A short guide to rules and practices of arbitrating in Ukraine or with Ukrainian parties
Both efforts to attract private investment into Ukraine for reconstruction and development and the country’s accession to the EU mean that Ukrainian businesses are more attractive as potential business partners for many German executives, meaning their legal teams are increasingly assessing the Ukrainian commercial legal system.
Although potential investors are often interested in the question of ‘de-risking’ (i.e. whether an investment has an acceptable risk profile), many will ask more technical questions, for example, whether Ukrainian counterparties would agree to a foreign law jurisdiction, or an arbitration clause in their contracts. This article focuses on commercial arbitration in Ukraine, with Ukrainian parties, and explores the general commercial law framework and the nuances of investment arbitration in Ukraine.
Commercial legal framework in Ukraine
Navigating different legal systems and cultures in transnational commerce is as inevitable as adjusting to time zones when traveling. Fortunately, European civil law lawyers might find that the Ukrainian legal system is not that different to their own.
The first consideration is selecting the governing law of a commercial agreement, which will be unique to each contractual relationship. Two factors, however, might provide comfort to a civil law lawyer in respect of Ukrainian civil and commercial law. Firstly, Ukraine is a civil law country, and historically its system has been influenced by German law, similar to many countries in Central and Eastern Europe. Specifically, the Soviet-era civil codes were largely based on the German Civil Code. While Ukraine adopted modern civil and commercial codes in 2003, many structural and conceptual commonalities with German and German-influenced systems of civil law remain. Secondly, whilst negotiating its EU membership, Ukraine undertook to make its national laws compatible with the EU acquis. Ukraine’s legal and institutional reforms are ongoing and are being closely monitored by its partners.
With the judicial reform at the heart of the Ukraine’s adjustment to rule-of-law standards, EU investors may prefer to rely on EU national courts or on a neutral forum for international arbitration than Ukrainian courts, for the time being. Whether a Ukrainian counterparty would be willing to accept a foreign court as the forum for dispute resolution is a matter of commercial sensibility and contractual trade-offs. From a European party’s perspective, it will also be important to consider whether and under what conditions a title obtained in the EU courts is recognisable and enforceable in Ukraine. Until recently, the answer to this question largely depended on the principle of reciprocity, which offered little by way of a reliable legal framework. In September 2023, the 2019 Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters came into force between the EU and Ukraine, which may facilitate the recognition and enforcement of EU court rulings in Ukraine in the future.
Arbitrating with Ukrainian companies or in Ukraine, however, might be a preferable (and reasonable) alternative.
Commercial arbitration with Ukrainian parties
Ukrainian companies with a history of international transactions are familiar with international arbitration.
In the 1990s and early 2000s, many US and UK law firms entered the legal markets of the ex-Soviet republics, bringing with them a broad acceptance of foreign and, particularly, English law as the governing law of commercial contracts. What was initially a preference for a stable legal system, with well-established contract laws, is now the commercial standard when dealing with foreign counterparties.
The same applies to the choice of forum for foreign dispute resolution. English courts are frequented by parties from Ukraine and eastern Europe in cases that often have no connection to England or Wales. Institutional arbitration with a seat in Europe has also gained broad acceptance with the LCIA, ICC, and VIAC now having a caseload from Ukrainian parties. DIS Rules with Germany as the seat of arbitration are not as popular as London or Vienna, but a German-speaking party may well offer this alternative. For example, continental European companies operating with the model contracts by the European Federation of Energy Traders (EFET) frequently opt for Option B (German law and the DIS Rules), instead of Option A (English law and LCIA Rules).
There are, of course, exceptions to the general rule. Firstly, in some areas, for example, procurement law, it is rare to see a foreign seat of arbitration or foreign institutional rules. Civil elements of disputes arising from public procurement contracts and those relating to state privatisation, however, are generally arbitrable and can lead to an arbitration with its seat in Ukraine. Secondly, Ukrainian SMEs with less international experience might find foreign arbitration burdensome, for example, due to language barriers and costs. Of course, costs might also be significant for a European party, depending on the size of the contract, particularly when arbitrating in Ukraine is a much cheaper alternative.
Selecting arbitration outside of Ukraine poses questions in respect of recognition and enforcement of the resulting award. As Ukraine is a member of the 1958 New York Convention, however, there are limited grounds on which the Ukrainian courts can refuse to recognise or enforce an arbitral award. The New York Convention grounds are also reflected in Article 36 of the Law of Ukraine on International Commercial Arbitration (Arbitration Act), the key legislative act governing international arbitration in Ukraine, and in Article 478 of the Code of Civil Procedure of Ukraine.
In practice, Ukrainian courts have acted favourably towards recognition and enforcement of foreign awards. Unlike Russian courts, Ukrainian courts generally have avoided stretching grounds to refuse recognition and enforcement under the New York Convention by invoking ordre public. Ukraine’s 2017 arbitration law reform further enhanced the quality of judicial review by entrusting jurisdiction over the recognition and enforcement of foreign awards to the Kyiv appellate civil court with the Supreme Court acting as an appellate instance.
Russia’s full-scale war of aggression and the introduction of martial law in Ukraine have not changed the Ukrainian courts’ generally pro-arbitration stance. For example, in February 2023, the Ukrainian Supreme Court upheld enforcement of a domestic arbitral award against a Ukrainian state-owned enterprise operating in the defence sector, ruling that such enforcement does not violate public order, even in martial law. Similarly, currency restrictions enacted in Ukraine under martial law did not, according to the Supreme Court, hinder enforcement of an arbitral award. While not binding, Ukrainian Supreme Court decisions are highly authoritative.
Overall, while specific contractual arrangements may call for an arbitration with a seat in Ukraine, Ukrainian parties with some international experience will often accept foreign arbitration as a dispute resolution mechanism, and Ukrainian courts have generally recognised and enforced foreign awards in line with international standards.
Commercial arbitration in Ukraine
Arbitrating in Ukraine may become increasingly familiar to those with experience in international arbitration.
As mentioned above, international arbitration seated in Ukraine is governed primarily by the Arbitration Act, adopted in 1994 and updated various times since. The international element of an international arbitration under Ukrainian law is derived from the foreign seat of one of the parties to the transaction. Subject to minor deviations, the Arbitration Act is a verbatim adoption of the 1985 UNCITRAL Model Law. In addition to the Arbitration Act, the Code of Civil Procedure of Ukraine governs the setting-aside procedure, recognition and enforcement of foreign awards, and judicial assistance to the arbitration proceedings. Furthermore, the arbitrability of commercial disputes is governed by the Commercial Procedural Code of Ukraine, which also stipulates the presumption of validity and enforceability of an arbitration agreement.
Ukrainian lawmakers have been developing Ukrainian arbitration law with a view to positioning Ukraine as an arbitration-friendly jurisdiction. The 2017 reform was instrumental to this and introduced several major changes, including:
- Enshrining the principle of interpretation of the arbitration agreement in favorem validitatis in order to preserve its validity.
- Moving the first-instance review of arbitration-related matters to the appellate civil courts, with the Supreme Court of Ukraine acting as an appellate court.
- Empowering the courts to assist arbitration proceedings by granting interim measures and orders on preserving and taking evidence. In line with the UNCITRAL Model Law standards, the issues Ukrainian courts have jurisdiction to rule on in the presence of a valid arbitration agreement are limited to the following: the power of the court to review the preliminary decision of the arbitral tribunal on its own jurisdiction, setting aside the award rendered in Ukraine, recognition and enforcement of foreign awards, and the assistance powers of the courts.
Ukrainian courts have tried to uphold the legislature’s pro-arbitration stance and Ukrainian arbitration lawyers tend to agree that the risk of a Ukrainian court intervening to frustrate or delay an arbitration seated in Ukraine is low.
Apart from Ukraine as a seat, parties may consider having a case administered by the Ukrainian arbitration institution – the International Commercial Arbitration Court (ICAC) under the auspices of the Ukrainian Chamber of Commerce and Industry.
The outbreak of full-scale war did not distract the ICAC from its work. The number of registered cases grew significantly in 2023 with 584 cases compared to 374 in 2022 and 298 in 2021. Approximately half of the cases registered by the ICAC in 2023 were international arbitrations, with parties from Switzerland and Germany frequently featured, for example (although primarily as respondents).
ICAC Rules are based on UNCITRAL Rules, but with a strong emphasis on the role of the institution. An example of this is the de facto mandatory appointment of arbitrators from a closed list of ICAC-approved names, the most recent list containing 115 arbitrators, of whom 71 are foreign practitioners. Whilst it is possible that such restrictions i.e., on parties choosing their own arbitrator, might cause them to treat the ICAC with caution, it is important to note that top Ukrainian arbitration practitioners, with considerable international experience, are on the ICAC list. Those who have used the ICAC have reported that the quality of arbitration is usually high.
In 2022, ICAC Rules were amended twice to improve the procedures that regulate submission and service of documents, including claims, which can be sent via electronic mail, and oral hearings, which can be conducted via videoconferencing. They also introduced “arbitration-mediation-arbitration” and “mediation-arbitration” procedures.
Overall, the arbitration infrastructure in Ukraine is well-developed and would meet the expectations of a sophisticated foreign party to proceedings.
Investment arbitration and Ukraine
Ukraine is also no stranger to investment arbitration, both as the home state of the investors bringing claims and as the respondent state. For example, following the illegal annexation of Crimea by Russia in 2014, several Ukrainian companies brought (and won) cases against Russia for interfering with their investments.
Ukraine is a party to international law instruments that protect the rights of investors. Upon their ratification, international treaties become part of the national legislation in Ukraine and take precedence over the national law in case of a conflict. The sole exception to this rule is the provisions of the Constitution of Ukraine which takes precedence in all cases.
As a member of the 1965 ICSID Convention (which sets special rules for investment arbitration proceedings established at the World Bank in Washington, DC), Ukraine has also concluded bilateral investment treaties (BITs) with many EU countries. The future of these instruments, however, is uncertain as Ukraine’s accession to the EU would make any arbitration thereunder intra-EU and, as such, not in line with EU law (according to the Court of Justice of the European Union (CJEU)).
Investors should therefore consider including a separate arbitration clause in their contracts with government or state-owned enterprises. Clearly, investment protection and dispute resolution mechanisms will become more robust in the coming years, given that legal certainty and access to neutral adjudication are central to the overarching European political agenda to increase investment flows into Ukraine.
