Expert discussion on “Disputes with the Guaranteed Buyer”

On November 5, LIGA Business Center hosted an expert discussion on “Disputes with the Guaranteed Buyer.”

The event’s speakers, experts of Vasil Kisil & Partners, shared their vision of possible ways of defense in the current situation with the “green” energy in Ukraine, provided answers and recommendations on legal instruments to protect the rights of producers and investors in domestic courts, the ECtHR, and arbitration.

Relevance of the issue

The issue concerning the level of settlements with the “green” energy producers is highly relevant. For example, in May-July 2020, producers received no more than 5% of funds for the electricity they produced. Despite the Memorandum signed between the Government and the renewable energy producers, the State does not fulfill its obligations, and the Guaranteed Buyer’s debt to “green” energy producers continues to grow. The Guaranteed Buyer's outstanding liabilities to the “green” energy producers amount to more than UAH 20 billion.

What are the chances of debt recovery from the Guaranteed Buyer?

Oleg Kachmar, Partner in the Dispute Resolution Practice Group of Vasil Kisil & Partners, noted that the commercial court had received many lawsuits seeking debt recovery from the Guaranteed Buyer, including penalties. The situation with the Guaranteed Buyer’s debts is quite banal, the producers produced and sold electricity, for which the Guaranteed Buyer has simply failed to pay. The fact that the Guaranteed Buyer has no funds to settle with the producers does not exempt the Guaranteed Buyer from the obligation and liability.

Mr. Kachmar believes that most of the disputes over non-payment for electricity sold by producers will be decided by national courts in favor of the producers. This is because the law expressly stipulates that the debtor’s lack of funds, non-performance or breach of an obligation by the debtor’s counterparty do not exempt the debtor from the obligation or liability for the same. The question can only be about the amount of penalties because the court can really reduce the penalties if the Guaranteed Buyer asks for this and provides reasonable arguments.

Additionally, since the Guaranteed Buyer is a state-owned enterprise, it is highly doubtful that the court's decision to recover the funds will be enforced in the near future.

The speaker also drew attention to the fact that, in this situation, it is important not only that payment is made for the purchased electricity, but also that losses are compensated for. After all, it is obvious that the Guaranteed Buyer’s failure to make payments to the producers has resulted in certain losses sustained by them.

Is there any reason to talk about recovery of losses in this situation?

Oleksandra Bortman, Associate in the Dispute Resolution Practice Group, Vasil Kisil & Partners, notes that such reasons do exist. First, the vast majority of “green” energy producers were financed from borrowed funds, which they have to repay.

The speaker highlighted that by mid-autumn the banks were quite loyal to the debts of “green” energy producers, agreed to defer loan repayment and to debt restructuring but if the situation with debt repayment to “green” energy producers is not dealt with at the state level in the short term, the banks are unlikely to remain loyal in the future.

In addition, “green” energy producers have a large number of counterparties (equipment, raw material vendors). The inability to pay causes certain damage as well. Therefore, the penalties paid by them for late repayment of loans and late settlements with counterparties are the losses incurred by “green” energy producers, which they are forced to incur in view that the Guaranteed Buyer failed to make settlements with them.

It would be even more difficult to prove a loss of profit (unearned income) in court, though possible in the situation involving the Guaranteed Buyer.

Prospects of Resorting to the ECtHR

Nazar Kulchytskyy, Partner, White-Collar Crime Practice, Vasil Kisil & Partners, focused on two ways of resorting to the ECtHR. The first - and the simplest - one is to lodge a complaint against a domestic court's decision for recovering the debt. However, it should be borne in mind that, if so, the European Court would award the exact amount of compensation established by the domestic court. The ECtHR would not award any additional compensation under certain claims, so that the “net” compensation will be collected only. The second possible mechanism is an appeal to recognize as negative the practice as such (rather than specific actions).

In addition, Mr. Kulchytskyy pointed out that the ECtHR equates between the guaranteed buyer and the state, i.e., Ukraine will act as a defendant in these disputes.

Likewise, the ECtHR has certain attitude to the reduction of the “green” tariff. The European Court believes that the states that guaranteed certain conditions (profit margin) may not change them without any proper explanation. In such cases, the ECtHR used to insist on a reasonable transition period or adequate compensation being available. The speaker noted that a reasonable period could be considered to be at least one year. The ECtHR is not supportive of Ukraine's approach of a threefold decrease in the amount of payment in a short term. For the ECtHR, this legal relationship is indisputable because the state should not cause any excessive obstacles to the producers’ operations.

Investment Arbitration: May it Be a Solution and for Whom?

Dmytro Pernykoza, Associate, Dispute Resolution Practice, Vasil Kisil & Partners, noted that there might be a recourse to investment arbitration to resolve the issue with outstanding debts of the Guaranteed Buyer. It is appropriate when the investor's company has a foreign element and pursues a broad purpose. For example, the claim may rest on a disagreement with the reduction in the “green” tariff.

A commercial arbitration as such is a so-called ad-hoc tribunal whose principal jurisdiction mostly deals with the resolution of investment disputes related to changing the investment climate in the country. Ukraine has the full right to apply to investment arbitration on a ground that it has signed the Energy Charter Treaty. Ukraine currently acts as a defendant in two pending arbitration proceedings.

The high cost needed to follow this way is its key disadvantage. The speaker recommended that the applicants should unite to share such financial burden.