Arbitrability of “Corporate” Disputes in Ukraine – No News is Good News?

Whether so-called “corporate” disputes are capable of settlement by arbitration under the law of Ukraine appears to have been one of the most controversial issues in arbitration law in Ukraine in recent years, at least when judging by the perceived number of essays in law journals (including this forum).

Recently, Ukrainian commercial courts handed down decisions in a case which may spark discussions about the arbitrability of corporate disputes once again. To answer the question asked in the headline: This time, no news is at least not bad news. Possibly the most important finding in the decisions discussed here is that disputes over share sales and purchase agreements are still not “corporate” disputes and may be submitted to international arbitration, yet may perhaps not be made subject to non-Ukrainian law.

The Background of the Decisions

On 26 March 2009, Ukrainian company VAT Cherkasagroproekt and French company Bonduelle Development S.A.S. concluded a contract. Cherkasagroproekt promised to sell and transfer to Bonduelle 100% of Cherkasagroproekt’s shares in another Ukrainian company, TOV Mayak-Khudyaky, which corresponded to 99.9% of that company’s statutory capital stock.

A dispute arose. Cherkasagroproekt alleged that Bonduelle had not made a due payment. Cherkasagroproekt then filed a claim in the Commercial Court of the Cherkasy Oblast and asked the court to annul the contract, to order Bonduelle to return the shares to Cherkasagroproekt, and to order the state registrar to make the corresponding changes to the company registry.

Before submitting its first statement on the merits of the case, Bonduelle asked the court to discontinue the proceedings, arguing that the dispute was not subject to decision in the commercial courts of Ukraine because the contract provided that all disputes shall be resolved by ICC arbitration in Paris.

The Decision of the Commercial Court of the Cherkasy Oblast

On 21 December 2012, the Commercial Court of the Cherkasy Oblast granted Bonduelle’s request, discontinued the proceedings in the case, and referred the parties to ICC arbitration.

In a nutshell, the court came to the conclusion that the international treaties and laws of Ukraine did not provide for the exclusive jurisdiction of the courts of Ukraine over disputes over the annulment of an agreement to purchase a part of the statutory capital stock of a limited liability company or over the execution of the consequences of such annulment (where the agreement involves a foreign person who engages in commercial activity).

The court also held that while the courts of Ukraine would in principle have jurisdiction over the given case, this would not bar the parties from agreeing that another organ, including the ICC in Paris, was to decide the dispute. The court further found that the dispute at hand was covered by the arbitration clause and that the clause itself was not null and void, inoperative, or incapable of being performed.

The Decision of the Kyiv Appellate Commercial Court

On 4 February 2013, following an appeal by Cherkasagroproekt, the Kyiv Appellate Commercial Court annulled the decision of the Commercial Court of the Cherkasy Oblast and remanded the case to that court, based in essence on the following argumentation.

The Kyiv Appellate Commercial Court first quoted Article 12(1)(4) of the Ukrainian Commercial Procedural Code (“CoPC”) which provides that the commercial courts have jurisdiction over cases which arise out of “corporate” relationships in:

(1) disputes between a commercial company and its participants (i.e., founders and shareholders), including participants which have left the company, and

(2) disputes between the participants of commercial companies, which are connected with the foundation, activity, administration, and discontinuation of the activity of the company, except for labour disputes.

Based on several provisions of Ukrainian law and on a 2008 Decree of the Plenum of the Supreme Court of Ukraine, the court concluded that the legal relationship between Cherkasagroproekt and Bonduelle was such a “corporate” relationship.

The court continued that under Ukrainian law, certain “corporate” relationships may not be made subject to foreign law or be submitted to international commercial arbitration. Further, according to Article 16(5) CoPC (Article 16 CoPC is entitled “Exclusive Jurisdiction over Cases”), the commercial court at the seat of the commercial company examines “corporate” disputes which Article 16(5) CoPC defines in the same way as Article 12(1)(4) CoPC. The CoPC, according to the court, did not give the parties a right to change this jurisdiction.

Besides, the court pointed out that according to Article 76(1)(7) of the Ukrainian Law On Private International Law (“LPIL”), the courts of Ukraine have jurisdiction over cases with a foreign element if the act or event which became the reason for submitting the claim took place on the territory of Ukraine.

Hence, the claim had been filed in the correct court.

The Decision of the High Commercial Court of Ukraine

On 15 April 2013, the High Commercial Court of Ukraine granted an appeal filed by Bonduelle, annulled the decision of the Kyiv Appellate Commercial Court, and upheld the decision of the Commercial Court of the Cherkasy Oblast.

The court first held that it did not follow from Article 12(1)(4) CoPC that disputes between the participants of a commercial company and a person which is not a participant of the same company were “corporate” disputes. As one of the parties to the dispute at hand was not a participant of the company in question, the dispute could not be qualified as “corporate” in the sense of Article 12 CoPC.

The High Commercial Court then established that the appellate court had erred in declaring the parties’ 2009 contract invalid on the ground that they had provided for the applicability of a foreign law, as in fact, they had provided for the applicability of Ukrainian law (without its choice-of-law provisions).

The court further explained that Article 76(1)(7) LPIL was subject to an agreement by the parties, and because the parties had agreed on arbitration, the appellate court could not base the jurisdiction of the Ukrainian commercial courts on this provision.

The court finally established (1) that the lower courts had not found that the arbitration clause was null and void, inoperative, or incapable of being performed, (2) that Bonduelle had timely filed its request to discontinue the proceedings, and that therefore, the first instance court had come to a correct conclusion.

The Impact of Bonduelle

The decision of the High Commercial Court of Ukraine in Bonduelle is certainly important, yet several questions remain unanswered.

As early as 2007, the Presidium of the High Commercial Court had stated that certain disputes should not be considered as disputes which arise out of “corporate” relationships. The Presidium mentioned the following categories: Disputes over the recognition of property rights in shares, over the conclusion, annulment, change, enforcement, and declaring invalid of share sales and purchase agreements, as well as over other legal acts involving shares, except for disputes connected to the violation of prior rights to purchase shares.  In this regard, Bonduelle can be seen as a mere confirmation that the High Commercial Court still holds this statement to be true.

Following a change of the CoPC and other laws of Ukraine in February 2011, arbitration practitioners have been discussing whether or not the Ukrainian legislator intended to clarify that “corporate” disputes may not be submitted to domestic arbitration, but may well be submitted to international arbitration (e.g. here). Indeed, considerable linguistic, historical, and systematic arguments exist to support  a suggestion that the new version of the CoPC does not address whether “corporate” disputes may be submitted to international arbitration (e.g. here). After concluding that the dispute in Bonduelle was not a “corporate” dispute, the High Commercial Court did not have to consider these arguments.

The High Commercial Court referred to the 2008 Decree of the Supreme Court of Ukraine which may be seen as a limitation to the arbitrability of certain “corporate” disputes. Some may conclude that the court will apply this decree in future cases. Two arguments against its applicability are: (1) It follows from Article 1(4) and 1(5) of the Ukrainian Law on International Commercial Arbitration (available here) that a law of Ukraine or an international treaty are required to limit the international arbitrability of disputes, and the decree of the Supreme Court is neither of these two, and (2) in any event, the decree must be seen in the light of the legislative changes indicated above.

The court ultimately did not have to decide whether the parties may agree on the applicability of non-Ukrainian law to an agreement on the purchase of shares in a Ukrainian company. Based on several indicators, including once again the 2008 Decree of the Supreme Court of Ukraine, there is a real possibility that Ukrainian courts would conclude that the parties may not make such a choice of law.

Michael Wietzorek

Lawyer (Assessor) in Düsseldorf, Germany.