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13 June 2019
Ukrainian court proceedings rarely involve foreign states, mainly due to the doctrine of absolute sovereign immunity embedded into Ukrainian legislation.
In accordance with the International Private Law, consent from a foreign state's competent authority is required before:
However, these immunities are provided on a reciprocal basis, and the Cabinet of Ministers is authorised to approve retaliatory measures with respect to a foreign state and its assets if:
Given the events and hostilities between Ukraine and Russia regarding Crimea and the Donbass region and the number of investment arbitrations initiated against Russia in accordance with the Ukraine-Russia Bilateral Investment Treaty (BIT), the Ukraine Cabinet of Ministers was expected to approve certain exemptions from Russian immunities in Ukraine so that parties with claims against Russia can effectively pursue them in the Ukrainian courts. The need for a respective decision by the Cabinet of Ministers became apparent in May 2018 when a number of Ukrainian companies procured an arbitral award in proceedings between Everest Estate LLC and Russia. However, the Cabinet of Ministers has remained inactive in this regard.
When Everest Estate filed a petition with the Kiev Appeal Court to recognise and enforce the respective arbitral award and freeze certain assets allegedly owned by Russia, few people believed that it would succeed. However, the court paid little attention to the issue of Russia's sovereign immunities when it froze certain assets that were allegedly owned by Russia and granted the recognition and enforcement of the arbitral award. The issue of immunities was mentioned only once, when the court issued its 25 September 2018 judgment recognising and enforcing the arbitral award in Ukraine. In that judgment, the court limited itself only to quoting the 2015 letter from the Russian Ministry of Justice to the arbitral tribunal in Everest Estate. Although the ministry had asserted that none of Russia's actions should be interpreted as a waiver of any sort of immunity – including immunity from suit, immunity from freezing or other provisional measures and immunity from enforcement – the Kiev Court of Appeal provided no reasoning as to why the respective immunities did not apply.
As the freezing injunctions granted by the Kiev Court of Appeal were broad and effectively nearly paralysed the activities of certain banks with Russian capital (eg, VTB, Sberbank and Prominvestbank), the judgment was challenged in the Supreme Court.
Russia did not participate in the Supreme Court proceedings, but forwarded two letters to Ukrainian courts in which it claimed that:
However, these letters backfired, as the Supreme Court interpreted them as confirming that Russia has assets in Ukraine and thereby held that one of the requirements for the Ukrainian courts to assume jurisdiction over the case had been met. That said, even without those letters, the Ukrainian courts would still have had jurisdiction over the case since, as stated by the Supreme Court, the fact that Russia has assets in Ukraine (in particular, assets located in the occupied territory of Ukraine, such as military and other assets) is well known.
As regards the issue of immunities, the Supreme Court referred to Article 79 of the International Private Law, which is believed to profess the principle of absolute sovereign immunities, but has been interpreted differently. In particular, the Supreme Court relied on:
In concluding that Russia does not enjoy immunity from suit, the Supreme Court stated that the Russian Federation is a signatory to the United Nations Convention on Jurisdictional Immunities of States and their Property and that the rules of that convention constitute customary international law which Ukraine must honour. In reaching this conclusion, the Supreme Court echoed the similar reasoning given by the European Court of Human Rights in Oleinikov v the Russian Federation (Case 36703/04).
As regards Russia's immunity from provisional measures and enforcement, the Supreme Court initially quoted Article 19 of the United Nations Convention on Jurisdictional Immunities of States and their Property, which provides that:
no post-judgment measures of constraint, such as attachment, arrest or execution, against property of a State may be taken in connection with a proceeding before a court of another State unless and except to the extent that this is indicated in the arbitration agreement or a written contract.
The Supreme Court went on to interpret Article 9, Paragraph 3 of the Ukraine-Russia BIT, which states that "the award of arbitration shall be final and binding upon both parties to the dispute. Each Contracting Party shall undertake to execute such an award in conformity with its respective legislation". Based on its analysis, the Supreme Court ruled that in agreeing to the language of the BIT, Russia had effectively waived not only its immunity from suit, but also its immunity from provisional measures and enforcement.
This latter finding came as a surprise, especially in view of the arguments raised by Ukraine in separate proceedings in Russia which concerned the enforcement of the International Centre for Settlement of Investment Disputes award in OAO Tatneft v Ukraine. In those proceedings, Ukraine pleaded that the language of Article 9, Paragraph 3 of the Ukraine-Russia BIT was insufficient to constitute a waiver of immunities from jurisdiction for the purposes of subsequent recognition and enforcement, and the Russian court concurred with this argument. However, neither party in Everest Estate v Russia pointed to that interpretation of the Ukraine-Russia BIT; the outcome of the case might have been different had the Supreme Court evaluated these circumstances.
In any case, the Supreme Court's judgment is a dramatic departure from the Ukraine courts' former approach of treating sovereign immunities in absolute. It therefore opens up Ukraine as a possible venue for the enforcement of arbitral awards against other states. However, the question remains as to whether Ukraine will accord the same treatment to immunities of foreign states when:
Although few Ukrainian assets are owned by foreign states, there are a number of joint ventures with states of the former Soviet Union in which the states hold a respective shareholding directly or through a governmental agency, which may be targeted. On the other hand, the Supreme Court's judgment has made it difficult for the Ukrainian Ministry of Justice (which acts on the country's behalf in foreign proceedings) to argue in new enforcement proceedings that wording similar to that contained in Article 9, Paragraph 3 of the Ukraine-Russia BIT is insufficient to waive immunities against enforcement and provisional measures.
Another important issue which the Supreme Court addressed in Everest Estate was that of enforcement against assets which were indirectly owned or controlled by Russia. Initially, the Kiev Court of Appeal ordered the freezing of Sberbank, VTB and Prominvestbank's assets where Russia was the final beneficiary, but did not directly hold shares. When assessing the legality of the freezing order imposed by the Kiev Court of Appeal, the Supreme Court largely relied on Russian law, which – similarly to Ukrainian law – promotes the doctrine that:
The Supreme Court went on to state that under Ukrainian law, a freezing order may be imposed only with respect to assets directly owned by Russia as the debtor under an arbitral award and not with respect to foreign or Ukrainian legal entities. On this premise, the freezing order was substantially revised to apply only to those assets of Sberbank, VTB and Prominvestbank which were owned by Russia. Some claimants argued that in accordance with European Court of Human Rights practice, the assets of state-owned legal entities may be foreclosed with a view to recover the state's debt in cases where the respective legal entities do not enjoy sufficient institutional and operational independence. However, the Supreme Court provided no comments in this regard.
As a result of the Supreme Court's decision, the outlook for recovery following the enforcement of the Everest Estate arbitral award against Russian assets in Ukraine does not look particularly optimistic, at least while it remains unclear whether the claimants or Ukrainian bailiffs have located any assets which are directly owned by Russia and do not enjoy immunity from enforcement in accordance with international law.
However, the chances of recovery may increase if the Ukraine Cabinet of Ministers exercises its powers under the International Private Law to allow enforcement against assets indirectly owned or controlled by Russia. The grounds for exercising such power continue to mount, especially in view of the recent order of the Hamburg-based International Tribunal for the Law of the Sea, which acknowledged that Russia breached the sovereign immunities of Ukraine by detaining 24 crew members and intercepting three Ukrainian military vessels during the accident which took place near the Kerch Straight in November 2018. Should Russia fail to comply with the order, which looks likely, the Ukraine Cabinet of Ministers will have to consider appropriate measures, which may allow for the recovery of Russia's debts from assets which it indirectly owns or controls.
For further information on this topic please contact Vsevolod Volkov at Everlegal by telephone (+380 44 337 0016) or email (email@example.com). The Everlegal website can be accessed at www.everlegal.ua.
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