Case of the Day: Hulley Enterprises v. Russian Federation

The case of the day is Hulley Enterprises, Ltd. v. Russian Federation (D.D.C. 2022). It involves the $50 billion arbitral award that shareholders in Yukos Oil Co. obtained against Russia in 2014 after alleging, in an arbitration in the Netherlands, that Russia had violated the Energy Charter Treaty by measures intended to “bankrupt Yukos, appropriate the company’s assets, and silence the company’s head, Mikhail Khodorkovsky, due to Khodorkovsky’s support for political parties opposed to President Vladimir Putin and the company’s proposed integration with Western oil interests.” Russia moved to set aside he award in the District Court of the Hague in 2014, and at about the same time, the shareholders moved to confirm the award in Washington. Russia moved to dismiss for lack of jurisdiction and to deny confirmation.

In 2016, at the shareholders’ request, over Russia’s opposition, the US case was stayed pending the shareholders’ appeal of a 2016 Dutch decision setting aside the awards; although the stay was set to expire in 2019 whether or not the Dutch courts had resolved the appeal, the parties extended the stay by consent twice. In 2020, the Court of Appeal of the Hague reversed the lower court decision and rejected additional arguments Russia had made against the award. The US stay was, therefore, lifted, but in June 2020, Russia sought an additional stay in the US pending an appeal to the Dutch Supreme Court. The judge granted the stay until the earlier of November 2022 or the conclusion of the Dutch proceedings. The shareholders appealed, but before the appeal could be decided, in November 2021, the Dutch Supreme Court decided the case. The shareholders dismissed their appeal, and the case was remanded to the District Court.

The question now before the court was whether the stay should be extended pending the resolution of issues on remand after the Dutch Supreme Court’s decision, namely, Russia’s argument that the award was procured by fraud and is therefore unenforceable as contrary to Dutch public policy. The parties disagreed in particular about the effect of Russia’s invasion of Ukraine on the analysis. Russia said that the invasion was an “evolving situation” that created an additional reason to stay, especially as it was trying to “locate available and acceptable substitute Counsel for the Russian Federation.” This may seem a little cryptic, but a status report Russia filed explains that in light of the war and the sanctions against Russia, White & Case, Russia’s counsel “in the Netherlands and other relevant jurisdictions are evaluating how to suspend and/or exit their representations of the Russian Federation in this case and other pending cases in accordance with applicable rules of professional responsibility.” Given my recent experiences advising business clients on compliance with the US sanctions that followed Russia’s invasion, I don’t envy lawyers trying to navigate this situation, especially given the lawyer’s ethical obligation to his or her client and the need for approval of the tribunal before withdrawing from a representation. The shareholders focused on the impact of escalating sanctions on their ability to find and levy on Russian state assets in the United States.

You might say that the New York Convention itself (art. VI) authorizes the court to stay the confirmation in light of the continuing challenge to the award in the Netherlands. But as the court observed, citing DDC precedent, because the court has not even established yet that it has jurisdiction, it lacks the power under the Convention to impose a stay. (I am not sure I understand this. If a court can decide a case on forum non conveniens grounds, for example, even if it has not yet decided whether it has jurisdiction, why can’t it decide to stay a case even if it has not yet decided whether it has jurisdiction? And if it can decide to stay an action on non-Convention grounds before it has ruled on its jurisdiction, why can’t it stay the action on Convention grounds?)

In the previous stays, the judge had used the Second Circuit’s Europcar factors to decide on the propriety of the stay. But in light of the DC Circuit’s recent decision in LLC SPC Stileks v. Moldova

, 985 F.3d 871 (D.C. Cir. 2021), which case some doubt on the six-factor Europcar test but instructed courts at least to weigh as factors (1) the expeditious resolution of disputes about arbitral and avoidance of litigation, and (2) the status of the foreign proceedings and the estimated to time to completion, the judge considered those two factors only.

She held, first, that the policy in favor of expeditious resolution of disputes and avoidance of litigation clearly favored the shareholders. The case has been pending for many years, and it has been long stayed at Russia’s request, and with its consent.

The second factor was closer and called for an examination of just what issues were left for the Dutch courts to decide. These were issues of procedural fraud: Russia claimed the shareholders had “relied on fraudulent statements, withheld essential documents from the Tribunal, and made secret payments to a key fact witness, Dr. A. Illarionov.” Russia argued that these issues would be relevant to the jurisdictional question in the US, but it seemed to acknowledge that the US court would have to decide whether the allegations, if true, made the award void as a matter of US public policy as opposed to Dutch public policy. But more to the point, as the judge recognized, Russia’s arguments were really merits arguments that don’t go to the court’s jurisdiction. Weighing the expected long delay, the difference between the Dutch and US issues, and the arbitration policy of expeditious dispute resolution, the court held that the case would not be stayed.

I think the decision makes good practical sense. The US courts didn’t have to make a rule allowing foreign sovereigns an interlocutory appeal from a decision on foreign sovereign immunity. But since that is the rule we have, if the case is stayed now, and it takes a few years to be concluded in the Netherlands, when it finally returns to the US courts (assuming Russia does not prevail in the Netherlands), the shareholders will still be at square 1. The court could deny Russia’s jurisdictional motion to dismiss the day after the Dutch decision, and the shareholders would then face a long delay as Russia takes its inevitable interlocutory appeal, followed by a request for rehearing en banc, followed by a petition for cert. The jurisdictional issues can be resolved now, without any real prejudice to Russia, and assuming the courts find that the district court does have jurisdiction, it seems likely to me that at that time, the judge will stay the case if the Dutch proceedings are still pending.

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