No sovereign immunity for Ukraine against investment treaty award creditor

On 13 July 2018, Butcher J rejected an application by Ukraine based on sovereign immunity arguments to set aside an order made by Teare J ex parte in August 2017, which had granted leave to the claimant (Tatneft) to enforce an investment treaty award (Award) against Ukraine.  Butcher J entered judgment against Ukraine for USD112 million, plus interest.  In reaching this conclusion, Butcher J considered the interplay between the arbitration exception in s9 State Immunity Act 1978 (SIA) and the jurisdiction of the tribunal under the bilateral investment treaty between Russia and Ukraine (BIT).   

 

Butcher J preliminarily explained that Ukraine is entitled, as it had argued, to sovereign immunity pursuant to s1 SIA unless an exception applies.  The exception in s9 provides that “[w]here a State has agreed in writing” to submit a dispute to arbitration, “the State is not immune as respects proceedings in the courts of the United Kingdom which relate to arbitration”.  

 

Tatneft contended that the relevant arbitration agreement for the purposes of s9 stemmed from the dispute provision in the BIT.  Butcher J acknowledged that BITs can give rise to an “agreement in writing” between the state and an investor such that s9 is satisfied, since the provision effectively operates as a “unilateral offer” to an investor to arbitrate.  This offer is accepted by the investor when it commences arbitration.  Moreover, enforcement proceedings – such as in the present case – “relate to arbitration” as required by s9.

 

The crux of Ukraine’s sovereign immunity argument was that it “did not agree to submit to arbitration” two of the successful claims that had been determined by the tribunal in the Award.  One of these concerned whether Ukraine could be found to have breached the fair and equitable treatment standard (FET) in circumstances where there was no express FET provision in the BIT; the other was whether Tatneft had made a valid “investment” under the BIT.

 

Tatneft argued that Ukraine’s ‘no agreement to arbitrate’ arguments went to whether the tribunal had jurisdiction.  As such, these should all have been raised before the arbitral tribunal and, if they were not, Ukraine could not later raise them before the English court.  It argued that a State effectively waived the right to raise such new jurisdictional arguments at the enforcement stage.  If the contrary were true, Tatneft argued, states could “chop and change” their positions – which was unacceptable given that they would already have participated in a sophisticated arbitral process.

 

Butcher J disagreed with Tatneft.  He emphasised that s1(1) SIA provides that states are immune from the jurisdiction of the court unless an SIA exception applies.  As such, the court must be satisfied that, in this instance, the s9 exception applies to remove immunity.  He explained that nothing in the SIA suggested Ukraine is “precluded by what occurred before the Tribunal from raising the points which it has at this hearing”.  He also stated that the ‘chopping and changing’ of positions by states was likely overstated. 

 

In light of Butcher J’s findings then, it seems that there is scope for states to argue revised or even new jurisdictional objections at the enforcement stage of treaty proceedings, notwithstanding what was presented before the arbitral tribunal.  

 

 

Art. 9 of the BIT – the disputes clause – provided that “[a]ny dispute” between a contracting party and an investor of the other contracting party “in connection with investments” shall be referred to a competent court or arbitration.

 

In respect of Tatneft’s successful FET claim, Ukraine argued that as a jurisdictional matter, it had not agreed to the FET standard being incorporated into the BIT; therefore, it had not agreed to a claim of that type being arbitrated (It followed, therefore, that the s9 exception of the SIA didn’t apply).

 

Tatneft argued, however, that the only jurisdictional issue was whether the dispute as to the existence or otherwise of an FET obligation fell within the arbitration agreement.  Tatneft submitted it plainly did since it was a “dispute in connection with” a qualifying investment as required by Art. 9 of the BIT (As such, there was an agreement to arbitrate for the purposes of s9 of the SIA).

 

In Butcher J’s view, Tatneft was correct.  The FET issue was not a jurisdictional issue, but rather a question of construction of Art. 9 of the BIT.  Art. 9, he observed, was drafted in broad terms.  Giving proper effect to those terms, Ukraine agreed to arbitrate “any dispute” in connection with the relevant investments, and not particular types of dispute.  Butcher J was therefore unwilling to adopt Ukraine’s narrow interpretation.  Indeed, he remarked, if Ukraine’s position were adopted, then the logical consequence would be that a state could simply say it had not agreed to confer a particular protection on an investor, and therefore that it had not agreed to arbitrate claims alleging a breach of the obligation to provide that protection.  Butcher J said such an interpretation would be contrary to the broad intention behind BITs.

 

 

The case shows that a state will not be precluded from raising, before an English court, jurisdictional issues not raised before an UNCITRAL arbitration tribunal, and further that the court will carefully consider arguments of sovereign immunity.  While this might be considered a second bite of the cherry for a state that has been unsuccessful before an UNCITRAL tribunal, the reality is that it may be difficult for a state to establish it has not submitted in writing to arbitrate a dispute where, as here, the dispute provision is broadly worded (i.e. an agreement to arbitrate “any dispute”).  

 

Although, overall, this case may be construed as a positive development for investors, Tatneft must still execute its award against Ukraine, a process which requires surmounting many more immunity-related hurdles.  Ukraine has also reserved its right to raise other grounds against enforcement under s103 Arbitration Act 1996 should its claim for sovereign immunity fail.

 

 

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review​, a monthly publication.  If you wish to receive this publication, please contact Amy Edwards, amy.edwards@allenovery.com.