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Ukrainian court allows British investor to secure partial recognition and enforcement of UNCITRAL arbitration award against Ukraine
Автор: Маркіян Ключковський, Олександр Волков
Джерело: Thomson Reuters Practical Law . – 14 серпня 2019 року
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In JKX Oil & Gas PLC v Ukraine, Case No 824/22/19, the Kyiv Court of Appeal allowed partial recognition and enforcement of an UNCITRAL arbitration award rendered in favour of a British investor against Ukraine.

Speedread

The Kyiv Court of Appeal has partially recognised and enforced an UNCITRAL arbitration award rendered in favour of a British investor against Ukraine, under the UK-Ukraine bilateral investment treaty. In particular, the court rejected most of the defences to enforcement that were advanced by Ukraine, including denial of due process, lack of jurisdiction and the public policy defence. Although Ukraine prevailed in one narrow defence, the court enforced the remaining part of the award.

Under the denial of due process defence, Ukraine had claimed that the arbitration procedure was too expeditious, which prevented Ukraine from duly presenting its case. Having established that Ukraine's counsel participated in fixing the procedural timetable, the court disagreed with Ukraine. It considered that five months for filing its statement of defence upon receiving the statement of claim, and eight months for filing a rejoinder, was sufficient time for Ukraine to present its case.

Under the jurisdictional defence, Ukraine argued that there was no investment under the BIT, alleging that the investor made the investment in a fraudulent manner and manipulated documents. The Kyiv Court of Appeal also rejected this argument due to lack of proper and admissible evidence.

However, the court upheld Ukraine's defence that the tribunal exceeded its powers by requiring the National Bank of Ukraine (NBU) to undertake all necessary measures to ensure repatriation of dividends. The court held that the arbitration agreement in the BIT only applied between an investor and Ukraine, with no extension to Ukrainian public authorities. Therefore, the tribunal's ruling with respect to the NBU contradicted the public policy of Ukraine. At the same time, this finding did not affect the enforceability of the rest of the award.

This decision is one of the first decisions allowing recognition and enforcement of an investment treaty arbitral award against Ukraine by local courts. It is also notable that the Kyiv Court of Appeal allowed not only an award of damages, but also non-damages relief, which is rare in Ukrainian case law. Ukraine is likely to appeal to the Supreme Court. (JKX Oil & Gas PLC v Ukraine, Case No 824/22/19) (5 July 2019).)

Background

The exhaustive lists of grounds for refusal of enforcement and recognition of a foreign arbitral award in Ukraine are set out in Article V of the New York Convention, Article 36 of the Law of Ukraine "On international commercial arbitration" and Article 478 of the Civil Procedure Code of Ukraine. These lists are similar in substance but contain different wording. They are frequently invoked together by the national courts.

Article 36 of the Law of Ukraine "On international commercial arbitration" and Articles V(1)(b)-(c) and V(2)(b) of the New York Convention provide:

"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 the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case, or 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".

"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 the recognition or enforcement of the award would be contrary to the public policy of that country".

Articles 26 and 27 of the Vienna Convention on the Law of Treaties (VCLT) also impose particular obligations on states:

"Article 26

Pacta sunt servanda

Every treaty in force is binding upon the parties to it and must be per formed by them in good faith". "Article 27

Internal law and observance of treaties

A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty."

Article 7 of the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Ukraine for the Promotion and Reciprocal Protection of Investments (UK-Ukraine bilateral investment treaty (BIT) provides: "Article 7

Repatriation of Investment and Returns

Each Contracting Party shall in respect of investments guarantee to investors of the other Contracting Party the unrestricted transfer of their investments and returns. Transfers shall be effected without delay in the convertible currency in which the capital was originally invested or in any other convertible currency agreed by the investor and the Contracting Party concerned. Unless otherwise agreed by the investor transfers shall be made at the rate of exchange applicable on the date of transfer pursuant to the exchange regulations in force".

Facts

In 2014, in the midst of deteriorating conflict with the Russian Federation, Ukraine implemented several measures that targeted foreign and national companies engaged in the oil and natural gas industry. Among other measures, Ukraine temporarily increased royalties for extracting natural gas from 15% to 28% and from 28% to 55%, depending on the depth of extraction (royalties). It also obliged industrial companies to purchase natural gas exclusively from state-owned giant NJSC "Naftogaz of Ukraine", and via the National Bank of Ukraine (NBU), imposed various limitations on transfers of funds abroad, including payment of dividends (NBU restrictions). Although these measures were stated to be temporary, at the end of 2014, Ukraine extended most of them into 2015.

In early 2015, JKX Oil & Gas PLC (JKX), a British investor, along with its Dutch and Ukrainian subsidiaries, Poltava Gas BV (Poltava) and JV Poltava Petroleum Co (JV), respectively, launched three separate investment arbitrations: one under the UK-Ukraine BIT (UNCITRAL arbitration proceeding); one under the Netherlands-Ukraine BIT (ICSID arbitration proceeding); and the other under the Energy Charter Treaty (ECT) (SCC arbitration proceeding). As a preliminary matter, JKX and its subsidiaries succeeded in obtaining an SCC emergency arbitrator award, which they unsuccessfully attempted to enforce in Ukraine (see Legal update, Ukrainian Supreme Court ends saga over enforcement of SCC emergency arbitrator award against Ukraine).

In spring 2015, that parties agreed to consolidate the three proceedings and opted for all claims to be considered within the UNCITRAL arbitration proceedings seated in London. The two remaining arbitrations were discontinued.

On 6 February 2017, the UNCITRAL tribunal issued an award, dismissing the majority of the investors' claims estimated at $250 million in total. However, JKX, Poltava and JV prevailed with its argument that the NBU restrictions were illegal. The UNCITRAL tribunal ordered Ukraine to pay USD11.8 million plus interest and, under Article 7 of the UK-Ukraine BIT, required Ukraine to allow JV to freely transfer dividends in US dollars to Poltava, irrespective of any limitations set by Ukrainian law. In addition, the tribunal ordered the NBU to undertake all necessary measures to ensure repatriation of dividends.

Ukraine challenged the award before the English High Court. On 27 October 2017, Sara Cockerill QC sitting as a High Court judge, dismissed that challenge.

In parallel, in 2015, Ukrainian tax authorities launched an action to collect the unpaid royalties from JKX (tax litigation). The amount of JV's unpaid royalties, including accrued interest and fines, reportedly, significantly exceeds the debt under the award. The tax litigation is pending before the Ukrainian courts.

In February 2019, JKX applied to the Kyiv Court of Appeal for recognition and enforcement of the UNCITRAL arbitration award. Ukraine, represented by the Ministry of Justice of Ukraine (MOJ), raised several defences against the application. The MOJ relied on Article V of the New York Convention, alleging that Ukraine was not able to present its case, that the award dealt with an issue falling outside the scope of arbitration agreement and that its enforcement would be contrary to public policy. Furthermore, the MOJ claimed that the UNCITRAL tribunal exceeded its powers by imposing an obligation on NBU, which was not a party to the arbitration agreement. JKX denied MOJ's arguments.

Decision

The Kyiv Court of Appeal rejected all but one of the defences raised by Ukraine and allowed partial enforcement and recognition of the UNCITRAL arbitration award.

The Kyiv Court of Appeal rejected Ukraine's argument on violation of the process, finding that the tribunal was granted sufficient time to present its case. The court considered that Ukraine and its representatives had the opportunity to present their case and had participated in forming the procedural timetable. Further, it considered that five months for filing its statement of defence upon receiving the statement of claim, and eight months for filing a rejoinder, was sufficient time for Ukraine to present its case. The court also rejected as unfounded Ukraine's claim that it lacked resources due to the emergency arbitration proceeding.

The Kyiv Court of Appeal also disagreed with the MOJ that the dispute, considered by the UNCITRAL tribunal, did not fall under the scope of arbitration agreement due to illegality of the investment. In particular, Ukraine claimed that JKX defrauded the state and manipulated documents in respect of the investment, and therefore, the investor should not benefit from the BIT's protections. However, the court found lack of proper and admissible evidence supporting Ukraine's contention.

On the obligation of free transfer of dividends in a foreign currency, irrespective of any limitations set by Ukrainian law, the court disagreed with Ukraine that this obligation would be contrary to public policy and the tribunal exceeded its powers when rendering such relief. By relying on Article 7 of the UK-Ukraine BIT, which ensures the free transfer of dividends, the court concluded that the UNCITRAL tribunal had validly granted declaratory relief, which is plainly envisaged in the UK-Ukraine BIT. More importantly, the court invoked Articles 26 and 27 of the VCLT, which obliges states to comply with provisions of international treaties and prohibits them from invoking the provisions of internal law to justify non-compliance with a treaty. Therefore, the court upheld the conclusions of the UNCITRAL tribunal.

However, the court upheld Ukraine's defence on excess of powers in relation to the tribunal ordering the NBU to undertake all necessary measures to ensure repatriation of dividends. By closely considering the arbitration agreement, set out in the BIT and in the agreement to consolidate the proceedings, the court determined the existence of privity between an investor and Ukraine only. Therefore, it was contrary to the public policy of Ukraine to impose this requirement on the NBU in the absence of an arbitration agreement. At the same time, this finding did not affect the enforceability of remaining part of the UNCITRAL award.

Comment

This decision is one of the first decisions allowing recognition and enforcement of an investment treaty arbitral award against Ukraine by local courts. Ukraine will most likely pursue an appeal with the Supreme Court, which will reassess the parties' arguments and conclusions of the first instance court. If the decision survives scrutiny, it will allow JKX to set-off its royalty debts owed to Ukraine. Therefore, this decision may only decrease JKX's debts of and may be part of future settlement negotiations.

It is also notable that the Kyiv Court of Appeal allowed not only recovery of damages, but also non-monetary relief, which is rare in Ukrainian case law. As to the actual enforcement of this non-monetary obligation, it is worth monitoring how the decision will be executed, and in particular whether the NBU will comply with Ukraine's obligation to disregard its national law to ensure free transfer of funds abroad.

Case

JKX Oil & Gas PLC v Ukraine, Case No 824/22/19 (5 July 2019).