Dmytro Marchukov and Oleksandr Volkov, counsel and associate at Egorov Puginsky Afanasiev & Partners in Kiev, report on a series of puzzling Ukrainian court decisions that have mistaken a judgment of Russia's arbitrazh courts for an arbitral award.

A series of Ukrainian court decisions in Yukos-M v KAFA-Terminal, which culminated in June with one from the Supreme Court, is an example of the confusion that a court can face when dealing with a foreign judgment. In this case, the Ukrainian courts dealt with an application for recognition of a judgment rendered in 2007 by the Moscow Arbitrazh Court. But as a result of their confusion over the name of this Russian commercial court, the Ukrainian courts at four instances have failed to distinguish between an award arising out of an arbitral proceeding and a judgment of a state court. As a result, the Ukrainian courts have applied article V of the New York Convention to the recognition of a court judgment. Nor is this the only troubling aspect of these decisions.

Background to the dispute

In late 2007, Russian petroleum trader Yukos-M obtained a judgment for almost US$7 million from the Moscow Arbitrazh Court against KAFA-Terminal, a heavy fuel oil shipment company based in Feodosia, Ukraine. Yukos-M obtained recognition of the judgment in Ukraine some four years later. While considering the recognition application in the first instance, the local court came to somewhat unexpected conclusions. In particular, it treated a dispute resolution provision in the underlying agreement – referring disputes to the Moscow Arbitrazh Court –as an arbitration clause. Therefore, the local court applied articles IV and V of the New York Convention when granting the recognition order. This was notwithstanding the fact that some of the grounds to refuse recognition under article V of the convention are simply incompatible with the judgments issued by state courts.

The recognition order was subsequently overturned, after a Ukrainian court of appeal found that KAFA-Terminal had not been properly notified during the proceedings before the Moscow Arbitrazh Court. The court of appeal's order has not been made public, so it is not clear whether it also applied the New York Convention.

Yukos-M appealed again to the Highest Specialised Court in Civil and Criminal Matters (HSC), which applied the New York Convention again in deciding to remand the matter to the court of appeal. The HSC also tested the judgment of the Moscow Arbitrazh Court against article 396.2 of the Ukrainian Code of Civil Procedure (CCP), which lists grounds to refuse recognition of foreign awards. The list is similar to the grounds for non-recognition in article V of the New York Convention but the CCP provides that the grounds in article 396.2 only apply if a similar list is not set forth by an international agreement. In other words, article 396.2 and article V shall not apply together. Fortunately, the HSC also applied article 9 of the 1992 Kiev Agreement on Settlement of Commercial Disputes. This treaty operates within the CIS and applies to arbitral and judicial awards.

Considering the matter once more, the court of appeals denied recognition again, applying the New York Convention, the Kiev Agreement and article 396.2 of the CCP. Yukos-M appealed for a second time to the HSC, which restored the recognition order, again applying the New York Convention, the Kiev Agreement and article 396.2 of the CCP.

The Supreme Court proceedings

KAFA-Terminal asked the HSC for leave to appeal to the Supreme Court of Ukraine, which was granted. This in itself was remarkable, because under the applicable rules of procedure the Supreme Court shall not review lower court decisions on application of the procedural law. It is obvious that article V of the New York Convention, article 9 of the Kiev Agreement and article 396.2 of the CCP are procedural provisions.

The Supreme Court issued a decision on 26 June that completely confused the existing system of recognition of foreign arbitral awards and court judgments. In upholding the enforcement order, the Supreme Court applied the New York Convention and the Kiev Agreement. At the same time, it dismissed KAFA-Terminal's reference to article 396.2 of the CCP, finding that – unlike the convention and the Kiev Agreement – it contains no substantive rules. It is easy to comprehend the court's conclusion that article 396.2 of the CCP contains no substantive rules but in this respect it is not at all different from article V of the New York Convention and article 9 of the Kiev Agreement.

It should be noted that, when dealing with a similar case, the Munich Court of Appeals came to a different (and correct) conclusion . In a February 2012 ruling, the Munich court correctly found that a judgment of the Moscow Arbitrazh Court lies outside the scope of the New York Convention, for the simple reason that the convention does not apply to the recognition and enforcement of foreign judgments.

What's in a name?

Courts dealing with applications for recognition and enforcement of judgments issued by the Russian arbitrazh courts are often puzzled by the name of the courts, which was inherited from Soviet times. In the USSR, the arbitration courts functioned as quasi-judicial bodies within the executive branch that resolved commercial disputes between enterprises mainly belonging to the Soviet state. This was the only meaningful similarity between Soviet state arbitration and arbitration as it is globally recognised in its traditional sense.

The situation with the Soviet arbitration courts changed shortly before the collapse of the Soviet Union. State administrative arbitration gradually floated into the field of the judiciary. The Soviet state arbitration system merged with the state courts and arbitrators were renamed judges. Ultimately, in the vast majority of the former Soviet states, the state arbitration courts were either renamed as commercial courts or merged with the general courts. Today, only two former Soviet states have retained the confusingly anachronistic titles of their respective courts: Russia and Turkmenistan. Russia has retained the state arbitration courts since Soviet times, while Turkmenistan renamed them commercial courts but later went back to calling them arbitration courts. In practice, to minimise confusion, Russian state arbitration courts are often either translated in English as "economic" or "commercial" courts, or simply transliterated as "arbitrazh" courts.

In Ukraine, commercial courts replaced the state arbitration courts only in 2001. Therefore, it is somewhat surprising that Ukrainian judges failed to properly assess the nature of the judgment issued by the Moscow Arbitrazh Court. The Ukrainian courts have also reached other conclusions in the same case that one would not reasonably expect – for example, treating article V of the New York Convention as a rule of substantive law. Therefore, notwithstanding the pro-recognition outcome, the Ukrainian courts' reasoning raises serious concerns about how Ukraine's recognition and enforcement machinery can function properly going forward. Curiously, on the basis of its order in this case, the Supreme Court has published its "legal position" on this issue on its official webpage as a guidance for the lower courts in similar cases.

Cases referenced

Yukos-M v KAFA-Terminal, Supreme Court of Ukraine, 26 June 2013.
Munich Court of Appeals, file no. 34 Sch 30/10, 28 February 2012.

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