By 14 December, 2020 0 Comments Read More →

Crimean Legal Saga Continues: Investor Clamors for a Bigger Piece of the Pie

It comes as no surprise that winning a case does not always imply that a party will automatically get paid, which is a recurring challenge in the investor-state dispute settlement (ISDS) context. On November 10, the Supreme Court of Ukraine dismissed a case filed by IKB-Invest seeking to hamper enforcement of an arbitral award in favor of another Ukrainian investor Oschadbank, a state-owned bank.

As a co-claimant in the investor-state arbitration case against Russia over the expropriation of real estate assets in the Crimean Peninsula, IKB-Invest together with other Ukrainian companies won a US$159 million award in arbitration proceedings in Hague in 2018. Oschadbank, for its part, won a US$1.1 billion award in a similar claim against Russia over the loss of its banking operations in Crimea in arbitration proceedings in Paris.

IKB-Invest’s strategical application to overturn the enforcement decision favouring another investor Oschadbank glaringly reveals that securing payment of an arbitral award might prove a hollow victory. With limited assets available, interested parties understand that cake might not be big enough for everyone to have a slice.

Factual Background of the Underlying Disputes

In the aftermath of the 2014 unstable political situation in Ukraine, Russia took control over the Crimean peninsula, which caused discontent amongst the international community. To recover losses, Ukrainian investors have instituted several investor-state arbitrations against Russia under the Russia-Ukraine Bilateral Investment Treaty (BIT) with regards to investments in Crimea. Article 9 of the Russia-Ukraine BIT grants Ukrainian investors the right to institute arbitral proceedings against Russia for compensation if Russia expropriates any of the investors’ investments on Russian territory.

Investors initiated an ad hoc investor-state arbitration against Russia under the 1976 UNCITRAL Rules with a seat in Hague, the Netherlands. Russia has expressly taken a stance that it will not take part in the proceedings and disputed the jurisdiction of arbitral tribunals.

The Crimean series of cases required arbitral tribunals to plumb the depths of the jurisdictional issue. As previously reported in the CIS Arbitration Forum (here and here), the question, in particular, arose whether to regard Crimean territories as part of Russia within the meaning of the BIT. In order to determine whether the Ukrainian investors’ capital in Crimea qualify as “investments” under the BIT, the tribunals had to determine whether Crimea constituted a part of the Russian “territory”. Despite the fact that the Crimean Peninsula was under the de facto control of Russia at the time, Russian de jure sovereignty over Crimea had been widely called into question by the international community.

Although the arbitral tribunals in Paris and in the Hague approached the problem very differently, they had reached identical conclusions. Applying the Vienna Convention on the Law of Treaties, the tribunals have construed the ordinary meaning of “territory” as covering de jure and de facto territory under the state’s effective control. Tribunals, in particular, cited the default rule under Article 29 of the Vienna Convention, which provides that treaties apply to state’s “entire territory” without any qualifications, and further pointed out that it would be contrary to the BIT’s object and purpose to leave investments in Crimea with no legal protection under the BIT.

Big Win: Everest Estate and Oschadbank Prevail in Arbitration Proceedings Against Russia

The Crimean set of cases involved several investor-state arbitrations, whilst two of them are of particular interest. In 2018, Everest Invest, representing several Ukrainian investors, including IKB-Invest, succeeded in its arbitration claim, when the arbitral tribunal rendered an award on the merits, declaring that the Russian government had illegally expropriated assets of the Ukrainian investors in Crimea, and awarded approximately $159 million for this breach of the Russian-Ukrainian BIT.

The Russian Federation attempted to challenge the award at the seat of arbitration in the Netherlands. The Court of Appeal in Kyiv subsequently enforced the award and granted the claimants permission to attach the Ukraine-based assets of three Russian state-owned banks: Vnesheconombank (VEB), Sberbank and VTB Bank. The attachments froze the banks’ shares in their Ukrainian subsidiaries as well as the assets of those subsidiaries.

The aforesaid banks appealed the decision on several grounds. First, the Supreme Court of Ukraine did not accept the notification argument. Article V of the Kyiv Agreement on Settling Disputes Related to Commercial Activities requires direct engagement between the judicial bodies of both countries. Therefore, the court found that the simple procedure for notification by post would suffice to meet the obligation of proper notification. The Supreme Court ruled that as long as there is a proof of service, a relevant recipient, for instance, the Ministry of Justice of Russia, should be deemed to have been duly notified.

Second, in the same decision, the Ukrainian Supreme Court upheld an order to enforce an investment treaty arbitration award against the Russian Federation finding that Russia had consented to arbitration in its bilateral investment treaty with Ukraine and that this sufficed to constitute a waiver of sovereign immunity from execution.

In the Oschadbank case, the Court of Appeal in Kyiv also enforced the arbitral award. Both awards have been recognized and enforced in Ukraine.

Think Strategically, Act Tactically: the Winner Takes it All

IKB-Invest, in its turn, applied to overturn the enforcement decision favouring Oschadbank, arguing that the Supreme Court of Ukraine had erred in Ukrainian law. IKB-Invest’s tactic had failed, however, as the appeal was ultimately unsuccessful. The Supreme Court decided not to consider the appeal as the claimant (IKB-Invest) was not a part of the contested arbitration proceedings.

The court showed no sympathy for the argument that IKB-Invest’s interests were also at stake and ruled that it will not exercise its power to set aside the decision of the lower court under such circumstances. IKB-Invest’s tactic raises several interesting issues requiring further consideration, and may, in fact, give rise to a new trend in the investor-state arbitrations.

Concluding remarks

The examined cases reflect how challenging it might be for foreign investors to enforce a final award against sovereign states. In the context of ISDS, obtaining an award may prove a hollow victory and only be half the battle. Indeed, investors may face a long, complex battle if the losing state refuses to pay the arbitral award voluntarily. IKB-Invest in the case at hand, finding itself in a fairly tenuous position, made a tactical decision to hamper enforcement by other stakeholders, as a measure to preserve a pool of assets.

About the Author:

Rinat Gareev holds common law and civil law degrees, and he is admitted to the New York Bar. He obtained a Master of Laws (LL.M.) in International Trade and Dispute Resolution from the University of Illinois College of Law, and a Bachelor of Laws (LL.B.) from the Higher School of Economics in Moscow. He worked as a research assistant at the Higher School of Economics and later joint the UK-based legal-tech firm, where in his role as a junior associate he assisted the legal team in representing the interests of air-passengers before the EU State courts and in ADR proceedings. His professional and academic interests include international commercial arbitration, consumer arbitration, and cross-border litigation.

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