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05 December 2019
Historically, Ukrainian law has not provided for the recovery of interest awarded in arbitration proceedings. In practice, the courts and the authorities were not empowered to amend an arbitral award when deciding on its recognition and enforcement. Thus, if a party succeeded in arbitration and was awarded an amount plus interest, it could not recover the interest during enforcement proceedings unless the amount of such interest was expressly stated in the award or the party made the relevant calculation when submitting the award for recognition and enforcement. As enforcement and execution proceedings can take several years, parties often missed out on significant amounts of interest. Unsurprisingly, this was a point of frustration for foreign creditors seeking to enforce arbitration awards in Ukraine.
On 1 January 2019 amendments to the Civil Code of Procedure entered into force, allowing for post-award interest and penalties to be recovered up until the award's final execution.(1) Now, if an arbitral award provides for the payment of interest and penalties, the court will indicate the recovery of such interest and penalties in its decision on the recognition and enforcement of an arbitral award up to the moment of the decision's execution.(2) The final amount for recovery will be calculated by the executing authority and not by the court ordering the award's recognition and enforcement.
These amendments have been welcomed by foreign creditors seeking enforcement of arbitration awards and, most notably, the Ukrainian courts.
Under Ukrainian law, state courts cannot intervene in arbitration.(3) Therefore, when considering applications for the recognition and enforcement of an arbitral award, the courts will order the enforcement of the award as a whole and will generally not consider the issue of the method of calculating accrued interest.
This approach is sufficient if an award clearly states the interest rate and the applicable method of calculation. However, difficulties arise when the interest calculation is poorly worded or dependent on foreign lending rates, which gives unconscientious debtors grounds of defence.
For example, in a recent case, RHI Glas GMBH sought the recognition and enforcement of an International Arbitration Centre of the Austrian Federal Economic Chamber arbitral award and recovery of interest calculated at a rate of 8% and 9.2%, which was higher than the current annual base lending rate of the Austrian Central Bank.(4) In opposing the application, the respondent claimed as follows:
Thus, the respondent held that as the above omissions made it impossible to identify the award's execution procedure and considering that the courts could not order the partial execution of an award, the application should be rejected as the award violated Ukrainian public order.
In considering the respondent's arguments regarding the unclear interest rate calculation, the Kiev Court of Appeal confirmed that it was entitled to check only the respective provisions of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and should not assess the scope of the award or clarify its content and the procedure for its execution. The Kiev Court of Appeal also confirmed that the accrual of interest with no end date did not violate Ukrainian public order and should be calculated by the executing authority.
When dealing with the recognition and enforcement of arbitral awards, the Ukrainian courts do not normally deal with methods of calculating interest which are based on foreign law or differ from the one adopted in Ukraine. As such, this issue has traditionally been left for the Ukrainian authorities to resolve, which is where difficulties arise.
Even if a Ukrainian court orders the recognition and enforcement of an arbitral award per se, (ie, full relief granted in any currency), the successful party should refrain from celebrating if the interest and penalty calculation is unclear or refers to a foreign state's law. A good example of this is the high-profile case of Nibulon v Rise,(5) which proves that obtaining enforcement of an arbitral award in Ukraine is only part of the battle.
Nibulon concerned the recognition and enforcement of a Grain and Feed Trade Association (GAFTA) award which was issued in 2014. In September 2014 Nibulon applied to the Ukrainian courts for the recognition and enforcement of the award in Ukraine. The proceedings took almost four years and comprised three rounds of reconsideration by the courts of all instances. During that time, Ukraine underwent a judicial reform which, among other things, amended the civil procedure rules for the recognition and enforcement of international arbitration awards.
The GAFTA award in Nibulon provided for the recovery of the principal debt ($17.5 million) and the compound interest accrued from the date of default (2011) until the final payment under the award calculated on a quarterly basis.
The sticking point for the Ukrainian courts during the recognition and enforcement proceedings was the interest rate because – as mentioned above – Ukrainian law did not allow for the recovery of post-award interest of an unspecified amount and without a final date for calculation until 2019. Until then, creditors could try to recover the post-award interest only for the period between the date of the award and the date of the application for its recognition and enforcement by identifying the specific amount of such interest.
On 15 May 2018 the Supreme Court issued the final judgment in Nibulon. Rise was not in a position to voluntarily comply with the judgment and tried to obstruct execution proceedings however possible, including by:
Further, Rise petitioned the court to engage an expert to evaluate the method for calculating the interest provided for in the GAFTA award. In particular, Rise rejected the calculation method adopted by the Ukrainian bailiffs (which was unsurprising, given that the calculated interest amounted to approximately $43.7 million) and the incorrect Ukrainian translation of the GAFTA award, which had resulted in it adopting an inadequate calculation method. However, in considering this application, the court refused to appoint an expert to evaluate the calculation method and ruled that a decision on the applicable rate and currency of interest would require it to issue a separate judgment clarifying and interpreting the award, which was inadmissible under Ukrainian law.
Although the Ukrainian courts dismissed all of Rise's challenges as unsubstantiated, the challenges nonetheless complicated the enforcement proceedings to such an extent that Nibulon is still waiting for recovery.
Thus, although Ukrainian law now allows for the recognition and enforcement of arbitral awards which grant an undetermined amount of interest with no fixed maturity date or clear method of calculation, in practice, challenges may still arise during the execution proceedings.
For further information on this topic please contact Marina Ryashchenko at Everlegal by telephone (+380 44 337 0016) or email (firstname.lastname@example.org). The Everlegal website can be accessed at www.everlegal.ua.
(4) Case 824/265/18.
(5) Case 759/16206/14-ц.
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