24D, Polevaya St., Kyiv, 03056, Ukraine Tel M E M O R A N D U M

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1 24D, Polevaya St., Kyiv, 03056, Ukraine Tel M E M O R A N D U M To: Pascal Hollander, Recognition and Enforcement of Arbitral Awards Subcommittee International Bar Association From: Konstantin Pilkov, PhD, MCIArb Cai & Lenard Date: May 12, 2016 Re: Comparative Study of Arbitrability under the New York Convention - Ukraine I. SUMMARY... 1 II. ARBITRABILITY UNDER UKRAINIAN STATUTORY LAW AND JURISPRUDENCE Notion of arbitrability when applying the New York Convention Subjective and objective arbitrability Controversial jurisprudence... 5 III. OVERVIEW OF UKRAINIAN CASE LAW... 6 IV. TABLE OF CASES... 8 In this memorandum, arbitrability of disputes and respective Ukrainian laws and jurisprudence will be analyzed. As Ukrainian laws distinguish international commercial arbitration (foreign arbitration and commercial arbitration having the seat of arbitration in Ukraine) and domestic arbitration (arbitration between Ukrainian entities and individuals), in this memorandum only the matters related to enforcement of international commercial arbitration will be considered. I. SUMMARY 1. Ukrainian courts usually consider arbitrability in the context of validity of an arbitration agreement. 2. Ukrainian law defines persons capable of being a party to an arbitration ( subjective arbitrability ) and specifies disputes which are not capable of being resolved by arbitration ( objective arbitrability ). Rules related to subjective arbitrability are part of lex arbitri. The specific restrictions of objective arbitrability are part of lex fori, they are applied by the 1

2 competent court irrespective of the seat of arbitration or the law governing the arbitration agreement. 3. After 2011 legislative amendments, Ukrainian courts still have not adopted a clear approach to the matter of arbitrability of corporate disputes and disputes out of public procurement contracts. Courts still mostly consider corporate disputes and disputes out of public procurement contracts non-arbitrable. Controversial jurisprudence only allows to come to a conclusion that disputes out of or in connection with agreements of alienation of participation interests might be considered not corporate and thus arbitrable. II. ARBITRABILITY UNDER UKRAINIAN STATUTORY LAW AND JURISPRUDENCE 2.1. Notion of arbitrability Foreign arbitral awards are enforceable in Ukraine pursuant to international treaties, such as the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention ) and the European Convention on International Commercial Arbitration, or under the reciprocity principle which is presumed to exist unless proved otherwise. International commercial arbitration having the seat of arbitration in Ukraine is primarily governed by the Law of Ukraine On International Commercial Arbitration (the Arbitration Act ). The Arbitration Act is an implementation of the UNCITRAL Model Law which mirrors the New York Convention exactly in giving the same reasons why a state may refuse to recognize or enforce an arbitral award (Article 36 of the Arbitration Act on arbitrability: the recognition or enforcement of an award may be refused if the court finds that the subject matter of the dispute is not capable of settlement by arbitration under Ukrainian law). Although Ukrainian courts distinguish between (i) arbitrability for the purposes of recognition of arbitration agreements 1, (ii) arbitrability for the purposes of recognition and enforcement of arbitral awards 2 and (iii) validity of arbitration agreements 3, they usually consider arbitrability in the context of validity of an arbitration agreement. It results in controversial decisions when courts apply legislation effective as of the date of entry into the respective arbitration agreement Subjective and objective arbitrability Ukrainian law determines: (1) what disputes can be decided in arbitration; (2) what types of disputes are the exclusive domain of national courts. 1 Article II (1) of the New York Convention ( a subject matter capable of settlement by arbitration ). 2 Article V (2)(a) of the New York Convention ( The subject matter of the difference is not capable of settlement by arbitration under the law of that country ). 3 Article II (3) of the New York Convention (... unless it finds that the said agreement null and void, inoperative or incapable of being performed ). 2

3 i. Subjective arbitrability Pursuant to Article 1(2) of the Arbitration Act parties may agree to refer the following disputes to international arbitration: (1) disputes resulting from contractual and other civil law relationships arising in the course of foreign trade and other forms of international economic relations, provided that the place of business of at least one of the parties is situated abroad; (2) disputes between: a. enterprises with foreign investment, international associations and organizations established on the territory of Ukraine, b. disputes between the participants of entities specified in 2(a), c. as well as disputes between such entities and other subjects of the law of Ukraine. Arbitrability of disputes between participants of enterprises with foreign investments, and between such enterprises and any Ukrainian legal entity or person is completely in line with Article 26 of the 1996 Law of Ukraine On Foreign Investments Regime. It specifies that any dispute to which a foreign investor is a party can be brought to arbitration, including arbitral tribunals seated abroad, according to the parties agreement with the exception of disputes between the investor and the state over matters of state regulation of foreign investments and activities of enterprises with foreign investments. Those disputes are to be resolved in courts of Ukraine unless otherwise provided by the international treaties of Ukraine. Thus, presence of a foreign element is crucial for determining the subjective arbitrability of a dispute. It is worth mentioning that the above provisions of the Arbitration Act are applicable only to arbitration seated in Ukraine (as stated in Art. 1(1) of the Act). Thus, rules related to subjective arbitrability are part of lex arbitri. However, other laws might establish restrictions of arbitrability which might impact the enforceability of international arbitral awards issued in Ukraine as well as foreign arbitral awards. ii. Objective arbitrability Ukrainian Arbitration Act does not provide for any specific restrictions of objective arbitrability of disputes. The notion of commercial as applied to arbitrable disputes mirrors the one in the UNCITRAL Model Law. Ukrainian Civil Procedure Code (Art. 17) also does not establish any specific restrictions of arbitrability of civil law disputes. The specific restrictions of objective arbitrability are stipulated in several laws which are applied irrespectively of the seat of arbitration or the law governing the arbitration agreement, those rules are part of lex fori. 3

4 The law of Ukraine On International Private Law (Art. 77) lists types of disputes with foreign element which are the exclusive domain of the Ukrainian courts. Among those types of disputes the following are potentially relevant to international commercial arbitration: - if a real estate under dispute is located in Ukraine (except for disputes connected with entry into, amendment, cancelation of agreements in public-private partnership projects, entered into by the Cabinet of Ministers of Ukraine, according to which the real estate is the object of such partnership, and the dispute is not related to emergence, termination, and registration of property interests in such object 4 ); - if a dispute is in connection with formalization of intellectual property rights that requires registration or issue of a certificate (patent) in Ukraine; - if a dispute is in connection with registration or dissolution of foreign legal entities, sole entrepreneurs in Ukraine; - bankruptcy cases, if the debtor was established according to the laws of Ukraine; - if a dispute relates to issuance or cancelation of securities drawn up in Ukraine; It is generally recognized that the above types of disputes are non-arbitrable as most of them need a third party to be involved (usually a state body) for the dispute to be resolved. Bankruptcy cases are not disputes in a formally legal sense in Ukraine. iii. Debate over Article 12 of Commercial Procedure Code The most significant restrictions of arbitrability were established in Article 12 of the Commercial Procedure Code of Ukraine (the CPC ). In between and , based on Article 12 of the CPC the courts considered as non-arbitrable the following disputes: (1) disputes over nullification of non-regulatory acts of state and other bodies, enterprises and other entities; (2) corporate disputes ( disputes arising out of corporate relations between a company and its participant (shareholder), including a former one, as well as between the participants regarding establishment, activities, management, and dissolution of the company (except for labor disputes) ); 4 The public-private partnership exception comes into effect on 24 May Date of coming into force of the respective amendment to Article 12 of the CPC, so that the amended Article 12 contained prohibition to submit to arbitration (both domestic and international) 3 categories of disputes. Prior to that date Article 12 did not explicitly prohibit to arbitrate corporate disputes. However, already in 2007 the Presidium of the High Commercial Court of Ukraine advised commercial courts in the Guidance (Recommendations) On Jurisprudence in Disputes arising from Corporate Relations of No. 04-5/14 (the 2007 Guidance ) that Members of companies... are not entitled to subject corporate disputes related to the activity of companies, including those arising from corporate management, to international commercial arbitration courts (Art. 6.2 of the Guidance). This gave the commentators the idea that the High Commercial Court broadly interprets exclusive subject-matter jurisdiction of commercial courts as determined in Article 12 of the CPC. On the Plenum of the Supreme Court of Ukraine passed the Resolution On Jurisprudence in Corporate Disputes (the 2008 Resolution ), which contained the same advice to all Ukrainian courts. 4

5 (3) public procurement contracts disputes ( disputes arising in connection with entry into, alteration, cancelation, and performance of commercial contracts related to satisfaction of the state s needs ). Prohibition to bring corporate disputes to arbitration established in Article 12 of the CPC since 2009 clearly contradicted the rules of the Arbitration Act, which explicitly allowed to arbitrate disputes between an enterprise with foreign investments and its participant (shareholder), as well as disputes between participants (shareholders) of that enterprise. However, this contradiction has always been considered in favour of application of Article 12 of the CPC, as the Arbitration Act stipulated that if any other law established restrictions of arbitrability of certain disputes this other law should apply. 6 The 2007 Guidance and 2008 Resolution being widely used by commercial and common courts allowed to deduce several types of disputes which should not be considered corporate disputes for the purposes of Article 12 of the CPC. Among those are disputes over the title in and transactions with shares (except for those arising from infringement of pre-emption rights). Since 1 March 2011 important amendments have been introduced to Article 12 of the CPC: provisions on international arbitration were excluded. It meant that the restrictions of arbitrability became applicable only to domestic arbitration. However, the ambiguity of the wording of the CPC still leaves the room for a variety of interpretations Controversial jurisprudence Although since 2011 there have been no reported cases that addressed the issue of whether new wording of Article 12 of the CPC restricts the capability of disputes mentioned therein to be settled by international arbitral tribunals, commercial and common courts continue to adopt decisions invoking non-arbitrability of corporate disputes. Common courts still refer to 2008 Resolution of the Supreme Court as a guidance in deciding whether the case considered by an arbitral tribunal was arbitrable. Moreover, sometimes commercial courts still tend to support the approach that disputes out of or in relation to contracts of sale of participation interests (shares) in Ukrainian companies are corporate disputes and thus cannot be submitted to arbitration. 7 This view is generally consistent with the approach of common courts in cases upon requests for setting aside arbitral awards in disputes related to corporate rights in Ukrainian legal entities. 8 However, the position of the High Commercial Court of Ukraine expressed in its resolution of 15 April 2013 (case No. 07/5026/1561/2012), that disputes in connection with contracts of sale of participation interests 6 Article 1(4) of the International Arbitration Act: This Law shall not affect any other law of Ukraine by virtue of which certain disputes may not be submitted to arbitration or may be submitted to arbitration only according to provisions other than those of this Law. 7 Ruling of the Kharkov Commercial Court of Appeal of 2 April 2014 (case No. 917/429/13-г). 8 The High Specialized Court of Ukraine for Civil and Criminal Cases in its ruling of 5 February 2014 (case No св13) recognized that an award, in which the claimant s title to corporate rights in a Ukrainian legal entity was recognized should be viewed as an award made in a corporate dispute. 5

6 in limited liability companies are not corporate, and therefore may be brought to arbitration, creates the basis for a 180 degree turn of the jurisprudence. On 25 February 2016, the Presidium of the High Commercial Court of Ukraine issued the Resolution On Certain Aspects of Jurisprudence in Disputes arising from Corporate Relations of No. 4 (the 2016 Resolution ). The 2016 Resolution replaced the 2007 Guidance which contained the advice to commercial courts to consider corporate disputes non-arbitrable in international arbitration. The 2016 Resolution did not state that corporate disputes can be subjected to international arbitration, it did not mention non-arbitrability of these disputes as well. Thus, the 2016 Resolution added but little to the clarity of the issue of capability of disputes mentioned in Article 12 of the CPC to be settled by international arbitral tribunals. It is helpful, though, in determining the disputes which are not corporate (the Resolution contains the list of such disputes) and thus capable of being brought to international arbitration. III. OVERVIEW OF UKRAINIAN CASE LAW Raiffeisen Property Management GmbH v Double W LLC 9 Raiffeisen Property Management GmbH sought the recognition and enforcement in Ukraine of the 2010 arbitral award issued by the arbitral tribunal of the Vienna International Arbitral Centre of the Austrian Federal Economic Chamber (the VIAC arbitral award ). The arbitral tribunal decided in favour of Raiffeisen in the dispute related to several agreements which envisaged the transfer of participation interest in Double W LLC to Raiffeisen. In 2011, both the court of first instance and the court of appeal refused the recognition and enforcement of the VIAC arbitral award stating that the subject matter of the dispute which was the title to the share in capital of Double W LLC was not capable of settlement by arbitration under Ukrainian law. On 9 November 2011, the High Specialised Court of Ukraine for Civil and Criminal Cases reversed the ruling of the court of appeal and sent the case back for reconsideration to the court of first instance, stating that:... the conclusions of the court of first instance that the dispute is a corporate dispute which is not capable of settlement by arbitration under Ukrainian law are groundless. On 30 November 2012, the court of first instance refused the recognition and enforcement. However, the court of appeal reversed that decision on 6 June The respective ruling of the court of appeal was then upheld by the High Specialised Court of Ukraine for Civil and Criminal Cases (ruling of 17 November 2014). Court decisions in this case allowed to come to a conclusion that disputes out of or in connection with agreements of sale of participation interests might be considered arbitrable. The fact that the courts never discussed the impact of the 2011 amendment to Article 12 of the CPC on the capability 9 It is the only reported case in which the issue of arbitrability was addressed in the context of New-York Convention. 6

7 of corporate disputes to be settled by international arbitral tribunals implies that courts still apply Article 12 of the CPC to both domestic and international arbitration. 7

8 IV. TABLE OF CASES Case designation High Specialised Court of Ukraine for Civil and Criminal Cases (Court of cassation), 9 November 2011, Raiffeisen Property Management GmbH / Double W LLC NY Convention Provision (II.1; II.3; V.2.a) V.2.a Summary of ground for objecting to arbitrability of the dispute The dispute concerns a matter (transfer of corporate rights) in respect of which Ukrainian law restricts arbitrability. A court should apply its lex fori to decide whether the matter should be referred or not to arbitration. Arbitrability objection admitted Arbitrability objection rejected X 8