Ukraine’s Supreme Court pulls the plug on JKX emergency award enforcement

CMS Cameron McKenna,
Kyiv, Ukraine, Wed, Nov 21, 2018

By resolution dated 19 September 2018 (the “Resolution”) Ukraine’s Supreme Court confirmed denial of enforcement in Ukraine of the emergency award (the “Emergency Award”) rendered in accordance with Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce (the “SCC Rules”) in JKX Oil & Gas plc et al v. Ukraine case. This Resolution is final and cannot be further challenged.

The dispute originated from Ukraine’s 2014 decision to drastically increase rental fees for natural gas production from 28% to 55%. JKX Oil & Gas plc and several other companies (the “JKX”) instituted a series of investment arbitrations against Ukraine under Energy Charter Treaty, Ukraine-UK and Ukraine-Netherlands BITs, including arbitration under SCC Rules. On 14 January 2015, the emergency arbitrator Rudolf Dolzer issued award (the “Emergency Award”) whereby ordered Ukraine to temporarily refrain from applying the increased rate of rental fees (i.e., above 28%) to JKX until the tribunal reached decision on interim measures.

After several rounds of consideration of the case by Ukrainian courts, the Supreme Court finally confirmed refusal to enforce the Emergency Award with reference to public policy violation and lack of proper Ukraine’s notification about the investment dispute.

In particular, the Supreme Court accepted Ukraine’s argument that enforcement of the Emergency Award would result in application of different tax rates to a particular person without amendment of relevant tax laws. The Supreme Court decided that this approach would contradict fundamental principles of Ukrainian tax legislation and accordingly would run contrary to Ukrainian public policy. The Supreme Court opined that any special treatment of taxpayers is possible only by amendment of relevant tax laws.

Further, the Supreme Court noted that JKX did not comply with the three-months cooling-off period in accordance with Article 26(2) of Energy Charter Treaty. JKX sent the notice of investment dispute to the Administration of the President of Ukraine, whereas the Supreme Court ruled that the notice should have been sent to the Ministry of Justice. The Supreme Court oddly treated that circumstance as a ground to refuse enforcement under Article V(1)(b) of New York Convention (i.e., Ukraine was not properly notified about arbitration).

At the same time, neither the Supreme Court nor the lower courts ruled out the possibility of the enforcement of emergency awards in Ukraine in principle. In particular, the Supreme Court did not opine on whether emergency awards can be enforced under New York Convention, but explicitly referred to Article V of New York Convention when citing legal grounds for refusal of the enforcement. Therefore, there is likelihood that Ukrainian courts will enforce emergency arbitral awards in other proceedings.

Still, the fate of the Emergency Award in Ukraine posed a number of unanswered questions. Although the Supreme Court appears to have impliedly recognised that emergency arbitral awards are enforceable under the New York Convention, the Resolution demonstrates that Ukrainian courts tend to treat with caution arbitral awards, which require Ukraine to temporarily apply different tax treatment to any person.

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