Date of publication: 1 December 2023
Marina Riashchenko, Attorney at Law, Counsel
Mykhailo Churakov, Lawyer
Source: Yurydychna Gazeta
Since the beginning of Russian military aggression against Ukraine, special economic sanctions were imposed on the Russian Federation, its legal entities and natural persons, that significantly limited the execution of transactions, the implementation of payments and, in general, operations with the Russian Federation. One of the consequences of the introduction of such sanctions was the impossibility of execution of foreign economic contracts concluded with Russian counterparties, which in turn led to numerous disputes that were referred to international commercial arbitration. But a good arbitral award is an enforced arbitral award, and therefore the question arises: what is the fate of the arbitral award made within such a process and whether the creditor can enforce it.
Bona Fide Debtor
As a general rule, the arbitral award is final (unless the applicable regulations provide for the possibility of appealing it) and binding on the parties. However, there are hidden problems in processes involving parties from the aggressor country that the party may encounter at the stage of implementing the decision. If a foreign debtor decides to voluntarily enforce an arbitral award in favor of a Russian creditor, the first thing he may face is sanctions.
Thus, now, under no circumstances will the Ukrainian counterparty be able (or willing for objective reasons) to make a payment in favor of the aggressor country’s company or an individual. The Resolution of the Cabinet of Ministers of Ukraine No. 187 dated 3 March 2022 On Ensuring Protection of National Interests in Future Claims of Ukraine in Connection with the Military Aggression of the Russian Federation prohibited the fulfillment of any obligations (including monetary ones), the creditors (collectors) of which, in particular, are natural persons – citizens and legal entities – residents of the Russian Federation.
In addition, according to Part 17 of the Resolution of the National Bank of Ukraine No. 18 dated 24 February 2022 On the Operation of Banking System under Martial Law, banks are prohibited from carrying out any foreign exchange transactions: 1) using Russian and Belarusian rubles; 2) the participant of which is a legal entity or a natural person located (registered/permanently residing) in the Russian Federation or in the Republic of Belarus; 3) to fulfill obligations to legal entities or natural persons located (registered /permanently residing) in the Russian Federation or in the Republic of Belarus.
As for foreign debtors, everything will depend on the domestic legislation of the debtor state and the type of sanctions applied. If the creditor – resident of the Russian Federation is included in international sanctions lists, voluntary enforcement of an arbitration award in favor of the Russian Federation will hardly be possible. If a debtor – a legal entity or a natural person of the Russian Federation wants to voluntarily enforce the arbitration award in favor of the Ukrainian creditor, the latter will think twice whether to accept such enforcement because of the potential risks of accusations of collaboration and cooperation with persons of the aggressor country.
In addition, a Ukrainian bank may too carefully check the grounds and circumstances of the payment, the counterparty and its affiliation with sanctioned persons and ultimately reject such a transaction. Another important factor of the voluntary payment of arbitration awards by Russian debtors is the restrictions imposed by the Russian government on the withdrawal of foreign currency from Russia: Russian ruble is an absolute priority when making payments outside the Russian Federation. Therefore, the creditor should check whether his bank can accept payment in Russian rubles.
Recognition and Enforcement of Arbitral Awards Involving Russian Element
Unfortunately, despite the binding nature of the arbitral award for the parties, in most cases the debtor is reluctant to enforce it voluntarily, and the creditor applies for recognition and permission to enforce such an award. Section IX of the Civil Procedure Code of Ukraine regulates the procedure for the recognition and enforcement of international commercial arbitral awards.
The rules and procedures provided for in this section are consistent with the provisions of 1958 New York Convention, are common to all and do not establish specific exceptions for natural persons /legal entities from the aggressor country. The current legislation of Ukraine does not contain direct prohibitions regarding admission to the recognition and enforcement of arbitral awards rendered in favor of natural persons /legal entities of the aggressor country. Therefore, any person has the right, according to the legislation of Ukraine, to initiate, according to the established procedure, the process of recognition and enforcement of international commercial arbitral award. According to general practice, arbitral awards are allowed to be enforced in almost all cases, except for the exceptions provided for in Art. 5 of the New York Convention. But since the beginning of Russian military aggression against Ukraine, the term “sanctions” firmly entered the processes of recognition and enforcement of arbitral awards.
Current judicial practice considers sanctions to be part of the public order of Ukraine, therefore, most likely, the recognition of an arbitral award rendered in favor of a sanctioned creditor will be refused. As for the enforcement of an arbitral award in favor of a Russian creditor, the Law of Ukraine On Enforcement Proceedings directly provides for the suspension of enforcement actions and a ban on replacing debt collectors in enforcement proceedings, where the debt collectors are Russia itself, its citizens, Russian and foreign legal entities, whose final beneficiaries are Russia-related.
It is important that the sanction provided for in Clause 11, Part 1, Art. 4 of the Law of Ukraine On Sanctions allows the state to recover any assets belonging to a sanctioned natural person or legal entity, as well as assets in relation to which such a person can directly or indirectly perform actions identical in content to the exercise of the right to dispose of them. Therefore, there is a certain risk that in the event of an attempt by a natural person /legal entity from the aggressor country to recognize and enforce an arbitral award rendered in its favor on the territory of Ukraine, such a right of claim (which can also be considered as an asset) may be recovered in favor of the state given the presence of signs that a sanctioned person from the aggressor country is acting through the creditor as an agent. The judicial practice of the High Anti-Corruption Court shows that such claims are almost 100% satisfied in favor of the state in the shortest possible time. As for arbitral awards where a Russian company is the debtor, when recognizing them and obtaining permission for their enforcement, one may encounter the arbitrariness of the Russian system. Thus, in 2020, Russia adopted amendments to the Arbitration Procedural Code of the Russian Federation, which brought the resolution of disputes involving sanctioned persons under the exclusive jurisdiction of Russian courts.
Therefore, Russian legislation now considers it illegal to refer disputes involving parties from “hostile countries” to international arbitration, which means that recognition of such arbitral awards on the territory of Russia will most likely be refused. But this does not mean that in case of receiving a positive arbitral award, the creditor will not be able to receive the funds due to him. An alternative in such circumstances is to initiate a process of recognition and obtaining permission to enforce the arbitral award in other countries where the Russian debtor may have property. Indeed, the current circumstances resulting from Russia’s war against Ukraine have led to certain changes in the established process of recognition and enforcement of international arbitral awards. At the same time, in our opinion, there is no reason to talk about the impossibility of enforcing arbitral awards where the Russian element is a party, since, despite all the additional complications, there are still legal ways to satisfy the claims of creditors under such arbitral awards.
