In Everest Estate LLC and others v Russian Federation as represented by Ministry of Justice Case No 796/165/2018, the Ukrainian Supreme Court upheld an order for enforcement of an investment treaty arbitration award against the Russian Federation finding that Russia had consented to arbitration in its bilateral investment treaty with Ukraine and that this was sufficient to constitute a waiver of sovereign immunity from execution.
The Ukrainian Supreme Court has upheld orders granting recognition and enforcement of an UNCITRAL award rendered against the Russian Federation for the expropriation of property and real estate in annexed Crimea.
The claimant investors managed to persuade the court that Russia had waived its sovereign immunity from adjudication and from execution by agreeing to arbitration in its bilateral investment treaty (BIT) with Ukraine.
The Supreme Court found no public policy ground to deny enforcement in this case noting that it is the public policy of the enforcing court that is to be applied. However, probably anticipating that similar investment treaty awards could land in the Supreme Court's docket, it reserved room for the argument that enforcement of awards that contradict the national interests of a sovereign nation or its national security, may fall within the public policy exception.
The Supreme Court also partially upheld interim measures of protection in aid of executing the award issued by the first instance court in favour of the claimant investors. However, the Supreme Court ruled that the interim measures should be sustained only with respect to assets owned by Russia, rather than Russian assets owned in conjunction with private shareholders. It remains to be seen how the Russian ownership stakes will be determined.
This Ukrainian Supreme Court decision is likely to be subject to public scrutiny outside Ukraine, given that the judges considered issues of public and private international law.
The court's departure from the concept of absolute sovereign immunity usually applied in Ukraine was notable and its decision to infer a waiver of immunity from execution as well as a waiver of immunity from adjudication due to the consent to investor-state arbitration in the BIT, is doubtful. There is a significant risk that in cases, where Ukraine is defendant, similar arguments may appear before foreign courts.
Without engaging in an in-depth analysis of which specific instruments form the arbitration agreement under the BIT, the Supreme Court was ready to accept the BIT and the tribunal's decision on jurisdiction as evidence of a duly formed arbitration agreement. Impliedly, this sufficed to satisfy the requirement of Article IV (1) of the New York Convention and this demonstrates the court's pro-arbitration approach to enforcement. (Everest Estate LLC and others v Russian Federation represented by Ministry of Justice, Case No 796/165/2018 (25 January 2019).)
Articles V of the New York Convention 1958 provides in relevant part: "Article V
2. Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that:
(a) The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or
(b) The recognition or enforcement of the award would be contrary to the public policy of that country."
Article 79 of the Law of Ukraine "On international private law" (LUIP) provides that filing a claim against a foreign state, joinder of a foreign state as a defendant or third party, attaching property, which belongs to a foreign state and which is located in Ukraine, applying any other interim measures to such property and execution against such property is permitted only with the consent of the competent authorities of the respective state, unless otherwise stipulated by law or international treaty.
The relevant provisions of the United Nations Convention on Jurisdictional Immunities of States and Their Property 2004 ("State Immunity Convention") which Ukraine has neither signed nor ratified but which were discussed in this case were:
"Article 5 State immunity
A State enjoys immunity, in respect of itself and its property, from the jurisdiction of the courts of another State subject to the provisions of the present Convention.
Article 19 State immunity from post-judgment measures of constraint
No post-judgment measures of constraint, such as attachment, arrest or execution, against property of a State may be taken in connection with a proceeding before a court of another State unless and except to the extent that:
(a) the State has expressly consented to the taking of such measures as indicated:
(i) by international agreement;
(ii) by an arbitration agreement or in a written contract; or
(iii) by a declaration before the court or by a written communication after a dispute between the parties has arisen; or [...]"
The relevant provisions of the Agreement between the Government of the Russian Federation and the Cabinet of Ministers of the Ukraine on the Encouragement and Mutual Protection of Investments (Moscow, November 27, 1998) ("Ukraine-Russia BIT") discussed in this case were:
"Article 9 Resolution of Disputes Between Contracting Party and the Investor of the other Contracting Party
2. In the event the dispute cannot be resolved through negotiations within six months as of the date of the written notification as mentioned in Item 1 hereof above, then the dispute shall be passed over for consideration to:
a) a competent court or an arbitration court of the Contracting Party, on whose territory the investments were carried out;
b) the Arbitration Institute of the Chamber of Commerce in Stockholm,
c) an "ad hoc" arbitration tribunal, in conformity with the Arbitration Regulations of the United Nations Commission for International Trade Law (UNCITRAL).
3. The award of arbitration shall be final and binding upon both parties to the dispute. Each Contracting Party shall undertake to execute such an award in conformity with its respective legislation."
Article 475 (2) Civil Procedure Code of Ukraine (CPCU):
If a debtor does not permanently reside in Ukraine or its place of residence is unknown, the court can hear an application for recognition and enforcement of an international commercial arbitral award if the debtor has assets in Ukraine.
In March 2014, internal political turmoil in Ukraine caused a severe crisis in relations with Russia, which in response annexed the Crimean Peninsula. The newly established Russian government further expropriated some of the
properties owned by Ukrainian nationals. Among them were those of a number of Ukrainian legal entities linked to Ukrainian oligarch Igor Kolomoyskyi. The companies launched an ad hoc investor-state arbitration against the Russian Federation under the Ukraine-Russia BIT under the UNCITRAL Rules 1976 with a seat in Hague, the Netherlands. Russia expressly opted not to participate in the proceedings and disputed the jurisdiction of the arbitral tribunal.
On 20 March 2017, the tribunal ruled in favor of its jurisdiction and admissibility of the substantive claims against Russia.
On 2 May 2018, the tribunal rendered an award on the merits, finding Russia liable for breaching the Ukraine-Russia BIT and awarded compensation to the claimant investors in the amount of approximately $130 million.
In July 2018, the successful claimants applied for recognition and enforcement of the award with the Court of Appeal in Kyiv. The claimants argued that the Ukrainian court had jurisdiction on the basis that Russian owned assets in the Ukraine, which could be seized.
In August 2018, the claimants requested that the Court of Appeal of Kyiv issue interim measures of protection by attaching shareholdings and freezing assets allegedly owned by Russia indirectly via shareholdings in Ukrainian subsidiaries of Russian banks (for example, Sberbank Russia, VTB, VEB), which are in turn indirectly majority owned by Russia. In substance the petitioners requested that the court lifts the corporate veil (a legal mechanism unknown in Ukrainian law).
On 29 August 2018, Russia sought to set aside the award before The Hague Appellate Court asserting that the tribunal did not have jurisdiction to hear the claims.
On 5 September 2018, the Court of Appeal of Kyiv (Judge Kryzhanivska GV) granted the attachment requested by the claimants and froze Russian assets in three Ukrainian Banks. All banks appealed to the Supreme Court. Their shareholders, the Russian banks, that is, VTB, Sberbank Russia and VEB also filed separate appeals.
On 25 September 2018, the Court of Appeal of Kyiv (Judge Kryzhanivska GV) granted the petition for recognition and enforcement of the award under the New York Convention and permitted execution against Russia as represented by the Ministry of Justice. Prominvestbank and one private individual appealed this decision to the Supreme Court. Notably, Russia did not participate in the proceedings before the Ukrainian courts. However, the Russian Ministry of Justice filed several letters, where it raised various defences.
On 25 January 2019, the Ukrainian Supreme Court heard the appeals of the two September Kyiv Court of Appeal decisions.
In the proceedings, Russia raised the following arguments, among others:
The Supreme Court denied the appeals on the ruling dated 25 September 2018, finding no grounds to refuse recognition and enforcement of the award in Ukraine. In addition, it partially upheld the appeals on the ruling dated 5 September 2018 and amended the ruling on interim measures by limiting their application to assets which are owned by Russia only, without providing any specific guidance for bailiffs to determine the ownership of the assets falling within the scope of such injunctive relief.
Since the proceedings before the Ukrainian courts concerned Russian assets, the Supreme Court primarily had to assess if there were any procedural flaws in the procedure against the sovereign state.
The Supreme Court did not accept the notification argument. Relying on Article V of the Kiev Agreement on Settling Disputes Related to Commercial Activities, dated 19 December 1999, which requires direct engagement between the judicial bodies of both countries, it concluded that the simple procedure for notification by post would suffice to meet the obligation of proper notification. Therefore, the Supreme Court opined, that as long as it had proof of service, a relevant recipient, for example, the Ministry of Justice of Russia, should be deemed to have been duly informed.
In applications for recognition and enforcement of foreign arbitral awards against a debtor, who is not physically present in Ukraine, Ukrainian courts are only entitled to consider the application if the debtor's assets are located in Ukraine. In light of this rule, the Supreme Court was faced with the question of whether Russia's assets in Ukraine fell within this rule. The court held that it had jurisdiction to hear the application.
The Supreme Court held that the circumstances in the present case met the requirements of Art. 475 CPCU. It was enough to show that the debtor had assets in Ukraine, rather than any assets that could be collected. The court relied on letters from the Russian Ministry of Justice explicitly stating that Russia is a sovereign state and its property and assets in Ukraine are covered by sovereign immunity and concluded that presence of such property suffices for jurisdiction of the Ukrainian court.
The Supreme Court acknowledged state immunity as a defence and, analysed whether this is an absolute principle, and whether the state can waive it. It opined that sovereign immunity is a right, not an obligation, and a state is entitled to waive this right by consent. This conclusion is in line with Article 79 of the LUIP and Article 19 of the State Immunity Convention.
The Supreme Court then turned to the issue of whether Russia had consented to waive its sovereign immunity rights. It focused on the arbitration agreement contained in Art. 9 of the Ukraine-Russia BIT, where Russia consented to arbitration and to an arbitral award that was final and binding on both parties, and to execution in accordance with local legislation. The court considered that these undertakings indicated that Russia had in fact consented to waive its sovereign immunity.
One of the crucial issues for the Supreme Court was to establish whether there was an arbitration agreement in writing within the meaning of New York Convention. The Ukrainian Supreme Court had no difficulty in establishing that Article 9 of the Ukraine-Russia BIT incorporates an arbitration agreement. It also noted that neither Ukraine, nor Russia terminated the BIT after the events of 2014. Therefore, the arbitration agreement remained valid. As such, the court found no reason to deny enforcement of the award.
Equally, the Supreme Court found no valid public policy ground for denying enforcement of the award noting that it is the public policy of the enforcing country that should be applied when deciding the issue.
The Ukrainian Supreme Court established that under Russian civil law, Russia is liable with all its property for its obligations.
Further, the court unusually delved into a thorough analysis of the corporate structure of the Ukrainian banks and found that they are wholly-owned by Russian banks, because Russia, directly and indirectly, together with other private actors, owns and controls them. Therefore, for the first time in recognition and enforcement proceedings, the Supreme Court lifted the corporate veil, and considered the entire shareholding structure to determine whether Russia in fact owned the Ukrainian banks.
The court stressed that at the stage of execution, bailiffs will need to determine which assets Russia actually owns, and which assets are owned by other shareholders. The court did not provide any instructions as to the mechanics of doing this.
In addition, the Supreme Court determined that the first instance court's decision, dated 5 September 2018, failed to take into account the fact that Russia was the only debtor under the award, rather than the other foreign or Ukrainian companies. Therefore, the interim measures, including the attachment orders, and the prohibition on alienation of property were only substantiated with respect to the property that Russia owns, and not property owned by other legal entities. As a result, the Supreme Court partially annulled and amended the ruling of the first instance court by imposing limitations on the orders so that they only apply to assets owned by Russia.
This decision of the Ukrainian Supreme Court will be subject to public scrutiny outside Ukraine, mostly due to the fact that the judges touched upon issues of public and private international law.
First, the court's departure from the concept of absolute sovereign immunity usually applied in Ukraine was notable and its decision to infer a waiver of immunity from execution as well as a waiver of immunity from adjudication due to the consent to investor-state arbitration in the BIT, is doubtful. There is a significant risk that in cases, where Ukraine is defendant, similar arguments may appear before foreign courts.
Second, without engaging in an in-depth analysis of which specific instruments form the arbitration agreement under the BIT, the Supreme Court was ready to accept the BIT and the tribunal's decision on jurisdiction, as evidence of a duly formed arbitration agreement. Impliedly, this sufficed to satisfy the requirement of Article IV (1) of the New York Convention and this demonstrates the court's pro-arbitration approach to enforcement.
Third, in dealing with the public policy ground, it seems that the Supreme Court reserved the right to deny recognition and enforcement of similar awards obliging Ukraine to pay for the breaches of obligations undertaken in investment treaties.
Everest Estate LLC and others v The Russian Federation as represented by Ministry of Justice Case No 796/165/2018 (25 January 2019) Judges Cherniak Yu.V., Gulkov B.I., and Lyuspenyck D.D.
Reproduced from Practical Law Arbitration with the permission of the publishers. For further information visit www.practicallaw.com.