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Roman Marchenko, a Senior Partner of Ilyashev & Partners Law Firm: “Gazprom Will Not Make Any Payments Voluntarily, Naftigaz Will Have to Go a Long Way“


Roman Marchenko, Senior Partner at Ilyashev & Partners Law Firm

Source: Ukrainian News

On October 01 the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) finished oral hearings regarding the dispute between the National Joint Stock Company Naftogaz of Ukraine (“Naftogaz”) and Public Joint Stock Company Gazprom (“Gazprom”) under the Agreement on sale and purchase of gas as of 2009. Ukraine is waiting for the decision to be passed in March 2017. It should be reminded that the mentioned Arbitration Institute is having under its consideration two disputes between the companies: regarding the agreement on sale and purchase and regarding the transit agreement. Apart from change of the contractual provisions Naftogaz in aggregate seeks compensation of more than USD 28.3 bln. Ukrainian society has high expectations towards the results of such legal proceedings which will supposedly put the long-lasting dispute to rest. But the matter is not as simple as it seems. Roman Marchenko, a Senior Partner of Ilyashev & Partners Law Firm, who was once appointed as an arbitrator by Stockholm arbitration court gave an interview to Ukrainian News, the national news agency, about particulars of the arbitration proceedings and of the dispute between Naftogaz and Gazprom, as well as described the mechanisms and ways of enforcement of the decision if one or the other party fails to abide the decision upheld by the arbitration court.

Have there ever been in the world history any similar arbitration proceedings with such a huge sum of relief claimed and lengthy term of consideration as in the dispute between Naftogaz and Gazprom and could such dispute be called something out of the ordinary?

The matter is that among the particulars of the arbitration process, in contrast with regular court process, is privacy, including privacy of proceedings and confidentiality of the final decision. All, which Naftogaz and Gazprom are disclosing now, i.e. – the amount claimed, grounds, substantiations etc. – is being made on the basis of their own free will. Very often parties participate in arbitration court processes not declaring such participation and not making it public. This is why it is difficult to definitely say that there have been no decisions in respect of larger amounts at all. On the surface, judging from a number of cases which Gazprom had with other European buyers in the process of denying the “take or pay” principle, our case is the biggest.

And if we take Gazprom and the history of its arbitration practices would these sums also be on the top places among all the known cases? It depends. There are cases of YUKOS (companies of YUKOS group in its dispute with the Russian Federation) where the final arbitration awards implied a huge sum of compensation (more than USD 50 bln). There is enough cases with larger awards but in each case (even if we forget the GAZPROM’s cases and “take or pay” principle) the sums claimed by two monopolies, Naftogaz and Gazprom, are similarly quite substantial.

Does it happen very often when the arbitration court reviews mutual claims of the parties who ask it to enforce certain claims onto their partners? Very often. It is a so-called legal-psychological approach. In contrast to a regular court, which usually tries to look into the matter using a “black and white” principle, an arbitration court is more inclined to looking for a compromise and finding a neutral decision. Experienced lawyers, of course, are aware of the fact that if you file a sizeable counterclaim you will have more chances to decrease the damage inflicted by the potential court decision. It means that such cases when the parties file counterclaims are not so rare. I may say this as a head of arbitration practice at Ilyashev and Partners Law Firm, and we supervise a huge number of such cases. At the same time I acted as an arbitrator in many arbitration proceedings, including the proceedings in Stockholm arbitration, and know about the situation, so to say, “inside-out”.

Can the arbitration court take consideration for political moments when considering the cases? Formally, it cannot. But we understand that it is humans we are talking about. As a rule there are three arbitrators. They are not living in vacuum, but in a today’s system of coordinates, they daily watch the same TV programs that we watch; living in another state they have access to the same information content etc. Another matter is that they, as professional lawyers, will never admit that they had fallen under the influence and you are sure will not see this in the final award. Usually, especially in such categories of cases, the arbitrators are very respectable lawyers with vast experience, independent, having spotless reputation which they meticulously hone because it is the reputation which earns them money.

Now when the verbal hearings in relation to the Agreement on sale and purchase are underway is it possible to call this stage to be the most important and the one which will influence the final award of the arbitrators?

Of course verbal hearings constitute the high point of the process but they do not substantially change the position of arbitrators in the end. It happens, for example, when witness statements are very important for settlement of the case. The case in question is not related to the category of cases where arbitrators may change their opinion because of the witness statements.

At some point in the past a very well-known oligarch was trying to prove that another very well-known oligarch had agreed to sell him a TV channel under an oral agreement secured by a handshake. In the mentioned case the witness statements were very important: what happened and when, how it happened, circumstances of the case, who was present at the meeting, what promises were made etc. In our case it goes about written materials and in the process of upholding a decision consideration of such materials will prevail.

The Parties expect to receive the award in the 1-st quarter of 2017. On which stage the process will be throughout all this time?

After the hearing the arbitration tribunal may, for example, ask for one additional round of written filings. What is going to happen next? An arbitration award must be written. In the case like this it will consist of 100-200 pages; this is not a usual three-page decision of a Ukrainian court. In addition its final version must be coordinated between three arbitrators. We are aware that ordinary people may have many opinions, and the lawyers have even more. These are the matters which will take the largest portion of time.

You are saying that under the results of the hearings an additional round of exchange of opinions may be appointed. Will it extend the expected term of upholding a decision? Yes, it may – for a month or, maybe, for a little bit longer. Frankly speaking in such category of cases it is absolutely normal for a case to be considered in the course of 2-3 years. This is why there is no point expecting swift decisions here.

Are the witnesses claimed by the parties ignore the summon to the hearing? By the way, may, for example, Ms Tymoshchenko (who was directly involved into the signing of the disputed agreement) refuse to participate in the process?

This is not a court of a national jurisdiction and the arbitration court does not have the mechanism of enforced delivery to the court of the witnesses who refuse to provide official statements like, for example, it would be in a Ukrainian national court. Arbitration court does not do things like these, it does not have such powers. This why on practice such situation is settled as follows: each party provides a list of witnesses which it wishes to question during the process. Of course it is done in such method: each witness provides written statements which are attached at a certain stage for the arbitrators. The arbitrators and another party they consider such statements and say: “Thank you very much we have no more questions towards a certain witness and are not going to question him”. Certain witnesses are not questioned at all if the result of such questioning is doubtful. Nevertheless, questioning procedure means additional time and money.

Later the court defines the list of those witnesses who are going to be questioned and usually the party which submitted statements of such witness is obliged to bring such person to the court for questioning. There is no direct sanction if the party fails to bring its witness for questioning. But if such party has provided such written witness statement to the court and the witness fails to appear before the court at the request of the arbitration court or of another party such document will likely be dismissed as unsubstantiated. What is more, credibility of the party which provided the mentioned witness may be disturbed. This is why the parties treat it very seriously and file statements only of those people who, at the very least, provided a preliminary consent to appear before the court.

Can the arbitration court initiate questioning of the witness on its own accord? In theory this is possible, but in practice the arbitrators try to avoid it because we are talking about adversary proceedings, each party is represented by a large number of professional lawyers who devise their own defense strategy in the case. It is their task to convince the tribunal of the truth of their opinions.

Can the arbitration award be appealed somehow? Are there any appellate instruments or such award is final? Under the general rule the arbitration award is final and is not subject to appeal except for a very limited number of cases. If we talk particularly about Stockholm arbitration court the concerned party may file a complaint to Stockholm court of appeal. But this does not constitute appeal in Ukrainian understanding of the word – a complaint may be filed on the basis of a very limited number of grounds, for example, when the tribunal has failed to inform the parties about the hearing, the award was upheld in the absence of a party and such party was not aware that such process was underway – clearly, this is not our case. Say, the arbitration court goes beyond its commission. For example, arbitration was to review the dispute regarding the contract on supply of gas and, instead of this, renders the award regarding the dispute on transit agreement between these same parties, or reviews the title to Ukrainian gas transmission system. I do not think that in out case the arbitration court will go beyond its commission under the arbitration clause. With the high degree of probability the award will not be cancelled and will be final. In any case the arbitration award will enter into force immediately from the moment when it is upheld.

What will be the mechanism of enforcement of the arbitration award? Are the national jurisdictions obliged to implement such award via their own court decisions?

Yes, there is New-York Convention, 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. It stipulates that each country – signatory to the Convention – must recognize the arbitral awards made by arbitrators in other countries as binding. If we talk about Ukraine, for example, the district court which has the jurisdiction over the area of registration of Naftogaz (should Naftogaz lose the case) will hear the claim to be filed by Gazprom on the recognition and enforcement of the award. The decision of Ukrainian court may be challenged, appealed etc.

Let’s assume that under the Arbitration award Gazprom receives the right to certain compensation, files a claim to Shevchenkivskyi district court in Kyiv and the latter, acting through patriotic motives, dismisses such claim. Is such an option real?

Firstly, if we touch the matter of bias of judges, yes, it exists both in Russian Federation and Ukraine. I may recall how in 2004 Stockholm Arbitration court rendered the award against the State Property Fund of Ukraine under the claim filed by a Cyprus company TMP Energy Limited. According to the said award several planes of our client (State Enterprise ANTK Antonov, aircraft manufacturing company) were arrested in Belgium and Canada. The courts of the states to which TMP filed applications for enforcement of the award – Canada, Belgium, Israel and France – upheld positive verdicts. The only state which refused to enforce the award made against the State Property Fund was Ukraine. Of course, Ukrainian or Russian courts use a so-called concept of violation of “public order” referring to the fact that recognition of the arbitration award will contradict the principles of the legal system. It, although more rarely, happens in the relations when important state interests are involved. Quite many countries, not only the Russian Federation, abuse it, by the way.

So, if Ukrainian or Russian courts will take a so-called “patriotic” position will it be impossible for Gazprom and Naftogaz receive compensation under the arbitration award?

The parties have the right to search the assets of the opposing party in other jurisdictions and such struggle has been waged for decades. For example, in case of the awards made in relation to the Russian Federation, the claimants have been “prowling” all over the world trying to arrest anything. There were various efforts to impose arrest onto the money at the correspondent accounts, planes of the Presidential air fleet, pictures of Pushkin’s museum on display abroad, a sailing ship “Tovarishch”, a building of the Russian trade mission etc. Known is the recent attempt of the shareholders of YUKOS to impose arrest onto EUR 2 bln which France was going to return to the Russian Federation for helicopter aircraft carriers which France decided not to supply to the Russian Federation. The matter of actual enforcement is a separate big legal problem.

But Gazprom has more assets abroad? It must be understood that enforcement under the award made against Gazprom may be applied only to Gazprom’s assets. At the same time Gazprom is a joint stock company which carries various business-projects abroad not necessarily on its own behalf. More often these projects are carried out on behalf of its indirect subsidiaries and joint enterprises. This is not an easy task and effective enforcement of the positive award will be up in the air. For example, there may be efforts to try to impose arrest onto the transit gas which is piped via the territory of Ukraine, but here also may be the nuances like, who is going to be the owner of the gas as of the moment when the gas is on the territory of Ukraine.

Would it be possible to alienate the property of the state (as a shareholder) under the arbitration award? To do this it will be necessary to have a legal ground for settlement by the state of the indebtedness of its state company. When it comes to Naftogaz such theory is much more workable. For example, in the case which I previously mentioned, when Antonov airplanes were arrested, the Canadian judge, when providing the reasons why she had done that, gave a very poetic description: if the state of Ukraine is a rose, the State Property Fund is a rose bud, and Antonov is the smell of such rose. It means that they directly applied the concept that it was a unified owner, a unified asset and, although a complex structure is applied, the state enterprise may be liable for the debts of the state. In Gazprom’s case it will be more difficult to apply this concept because Gazprom is a joint stock company which has other shareholders who will unlikely be liable.

Apart from monetary compensation Naftogaz, for example, requires to introduce amendments to the agreement. Should the arbitration court satisfy such claim, how will it be enforced? Will the arbitration court draft the contractual provision itself or will it provide the parties with a certain deadline to carry out negotiations and bring the agreement in conformance with the arbitration award?

Under the general rule after making the award the arbitration tribunal is dissolved, so, it does not have powers to follow enforcement of its award. This is why the arbitration tribunal tries to structure its award using the imperative phrases which the parties will follow on their own accord. As for introduction of amendments to the agreement, various options are possible: certain provision of the agreement may be laid down in a certain form, certain provision of the agreement may be cancelled etc. If the parties fail to perform such provisions new arbitration process is organized, for example, enforcement of indebtedness in view of failure to abide by the arbitration award.

If the arbitration tribunal orders, for example, to introduce amendments to a certain provision and cancel another provision, will it mean that this automatically introduces amendments to the agreement?

It undoubtedly does, but the losing party may claim, for example, that the arbitration tribunal did not have such power and was only to impose obligation onto the parties to do certain things and this may be a separate legal battle within the process of challenging or recognizing the award.

And does it work?

Arbitration tribunal is not a state court. Let’s say in earlier times the states put the debtors into debt pits for failure to abide by court decisions; now in relation to failure to abide by a court decision there is an Article 382 of the Criminal Court. Arbitration court, nevertheless, is a place where the parties voluntarily decided to appear and it is supposed that they will respect the arbitration award and will abide by it. However, not all the parties abide by the court decisions. This is why in 1958 the UN member-states (including Ukraine, the Russian Federation, Sweden and majority of civilized countries) signed a convention and stipulated a possibility of enforcement of such court decisions.

Is it possible that Gazprom ignores the arbitration award? Everybody knows that it has its main agreements with European companies tied to Stockholm arbitration court.

Firstly, let’s not cross the bridges before we come to them and wait for the award. The Russian party often takes an offensive stance (I am talking, first and foremost, about the state, but may conventionally apply it to Gazprom) – they aggressively defend themselves, wage the legal wars but if they lose they just simply do not abide by “bad” decisions. This is why, for example, if the arbitration tribunal orders Gazprom to settle certain compensation to Naftogaz I assume that it will not do it voluntarily and Naftogaz will have to come a long way to enforce the arbitration award.

Does the arbitration tribunal stipulate for confidentiality of the award in the final document? Under the general rule the arbitration institute and the arbitration tribunal must protect confidentiality of the award. As for the parties it is ambiguous because if the award is provided for recognition to a national court it will inevitably be a public process. I do not think that it would be possible to hide this award because it raises quite a profound public interest and a great quantity of people will be engaged into further procedures related to this arbitration award. Lawyers will analyze it, other lawyers will challenge it, other lawyers will have such award recognized in dozens of jurisdictions, and judges in various jurisdictions will review it. In Ukraine alone the award will be reviewed by the Cabinet of Ministers of Ukraine, Naftogaz, relevant ministry, the Ministry of Justice of Ukraine, the State Financial Inspectorate etc. It means that because of the quantity of people involved into the process the award will, sooner or later, come to the surface. We are sure to see it or at least will find out what it will be about.

Gazprom requires compensation under the “take or pay” provision, Naftogaz is trying to delete this provision from the agreement. Based on the existing practices whose side does the arbitration court usually take? Frankly speaking, the court practices in these categories of cases are not open, but judging from what is known the balance of advantage lies with opponents of the “take or pay” principle.

Does such precedent work when the Germans had managed to drop the “take or pay” principle? Can Naftogaz take advantage of it? It does not work directly but, undoubtedly, in certain sense it is important for the arbitrators that three equally respectful colleagues before them had upheld such a substantiated award. In addition if the preliminary award was based on certain principles or norms, which are also applied in this case, it will also have additional weight.

As to the judicial dispute of Gazprom with the Antimonopoly Committee of Ukraine in this case. Finally the Committee filed a petition to court on compensation of UAH 86 bln. Should the Ukrainian court uphold a decision for the plaintiff (AMCU) and it will come into force, how will the enforcement service be able to impose a court-enforced collection: by asking the Moscow court to recognize such decision, by filing claims to international courts or by imposing arrest onto transit gas transferred to Naftogaz?

The AMCU will have the same status as any other claimant. It may search the assets of Gazprom in Ukraine, the Russian Federation and in the whole world and try to enforce collection onto them. The problem here is that in contrast to the arbitration awards, which are recognized almost anywhere on the basis of the New-York Convention, it is more difficult to have the decision of a national court recognized abroad.

It is possible, for example, to try to have the court decision recognized in the Russian Federation at first. Formally it is possible because we have a valid convention between our states on mutual recognition of court decisions. It is highly likely that the Russian Federation will refuse to recognize such court decision. In this case the AMCU will have to search the assets of Gazprom abroad and try to impose collection onto them. It means that such collection will be governed by the law of the country where certain Gazprom’s assets will be revealed.

Another option for Ukraine is to transfer the debt of the AMCU to Naftogaz which will be able to set off the indebtedness for the gas supplied.

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