In JKX Oil & Gas PLC and another v Ukraine, Case No 757/5777/15-#, the recently reformed Ukrainian Supreme Court considered whether the Kiev Appeal Court erred in concluding that recognition and enforcement of a Stockholm Chamber of Commerce (SCC) emergency arbitrator award was contrary to Ukrainian public policy.
Recognitions and enforcement defence
Ukrainian respondents in recognition and enforcement of foreign arbitral award proceedings frequently rely on the defence of lack of proper notification of the arbitral proceedings and on public policy grounds. Such rules are stipulated in Article 396(2) of the Civil Procedure Code of Ukraine, as well as in Articles V(1)(b) and V(2)(b) of the New York Convention:
"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."
"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."
Taxation principles and public policy defence
The Ukrainian courts have broadly interpreted the public policy principle recognising it as the legal order of the state including various fundamental principles and grounds relating to its independence, unity, self-governance, inviolability, fundamental constitutional rights, freedoms, guarantees, and the like (see paragraph 12 of Resolution No. 12 of the Plenum of the Supreme Court of Ukraine, dated 24 December 1999).
Article 92 of the Ukrainian Constitution mandates the imposition of taxes and duties exclusively by laws, which are promulgated by the Verkhovna Rada of Ukraine (Parliament). According to Article 1.1 of the Tax Code, Ukrainian law imposes an exhaustive list of taxes and duties and the order of administration thereof. Only the Tax Code of Ukraine sets specific grounds for tax privileges and procedure for their application. No authority other than Parliament may pass laws, and therefore amend taxes and duties imposed.
Article 7.3 of the Tax Code of Ukraine provides:
"Any question in relation to taxation shall be governed by this Code and could not be imposed or amended by other laws of Ukraine, except to the laws, that contain exclusively provisions relating to amendments to this Code and/or provisions, which impose liability for breach of tax legislation."
Noncompliance with the Energy Charter Treaty cooling off period The Energy Charter Treaty (ECT), which is considered part of the national law of Ukraine, stipulates at Article 26 (2) an obligation to comply with the so-called "cooling-off period" of three months before an investor may commence proceedings against the state:
"If such disputes cannot be settled according to the provisions of paragraph (1) within a period of three months from the date on which either party to the dispute requested amicable settlement, the Investor party to the dispute may choose to submit it for resolution."
The underlying facts of this case are set out in Legal update, Kiev Appellate Court refuses to recognise and enforce SCC emergency arbitrator award in investment dispute against Ukraine. In brief, JKX Oil & Gas PLC (JKX) and its wholly owned subsidiaries notified Ukraine via the Presidential Administration of Ukraine of a dispute under the ECT, among others, and requested amicable settlement.
No amicable resolution having been reached emergency arbitration proceedings under the SCC Rules were initiated and an emergency award rendered. Enforcement of the emergency award was refused by the Kiev Appellate Court on the basis, among other things, of public policy grounds and a failure to give proper notice.
In January 2017 JKX, Poltava Gas and JV Poltava Petroleum Co filed separate appeals to the High Specialized Court of Ukraine for Civil and Commercial Matters. On 15 December 2017 the reformed Supreme Court substituted the High Specialized Court of Ukraine for Civil and Commercial Matters and the appeals moved for consideration of the newly established court.
In the proceedings before the Supreme Court the petitioners alleged that the Kiev Appeal Court in refusing recognition and enforcement of the emergency arbitrator award incorrectly applied Article V(2)(b) of the New York Convention and Article 7.3 of the Tax Code of Ukraine. They alleged that Ukrainian courts frequently apply suspension of collection of taxes and other mandatory payments as interim measures of protection and that this is not considered a breach of Ukrainian public policy. Therefore, the appellate court misconstrued public policy and incorrectly applied Article V of the New York Convention and Article 7.3 of the Tax Code of Ukraine.
The Supreme Court upheld the decision of the Appellate Court.
The court began by considering the public policy defence. It referred to the definition of public policy set out in the Resolution of the Plenum of the Supreme Court in 1999, which defines public policy as the legal order of the state, its basic principles and foundations, which comprise the basis for its functioning.
The court found that relations in the field of taxation and collection of duties are governed by the Tax Code of Ukraine, which imposes mandatory rules, which cannot be altered other than by amending the Code. The court also established that only the Tax Code stipulates the grounds for granting tax preferences and sets procedures for their application. The court concluded that recognition and enforcement of the emergency award would lead to a change of royalties, which the courts are not authorized to order under Ukrainian law. Thus, the requirement imposed by the emergency award to refrain from imposing royalties exceeding 28% goes against the basic principles of taxation and therefore, violates Ukrainian public policy.
The Supreme Court also dealt with an issue that was not previously raised before the lower courts. It analysed Article 26(2) of the ECT and held that an investor wishing to bring a claim against a state is obliged to comply with the three-month cooling-off period and to try to amicably negotiate with the state.
In the opinion of the Supreme Court, since the investors sent their notice of dispute to the Presidential Administration of Ukraine and not to the Ministry of Justice of Ukraine, (the body authorised to conduct negotiations on behalf of Ukraine), they failed to comply with the cooling-off period. This constituted an independent ground to refuse recognition and enforcement of the emergency award under the New York Convention.
The Ukrainian Supreme Court has finally ended the saga concerning the recognition and enforcement of an emergency award. Although the higher courts ultimately annulled the first instance court decision enforcing the emergency award, none of the higher courts including the Supreme Court, explicitly stated that an emergency award cannot in principle be enforced in Ukraine. Therefore, there is a chance that future efforts to enforce emergency awards in Ukraine will be successful.
The Supreme Court upheld the ruling of the Appellate Court and developed its ratio that arbitral tribunals and courts may not substitute a Ukrainian legislator and amend state regulatory measures, which can only be done through legislative procedures. Therefore, investors initiating emergency arbitration proceedings against a state should carefully consider the relief they will request and scrutinise it against the functions of state authorities.
Further, investors should consider carefully all procedural steps required to commence arbitration, including compliance with the cooling-off period, since, at least in Ukraine, such non-compliance may lead to the ultimate non-enforceability of the award.
JKX Oil & Gas PLC and another v Ukraine, Case No 757/5777/15-ц (19 September 2018).
Reproduced from Practical Law Arbitration with the permission of the publishers. For further information visit www.practicallaw.com