija Penusliski and Benjamin Siino in Paris and Jonathan Tompkins in New York were made counsel.

Partner Robert Nelson in San Francisco left for Gibson Dunn & Crutcher and associate Wesley Pang left the firm after nine years to become second managing counsel at the Hong Kong International Arbitration Centre.

Client comment

François Driesen, general counsel to EDF, says the firm conducted the arbitration with the Baden-Württemberg government very efficiently. He describes Gaillard as “very impressive” in cross-examination and shaping the strategy of the case.

Pierre Charreton, former general counsel to Areva, says that Shearman’s performance in the Areva-TVO arbitration continues to be “amazing”. The firm has sustained a crack team since the start of the arbitration in 2008 and rose to the challenge of conducting an arbitration in a complex and technical area.

Another glowing review comes from Magdolin Samwel, senior contracts manager at Egypt’s state-owned natural gas supplier EGAS. “In my view, Shearman stands head and shoulders above its competitors,” she says.

She also describes partner Mohamed Shelbaya is an “outstanding strategist with great tactical sense” who can follow complex cases and offer practical solutions.