It has been over a year now since the final awards of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) were rendered in the disputes upon the claim of NJSC “Naftogaz of Ukraine” vs OJSC “Gazprom”.  The proceedings under such disputes were initiated in relation to the contracts on (1) natural gas supply and (2) natural gas transit through the territory of Ukraine. Both contracts are governed by Swedish law.

As a result of the proceedings, Naftogaz is awarded USD 4.7 billion compensation from Gazprom. However, given that in 2014, Naftogaz received natural gas from Gazprom in the amount valued USD 2.1 billion and did not pay pending the arbitration, this amount was credited as part of the compensation. So, let us figure out when and how Naftogaz will get paid the second “tranche” of compensation in the amount of USD 2.6 billion.

Brief background

The SCC’s award of December 22, 2017, rendered in favour of Naftogaz under the gas supply contract has become a breakthrough in the “cold war” with Gazprom. The Court rendered the following:

  • Satisfied Naftogaz claims to reduce the contract price of natural gas in the second quarter of 2014, and determined the price based on quotations at German Gas Hub prices (from USD 485 to USD 352 per thousand cubic meters).
  • Rejected Gazprom claim of USD 56 billion under a discriminatory contractual provision “take or pay“. Previously, Naftogaz as per this obligation had to pay Gazprom for the not off-taken quantities of gas during 2009-2017.
  • Reduced the mandatory annual gas supply quantities from 52 to 5 billion cubic meters.
  • Revoked the contractual provision prohibiting Naftogaz from reselling gas overseas.
  • Established that Naftohaz should not pay for natural gas supplied to the temporarily occupied territories of Ukraine.

Following the award on the gas supply contract, the SCC rendered an award under the gas transit contract dated February 28, 2018, as follows:

  • Gazprom charged liable and must pay 4.63 billion US dollars for the breach of the obligation to transit annually 110 billion cubic meters of gas and the actual transit shortfalls.
  • Established that transit volumes remain unchanged until January 31, 2019.

For its part, Gazprom refused to enforce voluntarily the arbitral award under the gas transit contract. Currently, the award is appealed before the Svea Court of Appeal, Sweden, where Gazprom seeks to suspend the arbitral award and its enforcement. What’s that supposed to mean?

Legal implications

It is well known that the success of any arbitration is not only a receipt of a favourable award. Yet this aspect is important as it ensures legal formalization of the parties’ claim rights and obligations, while arbitration is deemed completed only after the effective execution of the award or after the expiry of the time limit for its execution. Therefore, we see several scenarios as to Gazprom’s possibly paying compensation of USD 2.6 billion to Naftogaz.

Scenario 1

Naftogaz successfully attaches Gazprom’s property of USD 2.6 billion and then collects it. The Swedish court by its decision rejects the motion of Gazprom to revoke the SCC award on the gas transit contract. Gazprom fails to successfully waive recognition and enforcement of the arbitral award.

It is noteworthy that the application for setting aside the arbitral award and its appeal until the issuance of the court decision by the general court of appeal should not affect the award enforcement. Neither the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, nor the European Convention on International Commercial Arbitration of 1961 impose restrictions on the arbitral award enforcement if there have been instituted parallel proceedings for its setting aside in a local court.

Consequently, Naftogaz must secure recognition of the arbitral award as soon as possible and seize Gazprom’s assets abroad in support of the recognition and enforcement proceedings. After a favourable decision on the recognition of the arbitral award, Naftogaz must enforce the attached assets of Gazprom pending the decision of the Swedish court. This is a fairly time-consuming process, given the significant amount of Gazprom’s debt, as well as the fact that Gazprom is concurrently challenging the recognition of the arbitral award.

However, considering the latest Naftogaz reports, it has been quite successful in applying interim relief measures globally. Pending the issue of the Swedish court judgment, the English Commercial Court has ordered Gazprom the following:

  • not to hide or move its own assets outside of England and Wales and the Netherlands;
  • to provide a guarantee in the form of cash collateral or transfer the guarantee to the court’s bank account or escrow account;
  • to comply with these court orders, otherwise, fines would be applied and/or representatives of Gazprom management would be held criminally liable.

Scenario 2

Gazprom’s motion to suspend the arbitral award was satisfied. This is possible if the Swedish court finds procedural irregularities in relation to the arbitration proceedings. Preliminarily, the Svea Court of Appeal is expected to render its decision in 2020.

However, in practice, this should not have serious consequences for Naftogaz.

Firstly, the arbitral award is final for the parties to the dispute and the panel of arbitral tribunal does not have the power to review the case.

Secondly, the validity of the Swedish court’s order for suspension of the arbitral award does not automatically constitute grounds for refusal of its recognition and enforcement. According to the New York Convention, in connection with the suspension of the arbitral award, recognition and enforcement may be denied, but not necessarily so.

Conclusion

In view of the favourable legal tools offered in arbitration by international law, we are optimistic about Naftogaz’s prospects for collecting debt from Gazprom. The truth is that it will not happen in the near future. However, given that the arbitral award is final, and that Gazprom business is global, Naftogaz has enough legal tools and commercial grounds to enforce the award.

 

Serhiy Yaroshenko, senior associate exclusively for the online news portal “Ekonomichna pravda”.