An Israeli court revoked ICAC arbitration awards obtained by the Ukrainian Ministry of Internal Affairs, and declared them unenforceable due to what it considered to be unjust arbitration procedures under Section 5 of the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards.

The Ukraine Ministry of Internal Affairs (Department of Material Provisions) had obtained an arbitration award in its favor in the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry (ICAC), according to which an agreement signed with an Israeli supplier was declared void due to the unauthorized signature of the contract (by the Ukrainian Department of Material Provisions). Under a second consecutive arbitral award, the Ukrainian party was awarded restitution of over 1 million US$ paid to the Israeli supplier. This decision was also based upon the previous finding that the relevant agreement was void.

The Israeli supplier challenged the first arbitral award in the Ukrainian jurisdiction, and in each instance, was denied relief, including by the Ukrainian Supreme court. Then, the Ukrainian party applied to the Israeli District court for enforcement of the arbitral awards based on the New York Convention. The Israeli supplier, in response, submitted a response objecting to enforcement, as well as a separate motion to the Israeli court seeking to revoke the restitution arbitral award (that was the award the Ukrainian party required to enforce).

The Israeli court denied enforcement and held the arbitral awards were void. Specifically, the court made the following findings:

1. The appointment of the arbitration tribunal was not in accordance with the ICAC rules and was unjust, inter alia, because said tribunal was found to be biased in favor of the Ukrainian party.

2. The restriction upon one of the arbitrators to access arbitration documents, and improper influence placed upon one arbitrator, including via threats!

3. The witnesses for the Ukrainian party did not attend the arbitration proceedings for cross examinations or at all. In this regard it should be mentioned that the Israeli court so held, despite the fact the Israeli supplier did not attend the hearings, arguing it has no trust in the tribunal.

4. The failure to disclose to the Israeli party, arbitration documents and the failure to notify it of the arbitration institution fees.

5. The improper intervention by external figures to affect the tribunal's discretion.

6. The general violation of principals of justice.

This Israeli court decision is particularly important from an international perspective as it makes clear that to be effective, arbitration procedures must be properly conducted and duly managed. Barring same, tribunals run the risk of having their awards revoked, although there are very limited cases in which such a relief of revoking arbitral awards would be granted based on section 5 of the NY convention.

In analyzing the Israeli judgment at hand, one could argue that perhaps if the proceedings had been less flawed, the court would have found the arbitral awards to have been generally acceptable and that to the extent errors were committed, same were not irreparable. One could conceive that the decision of the Israeli supplier not to attend the arbitration must be held against it in a more substantial manner. One could also agree with the Ukrainian Supreme Court's ruling which denied the appeal of the Israeli supplier in regards with the first arbitral award, which should have hence, be held binding and final.

However the sheer magnitude of wrongdoing - including the threats upon the life of an arbitrator, the clear bias demonstrated against one of the parties and numerous other omissions - left the Israeli court no choice but to deny enforcement, and this also let the court to nullify the second arbitral award (which was based on the findings of the first award finding the contract void).

It is our view, that in fact, courts in all jurisdictions should follow the Israeli court's ratio in this judgment and its approach, when faced with similar circumstances, inter alia, to maintain and continue to build international trust in the arbitration world. This trust must be built in a way that ensures that arbitrators and arbitration institutions follow principles of due process, transparency and fairness. Only then can orders and awards issued by said arbitrators and institutions be valid and enforceable. Such a regime would send a clear message that there is no benefit whatsoever to spend significant resources on an unjust arbitration procedure.

Side note: reviewing the said judgment, it should be mentioned however, that from a procedural point of view, it is quite questionable why in fact the Israeli court decided, it should allow the Israeli supplier to submit a motion to revoke the second arbitral award, given and despite the great delay of a few years, and after the motion to revoke the first award was submitted in Ukraine and denied by final judgment, including by the Supreme Court of Ukraine. This issue was somewhat dealt with by a previous interim holding of the court applying interpretation to the NY convention and its application, but the reasoning there still seems peculiar.

In our view, given the circumstances of the case as stipulated in the judgmnet, it should have been sufficient to reach the same final outcome, by ruling denial of enforcement, based on the response of the Israeli supplier to the Ukrainian motion of enforcement, where in fact all the arguments could have been argued (and especially since the Ukrainian party failed to submit its closing arguments to the Israeli court) but for what seems to be unclear reasoning in the judgment, the court also awarded the Israeli party the Relief sought in its motion to revoke the arbitral award.

See Central Magistrate Court file # 12254-11-08 Vioans Ltd. Vs. The Ukraine Ministry of Internal Affairs Department of Material Provisions [15 April 2012]

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