In recent Ukrainian history both investment and commercial arbitration cases have had a tangible impact on the country’s business environment. Big business prefers to resolve disputes in trustworthy international arbitral centers that provide effective access to justice.
Olexander Martinenko, senior partner of CMS Cameron McKenna Nabarro Olswang, shared his vision on the recent achievements in pursuing international arbitration as part of judicial reform, role of expert witnesses, notion of arbitration friendly jurisdictions, and how Ukrainian arbitration practitioners face intellectually challenging cases.
What are the most challenging issues facing arbitral institutions around the globe? Do you observe them in Ukraine?
Olexander Martinenko: I guess there are some features that are common for arbitral institutions around the world, and there are some particular ones pertinent to some particular arbitration institutions. Among the most significant common problems are the following.
First of all, it is the nature of international arbitration which provides for the absence of the precedent system. In most cases the arbitration tribunals are composed on an ad hoc basis for a specific case, they are not permanent. The arbitral tribunal is a composition of particular arbitrators, and they are not representatives of a respective arbitration institution. Institutions only make the framework. They provide for the procedural rules and maybe arbitration facilities, services and so on. The arbitration is carried out by a particular composition of arbitrators who make up the arbitration tribunal. Even if there are two disputes between the same parties given in parallel in the same arbitral institution, they still can end up having two different compositions of arbiters. As a result, they may obtain drastically different awards.
The awards may differ because of the factual set of claims and background of those claims, and human appreciation of those problems, and their evaluation by a particular set of arbiters. The global and historical problem of international commercial arbitration is that there is no precedent feature in arbitration.
So the next generation of arbiters that are reviewing the same kind of cases with the same arbitration institution is not bound by previous arbitral awards, by the decisions taken by the previous composition of arbitrators.
In most cases, of course, the arbiters who are keen to take a solid unchallengeable decision or decision that may be subject to fewer particular challenges; they of course will look through the available precedents, reasons taking by the arbiters in other cases. However, those prior decisions are still not binding upon them. They do not feel that they should necessarily follow them. They may look at the set of facts from different angles. That creates quite a significant problem.
In the ICSID we have a slightly different situation because it is based on the Washington Convention. There is a permanent database of all of the cases. All the decisions adopted by the ICSID tribunal are open and published, so everyone can easily follow them. Basically it promotes the idea of tribunals following the same concept.
If a certain concept towards certain problems was already developed then
ICSID insists that this concept be followed in similar cases unless there are very compelling grounds to alter the decision. So, all the grounds should be very well substantiated.
For that particular reason in most cases ICSID awards in similar matters are taken on the same basis. Sometimes it becomes a very challenging task to change that attitude.
With respect to particular problems with international arbitral institutions worldwide, they relate mostly to the uneven quality of such arbitration institutions.
We know that some institutions of international commercial arbitration are based on the idea of an open attitude towards composition of their list of arbitrators. The ICAC at UCCI operates on the idea of a closed list. To a certain extent it limits the ability of parties to arbitrate because they are not fully free to appoint an arbitrator that is to their liking. Sometimes they may be forced to appoint an arbitrator who may not be a specialist in that particular field but only because they may not see the name of an arbitrator who specializes in the particular field of industry or legal matters on the list of recommended arbitrators. This creates a significant misbalance in quality of international arbitration institutions worldwide.
Another problem is the uneven enforcement practice of international arbitral awards around the globe. Let us assume that a party has a valid international arbitral award. However, it may have completely different experience of its enforcing in various jurisdictions. There may be a comparatively easy way of implementing, recognizing and enforcing international commercial arbitral awards in jurisdictions that are nicknamed arbitration-friendly jurisdictions. Other jurisdictions that are not arbitration friendly may provide for a different approach. It also creates a slightly uneven landscape in this area.
On the top of that, the final problem is that not all countries of the world are parties to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. That may sometimes create practical difficulties because some parties who are based in countries that are not parties to the New York Convention may theoretically arbitrate with you but you may have difficulties afterwards in trying to enforce an award if you win against such a party.
Which factors, in your opinion, determine the success of an arbitral institution?
O. M.: I guess, the only factor is the quality of cases. If you look at cases that are brought under review by arbitral tribunals of a particular arbitration institution, then you will be able to determine the quality of that institution. If you see that year after year the absolute majority of cases of a particular arbitration institution relate, for example, to recovery of commercial indebtedness, you will understand that that fact reflects the comparatively low quality of an international commercial arbitration institution because nobody would delegate it much higher, intellectually challengingcases. Those would typically amount to matters of law, to the intersections of nuances of the legal qualification of the position of the parties, because in the disputes world the collection of indebtedness is such a trivial thing…
How do you evaluate the recent changes in Ukrainian procedural legislation touching upon the field of international arbitration as a part of a wider reform of judiciary? Many arbitration experts are quite positive and treat them positively. What is your opinion?
O. M.: I agree that in terms of our legislation there are very positive signs. International commercial arbitration has been rooted into our legislation. Yet, we still have several disputes in terms of legal theory and practice, what international arbitration actually means. Both practitioners and academics have to form a common view.
For example, I personally follow the view that arbitration is a form of carrying of justice. In the Constitution of Ukraine there is a concept of “zdiysnennya pravosuddya”
(ed. — Ukrainian). It says literally that carrying out of justice is the exclusive function of Ukrainian courts. I think that is a quite significant fault of our Constitution because essentially we have two forms of carrying out of justice. The first one is effected by state-controlled courts that form the national judiciary. It is a system of general courts starting from trial courts to appellate courts and ending up with the Supreme Court. The separate branch is the constitutional judiciary represented by the Constitutional Court. Another concept is carrying out of justice by non-state-run courts. These would be arbitration courts because in all respects a decision of international commercial or investment arbitration has at the end of the day the same value and effect for its participants and for any third party as a decision of a state-run court. It is admitted into the social tissue of the society, both into its public and private sectors. There is the finality of the decision subject to procedural rules and so on. From this point of view, I do not support the views expressed by many lawyers that international arbitration is only an instrument of protecting one’s subjective interests. In my view, that is a meaningless phrase that does not position international arbitration within the system of dispute resolution mechanism at all.
From this point of view, I agree that in terms of Ukrainian legislation a lot has been done. Yet, there is a principal stumbling point at the level of the Constitution, and in that particular respect it should be more defined in order to provide the judicial function that may be carried out by both state-run courts and non-state-run judicial institutions and arbitrations. However, the function of international arbitration should be limited only to commercial, civil law, as well as any other cases that provide for private interest as opposed to the public one. It means that criminal, administrative, constitutional as well as any other public-law cases may not be considered by arbitration institutions. They should be reserved only for the remit of Ukrainian state-run courts. I hope that within the scope of constitutional reform this issue will somehow and at some point be addressed.
What other steps should be taken, in your opinion, to improve the quality of arbitration in Ukraine?
O. M.: I think there are numerous ways of developing and enhancing our Ukrainian arbitration system in terms of institutional development of international commercial arbitration, legislative and business underpinning.
We have more or less two international commercial arbitrations: International Commercial Arbitration Court at the UCCI and International Maritime Disputes Commission. Although the law does not restrict international arbitration to just those two institutions. Perhaps at some point in time the creation of alternative arbitration institutions may change the situation with competition and give an additional impulse in the development of international arbitration.
Frankly, I do not understand and do not support the whole idea of dividing arbitration into international arbitration and domestic arbitration. It’s complete nonsense. This is a very strange peculiarity of Ukrainian legislation in my point of view. This will be one of the tasks that we will eventually have to address in order to get rid of this drastic difference, because we know that the authority of international commercial arbitral institutions is much wider than the powers of domestic arbitrations. There are many very progressive lawyers on the market providing sets of arguments as to why domestic third-party courts should remain in their own niche and should not be elevated to the level of arbitrations. As a matter of strategic initiative, I do not see how we would be able to maintain two systems of third-party arbitration institutions. Plus this additional step at the level of the Constitution of Ukraine expressed organizing private party adjudication as a way of carrying out justice in Ukraine.
In terms of business underpinning, there should be cases with more complexity, a more complex business background. Parties should be willing to adjudicate them within Ukraine in its system of international commercial arbitration as opposed to taking them elsewhere.
As long as the Ukrainian arbitration landscape is filled with more complex cases that will raise the quality of Ukrainian arbitration institutions and the reputation of Ukraine as an arbitration jurisdiction.
You are often enlisted as an expert in Ukrainian law for the most resonant cases involving Ukrainian companies. Do you see any changes in the role of experts, perhaps, evolution? If so, how does this affect your practice?
O. M.: From my personal perspective, I see only one evolution. Each time I face this particular challenge, the case is bigger and more expensive. The claims put on the table keep rising. In terms of positioning an expert witness within the system of arbitration I think there is a global problem because within the scope of global arbitration the position of the expert witness is tremendously underestimated.
If we take an average international commercial arbitration, it has several participants. First of all, these are parties to arbitration, second, appointed arbitral tribunal, and then arbitration institution to administer the case, and the counsels. Each of the parties has at least one counsel. And typically, if this is an international commercial arbitration case there is a lead counsel, a specialist either in the domestic law of its client who is the principal party to that dispute, or specialist on the law in the respective jurisdiction where the arbitral tribunal seats, or specialist in the law that governs the contract between the disputing parties. It should be familiar with the applicable procedural rules, it should run the show.
There are domestic or local counsels because an international commercial arbitration dispute means that the business activities subject to the dispute took place in other jurisdictions. In order to understand what was going on behind that dispute, the lead counsel should be supported by local advisors where the respective business relations took place. Otherwise, it would not be able to understand what were the legal implications of the local decisions/actions that were taken or not taken.
There are factual witnesses who tell everything about actual facts that lie behind a particular dispute.
And there are expert witnesses. At least there should be an expert witness in the domestic legislation where the dispute took place. There may be other experts as well — accounting, technical, etc. But those certify on other, non-legal matters.
The local expert witness is the one who will take a position to testify on certain key legal issues in order to provide the respective food for thought for the arbitral tribunal.
That means that essentially the cases are being won or lost as a combination of two factors: the quality and activity of counsels, both lead and local, and the expert witnesses. You may end up having an expert witness who would be actually proving your case in front of an arbitral tribunal, who would be either the one providing inconclusive conclusions or results of his/her research, or his/her evidence may be destroyed on cross examination by the opposite party’s lead counsel. Or he/she may appear untrustworthy, which means the case will be lost, no matter how good the lead and domestic counsel is. There may be a brilliant case presented to the arbitral tribunal but a poor expert witness may spoil them completely. An arbitral tribunal will never take a decision in favor of a super bright lead counsel if it has no super bright expert witness to back up its legal position.
From this point of view, there are two front faces, a lead counsel and an expert witness. These two guys may either make or break your case.
What is your attitude towards the decision that only international law firms can be hired to represent the State of Ukraine, while Ukrainian counsels are subcontracted?
O. M.: I would not draw a line between intentional and domestic law firms. I would draw a line between law firms that have a wealth of experience in doing this type of work and those who don’t possess that experience.
An absolute majority of our law firms, including the local offices of international law firms, operating here on the ground, do not possess that wealth of experience. What does it mean?
It means that they may be very good at assisting international counsels. They are likely to lose the case if they were to be acting by themselves as a lead counsel.
In order to do the proper job in international investment arbitration, one will need to know all of the nuances, how to put up your name, how to phrase it, and what kind of proof is relevant, or may be relevant in the minds of arbitrators. You need to read the minds of arbitrators in advance. It may come only with experience of an institutional nature.
It is akin to having institutional memory.
Yet, in my opinion, we are still not at the level of being able to handle any such big international investment arbitration cases. For the time being we need to work as assistants to the top guys.
Are you aware of the consequences for officials involved in breaches of law that led to investment arbitrations?
O. M.: This is also quite an enigma. Sometimes, I am left with the impression that the officials who adopt wrong decisions on behalf of the country and whose actions resulted in international investment arbitrations have basically no liability for the results of their actions.
Unfortunately, that is true now. If you look at particular actions with our officials even in private communication, asking them if they figure out the implication of their decisions that will create liability for the country ending up in the international investment arbitration case, you may hear the answer — that is not my issue. But for the benefit of our officials we are not unique in the world. Otherwise, there would not be hundreds of investment arbitrations each year against other countries.
Do you expect the new wave of investment arbitrations against the State of Ukraine?
O. M.: Obviously yes, against Ukraine and all around it.
First, there will be cases related to the Russian actions stemming from the annexation of Crimea and occupation of Eastern part of Ukraine. In this situation the respondent should be Russia by definition. It creates all sorts of very interesting cases and scenarios.
Let us take the case of Crimea. In its a situation the originally investments were made by Ukrainian entities on Ukrainian soil under domestic investment legislation. Then the harm was done by that particular foreign nation within the same physical geographical area, and this damage should be somehow adjudicated. Although it is not directly provided in bilateral investment treaties or any other international instruments, we still observe a wave of international investment arbitration claims being filed in various institutions against Russia.
What is really interesting is that the practice turned out in favor of Ukrainian claimants. They started to recognize that although respective international instruments are not straight up to that point in the letter of law, their interpretation results in the conclusion that Russia de facto controls the situation in that geographical area, and it should be responsible for wrongdoings that were carried out against the respective investors in Crimea.
Many actions that were taken by officials of Viktor Yanukovych’s regime also resulted in the same situation where Ukraine is being held responsible for wrongdoings to international investors. Regretfully, some actions by incumbent officials may give rise to international investment arbitration claims.
What was the most challenging arbitration case in your practice?
O. M.: I would single out two cases. The first one was the case of Italian importer IUGAS (Italy — Ukraine Gas) against Naftogaz of Ukraine. It was about a gas export contract in 2004 — beginning of 2005. Naftogaz entered into a gas export contract with IUGAS, and it was contracted to supply substantial volumes of natural gas to Italy but it failed to deliver a single cubic meter.
After waiting for several years and numerous attempts to prompt Naftogaz to deliver on that contract, IUGAS filed an international commercial arbitration case in Stockholm. I was an expert witness on the part of IUGAS. It was a very difficult case, as we had to think of all similar cases on completely murky and non-transparent Ukrainian gas legislation relating to both domestic, imported gas and gas of all sources of origin — Russian, Central Asian gas. We won that case.
The second case is a very recent one between Raga and SCM with respect to Ukrtelecom. Raga challenged SCM for the latter’s failure to pay under a sale of Ukrtelecom contract. SCM decided to launch a very interesting defense. It filed counterclaims at the LCIA. SCM claimed that the original privatization of Ukrtelecom was a crooked one; it argued that Raga in the first instance obtained control over Ukrtelecom via indecent means. Essentially from the straight claim of a debt case (that SCM owes Raga hundreds of millions) it turned out to be a case where the privatization legislation, Ukrainian policy decisions, commercial law and procedure, criminal procedure were all discussed and debated. We also worked there as an expert witness. Intellectually it was an extremely challenging case.
This past year the Kyiv office celebrated 10 years in Ukraine. What are your plans for the near future? Would you comment on what you have received from the combining of CMS Cameron McKenna with Nabarro and Olswang?
O. M.: We are already in our second decade of formally operating here. Although general experience of working on Ukrainian matters and with Ukraine spans well over three decades already, maybe even more. We have quite optimistic views that our future will keep developing in the right direction.
As for the combining of Nabarro and Olswang, I think it was a very bright decision and solution for all three firms. To be frank, at the very beginning I didn’t quite understand the rationale behind the combination. But later on, when I became familiar with other two law firms and their partners, I understood that it was a complementary combination.
Our practices never challenged each other, we were not direct competitors but each of three firms occupied its own niche. For example, Nabarro was well-known for its dispute resolution practice. It enhanced our dispute resolution capabilities worldwide.
Olswang has always had the reputation of being a cutting-edge technology law firm. They are interesting even in terms of everyday habits and ways of doing business.
For example, I was surprised they never wear ties or formal dresses in the office or at client meetings, but dress very casually. They praised themselves for providing smart solutions for smart people. And smart people would ignore what people look like, treasure the way of their thinking and intellectual products. We see that this high-end IT/technology work in the firm has provided benefit for the new firm at large. The focus of our work has in general terms shifted more to this type of practice with the addition of Olswang’s partners. I think it was a very smart move on part of all the partners of all three former law firms.
CMS Cameron McKenna Nabarro Olswang
Year of establishment: 2007
Number of lawyers/partners: 25/4
Core practice areas
- Dispute Resolution
- Banking and Finance
- Real Estate