PAO Tatneft v Ukraine

Factual and Procedural Background

This opinion concerns an application by the Defendant ("Ukraine") to set aside an order made ex parte by Judge Teare on 9 August 2017 under section 101 of the Arbitration Act 1996. The original order granted leave to the Claimant ("Tatneft") to enforce an arbitration award dated 29 July 2014 ("the Merits Award"), with judgment entered against Ukraine for US$112 million plus interest.

Ukraine seeks to set aside the order on two grounds: first, that it has not lost its state immunity under the State Immunity Act 1978 because it did not agree to submit the relevant disputes to arbitration; second, that Tatneft failed to make full and frank disclosure during the original enforcement application. Ukraine also reserves the right to challenge recognition and enforcement of the award under section 103 of the Arbitration Act at a future hearing.

The dispute arises from a bilateral investment treaty ("BIT") between the Russian Federation and Ukraine dated 27 November 1998, which includes provisions relevant to the arbitration and enforcement proceedings.

Tatneft, a major Russian oil company, was a shareholder in a Ukrainian company ("Ukrtatnafta") owning the largest refinery in Ukraine. Various shareholding disputes involving Tatneft, and other entities ("Amruz" and "Seagroup"), arose following court actions and a forceful seizure of the refinery in 2007. Tatneft initiated arbitration under the BIT in 2008 alleging breaches of investment protections by Ukraine.

The arbitration tribunal confirmed jurisdiction in a 2010 partial award and subsequently issued the Merits Award in 2014, finding Ukraine liable for breach of fair and equitable treatment and ordering compensation of US$112 million plus interest.

Following the award, enforcement proceedings have occurred in France, the USA, and Russia, with mixed outcomes and ongoing litigation. In England, Tatneft obtained an ex parte order enforcing the award in 2017, which Ukraine now seeks to set aside.

Legal Issues Presented

1. Whether Ukraine has lost its state immunity under section 1 of the State Immunity Act 1978 by virtue of section 9, due to an agreement to arbitrate disputes under the BIT;
2. Whether the court has jurisdiction to enforce the Merits Award given Ukraine's contention that it did not agree to arbitrate certain disputes;
3. Whether Tatneft failed to make full and frank disclosure in the ex parte enforcement application, justifying setting aside the enforcement order;
4. Whether Ukraine waived jurisdictional objections by not raising them before the arbitration tribunal;
5. The proper construction of the BIT, particularly regarding the incorporation of a fair and equitable treatment (FET) standard and the definition of "investment";
6. Whether Ukraine's objections concerning timing and abuse of rights affect the arbitration tribunal's jurisdiction;
7. The applicability of the abuse of rights doctrine to Ukraine's claims;
8. The adequacy of disclosure by Tatneft concerning parallel enforcement proceedings in other jurisdictions.

Arguments of the Parties

Defendant's (Ukraine's) Arguments

• Ukraine maintains it retains state immunity under the State Immunity Act 1978 because it did not agree to arbitrate all disputes covered by the Merits Award.
• Ukraine argues the BIT does not include a fair and equitable treatment (FET) obligation and thus no agreement to arbitrate claims based on that standard exists ("the FET point").
• Ukraine contends it did not agree to arbitrate claims relating to Amruz's and Seagroup's shares because these do not constitute qualifying investments by Tatneft ("the No Investment point").
• Ukraine asserts Tatneft acquired these shares after the relevant disputes had arisen, so no jurisdiction exists over those claims ("the Timing point").
• Ukraine alleges Tatneft's acquisition of shares was an abuse of rights, made to gain treaty protection for foreseeable disputes ("the Abuse of Rights point").
• Ukraine contends Tatneft failed to disclose the likelihood of a state immunity claim and parallel enforcement proceedings in the USA and Russia during the ex parte application.
• Ukraine submits that unlike private parties, states are not precluded from raising new jurisdictional objections at enforcement stage, even if not raised before the arbitration tribunal.

Claimant's (Tatneft's) Arguments

• Tatneft argues that the question of whether Ukraine owed an FET obligation is a merits issue, not jurisdictional, and that the arbitration agreement covers any dispute "in connection with" investments.
• Tatneft submits that the MFN clause in the BIT incorporates the FET standard from another treaty, which the tribunal accepted.
• Tatneft contends Ukraine waived jurisdictional objections by not raising them before the arbitration tribunal, and the court should apply principles similar to those in the Arbitration Act regarding waiver.
• On the "No Investment point", Tatneft argues that acquiring shares in Amruz and Seagroup gave it indirect control of a Ukrainian company, constituting an investment protected by the BIT.
• Regarding timing, Tatneft submits the relevant breaches occurred after it acquired the shares, satisfying any temporal jurisdictional limits.
• Tatneft asserts the abuse of rights objection is a matter of admissibility for the tribunal, not jurisdiction for the court.
• On disclosure, Tatneft accepts it would have been preferable to expressly mention the likelihood of state immunity claims but contends the witness statement sufficiently indicated jurisdictional challenges and ongoing proceedings.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by confirming that Ukraine is entitled to state immunity under section 1 of the State Immunity Act 1978 unless an exception under section 9 applies, which requires a written agreement to arbitrate the dispute. The arbitration agreement arises from Article 9 of the BIT.

The court rejected Tatneft's argument that Ukraine was precluded from raising new jurisdictional objections at enforcement because it did not raise them before the arbitral tribunal. The court emphasized the special status of states and the mandatory nature of immunity, holding that the court must consider any immunity objections regardless of prior conduct before the tribunal.

On the FET point, the court held that whether Ukraine owed a fair and equitable treatment obligation is a merits issue, not jurisdictional. The arbitration agreement covers any dispute "arising in connection with" investments, which includes disputes over substantive protections.

Regarding the Amruz and Seagroup shares claim, the court addressed Ukraine's three objections:

• No Investment Point: The court adopted a broad interpretation of "investment" under the BIT, supported by international arbitral awards, concluding that Tatneft's acquisition of shares giving control of a Ukrainian company qualifies as an investment. The court rejected the narrow view requiring active resource contribution within Ukraine.
• Timing Point: The court accepted investor-state jurisprudence that jurisdiction is limited to breaches occurring after the investor acquired the investment. Applying this, the court found the relevant breaches occurred after Tatneft acquired the shares, satisfying the temporal requirement.
• Abuse of Rights Point: The court held that abuse of rights is a matter of admissibility for the tribunal, not a jurisdictional issue for the court. It reasoned that determining abuse involves complex factual and legal assessments unsuitable for a jurisdictional decision at enforcement.

On disclosure, the court acknowledged the duty of full and frank disclosure in ex parte applications but found that Tatneft's witness statement sufficiently disclosed the possibility of immunity claims and ongoing enforcement proceedings in other jurisdictions. The court was not persuaded there was a substantial or deliberate breach warranting setting aside the enforcement order.

Accordingly, the court dismissed Ukraine's application to set aside the enforcement order.

Holding and Implications

DISMISSED.

The court refused to set aside the order enforcing the arbitration award against Ukraine. It held that Ukraine retains state immunity except where it has agreed in writing to arbitrate disputes under the BIT, which the court found applicable to the disputes in question. The court clarified that objections based on state immunity can be raised at enforcement even if not raised before the arbitral tribunal. It also distinguished between jurisdictional and admissibility issues, holding that certain objections (FET incorporation and abuse of rights) are merits or admissibility matters for the tribunal.

The decision directly affects the parties by upholding the enforcement of the US$112 million award against Ukraine but does not establish new legal precedent beyond clarifying procedural and interpretive principles regarding state immunity and BIT arbitration enforcement.