Ihor Siusel and Kseniia Pogruzhlska
A. LEGISLATION AND RULES
Ukraine is a civil law country, thus, the issues of international arbitration are governed primarily by (i) international treaties, both multilateral and bilateral, (which, upon their ratification by the Verkhovna Rada of Ukraine (Parliament), have priority over domestic legislation) and (ii) domestic legislation. Court precedents are not considered to be the source of binding law in Ukraine, however, the courts of lower instances shall give due regard to the conclusions of law made by the Supreme Court and the Great Chamber of the Supreme Court in their decisions.
With regard to the international treaties, Ukraine is a party to the New York Convention, the Geneva Convention, the ICSID Convention and a number of bilateral investment treaties.
In respect of domestic legislation, international arbitration in Ukraine is primarily governed by the Law of Ukraine “On International Commercial Arbitration” (the “Arbitration Law”), dated 24 February 1994, which closely follows the UNCITRAL Model Law as of 1985. In addition to the Arbitration Law, the arbitrability of commercial disputes is also governed by the Commercial Procedural Code of Ukraine, whereas the procedure for recognition and enforcement of the arbitral awards, as well as the procedure for setting aside of the arbitral awards, are established by the Civil Procedural Code of Ukraine.
In 2019, the following legislative changes affecting arbitration and the procedure of enforcement of the arbitral awards were introduced in Ukraine.
Firstly, on 1 January 2019, the amendments to the Civil Procedural Code of Ukraine and the Law of Ukraine “On Enforcement Proceedings” became effective, by which the enforcement officers were explicitly granted the authority to calculate the interest that accrues under the arbitral award until the date of the full payment. The respective amendments overcame the material gap in the legal regulation of Ukraine, which was often referred to by the Ukrainian courts as a ground for denial of recognition and enforcement of the arbitral awards that provided for accrual of the interest until the date of the full payment of the debt because the courts and the law enforcement authorities were not authorized to calculate the amount of interest to be recovered. On the basis of such an “unclear” amount set forth by the award, the courts tended to deny recognition and enforcement with reference to violation of the public order of Ukraine. Now the law allows the accrued interest to be collected, and the final amount of interest shall be calculated by the enforcement officers after the award is recognized by the court.
Secondly, in 2019, the legislative changes extending the arbitrability of the disputes arising out of or in connection with the public-private partnership contracts (“PPP contracts”) were introduced. In particular, on 20 October 2019, the new Law of Ukraine “On Concessions” became effective, by which inter alia the amendments to the Law of Ukraine “On Public-Private Partnership” and Commercial Procedural Code of Ukraine affecting arbitration were introduced. Before the introduction of the above legislative changes, the parties to the PPP contracts (private partner and public partner) might agree on the resolution of the disputes arising out of or in connection with the PPP contracts by means of arbitration, only where the private partner was a non-resident entity or a company with the foreign investments. Accordingly, in cases where the private partner was a Ukrainian entity, the respective disputes fell under the competence of the national courts. By way of the legislative changes, the arbitrability of the disputes arising out of or in connection with the PPP contracts was extended to any PPP contracts notwithstanding the residency and ownership structure of the private partner under such contracts. Thus, now such disputes may be directed to arbitration courts.
At the same time, the ownership structure of the private partner under the PPP contract now has an impact on whether the disputes shall be resolved exclusively by the arbitration with the seat of arbitration in Ukraine or such disputes may also be referred to arbitration with the seat of arbitration abroad. As such, according to the current legislation, (i) the disputes arising out of or in connection with the PPP contracts, where the private partner (always a Ukrainian entity) is founded by the company with the foreign investments, can be referred to arbitration with the seat either in Ukraine or abroad, whereas (ii) all other disputes arising out of or in connection with the PPP contracts can be referred to arbitration with the seat in Ukraine only.
A.2 Institutions, Rules and Infrastructure
The Arbitration Law provides for two arbitration institutions in Ukraine that function at the Ukrainian Chamber of Commerce and Industry (UCCI) — the International Commercial Arbitration Court at the UCCI (ICAC) and the Ukrainian Maritime Arbitration Commission at the UCCI (UMAC). The statutes of both institutions are set forth in the annexes to the Arbitration Law.
The ICAC is a permanently functioning arbitral institution acting in accordance with the Arbitration Law, the Statute of the ICAC (dated 24 February 1994), and the Rules of the ICAC (approved on 27 July 2017, effective as of 1 January 2018).
The UMAC is a permanently functioning arbitral institution acting in compliance with the Arbitration Law, the Statute of the UMAC (dated 24 February 1994), and the Rules of the UMAC (approved on 27 July 2017, effective as of 1 January 2018), which resolves the disputes that arise out of or in connection with, contractual and other civil relations in the area of merchant shipping, regardless of whether the parties are Ukrainian or foreign entities.
Parties to a dispute may agree to refer the dispute to ad hoc arbitration, for which purpose an ad hoc arbitral tribunal may be formed. In that case, the ICAC may act as an appointing authority in accordance with the UNCITRAL Arbitration Rules and provide organizational assistance in arbitral proceedings on the basis of its separate Rules of Assistance approved by the Decision of the Presidium of the UCCI, dated 27 October 2011.
The ICAC list of arbitrators includes arbitrators from 35 countries including Austria, Croatia, the Czech Republic, France, Germany, Hungary, Latvia, the Netherlands, Norway, Poland, the Russian Federation, Slovakia, Sweden, the United Kingdom and the United States.
B.1 Invalidation of the contract by the national courts, in the absence of the explicit invalidation of the arbitration agreement, does not preclude the recognition and enforcement of the arbitral awards
Recent court practice in Ukraine affirmed that invalidation of the contract, which contains the arbitration agreement of the parties, by the national courts does not preclude the recognition and enforcement of the arbitral award rendered on the basis of such arbitration agreement. The above follows from the decision of the Supreme Court rendered on 27 March 2019 in Case No. 756/618/14-ц.
In the above case, in 2010, PJSC First Investment Bank (“Bank”) issued the bank guarantee in favor of the Austrian company Norbert Schaller Gesellschaft m.b.H. (“Beneficiary”), according to which the Bank undertook to repay the maximum amount of EUR 2,486,816.80 to the Beneficiary in case of non-fulfillment by Private Enterprise Flesh (“Principal”) of its contractual obligations before the Beneficiary under the supply contract. The bank guarantee included the arbitration agreement, according to which all disputes arising out of or in connection with this guarantee shall be resolved by means of arbitration at the International Arbitration Center of the Austrian Federal Economic Chamber (“VIAC”). Upon default of the Principal under the supply contract, the Beneficiary requested the Bank to repay the debt of the Principal under the bank guarantee. However, the Bank rejected the request of the Beneficiary and refused to repay the respective debt. Under such circumstances, the Beneficiary brought a claim against the Bank before VIAC.
In 2011-2012, VIAC rendered three arbitral awards in the case. In particular, on 17 January 2011, VIAC rendered the First Partial Award (on jurisdiction), according to which: (i) the parties have concluded valid arbitration agreement, and is included in the bank guarantee, and, accordingly; and (ii) VIAC has jurisdiction to resolve this case. On 28 February 2011, VIAC rendered the Second Partial Award (on merits), according to which the Bank was ordered to repay to the Beneficiary the principal debt and interest under the bank guarantee. Separately, on 6 June 2012, the Final Award (on costs) was rendered, which provided for repayment by the Bank of the arbitration costs of the Beneficiary.
In 2014, the Beneficiary applied to the Ukrainian courts for recognition and enforcement of three VIAC awards. The first instance court and the court of appeal denied the recognition and enforcement of the respective awards on the basis that the arbitration agreement of the parties included into the bank guarantee was found not valid under the law to which the parties have subjected it (article V(1)(a) of the New York Convention). The courts referred to the fact that the bank guarantee was declared invalid by the decision of the Commercial Court of Kyiv City dated 24 June 2008 (which was further upheld by the court of appeal and the cassation court on 20 October 2008 and 12 March 2009 respectively). The rulings of the first instance court and the court of appeal in the case of enforcement of the VIAC award were further appealed by the Beneficiary to the Supreme Court.
The main issue in this case before the Supreme Court was whether the VIAC awards should be recognized and enforced in Ukraine provided that there was a final and binding decision of the Ukrainian court declaring the bank guarantee, which contained the arbitration agreement, invalid.
The Supreme Court held that the final and binding decision of the Ukrainian court on declaring invalid the bank guarantee containing the arbitration agreement does not preclude the recognition and enforcement of the VIAC arbitral awards, taking into account that the Ukrainian courts in the case on invalidation of the bank guarantee did not specifically consider the issue of validity of the arbitration agreement included into the bank guarantee. In this respect, the Supreme Court noted that in the First Partial Award (on jurisdiction), VIAC established the validity of the arbitration agreement and upheld its own jurisdiction to consider the dispute. As such, the courts of lower instances did not take into account the principle of separability of the arbitration agreement and the main contract, containing the arbitration agreement. In view of the above, the Supreme Court ruled to grant the recognition and enforcement of the respective VIAC arbitral awards.
The above reaffirmed that the Ukrainian courts strictly comply with the principle of separability of the arbitration agreement and the main contract.
B.2 The arbitral award, by which the party is obliged to comply with its contractual obligations, does not violate the public order, even if the contractual default resulted from the alleged compliance of the defaulting party with the national sanctions in force
Recent court practice in Ukraine affirmed that the contractual default resulted from the alleged compliance of the defaulting party with the national sanctions in force may not serve as a ground to set aside the arbitral award, according to which the defaulting party is obliged to comply with its contractual obligations. The above follows from the decision of the Supreme Court rendered on 10 January 2019 in Case No. 796/134/2018.
In this case, in May 2017, a Czech company Czechoslovak Export Ltd. (“Seller”) entered into the supply contract with Ukrainian State Enterprize Konotop Aircraft Repair Plant “Aviakon” (“Buyer”), according to which the Seller undertook a supply to the Buyer helicopter tail rotor blades (“Blades”) within the specified terms. Upon the Seller’s failure to supply the Blades within the agreed terms, the Buyer brought a claim for penalties under the supply contract before the ICAC. In its turn, the Seller brought a counterclaim requesting to amend certain terms of the contract.
On 17 April 2018, the ICAC rendered a final award in the case, to which the Seller was obliged to pay penalties under the supply contract to the Buyer in the amount of USD 131,873.18 and compensate its arbitration costs. At the same time, the counterclaim was left without consideration.
In June 2018, the Seller applied to the Ukrainian courts with a request to set aside the ICAC award. The application to set aside was grounded on the following. The only manufacturer of the Blades on the market is JSC Moscow Machine-Building Plant “Vpered” (Russian Federation), which is part of the State Corporation “Rostec” (Russian Federation). However, according to the decision of the National Security and Defence Council of Ukraine “On Application of Personal Special Economic and Other Restrictive Measures (Sanctions)” dated 28 April 2017 (as approved by the decree of the President of Ukraine dated 15 May 2017), Ukraine imposed sanctions against the State Corporation “Rostec” for the period of one year, which included termination of performance of the economic and financial obligations. In view of the above, the Seller asserted that the performance of the supply contract would inevitably result in the purchase of the Blades from the company under sanctions, which would be de facto a violation of the decision of the National Security and Defense Council of Ukraine on the application of the sanctions. Thus, enforcement of the ICAC award would be in violation of the public order of Ukraine. The above circumstances were allegedly not taken into account by the ICAC when rendering the ICAC award. As such, the Seller stated that the ICAC award should be set aside as violating the public order of Ukraine.
The above arguments of the Seller were rejected by the Ukrainian courts. On 11 July 2018, the court of appeal, acting as the first-instance court, rejected the application to set aside the ICAC award and such ruling was further upheld on 10 January 2019 by the Supreme Court.
The Supreme Court held that the circumstances established by the ICAC award are related exclusively to the contractual relations of the parties and are not related to the public, social or economic basic principles of the state. Therefore, the Supreme Court concluded that the ICAC award is not aimed at violation of the public order of Ukraine and, accordingly, there are no grounds for setting aside the award.
As follows from the above, the Ukrainian courts do not consider that there are grounds to set aside the awards, by which the parties in default are obliged to comply with their contractual obligations, even if the contractual default resulted from the alleged compliance of the defaulting party with the national sanctions in force.
B.3 The Supreme Court confirmed the impossibility of piercing the corporate veil when enforcing the investment arbitration awards in Ukraine
As a result of the UNCITRAL investment arbitration initiated in 2014 by a number of Crimea-based Ukrainian companies against the Russian Federation, an award was rendered in May 2018 ordering the Russian Federation to reimburse damages arising from expropriation of investments following the annexation of Crimean territory by the Russian Federation.
In July 2018 the award was brought to a Ukrainian court for recognition and enforcement.
The Ukrainian court of first instance when considering the claimants’ request for recognition and enforcement of the award, applied interim measures in support of such enforcement proceedings. In particular, the court applied an arrest over shares of a number of Ukrainian banks, prohibited sale of all their property to any third parties, and applied a prohibition on these Ukrainian banks being liquidated or reorganized.
The arrest was applied over the Ukrainian banks’ shares fully or partially owned by a number of bank resident in the Russian Federation that had some indirect links with the Russian Federation. The court treated the shares of these Ukrainian banks as being owned by the Russian Federation as a state, and thus applied arrest over such shares to secure collection in Ukraine of the awarded amounts from the Russian Federation as a debtor.
Thus, the first instance court tried to pierce the corporate veil by stating that the assets of the daughter entity may be seized to pay off the debts of the shareholder of the mother company (despite the absence of any statutory regulations in Ukraine or any court practice confirming the possibility to apply such mechanism). In fact, the court went further and treated the assets of the Russian banks as the assets of the Russian Federation, and treated the debt of the Russian Federation as the debt of the Russian banks, without any legal grounds and ignoring the state immunity principle.
In reviewing the decision, the Supreme Court canceled the arrest of the shares of the Ukrainian banks owned by other parties (i.e., the Russian banks) and applied the arrest over the assets of the Russian Federation in Ukraine.
The Supreme Court thus, confirmed that (i) enforcement of the award may only be made on account of the assets directly owned by the debtor, whereas the assets of third parties may not be seized to pay off the debt of such debtor, and in view of that, (ii) no injunction may be applied over such third parties’ assets, not owned by the debtor, to secure collection of the debt awarded by the investment arbitration tribunal. Since the shares of the Ukrainian banks were not owned by the Russian Federation, which is the debtor under the award, such shares might not be arrested, nor could any prohibitions be applied to the assets of the Ukrainian banks or to their activities.
Although the position of the Supreme Court, in this case, was set out rather vaguely, subsequent enforcement of the award by the enforcement officers showed an equal and correct understanding of the Supreme Court’s message, as the arrests over Ukrainian banks shares were lifted.
According to Article 1 of the Law of Ukraine “On Regime of Foreign Investment,” a company with foreign investments is the company (organization), established under the laws of Ukraine, where the foreign investment is not less than 10 per cent of the statutory fund.