Ukrainian Arbitration Blog

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The state-owned Odessa Port Plant is one of Ukraine’s major chemical producers focusing on production and transportation of ammonia, urea and other chemical products, including nitrogen fertilizers. Odessa Port Plant is a predominantly export-oriented company with 85% of its products being exported to more than 30 countries, which makes the Plant an important player on the global chemical products market. Odessa Port Plant’s vast industrial capabilities and the global market share have for many years marked it as a lucrative candidate for future privatisation, with the State Property Fund launching the recent privatisation effort in 2018.

An important financial matter for Odessa Port Plant was the fate of USD 250 mln debt owed by the Plant under an arbitral award rendered by arbitral tribunal under Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce in 2016.

In January 2013 Odessa Port Plant entered into a gas supply contract, with Ostchem Holding Limited (“Ostchem”), a member company of the Ostchem group, one of the global leaders in production of nitrogen fertilizers. Odessa Port Plant failed to fully pay for the gas received under the contract and Ostchem turned to SCC arbitration to collect the debt. The arbitral proceedings resulted in a 2016 consent award with Odessa Port Plant recognising Ostchem’s claims of USD 193 257 811 for unpaid delivered natural gas and USD 57 977 343 for late payment penalties.

Despite recognising the bulk of Ostchem’s claims in arbitration Odessa Port Plant did not pay under the arbitral award, and in 2017 Ostchem proceeded to recognise and enforce the award with Ukrainian courts.

The initial attempt to get the award recognised and enforced in Ukraine was unsuccessful. Although the first instance and the appellate courts sided with Ostchem, the Supreme Court in June 2018 reversed the lower courts’ rulings and remanded Ostchem’s application for recognition and enforcement for reconsideration. In particular, the Supreme Court was dissatisfied with the form of the award’s copy submitted by Ostchem to Ukrainian courts, as well as purported failure of the lower courts to conduct full-blown analysis of the award’s compatibility with the requirements of arbitrability and public policy under Ukrainian law.

Upon the new consideration, the Kyiv Appellate Court in April 2019 again ruled in Ostchem’s favour and recognised and enforced the arbitral award in Ukraine. The appellate court found no signs of award’s incompatibility with Ukraine’s public policy, in particular rejecting Odessa Port Plant’s argument that enforcement of the award would endanger the state or environmental security.

Odessa Port Plant and Ukraine’s State Property Fund (the Plant’s current shareholder) both challenged the Appellate Court’s ruling before the Supreme Court and in June 2021, the Supreme Court handed down its judgement upholding the appeals.

Although the appellants advanced several defences against recognition & enforcement of the award (including Ostchem’s alleged incompliance with the pre-arbitral procedure under the contract), they succeeded only on one – public policy. Supreme Court decided that recognition and enforcement of the award would contradict Ukrainian public policy in light of the following reasons:

– in Supreme Court’s view Odessa Port Plant as a strategically important enterprise was involved in operating “high-risk objects” and the enforcement of the award would financially endanger Odessa Port Plant’s ability to ensure the fire and environmental safety in connection with these operations;

– the Supreme Court also opined that the enforcement of the award would put Odessa Port Plant’s privatisation effort in danger due to the risk of dissipation of the Plant’s assets in the course of enforcement proceedings;

– finally, the Supreme Court concluded that a Russian bank, JSC Gazprombank would be among the beneficiaries of the repayment of the debt established in the award, because Ostchem owed a debt to that bank.

All of the combined factors in Supreme Court’s view suggested that recognition & enforcement of the arbitral award would be incompatible with Ukrainian public policy and warranted the rejection of Ostchem’s application. 1

The Supreme Court’s judgement marks the final stop in the award’s enforcement process in Ukraine with no further avenues for appeal left within Ukrainian court system.

1 At this stage Author does not offer any opinion on whether the Supreme Court’s conclusions were correct as a matter of Ukrainian law and doctrine, or consistent with the Supreme Court’s previous jurisprudence.