PAO Tatneft v Ukraine

Hearing dates: 29 and 30 July and 21 September 2020

Approved Judgment

Introduction

By an order made ex parte and dated 9 August 2017, Teare J granted PAO Tatneft (“Tatneft”) permission to enforce a New York Convention Award dated 29 July 2014. By an application dated 31 January 2020, Ukraine applied to set aside the order in part. Previous challenges to the order brought by Ukraine have been rejected by Butcher J ( [2018] EWHC 1797 (Comm)) and by Cockerill J ( [2019] EWHC 3740 (Comm)). In my judgment, I adopt the terminology used in the earlier judgments.

The background to the case has been explained by Butcher J. In an arbitration under UNCITRAL Rules brought by Tatneft, a Russian oil company, on 21 May 2008 under an arbitration agreement in article 9 of a BIT between Ukraine and Russia, Tatneft was awarded damages in the principal sum of US $112 million. This comprised damages of $31 million in respect of the so-called “$31 million claim”, which concerned shares in a Ukrainian company called Ukrtatnafta that Tatneft had acquired directly from the company, and of $81 million in respect of the “$81 million claim”, which concerned shares in Ukrtatnafta that Tatneft indirectly acquired by buying interests in Seagroup, a US company, and in Amruz, a Swiss company: both had, Tatneft claimed, acquired shares in Ukrtatnafta from the company under agreements dated 1 June 1999. The consideration given for the shares was by way of promissory notes drawn and issued by Seagroup and Amruz respectively. In the event, only two of the 36 notes issued by Seagroup, 35 of which were for one million dollars and one for $845,132, were redeemed, and only one of the 30 notes issued by Amruz, for one million dollars each, was redeemed. The other notes were sold by Ukrtatnafta at a loss.

As Butcher J explained at paras 14 to 18 of his judgment, the Tribunal issued two awards: a “Jurisdiction Award” dated 28 September 2010, a partial award in which it considered and rejected challenges brought by Ukraine to its jurisdiction under the BIT and the admissibility of Tatneft's claims; and a “Merits Award”, a final award issued on 29 July 2014, in which the Tribunal concluded that Ukraine had breached its obligation to treat Tatneft fairly and equitably, and made its order that Ukraine pay Tatneft damages. (Teare J's order was, of course, concerned directly with the Merits Award.)

On 13 November 2017, Popplewell J made an order by consent that Ukraine might make and have determined an application challenging the order of Teare J on the grounds of state immunity before acknowledging service and issuing any application challenging enforcement of the Tribunal's award on other grounds. Accordingly, on 16 January 2018 Ukraine made an application (the “State Immunity Application”) whereby it sought to set aside Teare J's order on the grounds (i) that it was entitled to immunity under the State Immunity Act, 1978, and (ii) that Tatneft had not made proper disclosure about Ukraine's immunity when applying ex parte for the order.

In his judgment dated 13 July 2018 Butcher J refused the State Immunity Application He gave Ukraine permission to appeal upon one issue, the so-called “No Investment” point, which concerned only the $81 million claim. On 17 May 2019, however, the appeal was struck out after Ukraine had failed to provide security that had been ordered. Ukraine applied for permission to appeal to the Supreme Court against the order for security and the order to strike out the appeal, but its application was refused on 11 December 2019.

Meanwhile, by an order dated 14 June 2019, the Court had directed that the $81 million claim be stayed until the application for permission to appeal to the Supreme Court had been decided, but the stay did not cover the $31 million claim. Accordingly, Cockerill J heard an application by Ukraine that enforcement of at least that part of the Award be refused because of the composition of the Tribunal and the arbitral procedure in that the Presiding Arbitrator had not, it was said, made proper disclosure. On 20 December 2019, Cockerill J rejected that challenge.

The issues in the application

Ukraine's present application is made under section 103(2)(d) of the Arbitration Act, 1996, which allows a court to refuse to enforce a New York Convention award because the party against whom it is made proves that “the award deals with a difference not contemplated by or falling within the terms of the submission to arbitration or contains decisions on matters beyond the scope of the submission to arbitration”. It concerns only the $81 million claim: section 103(4) of the 1996 Act allows the court to enforce an award containing such decisions to the extent that it contains matters submitted to arbitration which can be separated, and it is common ground that the award of $31 million and that of $81 million can be so separated. In its application notice of 31 January 2020 Ukraine also contended that it would be contrary to public policy for the Court to enforce this part of the Award (see section 103(3) of the 1996 Act), but Mr Philip Edey QC, who represented Ukraine, did not pursue that argument: to my mind, he was right not to do so.

The arbitration agreement in article 9 of the BIT covers “Any dispute between one Contracting Party and an investor of the other Contracting Party arising in connection with investments.”. Butcher J explained (at para. 27 of his judgment) the legal analysis whereby the treaty provision gives rise to an arbitration agreement between Tatneft and Ukraine in respect of such disputes: the offer of Ukraine to arbitrate is considered to have been accepted by Tatneft when it brought the reference. The expression “Investments” is defined at article 1 of the BIT: “For the purposes of this Agreement: … ‘Investments’ means assets and intellectual property of all types that are invested by an investor of one Contracting Party within the territory of the other Contracting Party in accordance with the latter's legislation”. (Here and elsewhere, I quote from translations of Russian and Ukrainian documents, none of which has been challenged.) Ukraine contends that Ukraine's offer to arbitrate, and so the arbitration agreement, relate only to investments made in accordance with Ukrainian legislation, and that the shares were not so issued to Seagroup and Amruz, relying on the evidence of a Ukrainian lawyer, Dr Yuliya Chernykh (the “illegality argument”). Her evidence was that, at the relevant time, article 13 of the Law on Business Entities specified how members and founding members of a company might make contributions to it, and that it was not permissible to do so by way of promissory notes. In support of this view, she referred, inter alia, to a Joint Resolution of the Cabinet Ministers of Ukraine and the National Bank of Ukraine dated 10 September 1992, no 528 of 1992 (the “Joint Resolution”), which restricted the legitimate use of promissory notes for payment and, in Dr Chernykh's view, excluded their use to contribute to a company's charter fund. Dr Chernykh also considered it illegal to use promissory notes for this purpose because of the combined operation of article 8(3) of the Law on Securities and Stock Exchange, which provides that “Shares may be rendered to the recipient (purchaser) only after full payment of their value”, and article 33 of the Law on Business Entities, which required that “[w]ithin the terms prescribed by the constituent meeting, but not later than one year after registration of a joint stock company, the shareholder shall pay up the full value of the shares”.

Ukraine had another, logically anterior, argument, which I shall call “Ukraine's issue estoppel argument”: that in any event, Tatneft is not entitled to dispute that Seagroup's and Amruz's share acquisitions did not comply with Ukrainian legalisation because the Ukrainian courts have so decided in proceedings to which both Ukraine and Tatneft were parties. It relies on decisions of the Ukrainian Supreme Court of 18 March 2008 in cases 28/198 and 28/199, and on decisions of the Kiev Economic Court of 28 May 2008 in case 28/198 and of 2 June 2008 in case 28/199, and the appellate courts upholding them.

On behalf of Tatneft, Mr Ricky Diwan QC and Ms Emily Wood submitted that Tatneft is not prevented by issue estoppel from disputing Ukraine's illegality argument, and, relying on the evidence of Mr Sergiy Gryshko, contended that there was no contravention of Ukrainian law. But Tatneft has other points. First, it has what I shall call its “threshold arguments”:

a. That Ukraine's application should be refused because it has waived any right to dispute the Tribunal's jurisdiction on the basis of the illegality argument, having failed to raise the challenge before the Tribunal (the “waiver argument);

b. That Ukraine is estopped by the judgment of Butcher J from contending that the Merits Award deals with claims, or decides matters, beyond the scope of the submission to arbitration (“Tatneft's issue estoppel argument”); and

c. That the Court should reject Ukraine's...