Following aspirations of the previous legislative reform dating back to 2017, which positively impacted international commercial arbitrations seated in Ukraine and the recognition and enforcement of arbitral awards made abroad, 2020 and 2021 saw further initiatives to amend Ukrainian law pertaining to international and domestic arbitration and attracting strategic foreign investment into Ukraine.
In early 2020, during his address at the World Economic Forum, the Ukrainian President referred to the Investment Nanny programme,24 which was suggested would help boost the Ukrainian economy and would operate on the basis of the government organisation UkraineInvest.25 Once the covid-19 quarantine measures permitted, the draft law ‘On State Support for Investment Projects with Significant Investments’ (Investment Support Law) was registered and, subsequently, adopted by the Parliament of Ukraine on 17 December 2020. Effective as of 13 February 2021, the Investment Support Law applies to investment projects carried out within the territory of Ukraine in identified industries (including processing and extraction for further processing of certain minerals, waste management, transport, post and courier services, logistics, education, healthcare, and tourism, etc.) within the term of 5 years and of a total value exceeding €20 million.26 The various benefits offered under the Law are capped at 30 per cent of the estimated value of the investment project and may include tax benefits (exemptions from taxes and import custom duties), preemptive rights regarding the use of land for the investment project, and construction of the necessary adjacent infrastructure (e.g., roads, communication lines, utilities supply network, etc.) at the expense of the state or municipal budgets, or other permitted sources.27 On the basis of the special investment agreement and pursuant to the Investment Support Law, qualified investors are entitled to support and assistance with respect to the investment project from the UkraineInvest ‘investment nanny’, who serves as a specially designated state body.28 As of May 2022, UkraineInvest considered requests for potential investment projects with an investment value totaling more than US$2 billion.
Another notable legislative development is the amendments and draft amendments to Ukrainian law on international and domestic arbitration. First, the ICA Act was amended in November 2021 following the adoption of the Law on Mediation.29 The Law on Mediation lays down the foundations of mediation in Ukraine; however, it needs to be further clarified and elaborated on, in particular in relation to correlation with arbitration. With respect to domestic arbitration, the Draft Law No. 3411 dated 29 April 2020 suggested amendments to the Domestic Arbitration Act, including: (1) to expand the list of matters within the competence of domestic arbitration tribunals; (2) to expand the powers of the domestic arbitration self-government; and (3) to set forth a procedure for registering new domestic arbitration tribunals.30 Further, with respect to international arbitration, the Draft Law No. 5347 dated 8 April 2021 was put forward to amend, similarly, the list of arbitrable disputes as a matter of Ukrainian law and the procedure for registering new arbitral institutions. In addition, the Draft Law No. 5347 suggested a significant change of empowering a state court of appeals to resolve issues pertaining to appointment and challenge of an arbitrator, and termination of the arbitrator’s mandate.31 Both of the proposed legislations are yet to be adopted.
As of 1 November 2020, an updated version of the arbitration rules (and Rules of the MAC) applies to the international arbitration proceedings administered by the ICAC. In response to the pandemic and aiming to increase efficiency, the rules now better reflect virtual hearing procedures and resolve prior electronic communication issues in an effort to gradually transition ‘to 100 % digitalisation of arbitration’.32 In 2021, in ICAC nearly half of the cases were heard online under updated arbitration rules.33 Also, ICAC expelled arbitrators from the Russian Federation and Belarus from the recommendatory list of arbitrators in light of the Russian invasion.34
Ukrainian state courts have similarly accommodated the new 2020 reality and as early as April 2020 the State Judicial Administration of Ukraine approved the procedure for participating in a court hearing by videoconference using a separate system EASYCON.35 After the initial launch and trial period in 2019 of the electronic court system in Ukraine, an amended law on the Unified Judicial Information and Telecommunication System (‘e-court’) entered into force on 26 May 2021, providing for the gradual rollout of the system.
As one might expect, the Russian invasion in February 2022 wreaked havoc on commercial activities and investments. When the war ends, wide-spread destruction of property, infrastructure and the blockade of Ukraine’s chief seaports will have generated enormous economic harm, potentially leading to significant claims and disputes.
In March 2022, the Parliament passed a law allowing for a seizure of assets belonging to the Russian Federation and its residents,36 which paved the way to a subsequent forfeiture of the assets of several Russian state-owned banks, including Sberbank and Development bank Vnesheconombank (VEB). In response, Russia intends to file an investment claim under the Ukraine–Russia BIT.
Global calls for reparations have led to a flurry of legislative initiatives allowing for seizure of Russian assets located in rich economies with a view to their subsequent transfer to the victims of the aggression. Russia is likely to challenge such measures before courts and tribunals, as it intends to do with regard to the measures taken in Ukraine.
Alternatively, a specialised tribunal may be set up in future to adjudicate on commercial claims arising from the illegal acts committed in Ukraine. Pending its formation, parties will continue to seek redress before the arbitral venues that are already available, although the enforcement of awards in third countries may be associated with challenges such as state immunity from execution. A recent attempt to invoke war-related arguments during the enforcement of an arbitral award before a US court will demonstrate if the war has any impact on the availability of the Russian assets. In April 2022, the beneficiaries of the award in Stabil LLC et al. v. the Russian Federation (a case which originated from the annexation of Crimea in 2014) applied for an enforcement before the District of Columbia.
ii Arbitration developments in local courts
Jurisprudence of the Ukrainian courts generally reflects the pro-arbitration approach reinforced by the 2017 legislation reform with the practice of the Supreme Court further developing clarity and certainty with respect to application of the law. For instance, in the Evciler v. Dragprom ruling dated 12 November 2020 the Supreme Court resolved a challenge to the competence of an arbitral tribunal to consider disputes concerning validity of the arbitration agreement. The Supreme Court explained the positive and negative effects of the arbitration agreement, the first being the obligation to refer disputes to an arbitral tribunal, and the latter limiting a party’s attempts to resolve disputes falling under the arbitration agreement before a state court. Additionally, the Court emphasised separability of the arbitration agreement from the underlying agreement to conclude that the two agreements may be governed by distinct laws and that disputes concerning invalidity of the underlying agreement fall within the scope of the arbitration agreement and shall be considered in arbitration. On this basis and taking into account the language of the arbitration agreement in the case providing for all disputes and misunderstandings arising from or in connection with the contract to be resolved in arbitration, the Court resolved that challenges to validity of the arbitration agreement, and the underlying contract, shall be referred to arbitration.37
It is now well established in the jurisprudence of the Supreme Court, and as reflected in the ruling dated 29 April 2021 in case No. 910/9841/20, that commercial courts when presented with a matter falling within the scope of an arbitration agreement must as a matter of law leave the claim without consideration if the respondent timely objects to the proceedings before the court, and the court had not determined the arbitration agreement to be void, inoperative or incapable of being performed. In such case, validity of the arbitration agreement shall be determined by the court prima facie. The Supreme Court also confirmed that an arbitral tribunal rather than commercial court is entitled to decide upon its competence and upon validity of an arbitration agreement and it would be improper for the state court to interfere in these matters.38
Further, the Ukrainian Supreme Court solidified its approach to the waiver of right to object and its impact on the annulment of the award. For instance, in the Markent SIA v. KPD, the Supreme Court dismissed the arguments of Markent SIA (the debtor under the award) that the arbitral award concerned a dispute not falling within the arbitral agreement because Markent SIA did not raise these objections during the course of arbitration while fully participating in the proceedings. Accordingly, the Supreme Court concluded that Markent SIA agreed with consideration of this dispute in arbitration.39
Ukrainian courts continue to actively apply interim measures in support of international arbitration. For instance, in OlainFarm v. Olfa, the Supreme Court confirmed the application of interim measures in a form of seizure of funds within the claim brought at ICAC.40
Turning to the recognition and enforcement of international arbitral awards in Ukraine, public policy ground remains a frequently raised objection. Generally, courts take a restrictive and pro-enforcement approach; however, the assessment and outcome are significantly fact dependent. For instance, in VAB.RF v. Ukraine, when dealing with the application for recognition and enforcement of an arbitral award made by an emergency arbitrator seated in the Hague, the Supreme Court confirmed that the recognition and enforcement of the award granting interim measures would be contrary to the public order of Ukraine because it would de facto preclude enforcement of an arbitral award already recognised and enforced by the Kyiv Court of Appeal earlier.41 Thus, recognition and enforcement of an emergency award was refused for the need to preserve legitimacy and binding legal effect of a court judgment.
Another branch of jurisprudence dealing with the public order ground sprouted with respect to the enforcement of arbitral awards triggering sanctions regime developed in response to Russian military aggression. The court practice has been unsettled in this regard. For example, the ruling dated 9 January 2020 in case AVIA-FED-SERVICE v. Artem is an example of a positive outcome of an application seeking recognition and enforcement of an arbitral award in favour of a Russian company, although falling under the Ukrainian sanctions regime. However, enforcement of the award was deferred by the state enforcement officer because Artem is a company of the industrial military complex of Ukraine, and that there is a temporary ban on enforcement against this type of company in favour of Russian legal entities. Subsequently, the Supreme Court upheld the lawfulness of the state enforcement officer’s actions, stating that limitations on enforcement are temporary and justified by the necessity to protect the interests of the Ukrainian people and state, because enforcement of such decisions, that is, against a company of the industrial military complex of Ukraine in favour of Russian legal entities, would be incompatible with the public order of Ukraine.42
Notably, in a Separate Opinion dated 17 March 2020 in case No. 908/3736/15, justices of the Supreme Court noted that court practice on application of the sanctions regime to commercial contracts, including their use as a potential force majeure defence, is only forming and it remains to be determined whether the judgment should be in favour of the claimant (who falls under sanctions), but should not be enforced (voluntarily or compulsory).43
In other similar cases, the Supreme Court took a more consistent approach of refusing recognition and enforcement of an arbitral award on the grounds of public policy, an integral part of which is the sanctions regime.44
In January 2021, recognition and enforcement of a foreign court judgment in favour of a limited liability company incorporated in the Russian Federation against a Public Joint Stock Company registered in Ukraine, in which the State of Ukraine owned a block of shares, was refused for the reason of being contrary to the Law of Ukraine ‘On Sanctions’, as the judgment creditor falls under sanctions and payment of monies to it would be against the policy of Ukraine on sanctions.45
Similarly, in Ostchem Holding Limites v. Odesa Portside Plant (OPP), upon the appeal of the OPP and the State Property Fund of Ukraine (SPFU), the Supreme Court refused to grant recognition and enforcement of the approximately US$300 million SCC award since it was established that the Gazprombank, a Russian entity, would in fact receive payments under the award, which would be contrary to the public policy of Ukraine. 46 In addition, the Supreme Court reasoned that recognition and enforcement of the award is refused on the basis of public policy for the following reasons: (1) the OPP, a state-owned entity, is of strategic importance to the state’s security and economy; (2) the OPP is in the process of privatisation; and (3) the obligation of the OPP to ensure protection of the people and the environment from the objects of increased danger in its ownership, performance of which would be put at risk in case of enforcement of the award.47 Accordingly, and despite the award in question being a consent award, the issue of recognition and enforcement was finally resolved after over two years of litigation in Ukraine in favour of the state-owned entity.
As a general point of procedure for seeking recognition and enforcement of international arbitral awards in Ukraine, the Supreme Court clarified that as a matter of Ukrainian law only the parties to the arbitration proceedings are entitled to claiming setting aside of the award or seeking its recognition and enforcement, and subsequently challenging court rulings concerning these claims.48
iii Investor–state disputes
While the saga of Crimean arbitrations continued into 2021, the year also brought new investment disputes involving Ukraine and companies in the various industries.
Turning first to the Crimean-related issues, the ruling of the Paris Court of Appeal dated 30 March 2021 annulling the award in favour of the Ukrainian state-owned bank Oshchadbank against the Russian Federation drew major attention, raising concerns about the future of other awards. Despite this turn of events, Ukraine continues its offence against the Russian Federation for assets lost in Crimea with the latest claim announced by the national nuclear energy company Energoatom in May 2021.49 The company seeks redress for the Donuzlavska Wind Power Plant located on the territory of the temporarily occupied Crimea.
The Crimean arbitration saga is also to continue in 2022. For example, as of May 2022 such cases as Ukrenergo v. Russia, DTEK v. Russia, and Naftogaz and others v. Russia are still pending. All these cases relate to expropriation of claimants’ assets in Crimea following the annexation of this territory by the Russian Federation in 2014.50
Changes to the renewable energy subsidy regime in 2020 also put a target of investment claims on Ukraine itself. Foreign and domestic energy producers expressed concerns in April–May 2020 warning the state of an ‘avalanche of arbitration cases’.51 The Energy Charter Treaty claim of the Lithuanian investor Modus Energy brought in May 2021 is the first of potentially more alleged to come.52 Another case related to renewable energy was initiated against Ukraine by SREW under BLEU (Belgium–Luxembourg Economic Union)–Ukraine BIT (1996).53
Further, the Ukrainian government’s tax and antimonopoly measures imposed in 2020 spurred dissatisfaction among foreign investors and in 2021 resulted in two ICSID claims brought by Swedish Misen Energy and Misen Eneterprises under the Sweden–Ukraine BIT with respect to ‘imposition of a 70% subsoil use charge for the production of natural gas from depths of up to 5,000 meters’54 and Philip Morris under the Ukraine–Switzerland and Ukraine–US BIT for the fine imposed by the Antimonopoly Committee of Ukraine.55
Following the denial of Ukrainian courts to recognise and enforce the SCC award in Ostchem Holding Limites v. Odesa Portside Plant, Ostchem launched an Energy Charter Treaty claim at the SCC against Ukraine pleading denial of justice. Now the proceedings are stayed because of the Russian aggression. It is reported that since 24 February 2022, Ukraine has stayed litigation and arbitration proceedings in various cases.56
While in total 11 cases against Ukraine remain pending,57 in 2021 two cases were resolved, namely Olympic Entertainment Group AS (Estonia) v. Ukraine and Littop and others v. Ukraine. Ukraine lost in the first case that related to a ban on gambling businesses imposed in June 2009. Under the UNCITRAL tribunal award of 15 April 2021, Ukraine was ordered to compensate the Tallin-based Olympic Entertainment Group for the indirect expropriation resulting from the ban.58 Ukraine succeeded in the second case, as the tribunal in Littop and others v. Ukraine decided that it lacks jurisdiction to hear this case.59
There could potentially be another investment arbitration claims against Ukraine in relation to seized assets of Russian entities. For example, two Russian banks, Sberbank and Vnesheconombank, have already threatened to initiate arbitral proceedings under the 1998 Russia–Ukraine BIT.60
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