How to recover damages from Russia caused by the war in Ukraine in investment arbitration?

How to recover damages from Russia caused by the war in Ukraine in investment arbitration?

Ukrainian businesses may seek compensation via investment arbitration against Russia for damages caused in the temporarily occupied territories.

What is investment arbitration?

Investment arbitration is an alternative method of resolving disputes between a state and an investor. Arbitration is conducted like in court: cases are considered by professional independent lawyers, parties exchange explanations and documents, and, if necessary, arbitrators held oral hearings. Investment arbitration awards are binding for the parties.

How does it work?

In 1998, Ukraine and Russia concluded the Agreement on Mutual Protection of Investments (Agreement). Under this Agreement, Ukraine shall encourage and protect the investment of Russian businesses made on its territory, while Russia shall protect the investment of Ukrainian businesses on Russian territory. If the state has damaged investments, it is obliged to compensate for losses.

In the Crimean annexation cases, the investment tribunals found that a state exercising de facto control over the territory was responsible for the destruction of investments. Therefore, while Kherson, Donetsk, and other regions are obviously Ukrainian territory, Russia is still responsible for losses caused to businesses there.

What is an investment?

An investment may constitute a movable or immovable property: shopping mall, grain, agricultural land, cars, etc.

The investments also include:

  • funds, as well as securities, liabilities, and contributions;
  • rights on intellectual property, including copyrights and related rights, trademarks, rights to inventions, industrial designs, models, and technological processes and know-how;
  • rights to carry out economic activities, including rights to explore, develop and exploit natural resources.

What damages can be recovered?

The Agreement does not specify what kind of damages can be recovered. These can be both direct damages and lost profits.

For example, an agricultural company may suffer the following damages:

  • sale of goods under physical threat in exchange for nothing;
  • if the fields could not be sown because of the occupiers' actions — the value of crops that will not be harvested;
  • the value of the stolen goods and associated losses (e.g., if contractors sue for damages for non-delivery);
  • if the property has been destroyed due to military action — the value of such property.

The main thing is that the damages must be supported by evidence. Evidence can be a contract of sale, a loan agreement, an extract from the property register, witness statements, news in the media, and any other evidence supporting the claim.

Where to apply for damages?

The Agreement provides that a claimant has two options:

  • the Arbitration Institute of the Stockholm Chamber of Commerce (Stockholm Arbitration); or
  • ad hoc arbitration under the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules.

How much does it cost?

The costs depend on the disputed amount, the number of arbitrators, and the time spent by the arbitrators on dealing with the case. A calculator at the Stockholm Arbitration Tribunal website enables parties to estimate the average costs of the arbitration fee.

For example, if there is a claim for one million Euros and it is heard by a single arbitrator, the arbitration fee will be on average EUR60,835. If Russia is not involved in the case, the costs are likely to be lower.

Generally, the losing party pays the costs of the winning party.

How long does it take to resolve a dispute?

It depends on the complexity of the case and whether Russia is involved in the process. It usually takes at least a year to receive an arbitration award.

What to do after receiving an arbitration award?

Subject to a few exceptions, the arbitral award is final and not subject to review. Once the award is received, it can be recognised and enforced in the countries where Russian assets are located, e.g., in the EU, Canada, or the US.

Recognition is the procedure by which a foreign court verifies the authenticity of the award, as well as compliance with formalities, and makes it effective in the country of enforcement. The foreign court does not re-examine the merits of the award. There is a simplified procedure for the recognition of arbitral awards under the 1958 New York Convention.

How can the award be enforced?

There is a concept of "state immunity", which prohibits enforcement against property used for state purposes (e.g., embassy buildings). However, it is possible to enforce the award against the commercial property of Russia - for example, if Russia leases out part of an embassy as a shopping mall. Given the unprecedented war against Ukraine, some states have already taken steps to ensure that the principle of state immunity does not protect Russian assets. For example, the Canadian Parliament has passed a bill that empowers the government to confiscate frozen Russian funds and use them to pay compensation for losses incurred during the war.

I want to initiate investment arbitration. What should I do?

Write to [email protected] or call one of our lawyers. We will analyse your case, assess your prospects and suggest options for further action.

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