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The Kozatskiy’s Failure


Dmytro Shemelin, Lawyer at Ilyashev & Partners Law Firm
Source: The Yurydychna Praktyka

In case of invalidation of the principal agreement, the arbitration clause is declared null and void – decided the Supreme Court of Ukraine in case on investing in the Kozatskiy Hotel

The statement of the Supreme Court of Ukraine that the arbitration clause is null and void, if the principal agreement on joint activity is illegal, is extremely controversial. In international practice, the principle of “severability” of the arbitration clause is generally accepted: it remains valid regardless of validity of the principal agreement.

To “intentionally” cancel the arbitration clause, as a rule, it is necessary to show that it is deficient to some extend: for example, a dispute can not be considered in the court of arbitration at all.

This approach is very rare, and at first glance, it is also not visible in this case. Even if the Kozatskiy Hotel promised to transfer the property, which it could not transfer according to law (though how then the Ministry of Defense approved the agreement?), the court of arbitration may well consider the consequences of such actions for the parties. It will not influence the ownership right of the state in any way as the state is not a party to the arbitration and is not bound by the arbitration award.

Moreover, the position of the Supreme Court of Ukraine in this case is contradictory: if the arbitration clause is not valid, the award approved with reference to it is also invalid, but literally in the next paragraph the SCU confirms that such arbitration award (not recognized in Ukraine!) can be the ground for termination of the Ukrainian proceedings.

The SCU could easily uphold the arbitration clause. Termination of proceedings in the principal claim would be fully legal – the dispute has already been considered on merits in the award (the principle of res judicata, except that the award should be firstly recognized in Ukraine).

As for counter-claim, as mentioned in the resolution of the High Commercial Court of Ukraine in the same case on July 10, 2012, the claimant’s motion for transfer of counterclaim to the court of arbitration was filed after the first objections in the case, whereby the court could transfer nothing quite legally and continue the proceedings.

Therefore, the last question would remain: whether the award on merits of the principal dispute (i.e. on performance of the agreement) can have the force of res judicata in the dispute on counterclaim, i.e. on invalidity of the agreement. It all would depend on the issues that actually were considered by the court of arbitration. It is quite legitimate to conclude that arbitration and judicial proceedings in this case do not intersect.

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