As is characteristic for civil law jurisdictions, Ukrainian law consists of the legislative acts enacted by the Parliament of Ukraine and international treaties, which upon their ratification become part of the national legislation. According to the Constitution of Ukraine, in the case of a conflict between treaty provisions and national law, the international treaty provisions prevail. Conflict with the Constitution itself is the only exception as the Constitution is of the highest legal authority and always takes precedence over other provisions.
As a matter of Ukrainian law, the following legal instruments apply to international arbitration: the International Commercial Arbitration Act (ICA Act), the Code of Civil Procedure of Ukraine (CCPU) and the Commercial Procedural Code of Ukraine (CPCU).
Subject to minor deviations, the ICA Act is a verbatim adoption of the UNCITRAL Model Law on International Arbitration (1985) (Model Law), as amended in 2006, and applies to international commercial arbitration proceedings seated in Ukraine. Certain provisions of the ICA Act equally apply to arbitration proceedings and arbitral awards made abroad, such as the authority of the state courts to refer parties to arbitration unless an arbitration agreement is null and void, inoperative or incapable of being performed; and judicial measures in support of arbitration, as well as the recognition and enforcement of arbitral awards and the grounds for refusing the same.
In addition to the key regulation set forth in the ICA Act, the CCPU provides for the setting-aside procedure, recognition and enforcement of foreign awards8 and court-ordered measures in support of international arbitration. Aiming at increasing efficiency, the CCPU allows for a joint consideration of applications for setting an award aside and its enforcement within the same proceedings.
The list of non-arbitrable disputes as a matter of Ukrainian law is set forth in the CPCU, which also envisages a presumption of validity and enforceability of an arbitration agreement. According to the presumption, any inaccuracies in the text of an arbitration agreement shall be interpreted by the court in favour of the agreement’s validity and enforceability. The CPCU was amended to mirror key provisions of the ICA Act providing a state court with authority to leave a claim without consideration if one of the parties resorted to litigation despite a valid and enforceable arbitration agreement.
Major international arbitration instruments to which Ukraine is a signatory, such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention 1958), the European Convention on International Commercial Arbitration (Geneva Convention 1961) and the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID Convention 1965), also constitute part of the legal framework applicable to international arbitration in Ukraine. Additionally, investment arbitration issues may fall within the scope of the Energy Charter Treaty (1994), bilateral investment treaties (65 in force as of May 2021) and other legal instruments with investment provisions.
Ukrainian legislation regulates international and domestic arbitration differently.
Consistent with the Model Law, the ICA Act provides that contractual and non-contractual civil disputes arising in the course of foreign trade and other forms of international business relations, provided that the place of business of at least one of the parties to the dispute is located outside of Ukraine, may be referred to international arbitration.
In addition to the place of business criteria, the ICA Act clarifies that disputes involving Ukrainian entities with foreign investment, or international associations and organisations established in the territory of Ukraine, whether in agreement among themselves or their participants, as well as Ukrainian legal entities and individuals, may be referred to international commercial arbitration. This provides a legal ground to resolve by means of international arbitration disputes that otherwise would qualify as domestic.
In turn, disputes between Ukrainian parties, whether legal entities or individuals (i.e., domestic arbitration cases), fall within the scope of the Law of Ukraine on Arbitration Tribunals (Domestic Arbitration Act). The provisions of the Domestic Arbitration Act do not follow the Model Law, and there are many examples evidencing distinctive regulation of international and domestic arbitrations.
For instance, and unlike the ICA Act, the Domestic Arbitration Act expressly sets forth restrictions as to who is prohibited from acting as an arbitrator (e.g., judges of the general courts and the Constitutional Court), clarifies requirements as to the impartiality and independence of arbitrators, and provides for the liability of arbitrators in accordance with the applicable law or the parties’ agreement. There is also a separate list of non-arbitrable disputes within the domestic arbitration legislation.
Similarly, where the CCPU and CPCU provide for the setting aside of awards in domestic arbitrations, the issuing of enforcement orders and the taking of judicial measures in support of domestic arbitration, these respective procedures differ from the ones envisaged for international arbitrations. By way of example, grounds for setting a domestic arbitral award aside or for its enforcement under the CCPU are different from those for international arbitration awards.
A major overhaul of the judiciary in Ukraine took place in 2016 when a number of amendments were introduced to the legislative regime, in particular the Constitution, the Law of Ukraine ‘On the Judicial System and the Status of Judges’ and the Law of Ukraine ‘On Bodies and Individuals Carrying out Enforcement of Judgments and Decisions of Other Bodies’.
Ukraine’s judicial system is organised according to the principles of territoriality, specialisation and instance differentiation. Following the judiciary reform, the court system consists of local courts (circuit general, commercial and administrative courts), courts of appeal (circuit general, commercial and administrative courts) and the Supreme Court. As the highest court in the court system of Ukraine, the Supreme Court consists of the Grand Chamber of the Supreme Court, the Cassation Administrative Court, the Cassation Commercial Court, the Cassation Criminal Court and the Cassation Civil Court.
Also resulting from the judiciary reform, two specialised courts were established to deal with intellectual property matters and corruption cases: the High Court on Intellectual Property and the High Anticorruption Court.
In the arbitration context, a number of significant amendments to the procedural laws that became effective on 15 December 2017 introduced major changes in support of international arbitration. One of them was a simplification of the procedure for setting awards aside: according to the amended CCPU, an application for the annulment of an award shall be filed to the court of appeal at the seat of arbitration. The court of appeal is acting as the court of first instance and the Supreme Court is acting as a court of appellate instance in the case of further challenges. Similarly, a two-tier system is envisaged for the recognition and enforcement of foreign arbitral awards where an application for the recognition and enforcement shall be brought before the Kiev Court of Appeal.
Judicial measures in support of international arbitration, although available under the ICA Act even before the 2017 amendments to the legislation, were in practice rarely sought because of the absence of relevant procedural rules to grant such measures. After the reform, judicial measures in support of arbitration – for example, interim measures aimed at preserving evidence or assets – may be sought before a respective court of appeal at the debtor’s location or the location of the evidence or the assets, or the place of arbitration. In addition, the court of appeal at the location of the evidence may order production of such evidence upon a request of the arbitral tribunal or a party to the arbitral proceedings, subject to the approval of the tribunal.
Under the law, it is prohibited to establish extraordinary or special courts.
The two permanent arbitral institutions functioning on the territory of Ukraine are the International Commercial Arbitration Court (ICAC) and the Maritime Arbitration Commission (MAC), both at the Ukrainian Chamber of Commerce and Industry (UCCI) and established in accordance with the ICA Act. The year 2017 marked a quarter of a century since the establishment of the ICAC.
In 2020, the ICAC registered 341 cases, which spread across various industries with metallurgy at the top (18.1 per cent of the caseload), followed by chemical industry (12.6 per cent of the caseload) and, subsequently, agribusiness and energy and natural resources splitting the third place (10.5 per cent of the caseload). It is reported that more than 45 per cent of cases were considered in less than three months and 43 per cent within three to six months, suggesting that time efficiency could be among the benefits of considering cases at the ICAC.
In line with efforts to support diversity and equal representation in international arbitration, the ICAC reported that female arbitrators were involved in 42.2 per cent of the cases administered in 2020: 37.9 per cent of female arbitrators were appointed by the President of the UCCI, 57.4 per cent by the parties and 27.8 per cent by the two appointed arbitrators. Female arbitrators comprise 25.4 per cent of the ICAC’s recommended list of arbitrators from which potential candidates for appointment should be selected.
The ICAC caseload and figures reported by major international arbitral institutions often chosen by Ukrainian parties (LCIA, ICC and Stockholm Chamber of Commerce (SCC)) evidence that international arbitration is a popular dispute resolution method among users originating from and operating within this jurisdiction. Benefits of international arbitration are also acknowledged by the government, which is relying on it to attract foreign investment and to protect its own rights and legitimate interests in investment and commercial disputes against private parties and states.
II THE YEAR IN REVIEW
i Developments affecting international arbitration
Following aspirations of the previous legislative reform dating back to 2017, which positively impacted international commercial arbitrations seated in Ukraine and the recognition and enforcement of arbitral awards made abroad, 2020 saw further initiatives to amend Ukrainian law pertaining to international and domestic arbitration and attracting strategic foreign investment into Ukraine.
In early 2020, during his address at the World Economic Forum, the Ukrainian President referred to the investment nanny programme, which it was suggested would help to boost the Ukrainian economy and would operate on the basis of a government organisation, UkraineInvest. Once the covid-19 quarantine measures permitted, the draft law ‘On State Support for Investment Projects with Significant Investments’ (Investment Support Law) was registered and, subsequently, adopted by the Parliament of Ukraine on 17 December 2020. Effective as of 13 February 2021, the Investment Support Law applies to investment projects carried out within the territory of Ukraine in identified industries (including processing of and extraction for further processing of certain minerals, waste management, transport, post and courier services, logistics, education, healthcare and tourism) within a term of five years and with a total value exceeding €20 million. The various benefits offered under the Law are capped at 30 per cent of the estimated value of the investment project and may include tax benefits (exemptions from taxes and import custom duties), preemptive rights regarding the use of land for the investment project and construction of the necessary adjacent infrastructure (roads, communication lines, utilities supply network, etc.) at the expense of the state or municipal budgets or other permitted sources. On the basis of the special investment agreement and pursuant to the Investment Support Law, qualified investors are entitled to support and assistance with respect to an investment project from UkraineInvest, (i.e., the investment nanny), which serves as a specially designated state body. As of May 2021, cooperation with approximately 15 investors with an investment value totalling at US$1 billion was considered within the framework of the Investment Support Law.
Another notable legislative development consists of the draft amendments to Ukrainian law on international and domestic arbitration. First, with respect to domestic arbitration, Draft Law No. 3411 dated 29 April 2020 has suggested amendments to the Domestic Arbitration Act, including to expand the list of matters within the competence of domestic arbitration tribunals, to expand the powers of domestic arbitration self-government and to set forth a procedure for registering new domestic arbitration tribunals. Further, with respect to international arbitration, Draft Law No. 5347 dated 8 April 2021 was put forward to amend, similarly, the list of arbitrable disputes as a matter of Ukrainian law and the procedure for registering new arbitral institutions. In addition, Draft Law No. 5347 suggests a significant change of empowering a state court of appeals to resolve issues pertaining to the appointment and challenge of an arbitrator, and termination of the arbitrator’s mandate. Both pieces of proposed legislation are yet to be adopted.
As of 1 November 2020, an updated version of arbitration rules (and Rules of the MAC) applies to the international arbitration proceedings administered by the ICAC. In response to the pandemic and aiming to increase efficiency, the rules now better reflect virtual hearing procedures and resolve prior electronic communication issues in an effort to gradually transition ‘to 100 % digitalization of arbitration’. Ukrainian state courts have similarly accommodated the new 2020 reality, and as early as April 2020, the State Judicial Administration of Ukraine approved the procedure for participating in a court hearing by videoconference using a separate system, EASYCON. After the initial launch and a trial period in 2019 of the electronic court system in Ukraine, an amended law on the unified judicial information and telecommunication system (e-court) entered into force on 26 May 2021, providing for the gradual rollout of the system.
ii Arbitration developments in local courts
The jurisprudence of the Ukrainian courts generally reflects the pro-arbitration approach reinforced by the 2017 legislation reform with the practice of the Supreme Court further developing clarity and certainty with respect to application of the law. For instance, in the Evciler v. Dragprom ruling dated 12 November 2020, the Supreme Court resolved a challenge to the competence of an arbitral tribunal to consider disputes concerning the validity of an arbitration agreement. The Supreme Court explained the positive and negative effects of the arbitration agreement, the first being the obligation to refer disputes to an arbitral tribunal, and the latter limiting parties’ attempts to resolve disputes falling under the arbitration agreement before a state court. Additionally, the Court emphasised the separability of the arbitration agreement from the underlying agreement to conclude that the two agreements may be governed by distinct laws and that disputes concerning invalidity of the underlying agreement fall within the scope of the arbitration agreement and shall be considered in arbitration. On this basis and taking into account the language of the arbitration agreement in the case providing for all disputes and misunderstandings arising from or in connection with the contract to be resolved in arbitration, the Court resolved that challenges to validity of the arbitration agreement, and the underlying contract, shall be referred to arbitration.
It is now well established in the jurisprudence of the Supreme Court, and as reflected in the ruling dated 3 March 2020 in case No. 920/241/19, that commercial courts when presented with a matter falling within the scope of an arbitration agreement must as a matter of law leave the claim without consideration if the respondent timely objects to the proceedings before the court, and the court had not determined the arbitration agreement to be void, inoperative or incapable of being performed. In such case, the validity of the arbitration agreement shall be determined by the court prima facie.
Further, the Ukrainian Supreme Court solidified its approach to the waiver of right to object and its impact on the annulment of an award. For instance, in the Ukrkhimtransamiak v. Togliattiazot ruling, the Supreme Court dismissed arguments of Togliattiazot (the debtor under the award) regarding the competence of the ICAC tribunal since Togliattiazot did not raise these objections during the course of arbitration while fully participating in the proceedings and having submitted a counterclaim. Accordingly, the Supreme Court concluded that if there were in fact any concerns with respect to the competence of the arbitral tribunal to hear the original claim, particularly due to the alleged non-compliance with the pre-arbitration negotiation procedure, the arbitral tribunal was suited to consider such objections and it would be improper for the state court to interfere with the tribunal’s jurisdiction.
Turning to the recognition and enforcement of international arbitral awards in Ukraine, public policy grounds remain a frequently raised objection. Generally, courts take a restrictive and pro-enforcement approach, however the assessment and outcome are significantly fact-dependent. For instance, in VAB.RF v. Ukraine, when dealing with an application for recognition and enforcement of an arbitral award made by an emergency arbitrator seated in The Hague, the Supreme Court confirmed that the recognition and enforcement of the award granting interim measures would be contrary to the public order of Ukraine since it would de facto preclude enforcement of an arbitral award already recognised and enforced by the Kiev Court of Appeal earlier. Thus, recognition and enforcement of an emergency award was refused for the need to preserve legitimacy and the binding legal effect of a court judgment.
Another branch of jurisprudence dealing with the public order ground emerged with respect to enforcement of arbitral awards triggering the sanctions regime developed in response to the military conflict between Ukraine and the Russian Federation. The ruling dated 9 January 2020 in case JSC ‘AVIA-FED-SERVICE’ v. SJSHC ‘Artem’ is an example of a positive outcome of an application seeking recognition and enforcement of an arbitral award in favour of a Russian company, although falling under the Ukrainian sanctions regime. From the courts’ perspective, public law relations between Ukraine and the Russian Federation had no implications on the private contract between the parties and their respective rights and obligations. Later in 2020, however, enforcement of the award was deferred by the state enforcement officer due to the fact that SJSHC ‘Artem’ is a company of the industrial military complex of Ukraine, and that there is a temporary ban on enforcement against this type of company in favour of Russian legal entities. Subsequently, the Supreme Court upheld the lawfulness of the state enforcement officer’s actions, stating that limitations on enforcement are temporary and justified by the necessity to protect the interests of the Ukrainian people and state, since enforcement of such decisions, that is, against a company of the industrial military complex of Ukraine in favour of Russian legal entities, would be incompatible with the public order of Ukraine. Therefore, an inconsistency arises regarding the final recovery under the award, since even if the hurdle of public police falls at the stage of recognition and enforcement, it may resurface again at a later stage under provisions applicable to enforcement of court judgments in Ukraine. Notably, in a Separate Opinion dated 17 March 2020 in case No. 908/3736/15, justices of the Supreme Court noted that court practice on the application of the sanctions regime to commercial contracts, including their use as a potential force majeure defence, is only formative, and it remains to be determined whether a judgment should be in favour of the claimant (who falls under sanctions), but should not be enforced (voluntarily or compulsory).
In other similar cases, the Supreme Court has taken a more consistent approach of refusing recognition and enforcement of an arbitral award on the grounds of public policy, an integral part of which is the sanctions regime.
Noteworthy in Ostchem Holding Limited v. PJSC ‘Odesa Portside Plant’ (OPP), upon the appeal of OPP and the State Property Fund of Ukraine, the Supreme Court refused to grant recognition and enforcement of the approximately US$300 million Stockholm Chamber of Commerce SCC award since it was established that the JSC ‘Gazprombank’, a Russian entity, would in fact receive payments under the award, which would be contrary to the public policy of Ukraine. In addition, the Supreme Court reasoned that recognition and enforcement of the award would be refused on the basis of public policy for the following reasons:
- the OPP, a state-owned entity, is of strategic importance to the state’s security and economy;
- the OPP is in the process of privatisation; and
- the obligation of the OPP to ensure protection of the people and the environment from the objects of increased danger in its ownership, the performance of which would be put at risk in case of enforcement of the award.
Accordingly, and despite the award in question being a consent award, the issue of recognition and enforcement was finally resolved after over two years of litigation in Ukraine in favour of the state-owned entity.
As a general point of procedure for seeking recognition and enforcement of international arbitral awards in Ukraine, the Supreme Court has clarified that, in Ukraine, parties to arbitration proceedings are entitled to claim the setting aside of an award or seek its recognition and enforcement, and subsequently challenge court rulings concerning these claims.
iii Investor–state disputes
While the saga of Crimean arbitrations continued into 2020, the year also brought new investment disputes involving Ukraine and companies in various industries including in the renewable energy, gambling, tobacco production, agriculture and aerospace industries.
Turning first to the Crimean-related issues, a ruling of the Paris Court of Appeal dated 30 March 2021 annulling the award in favour of the Ukrainian state-owned bank Oshchadbank against the Russian Federation drew major attention, raising concerns about the future of other awards. Despite this turn, Ukraine continues its offence against the Russian Federation for assets lost in Crimea with the latest claim announced by the national nuclear energy company Energoatom in May 2021. The company seeks redress for the Donuzlavska Wind Power Plant located on the territory of the temporarily occupied Crimea.
Changes to the renewable energy subsidy regime in 2020 also put a target of investment claims on Ukraine itself. Foreign and domestic energy producers had expressed concerns in April and May 2020 warning the state of an ‘avalanche of arbitration cases’. The Energy Charter Treaty claim of the Lithuanian investor Modus Energy, brought in May 2021, is the first of potentially more cases alleged to be coming.
Another Baltic-based investor already succeeded against Ukraine under the 1995 Estonia–Ukraine bilateral investment treaty (BIT) in the case involving a ban on gambling businesses imposed in June 2009. Under the UNCITRAL tribunal award of 15 April 2021, Ukraine was ordered to compensate the Tallin-based Olympic Entertainment Group for the indirect expropriation resulting from the ban.
Further, the government’s tax and antimonopoly measures imposed in 2020 spurred dissatisfaction among foreign investors and resulted in two ICSID claims brought by Swedish Misen Energy and Misen Enterprises under the Sweden–Ukraine BIT with respect to the ‘imposition of a 70% subsoil use charge for the production of natural gas from depths of up to 5,000 meters’, and Philip Morris under the Ukraine–Switzerland and Ukraine–US BITs for a fine imposed by the Antimonopoly Committee of Ukraine.
There could potentially be another investment arbitration claim brought against Ukraine in connection with the major Ukrainian manufacturer of helicopter and plane engines, Motor Sich. A corporate control takeover seems to have gone wrong in a conundrum of Ukrainian competition regulation, national security concerns, and sanctions imposed on Chinese companies and individuals behind the takeover by both Ukraine and the US. The Ukrainian Ministry of Justice was notified by the Chinese investors of their intent to arbitrate in September 2020, with a formal request for arbitration under the China–Ukraine BIT communicated on 5 December 2020.
III OUTLOOK AND CONCLUSIONS
Ukrainian law offers clear and understandable mechanisms for resolving disputes effectively through international arbitration and has been amended to better serve the needs of its users. Ukrainian jurisprudence, undoubtedly positively influenced by the development of the professional legal and, particularly, arbitration community, is moving in the direction of aligning the application of Ukrainian law pertaining to arbitration with well-established international principles and constantly developing best practices, promising more legal certainty to parties. The aspirations of the government to attract foreign investment have the potential to result in creating a better infrastructure for making investments in Ukraine and benefiting investors by means of state support and cooperation. At the same time, however, due to the volatile political climate in Ukraine and continuing reforms, it may be even more advisable to have a decent understanding of the situation on the ground, the strategies in place for a response to a change and agility in their implementation. For Ukraine, and this is most certainly applicable to other jurisdictions, 2020 and 2021 evidence that while business is not being done as usual, it is still being done, and arbitration remains a frequently relied-upon method for straightening out wrinkles in the process.
Authors: Oleg Alyoshin, Partner, Vasylyna Odnorih, Senior Associate
Published: The International Arbitration Review, November 2021