International arbitration cases involving Ukrainian companies: new challenges for lawyers

In Case No. 824/50/22, in which a Slovak-registered company brought a claim against a Ukrainian counterparty, the court ruled in favour of the foreign party, awarding €908,878.03. The Ukrainian counterparty attempted to challenge this ruling, arguing that the arbitration agreement was invalid due to the expiry of the contract. However, the court of first instance failed to take into account the principle of the autonomy of the arbitration agreement (separability), which holds that an arbitration agreement is independent of the term of the underlying contract. The Supreme Court confirmed that the arbitration agreement remains in force even if the term of the main contract has expired, as it constitutes a separate legal transaction. Ultimately, the court rejected the claimant’s arguments, noting that the claimant’s interpretation of the expiry of the contract as grounds for declaring the arbitration agreement invalid was erroneous.

In Case No. 824/144/22, NOVARGI INDUSTRIES S.L. (Spain) applied to the court for the recognition and enforcement of the award of the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry dated 12 October 2021 in Case No. 307/2020. The arbitral tribunal upheld NOVARGI INDUSTRIES S.L.’s counterclaim against JSC ‘Ukrgazvydobuvannya’ and ordered the latter to pay 624,132.32 euros for breach of the terms of supply of the goods. The court noted that establishing and taking into account the circumstances surrounding the enforcement of an international commercial arbitration award, in particular on the basis of the provisions of the Civil Code of Ukraine or the Commercial Code of Ukraine, does not constitute a modification of the award itself, but is a procedural obligation of the court. The court must determine whether there are legal grounds for the enforcement of the arbitral award in accordance with the Code of Civil Procedure of Ukraine. The court also emphasised that the question of the termination of the debtor’s obligations, which were confirmed by the arbitral award, does not go beyond the scope of the application for authorisation to enforce that award, since the sums awarded are reciprocal and undisputed, and the parties have already agreed to the arbitral tribunal’s award.

In Case No. 824/80/22, Evor Consulting OU brought a claim against an individual seeking recognition and enforcement of an arbitral award ordering the payment of a penalty of EUR 5,000,000.00, as the individual (a Ukrainian citizen) had failed to pay the deposit for the purchase of an aircraft on time. In this case, the court concluded that if the applicant had not attached the original arbitration agreement or a notarised copy of such an agreement to the application for recognition and authorisation of the enforcement of an international commercial arbitration award, such an application is to be left without consideration in accordance with the provisions of the Code of Civil Procedure of Ukraine.

In Case No. 824/83/23, the company Dimida Spółka z Ograniczoną Odpowiedzialnością (Republic of Poland) applied to set aside the award of the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry, which ordered the company to pay a penalty of 47,895 euros for breaching the product delivery deadline and 4,758.88 euros in reimbursement of arbitration fees, totalling 52,653.88 euros in favour of the State Enterprise ‘National Nuclear Power Generating Company “Energoatom”’. The ruling in this case established that the court cannot review the correctness of the arbitral tribunal’s application of substantive law, but merely determines whether there are grounds provided for by law to set aside the award; otherwise, this would constitute an overstepping of the national court’s powers. The court concluded that such an application should not be granted, as Dimida Spolka Z Ograniczona Odpowiedzialnoscia’s assertion that the ICAC award is aimed at interfering with Ukraine’s public order is unfounded and not supported by sufficient evidence.

In the context of modern arbitration practice, there is a trend towards an increase in the number of cases heard by ad hoc arbitration. This allows the parties to avoid the constraints associated with established arbitration institutions, ensuring greater flexibility and speed in the proceedings.

For example, in Case No. 4820/1103/22, an interesting aspect was the appointment of an ad hoc arbitration, which was made possible by the precise wording of the arbitration clause in the contract. At the same time, in the circumstances of Case No. 824/22/24, the proceedings were conducted by a sole arbitrator, also via ad hoc arbitration, which underscores the growing role of such arbitration mechanisms in the current climate.

This trend indicates that the resolution of disputes through ad hoc arbitration is gaining momentum, owing to its advantages over institutional arbitration.

Key changes to the legal framework governing arbitration

On 12 July 2024, the Presidium of the ICAC at the Ukrainian Chamber of Commerce and Industry approved amendments to the Rules concerning the acceptance of claims arising from two or more contracts. Under the new Article 17 of the Rules, the Chairman of the ICAC may accept for consideration a claim containing claims arising from several contracts, provided that these claims can be separated into distinct claims. The claimant may insist on the simultaneous consideration of such claims if this enhances the efficiency of the proceedings, provided that the arbitration agreements are compatible. Furthermore, pursuant to the amendment to paragraph 9 of Section III of the Regulations on Arbitration Fees, the arbitration fee for claims arising from several contracts is calculated as the sum of the fees for each contract, without an additional registration fee. This helps to reduce costs and speed up the process, as it avoids the double charging of registration fees. The changes help to streamline the arbitration process and reduce costs for the parties.

Compliance Policy of the ICAC and UMAC at the Ukrainian Chamber of Commerce and Industry (ICAC/UMAC)

The Compliance Policy of the ICAC and UMAC at the Ukrainian Chamber of Commerce and Industry, approved on 6 March 2024, governs the conduct of proceedings involving sanctions-related elements, in particular where the parties or their affiliated persons are subject to sanctions. It requires additional information regarding sanctions that may affect the duration of the proceedings; however, any delays are not considered a breach on the part of the arbitral tribunal. Responsibility for breaches of sanctions lies with the party concerned, not with the arbitral tribunal. All documents must be submitted electronically, whilst key procedural documents must be submitted in hard copy, unless otherwise agreed. Fees are paid via bank transfer without the issuance of invoices. Oral hearings are held via videoconference until the end of the military aggression against Ukraine.

Arbitration practice in favour of Ukrainian companies against the Russian Federation

The scale of claims against Russia under international investment agreements may be reaching a turning point. Russia’s tactics of procedural delay and obstruction have, on the whole, proved unsuccessful. Russia’s attempts to derail the arbitration proceedings brought against it have so far proved ineffective. In some cases, Russia refuses to participate in the arbitration proceedings. In 2019, Russia changed its strategy and began to employ a wide range of procedural measures, including filing motions for bifurcation and security for costs, as well as challenging the seat of arbitration, the appointment of specific arbitrators and even the bodies responsible for appointing arbitrators.

None of these efforts has hindered the progress of the arbitration proceedings against Russia. According to the British Institute of International and Comparative Law, the average duration of Crimea-related arbitrations is 4.8 years, which is comparable to the duration of UNCITRAL ad hoc proceedings and proceedings at the International Centre for Settlement of Investment Disputes.

The arbitral tribunals have unanimously found Russia liable in the Crimea-related arbitrations

In the energy sector, Ukraine’s largest private energy company (DTEK) received US$267 million, whilst the Ukrainian state-owned oil and gas company (Naftogaz) received US$5 billion. Numerous investors in petrol stations were also parties to two separate arbitration cases, in which the arbitral tribunals awarded them US$34.5 million (‘Stabil’ v. Russia) and US$55 million (Ukrnafta v. Russia). In the banking sector, the arbitral tribunal awarded the Ukrainian state-owned bank Oschadbank US$1.1 billion.

In the property sector, in the case of Everest Estate LLC v. Russia, the investor was awarded US$150 million, whilst the amount awarded to the investors in the case of ‘Lugzor v. Russia’ remains unknown. In the aviation sector, a quantification award is expected following the arbitral tribunal’s finding that Russia was liable in the dispute concerning investments in Belbek Airport near Sevastopol (‘Belbek v Russia’).

The Russian Supreme Court’s refusal to enforce the arbitral award

A dispute arose between C. Thywissen GmbH and OJSC ‘Novosibirsk Khliboproduct’ over an alleged breach of contract, in which the latter failed to fulfil its obligation to supply flaxseed. The arbitral tribunal ruled in favour of Thywissen, however, the Russian Supreme Court, in its ruling of 26 July 2024, refused to enforce the arbitral award, invoking the public policy exception under the New York Convention. The court justified its refusal in part by the nationalities of the arbitrators, as they were from countries considered ‘unfriendly’ under Russian law (Ukraine, the United Kingdom and Denmark).

This decision highlights the potential difficulties in enforcing international arbitral awards in countries where there are politically motivated restrictions on the recognition of foreign arbitral awards, particularly where countries are involved in political or economic disputes with Russia. For Ukrainian companies, this serves as an important reminder of the potential difficulties in enforcing arbitral awards in ‘unfriendly’ jurisdictions.

The advantages of London arbitration for Ukrainian companies in international financial disputes

A recent decision by an English court in case CL-2023-000005 confirmed the effectiveness of London arbitration for resolving international disputes and the possibility of using enforcement measures by English courts, such as the freezing of assets, to ensure the enforcement of awards.

The respondents are the founders of a Cypriot holding company for a Ukrainian import-export business. In 2019, the company borrowed approximately US$75 million from two investment funds managed by the Lender in accordance with the terms of the Finance Agreement. The debt is secured by a number of guarantees, under which each of the Respondents agreed to act as a personal guarantor for the loans. The guarantee agreement contains arbitration clauses with a seat in London under the LCIA Rules.

Ukrainian companies can take advantage of these benefits by including arbitration clauses with a seat in London in their contracts, which will give them access to powerful enforcement mechanisms to protect their rights in international disputes. In particular, London arbitration ensures neutrality, confidentiality and the possibility of effective enforcement of arbitral awards through the English courts, which is particularly important in international financial and commercial disputes.

Author: Maksym Kinash
Read the article on the ‘Yurydychna Gazeta’ website: here.