Koziakov & Partners | View firm profile
After a favourable outcome in arbitration, many foreign companies face another challenge – the debtor’s refusal to comply with an arbitral award.
In this case, it may be necessary to enforce the award. One of the key decisions is selecting the appropriate jurisdiction to recognize the award and ultimately recover funds from the debtor.
In Ukraine, the enforcement of a final and binding arbitral award is only possible if the debtor: 1) is a Ukrainian resident, or 2) has assets within Ukraine’s jurisdiction. The Kyiv Court of Appeal conducts enforcement proceedings as a court of first instance, while the Supreme Court considers appeals as an appellate body.
As a signatory to the 1959 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Ukraine has incorporated its uniform procedures into the Civil Procedure Code, which provides a clear and structured enforcement procedure. Article 478 of the Civil Procedure Code of Ukraine lists the grounds derived from Article 5 of the New York Convention that allow a court to refuse recognition and enforcement of an arbitral award. One of these grounds is public policy.
The Supreme Court of Ukraine defines the concept of public policy broadly, demonstrating a flexible and pragmatic approach to ensure the resilience and adaptability of the legal system to emerging issues, and consistently holds that national courts must examine ex officio whether the recognition and enforcement of an award would be contrary to public policy. This duty exists regardless of whether public policy is invoked by a party opposing the recognition and enforcement of the award. One of the most recent issues is the enforcement of arbitral awards in favour of a sanctioned party or a party related to it.
The Supreme Court made clear in its decisions that recognizing and enforcing an award would violate public policy if doing so results in the recovery of funds for the benefit of a sanctioned legal entity or if enforcement is sought for unlawful purposes, such as circumventing sanctions.
Case № 824/100/19 was the first in which the Supreme Court, by its decision of February 2020, refused to enforce the arbitral award on the application of the sanctioned entity.
In a most recent Case 824/107/23, a British Company sought enforcement of an arbitral award dated May 2023 and an additional arbitral award dated June 2023 in a contract dispute against a Ukrainian pipe plant.
The dispute arose when the Ukrainian plant entered into an agreement with the Cypriot company to substitute the debtor — a trading house — for the monetary obligation related to the delivered goods, which was subsequently not fulfilled.
The Cypriot company initiated arbitration against Ukrainian plant, however, while the arbitration was ongoing, it became subject to Ukrainian sanctions in May 2023. The claimant then, pursuant to Article 39 of the UNCITRAL Arbitration Rules, initiated its substitution by the new creditor (a British company) as the legal successor to the disputed obligation. As a result, the arbitrator issued an additional award on the change of Claimant in the case.
During the enforcement proceedings, the Kyiv Court of Appeal granted the enforcement request. Its ruling was subsequently appealed to the Supreme Court. In its December 2024 decision, the Supreme Court overturned the Court of Appeal’s decision and ultimately refused the enforcement.
The Supreme Court reiterated that one of the new aspects of public order in Ukraine is the sanctions regime created by the adoption of the Law of Ukraine “On Sanctions” and that participants in civil transactions often try to use civil equity instruments (in particular, applications for recognition and enforcement of arbitral awards) for an unlawful purpose, not to ensure certainty in private relations or to protect rights and interests, but to create conditions for protecting assets from sanctions and/or their “circumvention”.
After reviewing the facts of the case, the Supreme Court concluded that the replacement of the claimant with the British Company in the arbitration took place after the sanctions were imposed on the Cypriot company as the original creditor. The sanctions included, inter alia, a temporary ban on the disposal of certain assets, the prevention of capital outflows from Ukraine, the suspension of economic and financial obligations and restrictions on commercial transactions. Thus, the Supreme Court found that the parties had ‘circumvented’ the sanctions. Specifically, the application for recognition and enforcement of the arbitral awards—issued in a dispute based on the claims of the sanctioned company—was filed by a British company, which had become the new creditor after the original creditor, a Cypriot company, got sanctioned.
It is worth noting that in all such cases, the Supreme Court emphasizes that sanctions imposed by Ukraine against a creditor or a person associated with it do not terminate the debtor’s obligations, nor do they make it impossible to enforce the arbitral award within the territory of Ukraine once the sanctions are lifted.