24D, Polevaya St., Kyiv, 03056, Ukraine Tel. 38044 585 13 05 e-mail: info@c-n-l.eu www.c-n-l.eu M E M O R A N D U M To: From: Pascal Hollander, Recognition and Enforcement of Arbitral Awards Subcommittee International Bar Association Konstantin Pilkov, PhD, MCIArb Cai & Lenard Date: April 16, 2016 Re: Public policy as defined by Ukrainian courts in relation to the recognition and enforcement of foreign arbitral awards and to challenges of arbitral awards issued in Ukraine I. SUMMARY... 1 II. NOTION OF PUBLIC POLICY IN UKRAINIAN LAW AND JURISPRUDENCE... 2 2.1. Domestic, international and transnational public policy... 2 2.2. Scope of public policy... 2 2.3. Definition applied in enforcement and setting aside proceedings... 3 2.4. Contradictory interpretation of the public policy by courts... 4 2.5. Burden of proof of public policy violation... 5 III. OVERVIEW OF UKRAINIAN CASE LAW... 6 3.1. Recognition and enforcement cases... 6 3.2. Setting aside cases... 7 IV. TABLE OF CASES... 8 In this memorandum, application of the public policy defenses of various national courts 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 setting aside and enforcement of international commercial arbitration will be paid attention to. I. SUMMARY 1. Ukrainian law does not distinguish on issues of public policy between domestic public policy, international and transnational public policy. 1
2. Public policy embraces legal order of the state, basic principles and foundations of the existing constitutional system relative to: the independence of the state, integrity of territory, inviolability of borders, basic constitutional rights, freedoms, and safeguards. 3. Ukrainian courts tend to narrow interpretation of public policy. In the vast majority of cases the courts granted the leave for enforcement of arbitral awards or refused to set aside arbitral awards, which were challenged based on the alleged public policy violation. II. NOTION OF PUBLIC POLICY IN UKRAINIAN LAW AND JURISPRUDENCE 2.1. Domestic, international and transnational public policy Foreign arbitral awards are enforceable in Ukraine pursuant to international treaties, such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ( New York Convention ) and the European Convention on International Commercial Arbitration ( European Convention ), 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 ( 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 in Article 36. Public policy is referred to in Articles 34(2)(2)(ii) and 36(1)(2)(ii) of the Arbitration Act. Article 34(2)(2)(ii) relates to arbitral awards issued by commercial arbitration having the seat of arbitration in Ukraine and provides that such awards can be set aside if they are contrary to public policy of Ukraine. Article 34(2)(2)(ii) relates to both foreign arbitration and commercial arbitration having the seat of arbitration in Ukraine, and specifies that the leave for enforcement of such arbitral awards can be refused if the awards are contrary to public policy of Ukraine. Ukrainian law thus does not distinguish on issues of public policy between a domestic public policy, international and transnational public policy. Therefore, there is no distinction in approaches to public policy in the annulment proceedings of an award rendered in Ukraine or the enforcement proceedings of a foreign award. 2.2. Scope of public policy The term public policy is open-textured and encompasses a broad spectrum of different acts. Ukrainian public laws do not provide for a definition of public policy. In private law, the notion of the public policy can be deduced from various acts. Some scholars and practitioners believe that public policy in private relations include basic principles of civil law listed in Article 3 of the Civil Code of Ukraine: 1) prohibition of interference with one s private life; 2
2) prohibition of deprivation of property rights, except as required by the Constitution of Ukraine and the law; 3) freedom of contract; 4) freedom of business activity that is not prohibited by law; 5) judicial protection of civil rights and interests; 6) fairness, integrity and reasonableness. In contractual relations a more precise definition of public policy can be deduced from Article 228 (1) of the Civil Code of Ukraine which states that: A transaction shall be considered violating public policy if it is aimed to violate constitutional rights and freedoms of a person and citizen, destruction of or damage to property of an individual or legal entity, State, Autonomous Republic of Crimea, territorial community, illegal taking possession of property. In 2009, the Supreme Court of Ukraine gave a detailed interpretation of what constitutes a transaction violating public policy of Ukraine: transactions that infringe upon public, economic and social fundaments of the state, in particular transactions aimed at use of municipal, state of private property contrary to the law; transactions aimed at illegal alienation or illegal possession, use, disposal of objects of Ukrainian people s property land as the basic national treasure, which is under special protection of the state, its subsoil, other natural resources (Article 14 of the Constitution of Ukraine); transactions of alienation of stolen property; transactions violating the legal regime of objects excluded from or restricted in civil turnover. Any other transaction aimed at violation of other objects of law determined by other rules of the public law are not violating public policy. While qualifying a transaction according to Article 228 of the Civil Code of Ukraine it is necessary to consider the guilt which is expressed in the intention of parties to the transaction or one of the parties to violate public policy. A sentence of the court issued in a criminal proceeding about destruction, damaging property or its unlawful seizure may serve as proof of the guilt. Ukrainian law also deals with the concept of public policy in matters related to application of foreign law. Article 12 (1) of the Law of Ukraine On Private International Law states that: A foreign state s rule of law shall not be applied in cases where its application leads to consequences manifestly incompatible with the general principles of Ukraine s public law and order (public policy)... Although this rule does not apply in international arbitration it certainly impacts the understanding the concept of public policy by Ukrainian courts. 2.3. Definition applied in enforcement and setting aside proceedings The most universal definition of public policy was given by the Supreme Court of Ukraine in Resolution No.12 of 24 December 1999: 3
legal order of the state, basic principles and foundations of the existing constitutional system relative to: the independence of the state, integrity of territory, inviolability of borders, basic constitutional rights, freedoms, and safeguards etc. 1 The Resolution is not the law, however it constitutes the most comprehensive source of guidance on enforcement of arbitral awards in Ukraine. Although, there has not been a coherent policy adopted by the Ukrainian courts but rather these issues have been dealt with on a case by case basis. In 2015, the High Specialized Court of Ukraine for Civil and Criminal Cases (Ukrainian court of cassation) issued a letter with the title Generalization of the practice of courts in matters of setting aside of awards of the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry and recognition and enforcement of international and foreign arbitral awards. Although it pays significant attention to public policy violation as a ground for setting aside and refusal of recognition and enforcement of arbitral awards (para. 21) it does not provide a sound definition of public policy and adds little to understanding of the concept of public policy. It marks the public policy violation as the most popular argument used by the party that lost the arbitration to avoid or delay the enforcement of the award. The letter emphasizes that such party invokes such theoretical and value concepts as lawfulness principle, general principles of law, fairness, good faith and reasonableness, but not specific rules of the legislation. This may lead to an interpretation of an arbitral award as being contrary to public policy only if contradiction with specific provisions of Ukrainian law are shown. 2.4. Contradictory interpretation of public policy by courts In the majority of cases public policy is understood by the courts only as basic principles of the law and order and the legal system. This approach is demonstrated in the Ruling of the Cherkassy Region Court of Appeal of 22 July 2013 on the enforcement of an award issued by the arbitral tribunal under the Rules of the Swiss Chambers Arbitration Institution (Geneva), in which the court found the following: the public policy is understood as the legal order of the state, basic principles and foundations of the existing constitutional system relative to: the independence of the state, integrity of territory, inviolability of borders, basic constitutional rights, freedoms, and safeguards and The court does not examine whether an arbitral award is correct from the standpoint of the merits of the claim as it would be contrary to the sovereignty of the state whose court made a decision in question 1 Resolution of the Plenum of the Supreme Court of Ukraine of 24 December 1999 No. 12 "On the practice of courts in matters of consideration of requests for recognition and enforcement of foreign judgments and arbitral awards and while setting aside awards rendered by international commercial arbitration in Ukraine" 4
Although there is an obvious misinterpretation of an arbitral award as a court decision, the basic attitude of the court is correct, the court stands on a narrow and pro-arbitration understanding of the concept of public policy. In a relatively small amount of cases the public policy is interpreted by the courts as covering any departure from procedural and substantive rules of Ukrainian law, which are not necessarily the mandatory rules. This approach might be illustrated by the Ruling of the Odessa Region Court of Appeal of 5 June 2013 in which the court made assumptions of how the case would be decided by a national court and how the substantive law of Ukraine would be applied and refused to grant the leave for enforcement of the FOSFA arbitral award: If the case had been adjudicated by a national court, under the present circumstances the claim most probably would have been denied by the court Despite the pending uncertainty of this topic, it has been seen that, in years, public policy has been interpreted narrowly by Ukrainian courts. This is because the courts generally bear a proenforcement attitude towards arbitral awards. In the vast majority of cases the courts granted the leave for enforcement of the awards or refused to set aside arbitral awards, which were challenged based on the alleged public policy violation. 2.5. Burden of proof of public policy violation Ukrainian courts usually place the burden of proof of the violation of public policy upon the interested party, though according to the New York Convention a court has the power to determine whether an award is contrary to the public policy of the state and refuse the enforcement if it finds so even if interested party does not invoke the public policy violation argument In the Ruling of the Kiev City Court of Appeal of 14 March 2013 on granting the leave for enforcement of the award of the arbitral tribunal of Riga International Arbitration Court the competent Ukrainian court found: in the course of the proceedings the representatives of the party failed to provide any evidence that the enforcement of an arbitral award against an individual who undertook obligations under a surety agreement would be contrary to the public policy and endanger the interests of Ukraine. Similar views on who should prove the violation of public policy might be find in the Ruling of Shevchenkivskyi District Court of Kyiv of 17 October 2013 (case No. 761/20462/13-ц): The representative of the applicant did not present any evidence of violation of public policy of Ukraine in the arbitral proceedings Placing of the burden of proof of public policy violation can be explained by the fact that in all cases in which courts did place the burden upon the party the violation had been alleged by that party. For now there is no precedent of application of the public policy violation clause by a Ukrainian court upon its own initiative. 5
III. OVERVIEW OF UKRAINIAN CASE LAW 3.1. Recognition and enforcement cases Euler Hermes case On 7 September 2011, FOSFA arbitration tribunal in London issued an award by which PJSC Odessa Fat and Oil Plant (Ukraine) was required to pay the debt to Pontus Trade S.A.(Switzerland). However, by a deed of assignment dated 27 November 2009, Pontus Trade S.A. assigned its claims against PJSC Odessa Fat and Oil Plant to Euler Hermes Services Schweiz AG (Switzerland) ( Euler Hermes ). Euler Hermes made an application to a competent court of Ukraine seeking leave to enforce FOSFA arbitration award. The court dismissed the application having reasoned the dismissal as follows: an application for leave to enforce foreign court judgment shall be submitted by the creditor (his representative), or according to an international treaty which was granted with mandatory legal force by Verkhovna Rada of Ukraine - by other person (his representative). In this case the term creditor cannot be interpreted broadly Thus, the judge finds that the effective civil procedure legislation of Ukraine envisages in this case that only Pontus Trade S.A. as a creditor under FOSFA arbitration award No. 4219 dated 7 September 2011 can submit the respective application (Ruling of Prymorskyi District Court of Odessa City dated 20 March 2013, case No. 1522/25614/12). The court of appeal supported that ruling (Ruling of the Court of Appeal of Odessa Region dated 5 June 2013, case No. 22-ц/785/4523/13). However the court of cassation High Specialized Court of Ukraine for Civil and Criminal Cases - set aside the ruling of the court of appeal as having mentioned that granting the leave for enforcement of an award which had been issued in favor of one person to a different person that had no right of claim under a contract (main obligation), would contradict public policy of Ukraine and could be harmful to a Ukrainian enterprise, the court of appeal did not invoke any legal reasoning for that finding (Ruling of the High Specialized Court of Ukraine for Civil and Criminal Cases dated 20 November 2013). Formally, the court of cassation did not state that the assignee had the right to apply for enforcement, it only set aside the ruling of the court of appeal and returned the case to it for a new full hearing. The Court of Appeal of Odessa Region considered the case in a new hearing and ruled against Euler Hermes. The court excluded findings related to public policy violation, and used only the core reasoning of the court of first instance (Ruling of the Court of Appeal of Odessa Region dated 22 January 2014, case No. 22- ц/785/134/14). SKLOFORM a.s. v. LLC Merefyanska Sklyana Kompaniya On 18 April 2013, the arbitral tribunal at the ICAC at the UCCI issued an award against LLC Merefyanska Sklyana Kompaniya. It objected against the motion for granting the leave for enforcement submitted by SKLOFORM a.s. Among other arguments invoked by LLC Merefyanska Sklyana Kompaniya was the argument that the award was issued without proper 6
assessment of the facts of the case which contradicted the rule of law principle established in Article 8 of the Constitution of Ukraine and thus constituted violation of the public policy of Ukraine. The court rejected this argument and granted the leave for enforcement 2. Plan Team GmbH v. Skorzonera LLC Skorzonera LLC, a Ukrainian company, objected against enforcement of the ICAC at the UCCI award on the ground of public policy violation. According to Skorzonera LLC the representative of Plan Team GmbH who submitted a claim to arbitration acted on the basis of the power of attorney, which was signed by a person whose authority was not confirmed. The court found that the enforcement of the arbitral award issued upon the claim signed and submitted by a person having no powers to represent the claimant would violate the public policy of Ukraine. The court determined that as a violation of public policy of consideration of cases established by the law of Ukraine, thus as violation of procedural public policy. The court also found that the motion for granting the leave for enforcement was signed and submitted by the same person who also had no power to sign such motions on behalf of Plan Team GmbH. However, the court did not returned the motion to the applicant but decided on its merits and refused in granting the enforcement. 3 3.2. Setting aside cases NVO Rostehpribor v. PJSC Zaporizkyi Elektroaparatnyi zavod The arbitral tribunal at the ICAC at the UCCI awarded damages to be paid by PJSC Zaporizkyi Elektroaparatnyi zavod. PJSC Zaporizkyi Elektroaparatnyi zavod submitted the setting aside motion. It argued that mandatory rules constituted part of public policy of Ukraine, and arbitral tribunal did not apply Ukrainian laws and bylaws and thus violated the principle of lawfulness and public policy of Ukraine. The court dismissed the motion and stressed in its decision that giving any opinion on whether the arbitral tribunal made a mistake in application of law or wrongly assessed facts of the case would mean that the court that considers the motion intends to review the arbitral award on its merits which is not allowed according to the Law of Ukraine On International Arbitration and the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 4 2 Ruling of Kharkivskyi District Court of Kharkiv Region of 4 October 2013 (case No. 635/6529/13-ц) upheld by the ruling of Kharkiv Region Court of Appeal of 29 January 2014. 3 Ruling of Yaremchanskyi District Court of Ivano-Frankivsk Region of 26 January 2016 (case No. 354/81/15-ц). 4 Ruling of Shevchenkivskyi District Court of Kyiv of 17 March 2015 (case no. 761/1871/15-ц) upheld by the ruling of Kyiv City Court of Appeal of 14 May 2015 and the ruling of the High Specialized Court of Ukraine for Civil and Criminal Cases of 15 July 2015. 7
IV. TABLE OF CASES Identification of the decision Court of Appeal of Odessa Region 22- ц/785/4523/13, 5 June 2013 Chervonograd City Court of Lviv Region, 1327/5020/2012, 29 July 2013 5 Kharkivskyi District Court of Kharkiv Region of 4 October 2013 (case No. 635/6529/13-ц) Summary of the public policy argument Substantive Procedural Granting the leave for enforcement of an award which had been issued in favor of one person to a different person that had no right of claim under a contract (main obligation), would contradict public policy of Ukraine The debtor argued that the enforcement of the ICAC at the UCCI award would violate public policy of Ukraine because the award was delivered with violation of adversarial process, directness, soundness principles, because the tribunal admitted irrelevant evidence and conducted the proceeding contrary to the law of the seat of arbitration. The court rejected arguments of the debtor because they boiled down to disagreement with the position of the arbitral tribunal and the tribunal s assessment of evidence. The award was issued without proper assessment of the facts of the case which contradicted the rule of law principle and thus constituted violation of the public policy of Ukraine. The court rejected this argument and granted the leave for enforcement. Enforcement denied Enforcement accepted Yaremchanskyi District Court of Ivano-Frankivsk Region of 26 January 2016 (case No. 354/81/15-ц) The claim was submitted to arbitration by a person acting under the power of attorney, which was signed by a person whose authority was not confirmed. 5 Upheld by the Ruling of the Lviv Region Court of Appeal of 26 November 2013. 8