Thursday, 17 April 2014

Recognition and enforcement of an arbitral award by the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry (ICAC at the UCCI)



In a 2012 decision, the Thessaloniki 1st Instance Court refused partially to declare enforceable a Ukrainian arbitral award on public policy grounds [Case Nr. 13432/2012, unreported]. 

The facts: The parties concluded an agreement, signed in Simferopol late 2009. It was agreed that the Ukrainian company would sell beverages to the Greek company. Pursuant to Art. 12.2 of the contract, the parties decided to submit any dispute before the ICAC at the UCCI. At the same time, they agreed that Ukrainian law would be applicable. The buyer made an advance payment, following which the seller delivered the goods by end March 2010. Full payment was supposed to take place by end May 2010. However, the buyer failed to pay the remaining amount. Upon that the seller initiated arbitration proceedings in accordance with the clause of the contract. The Ukrainian company sought damages for the total amount of 206.432 €, consisting of: 99.751 € for the remaining unpaid price; exactly the same sum as penalty for non-performance; and 9.630 € for costs of the proceedings. For the purposes of appointing an arbitrator, the ICAC at the UCCI summoned the buyer with registered letter, which was received by its legal representative. In a similar fashion the court also summoned the buyer for informing him on the date of the hearing. Mid March 2011 the award was rendered in default of the buyer. 

The ruling: The Ukrainian company requested that the arbitral award be recognized and enforced pursuant to the 1958 New York Convention on the recognition and enforcement of arbitral awards. Both countries are signatories of the Convention. Art. 20.2 of the bilateral treaty on judicial assistance in civil matters refers to the NYC with respect to arbitral awards rendered in the territory of the countries.
The Greek company challenged the award on the basis of the following grounds:
a)      The award was not final and conclusive, because it has filed an action to quash the award before the Shevchenko District Court in Kiev.
b)      Notice by post was not proper, so as to appear before the court.
c)      No service of the award has been effectuated.
d)      The arbitration agreement was not valid according to Ukrainian law, and the court had decided on a matter falling out of the scope of the arbitration agreement.
e)      The subject matter of the dispute is not subjected to arbitration according to Ukrainian law.
The Thessaloniki 1st Instance court answered as follows:
a) It has not been proven by the buyer that the sole filing of an action to quash the award activates the ground of Art. 5.1.e of the New York Convention.
b) Service by post has actually reached the Greek company’s premises, as evidenced by the acknowledgements of receipt by the buyer’s legal representative. In other words, service was proper.
c) The buyer did not provide evidence on ground (d).
d) The arbitrability of the dispute is examined in accordance with the lex fori, i.e. the law of the state where recognition and enforcement of the award is sought. Pursuant to Greek law, this is a typical commercial case, falling within the ambit of arbitration according to Art. 867 & 868 Greek Code of Civil Procedure.
The remaining point for the court was to examine the compatibility of the foreign award with Greek public policy. This has to be done by the court on its own motion, i.e. even if the party against whom recognition is sought does not invoke public policy considerations (Art. 5.2 NYC). The court referred to the clause under Art. 11.4 of the contract, stating that if the buyer does not pay to the seller fully or partially the amount owed, he will be burdened with a penalty equivalent to 5 % of the full amount for each day in default. The ICAC at the UCCI granted partially the request of the applicant, and ordered the buyer to pay the amount of 99.751 € for 35 days in default of payment (instead of 174.564,25 €). The Thessaloniki 1st Instance Court held that such a penalty for non-performance, which ends up being equivalent to the actual price of the transaction, is considered to be disproportionately high, in light of a) the default of the buyer in the arbitration proceedings, and b) the fact that the Ukrainian company did not suffer any subsequent damages, given the partial performance by the buyer. For the reasons above, the court declared the Ukrainian award enforceable in regards to the remaining price and the costs of the arbitration proceedings, whereas at the same time it refused to recognize the amount granted by the ICAC at the UCCI as a penalty for non-performance.

Comments: The quintessence of the Greek ruling relates without any doubt to the public policy clause. Starting from 1999, Greek courts refuse to recognize and enforce foreign awards rendering punitive damages [leading case: Supreme Court (Full Bench) 17/1999]. Focusing precisely on Ukrainian arbitral awards rendered by the ICAC at the UCCI, we have the following situation: In two previous attempts, Greek courts were reluctant to allow recognition and enforcement of the sums related to penalty for non-performance. In particular:
a)      In the first case, the application was dismissed in the 1st instance court; the latter decision was reversed before the Thessaloniki CoA; finally, the Supreme Court reversed the appellate ruling, because it failed to consider the proportionality of the penalty imposed [SC 1260/2002].
b)      In the second case, the application was accepted in 1st instance, however reversed before the Athens CoA [4332/2011].
In conclusion, the message is clear: As things stand today, Greek courts will be reluctant to grant exequatur to Ukrainian arbitral awards, condemning Greek buyers to pay penalty for non-performance, unless the amount has been considered to be proportionate to the standards of domestic public policy. The lesson learned from the decision of the Thessaloniki court is that this will not be the case, if the above amount is almost equivalent to the price of the sale’s contract.

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