Arbitration proceeding – the freedom to choose is not a luxury service

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Attorney Ilo-Hanna Keres writes in a publication of Accounting News about the purpose of the international arbitration proceeding, which is to achieve the fair resolving of dispute by independent composition of the panel of the court without excessive delay and costs.

Resolving the possible dispute in arbitral court is not obviously the first idea which would go through someone’s head while concluding a new contract. It can seem a bit awkward – who would want to talk about possible future problems while being happy of concluding a contract. Still, the best protection of rights is secured when the procedure of resolving disputes is honestly and prudently agreed upon. At the end, both parties will save time and money by that. The option of arbitration proceeding is possible for so-called internal and international contracts. As the latter appear to be more complicated often, less attention is drawn on them in the article.

Unprecedented case of Jukos

A great example of a so-called large-scale arbitration proceeding which illustrates well the importance and possibilities of such proceeding, is the sensational proceeding between the majority shareholders of Jukos and Russian Federation which came to conclusion in the summer of 2014. The name Mihhail Hodorkovski and his destiny is known to all. Also the fact that he was arrested in 2003, allegedly as revenge for politically challenging president Vladimir Putin, and was sentenced to prison for tax evasion, theft and money laundering for 14 years (was released in 2013). The fact less known is that his co-shareholders from oil-company Jukos initiated an arbitration proceeding against Russian Federation, claiming the compensation for damage caused to them as the result of the activity of the state. Last July, the Permanent Court of Arbitration in Hague satisfied the claim of Group Menatep Limited (former shareholder of Jukos) against Russian Federation. The claim was satisfied only partially, but the sum ordered to be paid was larger than ever ordered in an arbitration proceeding – 50 billion dollars.

It is worth mentioning that in 2003 Jukos was the biggest oil-company in Russia in daily state of return, owning a hundred thousand employees. The assumption of the investment of the shareholders was conducted in several steps which included, amongst other, crippling the activities of the company (mainly by arresting, imprisoning or harassment of the management of the company), using it as an excuse to assume the company’s assets bit by bit. Later, all assets of Jukos were given to state-owned companies Rosneft and Gazprom. This made Rosneft one of the largest oil producers in the country. The activity of Russian Federation culminated by liquidation of Jukos in 2007, as a result of which the former majority shareholders who had turned to court, lost their investments completely and definitely.

The Permanent Court of Arbitration in Hague found in its decision that even though Russia had not signed the Energy Charter Treaty, hereinafter ECT, it had to follow the requirements arising from it regarding Jukos. The Court also found unanimously that the Russian Federation violated the obligations arising from ECT, when destroyed Jukos and took over its assets. The judicial tribunal decided the Russian Federation must therefore pay 50 billion USA dollars to compensate for the damage caused to former major shareholders (in addition, 60 million dollars of legal aid and 4,2 million euros of arbitration proceedings costs). The decision was unprecedented regarding the sums. The tribunal found that the allegation of the shareholders that Jukos was destroyed and its assets were taken for political reasons, was correct. By that decision, Russian Federation was held liable for violating the international rights and that by an independent arbitration tribunal, having the jurisdiction to resolve a dispute.

The payment obligation was due by 15.01.2015, the latest, pursuant to the decision, but Russian Federation announced immediately that was going to contest the decision. The decision is contestable only as an exception, as the decision made in arbitration proceeding is final and binding and subject to compulsory execution in 150 countries according to the Convention of Recognition and Enforcement of Judgments made in New York in 1958. Russian Federation has not paid the ordered sums so far.

Pros of arbitration proceeding

The previous example of the Jukos proceeding is a good introduction to the topic of pros of arbitration proceeding. Taking a look at the political background of what happened, it is clear that if the former shareholders of Jukos had turned to national court of Russian Federation, 

not Court of Arbitration in Hague with their claim, they would not only have lost the trial, but would have likely suffered repressions waged directly or indirectly against them.

Therefore the arbitration proceeding here was an ideal lever by which the fair and impartial resolution to the dispute was received quickly. The example of Jukos, illustrates all pros of arbitration proceeding. But as effective as the resolving of the dispute in arbitration proceeding of Jukos vs Russia, in proceeding such giant claims and making revolutionary decisions on the world’s stage, it is with proceeding smaller claims, as well. General rules and principles of arbitration proceeding which are being guided by in resolving the arbitration proceeding, shall remain the same.

The full version of the article is published in the paper edition no 2 2015 of Raamatupidsmisuudised and the abbreviated version on web.

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