Mechanisms for protection of investors` rights in Ukraine

08 October 2021 - Publication

National Courts

Investors’ rights protection is predominantly associated with arbitration. However, international arbitration, including investment arbitration, is an alternative method of dispute resolution.

According to Ukrainian law , as well as bilateral investment treaties (BIT), an investor has the right to apply to the national courts of Ukraine in order to protect their rights when they have been infringed. For instance, the BITs concluded between Ukraine and Argentina, Greece, India, Portugal, the USA, etc. provide for such a right.

It should be noted that an investor can lodge a claim with Ukrainian courts both against the state, as represented by public authorities, and against private individuals.

However, as a matter of practice, investors have a low level of confidence in national courts. According to the Investment Attractiveness Index for the first half of 2021, prepared by the European Business Association (EBA), 90% of the investors surveyed consider the judicial system in Ukraine to be inadequate. The level of confidence is especially reduced when the state acts as a party to a dispute in the national court. That is why many investors prefer arbitration to resolve a dispute.

Pre-arbitration and amicable settlement

When the state violates the investor’s rights, the latter is entitled to apply to the arbitration for dispute resolution. As a rule, the BITs signed by Ukraine oblige the investor to go through the pre-arbitration dispute settlement procedure by sending a written investment claim (notification of intention to commence the arbitration proceedings) to the state represented by the Ministry of Justice of Ukraine. The requirements for such claims vary depending on the BIT under which the document is sent. For this purpose, the filing of such a document does not require payment.

On the one hand, an investment claim is a prerequisite for initiating the arbitration proceedings; on the other hand, it is an opportunity to start negotiations with the state and a chance for an amicable settlement.

Frequently, the period for considering an investment claim ranges between 3-6 months. It is assumed that during this time, the parties can reach a compromise and avoid the arbitration itself. However, states are reluctant to conclude amicable agreements at this stage. Investment arbitration is expensive and not all investors can afford it. Also, statistically, the majority of investment arbitration disputes are resolved in favour of the state.

The state can afford to disagree with the requirements set out in the investment claim, hoping that investors will not go through with the arbitration in the future and incur significant costs.

It should be noted that Ukraine has a positive experience in considering investment claims, which ended in amicable settlement of the dispute. For example, on January 25, 2017, the Cabinet of Ministers of Ukraine approved the Amicable Agreement between Ukraine and Gilead Science, Inc. In this situation, the violation of the investor’s rights was triggered by the illegal actions of the Ministry of Health of Ukraine, which registered a drug containing a unique active ingredient. At the same time, the investor had exclusive rights to supply drugs containing such a component to Ukraine for five years.

Another interesting example of an amicable dispute settlement is the agreement between Ukraine and Philip Morris companies, approved by the Cabinet of Ministers of Ukraine on December 5, 2018. Philip Morris did not agree with the tax decisions, which determined the monetary obligations in the total amount of UAH 635.3 million. The company perceived such actions of the State Fiscal Service of Ukraine as pressure. It is noteworthy that at the time of signing the agreement, the litigation on challenging the tax notifications-decisions was already underway. However, the case was closed shortly after the signing of the amicable agreement.

Arbitration proceedings

The international investment arbitration laid a foundation on March 18, 1965, the date when the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, better known as the Washington Convention was signed. This Convention established the International Centre for Settlement of Investment Disputes (ICSID).

Ukraine became a party to the Washington Convention in 2000. Additionally, our country has also been a party to the Energy Charter Treaty since 1998, as well as a party to many BITs.

Relating to the arbitration proceeding itself, the BIT usually provides several options for the claimant. Thus, the overwhelming majority of Ukrainian BITs send claimants to the ICSID or to an ad hoc arbitration in accordance with the UNCITRAL Arbitration Rules. This is evidenced by the BITs, concluded between Ukraine and Spain, Serbia, USA, Finland, etc. The BIT between Ukraine and the Russian Federation allows dispute resolution in the Arbitration Institute of the Stockholm Chamber of Commerce (SCC).

It should be noted that the investment arbitration is an expensive and sometimes very time-consuming process. At the same time, Ukraine is among the leading states against which arbitration proceedings are initiated. One of the latest high-impact cases is an arbitration dispute initiated by Motor Sich JSC and considered by an ad hoc arbitration court.

Conclusion

The mechanisms for the protection of investors` rights in Ukraine are in line with international practice. The choice of a specific mechanism for protecting one’s rights depends on the circumstances of the dispute, financial capabilities and the investor’s personal discretion.