The Supreme Court (Ukraine) on the execution of the arbitration award against the Russian Federation on the territory of Ukraine

Date of publication: 14 March 2019

On 2 May 2018, the Arbitration Court (The Hague, Kingdom of the Netherlands) in the case No. 2015-36 decided to recover from the Russian Federation represented by the Ministry of Justice of the Russian Federation in favor of 17 companies and one individual over $ 140 million (the “Arbitration Award”). The case concerned compensation for immovable property that was illegally expropriated from the applicants after the occupation of the Crimea and in violation of Article 5 of the Agreement between the Cabinet of Ministers of Ukraine and the Government of the Russian Federation on the Encouragement and Mutual Protection of Investments of November 27, 1998 (“Agreement of 1998”).

It is necessary to note that the Russian Federation did not recognize the jurisdiction of the Arbitration Court and did not participate in the arbitration proceedings, although it was duly informed about this.

After rendering the Arbitral Award, the applicants applied to the Kyiv Appellate Court  ("KAC" as a court of the first instance) to decide on the recognition of the award and to grant permission for its execution in Ukraine.

As part of the consideration of this issue, the KAC made a decision of 09/05/2018 on securing the execution of the Arbitral Award, among other things, by imposing arrest on property owned by the Russian Federation, including registered shares

• PJSC Prominvestbank (Ukraine), owned by Vnesheconombank (Russian Federation),
• JSC Sberbank (Ukraine), owned by OAO Sberbank of Russia (Russian Federation),
• JSC "VTB Bank" (Ukraine), owned by VTB Bank (Russian Federation).

On 25.09.2018, the same court decided to recognize and grant permission to enforce the Arbitral Award on the territory of Ukraine.

The Russian Federation and banks did not agree with the decisions made and appealed to the Supreme Court.

On January 25, 2019, the Civil Court of Cassation as a part of the Supreme Court made a decision on appeals against the decisions of the KAC, by which the decision of 09/25/2018 was upheld and unchanged, and the decision of 09/05/2018 was partially changed.

Making such a decision, the Supreme Court considered legal issues, some of which deserve our attention and concern, namely:

• due notice to the Russian Federation,
• the jurisdiction of the Ukrainian courts concerning the enforcement of an arbitral award against a foreign state,
• judicial immunity of the Russian Federation and
• grounds for refusal to recognize and grant permission for the execution of the award.

Due notice to the Russian Federation

The Russian Federation referred to the fact that the KAC did not comply with the procedure for sending court documents in accordance with the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters of 1965, since the judicial documents were received in the Russian Federation without accompanying note verbale from Ukraine’s diplomatic mission accredited in the Russian Federation.

The Supreme Court rejected this argument and agreed that sending the summons directly to the Ministry of Justice of the Russian Federation was the due notification.

Jurisdiction of the Ukrainian courts

The Supreme Court recognized the jurisdiction of the courts of Ukraine regarding the resolution of the issue of recognizing and granting permission to enforce the Arbitral Award, since the property of the Russian Federation is located on the territory of Ukraine, including in its occupied part, which is a well-known fact. For example, it includes military and other property in the temporarily occupied territory of Ukraine. Given this, such circumstances do not require proof.

Judicial immunity of the Russian Federation

Appellants challenged the decisions of the appellate court on the grounds that they were made in violation of Article 79 of the Law of Ukraine "On International Private Law", that is, bringing a claim to a foreign state, attracting a foreign state to participate in the case as a defendant or a third party, imposing arrest on property belonging to a foreign state and located on the territory of Ukraine, the use in relation to such property of other means of securing a claim and foreclosure of such property was carried out without the consent of the competent authorities of the State concerned.

 The Supreme Court did not agree with these arguments, noting the following:

1. State immunity is the right to such a state and not a duty. According to international legal acts and the practice of their application by the overwhelming majority of states, the state may waive immunity in one of the following ways:

1) by an international treaty with the participation of the state;

2) by including in the contract a clause on the waiver of immunity (clause on the transfer of a dispute, if it occurs, to the relevant jurisdictional authority)

3) through the proclamation of the relevant statement after the opening of the proceedings.

2. The Russian Federation signed the UN Convention on Jurisdictional Immunities of States and Their Property of 2004 and outlined its concept of limited jurisdictional immunity of the state separately in Federal Law of the Russian Federation of 03.11.2015 N 297-ФЗ "On Jurisdictional Immunities of a Foreign State and Property of a Foreign State in the Russian Federation".

3. Ukraine is not a party to the 1972 European Convention on Immunity of States and the mentioned UN Convention, however, the concept of limited jurisdictional immunity of the debtor state set forth in them is used in Ukraine in accordance with the customary international law, taking into account the ECHR Judgment of March 14, 2013, in the case of Oleynikov v. Russia (Application no. 36703/04).

4. Including in the Agreement of 1998 an arbitration clause and stipulating in it the finality and binding nature for both parties of the arbitral award adopted on the basis of any dispute arising from this Agreement, the debtor - the Russian Federation ipso facto agreed to waive the types of state immunity provided for in Article 79 Law of Ukraine "On International Private Law" and the UN Convention on Jurisdictional Immunities of States and their Property of 2004, namely:

a) immunity from filing a claim against a foreign state,

b) immunity from pre-judgment measures,

c) immunity from the enforcement of a court decision.

The grounds for refusal to recognize and execute the Arbitration Award

The Supreme Court agreed with the conclusions of the KAC that there were no grounds for refusing recognition and granting permission to enforce the Arbitral Award.

The Supreme Court noted that the participants in the case, challenging the validity of the arbitration agreement, did not provide the court with adequate evidence

•  to refute the validity of the arbitration agreement provided for in Article 9 of the Agreement of 1998, as well as the fact that
•  the execution of the award will be contrary to the public policy of Ukraine.

The Supreme Court noted that, as a rule, a violation of public order as a basis for refusing to recognize and grant permission to enforce a foreign arbitral award is a kind of mechanism that secures the priority of state interests over private ones and thus protects the public order of the state from negative impacts on it. A clause on public order in international civil proceedings does not allow recognition of a court decision on the territory of a state if, as a result of its execution, there are actions that are expressly prohibited by law or cause damage to the sovereignty or security of the state.

At the same time, in this case, the debtor is not Ukraine, but the Russian Federation, the fact of whose aggressive actions on the territory of the Autonomous Republic of Crimea of the State of Ukraine is confirmed by a number of documents of international organizations and acts of internal legislation of Ukraine.

The Arbitral Award for awarding the amount in compensation for the property of applicants illegally expropriated by the Russian Federation in the territory of the Autonomous Republic of Crimea of the State of Ukraine concerns property owned by the debtor, the Russian Federation.

Our Comments

In this case, the Supreme Court consecutively analyzed the arguments of the parties and set out a clear legal position regarding the possibility of enforcing arbitration court decisions on the territory of Ukraine, according to which the defendant is a foreign state. Especially critical in this case are the court's approaches to determining the jurisdiction of the Ukrainian courts and the immunity of a foreign state.

Taking into account the number of cases initiated against the Russian Federation, including due to the occupation of part of the territory of Ukraine, this decision indicates the possibility of implementing other similar decisions in Ukraine with the presence of the debtor’s relevant property. Also, it is possible that such property can be not only in the form of registered shares of banks.