The publication was posted on the website of CIS Arbitration Forum.
In an earlier post the CIS Arbitration Forum reported on three investment treaty claims which have been initiated this year against Ukraine in the gas sector.
In one of them a UK-based energy company, JKX Oil & Gas, and its Dutch and Ukrainian subsidiaries, Poltava Gas B.V. and JV Poltava Petroleum Company, obtained the first ever emergency arbitration award against Ukraine and initiated its recognition and enforcement in Ukraine.
On 8 June 2015, the Pecherskyi District Court of Kyiv granted permission to enforce this emergency arbitration award on the basis of the New York Convention, thus adding Ukraine to the pool of jurisdictions open to enforcement of interim measures issued by foreign arbitral tribunals. But the claimants’ joy was short-lived.
Three months later the Court of Appeal overturned the ruling of the first instance court and refused enforcement on grounds of public policy, although confirming, as a matter of principle, enforceability of such kind of awards under the New York Convention. The case is now pending before the third instance court and is interesting in many aspects, both from a Ukrainian and international perspective.
The case concerns rental fees that JKX’s Ukrainian subsidiary spent on gas and oil production since 2011 and a recent increase of the royalties on gas production to 55 per cent among other issues.
On 13 November 2014 the Claimants sent a request for amicable settlement under the Energy Charter Treaty (the “ECT”), the UK-Ukraine BIT and the Netherlands-Ukraine BIT to the Presidential Administration of Ukraine. Three months later – on 13 February 2015 – they filed a request for arbitration against Ukraine under the SCC Arbitration Rules. In between, on 7 January 2015 – the day of Orthodox Christmas in Ukraine – they requested emergency measures under the Emergency Arbitrator provisions of the SCC Rules 2010. A week later the Emergency Arbitrator issued an award ordering Ukraine to abstain from imposing royalties exceeding 28 per cent (ie the rate set out by the Tax Code of Ukraine till 31 July 2014) on gas production by JKX’s Ukrainian subsidiary during the arbitral proceedings.
Proceedings before Pecherskyi District Court of Kyiv
The Claimants requested recognition and enforcement of the Emergency Arbitrator Award in Ukraine under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “NYC”). Ukraine raised several objections against enforcement of the Emergency Arbitrator Award in Ukraine, also relying on the NYC provisions.
First, the arbitral procedure was not conducted in compliance with the parties’ agreement. Ukraine alleged that the Claimants did not comply with the mandatory three-month cooling-off period under Article 26(2) of the ECT, and that they were thus not entitled to apply for interim measures to the SCC, and further that the Emergency Arbitrator was not entitled to grant respective interim measures.
Second, Ukraine was not duly notified about the emergency proceedings, and, accordingly, was unable to present its case as required by Article V(1)(b) of the NYC.
Third, the Emergency Arbitrator Award did not fall within the terms of the parties’ arbitration agreementsince Ukraine ratified the ECT in 1998, when the SCC Rules did not contain provisions on emergency arbitrators.
Fourth, enforcement of the Emergency Arbitrator Award would violate the public policy of Ukraine and threaten its interests, as types and rates of taxes could only be determined by the Tax Code of Ukraine, and alteration of the mandatory payments amounts would alter the royalty rate for natural gas production and would result in a material deterioration of the state’s economy.
The Pecherskyi District Court of Kyiv dismissed all these objections and granted enforcement of the Emergency Arbitrator Award in Ukraine on the basis of the NYC provisions.
In particular, it found that (i) the three-month period is established by the ECT, not by the arbitration agreement, and this excludes application of Article V(1)(b) of the NYC; (ii) the parties submitted documentary evidence confirming that the Emergency Arbitrator sent the notifications by e-mail and granted opportunity to present the case to all the parties, and that lack of reaction to those notifications could not amount to the lack of proper notification; (iii) the emergency arbitration proceedings were in conformity with the Arbitration Rules in force at the moment of filing of an application for the appointment of an Emergency Arbitrator; and (iv) the Emergency Arbitrator’s award in this case aims to prevent breach of the claimants’ interests, does not establish any other rules than those in force at the territory of Ukraine and concern the Claimants only.
Proceedings before the Court of Appeal
Ukraine appealed against the ruling of the Pecherskyi District Court of Kyiv, relying on the same arguments.
The Court of Appeal dismissed the first three arguments, but agreed with the fourth one. And on 17 September 2015 it granted the appeal, overturned the first instance court ruling and refused enforcement of the emergency arbitrator award in Ukraine.
When analysing Ukraine’s objections against enforcement, the Court of Appeal applied to the NYC and the formal ground for refusal was Article V(2)(b) of the latter, ie it found that the enforcement of the award would violate the public policy of Ukraine, defined in the Resolution No.12 of the Supreme Court of Ukraine of 24 December 1999 as:
[…] the legal order of a state, the determinative principles and foundations, which constitute the basis of its policy (pertaining to its independence, integrity, autonomy and inviolability, its fundamental constitutional rights, freedoms, guarantees etc.)
The Court of Appeal found that the enforcement of the Emergency Arbitrator Award shall entail the change of the tax rate applicable to the Claimants, while only the Tax Code of Ukraine may determine such issues. Granting courts the competence to alter tax rates in violation of the Tax Code of Ukraine would breach the fundamental and determinative principles of taxation established in Ukraine. And in addition Ukraine would suffer significant losses and they could cause economic deterioration of Ukraine.
In this light, the Court of Appeal rendered that the recognition and enforcement of the Arbitral Award would violate the public policy of Ukraine.
However, despite the negative outcome of JKX case, the Court of Appeal in fact confirmed enforceability of the interim measures issued by foreign arbitral tribunals in Ukraine under the NYC.
Final v Binding
Still, surprisingly, the case did not raise another interesting question, namely the finality of the Emergency Arbitrator Award.
One may notice that there is a crucial difference between the English and Russian language versions of Article V(1)(e) of the NYC. In particular, the English version requires the award to become “binding” on the parties, while the Russian text contains the wording “окончательный“, which means “final”. Needless to say, the latter allows opposition to enforcement of an emergency arbitrator award on the grounds that it is not final.
Ukraine was one of the signatories of the NYC and at the time of ratification and further succession it was not necessary to translate it officially into Ukrainian. So in practice during all these years Ukrainian arbitration practitioners relied on the Russian version of the NYC in respective enforcement proceedings before the Ukrainian courts. Absence of an official translation poses an interesting hypothetical question. If a Ukrainian court is to decide the objections under this particular provision of Article V(1)(e) of the NYC, which wording it should rely upon and which standard, “final” or”binding”, it should apply to the award?
Article XVI of the NYC prescribes that its Chinese, English, French, Russian and Spanish texts shall be equally authentic. However, compliance with both “final” and “binding” requirements would be not only extensively burdensome, but further inconsistent with the nature of the NYC.
On these grounds, profound interpretation of the NYC seems the only way out to resolve the above controversy.
The most notable and comprehensive approach in this respect was developed in Kahn Lucas Lancaster Inc. v Lark International LTD., where the United States Court of Appeals, Second Circuit dealt specifically with interpretation of the NYC in the light of contradictions between its “equally authentic” language versions, and made the following findings.
First, the Court found that:
Some of the official languages provide more insight into the drafters’ intent than others: Of the five official languages, English, French, and Spanish were the working languages of the United Nations Conference on International Commercial Arbitration, which drafted the Convention. All records of Conference meetings were kept in these working languages.
In this regard, the Court (quite relevantly to the case) went on to state that “we are reluctant to allow the seemingly contradictory Russian-language version to dictate a different result.”
Second, the Court found that “the legislative history of the Convention puts the matter to rest“ in resolving any remaining ambiguity.
Application of this two-tier test in our situation confirms that the Russian version of Article V(1)(e) of NYC contradicts both the versions of the NYC in the working languages and the legislative history of the Convention.
In particular, the English version – “The award has not yet become binding”, the French version – “Que la sentence n’est pas encore devenue obligatoire” and the Spanish version – “Que la sentencia no es aún obligatoria” expressly lead to the sole application of the term “binding” and do not require the award to be final.
As to the legislative history, the “finality” requirement was subject to many discussions in the Working Group, which rejected it as burdensome and inadequate, and preferred the “binding” requirement instead. [UN DOC E/CONF.26/L.43].
Leaving without comment why, contrary to these discussions in the Working Group, the Russian version of the NYC contains the term “final”, we can definitely answer our hypothetical question: the Ukrainian court should rely on other language versions and apply the “binding” standard.
The proceedings in the JKX case are now pending before the High Specialised Court of Ukraine for Civil and Criminal Cases. And the arbitration community looks forward to hearing its findings on the public policy issue. Meanwhile the ruling of the Court of Appeal is in force and confirms that in principle the emergency arbitrator awards could be enforced in Ukraine.