The results of the last year
Nearly one year ago we published a comprehensive review of the restrictive measures (sanctions) introduced by Ukraine. We analyzed the mechanism of imposition, problems of their application, administering of the list, pitfalls of judicial and non-judicial remedies. One year after there is no need to change its remarks: the Cabinet of Ministers of Ukraine has not adopted a regulation defining the mechanism of application as the Law ‘On Sanctions’ prescribes, lawsuits of legal and natural persons seeking cancellation of the measures against them are moving slowly in the Supreme Court due to the state secrecy regime which is administered by the Security Service of Ukraine. Moreover, during the last year, the President of Ukraine did not amend the list of sanctioned persons, neither by adding new names nor by eliminating the old ones.
However, the abandonment of the restrictive measures regime in no way means that it has ceased to exist – sanctioned persons continue to entertain legal relations, which is why most of legal disputes which inevitably occur are brought to Ukrainian courts. Thus, the latter cannot stand aside and the Supreme Court has to deal with the cases concerning the restrictive measures.
While we can barely say that its practice in the field is developing sustainably enough, we managed to come across several fruitful findings of the highest Ukrainian court which are worth looking at.
The restrictive measures only delay contractual obligations and do not remove them. They are applied only to directly designated persons and to those who are affiliated with them
Above all, the Court seized an opportunity (only in Ukrainian) to emphasize that application of the measures to the creditor in contractual obligations only delays their execution by the debtor and do not exempt the latter from the ultimate obligation to execute. This is all due to the temporary character of the restrictive measures – up to three years, however, the extension option is always on the table.
In the same judgment, the Supreme Court chose a narrow approach towards the application of the sanctions and concluded that they concern only directly designated persons – the ones listed in the Appendix to the decision of the National Security and Defense Council, and not those who can be affiliated with these persons.
In the other case, by judgment of 22 January 2020 (only in Ukrainian), the Supreme Court refused to enforce the restrictive measures in the dispute between the parties where the subject-matter of the contract was goods (software) produced by the sanctioned person, not a party to the contract. In this case, the Court stated that the restrictive measures are not applicable since neither party was listed as the one to whom the measures are applied.
Besides, in judgment of 28 October 2019 (only in Ukrainian), the Supreme Court declined to declare the contract null and void where a party was directly designated person. The Court reasoned its decision by the fact that at the moment of conclusion of the contract the restrictive measures did not exist and that these measures fail to prescribe for declaring commercial contracts null and void.
Blocking of assets of the holder of corporate rights leads to the temporary suspension of the rights to dispose of the shareholder rights, including the rights to participate in corporate governance
In a recent dispute between a joint stock company and its shareholder included to the sanctions list, the Supreme Court noted that blocking of assets as a restrictive measure of the sanctions regime does serve as a legal ground for temporary suspension of the shareholder rights, including the rights to participate in corporate governance, to participate in voting during shareholders meetings and to form their order, to delegate representatives to a supervisory board or to an audit commission, etc. (judgement of 16 October 2019, only in Ukrainian).
Direct designation of a person in the list of sanctions serves as a ground for refusal to recognize and to enforce an award of an international arbitration
In the context of recognizing and enforcing of awards of foreign arbitrations, the Supreme Court recently judged that the sanctions regime is a new feature of public policy within the meaning of 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the respective Law of Ukraine ‘On International Commercial Arbitration’.
By judgment of 13 February 2020 (only in Ukrainian), the Supreme Court refused to recognize and to enforce the award of International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation due to the fact that an awardee was a legal person included to the sanctions list given the need of Ukraine to protect the interest of the state and the society from threats to national security. Besides, the Court specified that the obligation to temporary suspend recognition and enforcement of the foreign arbitration award during the period of restrictive measures effects rests with the court and not with the enforcement authorities.
Paradoxically, in the absolutely identical case involving the same sanctioned creditor and the same debtor, the Supreme Court upheld the order of the lower court to recognize and enforce similar arbitral award (judgment of 09 January 2020, only in Ukrainian). At the same time, in its later judgment, the Supreme Court underlined that its ultimate decision to refuse to recognize and to enforce the foreign arbitral award is contrary to the decision in the previous case because in that case the Court did not examine the issue of application of the restrictive measures.
Hence, the precedent, where the Supreme Court reaches two opposite conclusions in two factually identical cases reflects the dangerousness of controversial court practice yet within one (civil) jurisdiction, while the issues concerning Ukrainian sanctions can be raised also in commercial and administrative litigations. As such, it explains the growing need to seek the answers from the Grand Chamber of the Supreme Court.
Controversial issues of application of the Ukrainian sanctions: approach of the Grand Chamber of the Supreme Court
In this respect, it seems worth considering the interaction between the Cassation Commercial Court (a part of the Supreme Court) and the Grand Chamber. The latter is empowered to consider the cases raising an ‘exceptional legal problem’ when its intervention is necessary to form coherent judicial practice on the basis of Article 302 of the Commercial Procedural Code of Ukraine (the same clauses are included in the other Procedural Codes of Ukraine). However, the Grand Chamber itself decides where there is enough basis for its intervention.
By order of 23 October 2019 (only in Ukrainian), the Cassation Commercial Court referred to the Grand Chamber the case regarding recovery of the sum by the sanctioned person who paid under the contract which was then terminated. The Cassation Court stated that the restrictive measures applied to the large number of persons, while the court practice is not coherent and certain issues lack legal regulation from the government. However, by order of 13 November 2019 (only in Ukrainian), the Grand Chamber declined to consider the case and referred it back to the Cassation Commercial Court due to groundlessness of its request and absence of the controversy in the court practice.
The Cassation Commercial Court made a second attempt by order of 18 February 2020 (only in Ukrainian) in the other similar case by noting that the mechanism of the restrictive measures application is regulated only for banks, while the commercial relations lack according regulation and the questions arise if the sanctions are the basis for suspension or termination of contractual obligations. However, the Grand Chamber refused (only in Ukrainian) again by citing its previous position and precising that only controversy and not the absence of court practice would be the basis for it to consider the case of application of the sanctions in commercial relations.
Although, five judges of the Grand Chamber issued a dissenting opinion stating a number of legal questions which require the intervention of the Grand Chamber – including the one whether the sanctions can be treated as force majeure and if it can serve as a ground to dismiss the claim.
The last year was marked by first clarifications from the Supreme Court on crucial issues of application of the Ukrainian sanctions: commercial obligations are delayed, not removed; the sanctions cannot be a ground for declaring a contract null and void; the shareholder rights are also subject to the restriction which has an impact on corporate governance; the sanctions of Ukraine are part of the public policy of Ukraine in the context of recognition and enforcement of foreign arbitral awards.
Also important is to note the Supreme Court keeps a narrow approach in the application of the sanctions and the vital question is if a party is a directly designated person. As such, the mechanism of application of Ukrainian sanctions is now much more similar to the one of the EU restrictive measures. At the same time, it differs from the one chosen in the U.S. where the Office of Foreign Assets Control applies such a broad approach that under the sanctions may also fall the persons who operates payments with the sanctions persons in U.S. dollars.
At the same time, the Cabinet of Ministers of Ukraine continues to disregard its obligation to adopt a regulation defining the mechanism of application of the Ukrainian sanctions. Lawsuits concerning the sanctions brought by natural and legal persons are progressing extremely slowly, while the Grand Chamber persistently refuses to find the controversy of the court practice which would give it reasons to provide answers on the most crucial legal issues related to the application of the Ukrainian restrictive measures (sanctions).