Kyiv Commercial Court Reviews ICSID Award Against Ukraine

A recent decision of the Kyiv Commercial Court is of particular importance to arbitration practitioners since it concerns not only issues related to the invalidation of a joint investment activities agreement, but also the application of the findings of the ICSID Tribunal which were previously made in respect of this agreement. The Ukrainian court invalidated the agreement which the ICSID tribunal had previously recognised as “legitimate”.

The Kyiv Commercial Court invalidated the 1999 Agreement on Joint Investment Activities between, among others, Alpha Projektholding GmbH and the Ukrainian Hotel “Dnipro” and certain addenda thereto (the “1999 JIA Agreement”). Earlier, the same agreement had been the basis of a major part of Alpha’s claims in an ICSID arbitration against Ukraine, which resulted in an award in Alpha’s favour rendered in 2010.

On 23 May 2012 the Commercial Court in the city of Kyiv held that the 1999 JIA Agreement was invalid, since (a) it was a mock transaction and (b) the terms and conditions of the agreement contradicted the provisions of the Civil Code of the USSR and the Act of Ukraine on Investment Activities (effective as of the date of the 1999 JIA Agreement execution).

The above judgment was rendered by the Kyiv Commercial Court despite the fact that on 20 October 2010 an ICSID tribunal had already considered the JIA Agreement and held it to be “legitimate”. The Ukrainian court expressly refused to follow the ICSID tribunal’s award. The case is interesting because an ICSID tribunal’s award was recognised and enforced in Ukraine and the amount awarded in the ICSID arbitration has apparently already been paid to the claimant.

The ICSID case

In the ICSID case Alpha Projektholding GmbH v Ukraine, Alpha claimed violations by Ukraine of its obligations under the BIT with Austria and certain provisions of the Act of Ukraine on Foreign Investment. The dispute concerned Alpha’s investment in the renovation of Hotel Dnipro in Kiev, which was carried out under several agreements including the 1999 JIA Agreement.

Under the 1999 JIA Agreement the hotel was required to make regular payments to Ukraine. However, the transfer of authority to manage the state’s ownership of Hotel Dnipro from the State Tourist Administration to the State Administration of Affairs in 2004 resulted in a complete cessation of all payments owed to Alpha under the investment agreements, including the 1999 JIA Agreement.

In the arbitration proceedings, Alpha argued that Ukraine had violated its investment obligations by ordering Hotel Dnipro to cease making payments and performing other contractual obligations owed to Alpha.

In its award of 20 October 2010 the ICSID tribunal found that (i) “[Alpha] has been deprived of all remaining value of the… [1999 JIA Agreement]”, (ii) generally the 1999 JIA Agreement is a “legitimate joint activity agreement…”, while concluding that (iii) some of the provisions of the JIA Agreement were invalid.

The ICSID tribunal concluded that Ukraine had expropriated Alpha’s rights and interests in the JIA Agreements and violated the fair and equitable treatment guarantee provided by the BIT.

The ICSID Tribunal ordered Ukraine to pay USD 2,979,232 with additional interest accruing from July 1, 2004, at a rate of 9.11 percent compounded annually. This ICSID case was the first investment proceeding ever to be lost by Ukraine.

It is worth noting that on 23 June 2011 the Pecherck District Court of Kyiv recognised and enforced the said ICSID award in Ukraine. Moreover, according to the Ministry of Justice, Ukraine has already paid UAH 44,696,400.00 (approximately USD 5,587,050.00) to the claimant.

The ICSID award is available here (in English).

Findings of the Kyiv Commercial Court

The Ukrainian court rejected Alpha’s argument that the JIA Agreement had been recognised as a “legitimate joint activity agreement” in full compliance with the Ukrainian legislation by an ICSID tribunal. The Kyiv Commercial Court reasoned that the tribunal had not considered the validity of the JIA Agreements “as a whole”.

In the proceedings, the Deputy Prosecutor of Kyiv, who acted in the interests of the Ukrainian state authorities, claimed that the 1999 JIA Agreement violated mandatory provisions of Ukrainian legislation effective as of the date of conclusion of the agreements in question.

In particular, the prosecutor submitted that the 1999 JIA Agreement did not provide for any social effect in the form of the creation of material benefits, goods, etc., which should be the purpose of an agreement on joint activities according to Ukrainian laws. Therefore, according to the prosecutor, the 1999 JIA Agreement was a bilateral credit agreement, and so it did not meet the requirements imposed by Ukrainian laws on joint activities agreements.

Endorsing the above-described argument, the Kyiv Commercial Court invalidated the JIA Agreement. This decision could have been further appealed within 10 days from the date of its rendering. However, no information in respect of any possible such appeal is available as of the date of this post.

The Decision of the Kyiv Commercial Court dated May 23, 2012 in case No. 17/434 is available here (in Ukrainian).

Pavlo Byelousov, Adv.

Senior Associate at Vasil Kisil & Partners Law Firm

Kyiv, Ukraine