Guerrilla Tactics in Arbitration: Ukrainian Style

Over the last decades international arbitration has proved to be one of the most effective dispute resolution mechanisms worldwide. At the same time, not all the users of international arbitration are keen on following the formal and informal rules of the latter and sometimes they might use any means to an end, including certain “hostile” ones. The latter are also known as “guerrilla tactics” and are considered by the arbitration community to be highly negative and harmful for the international arbitration in general, as they undermine the confidence in, and reduce, the efficiency of this dispute resolution mechanism.

Guerrilla tactics often include bringing parallel claims before different tribunals and courts, filing for insolvency, intentional destruction of evidence or challenging witnesses, counsel and arbitrators, etc.

Ukrainian parties are known for their improper behavior and misconduct in arbitration. So, this short list of “guerrilla tactics” most frequently employed by them at different stages of arbitration proceedings or even after it may be summarized and illustrated as follows.

Fraudulent Insolvency Filing/Dissolution of Debtor

Sometimes Ukrainian debtors owing substantial amounts under a contract may use rather radical means in order to avoid payment to the other party. In case of initiating arbitral proceedings against such a debtor, it may file for insolvency or even for dissolution of the company. If the proceedings are conducted in different jurisdictions it could be rather difficult to “reveal” in time such insolvency/dissolution and to take appropriate measures in view of the pending arbitral proceedings.

For instance, in the arbitration at the International Commercial Arbitration Court at Ukrainian Chamber of Commerce and Industry (ICAC), case No.319n/2007, at the very beginning of the proceedings the Dutch debtor (affiliated to Ukrainian companies and nationals) filed a motion for considerable extension of terms for submitting the statement of defense. An extension was granted. After that the respondent did not participate in the arbitral proceedings, although it received all the procedural documents. When the Malaysian claimant obtained the arbitral award and tried to enforce it in the Netherlands it found out that the debtor no longer existed and was dissolved by its shareholders shortly before the ICAC arbitral award was rendered.

Transfer of the Debtor’s Assets to Affiliates or Third Parties

The enforcement of an arbitral award against a Ukrainian debtor can sometimes still be avoided by means of transferring all of its considerable assets to some affiliates or third parties. In this case even if the arbitral award is rendered in favor of a foreign claimant and exequatur is obtained, it could, finally recover nothing in view of the lack of the debtor’s assets.

For instance, such a situation occurred with the enforcement of ICAC arbitral awards against the same Ukrainian debtor for a total amount about USD 1 million. (ICAC cases No.322u/2006 and No.179u/2007).

In practice this tactic is used by bad faith debtors, since according to current Ukrainian legislation it is practically impossible for claimants/creditors to obtain interim or provisional measures to ensure enforcement of an award either within the arbitral proceedings or at the enforcement proceedings stage.

Contract Annulment by Courts while Arbitration is Pending

Most often such tactics are employed by shareholders of Ukrainian respondents to arbitration proceedings.

For instance, in 2003 the Russian CJSC TEKOM Corporation (TEKOM) filed a claim to the ICAC against Ukrainian OJSC Zaporozhye Aluminium Smelter (ZAlK) (Case No.216u/2003). Afterwards, a shareholder of ZAlK filed a claim to the local general court in the city of Zaporozhye against ZAlK and TEKOM alleging that a contract between those entities contradicts Ukrainian law and thus should be recognized null and void, including the arbitration clause contained therein. TEKOM was not duly notified of the court proceedings, while ZAlK recognized and agreed with the shareholder’s claims. Thus, at the end of 2003 the local court rendered a judgment recognizing the contract and arbitration clause null and void. This judgment “appeared” at the very end of arbitral proceedings, but did not preclude the ICAC from granting an arbitral award in favor of TEKOM in 2005. After that ZAlK successfully used the judgment for setting the ICAC award aside by alleging that the award contradicts public order of Ukraine, and the arbitration clause is null and void. The setting aside proceedings came up before the Supreme Court of Ukraine, which in 2006 ruled that the court judgment constitutes a part of public order of Ukraine and thus the ICAC award not observing the said judgment contradicts public order of Ukraine.

Another similar type of tactic can be employed in contracts involving Ukrainian nationals, most often in collaterals as surety, guaranty, pledge or mortgage. According to Ukrainian family law, the consent of spouses is required for any substantial transaction to be carried out by the other spouse, if they have not established a separate property regime. Failure to comply with this rule makes a transaction voidable. As a spouse of the party to a contract is not bound by the arbitration clause contained therein, she/he may file a claim to a respective local general court for invalidation of the contract signed by her husband/his wife without her/his (claimant’s) proper consent.

Filing for Prohibiting the other Party to Participate in Arbitral Proceedings

Although Ukrainian procedural law does not contain specific provisions allowing a court to prohibit parties from participation in arbitral proceedings, there are some examples when such prohibition was established in a motion of one of the parties to a pending arbitration. The most notorious example of such tactics took place in 2006 within a corporate dispute between Ukrainian telecommunication company Kyivstar G.S.M. shareholders — Ukrainian company Storm LLC and Norwegian company Telenor Mobile Communications AS — referred to arbitration in New York and involving a number of court proceedings in different jurisdictions. Among the other “guerilla tactics” this dispute was “rich” in, Storm LLC obtained, through its shareholder (i) a Ukrainian court ruling recognizing the contract in dispute and the arbitration clause contained therein to be null and void and (ii) “clarification” of the said court ruling, wherein the court ruled that “should the parties and the arbitrators … ignore the above circumstances and render an award on the dispute, such acts shall constitute a violation of the court decision”. Later on the same Storm shareholder initiated other court proceedings against the director of Storm — Mr. Klymenko, and secured an injunction from the Ukrainian court barring Telenor, Storm and Klymenko from participating in any way in arbitration.

Filing of Parallel Arbitral/Court Proceedings

This tactic is usually employed in order to delay initial arbitral proceedings and gain some time for other “guerrilla tactics” or to establish some legal facts within the second proceedings which could then be relied upon in the first one, or simply to obtain a contradictory award for blocking enforcement of the arbitral award to be rendered in the initial arbitral proceedings.

This tactic can be illustrated by Maritime arbitration commission at the UCCI Case No.12г/2005 initiated by a Ukrainian shipyard against a Greek company a couple of months after initiating of ad hoc arbitration in London by the latter against the former. In 2008-2009 a Russian company, being a respondent in two arbitral proceedings before the ICAC at UCCI (Cases Nos.199p/2008 and 200p/2008) initiated two parallel arbitrations in the Russian Federation (before the ICAC at RF CCI, Cases Nos.127/2008 and 130/2008).

Apart from the “guerrilla tactics” employed when arbitral proceedings are still pending, there are also some “post-arbitration” ones, such as filing for denial in recognition and enforcement of the arbitral award or filing for setting aside the award, even if no real grounds for the latter exist, etc.

Of course, the spectrum of these tactics is much wider; the degree of legality and appropriateness of each of them may vary considerably. Needless to say, there is no universal remedy from any and all of them. But the international arbitration community and institutions are still trying to apply ethical codes of conduct and to use legally correct tools to tackle at least the most unacceptable tactics, and to this end the personal input of each arbitration practitioner cannot be overestimated.