Balancing Justice and National Security: Enforcing Arbitral Awards with Sanctioned Elements. Episode No. 1

Sayenko Kharenko is launching an insightful publication series that explores the complex issues surrounding the recognition and enforcement of arbitral awards with sanctioned entities in Ukraine. In a landscape where national security and international obligations intersect, these publications will provide key analysis of the up-to-date court practices and legislative developments.?

And today’s episode unpacks the complexities of recognising and enforcing arbitral awards in favour of sanctioned entities.?

With global sanctions expanding and the shadow of russia's war against Ukraine, enforcing arbitral awards in favour of sanctioned entities has become a complex issue. Following the latest update on 12 November 2024, Ukraine’s sanctions list includes 17,786 entities: 7,367 legal entities and 10,419?individuals. With 976?new entries added this year alone, Ukraine is emerging as a leader in the pace of sanctions expansion. As a result, Ukraine faces the challenge of balancing its international obligations under the New York Convention (NYC) with the need to protect its national interests, especially as a country at war.?

Under Article 1 of NYC, states generally agree to recognise and enforce arbitral awards rendered in other countries. However, Article 5(b)(2) introduces a key exception, allowing states to refuse enforcement if doing so would conflict with their public order. Ukraine upholds this principle through national legislation, including the Civil Procedure Code, the Law “On Private International Law”, and the Law “On International Commercial Arbitration”. In line with recent rulings, Ukrainian courts consistently apply this exception, prioritising national security and public order considerations over enforcement of awards that could undermine these interests.?

One of the guiding stars in this field is the Resolution of the Supreme Court in case No. 824/138/21 dated 22 December 2022.?

In this pivotal resolution, the Supreme Court examined the application of Oil Company “Rossnafta” PJSC (Rossnafta), a sanctioned russian entity, seeking the recognition and enforcement of an award rendered by the International Commercial Arbitration Court at the russian Chamber of Commerce and Industry (ICAC). This award, which penalised Eurostandard-Avtogaz LLC (Eurostandard-Avtogaz), a Ukrainian oil and gas company, in favour of Rossnafta, brought to light significant issues related to Ukrainian public order.?

The Supreme Court determined that Rossnafta, the russian-registered entity subject to Ukrainian sanctions, represents a threat to Ukraine’s public order. The main Supreme Court’s finding was based on the Law of Ukraine “On Sanctions”, under which Rossnafta was subject to sanctions preventing capital outflow from Ukraine for a three-year period. These sanctions highlight that Rossnafta’s actions compromise Ukraine’s fundamental national interests, including national security and the safety of its citizens. Consequently, the Supreme Court refused to recognise and enforce the ICAC award in favour of Rossnafta, affirming the primacy of public order and national security considerations over the enforcement of international arbitral awards involving sanctioned entities.?

Equally notable is the Resolution of the Supreme Court in case No. 824/100/19 dated 13?February 2020.?

In this case, Avia-Fed-Servis JSC (Avia-Fed-Servis), another sanctioned russian company, sought to recognise and enforce an ICAC award ordering Artem SJSHC (Artem), a Ukrainian state company, to pay off a debt to Avia-Fed-Servis. The Supreme Court confirmed that sanctions against Avia-Fed-Servis, imposed due to russian aggression, provided sufficient grounds per se for denying recognition and enforcement of the ICAC award. Given that Artem holds a strategic role in Ukraine’s defence sector, enforcing the award was deemed detrimental to Ukraine’s political, social, and economic stability, as well as to the rights of Ukrainian citizens.?

These cases highlight that while NYC supports impartial enforcement of arbitral awards, Ukraine’s legislation and court practices affirm the precedence of public order and national interest considerations.?

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Stay tuned for Episode 2 of our series, “Balancing Justice and National Security: Enforcing Arbitral Awards with Sanctioned Elements”, which will air next week.?

For further insights, please get in touch with Olga Vorozhbyt, Partner, at [email protected] , or Oleksandr Zub, Associate, at [email protected] .?