Ukrainian "Blue Fuel" Prospects
The past month was a rich one in the gas topic worldwide.
Indeed, according to public information the price for Ukraine is higher compared to that paid by other European states. The highest official rhetoric was getting pragmatic and headlined. Several precedents of successful cases against Russian gas monopolist Gazprom have taken place recently. Sound announcements by the Ukrainian government and very decisive political steps and meetings at the highest level promise us quite a challenging period in our relationship with Russia.
We don’t know yet whether the parties will decide to go to international arbitration, but the current situation looks quite interesting from the legal perspective. Setting aside political sentiments, we have asked legal practitioners to share their views regarding the chances of appealing the gas contracts with Russia.
There does not exist any possibility of unilateral refusal to perform obligations under the gas contract with Naftogaz, because the law of any civilized country (including the Swedish law based on which the dispute could be considered) is based on the premise that a contractor, who has assumed an obligation, should fulfill it. As of now, experts are not aware of the norms in Swedish law, and in the legislations of Ukraine and Russia, that would under the same conditions not allow fulfillment of a contract without addressing a court.
I am not sure of the possibility of terminating the gas contract based on the assumption that the rights and obligations of the contracts are “asymmetric” (allegedly, Ukraine received only obligations, and Russia — mainly rights). Such an argument, and only under certain circumstances, would make sense if, for example, the top manager of Naftogaz Oleg Dubina were convicted, and the court would “in black and white” recognize the malicious intent of the former head of Naftogaz to sign an enslaving contract, for example, in exchange for a bribe. Moreover, even if Yulia Tymoshenko is ultimately convicted, arbitrators will carefully read every line of her charges evaluating the verdict adopted by the national court in question. After all, everybody understands that in such a case the state-owned company will use a decision of the state court as evidence for arbitration in order to seek a favorable outcome.
The decision of the Stockholm court of arbitration has yet to be recognized by courts both in Ukraine and Russia
Given that the decision in the case Naftogaz vs. Gazprom may become a precedent for other disputes between the Russian energy monopoly and European companies, the battle promises to be a tough one. Besides, I can assure you that disputes of this complexity are usually considered on average for about two years, but in no case less than a year.
Another important fact deserves our attention: a decision of the Stockholm court of arbitration has yet to be recognized by courts both in Ukraine and Russia. In fact, it is established by the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. According to a general rule, if a decision of the Stockholm arbitration contains any binding norms (for example, on payment of a fine, penalty by a party, or execution of other actions), a national court’s decision may be required for recognition and enforcement of the arbitral award. And a national court would have the right to deny recognition if it determines, for example, that such award contradicts the public law of its country.
Neither are there good chances that fulfillment of the contract can be avoided through the reorganization of Naftogaz. If the company is reorganized by splitting it into several companies — production, transportation, purchase of the “blue fuel” — there will be a designated successor for obligations. And liquidation of the debt-burdened Naftogaz could only be possible by way of bankruptcy, and hardly anybody in the country’s current pragmatic leadership would favor this option.
Given the recent comments from Ukrainian authorities one of the key arguments in submitting the claim to Stockholm Arbitration is the non-compliance of the contract for supplying natural gas in 2009-2019 with previous framework agreements between Ukraine and Russia. This issue is quite “ordinary” for Ukrainian-Russian relations as a number of bilateral treaties with Russia and treaties concluded within the CIS have retained unenforceable declarations in the long run. The 2001 Agreement on gas supply, as concluded between Ukraine and Russia, provided for conclusion of separate protocols each year whereby a new price for the subsequent year could have been agreed. Ukraine, therefore, may have good chances to challenge the present long-term agreement as it is in conflict with the framework agreement concluded earlier.
Whatever Ukraine’s arguments may be the arbitration proceedings, given the complexity of this issue, may take from 1 to 3 years
I would not say that Ukraine has good chances to challenge the gas supply contract on the basis that this contract is not beneficial for Ukraine. International law as well as Swedish law firmly defends the principle of freedom of contract. Certainly, there is a doctrine of “oppressive contracts”, but Ukraine will have to prove that there were certain circumstances which had forced her to enter into this contract despite its terms being extremely unprofitable.
The Government might also attempt to challenge the contract on the basis that Mrs. Tymoshenko had no authority to instruct Naftogaz to enter into this contract and to use the outcome of criminal proceedings against her in Ukraine to support Ukraine’s position in the Stockholm arbitration. This, however, is unlikely to remedy the situation as Naftogaz despite being a fully state-owned company is a separate and independent entity which may enter into commercial contracts on its own.
Whatever Ukraine’s arguments may be the arbitration proceedings, given the complexity of this issue, may take from 1 to 3 years.
From the perspective of Swedish law, a contract can be adjusted or set aside if it is unreasonable or unfair (Section 36, Contracts Act). So, in case of Naftogaz proving that the contractual price is unjust or unreasonable, the arbitration court will have to adjust relevant provision or terminate the contract in toto.
In order to determine whether the term is unjust, reference shall be made to the contents of the contract, the circumstances at the formation of the contract, circumstances arising later, etc. In general we presume that in order to succeed on this ground Naftogaz will have to prove that 1) the contractual price is unjust compared to world practice; 2) Gazprom was in a position to force Naftogaz to sign the contract on unjust terms, i.e. used economic coercion.
Unfortunately, I am not in a position to comment on the technical side of the issue whether the gas formula for Ukraine was just and reasonable. So, in my opinion, one of the most prospective grounds for Naftogaz to avoid the gas contract is to prove that it was dependant on gas supplies from Gazprom in 2009.
One of the most prospective grounds for Naftogaz to avoid the gas contract is to prove that it was dependant on gas supplies from Gazprom in 2009
To the advantage of Naftogaz in these legal proceedings, Gazprom stopped gas supplies to Ukraine in the midst of winter 2009. In the meantime, according to certain statements made by the highest officials of Ukraine, Ukraine had substantial gas reserves to see out the winter period and, thus, to negotiate with Gazprom on a par. Furthermore, according to media reports Gazprom had to suppress extraction at more than 100 wells, and so suffered substantial damages while not supplying gas to Ukraine. Considering the above-mentioned, there are at least arguments for both sides.
It should also be noted that Ukraine still continues to perform the gas contract with Gazprom even after the Government in Ukraine was changed in 2010. In my opinion this can be used by the opponent party to prove that Ukraine has through its actions confirmed the validity of the contract.
In summing up, we would like to note that in general arbitrations proceedings under the Rules of the Arbitration Institute of the SCC will take up to 15 months following the request for arbitration being made. However, taking into account the substantial stake of the politics in this case, we expect that the final award will not be rendered earlier than within 2 years.
In this junction, we believe that it would be in the interest of the parties to find an amicable solution.
