The global financial markets are currently preparing for the phasing out of the London Inter-bank Offered Rate (or LIBOR) and other Inter-bank Offered Rates (or IBORs). LIBOR is the most widely used benchmark interest rate globally, employed in an estimated US$350 trillion worth of financial contracts worldwide. LIBOR may also be used in commercial contracts – for example, in price adjustment mechanisms in share purchase agreements, price escalation clauses or as a reference rate for contractual interest on late payments. LIBOR may also be specified in arbitration clauses as a benchmark rate for interest on the award.
Many financial instruments affected by the discontinuation of LIBOR will include arbitration clauses. As discussed below, whilst the substantive disputes arising from the end of LIBOR will be the same whether they are resolved in a court or by an arbitral tribunal, there are some additional considerations particular to the arbitration process which are relevant in the context of LIBOR discontinuation disputes. Further, even when determining a dispute which does not arise from the end of LIBOR, arbitral tribunals may have to grapple with how to award interest where an arbitration clause uses LIBOR as a reference point. Read more in the E-bulletin here.
In the recent judgment of National Housing Trust v YP Seaton & Associates Co Ltd ( UKPC 43), the Judicial Committee of the Privy Council (the "Privy Council") found that an arbitrator's award of compound interest should be set aside and remitted to the arbitrator because the arbitrator had no power under the law of the seat (Jamaica) to award compound interest. This judgment illustrates the importance of considering, including at the contract drafting stage, whether the law of the seat permits compound interest in the absence of party agreement.
On 18 July 2014, the Claimants in three related arbitrations administered under the 1994 Energy Charter Treaty and the 1976 UNCITRAL Arbitration Rules prevailed against the Russian Federation. The Claimants were former shareholders of the OAO Yukos Oil Company (“Yukos”), which had emerged in the early 2000s as the largest private oil company in post-Soviet Russia.
Although the arbitrations were brought separately by each Claimant and not consolidated, the Parties appointed the same arbitrators to each Tribunal (collectively, the “Tribunals”) and the Tribunals proceeded to hear and decide the claims together in three substantially similar awards (the “Awards”). The Tribunals found that the Russian Federation had unlawfully expropriated the assets of Yukos, in contravention of its obligations under international law, through a series of targeted measures taken between 2003 and 2007. Put together, in monetary terms the arbitration Awards are by far the largest ever made public, as the Tribunals awarded total damages to the Claimants of more than US$ 50 billion. The Tribunals also ordered Russia to reimburse the Claimants for arbitration costs of € 4.2 million and costs of representation of more than US$ 60 million.
Of particular note in the Awards is the Tribunals’ consideration of the doctrine of “unclean hands” in international law, along with the application of the doctrine of contributory fault. The Tribunals’ decision to reduce to Claimants’ recovery by 25%, following the same approach adopted in the recent case of Occidental Petroleum and another v Ecuador, is likely to attract significant attention and may set a precedent for future investment treaty cases. However, the Tribunals’ extensive analysis of the Parties’ submissions concerning valuation, damages, and the awarding of interest will also add to the body of jurisprudence available to practitioners and arbitrators faced with similar questions.
The decision could prompt other Claimants (including some of the over 50,000 other minority shareholders in Yukos) to move forward with claims against the Russian Federation. For claimants from ECT signatory states, the Tribunals’ decision to uphold the continued application of the substantive protections of the ECT, at least for qualifying investments made before Russia withdrew from the ECT in August 2009, is likely to make the ECT an attractive option under which to bring such claims.
In the case of Yukos Capital SARL v OJSC Rosneft Oil Company  EWHC 2188 (Comm) the English Court considered two preliminary issues relating to the long-running dispute between Yukos Capital SARL (“Yukos Capital”) and OJSC Rosneft Oil Co. (“Rosneft”). The issues were as follows:
- Whether enforcement of arbitral awards that have been set aside by the courts of the seat is precluded under common law; and
- whether, in principle, interest could be recovered on such arbitral awards under either Russian and/or English law.
In relation to the enforcement issue, the Court considered the “test” was whether it could (in particular and identifiable circumstances) treat an award as having effect notwithstanding a later decision of a court annulling the award. The Court found that, as a general position, it would be unsatisfactory and contrary to principle if a Court were bound to recognise a decision of a foreign court which offended against basic principles of honesty, natural justice and domestic concepts of public policy.
It is clear therefore that, in general terms, the Court has the power to enforce the Awards at common law notwithstanding the set-aside decisions of the courts of the seat. However, it now remains for Yukos Capital to prove the allegations which it has made as to why those set aside decisions should not be recognized by the English Court.
Whilst the claim to interest under Russian law was unsuccessful (as a matter of Russian law), the Court concluded that, in principle, interest on the sums claimed in the English proceedings could be recovered under Section 35A of the Senior Courts Act 1981, notwithstanding the fact that interest had not been awarded by the tribunal.