By: Igor Siusel,1Igor Siusel is a partner in the Kyiv office of Baker & McKenzie. He advises and represents clients from various industries in domestic and international arbitration and litigation, recognition and enforcement of arbitral awards, enforcement of court judgments and bankruptcy proceedings. He is a member of the Ukrainian Bar Association and the Ukrainian Arbitration Association. Kseniia Pogruzhalska2Kseniia Pogruzhalska is an associate in the Kyiv office of Baker & McKenzie and a member of the Firm’s Global Dispute Resolution and Energy, Mining and Infrastructure Practice Groups. She is a member of the Ukrainian Arbitration Association. and Iaroslav Polishchuk3Iaroslav Polishchuk is a junior attorney in the Kyiv office of Baker & McKenzie and a member of the Firm’s Global Dispute Resolution Practice Group.
A. Legislation, Trends and Tendencies
A.1 Legislation
International arbitration in Ukraine continues to be governed by: the Law of Ukraine “On International Commercial Arbitration” (the “Arbitration Law”); the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958; the European Convention on International Commercial Arbitration 1961; the Civil Procedural Code of Ukraine; and the Commercial Procedural Code of Ukraine, to which no legislative amendments were made in 2015. However, within the framework of a 2015 judicial reform in Ukraine, arbitration practitioners have widely discussed proposals on changes and amendments that are needed to improve Ukrainian arbitration law and rules, including: (i) the introduction of mechanisms enabling the issuance of interim measures by the courts in support of arbitration, which are currently not practically available under Ukrainian procedural legislation; (ii) suggestions to decrease the number of court instances reviewing arbitral awards; (iii) court assistance in the collection of evidence; and (iv) time limits for court proceedings concerning arbitration issues. If these amendments are adopted, the whole process of arbitration will be more predictable and efficient.
A.2 Trends and Tendencies
Ukrainian legislation in relation to international arbitration is constantly developing in a pro-arbitration direction, which should make the whole process of arbitration more logical and simple. The number of refusals to grant recognition or enforcement of international arbitral awards by the Ukrainian courts is relatively low. At the same time, the most common grounds for refusal are: the absence of proper notice to the party about the appointment of an arbitrator or the arbitral proceedings; the unenforceability of the arbitration agreement; or that the arbitral procedure was not in accordance with the agreement of the parties.
B. Cases
In 2015, there were several noteworthy arbitration cases in Ukraine.
B.1 Extension of Arbitration Agreement to Nonparties
In May 2015, the High Commercial Court of Ukraine (the HCC) reviewed the decisions of the lower courts in a case initiated by the Prosecutor’s Office, acting in the interest of the state on behalf of the Ministry of Infrastructure of Ukraine and Kyiv Boryspil International Airport, against Ukrainian International Airlines, under a service agreement containing an arbitration clause. It is noteworthy that neither the Prosecutor’s Office nor the Ministry of Infrastructure of Ukraine was party to this service agreement and that they were therefore not bound by the arbitration clause in the agreement. Upon review of the case, the HCC cancelled the decisions of the lower courts on the merits, terminated the proceedings on the ground that the commercial courts had no jurisdiction to consider the case, and referred the parties to arbitration.
B.2 Disputes Under State Procurement Agreements Nonarbitrable
In 2015, the Supreme Court of Ukraine upheld decisions of the lower courts setting aside an arbitral award of the International Commercial Arbitration Court at the Chamber of Commerce and Industry of Ukraine (the ICAC) on the ground that the dispute resolved by the ICAC was nonarbitrable.
The dispute arose from an agreement on the supply of medical equipment between the Austrian company VAMED Engineering GmbH & CO KG (the “Seller”) and a Ukrainian state-owned company (the “Buyer”). The purchase of the relevant equipment was financed by a loan guaranteed by the State of Ukraine. Taking this into account, the Ukrainian courts came to the conclusion that, in fact, the dispute arose from the state procurement agreement, and as such, could not be referred to arbitration by virtue of Article 12 of the Commercial Procedural Code of Ukraine.
B.3 Nonarbitrability of Immovable Property Disputes
In 2015, Jewelsoft LTD (UK) applied to the Primorskiy District Court of Odessa for the enforcement of an LCIA award of 2012 against a Ukrainian debtor. The Primorskiy District Court of Odessa rejected the enforcement of the award because the arbitral tribunal had no jurisdiction over the dispute, which related to the recognition of ownership of immovable property, since the consideration of such disputes falls within the exclusive jurisdiction of the Ukrainian courts. Moreover, the Primorskiy District Court of Odessa found that the Ukrainian debtor was not informed of the arbitration proceedings. The decision of the Primorskiy District Court of Odessa was upheld by the Appellate Court of Odessa Region.
B.4 Premature Recognition of the Arbitral Award
In September 2015, the High Specialized Court for Consideration of Civil and Criminal Cases (the HSC) reversed the decision of the lower court granting the recognition and enforcement of the GAFTA arbitral award and returned the case for reconsideration to the lower court.
In its decision, the HSC stated that firstly, the recognition of the award was premature because the award had been challenged in the Queen’s Bench Division of the High Court in England and this challenge had not been resolved by the English court at the time of the recognition of the award by the Ukrainian courts. Secondly, the lower courts had no power to change the arbitral award, and by recognizing the amount of interest rather than the interest rate, as provided in the award, the lower courts exceeded their powers.
B.5 Improper Notification of the Respondent
In September 2015, the Supreme Court of Ukraine reversed a decision of the lower court granting the recognition and enforcement of a UK arbitral award and returned the case for reconsideration to the lower court.
In its decision, the Supreme Court of Ukraine noted that the lower court failed to take into consideration the specific notification procedure envisaged in the agreement of the parties (delivery of written notifications to the office of the respective party), and therefore, the lower court came to a wrong conclusion as to the propriety of notification of the respondent by electronic means.
B.6 Recognition of an Emergency Arbitrator Award
On 8 June 2015, the Pecherskyi District Court of Kyiv granted permission to enforce an emergency arbitrator award on the basis of the New York Convention that had been issued as a result of the arbitration proceedings initiated by JKX against Ukraine under the ECT and the investment treaties between Ukraine, the United Kingdom and The Netherlands. The interim award required the government of Ukraine to limit the collection of rental fees for gas extracted by JKX’s Ukrainian subsidiary, Poltava Petroleum Company (PPC), to a rate of 28 percent (the rate currently applicable under Ukrainian law is 55 percent). However, three months later, the Court of Appeal overturned the ruling of the first instance court and refused enforcement on the grounds of violation of the public policy of Ukraine, as tax rates could only be determined by the Tax Code of Ukraine, and the change in the tax rate would result in a material deterioration of the state’s economy. The case is now pending before the third instance court.
C. Costs in International Arbitration
C.1 Allocation of Costs
The Schedules on Arbitration Fees and Costs attached to the ICAC Rules provide the rules for allocation of costs in an award. In particular, unless otherwise agreed by the parties, the arbitration fee is to be allocated to the losing party. If a claim is granted in part, the arbitration fee is to be allocated to the respondent in proportion to the amount of the granted claims, and the claimant is to bear the arbitration fee relating to the amount of the claim that has been dismissed.
The expenses incurred by the successful party (travel expenses of the parties’ representatives, lawyers’ fees, etc.) may be allocated to the other party to the extent that the Arbitral Tribunal determines that the amount of such costs is reasonable.
C.2 Security for Costs
Pursuant to the Arbitration Law, a party to the arbitration proceedings may request a court, before or during the arbitration proceedings, to order interim measures (prohibition on disposing of money in bank accounts and/or on alienating certain assets, security for costs, etc.) However, there is no legal mechanism for the recognition and enforcement of such orders of the ICAC in Ukraine.
C.3 Recovery of Costs
According to the ICAC Rules, costs that are subject to allocation by the arbitral tribunal according to the results of arbitration include: expenses of examination by experts; oral and written translations; and arbitrators’ travel expenses, etc. As regards the parties’ expenses (including travel expenses, legal fees, etc.), they should be covered by each party itself in the first instance. However, the expenses of the winning party may be allocated to the losing party in the arbitral award to the extent that the arbitral tribunal determines that the amount of such costs is reasonable. It is worth noting that the costs incurred by the parties must be confirmed by the appropriate documents (e.g., invoices, bank confirmation, etc.).
The ICAC may, taking into account the circumstances of a particular case, order a different apportionment of the arbitration fees, additional costs of the ICAC, and expenses of the parties. In particular it may order one party to reimburse any additional expenses incurred by one of the parties as a result of inappropriate or bad faith actions of the other party, including actions causing unjustified delay to the arbitration proceedings.
As a rule, lawyers’ costs are understood to be the costs of the external counsel, while the costs of management and in-house lawyers (except for the direct travel expenses of the party representatives) are not recoverable.