UKRAINE

Ihor Siusel, Kseniia Prokhur and Nataliya Lipska

A. LEGISLATION AND RULES

A.1       Legislation

Ukraine is a civil law country, thus, the issues of international arbitration are governed primarily by (1) multilateral and bilateral international treaties which, upon their ratification by the Verkhovna Rada of Ukraine (Parliament), have priority over domestic legislation, and (2) domestic legislation. Court precedents are not considered to be a source of 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 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” (“Arbitration Law”), dated 24 February 1994, which closely follows the UNCITRAL Model Law 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.

On 19 June 2020, the new Law of Ukraine was adopted, by which certain amendments to the Arbitration Law were introduced; such amendments shall come into force on 1 July 2021.

The respective amendments extend the range of disputes, which may be referred to international commercial arbitration. Namely, the list of the arbitrable disputes will be extended with the disputes between the trustee for the bond issue acting in the interests of bondholders in accordance with the provisions of the Law of Ukraine “On Capital Markets and Organized Commodity Markets” and the issuer of bonds and/or persons, providing security for such bonds, if at least one of the parties to such dispute is a company with foreign investments[1]. Accordingly, the arbitration agreement for such disputes may be included in the securities prospectus (decision on the issue of securities), which provides for the appointment of a trustee for the bond issue.

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.

(1) 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).

(2) 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.

In 2020, the amendments to the Rules of the ICAC and the UMAC (“Rules”) were introduced, effective as of 1 November 2020. The amendments cover (1) the improvement of arbitral proceedings; (2) the conduct of oral hearings via videoconferencing; (3) the transition of arbitration into a digital environment; (4) the recent court practice on cancellation, recognition, and enforcement of arbitral awards. In particular, the amendments to article 11 of the Rules provide for compulsory submission of all documents relating to the initiation and conduct of the arbitral proceedings in electronic form in addition to hard copies. Article 22 of the Rules was amended to allow a third party to join the arbitral proceedings provided that such third party is bound by the arbitration agreement with at least one of the parties to the dispute (a previous version of the Rules provided the possibility to join only if the common arbitration agreement between the parties to the dispute and the third party exists).

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 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. CASES

B.1       Enforcement of arbitral awards that provide for payment of the debt for the supplies of military goods to the sanctioned entities does violate the public order in Ukraine

Recent court practice in Ukraine affirmed that Ukrainian courts deny recognition and enforcement of the arbitral awards under which the defaulting party is obliged to make payments to a sanctioned entity that orders military goods. The above follows from the decisions of the Supreme Court in a number of cases[2]  upon the applications of JSC Avia Fed Service (Russian Federation) for recognition and enforcement of the arbitral awards against SJSHC Artem (Ukraine).

In 2012-2013, Ukrainian State Joint Stock Holding Company Artem (“Seller”) entered into several supply contracts with Russian company JSC Avia Fed Service (“Buyer”), under which the Seller agreed to supply to the Buyer military goods. Upon the Seller’s failure to supply the military goods and refund the advance payments, the Buyer brought the claims before the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (“ICAC at the RF CCI”).

In 2018, the ICAC at the RF CCI satisfied the claims of the Buyer and rendered three arbitral awards, according to which the Seller was ordered to repay the advanced payments plus interest under the supply contracts to the Buyer and compensate its arbitration costs.

In 2019, the Buyer, who had been subject to Ukraine personal economic sanctions since May 2018, applied to the Ukrainian courts for recognition and enforcement of said arbitral awards. The court of appeal, acting as the first-instance court, satisfied two out of three applications of the Buyer (in cases No. 824/100/19 and No. 824/101/19) and granted the recognition and enforcement of the respective awards. In the substantiation of such decisions, the court held that (1) the Seller did not provide any sufficient evidence of the existence of the grounds for refusing recognition and enforcement of the arbitral awards and (2) the rendering of the arbitral award in favor of the sanctioned entity shall not be considered as a ground for refusing recognition and enforcement of the arbitral award, but may serve as a ground for the suspension of enforcement actions by the enforcement authority. In the third case (case No. 824/174/19) the court decided otherwise and refused to grant recognition and enforcement referring to a violation of public order in Ukraine, which may occur if the Seller pays the debt in favor of the sanctioned entity.

Therefore, taking into account the discrepancies in the court’s approaches, the main issue in these cases before the Supreme Court was whether the recognition and enforcement of the ICAC at the RF CCI awards that provide for debt recovery for the supplies of military goods in favor of the sanctioned entity constitutes a violation of the public order in Ukraine.

In this respect, the Supreme Court found that recognition and enforcement of ICAC at the RF CCI awards would indeed violate the public order in Ukraine since such awards provide for payment of the debt (1) by the state entity, which is of strategic importance for the defense of the state, (2) under the supply contract for military goods concluded with the aggressor-state incorporated entity, and (3) in favor of the sanctioned entity. Separately, the Supreme Court emphasized that recognition and enforcement of the arbitral awards constitute the competence of the court, but not the enforcement authority, and therefore, it is the court’s obligation to temporarily limit the debt recovery in favor of the sanctioned entity. In view of the above, the Supreme Court ruled that the court has no right to enforce the ICAC at the RF CCI awards within a sanctions effective period and denied recognition and enforcement of the respective awards.

B.2       Enforcement of arbitral awards that provide for payments in favor of the companies that are related to the sanctioned persons does not violate the public order in Ukraine

Recent court practice in Ukraine affirmed that Ukrainian courts grant applications for recognition and enforcement of the arbitral awards even if any of the applicant’s shareholders or other related persons are subject to Ukrainian sanctions in force. This conclusion follows from the decision of the Supreme Court in case No. 824/146/19 dated 19 March 2020.

In this case, Russian company JSC Normetimpex (“Applicant”) applied to the Ukrainian court seeking recognition and enforcement of the arbitral award of the ICAC at the RF CCI dated 26 November 2018. According to this arbitral award, Ukrainian company PJSC Zaporizhtransformator (“Debtor”) was ordered to pay penalties to the Applicant and compensate its arbitration costs due to a delay in fulfilling the contractual obligations under the supply contracts.

On 7 November 2019 the Court of Appeal, acting as the first-instance court, satisfied the application and granted recognition and enforcement of the ICAC at the RF CCI award. The Debtor appealed the respective decision of the first-instance court to the Supreme Court, asserting that recognition and enforcement of the arbitral award violate the public order in Ukraine in view of the fact that the shareholding structure of the Applicant includes persons subjected to Ukrainian sanctions in force.

Having considered the parties’ arguments, the Supreme Court arrived at the conclusion that since the Ukrainian sanctions apply only to the specific list of persons, there is no legal basis to apply such sanctions to the persons somehow related to the sanctioned persons. Therefore, recognition and enforcement of arbitral awards that provide for payments in favor of the companies somehow related to the sanctioned persons do not violate the public order in Ukraine. In view of the above, the Supreme Court upheld the decision of the appellate court on granting recognition and enforcement of the ICAC at the RF CCI award.

B.3       The existence of a case on setting aside the arbitral award is not an indisputable ground for suspension of the proceedings for recognition and enforcement of same arbitral award

According to the recent court practice in Ukraine, the court is not obliged to suspend the proceedings for the recognition and enforcement of the arbitral award if there is a pending case on setting aside the same arbitral award. Such conclusion follows from the decision of the Supreme Court rendered on 20 February 2020 in case No. 824/215/19.

The provisions of the Civil Procedural Code of Ukraine indeed provide for the right of the court to suspend the proceedings for the recognition and enforcement of the arbitral award if there is a pending case on setting aside the same arbitral award. However, since the law does not outline the criteria for granting such a suspension, this question is usually decided on a case-by-case basis.

With regard to the factual background of this case, on 6 November 2019, Austrian company Roxcel Trading GmbH (“Applicant”) brought an application to the Ukrainian court for recognition and enforcement of the arbitral award rendered by the ICAC on 7 October 2019. By this arbitral award, Ukrainian company Trade Group Interpap LLC (“Debtor”) was obliged to pay penalties and damages arising from the breach of the supply contract to the Applicant and compensate its arbitration costs.

On 26 November 2019, the Debtor applied to the court with a motion seeking suspension of the proceedings for the recognition and enforcement of the arbitral award due to filing an application on setting aside the same award. The first-instance court satisfied the Debtor’s motion and suspended the proceedings for the recognition and enforcement of the arbitral award until the decision in the case on setting aside the arbitral award becomes effective. In substantiation of such a decision, the first-instance court relied on the above-mentioned provisions of the procedural law, which provide for the right of the court to suspend the proceedings.

However, the Supreme Court, having reconsidered the decision of the first-instance court on the suspension of the proceedings for the recognition and enforcement of the arbitral award, ruled that the courts while considering such category of cases should not only apply the explicit provisions of the Civil Procedural Code of Ukraine but also evaluate the objective possibility to consider the case without suspension of the proceedings. For example, if the cases on recognition and enforcement of the arbitral award and setting aside the arbitral award are based on the same grounds, there is no reasonable need to suspend the proceedings. In addition, the Supreme Court emphasized that in the present case ungrounded suspension of the proceedings in the case on recognition and enforcement of the arbitral award caused undue delay in the proceedings, which violated the right of the Applicant to a fair trial and undermined the efficiency of the trial.

[1] 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 percent of the statutory fund.

[2] No. 824/100/19, No. 824/101/19, No. 824/174/19