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Ukraine: New Rules on Security for Claims and Costs

Two weeks ago the Cabinet of Ministers of Ukraine decided to allow state organs to make payments under orders for security for costs or security for the claim issued by foreign courts and arbitral tribunals. The new rules are expected to remove some practical difficulties the Ukrainian authorities currently face in such situations.

According to the Ministry of Justice, potential obstacles to effective participation in investment disputes were created by the absence of a mechanism for the provision of security for costs or security for the claim. This may have been the case for example where procedural orders or awards were challenged. The amendments are intended to bolster Ukraine’s right to challenge orders or apply for the annulment of judgments and awards of foreign courts and tribunals issued against the state.

With this in mind, the Cabinet of Ministers resolved to amend the Government Resolution to allow payments under procedural orders of foreign courts and tribunals relating to security for costs and security for the claim. The amendments entered into force on 4 September 2012.

Regime Prior to the Amendments

Ukrainian law specifically regulates the procedure for making payments pursuant to arbitral awards and foreign judgments rendered against the state in a regulation dealing with the implementation of judgments of foreign jurisdictional authorities (Resolution of the Cabinet of Ministers No 408 of 7 March 2007) (the “Government Resolution”).

Before the 29 August 2012 amendments the Government Resolution provided that only “judgments of foreign jurisdictional authorities” could serve as “grounds for making payments” from the state budget. Procedural orders such as security for costs or security for the claim were not considered to be “judgments” for these purposes.

The Current Regime

Ukrainian law did not establish a procedure for the enforcement of procedural orders of foreign courts and tribunals, which led to considerable practical difficulties. However, according to the Ministry of Justice’s press-release Ukraine intends to comply with such orders in practice which is the reason for the amendments the Ministry has made.

On 4 September 2012 amendments to the Government Resolution came into force. The only substantive amendment changes Clause 2, adding a sub-clause 4 which states that budgetary funds can be used for:

“other expenditures envisaged by the decisions of foreign jurisdictional authorities, including expenditures connected to security for the enforcement of the mentioned decisions (concerning the provision of bank guarantees, letters of credit, deposits etc).”

The term “decision” may be loosely translated either as “judgment” or as “award”; some may even argue that the term may encompass procedural orders as well.  Therefore, it remains unclear whether, even with the new amendments, procedural orders such as in relation to security for costs or security for the claim can be paid out from the state budget since there is no authoritative interpretation as to whether the term “judgment”/“award” [rishennia] encompasses such procedural orders.

Furthermore, Clause 3 (grounds for making payments) of the Government Resolution has not been amended. It provides that the ground for making payments from the state budget is a judgment/award of a foreign jurisdictional authority. This clause does not include security for costs or security for the claim orders, which are procedural in nature.

Arguably, this situation creates leeway for the state to pay out those procedural orders which it deems necessary and block others which it may argue are not to be considered as a judgment or an award.

Payments of Amounts Awarded by Arbitral Tribunals by Ukraine

To give a brief illustration of the general procedure for the payment of arbitral awards by Ukraine as reflected in the Government Resolution, let us take a look at the procedure for the enforcement of ICSID awards.

In practice ICSID awards rendered against Ukraine have to go through a “recognition procedure, whereby a Ukrainian court recognises and allows enforcement of the award on the territory of Ukraine. The Law of Ukraine “On Enforcement Proceedings” (Article 17) does not list ICSID awards (unlike e.g. judgments of the European Court of Human Rights) as warrants of execution. Thus state enforcement officers are not empowered to initiate enforcement proceedings on the basis of an ICSID award alone.

An ICSID award creditor is expected to apply to a Ukrainian court of general jurisdiction (first instance court) to have the award recognised and enforced in accordance with the procedure for the enforcement of international commercial arbitration awards and foreign judgments. If the court decides to recognise and enforce the award, the award creditor can obtain a writ of execution and proceed with compulsory enforcement and have the award paid. At this stage the Government Resolution would come into play.

In accordance with Clause 5 of the Government Resolution the Ministry of Finance (by virtue of Article 4(53) of the Statute of the Ministry of Finance) delivers to the State Treasury and the National Bank of Ukraine the documents required for payment (including the official translation of the award/judgment and the resolution of the state enforcement officer concerning the commencement of the enforcement proceedings). These state organs of Ukraine are responsible for making the actual payment to the bank account of the award creditor mentioned in the documents submitted by the Ministry of Finance.

The reported Ukrainian court judgments on this matter include those relating to ICSID awards in the Alpha Projektholding GmBH v Ukraine and Gea Group Aktiengesellschaft v Ukraine cases. The awards in both of these cases were successfully recognised and allowed enforcement on the territory of Ukraine on 23 June 2011 and 29 November 2011 respectively. Alpha Projectholding received payment within approximately 5 months of the date of the judgment.

Compliance with Procedural Orders Requiring Ukraine to Make Payments

This decision by the Cabinet of Ministers of Ukraine is aimed at improving the international arbitration climate in Ukraine. It provides strong evidence that Ukraine earnestly seeks to implement arbitral awards and procedural orders of international arbitral tribunals, even unfavourable ones. This is further evidenced by the recent allocation of budgetary funds by means of amendments to the 2012 budget of Ukraine both for the implementation of arbitral awards and foreign judgments rendered against Ukraine (circa EUR 19 million) and defence of Ukraine in foreign arbitral and judicial proceedings (circa EUR 14 million).

Iegor Sierov

Associate,  ARBITRADE

About the Author:

Sergey Usoskin is an advocate (member of the Russian bar) and a senior associate at Ivanyan&Partners. He has experience advising clients on and representing them in commercial and investment arbitration matters as well as before the Russian court (including the Supreme Commercial Court). He is a graduate of St Petersburg State University, Faculty of Law and University College London Faculty of Laws.

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