Arbitration Agreement is no Waiver of State Immunity from Jurisdiction for the Purposes of Recognition and Enforcement – Comment on Commercial Court of Moscow’s decision in Tatneft v Ukraine

In April 2017, the Russia-based PJSC Tatneft initiated against Ukraine the process of recognition and enforcement in Russia of an arbitral award issued in the PCA investment arbitration OAO Tatneft v Ukraine under the UNCITRAL Rules and the Russia-Ukraine BIT. This June, the Commercial Court for the City of Moscow (the court of first instance, hereinafter – “the Court” or “the Russian Court”) dismissed Tatneft’s recognition and enforcement application, inter alia, sustaining Ukraine’s plea of immunity from jurisdiction [see А40-67511/2017 (in Russian)]. This post comments on the part of the Court’s judgment concerning Ukraine’s immunity from jurisdiction.

The Positions of the Parties and the Judgment

Insofar as it is possible to ascertain the crux of the parties’ submissions from the text of the judgment, Ukraine raised two objections to jurisdiction. The first objection was based on Ukraine’s immunity from jurisdiction in the recognition and enforcement proceedings, and the second on the Russian courts’ lack of effective jurisdiction to try the claim due to the absence of Ukraine’s commercial assets in the territory of Russia. This note will concern itself only with the first of the two objections.

In response to Ukraine’s immunity objection, Tatneft argued that Ukraine had waived its immunity from jurisdiction, either:

1. under Article 5(1) of the Russian State Immunity Act 2015 by assuming the international obligation to accept the award as final and binding and to execute it in conformity with its legislation in Article 9(3) of the Russia-Ukraine BIT; or
2. under Article 6(2) of the Russian State Immunity Act 2015 by concluding with Tatneft the arbitration agreement as such within the framework of Article 9(2) of the Russia-Ukraine BIT.

It is not clear whether Tatneft has also suggested to locate Ukraine’s waiver in Article 34(2) of the UNCITRAL Rules obliging the parties to accept the award as final and binding and to comply with it [bearing in mind practice of the French courts to a similar effect – see Creighton Limited v Minister of Finance and Minister of Internal Affairs and Agriculture of the Government of the State of Qatar (2000) XXV Yearbook Commercial Arbitration 460].

The relevant provisions of the Russian State Immunity Act 2015 read as follows:

Article 5. Consent of a foreign State to the exercise of jurisdiction by the court of the Russian Federation

1. A foreign State does not enjoy immunity from jurisdiction in the Russian Federation if it has explicitly consented to the exercise of jurisdiction by the court of the Russian Federation with respect to the dispute at hand in:

1) a treaty;

2) a written agreement, which is not a treaty;

3) a declaration before the court of the Russian Federation, written notification of a court of the Russian Federation, or a written notification handed over to the Russian Federation via the diplomatic channels, within the framework of the process with respect to the dispute at hand.

Article 6. Waiver of immunity from jurisdiction

[…]

2. A foreign State is deemed to have waived its immunity from jurisdiction regarding the disputes concerning the arbitration agreement, if such a foreign State has entered into an arbitration agreement for the resolution of disputes, which have arisen or which may arise with respect to performance of obligations.

[…]

The Court sustained both of Ukraine’s objections. Insofar as the judgment is concerned with immunity from jurisdiction (as opposed to the lack of effective jurisdiction), the Court held, without much explanation, that Article 9(3) of the Russia-Ukraine BIT was not explicit enough to amount to Ukraine’s waiver of immunity from jurisdiction for the purposes of subsequent recognition and enforcement of the investment arbitration award. The Court added that neither did the arbitration agreement between Tatneft and Ukraine constitute such a waiver.

Unfortunately, the Court did not engage into discussion of the issue whether its rejection of Tatneft’s petition for recognition and enforcement based on Ukraine’s immunity from jurisdiction could violate Tatneft’s right of access to court under Article 6 of the European Convention on Human Rights [Oleynikov v Russia App no 36703/04 (ECHR, 14 March 2013) [54] – [73]] as well as the right to peaceful enjoyment of its possessions under Article 1 Protocol 1 to the same Convention [by implication, Sedelmayer v Germany App nos. 31090/06 30216/06 (ECHR, 10 November 2009)]. Neither did the Court analyse whether such a rejection could violate Russia’s obligation under Article V of the New York Convention for the Recognition and Enforcement of Foreign Arbitral Awards to recognise and enforce arbitral awards subject only to a limited set of exceptions, immunity not being mentioned. Nor was it elaborated whether the rejection of Tatneft’s application could contradict Russia’s obligation under Article 18 of the VCLT not to deprive the UN Convention on Jurisdictional Immunities of States and Their Property signed by Russia without subsequent ratification of its object and purpose. Below I will  examine the points discussed by the Court.

The Analysis

The judgment is explicit in treating recognition and enforcement proceedings as those concerned with immunity from jurisdiction rather than immunity from execution, despite the view taken by the ILC while preparing the Draft Articles on the Jurisdictional Immunities of States and Their Property [“Summary record of the 2220th meeting” Yearbook of the ILC (1991, vol I) 88].

As far as the judgment concludes that Article 9(3) of the Russia-Ukraine BIT does not amount to a waiver of immunity from jurisdiction, the judgment is in contrast with the approach accepted by the Supreme Court of Germany in Werner Schneider v Kingdom of Thailand [R Kläger, ‘Werner Schneider (liquidator of Walter Bau AG) v Kingdom of Thailand: Sovereign Immunity in Recognition and Enforcement Proceedings under German Law’ (2014) 29 (1) ICSID Review 142-148]. In this case, the Supreme Court of Germany held that Article 10(2) of the Germany-Thailand BIT providing almost identically with Article 9(3) of the Russia-Ukraine BIT that “[t]he award shall be enforced in accordance with domestic law” amounted to Thailand’s waiver of its immunity from execution, while the State’s waiver of immunity from execution necessarily implied also its waiver of immunity from jurisdiction for the purposes of recognition and enforcement in the German courts, waiver of immunity from execution otherwise being futile.

The Supreme Court of Germany might have read too much into Article 10(2) of the Germany-Thailand BIT, whose reference to “enforce[ment] in accordance with domestic law” could better be understood as a reference inter alia to the principles of State immunity forming part of the relevant State’s legal system. State immunity (whatever is the position taken by the relevant State regarding its absolute or restrictive nature) thereby has itself confirmed rather than waived in Article 10(2) of the Germany-Thailand BIT.

In addition, interpretation of Article 10(2) of the Germany-Thailand BIT as a waiver of immunity from execution will only make sense, if it covers those assets which enjoy immunity disposable by a waiver, ie the assets which do not fall within the default customary exceptions (if any) to the general rule of immunity from execution [see, possibly reflecting customary international law, Article 19(c) of the UN Convention on Jurisdictional Immunities of States and Their Property]. By exclusion, these will be inter alia assets used by the State for sovereign and diplomatic purposes. However, it is rather difficult to imagine that a State might have waived its immunity from execution in a BIT in a manner so blanket that all its foreign assets otherwise enjoying immunity from execution (including those used for sovereign purposes or even enjoying diplomatic immunities) thereby became amenable to seizures.

Moreover, Article 10(2) of the Germany-Thailand BIT is worded remarkably similarly to Articles 54(1) and (3) of the ICSID Convention (surely, with the exception that, unlike the ICSID Convention, the discussed BIT does not equate the rendered awards to judgments of the States-parties to the BIT). According to Article 54(1), “[e]ach Contracting State shall recognize an award rendered pursuant to [ICSID] Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State.” According to Article 54(3), “[e]xecution of the award shall be governed by the laws concerning the execution of judgments in force in the State in whose territories such execution is sought.” Still, Article 55 of the ICSID Convention confirms that “[n]othing in Article 54 shall be construed as derogating from the law in force in any Contracting State relating to immunity of that State or of any foreign State from execution.” Then, following the logic of the Supreme Court of Germany in Werner Schneider, if Article 10(2) of the Germany-Thailand BIT, like Articles 54(1) and (3) of the ICSID Convention, does not dispense with immunity from execution of the States-parties to the BIT, neither should it dispense with their immunity from jurisdiction.

Yet, the judgment of the Russian Court does make any attempt to criticise or indeed refer to the judgment of the Supreme Court of Germany in Werner Schneider. This being said, the result of the Court’s attempt to interpret Article 9(3) of the Russia-Ukraine BIT may still be correct.

The Russian Court also interpreted Article 6(2) of the Russian State Immunity Act 2015 as unrelated to the recognition and enforcement proceedings thereby finding that under Russian law an arbitration agreement as such does not constitute a waiver of immunity from jurisdiction for the purposes of subsequent recognition and enforcement of the arbitration award. This is a departure from the trend established by a number of jurisdictions to treat arbitration agreements as the described waivers [B Juratowitch, “Waiver of State Immunity and Enforcement of Arbitral Awards” (2016) 6(2) Asian J Int’l Law 220-230]. However, recalling the judgment of the Hong Kong courts in Democratic Republic of Congo v FG Hemisphere [2011] HKCFA 41, whatever its merit may be, the trend is not an unbroken one. In fact, it is not surprising that the Russian Court in its judgment has followed the position taken by the Hong Kong court (which, in turn, followed the position of Mainland China), be it accidentally or on purpose (the judgment of the Russian Court does not refer explicitly to FG Hemisphere). Russia and China have often endorsed their common understanding of the principle of sovereign equality of nations [See, eg UN Docs A/52/153-S/1997/384 and A/70/982–S/2016/600] – a cornerstone of the principle of State immunity [Jurisdictional Immunities of the State (Germany v Italy: Greece intervening) [2012] ICJ Rep 99, 123]. Historically, State practice of Russia has been going hand in hand with that of China [L Mälksoo. Russain Approaches to International Law (OUP 2015) 26]. In the field of State immunity, Russia and China are the two of the handful of States, which maintain that immunity can be denied on the basis of reciprocity (yet, unlike China, Russia has adopted the doctrine of restrictive immunity).

In any event, as a matter of legal principle, for the Russian Court to imply that merely by entering into an arbitration agreement Ukraine waived its immunity from jurisdiction in the courts of all States where the recognition and enforcement proceedings could take place would have contradicted the requirements of both Russian law and customary international law for a waiver to be explicit [Article 5(1) of the Russian State Immunity Act 2015 and, possibly reflecting customary international law, Article 7(1) of the UN Convention on Jurisdictional Immunities of States and Their Property].

Conclusion

The judgment of the Court, if stands on appeal, will present another departure from a trend to consider an arbitration agreement as a waiver of State immunity from jurisdiction for the purposes of subsequent recognition and enforcement of the rendered award, which may put into question the formation of the new custom on the issue.