DCIM100MEDIA

The Ukrainian Supreme Court ruled in September 2018 on recognition and enforcement of the emergency arbitral award (the “Emergency Award”) rendered under the Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce (the “SCC Rules”) in JKX Oil & Gas plc et al v. Ukraine case. The respective decision is remarkable for international legal and business community for being the first case in Ukraine, where the Supreme Court considered the issue of enforceability of the emergency arbitral award in Ukraine. While the Supreme Court refused recognition and enforcement of the Emergency Award in Ukraine, such refusal was based on the grounds that enforcement of the Emergency Award would be contrary to the public policy of Ukraine due to violation of the fundamental principles of the Ukrainian tax legislation and also that Ukraine was not given proper notice of the respective arbitration proceedings. Notwithstanding the above, the Supreme Court did not rule out the possibility of recognition and enforcement of the emergency arbitral awards in principle in Ukraine.

Background

The dispute between Ukraine and the companies JKX Oil & Gas PLC, Poltava Gas B.V. and Poltava Petroleum Company JV (“JKX”) arose in July 2014, when the Ukrainian government enacted the amendments to the Tax Code of Ukraine, which provided for increase of royalties on extraction of natural gas from 28% to 55% until 1 January 2015.

Considering that such actions of the Ukrainian government violate the rights of JKX as Ukrainian investor under the bilateral investment treaties between Ukraine and the United Kingdom, Ukraine and the Netherlands and the Energy Charter Treaty (the “Investment Treaties”), in November 2014, JKX filed with the Administration of the President of Ukraine the written notification of the investment dispute.

In December 2014, the Ukrainian government decided to extend the increase of royalties on extraction of natural gas until the end of 2015, which compelled JKX to commence an emergency arbitration proceedings under the SCC Rules to obtain the emergency arbitral award restraining Ukraine from collecting royalties from JKX in the amounts that exceed 28%.

On 14 January 2015, the Emergency Arbitrator Prof. Rudolf Dolzer rendered the Emergency Award, according to which Ukraine was ordered to refrain from collecting royalties from JKX in the amounts that exceed 28%.

Due to the non-compliance of Ukraine with the Emergency Award, in February 2015, JKX applied to the Ukrainian courts for recognition and enforcement of the Emergency Award.

The case was considered by the Ukrainian courts in several rounds.

The final decision in the case was rendered by the Supreme Court on 19 September 2018.

Decision

The Supreme Court refused recognition and enforcement of the Emergency Award in Ukraine on the basis that (i) recognition and enforcement of the Emergency Award in Ukraine would be contrary to the public policy of Ukraine, and (ii) Ukraine was not given a proper notice of the arbitration proceedings.

As regards the contemplated violation of the public policy, the Supreme Court held that recognition and enforcement of the Emergency Award would de facto lead to establishment by the court of the special royalties’ rates for the particular Ukrainian taxpayer. In such circumstances, the above would violate the fundamental principles of the tax legislation envisaged in the Tax Code of Ukraine, according to which the tax and royalties’ rates shall be established by law only.

Additionally, the Supreme Court held that JKX did not comply with the three-month cooling-off period established by the Investment Treaties. In this respect, the Supreme Court noted that JKX filed the written notification of the investment dispute with the Administration of the President of Ukraine, whereas in accordance with Ukrainian legislation the respective notification should have been filed with the Ministry of Justice of Ukraine. Therefore, the Supreme Court found that Ukraine was not notified of the investment dispute in accordance with the Investment Treaties. In this regard, the Supreme Court opined that such failure to notify Ukraine of the investment disputes shall be viewed as failure to give a proper notice of the arbitration proceedings under Article V(1)b of the New York Convention.

The Supreme Court did not explicitly opined on the issue of whether the emergency arbitral awards can be in principle recognized and enforced in Ukraine. However, the Supreme Court while considering the possibility of recognition and enforcement of the Emergency Award in Ukraine scrutinized it under the provisions of Article V of the New York Convention, which suggests that the Supreme Court found the New York Convention applicable to the recognition of the Emergency Award. Therefore, the Supreme Court did not rule out the possibility of recognition and enforcement of such arbitral awards.

Practical Implications

The decision of the Supreme Court in JKX Oil & Gas plc et al v. Ukraine case is the first case in Ukraine, where the Supreme Court considered the issue of recognition and enforcement of the emergency arbitral award. While the Supreme Court did not opined explicitly on whether the emergency arbitral award can be recognized and enforced in Ukraine under the New York Convention, the Supreme Court left open the possibility of recognition and enforcement of such arbitral awards in future proceedings.

Whereas the respective decision is well-known mostly for being the first case, where the Supreme Court considered the issue of enforceability of the emergency arbitral award in principle, the respective decision also contains conclusions of the Supreme Court as regards the application of Articles V(2)b and V(1)b of the New York Convention, which should be taken into account by the legal and business community.

In particular, in light of the respective decision of the Supreme Court, the parties to the arbitration proceedings need to be more prudent when requesting the arbitral tribunal to impose specific interim measures.

Moreover, if the arbitration agreement of the parties or the applicable international treaty provides for the cooling-off period, the claimants of the contemplated arbitration proceedings need to comply with the procedure of notification of the arbitration proceedings as provided by Ukrainian law. Such measures should mitigate the risk of refusal of enforcement of arbitral awards by the Ukrainian courts under the New York Convention.