Year in review: international arbitration in Ukraine

12 Апр

An extract from The International Arbitration Review, 11th Edition

The year in review

i Developments affecting international arbitration

In terms of reforms, 2019 saw another positive development for international arbitration with respect to disputes arising from public-private partnership contracts. As of October 2019, the Law of Ukraine ‘On Concessions’ has introduced an option of international arbitration, mirrored in the Law of Ukraine ‘On the Public-Private Partnership’, for public-private partnership contracts. Furthermore, cases where a private party is a Ukrainian entity founded by a company with foreign investment may be referred to arbitration with a seat outside of Ukraine.

Year in review: international arbitration in Ukraine

Also in 2019, Ukraine continued to frequently take the spotlight for international arbitration matters and harvest the fruits of the 2017 legislative reform. Notably, the Supreme Court of Ukraine strived to develop a more uniform approach when dealing with international arbitration issues, and has been regularly publishing updated reviews of its practice. At the same time, however, a degree of uncertainty remains with respect to the interpretation of certain provisions of the law.

While some of the high-profile investment arbitration cases related to Crimea-based assets have been resolved, a number remain outstanding and are awaiting a meaningful resolution.

ii Arbitration developments in local courts

The 2017 reform of legislation affected, inter alia, provisions on international arbitration. The most notable legal changes particularly relevant for international arbitration relate to establishing the validity and interpretation of arbitration agreements, the arbitrability of disputes, and the powers of the national court to grant interim measures in support of international arbitration, calculate and grant the enforcement of post-award interest.

On the issue of the validity of arbitration agreements, the Supreme Court reaffirmed in its practice fundamental principles of separability of the arbitration agreement from the underlying contract, Kompetenz-Kompetenz and the presumption of the validity of an agreement to arbitrate. For instance, in the case of Norbert Schaller Gesellschaft mbH v. First Investment Bank PJSC, the court rejected the arguments of the defendant objecting against the recognition and enforcement of an award on the basis that arbitration agreement was invalid due to the invalidity of the guarantee in which the arbitration clause was contained. The court also went beyond the merely formalistic approach traditionally adopted by Ukrainian courts in the past and found that the requirement of the arbitration agreement to be in writing had been satisfied by way of the transmission of the underlying agreement containing the arbitration clause to the other party.

Due to its complexity and the variation of fact patterns, notwithstanding a clear pro-arbitration approach under the law, the interpretation of arbitration agreements remains among the controversial aspects of court practice. For instance, the invalidity of an arbitration agreement containing discrepancies in the name of an arbitral institution remains open at the lower court instances. The Supreme Court, however, reaffirmed the pro-arbitration approach.

Aiming to offer court assistance to parties in international arbitration and ensure the efficiency of the arbitration mechanism, the 2017 legislative reform introduced provisions on interim measures that can be requested before a state court in support of arbitration. Since this was a novelty, court practice on the granting of interim measures developed throughout 2018 and 2019. What transpires from practice is that the courts strive to strike a balance between the interests of the parties when considering requests for interim measures. For instance, in a ruling dated 28 March 2019, the Supreme Court held that the absence of details as to the value of a debtor’s assets makes it impossible for the court to consider and resolve on the criterion of proportionality. This, in turn, is a ground to deny a claim to arrest all of a debtor’s assets.

In contrast, in a ruling of 24 September 2018 in SoftCommodities Trading Company SA v. Elan Soft LLP, the Supreme Court upheld the security of the claim and a countersecurity in relation to Grain and Feed Trade Association arbitration proceedings seated in London.

With respect to the enforcement of post-award interest set forth in an arbitral award, until the 2017 reform the issue remained unsettled in the legislation, and in practice courts refused to enforce post-award interest for the reason that such exercise of their powers would interfere with the content of an award. On 15 May 2018 the Supreme Court made a ruling that ended the saga of the Nibulon SA v. Rise PJSC case, and seemed to have resolved the issue. In essence, the Supreme Court resolved the debate as to the enforcement of post-award interest, notwithstanding that provisions of the CPCU expressly regulating this issue were to enter into force only as of 1 January 2019, because from the perspective of the Supreme Court, the legislator had already expressed how the respective legal matter was to be regulated, and a gap could be filled in principle before a specific procedural provision came into force. Still, court practice on this issue remains controversial. As an example, the Supreme Court in Norbert Schaller Gesellschaft mbH v. First Investment Bank PJSC refused to establish the 8.38 per cent of interest on an award of above €2 million for the reason that the resolutive part of its decision must correspond to the resolutive part of the award. Accordingly, the calculation of interest and reflecting the final amount in the decision on the recognition and enforcement of the award would result in the Court acting beyond what has been decided by the arbitral tribunal and, in effect, would supplement the award. According to the new procedural law provisions in effect as of January 2019, enforcement officers are authorised to conduct the necessary computations of the interest accrued.

The practice of the Ukrainian courts often evidences the attempts of debtors under an arbitral award to avoid compliance with the award by initiating court proceedings for the invalidation of a contract, including an arbitration agreement contained therein. However, the Supreme Court has clarified that legal proceedings for the recognition and enforcement of an arbitral award in Ukraine may not be suspended due to a litigation proceeding for the invalidation of the contract on the basis of and in relation to which an award was made. The reasoning of the Court is based on qualifying recognition and enforcement proceedings as a non-contentious civil matter that could be suspended only due to the consideration of a setting aside procedure of the award being considered.

iii Investor-state disputes

2019 was another year of high-stakes investment arbitration proceedings involving Ukraine and Ukrainian investors fighting battles in courtrooms. There is still a number of investment arbitration proceedings pending with regard to Ukrainian investments in Crimea. In addition, a new case was brought by NEK Ukrenergo against Russia for alleged expropriation of assets.

The beginning of 2019 was marked by further developments in Crimea-related investment arbitrations: awards in favour of Ukrainian investors in Crimea were issued in Everest Estate LLC et al v. The Russian FederationOschadbank v. Russian FederationPJSC CB PrivatBank and Finance Company Finilon LLC v. Russia, Aeroport Belbek LLC and Mr Igor Kolomoisky v. RussiaStabil et al v. Russia and PJSC Ukrnafta v. Russia. It also saw a radical change in Russia’s stance as it started participating in proceedings fighting admissibility and jurisdiction. Ukrainian investors Stabhil and Ukrnafta have successfully fought challenges brought by Russia before the Swiss court. In addition, DTEK announced that Russia was participating in its arbitration proceedings, but a decision in these proceedings is still pending.

In Ukraine, the Supreme Court ordered the enforcement of an arbitral award made in favour of Everest Estate and 18 other claimants in an amount of US$159 million to be paid by Russia to the Ukrainian investors in Crimea. The debate around the enforcement of the award captured the attention of legal minds both in Ukraine and abroad, as the Court dealt first with a freezing order covering shares of three Russian state-owned banks – Vnesheconombank, Sberbank and VTB Bank – and their Ukrainian subsidiaries, and the assets of their respective subsidiaries, and subsequently with the attachment of the assets against which the arbitral award may be enforced. The Supreme Court ruling dealt with a variety of issues, and in particular:

  1. establishing the presence of Russian assets in the territory of Ukraine, including in Crimea, for the purposes of establishing jurisdiction to consider the application for enforcement;
  2. waiver by the Russian Federation of its sovereign immunity by way of an agreement to be bound by the bilateral investment treaty and the award made in accordance thereto; and
  3. attachment of the assets of the Russian Federation only, and not of the separate legal entities: that is, the shareholders in the Ukrainian subsidiaries.

In its ruling, the Court held that by way of including an arbitration clause into the Agreement on the Encouragement and Mutual protection of Investments between the Russian Federation and Ukraine, the Russian Federation ipso facto agreed to waive the following types of sovereign immunity under the Law of Ukraine ‘On Private International Law’ and UN Convention on Jurisdictional Immunities of States and Their Property: immunity from suit, immunity from security of a claim and immunity from the enforcement of a court decision.

In July 2019, the Kiev Court of Appeal granted the recognition and enforcement of Oshchadbank’s award against Russia.

Separately, the Naftogaz v. Gazprom Stockholm arbitration saga was finally resolved in 2018 with the tribunal ruling in favour of Naftogaz. Naturally, Gazprom challenged the findings of the arbitral tribunal before the Swedish court, which rejected the Russia appeal.

Towards the end of 2018, and after three years of litigation before the Ukrainian court seeking enforcement of an emergency award, the JKX Oil & Gas plc et al v. Ukraine case has been given final relief. Recognition and enforcement of the interim measures was refused on the basis of violation of the public policy of Ukraine and the absence of a proper notification of Ukraine of the arbitration proceedings, while an award on the merits was partially enforced. This case is of particular interest not only because of the consideration of the public policy exception regarding the recognition and enforcement of foreign arbitral awards, but also the enforceability of awards granting interim emergency relief under the New York Convention – that issue, unfortunately, is not being dealt with in much detail by the Supreme Court.

Finally, Gazprom brought a claim in October 2018 against Ukraine for alleged abuse by the Ukrainian Anti-Monopoly Committee.

Vasil Kisil & Partners

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