logo-image
SCC partial award recognised and enforced in Ukraine despite allegations of public policy violations and noncompliance
Автор: Маркіян Ключковський, Олександр Волков
Джерело: Thomson Reuters Practical Law . – 26 червня 2019 року
Завантажити

In Ostchem Holding Ltd v Odesa Portside Plant Case No 824/241/2018, the Kyiv Court of Appeal in Ukraine allowed the recognition and enforcement of a Stockholm Chamber of Commerce (SCC) partial award despite allegations of public policy violations, as well as non-compliance with the pre-arbitration dispute resolution procedure.

Speedread

The Kyiv Court of Appeal in Ukraine has recognised and enforced a partial consent award rendered under the arbitration rules of the Stockholm Chamber of Commerce (SCC). In the partial award, state-owned Odessa Portside Plant (OPP) agreed to pay Ostchem Holding Ltd (Ostchem) approximately USD 251 million under a gas supply contract.

Despite having consented to the award, OPP and its majority shareholder, state-owned State Property Fund of Ukraine (SPFU), an intervener in the enforcement proceedings, resisted enforcement. OPP invoked the public policy defence under Article V(2)(b) of the New York Convention alleging that Ostchem had not complied with the pre-arbitration dispute resolution procedure, which provided for a cooling-off period of 30 days for negotiations before arbitration could be commenced. Due to that failure, OPP claimed that the partial award did not fall under the arbitration agreement according to Article V(1)(c) of the New York Convention. On public policy, OPP argued that collection under the award would cause a permanent suspension of its operations, lead to bankruptcy and create a technological and ecological catastrophe. Meanwhile, SPFU put forward other arguments, including that OPP was strategically important for the economy and state security and that the underlying contract was void.

While the Kyiv Court of Appeal held that non-compliance with a contractually agreed cooling-off period for negotiations may be a ground to refuse to recognise and enforce an award, here the court rejected that argument. Non-compliance with a cooling-off period did not fall under Article V(1)(c) of the New York Convention. The court also found that the amount of debt and potential detriment for a state-owned company, listed as strategically important for the economy and state security, cannot trigger the public policy defence under Article V(2)(b) of the New York Convention. In the court's opinion, OPP and SPFU invoked the public policy defence to preserve their own financial interests, which, if upheld, would be tantamount to intrusion into private property. Finally, the court determined that the underlying contract was not void, but rather voidable but found no grounds to deny recognition and enforcement of the partial award on that basis.

This decision demonstrates the recent trend of Ukrainian courts giving effect to foreign arbitral awards, even where that may be against the interests of state authorities. However, this decision has already been appealed to the Supreme Court. (Ostchem Holding Ltd v Odesa Portside Plant Case No 824/241/2018 (24 Apr 2019).)

Background

Article V of the New York Convention provides, in relevant part:

Article V

"1. Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:

CO

(c) The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced".

"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".

Articles 35 and 36 of the Law of Ukraine On International Commercial Arbitration provide:

"Article 35. Recognition and Enforcement of the Arbitral Award.

1. An arbitral award, irrespective of the country in which it was made, shall be recognized as binding and, upon application in writing to the competent court, shall be enforced subject to the provisions of this article and of Article 36".

"Article 36. Grounds for Refusing Recognition or Enforcement of Arbitral Award.

1. Recognition or enforcement of an arbitral award, irrespective of the country in which it was made, may be refused only:

1) at the request of the party against whom it is invoked, if that party furnishes to the competent court where recognition or enforcement is sought proof that:

- the award was made regarding a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decision on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced; or

2) if the court finds that: - the recognition or enforcement of the award would be contrary to the public policy of Ukraine.

2. If an application for setting aside or suspension of an award has been made to a court referred to in the fifth point of subparagraph 1 of paragraph 1 of this article, the court where recognition or enforcement is sought may, if it considers it proper, adjourn its decision and may also, on the application of the party claiming recognition or enforcement of the award, order the other party to provide appropriate security".

Facts

On 25 July 2016, a Stockholm Chamber of Commerce (SCC) tribunal seated in Stockholm issued a partial consent award recording an agreement reached in a dispute between Ostchem Holding Ltd (Ostchem) and state-owned Odessa Portside Plant (OPP). In the award, the parties agreed that OPP would pay approximately USD 251 million to Ostchem to settle a contractual debt and penalties owed under a gas supply contract. Neither party sought to annul the award.

In January 2017, Ostchem commenced proceedings in Ukraine to recognise and enforce the partial award. The first instance and appellate courts granted Ostchem's petition and OPP appealed. The Supreme Court found various procedural violations and reversed both decisions and remanded the case to the first instance court. In doing so, it also provided certain instructions to the lower courts (see Legal update, SCC partial award capable of recognition and enforcement in Ukraine (Ukrainian Supreme Court).)

In August 2018, the case was remanded to the Kominternovskyi District Court in the Odessa region, as a first instance court, which terminated the proceeding upon Ostchem's request.

In November 2018, Ostchem filed a new petition to recognise and enforce the partial award in the Kyiv Court of Appeal. In the new petition, Ostchem rectified the procedural deficiencies of the initial petition, as per the instructions of the Supreme Court. It also obtained the necessary updated documents, namely, duly certified documents from the SCC Secretariat.

On 4 February 2019, OPP applied to join the State Property Fund of Ukraine (SPFU) as a third party, as it held a 99.57% share in OPP on behalf of Ukraine. On 14 February 2019, SPFU also filed a motion to be joined to the proceeding as a third party. Both OPP and SPFU alleged that any resulting decision might have implications on the operations of SPFU and on OPP's privatisation, which SPFU manages. On 15 February 2019, the court granted the motion, primarily, relying on the instructions from the Supreme Court.

In its defence to the motion for recognition and enforcement, OPP advanced two core arguments based on Article V of the New York Convention:

  1. The partial award was rendered in a dispute that fell outside the arbitration agreement. In particular, the parties had failed to comply with a contractually agreed cooling-off period of 30 days for negotiations before launching the arbitration. Due to that failure, the OPP claimed that the partial award did not fall under the arbitration agreement according to Article V(1)(c) of the New York Convention.
  2. Enforcement and recognition would violate the public policy of Ukraine under Article V(2)(b) of the New York Convention. Since Ukraine owned 99.57% of OPP's shares, and OPP had already temporarily suspended production to avoid further losses, collection under the award would cause a permanent suspension of operations, lead to bankruptcy and would create a technological and ecological catastrophe in the country.

SPFU also objected to the petition, raising a slightly different defence under Article V(2)(b) of the New York Convention. It claimed that amendments to the contract, dated 24 May 2013 and 16 December 2013, should have been pre-approved by it, but were not. It claimed that OPP is a company that Ukraine lists as strategically important for the economy and state security. Furthermore, SPFU argued that the contract was void under Ukrainian law and that the arbitral tribunal omitted this fact, which results in the partial award being contrary to public policy.

Decision

The Kyiv Court of Appeal granted Ostchem's petition, allowed recognition and enforcement of the partial award and ordered that OPP pay USD 251 million.

The Kyiv Court of Appeal found OPP's and SPFU's defences to enforcement unpersuasive. The court conducted its legal analysis in light of the three presumptions:

  1. The New York Convention obliges Ukraine to recognise and enforce foreign arbitral awards.
  2. In light of this obligation, Article V of the New York Convention stipulates an exhaustive list of grounds for refusing recognition and enforcement.
  3. The moving party bears the burden of proof.

Turning to OPP's and SPFU's defences, the court disagreed with OPP's interpretation of Article V(1)(c) of the New York Convention. It found that the term "a difference not contemplated by or not falling within the terms of the submission to arbitration" should be understood to cover situations where a substantive dispute arises as to say, non-performance of the contract and the parties fail partially or entirely to refer that dispute to the arbitral tribunal, but the tribunal nonetheless decides on it. Having so concluded, the Kyiv Court of Appeal reframed OPP's purported defence as a failure to adhere to pre-arbitration negotiations, which in the court's opinion, did not fall under Article V(1)(c) of the New York Convention.

The court was also not persuaded by OPP's and SPFU's public policy defence under Article V(2)(a) of the New York Convention. The Kyiv Court of Appeal observed that the partial award was rendered in a dispute as to contractual obligations typical under Ukrainian law. It also opined that state ownership cannot not discharge liability for non-performance of a contractual obligation and does not preclude the possibility of being a debtor under a court decision irrespective of the amount awarded. In the court's opinion, OPP and SPFU invoked the public policy defence to preserve their own financial interests, which, if upheld, would be tantamount to infringing Ostchem's private property rights.

Finally, the Kyiv Court of Appeal addressed SPFU's argument that the contract was void under Ukrainian law. Although this issue required a review of the merits, which Ukrainian courts are not supposed to conduct during an enforcement application, the court still determined that the contract was not void, but rather voidable. Having said that, the court found no grounds to deny recognition and enforcement of the partial award.

Comment

This decision illustrates the recent trend of Ukrainian courts giving effect to foreign arbitral awards, even where this may run contrary to the interests of state authorities.

However, with an appeal already lodged with the Supreme Court, this trend is to be further tested. More importantly, the Supreme Court will have to determine whether a contractually agreed pre-arbitration dispute resolution procedure is of a mandatory nature and whether non-compliance with it can serve as a barrier to enforcement. This is especially important given the recent decision in JKX Oil & Gas PLC and another v Ukraine, Case No 757/5777/15-ц in which the Supreme Court determined that non-compliance with the cooling-off period in a bilateral investment treaty was a potential ground for non-enforceability of the arbitral award (see Legal update, Ukrainian Supreme Court ends saga over enforcement of SCC emergency arbitrator award against Ukraine).

Case

Ostchem Holding Ltd v Odesa Portside Plant Case No 824/241/2018 (24 Apr 2019) (Judge Polyschyuk N.V.)