Courts consider effects of a change of parties during arbitration proceedings
As a general rule, an arbitration agreement extends to the parties that are directly bound by its terms. However, the parties to the arbitration agreement sometimes change during the course of performance of the contract or at various stages of the arbitration proceedings. This usually happens as a result of a transfer of rights and/or obligations to third parties, such as through assignment of a contract or the benefit of a previously issued arbitration award, procedural succession or statutory subrogation.
Consequently, national courts, when asked to allow the recognition and enforcement of foreign arbitral awards within their jurisdiction, must frequently consider whether a change of the original party to the arbitration agreement affects the enforceability of the award. Pursuant to English precedent and decisions of the German and French courts, in principle the arbitration agreement follows the transferred right, unless prohibited by law or unless the agreement itself indicates that it is binding only on the original parties.(1)
Recent Ukrainian court practice shows that the courts are equivocal in their interpretation of statutes applicable to this issue, resulting in ambiguous case law.
Recognition and enforcement application by third party
The procedure governing the recognition and enforcement of foreign court judgments in Ukraine is stipulated in Chapter VIII of the Civil Procedure Code. Under Article 390 of the code, a foreign court judgment (the scope of this term extends to international arbitral awards) must be recognised and enforced in Ukraine if its recognition and enforcement is envisaged in an international treaty ratified by the Ukrainian Parliament or in accordance with the principle of reciprocity.
As Ukraine ratified the New York Convention in 1960, the issue of which parties may apply for recognition and enforcement of arbitral awards in Ukraine is governed by the convention, Articles 390 to 398 of the Civil Procedure Code and Articles 35 and 36 of the Law on International Commercial Arbitration.
Article 393(1) of the Civil Procedure Code stipulates that an application for enforcement of a foreign court judgment must be submitted directly to the court by the claimant (or its representative) or, in accordance with an international treaty ratified by Parliament, by another party (or its representative). In this regard, the New York Convention makes no distinction between the party to an arbitration agreement and a party that serves an application to recognise and enforce the award. Article IV of the convention merely refers to the “party applying for recognition and enforcement”.
Therefore, although it may appear on its face that Article 393(1) of the Civil Procedure Code allows a third party to seek recognition and enforcement of an arbitral award in Ukraine, uncertainty remains as to its judicial interpretation.
Change of parties before commencement of arbitration
The issue of a change of parties before commencement of arbitration proceedings was recently considered by the Odessa Region Appeal Court in Euler Hermes Services Schweiz AG v OJSC Odessa Fat and Oil Plant. The case concerned an application served by Swiss company Euler Hermes to recognise and enforce a 2011 Federation of Oils, Seeds and Fats Associations (FOSFA) arbitral award against OJSC Odessa Fat and Oil Plant (OMZhK).(2)
Euler Hermes acquired the right to seek enforcement of the FOSFA tribunal’s award in Ukraine, where OMZhK was domiciled, on conclusion of an assignment agreement with Pontus Trade SA, an original party to a sale contract (incorporating a relevant arbitration clause) signed with OMZhK. The assignment agreement was made on the basis of two pro forma invoices issued by Pontus Trade SA to OMZhK under the sale contract and was subject to Swiss law. Notably, the sale contract at issue prohibited any assignment of rights or obligations to third parties.
The assignment of claims from Pontus Trade SA to Euler Hermes occurred in December 2009, before the commencement of FOSFA arbitration in 2010. The arbitration proceedings nonetheless revolved around the dispute between the original parties without notifying FOSFA or the tribunal of the assignment. In 2011 Pontus Trade SA was awarded its claimed damages and losses in respect of OMZhK’s failure to pay for the shipped cargo under the contract and the pro forma invoices that had been issued.
On issuance of the award, Euler Hermes commenced recognition and enforcement proceedings in Ukraine, relying, among other things, on the original assignment agreement. Euler Hermes argued that the assignment agreement was made in relation to all actual and ancillary claims that could have arisen out of OMZhK’s unpaid pro forma invoices. Thus, as the amount awarded to the claimant was based on the outstanding invoices, Euler Hermes asserted that the effect of assignment extended to the FOSFA award. It further submitted that Article 393(1) of the Civil Procedure Code allows a party other than the original claimant to apply for recognition and enforcement of a foreign arbitral award.
In its defence, OMZhK argued as follows:
- As a matter of general principle, Article 393(1) does not allow any party other than the original party to the arbitration clause to apply to the court for recognition and enforcement of the arbitral award.
- The assignment agreement was invalid, because the contract at issue was non-assignable and Euler Hermes did not follow the proper debtor’s notification procedure in accordance with Ukrainian law.
The Odessa Region Appeal Court largely agreed with OMZhK’s position. In its March 20 2013 order the court found that under Ukrainian civil procedure law, only the original party – in whose name the arbitral award was issued – is legally entitled to apply for its recognition and enforcement in Ukraine. Moreover, the court held that despite the fact that the assignment agreement was governed by Swiss law, its terms and legal effect had to be viewed through the lens of Ukrainian legal norms, which prohibit any assignment made contrary to the contractual non-assignability clause. The court concluded that in such circumstances, recognition and enforcement of the FOSFA award, if allowed, would violate Ukrainian public policy. The judgment has been appealed to the High Specialised Court for Civil and Criminal Matters, which has yet to issue its decision on the case.
Change of parties after issuance of arbitral award
In FF Engels Investments Ltd v Pacific Inter-Link Sdn Bhd the Odessa Region Appeal Court ruled on an appeal against an Ilyichevsk City Court order dismissing an application for recognition and enforcement of four FOSFA arbitral awards issued in 2011 and eight FOSFA appeal awards issued between 2010 and 2011.(3)
The applicant relied on 12 separate assignment agreements concluded in April 2012 with the claimants that had participated in FOSFA arbitration and appeared as parties to the corresponding arbitration agreements. All awards were made against the debtor in the enforcement proceedings, Pacific Inter-Link Sdn Bhd.
Although the dispute touched on various legal issues, mostly dealing with the nature of bills of lading and ownership rights over the cargo arrested at a Ukrainian sea port, one of the principal defences raised by Pacific Inter-Link was against the enforceability of arbitral awards related to the validity of the submitted assignment agreements. Unlike in Euler Hermes v OMZhK, the debtor did not argue that the application of FF Engels Investments Ltd should be dismissed on the basis of Article 393(1) of the Civil Procedure Code. Instead, Pacific Inter-Link insisted that assignment agreements were invalid under Ukrainian law, which governs their effectiveness and validity, as no price clause was included in their terms in accordance with Article 180 of the Commercial Code.
In its December 19 2012 order the Odessa Region Appeal Court upheld the decision of the first instance court that dismissed the application for recognition and enforcement of 12 arbitral awards in Ukraine. Despite its ruling, the court found that under Article 514 of the Civil Code, which provides for a party’s right to assign its rights and obligations to an assignee, all assignment agreements are valid and effective. Thus, FF Engels Investments Ltd was fully entitled to apply to the Ukrainian courts for recognition and enforcement of the arbitral awards under Article 393(1) of the Civil Procedure Code.
In another case decided by the Feodosiya City Court of Crimea, CJSC Yukos-M filed an application to recognise and enforce a 2007 judgment of the Moscow Arbitrazh Court against CJSC KAFA.(4) Although this case concerned a foreign state court judgment, rather than an arbitration award, the same principles with respect to the succession of a legal entity applied.
Having obtained a positive decision under its claim, which arose out of an agency agreement, in 2010 the applicant again appeared before the Moscow Arbitrazh Court seeking to substitute the original debtor with its legal successor, JSC KAFA-Terminal. The Russian court granted this application.
In June 2011 the Feodosiya City Court admitted submissions of CJSC Yukos served in addition to its initial application to recognise and enforce the Moscow court judgment in Ukraine and allowed it to replace the original debtor with JSC KAFA-Terminal. This was done in accordance with Article 37 of the Civil Code, which permits procedural succession at all stages of proceedings.
The Feodosiya City Court allowed recognition and enforcement of the foreign court judgment, finding that although the debtor under the respective prorogation agreement was named as CJSC KAFA, the judgment had to be enforced against its legal successor, JSC KAFA-Terminal. The court confirmed that in the case of procedural succession, Article 393(1) permits the recovery of the awarded sums against the new debtor.
The proceedings in both Odessa Region Appeal Court cases are ongoing, as both orders have been challenged through cassation appeal. The judgments of the High Specialised Court for Civil and Criminal Matters are eagerly awaited in the hope that they will clarify whether a third party may in principle apply for recognition and enforcement of arbitral awards in Ukraine.
Nonetheless, these cases demonstrate that Ukrainian courts are willing to allow for the recognition and enforcement of arbitral awards where a change of party to an arbitration agreement occurs after completion of the arbitration proceedings and such a transfer of claims is governed by Ukrainian law. In more factually complex matters, and where the transfer of rights occurs in accordance with foreign law, the courts are generally reluctant to issue rulings in favour of recognition and enforcement. The usual rules governing the assignability of contracts and those relating to legal succession will still apply in enforcement proceedings.
Authors: Eugene Blinov, Elena Kardash
(1) Julian D M Lew, Loukas A Mistelis and Stefan Kröll, Comparative International Commercial Arbitration, Chapter 7, “Arbitration Agreements – Validity and Interpretation”, Kluwer Law International, 2003, pp 147-149.
(2) Euler Hermes Services Schweiz AG v Open Joint Stock Company Odessa Fat and Oil Plant, Odessa Region Appeal Court, Case 1522/25614/12, March 20 2013.
(3) FF Engels Investments Ltd v Pacific Inter-Link Sdn Bhd, Odessa Region Appeal Court, Case 22ц-1590\9143\2012, December 19 2012.
(4) CJSC Yukos-M v CJSC KAFA, Feodosiya City Court of the Autonomic Republic of Crimea, Case 2-k-1/11/0121, August 9 2011.