Pursuing Russia for Damages Caused by the War: National Courts vs Investment Arbitration

Pursuing Russia for Damages Caused by the War: National Courts vs Investment Arbitration

Introduction

You should read this article if you or your business has been affected by Russia’s war against Ukraine. It discusses two ways in which you could potentially seek compensation from Russia for your losses: proceedings in Ukrainian courts and international investment arbitration against Russia. By the end of this article, and depending on your specific situation, you should be able to decide which mechanism would work best for you.

This article compares the two kinds of proceedings by the following parameters:

  • available remedies;
  • cost/length of proceedings; and
  • ease of enforcement abroad.

Remedies available in national courts

In Ukraine there are several procedural hurdles to pursuing Russia for damages caused by its war against Ukraine. Firstly, criminal proceedings are normally available only against individuals. Russia is not an individual.

In terms of civil law remedies, one can seek moral damages and damages for lost property / income. There is a Ukrainian court decision where an apartment owner has been able to obtain a judgment against Russia in respect of their lost rental income. At the moment, all similar judgments are made in favour of individuals. It is not clear whether companies can seek the same relief. It is not clear whether individuals can seek relief in respect of the damages suffered by their companies. While the desire of Ukrainian courts to award damages against Russia is well understood, the legal basis for such decisions is somewhat shaky and might potentially be called into question when the successful claimants seek to enforce such decisions abroad.

There was a further hurdle, namely the concept of sovereign immunity. Normally one cannot pursue a state in a national court of another state. However Ukrainian courts have now consistently held that for the purposes of civil proceedings, in the context of Russia’s full-scale war against Ukraine, Russia cannot benefit from its sovereign immunity.

In short, then, the only established procedure for seeking damages against Russia in Ukrainian national courts is a civil claim by individuals. It may be that further causes of action, civil or criminal, will shortly become available. However, as things stand, one cannot assert with confidence that commercial claims by businesses would succeed, or that judgments on such claims could be successfully enforced abroad.

Remedies available in investment arbitration

In investment arbitration, an investor can seek compensation from Russia for expropriation or damage caused by Russia to the investor’s business on the territory de-facto controlled by Russia. For example, a company who had land, tractors and a stock of grain on an occupied territory in the Donetsk region can seek compensation for theft of the grain and tractors and the profits lost due to its inability to use the land.

There are however certain restrictions. Firstly, one cannot seek compensation for moral damages, personal injury or loss of personal property which does not amount to an “investment” within the meaning of the bilateral investment treaty between Russia and Ukraine. If your personal apartment has been damaged, or your personal car has been stolen, by Russian soldiers in Severodonetsk, this is not something you can claim compensation for in investment arbitration.

Secondly, one cannot seek compensation for damages suffered on Ukrainian territory by reason of Russia’s missile or artillery strikes. It is a requirement for an investment claim that the damage is suffered on the territory de-facto controlled by Russia. Lawyers are working to relax the rule and allow investors to receive compensation for damage caused by Russia on territory that was under its fire control - that is, damage caused by Russian shelling.

Thirdly, in investment arbitration, there is a French precedent (in Oschadbank v Russian Federation) to the effect that one can only seek compensation for investments made after the bilateral investment treaty for protection of investments between Russia and Ukraine entered into force (i.e. after 1998). It is arguable, however, that the case was wrongly decided and it is currently being appealed. This factor may therefore be less important in the future.

In the context of the so-called Crimean cases, Russia has asserted that investment tribunals have no jurisdiction over it, because the relevant investments have been made by Ukrainians on the territory of Ukraine, and therefore the investment treaty between Russia and Ukraine does not apply. Such arguments have been uniformly rejected by investment tribunals and also by national courts in Switzerland, the Netherlands and other countries.

Costs/length of national proceedings

Costs of national court proceedings in Ukraine may be very low. Court fees in Ukraine run up to the ceiling of approximately US$23,500. Lawyers are flexible and may work on the basis of fixed fees, hourly rates or damages-based agreements, such that in some cases there may be nothing to pay unless and until the case is won.

On the basis of the currently available judgments on claims for moral damages against Russia, one can assume that such proceedings are quick, and may last from several months to several years.

Costs/length of investment arbitration

Investment arbitration is expensive and takes much longer than Ukrainian court proceedings. There are two kinds of fora available to Ukrainian investors who have lost their investments due to Russia’s war: arbitration under the rules of the Stockholm Chamber of Commerce (“SCC arbitration”) or arbitration under the UNCITRAL arbitration rules (“UNCITRAL arbitration”). You can read about the differences between these arbitrations in our previous article "Pursuing Russia in Investment Arbitration for Damages Caused by the War. Differences between UNCITRAL and SCC Arbitration".

The SCC arbitration rules provide that an arbitration must finish within 6 months from the date when the case is referred to the tribunal. However this is very rarely the case, especially in the context of investment arbitrations. For a simple case where Russia does not participate, one can expect that the proceedings will last between 1 and 2 years.

UNCITRAL proceedings may take longer because, where Russia does not participate in the process of appointing arbitrators, the case has to be referred to the Permanent Court of Arbitration in the Hague, that Court then selects the appointing authority and the arbitrators are then appointed by that appointing authority. This process alone might take several months. The Crimean cases before UNCITRAL tribunals have lasted between 2 and 4 years. However, given that the issue of jurisdiction has now been conclusively determined against Russia, one can expect that future cases will be decided faster.

The SCC has a calculator which allows a potential claimant to determine how much it would have to pay the arbitrators and the SCC for its case. A claim for EUR1 million would cost EUR108,445 in SCC fees, arbitrators’ fees and expenses. The SCC is likely to ask the parties to pay this fee in advance and, if Russia refuses to pay, the claimant would have to bear the entirety of these fees.

In UNCITRAL there are no fees of the SCC, however the arbitrators might have to be paid the same amounts whether or not they are appointed by the SCC. In a claim for EUR1 million one can therefore spend roughly EUR80,000 on arbitrators. Since UNCITRAL arbitration is more flexible than the SCC, one could seek to convince the arbitrators that they do not need to spend as much, or at the very least should not request all this money in advance, especially if Russia does not participate in the proceedings.

Then of course there are lawyers’ fees. Lawyers’ fees might be slightly less in SCC arbitration, where a lot of procedural matters are governed by the SCC rules and do not need to be argued about. However the difference is unlikely to be significant. The amount charged by the lawyers will essentially depend on two factors. Firstly, whether or not Russia participates and disputes jurisdiction / the facts you assert (in which case witness and expert evidence may be required, as well as an oral hearing of significant length). Secondly, how complex your facts are. For example, a case where you have a lost a parcel of grain and its market price is known can be relatively cheap. A case where you have lost a factory with many small pieces of equipment whose market value is difficult to ascertain may be much more expensive. A simple case where Russia does not participate might roughly cost between US$25,000-US$75,000 in lawyers’ fees.

Both UNCITRAL and SCC rules allow for joinder / consolidation of claims. As is evident from the Crimean cases, UNCITRAL tribunals were open to ruling on mass claims, where the background facts are similar. Where claims are consolidated / run as a mass claim, they may cost the potential claimants a fraction of the above costs.

Enforceability of national court judgments in foreign jurisdictions

Whether you can enforce a Ukrainian court decision abroad and what the procedure would be depends on whether Ukraine and the country where you seek to enforce have a convention for mutual recognition of court decisions. Where there is a convention for this purpose, enforcement may be relatively easy. Where there is no such convention, enforcement might require a re-trial of the entire case, where you are far from certain to succeed.

There is a 2 July 2019 Hague Convention on Recognition and Enforcement of Judgments in Civil and Commercial Matters, which Ukraine has signed. It allows for easier enforcement of court judgments among contracting states. The convention enters into force on 1 September 2023. There are currently 28 contracting parties to the convention, who are mostly EU member states. Importantly, the UK, USA and Canada (who have adopted or are working on national legislation to permit confiscation of Russian assets to make them available to compensate damages caused by Russia’s war) have either not signed the convention at all or have not confirmed the date when the convention could enter into force on their territory.

If, for example, you seek to enforce a Ukrainian judgment in England, then you would have to demonstrate two things to the English Court. Firstly, that your judgment is for a definite sum of money – which should be easy to do. Secondly, that the Ukrainian court had jurisdiction based on the English rules of jurisdiction. This might be impossible to do since Russia would normally benefit from sovereign immunity under English law. In any event, in order to have the Ukrainian judgment recognised, you would have to bring fresh proceedings in the English Court – which might cost you the same as the investment arbitration. Worse, while your investment arbitration costs might be recoverable from Russia, the costs of enforcing a Ukrainian judgment in England will normally not be recoverable.

In short, then, enforcement of a Ukrainian judgment abroad against Russia might be very difficult and costly. In many countries it may simply be unenforceable due to the concept of sovereign immunity, according to which states such as Russia are immune from suit in national courts.

Enforceability of investment arbitration awards in foreign jurisdictions

In investment arbitration, the problem of Russia’s immunity from suit does not arise. Russia has agreed, by concluding the bilateral investment treaty with Ukraine, that it can be sued in international investment arbitration in relation to all disputes arising out of the treaty.

Whether the arbitration proceeds under the SCC rules or under the UNCITRAL rules, it is almost certain to be issued in a country party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. There are currently 169 states-parties to the convention. The convention provides that arbitral awards made in one contracting state shall be enforced in all others subject to very limited exceptions. Thus, technically, there are no issues with enforcing an investment arbitration award wherever Russia’s assets may be.

It is important to note that not all of Russia’s assets may be subject to enforcement – and this applies to enforcement of both arbitration awards and court decisions. Russia’s commercial assets may be enforced against without further legislation in the states where the assets are located. Russia’s sovereign assets (e.g. money of the central bank, embassy accounts etc) may only be enforced against where the state where that money is located passes appropriate legislation. Currently, the United States, Canada, United Kingdom and several European jurisdictions are working on such legislation and it is likely to be finalised by the time when first investment awards arising out of Russia’s full-scale war against Ukraine are issued.

Conclusion

If you are seeking moral damages, then you can only do so in Ukrainian courts. You cannot seek moral damages in investment arbitration.

If you seek compensation for damage to your business, then you could try Ukrainian courts, however there is no established route to compensation and you risk losing. The advantage of Ukrainian courts in this scenario could be that they are much cheaper and the proceedings will reach their conclusion much faster than in investment arbitration. However the disadvantage, even if you win, is that you could face serious difficulties in enforcing Ukrainian court decisions abroad. Foreign courts might decide that they are unenforceable altogether, or the enforcement proceedings could last long and cost you as much as the investment arbitration.

Thus, if you can afford it, investment arbitration is much better suited to deal with business losses on occupied territories. It results in awards which are nearly automatically enforceable all over the world, and would not be subject to challenge on the basis of Russia’s immunity from suit or on the basis that the Ukrainian courts had no valid legal grounds to order Russia to pay damages.

If your claim is small and you cannot afford to run it yourself, consider whether you or your lawyers can find similar claims with which to consolidate it. This could allow you to run your case against Russia at a fraction of the standard costs bill. You can read more about this in our previous article "How to prepare your investment arbitration against Russia: things to do and evidence to collect prior to commencing arbitration".

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