Argument (#09 September 2017)

Investment Opportunities through Recognition and Enforcement of Arbitral Awards in Ukraine

by Oleksii Prudkyi, Iryna Vlasiuk

Ukraine has recently proved itself to be a fast transforming economy as the Government has implemented a number of measurers to pursue unprecedented reforms across the legal, economic and political spheres.

The first positive outcomes of the changes may well be seen soon enough. This could make those investors considering new economic opportunities in Ukraine, to open (or reopen) the country for their business. Doing business under a new legal framework and ongoing reforms inevitably requires sound legal advice not only on regulatory matters but also on assessment of possible risks related to potential disputes and arbitration proceedings.

Analyzing recent court practice on recognition and enforcement of foreign arbitral awards in Ukraine, we have developed certain guidelines for foreign investors to be on the safe side while planning to implement their business initiatives in this jurisdiction. They, of course, do not guarantee complete safety, but have proven to be the minimum set of rules to provide the basic level of comfort for investors.

Drafting the contract

Arbitration proceedings start far in advance before a dispute arises. For this reason, investors should pay special attention to drafting an arbitration clause. A well-drafted arbitration clause is also one of the key elements for successful recognition and enforcement of an arbitral award and should never be underestimated.

In a recent case heard in 2016, a Ukrainian court refused to recognize and enforce a USD35.7million arbitral award rendered by the LCIA sole arbitrator because the respondent had not been notified about the arbitral proceedings in the proper way. The court found that the arbitral tribunal sent all notifications to the respondent via email, whereas the contract and the respective arbitration clause, which the parties had concluded back in 1993, did not provide for such form of notification. Consequently, the court arrived at the conclusion that the respondent had not been properly notified of the case, and subsequently refused to recognize the arbitral award.

Therefore, it is extremely important to draft the contract with utmost broad list of opportunities for communication between the parties taking into account fast development of information technologies. At this point, standard provisions may turn to be a downfall.

As to existing contracts, especially those entered into in the early 1990s, we would strongly advise to revise the texts and, if need be, to adjust them to modern conditions of doing business.

Compliance with an arbitration clause

Compliance with an arbitration clause is as important as its drafting. Any derogation from its provisions should be executed in writing as a mutual agreement between the parties. Otherwise, there is a high risk that a Ukrainian court might find the arbitral award unenforceable due to breach of the arbitration clause.

For example, in one case considered in 2016, a Ukrainian court dismissed the application for recognition and enforcement of a USD 3.3 million arbitral award rendered by the ICC International Court of Arbitration. The court found that the arbitral award was rendered by a sole arbitrator, which contradicted the arbitration clause. The latter provided for a panel of three arbitrators to consider the dispute if the parties failed to agree upon the candidacy of the sole arbitrator, which, according to the court, was the case in that specific situation.

The arbitration clause is the roadmap the parties to arbitration should fully and carefully comply with. Failure to do so may render recognition and enforcement of an arbitral award in Ukraine impossible.

Careful with interest

Until recently Ukrainian courts had no problems in recognizing and enforcing foreign arbitral awards, which did not specify the exact amount of interest. Where necessary (e.g. with respect to post-award interest), the courts simply calculated the amount of accrued interest based on the wording of the arbitral award. However, in 2017 a court of appeal reversed the lower courts order on recognition and enforcement of a USD 17.5 million arbitral award issued under GAFTA Rules, which contained such type of interest calculation. The court found that the arbitral award contradicted the public policy of Ukraine and, therefore, could not be recognized. Importantly, the appellate court dealt with both pre- and post-award interest.

According to the arbitral award, the respondent was obliged to pay damages to the claimant, plus quarterly interest. The arbitral award did not specify the exact amount of interest, which the respondent had to pay to the claimant, which, according to the court, effectively implied that this interest should be determined by the bailiff within the procedure for enforcement of the award. While reconsidering the application for recognition and enforcement of the arbitral award the court of appeals arrived at the controversial conclusion that delegating the right to determine the amount of interest to the claimant or the bailiffs would contradict the basic principles of justice in Ukraine, i.e. the rule of law and the right to a fair trial.

Therefore, according to the controversial position of the court of appeals, such a lack of exact wording in an arbitral award does not allow the competent authority of a country where its recognition is sought to determine the exact amount of interest at its own discretion, as such actions would be regarded as interference with the legal relationship specified in the arbitration clause. The court subsequently arrived at the conclusion that enforcement of such an arbitral award would contradict the public policy of Ukraine.

Although the abovementioned case is still pending before the higher court, it is quite remarkable, as it may reshape existing court practice. It also triggered the attention of the vast majority of lawyers practicing in the area of international arbitration and cross-border litigation. For the first time in Ukrainian history, the Ukrainian Arbitration Association prepared and submitted to court an independent expert opinion the Amicus Curiae Brief.

In the Brief, the lawyers pointed out that Ukrainian substantive law also contains provisions on charging interest in the future, whereas the procedural law lacks such provisions. This gap certainly does not mean that a court itself cannot do technical calculations and calculate the interest itself without interfering with the merits of the case.

The Ukrainian arbitration community is looking forward to the final decision on this matter, which is expected later this year.

Upcoming reform of procedural legislation

Ukraine is on the eve of fundamental judicial reform. According to the drafters of the new Code of Civil Procedure (P), it reflects the arbitration communitys endeavors to make Ukraine a more arbitration-friendly jurisdiction and, thus, encourage investment into the Ukrainian economy.

For instance, unlike the current P, the Draft Law provides that a court may extend the three-year limitation period for submitting the application for recognition and enforcement of an arbitral award provided that the court finds the grounds for missing this period to be reasonable.

The Draft P has also addressed issues regarding post-award interest. According to the Draft, if an arbitral award provides for payment of penalties and/or interest, the court in its order on recognition and enforcement of such award should specify these figures the way they were set out in the arbitral award. The final calculation of penalties and/or interest should be made by the authority enforcing such decision, i.e. the bailiff.

Remarkably, the Draft P also deals with currency issues, which have lately been a challenge for the parties seeking recognition of foreign arbitral awards that were issued by arbitral tribunals outside Ukraine. The problem is that the current wording of the P obliges a national court to specify the sum of costs, which are to be collected from the debtor, in the national currency of Ukraine hryvnias. In this case the creditor faces certain currency risks due to the hryvnias instability. This may lead to the impossibility to collect the entire sum of money in the respective currency indicated in the arbitral award.

The Draft P provides a solution for this issue, obliging the court to indicate the sum of costs in the same currency, as was specified in the arbitral award, which is sought to be recognized and enforced in Ukraine. The Draft also provides the creditor with a right, if it deems necessary, to ask the court to specify the sum of costs to be collected from the debtor in the national currency of Ukraine according to the official exchange rate of the National Bank of Ukraine as of the date of the respective court order.

Lastly, the Draft P sets out an entirely new procedure voluntary enforcement of an arbitral award on collection of costs. It appears that this procedure has been proposed so that honest debtors would have a right to recognize and enforce an arbitral award (as of today only the creditors are entitled to do so). According to this procedure, the debtor is entitled to submit an application on recognition and voluntary enforcement of an arbitral award rendered against it. Only arbitral awards on collection of costs from a debtor are subject to this procedure. According to the Draft P, this procedure is meant to be very quick as the judge has only 10 days to decide upon the debtors application, and does so without the summoning the parties.

To sum up, it is fair to say that Ukraine is becoming a more arbitration friendly jurisdiction. An investor seeking recognition and enforcement of an arbitral award should ensure its compliance with the arbitration clause, applicable rules of procedure and take into account recent Ukrainian legislative developments and court practice.

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