This article is available in Russian only.
This article is available in Ukrainian only.
This article is availible in Russian only.
Without any modesty, we may confirm that Ukraine is one of the major exporters of agrarian commodities in the world. In particular, sunflower oil and seeds, grain and barley are Ukrainian distinctive competence. Thus, the share of disputes at arbitrations of GAFTA (The Grain and Feed Trade Association) and FOSFA (Federation of Oils, Seeds and Fats Associations) related to Ukraine is quite substantial.
We are going to analyze in what way the international arbitral awards may be enforced in Ukraine.
- Ukrainian courts adhere to the New York Convention
There were 11 cases submitted for recognition and enforcement of GAFTA/FOSFA awards.
Given that beauty optimism will save the world, we will start from the good news. All cases were resolved without any violations of the New York Convention. In other words, awards that had to be enforced were enforced.
It takes time…
It means that statistically one award is passed through 7 court hearings at different instances (including procedural orders) to be recognized in Ukraine. Formally, it may be recognized after one court hearing. Mainly, in some cases it takes long time to find the only right solution. Let`s resort to the State Registry of Court decisions of Ukraine.
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It is widely thought that Ukrainian court and legislation is rather formal and does not take into account new means of communication. However, cases on recognition and enforcement of the GAFTA/FOSFA awards prove that it is not so.
Ukrainian courts deliver justified decisions in this regard. For instance, if the arbitral agreement as well as the main contract was concluded via e-mail or some arbitration notice was sent by e-mail, the Court recognized and enforced the arbitral award. Notably, in the case MILLWILL Ltd (Broker) vs Ukrainian Agrarian Investments LLC (Seller) on recognition and enforcement of GAFTA Award dated 19.11.2012 the defendant tried to prove that the award must not be recognized, because the parties did not sign and stamp the contract. The court rightfully held that it was not necessary due to the rules of the governing (English) law.
- Capacity of the party claiming enforcement
Almost 20% of the claims for recognition and enforcement of the awards were rejected because they were filed by the improper claimant – the person that did not have a right to file such a claim.
In particular, in the case Budtechimport LLC vs Prodexim LLC on recognition and enforcement of GAFTA Award № 14-476 between Feed Factors LTD and Prodexim LLC (debtor) the court logically rejected the claim since it was filed by the guarantor, not by the creditor. Obviously, the person that was not the party to the arbitral proceedings or did not obtain the right to file a claim on the recognition of the award is not entitled to file a claim with a Ukrainian court (Article 393 of the Civil Procedure Code of Ukraine and Article 4 of the New York Convention).
In the other case, Euler Hermes Services Schweiz AG filed a claim against Odessa oil-fat combine PJSC on recognition and enforcement of FOSFA Award № 4219 as of 07.09.2011 in the matter between Pontus Trade LLC and Odessa oil-fat combine PJSC, Euler Hermes Services AG obtained the right to claim for enforcement due to assignment agreement.
The company Euler Hermes Services Schweiz AG that filed a claim on recognition and enforcement of FOSFA award did not have a right for such a claim, because the party to the assignment agreement was the other company – Euler Hermes Services AG.
There was no evidence that the Euler Hermes Services Schweiz AG is a legal successor of Euler Hermes Services AG.
Thus, Ukrainian court acted in accordance with the international and Ukrainian law. As a result, both arbitral awards had no chances to be enforced.
- The court enforces the award if the debtor is registered or has a property within the territory of Ukraine.
It is important, that such property or registration must belong only and strictly to the debtor as opposed to related companies, beneficiaries of the debtor etc.
Notably, in the case Nibulon S.A. vs BSC CmbH on recognition and enforcement of GAFTA award № 4301 dated 05.02.2013, the defendant was not registered in Ukraine, being the Austrian company. Moreover, it did not have property in Ukraine that disabled Ukrainian court to handle the case (Article 394 of the Civil Procedure Code of Ukraine). Interestingly, that Nibulon S.A. provided the court with supposed address of the debtor that appeared to be the office of Nova Capital LLC. It arose that debtor had never been registered there and did not have any connections with the Nova Capital LLC. At least formally …
The second case was F.F. ENGELS INVESTMENTS LTD vs PACIFIC INTER-LINK SDN BHD on recognition and enforcement of numerous FOSFA Awards.
Debtor was not registered in Ukraine, however it was supposed to have property in Ukraine – goods at the warehouse. The property was arrested by the means of interim relief, while awards were recognized. However, the higher Court cancelled the decision and concluded: the owner of the goods is not a debtor under the contract and the party to arbitral proceedings. In fact, the awards were enforced against the company with the name alike, but not similar to the debtor`s one. Markedly, Pacific Oils & Fats Industry SDN was mentioned as a debtor, while the real debtor was PACIFIC INTER-LINK SDN BHD
Therefore, since claimant did not prove that the property belongs to the debtor, awards were not recognized.
- The claimant may ask for interim relief in the cases for recognition and enforcement of arbitral award.
Securing a claim is allowed at any stage of proceedings (even before filing a claim), if the failure to secure such a claim may complicate or prevent the enforcement of the award.
The creditor may seek for enforcement in Ukraine, provided that the debtor is registered and has assets or cargo allocated in Ukraine.
If at least one prerequisite is met, creditor may file a claim with Ukrainian court for arrest of such cargo or any other property as an interim relief. Afterwards it is necessary to file a claim on recognition and enforcement of the award within 3 days from the date of the court order on arrest of the property.
However, there are two points to take into account in this regard:
- If the claim is considered by the third instance (Higher Court/Supreme Court), the court is not empowered to grant an interim relief.
- It should be a good arguable case to ask the court for interim relief. Should the court find the debtor`s property arrest was unlawful, the defendant is entitled for compensation of all damages incurred. For instance, in the case of property arrest: storage costs, demurrage of containers or the vessel, handling costs, losses associated with damage or delayed delivery of cargo and other additional costs.
Thus, the claimant should be very cautious in such cases in order to avoid increase in his losses.
- The practice on compound interest enforcement is not univocal.
There is no univocal practice on whether the compound interest prescribed by the award must be compensated. The question is what to do if the arbitral award contains the formula on its calculation, but not the sum presented by the figures.
GAFTA and FOSFA arbitration awards on compensation of damages usually contain the debtor`s obligation to compensate the creditor for damages along with compound interest in the amount 4-5% from the date prescribed by the award till the date of payment. In most cases, the starting point is the date of default (i.e. a serious breach of a contract that resulted in termination thereof). The tribunal prescribes the basis sum from which the interest should be calculated and the relevant period for it.
Ukrainian courts used to enforce such awards for years. However, the recent decision of the Supreme Court dated 26 October 2017 in case No. 6-1197цс16 may change the approach. It paid attention that under Ukrainian law neither the court, nor the enforcement service empowered to calculate interest even if the arbitral decision contains the clear formula.
The court rejected the entire claim for recognition and enforcement of the award. Notably, Kyiv Court of Appeal held in the Order dated 23.02.2017 in the case number 759/16206/14-Ц, that:
“… when the foreign arbitration award containing an obligation of the debtor to compensate compound interest, the precise amount of which is not defined, then there are no legal grounds to enforce the decision. Given that claimant demands to compensate such interest and the absence of the court`s or other authority power to change the claimant`s demand, there is no possibility for partial enforcement of the decision. Otherwise, it would contradict subpara. b of para 2, Art. V of the New York Convention and paragraph. 6 of Article 396 of Civil Procedure Code of Ukraine”
At this point of time, the decision is waiting for another revision at the higher court.
Therefore, the issue of enforcement of GAFTA/FOSFA awards in part of compound interest is now open. If previously it was clear, now the tendency is that the award is to contain precise sum depicted in figures (not the formula) that should be paid by the debtor. Otherwise, there is a risk that the court will reject enforcement of entire award.
We will keep our readers informed on further developments of the practice in this regard. However, it would be the matter of separate post.
In what way claimants may enhance chances of enforcement of GAFTA/FOSFA awards?
Knowledge of the outlined tendencies lead us to the conclusions on how to avoid mistakes and receive enforced decision. We have prepared 7 tips in this regard.
- The claim must be filed by the company that is pointed out in the award or the company that obtained this right under assignment agreement. Preferably, that assignment agreement is concluded after the date of the arbitral award.
- Special attention should be paid to the evidence that the arbitral award came into force. It may be the extract from GAFTA/FOSFA arbitration rules or List of defaulters, or a letter from arbitration that this particular award came into force.
- The debtor must be registered or have a property within the jurisdiction of the court to which the claim is filed.
- If the creditor is sure that the case is a good arguable one and there is a risk of dissipating of the assets, it makes sense to ask the court for interim measures. Ukrainian courts are not reluctant to grant such measures. However, it should be noted that if the interim measure would be considered as illegal later, the claimant must compensate for all damages.
- Claimant should be prepared for long-lasting procedures since there is a risk that the case will pass through all instances several times. The whole process may take 1,5 – 2 years.
- It is better to send arbitral agreement and notices via the same e-mail as the previous correspondence. It would be a plus, if the debtor answered from this e-mail to any letter.
- The claim and the award is to be in compliance with the New York Convention. We can make the case that after all procedures, its requirements will be adhered by Ukrainian courts.
Overall, Ukrainian practice on recognition and enforcement of GAFTA/FOSFA awards complies with the New York Convention. The approach of Ukrainian Courts may be characterized as pro-arbitration one.
At the same time, there are not so many cases for recognition and enforcement of such awards in Ukrainian courts. The reasons for noted results may be different: GAFTA/FOSFA awards against Ukrainian companies are enforced voluntarily; the debtors with Ukrainian roots are registered in other jurisdictions; creditors do not start the proceedings because they do not believe that it may bring fruits due to prior dissipation of debtor`s assets or corruption in Ukrainian courts.
Then again, statistics are quite optimistic: 50% of awards were enforced by means of court procedures against 50% that were not enforced. One more case is still in progress (Nibulon vs Rise). That particular case concerns the obligation to pay for compound interest. At this point of time, it is hard to predict the outcome of the proceedings. The mentioned statistics relates only to the compulsory enforcement (by means of court procedures) and do not take into account the awards that were enforced voluntarily. Should we count them too, the statistics would much more optimistic.
However, if the court upholds the decision of the previous instance, the practice on recognition and enforcement of the GAFTA/FOSFA awards will change dramatically. After the final decision on the case will be delivered, we will analyze it for our readers.
Thus, practice of enforcing of GAFTA and FOSFA awards in Ukraine is dynamic, but still optimistic.
Ivan Kasynyuk, Partner at AGA Partners
Olga Kuchmiienko, Associate at AGA Partners
Probably the issue of validity and effectiveness of arbitration clause is one of greatest practical importance for international arbitral process, giving rise to arbitration as such.
Clear intention to contract out of the national court system is needed as this is where most disputes are usually resolved. This can also be done by referring to a standard form contract in the agreement which incorporates an arbitration provision.
It is important first to distinguish the validity of arbitration clause from its effectiveness. Whereas the validity issue answers the question whether there is a legally acceptable and enforceable arbitration clause, the effectiveness deals more with its construction, efficiency and performance. Although an arbitration clause can be valid it does not necessarily should be effective.
Below we should refer to issues of validity and effectiveness separately.
With reference to the validity the difference should be drawn between the formal and substantive validity where both plays a fundamental role on applicability of arbitration clause for pro-arbitration regime. Also, below we outline other important characteristics of parties’ agreement to arbitrate.
And at the end we will deal with issues of effectiveness.
- “Written form” accompanied with “signature” and/or “exchange” of communication;
The key sources of regulation to the formal requirement of a written form is given in a number of international and national rules. The first place to look is Art. 2(II) New York Convention (the NYC) and Art. 7(2) UNCITRAL Model Law 1985 with its further modernization and liberalization in 2006. (the Law). 
The idea behind adopting requirements for written form at the time it was made is an indication of the parties’ consent and record of it to establish jurisdiction. Nevertheless, I fully support the criticism of the outmoded requirements of NYC as to the written form which clearly falls behind the changes which were made in Law amendments in 2006 and number of national legislations worldwide, allowing for the arbitration clause to be made in oral or tacit. If the multi-billion agreements can be made orally, why arbitration agreements can’t?
it is worth noting that in certain circumstances the behavior of party may replace the compliance with formal written requirements.
Globally the issues of substantive validity are vital, bringing many challenges of arbitration agreement on applicable contract law grounds.
- Compliance with international conventions
All major Conventions treat arbitration agreements as presumably valid and enforceable, subject to limited cases of invalidity on where the relevant clause may be “null and void,” “inoperative,” or “incapable of being performed.” European and Inter-American conventions also refer to “nonexistence” of arbitration clause where there has been no consent.
- Compliance with national law
The majority of national legislation does not have special regulation as to the invalidity of arbitration agreements (except as provided in International Conventions) and is commonly governed by applicable contract law (either the law of the arbitral seat or the underlying contract). The burden of proof in such cases is usually on the contesting party. As an example of the application of these criteria, an arbitration agreement may become ‘inoperative’ for the purposes of section 9(4) through the actions of a party amounting to a repudiatory breach. [see Downing v Al Tameer Establishment & Anor.  EWCA Civ 721.
- Reference to standard terms.
It is common that an arbitration clause can be included in standard or general terms, whether it is in same document (on reverse side) or a separate document. In such case parties should either have availability of document or made a specific reference to it - incorporation by reference Also the arbitration clause may be valid if incorporated by the third parties, like in B/L which incorporates the terms of Charterparty.
- Capacity to enter agreement. Consent. Assignment.
The capacity of the parties originates from the law applicable to the parties, since neither convention prescribes rules governing the capacity. NYC and European Convention addresses this issue indirectly and in very general terms.
Despite some economies (e.g. controlled) may have certain limitations within national legislation, it has become common that tribunals in most circumstances taking pro-arbitration approach. In majority of cases the tribunals uphold validity of agreements by application of principles of estoppel, ratification and good faith.
Some Tribunals even extend the arbitration clause to the parent and subsidiary companies, despite lack of formal signature. Worth noting also that assignment of arbitration clause is possible automatically if not excluded by the parties or during pending arbitration.
Other essential characteristics of valid arbitration clause.
Non-arbitrability doctrine has a different nature from substantive validity, limiting specifically the right of the parties to arbitrate certain types of disputes
As a matter of general rule, the consent given by the parties to the contract does not necessarily mean consent to the arbitration clause. The critical issue is whether parties made a valid consent to the agreement to arbitrate itself.
Agreement to arbitrate.
Rather straightforward requirement providing the express parties’ intention to arbitrate rather than litigate. Arbitration should be the only forum where the disputes should be resolved.
Scope of arbitration.
Fundamental issue when considering the effectiveness of the clause is weather the parties’ language of agreement extends to all contractual (or noncontractual, e.g. tort, delict) claims making it a subject of arbitration or only to a limited ones. Presently, the most of jurisdictions holds a pro-arbitration approach in this respect.
Broad wording of clause is of the essence providing “all” or “any” claims to be covered by arbitration. The narrower wording may lead to consequences where tort and other non-contractual claims were recognized as giving no rise to arbitration. However the recent findings of the House of Lords in Premium Nafta v Fili make it less relevant. If there is nothing in[syntax unclear here?] contrary it illogical to assume that parties had intention to “split” jurisdiction.
Basically there was a move away from the overly formalistic approach. Lord Hoffmann in that case first reviewed the terms of the standard ‘Shelltime 4 Form’ arbitration clause as only “the agreement can tell you what kind of disputes they intended to submit to arbitration.” The starting position in the construction of an arbitration clause should be that rational businessmen intend that all disputes arising out of that agreement will be decided by the same tribunal. This presumption should be applied unless there is express language to the contrary. Lord Hoffmann declined to consider in detail the extensive case law on the scope of specific wordings used in arbitration clauses – ‘arising under’ or ‘arising out of’ - as he agreed with the Court of Appeal that “the time had come to draw a line under the authorities to date and make a fresh start.” Lord Hope of Craighead in his separate assenting opinion confirmed this approach in particular in the context of international commerce. 'This view is consistent with the approach adopted in other jurisdictions. Lord Hoffmann cited a German Bundesgerichtshof Decision of 1970 and Lord Hope of Craighead referred to decisions from the courts of the United States and Australia to conclude that arbitration provisions should be construed as broadly as possible and to prevent different proceedings in alternative fora.'
Finality of the award.
Providing in writing a “one stop” forum is essential for fast and efficient arbitration process. Still respective attention should be made to national laws which in majority of cases allows limited rights to appeal. For example Arbitration Act 1996 gives parties a right to appeal either on issues of serious irregularity (art. 68) or on a point of law (art. 69). This latter is not possible if institutional rules confirm award is final and binding e.g. LCIA or ICC. section 68 is a mandatory provision - that is the parties can not contract out of the possibility of a challenge for procedural irregularity.
Other relevant considerations.
Many practitioners and law associations provide generally similar recommendations to this effect. I shall outline the fundamental ones:
- Decide between ad hoc or institutional arbitration;
Institutional provide usually all necessary assistance, rules and procedures, facilities, etc for a certain fee, unlike ad hoc arbitrations where parties all liable for running arbitration, which sometimes leads to many disputes on the procedure.
- Seat of arbitration;
It may influence on the law that is applicable to arbitration and courts of which jurisdiction should make assistance and/or support of process. Friendly to arbitration jurisdictions is highly recommended.
Usually one or three arbitrators. Thus, the cost may vary greatly since parties pay for their services. Appointment much depends on parties’ agreement or applicable rules.
- Language, procedure, timetable, cost, confidentiality.
Also worth to be agreed at the initial stage. Usually depends on the arbitration rules that is to apply or agreement between parties made before or during the proceedings. Especially if dealing with parties with different languages.
In case of joint-venture, consortium or similar agreements where more than two parties involved the arbitration clause should anticipate possibility of multiparty arbitration. The key challenge is the managing of procedure (e.g. submissions exchange or oral hearings). and arguably the appointment of the tribunal?
There is a distinction between the formal validity of an arbitration agreement and the criteria that make it an effective clause. Most courts will interpret the clause in a pro arbitration manner. Once consent to arbitration is found, a lot of time and money could be spent in trying to determine the specific details of the arbitration.
If the parties could agree to specific terms this would be the best outcome but experience shows that once a dispute has arisen that there is very little chance of the parties reaching any consensus on the details. The courts will try to be as helpful as possible but can do little to prevent delay in the face of a reluctant party.
Formal validity including the requirement that the arbitration agreement be in writing is critical. The remainder of the criteria make the arbitration agreement effective for example, the seat, language and applicable law.
Most international arbitration institutions have Model arbitration clauses that deal in brief with the main issues. An arbitration clause does not have to be long and detailed so long as it is clear and precise so as to ascertain the parties’ intention.
 See for some examples of cases where incorporation by reference was accepted Stretford v Football Association Ltd and another  EWCA Civ 238 and Sumukan Ltd v The Commonwealth Secretariat  All ER (D) 341
 Julian Lew, “The Law Applicable to the Form and Substance of the Arbitration Clause»
 Gary B. Born, “International Commercial Arbitration” (Second Edition), par. 5-02, p. 657
 Ibid p. 656
 Lew, Mistelis, Kroll, “Comparative International Commercial Arbitration”, par. 7-6, p. 131
 The NYC provides very narrow definition failing to foresee the development of communication tools. The Law instead made a step forward with broader definition allowing modern means of communication and record of agreement evidence and finally in 2006 Law allows practically oral form agreement.
 Kaplan, “Is the Need for Writing as Expressed in the New York Convention and the Model Law Out of Step with the Commercial Practice?”;
We have to recognize the problems involving changes in any part of NYC and put attention and efforts to promote the changes to national legislations and more liberal approach while treating NYC requirements during award enforcement procedure as to the written form.
 States that allows arbitration agreement to be made orally either formally or in effect: France, New Zealand, Sweden, Scotland, Singapore, Hong Kong. Germany allows tacit agreement when no objection is submitted. Swiss provides a unique regulation specifically addressing the validity issue requiring evidencing agreement by a text. English Arbitration Act 1996 allows certain categories of oral agreements.
 In Compagnie de Navigation et Transport SA v Mediterranean Shipping, Tribunal Fédéral 1995 the Swiss Tribunal resorted to doctrine of estoppel and good faith where consent was confirmed by parties’ conduct in the past.
 For example fraud, mistake, frustration, impossibility, waiver;
 Art.II of the NYC, art. 1 of the Inter-American Convention and less clearly Art. II(1), IV and V of the European Convention;
 Cases in which an arbitration agreement was defective or invalid from the outset - fraudulent inducement, unconscionability, illegality and mistake;
 Cases where agreements were at one time valid, but which thereafter ceased to have effect;
 Cases where the parties have agreed upon a procedure that is physically or legally impossible to follow;
 New York Convention, Arts. II(1), (3); UNCITRAL Model Law, Arts. 7, 8(1);
 Worth noting that UNCITRAL Model law contains no provisions of substantive validity;
 National courts, dealing with issues of validity generally examining arbitration agreement as to the cases of fraud, mistake, duress, lack of consideration, unconscionability, impossibility and frustration to the substantive validity of international arbitration agreements.
 Gary B. Born, “International Commercial Arbitration” (Second Edition), par. 4.04, p. 472
 Ibid, p. § 5.06 (2) p. 844-845
 Lew, Mistelis, Kroll, “Comparative International Commercial Arbitration”, par. 7-37, 7-43 p. 144-145
 Either the place of domicile of the party or law applicable to arbitration agreement
 Lew, Mistelis, Kroll, “Comparative International Commercial Arbitration”, par. 7-33, p. 140
 Gary B. Born, “International Commercial Arbitration” (Second Edition), par. 5-023, p. 721
 NYC by implication to capacity provides non-recognition of arbitration agreements only if they are “null and void, inoperative or incapable of being performed.”. European Convention provides that courts shall examine the capacity of the parties under the law applicable to them.
 Where license is required, limitation in POA, no proper authorization by person who signed agreement, etc.
 Interim Award in ICC Case No. 5065, 114 J.D.I. (Clunet) 1039, 1043 (1987) (“in accordance with general principles of international commercial law, usages and…good faith,…the existing entity is personally bound.”); Balen v. Holland Am. Line Inc., 583 F.3d 647, 655 (9th Cir. 2009) (seaman bound by arbitration provision in collective bargaining agreement notwithstanding fact that agreement was signed by an employment agency on behalf of employer);;
 ICC case no 5721 (1990), 117 Clunet (1990)
 Lew, Mistelis, Kroll, “Comparative International Commercial Arbitration”, par. 7-52 - 7-57, p. 147
 Merkin, Arbitration Act, para. 2-33, 2-37;
 (e.g. arising from land, property, competition, etc.). The latest draft of Commercial Code in Ukraine is intended to treat the disputes arising from privatization of government property as non-arbitrable.
 In this respect the requirements for arbitration clause to be properly workable produced by Eisemann are also of essence:
(1) produce mandatory consequences; (2) exclude the intervention of state courts; (3) give power to arbitrators; and (4) put a procedure leading to enforceable award;
An arbitration clause may be considered as defective or pathological when it deviates from any one of the above four elements. The consequences vary greatly depending on the level of deviation. Mr. Eisemann coined the term “pathological clauses” in “La clause d’arbitrage pathologique” in Commercial Arbitration Essays in Memoriam Eugenio Minoli (Torino: Unione Tipografico-editrice Torinese, 1974)
 Lew, Mistelis, Kroll, “Comparative International Commercial Arbitration”, par. 8-9 p. 167
 In my practice I had a dispute where the arbitration clause provided resolution of dispute either in arbitration in Ukraine or litigation in Russia depending on which party shall be claimant (from Russia or Ukraine). Both parties applied to respective forum, one in Ukraine other in Russia. The Ukrainian arbitration refused on jurisdiction according to competenz-competenz principle sine the claimant from Russia submitted their claim first.
 The model clauses recommended by institutions vary significantly in terms of language of the clauses providing “all” or “any”; “disputes”, “differences” or “controversies”; “relating to” or “in connection with”; etc.
 Lew, Mistelis, Kroll, “Comparative International Commercial Arbitration”, par. 7-67, p. 153
 For example: Hoggan Lovels http://www.americanbar.org/content/dam/aba/events/international_law/2014/04/aba-nysba-international-boot-camp/CrossBorder11.authcheckdam.pdf; Clyde and Co. http://www.clydeco.com/insight/article/burning-the-boiler-plate-drafting-an-effective-arbitration-clause; Freshfields http://www.freshfields.com/uploadedFiles/SiteWide/News_Room/Insight/Asia_DR/Freshfields%20disputes%20academy%20workshop%20on%20drafting%20effective%20arbitration%20clause%206%20September%202016.pdf; IBA Guidelines for Drafting International Arbitration Clause - file:///C:/Users/Ivan/Downloads/Guidelines%20for%20Drafting%20Intl%20Arbitration%20Clauses%202010.pdf
 In contrast GAFTA and FOSFA rules provide appeal procedure to be conducted by 5 arbitrators;
Ivan Kasynyuk, Partner at AGA Partners
The analysis of Ukrainian court practice enables us to share our thoughts on trends regarding the recognition and enforcement of GAFTA/FOSFA awards in Ukraine, and to provide tips that may help to enforce this type of awards in the future.
Seven Trends on the Recognition and Enforcement of GAFTA/FOSFA Awards in Ukraine
1. Ukrainian courts adhere to the New York Convention.
But it takes time…
Statistically, an award is passed through seven court hearings at different instances before being recognized in Ukraine, despite Ukrainian legislation, which allows to recognize an award at the first instance hearing.
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2. Ukrainian courts tend not to interfere in the merits of awards.
Our research showed that only once a lower court’s decision analyzed the merits in an award. The decision was subsequently cancelled by a higher court, finding it to be in contradiction to the New York Convention and Ukrainian legislation.
3. The cases on recognition and enforcement of GAFTA/FOSFA awards are frequently revised by higher courts.
Out of about 80 court decisions in 11 cases on the recognition and enforcement analyzed in the research, 63% of them were revised by higher courts. In most cases, a decision was changed or the case was remitted to the first instance for revision.
4. The standing of a party claiming enforcement is regularly assessed by courts.
Almost 20% of the claims for the recognition and enforcement of arbitral awards were rejected because they were filed by a claimant who did not have standing before an arbitral tribunal. For instance, recognition and enforcement was sought by a person that is not a party to an arbitration agreement (Budtechimport LLC vs Prodexim LLC) or to an assignment agreement (Euler Hermes Services Schweiz AG filed a claim against Odessa oil-fat combine PJSC).
5. The court enforces an award if the debtor is registered or has a property within the territory of Ukraine.
In the case Nibulon S.A. vs BSC CmbH, the defendant was not a registered entity in Ukraine, but an Austrian company. It did not have any property in Ukraine, and hence the Ukrainian court refused to decide the case. Interestingly, Nibulon S.A. provided the court with an alleged address of the debtor that appeared to be the office of Nova Capital LLC, registered in Ukraine. It arose that debtor had never been registered there (and in Ukraine as well) and did not have any connections with Nova Capital LLC. Therefore, since the claimant did not prove that the property belongs to the debtor, awards were not recognized.
6. The claimant may seek an interim relief in the proceedings for recognition and enforcement of an arbitral award.
Securing a claim is allowed at any stage of proceedings (even before filing a claim), if the failure to secure such a claim may complicate or prevent the enforcement of the award. As mentioned above, the creditor may seek enforcement in Ukraine provided that the debtor is registered, has assets, or cargo in Ukraine. However, it should be noted that when a claim is considered by the third instance court, i.e. Higher Court/Supreme Court, the court is not empowered to grant an interim relief.
7. The practice on compound interest enforcement is not uniform.
There is no uniform practice on whether a compound interest prescribed by an award must be compensated, although for already some time, Ukrainian courts have been enforcing arbitral decisions awarding compound interest.
Examples of decisions enforcing such awards are as follows:
a) a court decision in the case № 4с-410/2563/12 stated that it “[a]llow[s] to enforce the arbitration award of GAFTA dated July 21, 2011 №14-329”, without any details provided as to a particular sum of interest;
b) a court decision in the case № 127/4348/13-ц enforcing the original award, followed by the claimant asking the court to define a particular amount of interest. The court defined the amount then in an additional decision, rendered as an integral part of the recognition and enforcement decision;
c) a court decision in the case № 2521/930/2012 citing the resolution of an award with the following words added: “that constitutes [money equivalent of the compound interest at the date of the decision]”. In particular, the court inserted into its decision the precise sum of compound interest, calculated on the date of making the decision by applying the formula of compensation prescribed by the award.
However, the approach may be changed.
Notably, the Kyiv Court of Appeal held in the Order dated 23.02.2017., based on the recent decision of the Supreme Court dated 26 October 2016, stated that:
“[…] when a foreign arbitral award containing an obligation of the debtor to compensate compound interest, the precise amount of which is not defined, then there are no legal grounds to enforce the decision. Given that claimant requests such interest and in the absence of the court`s or other authority’s power to change the claimant`s request, there is no possibility for a partial enforcement of a decision. Otherwise, it would contradict subpara. b of para 2, Art. V of the New York Convention and paragraph. 6 of Article 396 of Civil Procedure Code of Ukraine.”
At this point of time, the decision is waiting for another revision of the higher court. Therefore, the issue of enforcement of GAFTA/FOSFA awards containing compound interest is currently left open.
Seven Tips: In What Way May Claimants Enhance Their Chances of Enforcement of GAFTA/FOSFA Awards?
The above outlined trends underline seven tips regarding how to avoid obstacles and successfully enforce arbitral decisions:
- A claim must be filed by a company mentioned in the recital of an award, or a company that obtained this right under an assignment agreement. Preferably, an assignment agreement would be concluded after the date of the arbitral award. Otherwise, the court may refuse the claimant in recognition since “the assignment agreement precedes the award”.
- Special attention should be paid to the evidence that the arbitral award came into force, i.e. that it is valid and final. In terms of such evidence, the extract from GAFTA/FOSFA arbitration rules or a letter from an arbitration institution that this particular award came into force would assist.
- The debtor must be registered or have property within the jurisdiction of the court before which the enforcement claim is brought.
- If there is a strong indication that the claim will be successful and there is a risk of dissipating the assets on the debtor’s side, it makes sense to ask the court for interim measures. Ukrainian courts are not reluctant to grant such measures. However, it should be noted that shall the interim measure be found as exercised without sufficient legal grounds, the claimant must afterwards compensate for all damages to the other party caused by a granted measure. In such a case, the court decision on interim measures is to be cancelled by the higher court.
- A claimant should be prepared for long-lasting procedures since there is a risk that the case will pass through all instances. The whole process may last from one and a half up to two years depending on the number of hearings, appeals, and new trials.
- It is advisable to send an arbitral agreement and notices via the same e-mail.
- A claim for enforcement and an arbitral award are to be in compliance with the New York Convention.
Overall, the approach of Ukrainian courts may be characterized to be pro-arbitration and in accordance with the international practice.
At the same time, there are not so many cases for the recognition and enforcement of GAFTA/FOSFA awards in Ukrainian courts. The reasons for noted results may be different: GAFTA/FOSFA awards against Ukrainian companies are enforced voluntarily; debtors that have Ukrainian beneficiaries and staff are incorporated in other jurisdictions; creditors do not start the proceedings because they do not believe that they will be successful due to the dissipation of debtor`s assets, or corruption in Ukrainian courts.
Then again, statistics are speaking for themselves: 50% of arbitral awards were enforced by means of court procedures during the last seven years. One more case is still in progress (Nibulon vs Rise), which concerns the obligation to pay compound interest. At this point in time, it is hard to predict the outcome of the proceedings.
To sum up, if the trends in Ukrainian justice on recognition and enforcement were synonymous to the fashion ones, we would recommend claimants to: choose the classic style, but keep an eye on the new winds of changes.
Ivan Kasynyuk, Partner at AGA Partners
Olga Kuchmiienko, Associate at AGA Partners
Before you get behind the wheel of the law firm, you should think about whether you need to actually do it. After all, you can obtain the status of the head manager and full independence through partnership, managerial position or individual practice. In addition, prior to becoming Managing Partner, it is preferably to acquire the relevant experience. This will provide an understanding of youself and your aspirations. This will help to feel your own style of management and building relationships. It won’t let you forget how the company and profession is perceived at the different stages of career.
I got behind the wheel of AGA Partners in 2005, having experience of a law firm Intern, Paralegal in classical law offices, Senior Associate at one of the best and most well-known law firms at the time, self-employed lawyer – free hunter, and Department Director of a large national company. In addition, I had a chance to work as in-house lawyer for about a month, but after realizing that this is not really my thing I left before the end of the probationary period. Overall, my professional experience comprised 9 years. In 28 years, I established my own company.
The first thing to understand is that the company is exactly what you need. You need to understand that you are ready. This should be your lifework, your mission. And from that moment the firm becomes a part of your life. Everything that happens here (your relations with the staff, partners and customers), defines you as well as behavior with family and friends determines you. The responsibility that you take of the firm, should satisfy and shouldn’t not cause any doubts. It's like having a child – no matter how difficult it can be, dropping it is not an option. Without this all the way forward is just impossible. By the way, I believe that there is no difference, whether you establish a company or accept it. It all depends on you when the wheel is in your hands. After all, you are the only person responsible for everything.
The second thing that I suppose Managing Partner should always remember is a formula of " first people, then business." This is my personal approach to work. For me it is important with whom I work, how we do this, for whom we work. And I cannot imagine our company without healthy, friendly, warm atmosphere in the office. Honesty and transparency in relationships are very important. We have developed horizontal communication where everyone can freely communicate with anyone, there is no military hierarchy. Another point is that we will never work with a client who misbehave with any of our people.
The third thing is – learn, Managing Partner, learn! There is plenty of information on business management, but not only this. You can use literature, consultants, trainings, any new knowledge, even art! You should be open to the world, feel it’s pulse. There will be no ideas, innovations, and breakthroughs without this. You should let these information flows pass through youself and rethink them. It is highly unlikely that someone will give you a magic recipe that will help immediately develop a company or just teach you everything and solve problems. However, if you reside in the information field, the brain becomes much faster and more inventive.
The fourth is that you should decide where and how you go. Choose the aims, strategy and tactics. Interestingly, it may all diametrically change over time. Life experience, Partners’ and lawyers’ willingness impose some imprint on the process. However, it should be fully controlled and extremely balanced. It is Managing Partner’s responsibility, because the wheel is in your hands and it’s you who turn it.
The fifth is that you should honestly answer the question of who you want to be (manager or leader). Who is a leader? That’s a good question. Leader is a jaded word that has become a banal cliche, but there is no more aptly word than that.
The leader’s philosophy differs from the philosophy of the head. The first difference is that the leadership must be proven. It is worth fighting for, and you can lose it by distancing yourself from those you work with, surrounding yourself with retinue, losing visual acuity. I can not tell which system is better – head or leader. But I can state that loss of movers and shakers is inevitable in “the head” system. However, such system is the part of our social and legal traditions. We know a lot of successful companies with this structure.
Overall, I can say by paraphrasing Lev Tolstoy that every happy company is happy in its own way. I saw completely different management models whereby legal business makes a profit, if we put profit a criterion of success, because another universal criterion is hard to reconcile. One thing that remains unchanged is the responsibility for everything.
If we have already used an analogy with the wheel, so it's like driving a car. You can both know the rules and don’t know. You can abide by the rules, and you can be easy-going about such a trifle. You can race and cut off everybody collecting sincere and not very good wishes or epithets from other drivers. At a certain distance such a driver can be ahead of others, but he risks both his license and vehicle. You can also ask godfather to give you flashers and loudspeaker, and demand to be given way. Most will do it, as all know who the godfather is. However, godfathers change. And the trouble is that they change suddenly. It is also possible to drive without regaining consciousness for years, and if the police catch you and take away the license you can just buy it again.
There are plenty of options. The main thing is to realize that you are not alone in your car. If everybody agrees, then drive the way you want. That's what is a team of associates.
Throughout the modern history of mankind, trade wars accompanied almost every military or political conflict between hostile states, ready to take the most radical actions for the sake of the victory. This is not surprising as trade directly affects the economy and, accordingly, the ability of the country to fight and resist successfully.
Unfortunately, in order to understand what “trade war” means, we do not have to look into the past, but we just need search in the latest news. As before, such actions nowadays constitute an integral part of any international conflict: trade blockades, sanctions, import duties, quotas and licenses, preferences and many other “weapons” are actively used by world players for their own purposes. Of course, the least “guilty” participants of the market – producers and trading companies of both countries – suffer the most from such conflicts. These players are blatantly forced to incur huge losses as a result of all sorts of restrictions and prohibitions, which often are fatal for their business.
The sphere of commodity trading is particularly at risk, as it is always likely that circumstances preventing contract execution will appear during a significant period of time between the moment of the conclusion of the contract and its execution. The probability of the ban can sometimes be foreseen, as in the cases with the adoption of mirroring sanctions. However, such events have the tendency to occur suddenly, especially given an ongoing armed conflict and the political situation. What can be done in this case?
To illustrate, it might happen that goods are sold in April and are to be delivered in September, but official authorities of a buyer’s country introduce additional duties for the import of goods. Who should bear such losses? Is it possible to refuse to supply or to take the goods?
Let us take as example the recent case of the introduction of import duties on the import of Russian products to Turkey and, in particular, the duty on corn and wheat which was established at 130%, and considering that the sale of corn of Russian origin took place in February with subsequent delivery in May.
First of all, it is worth paying attention to the contract concluded between the parties. As a general rule, the parties explicitly determine the buyer to be the party responsible for the import of the goods and for all the formalities associated with the import, including the payment of taxes and duties in the country of import. If the contract is silent, majority of grain and oil commodities contracts incorporate standard contract forms developed by Grain and Feed Trade Association(“GAFTA”) and Federation of Oils, Seeds and Fats Associations (“FOSFA”), which expressly state that all import duties, taxes, levies, etc., present or future, in country of destination, shall be for buyers’ account. If the contract does not incorporate any standard contract form, the parties should refer to any specific rules regulating their obligations under the contract. Most of such transactions are carried out by sea on the basis of CIF or FOB in accordance with the international rules of Incoterms, according to which taxes, duties and other official fees, as well as customs formalities payable upon importation of goods, are paid by the buyer.
Moreover, such contracts tend to incorporate English Law by implication from a standard form or an express agreement. Under the general rule, English law consider such duties as business risks, which do not release the responsible party from performing contractual duties.
That is, under the conditions described above, payment of the import duty on Russian wheat introduced by Turkey will lie with the buyer and will not release it from the obligation to take and pay for the delivered goods.
And, what is the case if the authorities of the buyer’s country prohibit the import of goods completely? Is the buyer’s refusal to take the goods due to force majeure circumstances reasonable in this case? The answer is not so clear and it depends on many factors.
Let us take as example a case under the Rules of Arbitration of FOSFA concerning a ban on import of agricultural products in the country of destination. A large agro-holding company (“Seller”) concluded a contract with agro-industrial company (“Buyer”) for the delivery of goods for import and further processing on the territory of the Buyer. According to the contract, the Seller should have delivered the goods on the DAF terms (Incoterms 2000). The place of delivery was the border between the states of the parties and the governing law of contract was English law.
The contract had a force majeure clause that ambiguously interpreted the consequences of imposing import restrictions and the Buyer’s responsibility for not obtaining an import license and other official permits necessary for the import of goods into the territory of his country. Soon after the contract was concluded, the Buyer reported on the governmental restrictions on imports of goods from the Sellers’ country and referred to the force majeure circumstances, making the execution of the contract impossible. Despite the official prohibition, the Seller refused to accept the Buyer’s notification of force majeure and proceeded to fulfill its obligations. During the next several months, the Seller repeatedly notified the Buyer about its readiness to deliver the goods and asked the latter to provide documentary instructions, without which further execution of the contract by rail was impossible. The Buyer confirmed that it could not take the goods, justifying its position by the onset of force majeure circumstances. In the meantime, the price of goods had significantly decreased, making the contract extremely unfavorable for the Buyer. By the end of the delivery period stipulated in the contract, the Buyer had terminated the contract, under the force majeure clause. In response, the Seller considered the Buyer to be in default. As the price for the goods decreased, the Seller demanded compensation for the difference between the contract price and the market price, to which the Buyer objected, arguing the force majeure circumstances and referring to the frustration doctrine under the English law which provides for an exemption from liability. Eventually, the case was submitted to the FOSFA arbitration at the request of the Buyer.
The Seller’s position consisted of two key arguments. Firstly, according to DAF terms, the obligation to obtain a license to import goods in the territory of the Buyer’s country rested on the Buyer, while the Seller’s duty was limited to the delivery of the goods to the borders between the states and did not imply importation into the territory of the Buyer’s country. Secondly, any restrictions on the import of goods into the territory of the Buyer’s country are not force majeure circumstances either within the framework of the contract concluded, including under the DAF terms, or in accordance with English law. In particular, restrictions on import of goods do not fall under the frustration doctrine referred to by the Buyer, as this circumstance did not prevent the Buyer from lawfully performing its contractual obligations, namely, accepting the goods at the contracted place of delivery.
The Tribunal observed that the ban on import had no effect on the fulfillment of the contractual obligations by either the Seller or the Buyer: the Seller could deliver the goods and the Buyer could accept them at the border between the states. At the same time, the import of goods to the Buyer’s country was not the responsibility of the Seller, who was responsible only for export while the Buyer had the obligation to import the goods. Consequently, the ban on imports was not a force majeure circumstance either under the contract, or under English law. Finally, the Tribunal decided that the Buyer could not refer to the ban on the import of goods and refuse to fulfill its contractual obligations. Having terminated the contract, the Buyer itself infringed the contract and therefore must compensate the Seller for the losses incurred as a result of the Buyer’s non-fulfillment of the contract.
The position of the arbitral tribunal under the FOSFA rules shows that impossibility to import will not discharge the contract under the doctrine of frustration. The intention for the goods to be processed in Buyer’s state was indeed the reason why the Buyer concluded the contract; however, the impossibility for such purpose to be achieved was not a sufficient ground to discharge the Buyer from its contractual obligations. The decision generally follows the line adopted by English courts in cases with similar circumstances. (See Congimex Companhia Geral de Commercio Importadora & Exportadora S.A.R.L. v. Tradax Export S.A  1Lloyd’s Rep. 250 and Bangladesh Export Import Co Ltd v. Sucden Kerry S.A.  2 Lloyd’s Rep. 1) The parties clearly outlined the scope of their duties in the contract and did it in such a way that the import ban would not make the performance illegal. First, the parties agreed on the DAF Incoterms which specifically provides that the Seller’s obligation is to place the goods at the border between the parties’ states, cleared for export but not cleared for import. Second, the parties agreed to English law as the governing law, which provided adequate level of protection against import prohibitions, preventing the parties to use such circumstances in bad faith and escape from their respective contractual obligations.
Unfortunately, trade conflicts are part of the current trade and economic policy of many countries and they are an inherent risk factor, which must be taken into account when doing business with these countries. Mostly driven by political reasons, the states are always ready to introduce trade restrictions in order to harm the opponent as much as possible. Like any war, a trade conflict entails losses on both sides. In most cases, this practice becomes detrimental to both states, not only to the one introducing the ban, as the case presented above shows.