Arbitrations against Ukraine: Overview of 2012

In the past decade Ukraine has been one of the busiest respondents in the CIS region. However, the arbitration statistics of 2012 shows a change in this trend.

On 30 January 2013 the Minister of Ecology and Natural Resources of Ukraine confirmed that the settlement agreement between Vanco Prykerchenska Ltd and Ukraine had been approved by the Stockholm Chamber of Commerce arbitral tribunal (the “SCC”) in late December 2012.

About a month earlier the Ministry of Justice of Ukraine reported that on 4 December 2012 the Permanent Court of Arbitration in The Hague had fully dismissed Naftrac Limited’s USD 185 million claims against Ukraine. The dispute concerned the fulfillment by Ukraine of its obligations under the UN Framework Convention on Climate Change of 1992 and the Kyoto Protocol of 1997.

These cases broadened a rather impressive list of arbitrations against Ukraine which had been concluded or settled in 2012, with at least two ICSID arbitrations and one UNCITRAL arbitration among them. And although the majority of the awards and settlement agreements remain unpublished, information about the arbitral proceedings and their outcome can still be reconstructed based on certain public sources of information, including sovereign debt security documents and official statements of Ukrainian officials.

Vanco Prykerchenska Ltd v Ukraine

The USD 100 million dispute arose out of the termination by the Cabinet of Ministers of Ukraine of Ukraine’s first Production Sharing Agreement (“PSA”) in the oil and gas sector.

The PSA was entered into on 19 October 2007 after 18 months of negotiations between the Cabinet of Ministers of Ukraine and Vanco International Limited, which won the government tender for the Prykerchenska subsoil block of the Black Sea continental shelf. Vanco International Limited then assigned its rights to a new subsidiary – Vanco Prykerchenska Ltd. The latter was owned in equal shares by Vanco International, DTEK Holdings Limited, Shadowlight Investments Limited and Integrum Technologies Limited.

Following a change in the Ukrainian Government in 2007, the licence for subsoil use issued to Vanco Prykerchenska Ltd was revoked. On 21 May 2008 the Cabinet of Ministers of Ukraine adopted Resolution No 740 concerning the termination of the PSA.

In 2008 Vanco Prykerchenska initiated arbitration under the SCC Rules. After another change in the Ukrainian Government in 2010 the parties agreed to suspend the arbitral proceedings. The settlement negotiations lasted several years, and finally resulted in a settlement agreement which was signed by the parties and approved by the arbitral tribunal in late December 2012.

On 11 February 2013 the Cabinet of Ministers of Ukraine adopted Resolution No 58-p which cancelled its previous Resolution No 740 and thus renewed the PSA.

Naftrac Limited v Ukraine

The arbitral proceedings in this case were initiated by Naftrac Limited (Cyprus) against the National Environmental Investment Agency of Ukraine (the “Agency”) in 2009. The dispute arose in connection with the performance of the Collateral Custody Agreement dated 19 December 2008 entered into by and among Naftrac, the Agency and Fortis Intertrust (Netherlands) B.V. The arbitration was conducted according to the PCA Environmental Rules.

Naftrac Limited (“Naftrac”) claimed (i) $185 million in compensation for the alleged violation of its rights as an investor as well as (ii) definition of the number of emission reduction units of greenhouse gases to be transferred to its account.

The Agency alleged that Naftrac had failed to satisfy certain conditions precedent regarding the delivery of equipment.

The arbitral tribunal dismissed all the monetary claims of Naftrac and partially satisfied its claim for transfer of emission reduction units.

Other arbitrations concluded in 2012

On 1 March 2012 the ICSID arbitral tribunal rendered an award in Inmaris Perestroika Sailing Maritime Services GmbH and others v Ukraine, ICSID Case No ARB/08/8, ordering Ukraine to pay in the region of EUR 3 million in damages to German investors (out of over EUR 13 million claimed). The case was reported in our earlier post.

Then, after UNCITRAL arbitration in Laskaridis Shipping Co. LTD, Lavinia Corporation, A.K.Laskaridis and P.K.Laskaridis v Ukraine cleared the jurisdictional hurdle, Ukraine agreed to a settlement of the USD 9 million claim under the Ukraine-Greece BIT.

On 25 October 2012, another ICSID tribunal unanimously dismissed all claims submitted by US company Bosh International and its subsidiary against Ukraine (Bosh International, Inc. and B&P, LTD Foreign Investments Enterprise v Ukraine, ICSID Case No. ARB/08/11). As reported earlier, the claims arose out of the termination of a joint activities agreement between a subsidiary of the claimant and Taras Shevchenko National University with respect to a conference and hotel complex in Kiev.

Pending arbitrations

According to the Eurobond emission prospectus, as of 26 November 2012, Ukraine was still a party to several arbitrations.

Torno/Beta Arbitration

This ICC arbitration was initiated on 30 March 2012 under the second request for arbitration from Italian companies Torno Global Contracting S.P.A. (previously known as Torno Internazionale S.p.a.) (“Torno”) and Beta Funding S.R.L. (“Beta”) against the Ministry of Transport of Ukraine and the State Road Service of Ukraine (“Ukravtodor”).

In their request for arbitration, Torno and Beta allege that the Ministry of Transport of Ukraine and Ukravtodor breached the terms of their agreement regarding the Kyiv Odesa Highway, dated 8 October 2003. The claimants indicated in the request for arbitration that the amount of their claims is EUR 45.0 million. As of the end of November 2012 the parties were in the process of discussing settlement of the disputes.

OJSC “Tatneft” v Ukraine

The arbitration in OJSC “Tatneft” v Ukraine under the UNCITRAL Arbitration Rules was initiated on 21 May 2008.

In its notice of arbitration and statement of claim the Russian company OJSC “Tatneft” (“Tatneft”) claimed that Ukraine had violated the Agreement between the Cabinet of Ministers of Ukraine and the government of the Russian Federation regarding the facilitation and mutual protection of investments in so far as Tatneft and other foreign shareholders in CJSC “Ukrtatnafta” (“Ukrtatnafta”) had been deprived of the right to effectively control their investments.

Tatneft initially sought reinstatement of what is alleged was the lawful management of Ukrtatnafta, reimbursement of arrears for oil supplies in the amount of USD 520 million and payment of compensation for the loss of control over its shareholding in Ukrtatnafta in the amount of USD 610 million. On 29 June 2009, Tatneft increased the amount of its claim to USD 2.4 billion.

Joseph C Lemire v Ukraine

According to the information available on the ICSID website on 8 January 2013 an ad hoc Committee declared the annulment proceedings in  Joseph C. Lemire v Ukraine (ARB/06/18) closed in accordance with ICSID Arbitration Rules 53 and 38(1).

The annulment proceedings were initiated by Ukraine in July 2011. According to the award of 28 March 2011 Ukraine was ordered to pay USD 8,717,850 in compensation for violation of the fair and equitable treatment standard defined in the USA-Ukraine BIT, USD 750,000 in compensation for the costs and expenses incurred in that arbitration and post-award interest of LIBOR + 2%.

This case is the only pending ICSID arbitration against Ukraine out of a total of 10 cases.

In view of such status of the pending proceedings, in fact, Ukraine has entered 2013 with not so many active arbitrations against it. And this number is significantly lower than in previous years. So, we will see if Ukraine succeeds to keep to this trend during the current year.

Olena Perepelynska MCIArb
Sayenko Kharenko, Kiev