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Transit Dispute in Stockholm: Prospects of Lawsuit “Naftogaz v. Gazprom”


Dmytro Shemelin, Lawyer at Ilyashev & Partners Law Firm
Source: RBC – Ukraine

The judgment will be declared in the mid-second half of 2016

The arbitration claim under the contract on gas transit was filed by Naftogaz of Ukraine against Gazprom yet in October 2014. Meanwhile the arbitration proceedings do not go too fast.

According to the official release of Naftogaz, on May 1, 2015 only a claim of NJSC in the dispute was filed. Now Gazprom will provide a statement of defense, and then the parties may well exchange written submissions again.

Based on the similar cases, it can be assumed that a written stage of the dispute will last about six months. After that (unless the tribunal decides to settle the dispute in parts) an oral hearing will be held (somewhere at the beginning of 2016), and the arbitrators will go for adjudication.

Probably, the judgment will be announced in mid-second half of 2016. After that, it is may be appealed.

Sure, it is the simplest scheme. The tribunal may adjudicate on specific aspects of dispute (e.g. separate invalidation of some provisions of the transit contract and compensation of losses), thus, the case may delay for even longer, since each of these aspects requires a separate exchange of written submissions and, probably, a separate hearing.

Prospects of success of Naftogaz on merits of the dispute should be evaluated by those skilled in the Swedish law governing the transit contract.

Obviously, Naftogaz would claim that implementation by the EU of the Third Energy Package (including the Gas Directive 2009/73/EC) resulted in invalidity of certain provisions of the transit contract, which must be cancelled or amended.

Amendments to the Ukrainian legislation (including the Law “On the Natural Gas Market”) are less important here, since the contract is subject to the Swedish law. It means that the risks of legislative changes in Ukraine are referred to Naftogaz.

In anticipation of such changes a reservation to paragraph 13.2, which obliges the parties to agree on replacement of such invalid provision by a new one with “as close as possible” economic result, was inserted in the transit contract. Whereas the parties cannot do it now, their dispute will be resolved by the tribunal.

Considering that in April 2015 the European Commission officially accused Gazprom of violation of the European antitrust law (Statement of Objections of 22.04.2015), we can assume that the transit contract is likely to contain some illegal provisions and, obviously, will be changed by the decision of the arbitral tribunal.

Unfortunately, Ukraine almost lacks practice in cases where the court does not simply invalidate a specific provision of the contract, but also changes the contract on the basis of evaluation of the economic effect. Therefore, the award will be particularly interesting for the Ukrainian lawyers.

The second question of monetary compensation seems ambiguous at first sight.

The transit contract contains nothing like take or pay clause from the gas supply contract, i.e. Gazprom’s strict obligation to pay for the pumping of X cubic meters of gas regardless of whether they were actually supplied to Naftogaz for pumping.

The lack of take or pay clause analogue in the transit contract (while it was envisaged in the gas supply contract) may indicate that the parties did not intend to fix Gazprom’s obligations so firmly.

Finally, paragraph 3.2 of the transit contract can be interpreted so that Gazprom has to pay only for transit of gas actually requested by the European consumers. Notwithstanding that the volume of gas must be confirmed by independent auditors.

Thus, if Gazprom redirected some part of transit through other pipelines, income of Naftogaz would be proportionally reduced.

On the other hand, if provisions of the transit contract have been unlawful for several years (e.g. Gas Directive was adopted just six months after the signing of the transit contract), and Naftogaz is able to prove that it had the right to a higher transit fee all this time, it may well be entitled to compensation for lost profits over the past periods.

Change of the transit contract may affect the transit price in future periods. It may, e.g. cause an interesting conflict of law when the tribunal considers the transit tariff inconsistent with the Ukrainian law (in accordance with resolution on temporary tariffs for transit, No. 510, passed by the Cabinet of Ministers).

Naftogaz will be between a rock and a hard place. On the one hand – a mandatory resolution of the Cabinet of Ministers, and on the other – not less mandatory award.

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