Yukos arbitration saga: the Swiss part
Decision of the Swiss Supreme Court dated 20 July 2017 (4A_98/2017, Fédération X. v. Z. Sàrl) reported in BGE/ATF 143 III 462
In February 2013, Z. (Yukos Capital Sàrl) initiated arbitration proceedings against X. (Russian Federation) on the basis of Art. 26(4)(b) of the Energy Charter Treaty dated 17 December 1994 (ECT), seeking payment of damages of more than USD 13 billion for alleged unlawful expropriation of investments in the context of the «Yukos saga». An arbitral tribunal composed of three arbitrators, having its seat in Geneva, was constituted in accordance with the UNCITRAL Arbitration Rules 1976 (UNCITRAL Rules), with the Permanent Court of Arbitration as appointing authority. Relying on Art. 21(4) UNCITRAL Rules, X. raised the following five objections to the arbitral tribunal’s jurisdiction: (i) X. never ratified the ECT and only applied it provisionally until 18 October 2009 (Art. 45(1) ECT); (ii) the loans granted by Z. cannot be characterised as «investments»(Art. 1(6) ECT); (iii) the dispute, bearing a tax nature, falls outside the scope of the ECT (Art. 21 ECT); (iv) X. is entitled to refuse the application of part III of the ECT given that Z. does not exercise a substantial commercial activity at its registered office and is controlled by citizens of another state (Art. 17 ECT); and (v) the alleged investments are not protected by the treaty as they were made illegally (Art. 17 ECT).
After consultation with the parties, the arbitral tribunal bifurcated the proceedings. It decided to consider the jurisdictional objections (i), (ii) and (iv) in a first phase and to address the jurisdictional objections (iii) and (iv) together with the merits of the case. In January 2017, the arbitral tribunal issued an «Interim Award on Jurisdiction»whereby it dismissed the three jurisdictional objections. All other objections to jurisdiction and admissibility were then to be dealt with in the second phase of the arbitration. Relying on Art. 190(2)(b) of the Private International Law Act (PILA), X. sought to have the interim award set aside. The Swiss Supreme Court (the "Court") held that the application was inadmissible.
The Court’s Reasons
Under Art. 77(1)(a) of the Federal Supreme Court Act (FSCA), in conjunction with Arts. 190-192 PILA, an application to set aside is admissible if directed against an award, whether final, partial or interim. By contrast, a mere procedural order may not be sought to be set aside (unless in exceptional circumstances) since it may be varied or repealed during the proceedings. When deciding on the admissibility of an application to set aside, the decisive factor is not the title of the decision of the arbitral tribunal but the contents of that decision.
Art. 186(3) PILA provides that an arbitral tribunal shall as a rule decide on its jurisdiction in a preliminary award. This rule is not mandatory and is without sanctions if breached. An arbitral tribunal may depart from this rule if it deems that the jurisdictional objection is so closely related to the facts of the case that the decision on such objection cannot be taken separately from the decision on the merits. Pursuant to Art. 190(3) PILA, the party wishing to challenge a preliminary award must act immediately. A party which proceeds on the merits without making any reservation shall by its conduct be deemed to acknowledge the jurisdiction of the arbitral tribunal and to have waived its right to object (Art. 186(2) PILA).
According to Art. 190(2)(b) PILA, an application to set aside an award is admissible if the arbitral tribunal wrongfully accepted or declined jurisdiction. If the arbitral tribunal decides that it lacks jurisdiction, it renders a final award. If the arbitral tribunal decides that it has jurisdiction to hear the matter, it renders an interim award on jurisdiction (Art. 190(3) PILA), which is subject to immediate challenge. The same applies to decisions whereby the arbitral tribunal does not expressly decide on its jurisdiction but upholds it in another implied manner. If the decision settles the jurisdictional issue only provisionally, such a decision may not be challenged.
In principle, arbitral decisions are subject to court review only at the end of the proceedings, unless the law expressly provides otherwise. For reasons of procedural efficiency, a party willing to challenge the decision by which an arbitral tribunal has dismissed jurisdictional objections should act immediately. On the one hand, it is in the arbitral tribunal’s and the parties’ interest not to proceed with the arbitration the course of which might be changed if the Court upholds the application to set aside, even though the award does not definitely settle the arbitral tribunal’s jurisdiction. On the other hand, the Court’s task is not to hear a number of successive jurisdictional objections in the course of the same arbitration proceedings. The risk in high-value arbitrations is that respondents could be tempted to considerably delay the proceedings, by raising numerous jurisdictional objections, in order to obtain separate decisions and then challenge them before the Court.
A decision may be sought to be set aside before the Court if the arbitral tribunal has concretely accepted or declined jurisdiction within the meaning of Art. 190(2)(b) PILA and not merely settled one or more jurisdictional issues. If the arbitral tribunal addresses certain jurisdictional objections, while leaving other objections to a later stage of the proceedings, it does not take any decision as regards its jurisdiction.
In the present case, the arbitral tribunal, in its interim award, dismissed three jurisdictional objections in a final manner, while leaving two other jurisdictional objections to be decided together with the merits of the case. Consequently, the arbitral tribunal has not accepted or declined its jurisdiction within the meaning of Art. 190(2)(b) PILA. For these reasons, the application to set aside is inadmissible. When the arbitral tribunal has finally decided, X. will be entitled to challenge that award, including as regards the three jurisdictional objections which have been dismissed by the arbitral tribunal in its interim award, without X.’s conduct being seen as running counter to the rules of good faith.
The decision taken by the Court is not without criticism. The party which considers that the arbitral tribunal lacks jurisdiction will have to go through fully-fledged proceedings on the merits before being allowed to challenge findings on jurisdiction contained in the interim award, although that party takes the view that the interim award is flawed. In terms of efficiency, in particular as to the costs to be incurred by the party denying jurisdiction which has no choice but to address the merits of the dispute, the decision of the Court does not appear satisfactory and seems triggered by the sole desire of the Court not to hear the case twice on jurisdiction. However, in a scenario where the decisions of the arbitral tribunal were wrong in the interim award and the Court would hold that the arbitral tribunal had no jurisdiction, it would be in effect in both parties’ interest to know it before addressing the merits of the case. Allowing to bring the matter twice before the Court – against the interim award and then against the final award, as the case may be – appears justified.
One understands from the reasons of the Court that the petitioner had been candid about its own doubts as to the admissibility of an application to set aside against the interim award deciding partially on jurisdiction. Wisely enough, the petitioner filed an application to set aside already at that stage for avoiding a subsequent objection that it would be precluded from challenging the jurisdictional findings in the interim award in setting aside proceedings against the final award. The Court made it clear in its decision that waiting until the final decision on jurisdiction is not tantamount to any tactic incompatible with the rules of good faith. In this respect, the merit of the Court’s decision is to provide legal certainty.
By Xavier Favre-Bulle, Partner, Lenz & Staehelin and Elena Neidhart, Associate, Lenz & Staehelin