Naftogaz and the enforcement of arbitral awards

On 28 February 2018, Ukraine’s state-owned gas entity, Naftogaz, secured an award of US$4.67 billion against Gazprom –which required Gazprom only to make a payment of US$2.56 billion on account of certain residual payments owed by Naftogaz – following a lengthy dispute between the parties concerning the supply and transit of Russian gas to consumers across Europe.

The Twitter announcement from Naftogaz upon its win was triumphant: “We did it! #Naftogazwins ”. The attempted enforcement of the award, however, has become anything but.

Identifying and attaching Gazprom’s assets

Gazprom has challenged the Tribunal’s award before the Svea Court of Appeal (Sweden being the seat of the arbitration and its courts thus having supervisory jurisdiction over the proceedings). In the meantime, Naftogaz has taken extensive steps to try and recover assets to enforce the award.

Like many multinational corporations, Gazprom’s assets are scattered around the globe. Therefore, unsurprisingly, Naftogaz’s search has sought to enforce against assets in an array of jurisdictions, including the UK, Switzerland, Luxembourg and the Netherlands. However, as the case of Naftogaz has shown, the mere identification of assets does not, in itself, completely secure the requisite funds. To the contrary, for Naftogaz, the enforcement process has proven expensive and time-consuming with very little to show for its efforts thus far.

In the Netherlands, Naftogaz attempted to attach Gazprom’s interests in seven Dutch subsidiaries, together with any debts owed by those entities to Gazprom. However, by the time the attachments had been granted by the District Court of Amsterdam, Gazprom had already fully divested its stakes in six of the seven subsidiaries.

Naftogaz experienced similar setbacks in Switzerland, where it was awarded an injunction (later overturned) to seize Gazprom’s receivables from Nord Stream AG and Nord Stream 2 AG but its bailiffs were reportedly unable to locate the share certificates for these entities.  It now faces the daunting prospect of determining the physical location of the certificates and has gone to great lengths to seek disclosure from the US courts as a means of ascertaining their whereabouts, before mounting further requests for attachment in Switzerland.

More recently, Naftogaz has sent a notice of arrest of any Gazprom indebtedness and assets to its Luxembourg-based subsidiary, Gaz Capital S.A, as well as the Luxembourg branches of certain major banks. Gazprom has since announced that it has challenged that notice in the Luxembourg courts.

Difficulties in enforcing arbitral awards

The relative ease by which parties can have their arbitral awards recognised and enforced under the New York Convention remains a significant draw of international arbitration. In the Queen Mary 2018 International Arbitration Survey ‘The Evolution of International Arbitration’, the enforceability of arbitral awards was perceived to be arbitration’s most valuable characteristic. At the same time, however, “greater certainty and enforceability of awards” was recognised as the second most likely factor to have a significant impact on international arbitration in the future.

Tellingly, the authors concluded that this

may be indicative of a perceived gap between the theoretical ease of award enforcement promoted by the provisions of the New York Convention and potentially less successful practical experiences of respondents seeking to enforce arbitral awards in various jurisdictions.

In many respects, the hurdles that Naftogaz has experienced are symptomatic of the wider challenges that parties may face when seeking to enforce an arbitral award. One only has to recall the attempted enforcement of the Yukos judgment in France, which was abandoned in 2017 because it “no longer [made] economic sense”.

The decision to withdraw those enforcement proceedings (taken by the former majority shareholders of Yukos Oil Company) was said to be prompted by the lifting of a number of the attachments against Russian state assets in the jurisdiction (many of which were found to be protected by sovereign immunity), as well as French legislation curbing the shareholders’ ability to attach further assets belonging to the Russian Federation in France.

Therefore, the key question remains how parties can adequately protect against, and alleviate, the enforcement risks that ultimately arise once an award has been rendered.

Protecting against enforcement risks

At the contract drafting stage, it remains important to consider the nature, value and location of the counterparty’s assets to determine the jurisdictions in which enforcement is expected to take place. In all likelihood, enforcement will be sought in the courts of jurisdictions other than those of the seat (which is typically a neutral forum), in which case the power of the domestic courts will be determined by local law.

To this end, it becomes important to consider whether any jurisdiction-specific considerations need to be factored into the dispute resolution clause. For example, as a matter of Russian law, the inclusion of an asymmetric arbitration clause (i.e. a provision granting only one party the right to choose a particular dispute resolution forum) may render a resulting arbitral award invalid if only one party was given the right to pursue arbitration when the dispute arose.

Furthermore, when dealing with a foreign state (or quasi-State) counterparty, it becomes imperative that the contract includes comprehensive waiver of immunity language – preferably in which the counterparty “irrevocably and unconditionally” waives its immunity in respect of (i) jurisdiction to hear disputes, (ii) jurisdiction to recognise judgments and awards, and (iii) execution, injunctive relief and other remedies against its assets – to ensure that the respondent does not raise sovereign immunity as a defence at the jurisdictional or enforcement phase.

Note that it is always worth obtaining local law advice to ensure that the proposed language will be sufficient to amount to a waiver of immunity in the given jurisdiction. Of course, if one is acting for a State, it may well be more advantageous to refuse to waive immunity and instead insist on including express provisions retaining such immunity (or, at a minimum, limiting the extent of such waiver).

In circumstances where a dispute has arisen and the dissipation of assets constitutes a serious concern, it may also make sense to secure some form of interim relief (to the extent that this is available in the applicable jurisdiction). English law, for example, allows for the imposition of a freezing order (which precludes the counterparty from disposing of, or otherwise dealing with, its assets in a way that would undermine the enforcement of an arbitral award), provided the party seeking relief can demonstrate the existence of the defendant’s assets and the risk of dissipation of such assets if the freezing order is not granted.

In the present case, Naftogaz obtained an ex parte freezing order from the English Commercial Court, which required Gazprom to freeze its assets in England and Wales (although this was later released, on the condition that Gazprom does not dispose of its shares in Nord Stream AG, pending the resolution of the recognition and enforcement proceedings in Sweden). Notably, freezing orders can also be granted in respect of assets located outside of England and Wales (known as worldwide freezing orders or WFOs).

Finally, where economically viable, it may be helpful to engage an asset tracing firm to identify the assets required to satisfy any potential award. As the Naftogaz case has demonstrated, enforcement can become a costly and time-intensive endeavour and parties are, therefore, advised to focus on the key jurisdictions where the counterparty’s assets are located and enforcement is likely to be sought.

Factors to consider when determining where to enforce include the location of the counterparty’s most valuable assets, and the nature and complexity of the local law requirements for recognition and enforcement of an award. They also encompass the cost of recognition and enforcement proceedings, and the local court’s familiarity with the arbitration process and its approach to complex issues, such as state immunity and conservatory relief. Insofar as the cost of enforcement is concerned, it is worth considering third-party funding, which has increasingly been used as a tool to fund enforcement efforts.

Enforcement proceedings play a critical role in international arbitration and users should take comfort in the fact that the majority of arbitral awards get complied with voluntarily. However, those faced with the prospect of having to enforce an award, need to know well and anticipate the substantive and procedural hurdles, as well as the most effective means of mitigating against such risks.

Chantal du Toit 

Associate

Allen & Overy LLP