Ukraine Courts Rule on the Effect of Assignment of Arbitration Awards

In its 8 April 2015 decision, the Higher Specialised Court of Ukraine confirmed that an application for recognition and enforcement of an arbitration award can be served only by an original claimant who has taken part in the arbitration proceedings.

Euler Hermes Services Schweiz AG v OJSC Odessa Fat and Oil Plant became the first case before the Higher Specialised Court of Ukraine on the specific right of an assignee, who received the benefit of an arbitration award by entering into an assignment agreement with the original claimant, to seek its recognition and enforcement within Ukrainian territory.

A panel of judges of the Higher Specialised Court of Ukraine revisited the case three times. In 2013 and 2014 the Court remanded it for a de novo review to the Odessa Region Appeal Court. Consequently, an almost three-year old legal battle ended with a controversial decision being rendered by the Higher Specialised Court of Ukraine in 2015.

Details of the case

The case began by the service of an application to recognise and enforce a 2011 Federation of Oils, Seeds and Fats Associations (“FOSFA“) arbitration award upon the first instance court located in Odessa, Ukraine. Euler Hermes Services Schweiz AG (“Euler Hermes“), a Swiss insurance company, filed the application against OJSC Odessa Fat and Oil Plant (“OMZhK“), a Ukraine-based enterprise.

Euler Hermes acquired the right to seek enforcement of the FOSFA arbitration award on the basis of an assignment agreement concluded with Pontus Trade SA, an original party to a sale contract (and arbitration agreement) signed with OMZhK. The assignment of claims from Pontus Trade SA to Euler Hermes occurred before the commencement of FOSFA arbitration in 2010.

The FOSFA tribunal had not been notified of any change of the parties to the sale contract and arbitration agreement, incorporated thereto. As a result, in 2011 Pontus Trade SA was awarded its claimed damages and losses in respect of OMZhK’s breach of the contract.

In Ukrainian court proceedings Euler Hermes asserted that the effect of assignment extended to the FOSFA award. It further argued that Article 393(1) of the Civil Procedure Code of Ukraine (“CPC“) allows a party other than the original claimant to apply for recognition and enforcement of a foreign arbitration award.

In turn, OMZhK asserted that Article 393(1) of the CPC does not allow any party except for the original party to the arbitration clause to apply to the court for recognition and enforcement of arbitration award within the Ukrainian territory. OMZhK also advanced some ancillary arguments dealing with incorporation of a non-assignment clause into the sale contract and alleged reorganisation and/or liquidation of Euler Hermes since the conclusion of the assignment agreement in 2009.

Decision

Both the Higher Specialised Court of Ukraine and Odessa Region Appeal Court agreed with OMZhK’s position, although applying different reasoning.

The Odessa Region Appeal Court in its decision of 24 December 2014 dismissed Euler Hermes’ request to allow recognition and enforcement of the FOSFA award in Ukraine on the basis of an alleged difference in the names of this company, which appeared in the text of the assignment agreement (Euler Hermes Services AG) and the application served before the first instance court (Euler Hermes Services Schweiz AG).

Thus, the court did not rule that Euler Hermes was not entitled to serve its application under Article 393(1) of the CPC, per se, but indicated that since the time of conclusion of the assignment agreement Euler Hermes Services AG had been reorganised, and no proof of any legal succession in favour of Euler Hermes Services Schweiz AG had been presented.

As it appears from the reasoning of the Odessa Region Appeal Court, should there have been no inconsistency between the names of the assignee and the applicant appearing before the Ukrainian court, Article 393(1) of the CPC would not have served as a stumbling block for the review of the application for recognition and enforcement of the arbitration award.

Nonetheless, in its 8 April 2015 decision the Higher Specialised Court of Ukraine found that under Ukrainian civil procedure law, only the original party – in whose name the arbitral award had been issued – is legally entitled to apply for its recognition and enforcement in Ukraine.

This decision raises highly contentious issues, given that in its two previous judgments issued in 2013 and 2014, the Higher Specialised Court of Ukraine quashed the respective orders of the Odessa Region Appeal Court. In those prior decisions the Higher Specialised Court of Ukraine confirmed the binding nature of international arbitration awards. It further ruled that under Article 393(1) of the CPC an application for recognition and enforcement of a foreign court judgment and/or arbitration award should be submitted directly to the court by the claimant (or its representative) or, in accordance with an international treaty ratified by Parliament, by another party (or its representative).

Thus, the Higher Specialised Court of Ukraine on its previous determination of this case recognised, although not explicitly, that Article 393(1) of the CPC provides for an alternative regime on service of an application for recognition and enforcement of arbitration award: 1) either by the original claimant or 2) as per requirements of an international treaty duly ratified by the Ukrainian Parliament, by another party (other than the original claimant).

Recognition and enforcement application by an assignee

The procedure governing recognition and enforcement of foreign court judgments in Ukraine is stipulated in Chapter VIII of the CPC of Ukraine. Under Article 390 of the Code, a foreign court judgment (including international arbitral awards) must be recognised and enforced in Ukraine, if its recognition and enforcement is envisaged in an international treaty ratified by the Ukrainian Parliament or in accordance with the principle of reciprocity.

As Ukraine is a party to the New York Convention, the issue of which party may apply for recognition and enforcement of arbitral awards in Ukraine is governed by this Convention, Articles 390 to 398 of the CPC and Articles 35 and 36 of the Law on International Commercial Arbitration.

As explained above, Article 393(1) of the CPC allows service of the respective application either by the original claimant (or its representative) or by another party (or its representative), if this is provided for in the international treaty ratified by the Ukrainian Parliament. Article IV(1) of the New York Convention refers only to the notion “party applying for recognition and enforcement” and draws no distinction between the rights of the original claimant and of the party who has acquired the benefit of the arbitration award from the original claimant. Likewise, Article 35 of the Law on International Commercial Arbitration does not refer to the original claimant under the arbitration award, but uses the concept “party who relies on arbitration award or seeks to enforce it”.

Comment

The Supreme Court of Ukraine by its Order of 24 June 2015 dismissed an application for leave to appeal against the discussed judgment. Regrettably, it found no divergent application of law by the cassation court.

Drawing the bottom line, the practice of Ukrainian courts in this regard remains inconsistent and obscure as the parties may rely on any of the three conflicting judgments by the Higher Specialised Court of Ukraine. This may have serious consequences for parties engaged in restructuring loan portfolios, insurance and factoring companies, banks and companies trading in commodities.

It is recommended that such parties seek specific professional legal advice prior to structuring respective transactions and/or taking steps to enforce them in Ukraine.

Eugene Blinov,
Partner, AstapovLawyers International Law Group

Elena Kardash,
Senior Associate, AstapovLawyers International Law Group