4. The Protection of Investment in Ukraine
This chapter provides an overview of the legal protections that Ukraine offers to investors in domestic legislation and international investment agreements. It focuses on several core investment policy issues – protections for investors’ property rights and mechanisms for resolving investment disputes – under Ukrainian law and Ukraine’s investment treaties. In terms of investment treaty policy, this chapter addresses Ukraine’s investment treaties, analyses the main substantive protections and investor-state dispute settlement provisions in these treaties and identifies considerations for possible policy reforms.
Ukraine has a domestic legal framework that adequately protects investors and provides strong guarantees against expropriation for energy companies. The guarantees to protect foreign investments in the country include protection against changes in legislation, nationalisation, and termination of investment activities, profit repatriation and compensation.
Intellectual Property Rights are essential to advance technology upgrades in the energy sector. As such, Ukraine has a robust regulatory framework to protect intellectual property rights. On July 2020, the newly-adopted law completing institutional IP reform in Ukraine was published, setting out the basis for the new National Intellectual Property Authority (NIPA). This new law on IP aims to harmonise the national legislation with the provisions of the EU acquis.
Deep reforms in the judiciary have been implemented in Ukraine as part of the Justice Sector Reform Strategy and Action Plan 2015-2020. In the absence of a holistic approach, various pieces of legislation were adopted to transform the judiciary. The positive effects of the judicial reform in Ukraine have been captured by the World Bank Doing Business report, with Ukraine’s distance to frontier score improving from 57.1 points in 2015 to 63.6 points in 2020. However, there are still challenges that investors face when accessing the court system, including vested interests affecting civil and commercial procedures and a limited respect for due process.
As of September 2021, Ukraine is party to 67 investment protection treaties and has had several experiences with investment treaties as a basis for legal claims by investors. Based on publicly-available information, foreign investors have filed at least 31 treaty-based claims against Ukraine. Many of the ISDS cases involving Ukraine concern investments in long-term energy projects (e.g. electricity, gas, steam and air conditioning supply projects) and natural resource projects in the country.
The most recent Global Investment Competitiveness report found that the three top factors affecting decisions multinational investors face are political stability and security, a fair and predictable legal and regulatory environment, and market size. Ukraine has a large domestic market, and is close to other attractive export markets, but, as discussed throughout this Review, further efforts are required to improve the country’s investment climate. Ukraine can no longer delay more decisive actions to reduce corruption, improve transparency in the public and private sectors, and protect property rights. Without those actions, private sector growth will remain stunted, preventing Ukraine from achieving its vast potential.
Strong guarantees against expropriation
As identified in the 2016 Investment Policy Review of Ukraine (IPR), the regulatory framework of the country establishes the undisputed and sovereign right of the government to expropriate property. Article 41 of the Constitution provides that the right of ownership is guaranteed and can only be affected as an exception, for reasons of public necessity. Expropriation can only be carried out under due process of law on the condition of advance and complete compensation of the property’s value (Verkhovna Rada of Ukraine, 1996[1]). The protection of property rights for both domestic and international investors has not been reformed and, as mentioned in the IPR of 2016, diverse domestic laws, including the Law on Investment Activity, the Commercial Code and the Tax Code, recognise property rights.
The laws of Ukraine that specifically set guarantees against expropriation of foreign investors are the Law on the Regime of Foreign Investing and the Law on Protection of Foreign Investments. The set of legislation implemented by Ukraine defines a range of guarantees for foreign investments, including national treatment, protection from expropriation, free transfer of funds and a ten year protection clause in case of changes to the foreign investment legislation (See Box 4.1).
Protection against changes in legislation:
Foreign investors are guaranteed protection against changes in foreign investment legislation for a period of ten years, but this protection does not prevent changes in other areas of Ukrainian legislation, which limits the applicability of this guarantee.
Protection against nationalisation
Foreign investments may not be nationalised. State bodies may not expropriate foreign investments, except in cases of emergency, such as national disasters, accidents or epidemics. The CMU is the authority that will decide which governmental body will oversee the exceptional procedures.
Guarantee for compensation and reimbursement of losses
Foreign investors have the right to compensation for losses, including lost profits and non-pecuniary damage caused as a result of actions, omissions or improper performance by state bodies of Ukraine. Compensation paid to a foreign investor must be prompt, adequate and effective. It must reflect the fair market value.
Guarantee in case of termination of investment activity
In case of termination of an investment activity, foreign investors are guaranteed the right to remit their revenue and withdraw their investments from Ukraine free from export duties within six months of the termination.
Guarantee of profit repatriation
After the payment of taxes, duties and other mandatory payments, foreign investors are guaranteed the right to the unimpeded and immediate transfer abroad in a foreign currency of all profits and other proceeds legally earned as a result of their investment activity.
Source: Law of Ukraine On the Regime of Foreign Investments
Whilst the 2016 IPR noted the obligation of foreign investors to register with the government in order to qualify for the guarantees provided by the domestic legislation, the government positively advanced its laws by adopting, in 2016, the “Amendments to some legislative acts regarding the cancellation of mandatory state registration of foreign investments”. This law abolished article 395 of the Commercial Code and amended the Law on the Regime of Foreign Investments by cancelling the requirement for foreign investors to be registered to enjoy the benefits and guarantees provided by the Ukrainian applicable laws and regulations. The implementation of the amendments has positively affected foreign investments in Ukraine by removing discrimination measures against foreign investors and preventing corruption when registering foreign investment projects (CMS Law Tax, 2016[2]).
Particularly relevant to investments in the energy sector, article 22 of the Law “On the Regime of Foreign Investments” determines that any disputes arising out of a concession agreement shall be settled through the dispute settlement mechanism agreed by the parties and business activities of foreign companies related to the use of state or municipal-owned objects shall be granted through concession agreements. Article 2 indicates that foreign corporations can sign contracts for Production Sharing Agreements and any other type of joint investment activities. The inclusion of PSA and joint production agreements as contracts feasible for signing with foreign corporations allows for protection guarantees and protections against expropriation for major projects in the upstream and midstream sectors.
Intellectual Property rights
The energy sector is characterised by developing technologies in all different areas – oil and gas, petroleum, electricity and green technology. With these technological advancements determining the future of energy usage, the protection of intellectual property (IP) rights is essential for attracting investments in the sector.
The World Intellectual Property Organisation is actively and directly encouraging the use of green technologies through its WIPO GREEN initiative, launched in 2013, to catalyse and accelerate green technology innovation and its transfer to expand the uptake and use of environmentally friendly technologies in support of the global transition to a low-carbon future. WIPO GREEN includes three main players:
Technology providers: Green technology inventors, entrepreneurs, and companies can list their products on the WIPO GREEN database to give them global visibility, helping to attract partners and finance.
Technology seekers: Organisations seeking eco-friendly technology solutions can use the WIPO GREEN database to publicise their needs and try to find a match. The database is also a useful tool for investors looking to make green tech deals as it provides access to technologies and entrepreneurs from around the world.
Partners: The WIPO GREEN network provides exciting opportunities for collaboration and partnership by bringing together a range of key stakeholders, such as multinational companies, academic and research institutions, intergovernmental organisations, and small and medium-sized enterprises.
Source: (WIPO, 2021[3])
IP rights are protected by Ukraine’s Constitution and in diverse domestic and international laws and regulations. Ukraine’s main national legal instruments on IP rights include Copyright Law, Trademarks and Service Marks Law, Inventions and Utility Models Law, Industrial Designs Law, State Regulation of Activities in the Sphere of Transfer of Technology Law, and the Protection against Unfair Competition Law. Ukraine is a member of the World Intellectual Property Organisation (WIPO) and is a signatory of all the most relevant international treaties in the field, including agreements under the World Trade Organisation (WTO) such as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
In June 2020, the Parliament of Ukraine adopted the Law of Ukraine No. 703 "On Amendments to Certain Legislative Acts of Ukraine Concerning the Establishment of a National Intellectual Property Authority" in force as of 14 October 2020, which introduces a two-tier structure of the state system of legal protection of intellectual property. The body responsible for granting rights and coordinating the national IP rights system is the Ukrainian Intellectual Property Institute (Ukrpatent), which performs the functions of the National Intellectual Property Authority, while the Ministry of Economy is responsible for ensuring the formation and implementation of state policy in the field of intellectual property.
One month later, in July 2020, the Rada approved legislative amendments to strengthen the protection of trademarks and industrial designs and patent law, which are now in force. The availability of opposition procedures provides an alternative to lengthy and costly litigation required to invalidate a patent. The new dispositions provide two opportunities for an opposition: a pre-grant opposition, which can be filed within six months after the patent application is published, and an post-grant opposition, which can be filed within nine months after publication of the grant of the patent. Examination guidelines with exact provisions on added proceedings were due by February 2021, however, at the time of writing of this Review, this had not yet been completed.
In 2017, the President of Ukraine signed a Decree establishing the High Court of Intellectual Property in Kyiv. The creation of a specialised court aimed to: (1) resolve a range of issues in the area of intellectual property that have hindered the development of intellectual property relations and, (2) raise the standards of protection of the intellectual property rights in Ukraine. However, as of now, the selection of the judges has not been completed and the court is not operational.
Under Ukrainian legislation, IP protection remedies are available through administrative procedures, civil litigation and criminal proceedings. Civil litigation is the most frequently used means of enforcing IP rights in Ukraine. The vast majority of IP civil litigation cases in the country are filed for termination of IP infringement, compensation for damages resulting from infringement, cancellation of a patent, extension of a patent term, invalidation of an IP-related contract, and termination of unfair competition in the IP domain (European Union Intellectual Property Office, 2015[4]).
Ukraine should continue reinforcing its levels of IP protection and enforcement
The EU-Ukraine Association Agreement requires Ukraine to reinforce its level of IP protection and enforcement in order to comply with EU standards. The Agreement represents a regulatory opportunity to push Ukrainian IP law closer to the EU acquis in the area of copyright, trademarks, designs, topographies of semiconductors, patents, and civil and border enforcement. The government has an opportunity to reinforce its levels of IP protection and enforcement. On this matter, in a 2021 report “on the protection and enforcement of intellectual property rights in third countries”, the European Commission acknowledged that Ukraine has made progress in reforming its IP protection regime. A number of new laws were adopted in 2019 and 2020: on trademarks and designs (815/2020)83, on patents (816/2020)84, on Gis (123/2019)85 and on IPR border measures (202/2019)86. Ukraine is also in the process of reforming its copyright regime. The adoption of these laws, the ongoing copyright reform and the new co-operation activities with the EPO and the EUIPO have brought Ukraine’s IP regime closer to international standards and thus also to EU law and practice [European Commission, SWD(2021) 97 final]. Nevertheless, in 2020, the EC highlighted that some of the laws and regulations proposed by the Rada are not in line with international standards set by the WIPO, WTO and the European Patent Convention (European Commission, 2020[5]).
Although the government has made consistent progress in the protection and enforcement of intellectual property, the US Trade Representative’s 2021 report concluded that Ukraine’s IP regime remains not fully satisfactory in certain areas, notably including administration of the system for collective management organisations (CMOs), – which are responsible for collecting and distributing royalties to rights holders – continued use of unlicensed software by Ukrainian government agencies and the ongoing failure to implement an effective means to combat online copyright infringement.
Legal and institutional framework for judicial contract enforcement
When justice institutions operate effectively and regulations are adequately implemented, trust in the government is enhanced, and businesses can invest with the confidence that their property rights will be protected. Strong justice institutions can address breaches of law, provide redress for violations of rights and entitlements, and facilitate peaceful resolution of disputes that may affect national and foreign investors. The UN, World Bank, IMF, OECD and European Union have supported, at both national and oblast level, judicial reform in Ukraine.
Coordination of the justice sector reform is necessary to successfully implement changes in the investment arena. With this in mind, the Judicial Reform Council (JRC) of Ukraine was established in 2014, and since then has been the reform champion and the ultimate filter for all reform initiatives. The Justice Sector Reform Strategy and Action Plan 2015-2020 (JSRSAP) serves as blueprint of the reforms that Ukraine has implemented in the last five years. To achieve the implementation of the reforms, Ukraine has produced annual implementation plans for each JSRSAP Chapter since 2016.
Empirical evidence shows that efficient, fair, and accessible justice systems promote security, encourage investment and growth, and provide fundamental protections to foreigners and national citizens. As a result, the government has devoted substantial efforts to reforming its justice system, aiming to lower barriers access, reducing delays, tackling corruption, and improving the quality of judicial system as further discussed in chapter 7 of this Review. One major step was taken on June 2016 when the Parliament adopted the Law №1401-VIII “On Changes to Constitution of Ukraine (regarding justice)”, settling the terms of reforming the justice system. Subsequently, the adoption of the Law № 2136-VIII “On the Constitutional Court” in 2017 allowed for individual complaints to be brought before the Constitutional Court. This meant a significant step forward in the workings of the judiciary, with any citizen of Ukraine now able to challenge the constitutionality of Ukraine’s laws applied to them in a final court decision before the Constitutional Court. To operationalise the new functioning of the judiciary, Law №1402-VIII “On the judiciary and the status of judges” and Law №1798-VIII “On High Council of Justice” were adopted in 2016.
The 2016 reforms transferred the authority to appoint judges from parliament to the High Council of Justice (HCJ), a key body conceived to be self-governing and autonomous from the rest of the judiciary, and the other two branches of power. Together with the High Qualification Commission of Judges (HQCJ), it was given the responsibility of coordinating the evaluation of the fitness of judges. By the end of 2019, after the qualification assessment of 2 038 judges, the HCJ dismissed 15 judges from the system. As discussed further in chapter 7 of this Review, there have been numerous issues with these two bodies, including integrity and corruption concerns. To face this challenge, in July 2021, the President of Ukraine adopted a new reform supported by international partners, notably the EU, aiming at rebooting the two judicial bodies in Ukraine dealing with the selection, disciplinary liability, and dismissal of judges, notably the HCJ and the HQCJ. The two laws adopted in July 2021, notably Law No 1629-IX and Law No1635-IX, envisage the creation of two bodies, notably the Selection Commission that will conduct the competition for HQCJ membership and the Ethics Council, which could conduct a one-time vetting of current HCJ members and advise on candidates for four vacant positions by assessing their compatibility with integrity and ethics requirements. In addition, the two laws foresee the engagement of international organisation professionals in both the HQCJ and the HJC in the selection of their members
The 2016 judicial reform advanced with the creation of a new Supreme Court and the reduction of the number and levels of courts from four to three. In addition, a new electronic asset declaration system was introduced, which obliged officials to declare all the assets they possess inside and outside Ukraine, as well as all assets officially registered in the name of their relatives. The need to comply with this policy made more than 2 000 judges voluntarily leave their positions, and thus brought fresh cadres to the system. The recruitment process for the new Supreme Court, which ended in late 2017, was nevertheless only partially transparent according to some observers (Gherasimov and Solonenko, 2020[6]).
The judicial reform process has addressed many of the key issues raised by the Council of Europe. Nevertheless, a number of shortcomings remain, including in relation to the enforcement of judgments as illustrated by the case Ostchem Holding Ltd. and the State Property Fund of Ukraine v. PJSC Odesa Portside Plant (see Box 4.3) as well as with respect to disciplinary proceedings against judges, the risks of undue interference with judicial independence and issues related to the enforcement of Law 193-IX “On Amendments to Certain Laws of Ukraine Regarding Activities of the Bodies of Judicial Governance” (see Box 4.4) (Council of Europe, 2020[7]). Other shortcomings have related to the understaffing of the Constitutional Court as well as of local and appellate courts, raising concerns about the extent to which Ukraine can effectively provide judicial protection. Well-functioning commercial courts are essential for investors and businesses, as was highlighted in a September 2021 climate survey conducted by the American Chamber of Commerce of Ukraine (American Chamber of Commerce of Ukraine, 2021[8]).
Economic sector: electricity, gas, steam, and air conditioning supply
By its decision of July 25, 2016, the Arbitration Institute of the Stockholm Chamber of Commerce issued a partial consent award recording an agreement reached in a dispute between Ostchem Holding Limited and the state-owned Odessa Portside Plant. The parties agreed that Odessa Portside Plant (OPP) would pay approximately USD 251 million to Ostchem Holding Limited to settle a contractual debt and penalties owed to OPP under a gas supply contract of 2013.
Odesa Portside Plant and its majority shareholder, State Property Fund of Ukraine, resisted enforcement of the arbitration award. The decision of the Kyiv Court of Appeal of April 24, 2019, satisfied the application of Ostchem Holding Limited and granted permission to execute the said arbitration award. The decision was made despite allegations of non-compliance with a contractually agreed cooling-off period for negotiations and public policy violations. However, on June 8, 2021, the Civil Court of Cassation of the Supreme Court of Ukraine revoked the decision of the Kyiv Court of Appeal of April 24, 2019, and denied Ostchem Holding Ltd. in the execution of the decision of the Stockholm Arbitration Court. It is worth noting that the Supreme Court’s decision was made in the context of the planned privatisation of the Odesa Portside Plant.
Source: (Jus Mundi, 2021[9]), (Supreme Court of Ukraine, 2021[10])
On November 2019, Law №193-IX came into force. One of the major changes introduced by the law concerned the bodies of judicial self-government in Ukraine. The law proposed to thoroughly examine the High Qualification Commission of Judges. It gave the High Council of Justice (HCJ) a prerogative to appoint the members of the HQCJ. The HQCJ is in charge of selecting judges and conducting their assessment as well as recommending judges to the HCJ for their subsequent appointment or transfer. The law also established a separate Commission on Integrity and Ethics endowed with the power to put forward disciplinary charges against the justices of the Supreme Court, members of the HQCI and the HCJ. It also reduced the number of Supreme Court judges from 200 to 100.
The law’s stipulation to halve the number of Supreme Court judges was controversial from the outset. Furthermore, the Venice Commission also criticised the law’s provisions for failing to specify procedures for selecting a new Supreme Court. According to its issued opinion, the lack of such procedures might lead to the politicisation of the selection process, for example, through the dismissal of judges who are disloyal to the government or by retaining those who have integrity issues.
On March 2020, in response to a submission by the Supreme Court, the Constitutional Court of Ukraine ruled that most provisions of Law №193-IX were unconstitutional. This was not the first act of the Constitutional Court to halt the judiciary reform. In February 2020, the Constitutional Court had already annulled parts of the judicial reform of 2016, when it declared the liquidation of the former Supreme Court to be unconstitutional and restored the rights of the ‘old guard’ judges.
Regarding the issue of the number of Supreme Court justices, the Court pointed out that such reorganisation made without substantive revisions of the Supreme Court’s functions in the Constitution was inadmissible. The Court noted that, in any case, the change in the number of justices may be possible after prior consultations of the Presidency and the HCJ, which was not adhered to in case of Law №193-IX. Additionally, the Court pointed out that intervening in the incumbency terms of Supreme Court justices constitutes a violation of their judicial independence.
On the account of the ethics and integrity commission, the Court argued that creating a body that would oversee the bodies of judicial self-government and the Supreme Court and endowing it with the prerogative to charge the incumbents of those bodies constitutes a violation of judicial independence. In view of the Court, the law created a prerequisite to ‘control’ the judiciary by creating a new commission without any constitutional foundation behind such body. The Court called on the parliament to amend the legislation in light of its decision.
Source: Opinion of the Venice Commission, “Ukraine. Law No. 193 of Ukraine ‘On Amending Certain Laws of Ukraine Regarding Activity of Judicial Governance Bodies’ and Explanatory Note,” Opinion No. 969/2019, November 20, 2019
Transparency through publication of court judgments
Pursuant to part one of Article 11 of the Law № 1402-VIII, court decisions, court hearings and information on cases considered by the court are open, except in cases established by law. No one may be restricted in the right to receive in court oral or written information on the results of his court proceedings. Any person has the right to free access to a court decision in the manner prescribed by law. To access court decisions of courts of general jurisdiction, the State Judicial Administration of Ukraine ensures the maintenance of the Unified State Register of Court Decisions. Judicial decisions are open for free with round-the-clock access to the official web portal of the judiciary of Ukraine, although it has been reported that representatives of courts such as clerks may sometimes purposefully delay the uploading of court decisions on the portal.
Due to COVID-19, in April 2020, the changes to the Procedural Codes went into effect, introducing rules that will apply to all court cases pending in the commercial, civil and administrative courts in Ukraine:
During the officially declared quarantine, the parties may attend the court hearings online by using personal video-conference equipment. The changes to the procedural codes instruct court employees on the technical aspects of handling videoconferencing tools necessary for hearings and detail the requirements that must be adhered to by participants in order to participate remotely. To take part in a court hearing via videoconferencing, a participant must file a respective motion with the court no later than five days before the hearing and send a copy of this motion to other participants in the case.
The decision to allow such a participant to take part in a court hearing remotely is made by the judge based on the availability of the relevant technical equipment in a given court. The regulations state that participation in a court hearing via videoconferencing can only take place using special software called EasyCon.
Most of the procedural terms, established by the law, are extended for the duration of the officially declared quarantine (e.g., terms for challenging the court decisions, amending claims, consideration of cases).
Where the procedural term is established by the court, it will not be shorter than the term of the officially declared quarantine (for commercial and administrative courts only).
Source: Recommendations of the Council of Judges of Ukraine establishing specific work regime of the courts of Ukraine to protect the population of Ukraine from the spread of acute respiratory diseases and COVID-19 coronavirus classified as extremely dangerous infectious disease, https://rm.coe.int/09000016809e3f74.
Reform efforts to strengthen the judiciary
As noted earlier in this Review, the reforming efforts of Ukraine in the judiciary are reflected in the increase of the country’s score related to the Enforcing Contracts indicator of the World Bank. In the 2015 Doing Business Report, Ukraine scored 57.1 points, whereas in 2020, it scored 63.6 points out of one hundred. The increment in the score of 6.5 points is likely a consequence of the reforms implemented by Ukraine in 2017, when the judiciary made enforcing contracts easier by introducing a system that allows the parties to pay court fees electronically and, in 2019, when the commercial courts introduced a simplified procedure for small claims and pre-trial conferences as part of their case managements techniques (World Bank Group, 2020[11]). Despite these advancements, the time involved in solving a commercial dispute for a breach of contract has not significantly decreased. According to businesses consulted in the framework of this Review, it would take over one year to obtain an adjudication from a judge of a first instance court. Another challenge relates to the high costs associated with litigating commercial matters, given that in Ukraine, the total disbursement that a company should assume to bring a case to a first instance court represents 46.3% of the claim value, whereas the average cost in Europe and Central Asian countries is 26.6% and in OECD high income countries the cost is 21.5%.
Despite the positive momentum from Ukraine’s justice sector reforms, as discussed later in this Review, there has been a lack of court judgments in top corruption cases, underscoring the need for greater institutional efficiency, transparency and independence in the process of prosecution (IDLO, 2018[12]). Ukraine’s experience suggests that high levels of corruption and entrenched vested interests impede governance and judicial reforms (International Monetary Fund, 2017[13]).
As corruption cases often involve complex financial schemes with elements of money-laundering, the need to delegate them to a specialised court has been strong. In 2017, the OECD recommended addressing this issue through the establishment of specialised anti-corruption courts insulated from corrupt and political influences, which can fairly and effectively hear and resolve high level corruption charges and select the judges through transparent, independent and highly trusted selection process, which in turn should guarantee integrity and professionalism (OECD, 2017[14]). In response to these needs and in order to implement numerous international recommendations, in June 2018 Ukraine adopted Law № 1402-VІІІ, which envisioned that the judicial system should include higher specialised courts to consider certain categories of cases, and particularly the High Anti-Corruption Court (HACC). The adoption of Law № 1402-VІІІ was a major break-through, in response to pressure from IMF. The jurisdiction of the court coincided with NABU and SAPO jurisdiction. However, the Law № 1402-VІІІ contains a provision that significantly narrows its jurisdiction: it provides that cases that have already been investigated by NABU and transferred to ordinary courts can be appealed in ordinary courts as well but not in the HACC (OECD, 2019[15]). The HACC was formally established on 11 April 2019 and it will be able to discharge the courts of general jurisdiction and, in turn, be limited to a specific type of court case.
The short-term positive impact of the HACC is that it should significantly speed up the timeframe for dealing with corruption cases. The number of judges in a court (except for the Supreme Court) is determined by the High Council of Justice (HCJ) taking into account the advisory opinion of the State Judicial Administration of Ukraine, court workload, and expenditures for the maintenance of courts and remuneration of judges (Part 6 of Article 19, the Law № 1402-VIII). In July 2018, the HCJ approved the number of judges in the Supreme Anti-Corruption Court - 39 full-time staff units, of which 12 - the number of full-time judges of the Appellate Chamber of the High Anti-Corruption Court.
Ukraine’s justice sector shares governance challenges with many transition countries, suggesting that historical legacies could play an important role, such as the emergence of oligarchs who have often exercised strong influence over government institutions. The significance of the challenge is illustrated by the high cost of enforcing contracts (46% of the total cost of the claim (compared to the ECA average of 26.2% according to DB2018) and the impact of non‐enforcement of civil claims (Ukraine’s recovery rate is estimated to be 9 cents on the dollar compared to, for example, 27 cents for the United States).
Since contracts are weakly enforced by Ukraine’s courts, property rights are reliant on connections with top officials or international guarantees such as bilateral investment treaties. While such arrangements might work for large enterprises and large transactions, they are too costly for small firms, thereby undermining the country’s economic growth potential. In fact, given the perceived deficiencies of the court system, vertical integration has remained a primary means of ensuring contract enforcement, protecting business interests relative to competitors, and helping to ensure good relations with various state organs (World Bank Group, 2019[16]).
The 2019 amendment to the Law on Concessions allows investors to request the state to waive its immunity against disputes, which means that foreign investors will be able to bring disputes involving the protection of their rights in any chosen forum around the world. The law also includes new rules providing investors with more options in resolving disputes (article 43). Parties to a concession agreement may freely choose the mechanism of dispute resolution, including mediation, non-binding expert appraisal, national or international commercial arbitration and investment arbitration.
Alternative Dispute Resolution
In 2017, the Law №2147-VIII implemented some changes to the Civil Procedure Code and in Commercial Procedure Code to support the functioning of international commercial arbitration in Ukraine. According to the law, any dispute that meets the requirements of the legislation of Ukraine on international commercial arbitration may be referred to international commercial arbitration by agreement of the parties, except in cases specified by law (part 5 of Article 4 of Commercial Procedure Code).
On October 2017, the Rada adopted Law № 6232 On Amendment of the Commercial Procedure Code of Ukraine, Civil Procedure Code of Ukraine, Code of Administrative Procedure of Ukraine and Other Legislative Acts restating in full three procedural codes (commercial, civil and administrative) and placing substantive advancements in the field of arbitration (US - Ukraine Business Council, 2017[17]).
Ukrainian legislation provides two separate sets of regulations applicable for domestic arbitration proceedings and international commercial arbitrations in Ukraine.
The domestic arbitration regime applicable to disputes between Ukrainian parties is primarily governed by the 2004 Law of Ukraine on Arbitral Courts (Treteyski Sudi). The rules governing domestic arbitration differ significantly from the provisions of the UNCITRAL Model Law.
Disputes involving a foreign party do not fall within the jurisdiction of Ukrainian domestic arbitration courts. They may be referred to either national courts or international arbitration. The main national legislation rules applicable to international arbitrations with the seat in Ukraine are set forth by the 1994 Law of Ukraine On International Commercial Arbitration (the ICA Law), as well as by the Civil Procedural Code of Ukraine (the CPCU) providing for procedural rules for challenging and enforcing arbitral awards by Ukrainian courts.
Law № 6232 ensures that arbitration clauses will be enforced by Ukrainian courts by introducing presumption in favour of the validity and enforceability of arbitration agreements (i.e., it provides that any inaccuracies in the text of the arbitration agreement or doubts regarding its operability, validity and possibility of performance will be interpreted in its favour) (Art. 22 of the Commercial Procedure Code). It broadens the meaning of the arbitration agreement and brings it into compliance with the amended 2006 Model Law by stipulating that the “writing requirement” is met by an electronic communication if the information contained therein is accessible so as to be useable for subsequent reference (i.e., is capable of being reproduced and read). It also identifies the list of non-arbitral disputes and to some extent resolves the problem with non-arbitrability of corporate and public procurement disputes. In particular, Article 22(1)(2) of the Commercial Procedure Code provides that disputes arising from corporate relations, including disputes between business entity participants (founders, shareholders, members) or between a business entity and its participant (founder, shareholder, member), including a former participant, regarding the business entity’s establishment, activity, management and liquidation, cannot be referred to arbitration. However, if such a dispute arises from a contract, it can be arbitrated if there is an arbitration agreement between the business entity and all of its participants. Similarly, the civil law aspects of the disputes arising from execution, modification, termination and performance of the public procurement agreements can be arbitrated. The Law transfers competence on setting aside and enforcement proceedings from the first instance courts to Kyiv Appellate Court.
Law № 6232 introduces judicial support to international arbitration undertaken by the Ukrainian courts. The courts may order the provision of evidence (Art. 84 of the Civil Procedure Code), inspect evidence (Art. 85 of the Civil Procedure Code), examine a witness (Art. 94 of the Civil Procedure Code), preserve evidence (Art. 116 of the Civil Procedure Code), and order other interim measures (Art. 149 of the Civil Procedure Code). The Law also provides for a cross-undertaking in damages if the arbitration tribunal rejects the claim in full or in part (Art. 159 of the Civil Procedure Code).
The need for mediation in Ukraine
The implementation of mediation has been proposed in Ukraine by scholars and practitioners, but the legal framework for mediation is currently non-existent – while between 2015 and 2019, several draft laws on mediation were registered in Verkhovna Rada, none of them were approved (Fursa, 2015[18]).
In May 2020, the Cabinet of Ministers submitted to the Parliament the draft Law № 3504 “On Mediation” that the Ukrainian Parliament passed on 15 July 2020 on its first reading. The draft sets the legal basis for mediation as an out-of-court mechanism. According to the draft law, mediation could be applied in any matter, including civil, family, labour, commercial, and administrative or in cases of criminal or minor offences. Mediation could take place before or during the court proceedings. Most importantly, mediation would be conducted with the mutual consent of the parties based on the principles of voluntary participation, self-determination and the equal rights of the parties.
Ukraine is party to 67 investment protection treaties that remain in force today. These include 66 bilateral investment treaties (BITs) and one multilateral treaty – the Energy Charter Treaty (ECT) (see summary table in Annex 4.A.). Ukraine is also a member country of two important multilateral treaties related to the enforcement of arbitral awards issued in investor-state arbitration cases under investment treaties – the New York Convention (in force for Ukraine since January 1961)1and the Washington Convention (in force for Ukraine since July 2000).
Ukraine signed many of its bilateral investment treaties in the 1990s and early 2000s just after it gained independence. A timeline of the signature and entry into force of its treaties appears in Figure 4.1. Six of these treaties are not in force today – with the Democratic Republic of Congo (signed in 2000), Equatorial Guinea (2005), Gambia (2001), Kyrgyzstan (1993), Romania (1995) and Yemen (2001) (see summary table in Annex 4.A).
Source: OECD calculations based on OECD investment treaty database (not public) and consultations with the Ukrainian government during the preparation of this Review.
Ukraine has concluded several other investment-related agreements. The Ukraine-EFTA Free Trade Agreement, which has been in force since 2012, contains provisions on investment protection subject to state-to-state dispute settlement in Ukraine’s investment relations with Iceland, Liechtenstein, Norway and Switzerland. Likewise, Ukraine’s Association Agreement with the EU (2014) contains some investment protections and other commitments on investment co-operation and facilitation, notably on energy efficient investments. The parties have also agreed to consider “including investment protection provisions and investor-to-state dispute settlement procedures” as part of future reviews of the Agreement. A similar agreement was concluded with the United Kingdom in October 2020. Ukraine has also concluded several association and co-operation agreements related to international investment.2
Ukraine’s treaty making activity and choice of treaty partners has led to significant coverage of its inward (approx. 46%) and outward (approx. 83%) FDI stock (see Figure 4.2 below). It is notable that treaty relationships with the Netherlands and the Russian Federation cover significant portions of Ukraine’s inward FDI stock (16% for the Netherlands) and outward FDI stock (58% for the Russian Federation). Treaty relationships with four countries (Germany, Russian Federation, Switzerland, and Syrian Arab Republic) also cover a sizable portion of inward FDI stock (approx. 19% in total) and relationships with another three countries (Estonia, Hungary, Latvia) cover sizable portions of outward FDI stock (approx. 16% in total). Many Ukrainian investment treaties in force today cover none of Ukraine’s FDI stock (inward or outward) or only negligible portions of it. This is a common phenomenon in many countries’ treaty samples (Pohl, 2018[19]).
Note: This graph shows the approximate share of overall inward and outward FDI stock by matching investment treaty relationships in force as of May 2021 with aggregate immediate bilateral FDI data. FDI data shown here does not cover relationships or stock in country pairs where only the ECT is in force due to the lack of bilateral sector-specific FDI stock data.
Source: OECD calculations based on OECD investment treaty database. FDI data was taken from OECD FDI database and IMF Direct Investment Positions and reflects FDI stock as of 2018 rather than historical values corresponding to a given year.
Treaty use: ISDS claims under Ukraine’s investment treaties
Ukraine has had several experiences with investment treaties as a basis for legal claims by investors. Based on publicly available information, foreign investors have filed at least 31 treaty-based claims against Ukraine: 17 administered under the auspices of the ICSID Convention3 7 with arbitral tribunals constituted under the UNCITRAL Arbitration Rules4, 4 under the SCC Rules5 and three others under rules that are not publicly known.6News reports at the time of writing in the second quarter of 2021 indicate that formal notices of dispute have been provided to Ukraine for several additional disputes.7
Many of the ISDS cases involving Ukraine concern investments in long-term energy projects (e.g. electricity, gas, steam and air conditioning supply projects) and natural resources projects in Ukraine. As of May 2021, at least nine cases are still pending. Some of these cases are described in further detail in the 2016 OECD Investment Policy Review of Ukraine (OECD, 2016[20]).
Aside from ISDS cases filed by treaty-covered investors operating in Ukraine, another fourteen treaty-based ISDS claims have been brought, as of May 2021, by Ukrainian investors operating abroad against one of Ukraine’s treaty partners.8
Reconsidering Ukraine’s investment treaty policy
Ukraine’s investment treaty policy deserves continued attention as part of the country’s approach to attracting and retaining investment in the energy sector for several reasons.
The role of investment treaties to achieve policy objectives. Many countries have concluded investment protection treaties in the hope of attracting long-term investments in their economies, including in their energy sectors. This is a goal for many countries, including Ukraine. Ukraine’s ESU 2035 and the European Commission’s 2020 Association Implementation Report on Ukraine attest to the government’s eagerness to attract energy-efficient investments in Ukraine. The fundamental assumption that international investment can contribute to prosperity, help overcome challenges such as the climate crisis and the need to transform economies, create employment, and address crises remains valid. Most immediately, international investment has a central role to play in a sustainable recovery from the COVID-19 pandemic.
Attempts to document that protection components of treaties help to attract investment have not been conclusive (Pohl, 2018[19]). Some studies suggest that reducing barriers and restrictions to foreign investments are positively correlated with greater FDI flows (Mistura and Roulet, 2019[21]). These assumptions continue to be investigated by a growing strand of empirical literature on the purposes of investment treaties and how well they are being achieved.
Investment treaties can play a role in fostering predictable rules for investment and providing more enforceable remedies than domestic courts in some countries. Investors need assurance that any dispute with the government will be dealt with fairly and swiftly, particularly in countries where investors have concerns about the reliability and independence of domestic courts and where they are uncertain about overall governance. Many also recognise that foreign investors may be exposed to specific risks, at least under certain circumstances, and that mitigating such risks may contribute to enabling foreign investment. These concerns may be more pronounced for energy-related investments, which often require long-term commitments to host countries and large upfront capital expenditure. Government acceptance of legitimate constraints on policies can provide investors with greater certainty and predictability, lowering unwarranted risk and the cost of capital.
Notwithstanding any potential benefits of being a party to international investment agreements, these should not be confused with or perceived as a substitute for long-term improvements in the domestic business environment. Any active approach to international treaty making should be accompanied by measures to improve the capacity, efficiency and independence of the domestic court system, the quality of a country’s legal framework, and the strength of national institutions responsible for implementing and enforcing such legislation.
Design features of older investment treaties. Many governments are increasingly attentive to whether experience with treaty use and interpretation warrants an update of their older investment treaties. Many Ukrainian BITs in force today contain features often associated with older investment treaties concluded in great numbers in the 1990s and early 2000s. Such treaties are generally characterised by a lack of specificity of the meaning of key provisions and extensive protections for covered investors. Some of Ukraine’s most recent BITs contain more precise approaches in some areas. Ukraine’s older BITs nonetheless remain in force alongside these newer agreements and form an integral part of the country’s legal framework for investment.
This scenario may expose Ukraine to a range of unintended consequences, especially given the potential scope for ISDS claims under these treaties. Government exposure to international investment arbitration has been receiving increasing attention. The number of claims remains modest in comparison with the amounts of international investment that is covered by such provisions but arbitration claims can create significant cost and resource burdens for governments, even if such claims remain ultimately unsuccessful. Energy investors are among the most frequent users of ISDS under Ukraine’s older investment treaties. This is not an unfamiliar experience across the global sample of known ISDS cases: around 30% of all known ISDS cases stem from investments in or related to upstream, downstream or transport activities for energy materials or products9
Many governments now recognise that it would be better if their older investment treaties had more specific design approaches used in newer investment treaties. While many countries have revised their approaches to negotiating new investment treaties in response to these and other concerns, retrospectively addressing older BITs has proven to be more challenging. Some governments have negotiated treaty amendments or joint interpretations with existing treaty partners to address individual treaties but these efforts can require significant time and resources and may remain unsuccessful if they do not enter into effect.
The Ukrainian government is well aware of these and other debates through its participation in several inter-governmental discussions regarding possible reforms of investment treaties, including UNCITRAL’s Working Group III on ISDS Reform and multilateral negotiations for possible updates to “modernise” the ECT. The ECT modernisation process may have particularly important implications for the energy sector in Ukraine given that the ECT is the most frequently-invoked investment treaty in ISDS cases globally and in Ukraine: investors have filed more than 130 known ISDS cases under the ECT (including at least four involving Ukraine) since the first claim was filed under this treaty in 2001 (Energy Charter Secretariat, 2021[22]). The ECT negotiations will enter their 8th round in 2021. Overall, however, these multilateral initiatives remain relatively limited in scope. The ECT negotiations concern only ECT members and focus on specific sectors (i.e. energy and energy-related sectors), while initiatives at UNCITRAL and ICSID focus on ISDS provisions and ICSID’s arbitration rules, respectively. Over 100 governments at the WTO are also negotiating an agreement on ways to facilitate investment by easing administrative burdens and fostering a more transparent, efficient, and predictable environment for FDI.
In response to the need for a broader, forward-looking and global reflection on the future of treaties and treaty reform options, governments at the OECD – including Ukraine – launched in March 2021 a two-track work programme to complement other discussions about investment treaty policy at the multilateral level. One of these work tracks focuses on what governments can do with older treaties in light of collective experiences with treaties and ISDS over recent decades, as well as evidence of convergence on the purpose and language of newer designs that clarify and calibrate treaty obligations. The other work track will seek to identify possible new policy directions for future treaties addressing investment.
Possible priorities and directions for future investment treaties. The government may also wish to reflect on the content that treaties addressing investment could usefully have in the future, including as part of exchanges with other governments at the OECD. A few Ukrainian investment treaties contain examples of this content, but broader inclusion may be possible and desirable. All of these issues potentially affect investment in Ukraine’s energy sector. Examples include the potential role of such treaties to: (i) contribute to sustainable development and responsible business conduct, (ii) preserve and improve investment market access and liberalisation of investment, and to facilitate FDI; (iii) promote fair competition for subsidies for investment and with subsidised SOEs; (iv) promote better rules for intellectual property rights protection, data governance and investments in the digital economy; and (v) offer more flexible and varied remedies and implementation mechanisms (Gaukrodger, 2021[23]).
The urgency of addressing the climate crisis has also markedly changed since Ukraine concluded its many older investment treaties. Decisions to integrate climate action across foreign and trade policy – and the necessity to do so – mean there is a pressing need to consider how treaties addressing investment can contribute to and reinforce climate policies. Conversely, it is vital to identify aspects of existing treaties and interpretations that may unduly interfere with such policies, and to promptly address them in effective reforms. Energy investors have used ISDS in recent years as a means to challenge government action related to climate policy in the Czech Republic, Germany, Italy, Netherlands, and Spain, among other countries, including phase-outs or moratoria on fossil fuel activities and regulatory changes affecting incentives for renewable energy. Initial reports of a notice of dispute filed by a Dutch investor against Ukraine under the ECT in March 2021 indicate that similar disputes may arise in relation to the government’s recent decision to reduce feed-in tariffs for renewable energy producers.10 Approaches to investment treaties will be of key importance for creating the necessary incentives for the transition to renewable energy sources.
The balance of this section examines four key aspects of possible reform for Ukraine’s older investment treaties – the scope of three frequently-invoked protections (FET, MFN and indirect expropriation) as well as dispute settlement mechanisms and ISDS. It then briefly outlines some other possible aspects of investment treaty reform.
Vague provisions referring generally to “fair and equitable treatment” generate risks and costs, and should be addressed where possible
Most of Ukraine’s investment treaties in force today contain provisions that require Ukraine to provide covered investors and/or their investments with FET.11Since the early 2000s, the FET standard has become the most frequent basis for claims in ISDS. Most FET provisions were agreed before the rise of ISDS claims related to this treatment standard. Starting around 2000, broad theories for the interpretation of FET provisions by arbitral tribunals emerged as the number of ISDS cases increased markedly. Based on public information, investors in at least twelve of the known ISDS cases against Ukraine have relied on FET provisions for their claims.12
Most FET provisions in investment treaties do not provide specific guidance on what treatment should be considered fair and equitable. Arbitral tribunals in ISDS cases under investment treaties have taken different approaches to interpreting such “bare” FET provisions. This creates considerable uncertainty and high litigation costs for governments and investors alike. It has also resulted in some broad interpretations of bare FET provisions that go beyond the standards of investor protection in the domestic legal systems of some advanced economies. Governments have reacted to these developments in various ways, including by adopting more precise or restrictive approaches to FET or excluding FET in recent treaties (Box 4.6). These recent approaches in broader treaty practice can serve as a useful point of comparison for varying approaches to FET in Ukraine’s investment treaties.
States are becoming more active in the ways in which they specify, address or exclude FET-type obligations in their treaties and submissions in ISDS. Dissatisfaction with and uncertainties about FET and its scope have also led some governments to exclude it from their treaties or from the scope of ISDS. Some important recent approaches are outlined below.
The MST-FET approach: express limitation of FET to the minimum standard of treatment under customary international law (MST). This approach has been used in a growing number of recent treaties, especially in treaties involving states from the Americas and Asia (Gaukrodger, 2017[24]). In addition to using MST-FET, the CPTPP clarifies that the claimant must establish any asserted rule of MST-FET by demonstrating widespread state practice and opinio juris (Article 9.6 (3)-(5), Annex 9A). Evidence of these two components has rarely been provided by claimants or arbitrators in ISDS cases. This approach has since been replicated by other states (e.g., Australia-Indonesia CEPA (2019), Article 14.7). The NAFTA governments have further reformed their approach to MST-FET claims in the USMCA (see below).
Exclusion of FET from ISDS, investment arbitration or from treaties. The recently-concluded USMCA (which replaced the North American Free Trade Agreement (1992) on 1 July 2020) includes MST-FET but generally excludes it from the scope of ISDS (except for a narrow class of cases involving certain government contracts) (Article 14.D.3). ISDS under the USMCA generally applies only to claims of direct expropriation and post-establishment discrimination (and only to Mexico-United States relations); only state-to-state dispute settlement (SSDS) is available for MST-FET claims. India’s Model BIT does not refer to FET and instead identifies specific elements; Brazil’s model treaty and recent treaties also exclude FET.
The definition approach: stating what FET means or listing its elements. Recent treaties negotiated by the European Union, China, France and Slovakia contain defined lists for the elements of FET. This approach can vary greatly depending on the nature of the list. Some lists include elements such as a denial of justice, manifest arbitrariness, fundamental breach of due process, targeted discrimination on manifestly wrongful grounds, and/or abusive treatment of investors. This approach likely results in a broader concept of FET than MST-FET, especially if state practice and opinio juris must be demonstrated to establish rules under MST-FET.
Clarifications of treatment excluded from FET. Some recent treaties have also clarified that FET does not protect investors from certain types of treatment. Starting with the Australia-Singapore FTA as revised in 2016, and followed by the CPTPP signed in March 2018 and the Korea-United States FTA as revised in 2018, several treaties now exclude government measures that may be inconsistent with an investor’s expectations concerning its investment from giving rise to a breach of the FET provision.1 Several recent treaties concluded by Australia clarify that the modification of government subsidies or grants is not protected under the FET provision.2
← 1. See also Argentina-Japan BIT (2018); Australia-Peru FTA (2018); USMCA (2018); Australia-Hong Kong Investment Agreement (2019); Australia-Indonesia CEPA (2019). Recent EU treaties such as the EU-Singapore Investment Protection Agreement and the EU-Viet Nam Investment Protection Agreement also contain clarifications relating to investor expectations. However, they clarify certain exclusions of liability generally rather than referring specifically to the FET provision.
← 2. Australia-Singapore FTA (2003), as amended in 2016, Article 6(5); Australia-Peru FTA (2018), Article 8.6(5); Australia-Uruguay BIT (2019), Article 4(5); Australia-Indonesia Comprehensive Economic Partnership Agreement (2019), Article 14.2(3).
Some Ukrainian BITs adopt some of these more precise approaches to FET. Ukraine’s BITs with Finland (1992), France (1994), Canada (1994), Kuwait (2002), Oman (2002), Japan (2015), Jordan (2005), and Turkey (2017) define FET in accordance with international law, albeit using different designs and formulations. The France-Ukraine BIT (1994) also provides an indicative list of what could constitute a breach of the FET provision, including “any restriction on the purchase and transport of raw and auxiliary materials, energy and fuels”.13
Other formulations of FET in Ukraine’s investment treaties may leave scope for broad interpretations by arbitral tribunals. Most of Ukrainian treaties contain an unqualified or “bare” reference to FET without any further specific guidance on its meaning. Some contain several different references to “bare” FET in the same treaty, which may generate additional uncertainty as to how these provisions should be interpreted.14 The prevalence of “bare” FET provisions and of varying approaches more generally creates uncertainty as to the scope of these FET obligations and exposure to unpredictable interpretations by arbitral tribunals in ISDS cases. More specific approaches to FET provisions could improve predictability for the government, investors and arbitrators alike. They could also potentially contribute to preserving the government’s right to regulate in the context of investment treaties (Gaukrodger, 2017[24]). In some cases, governments may be able to achieve greater clarity on the scope of FET by agreeing on joint government interpretations of provisions in existing investment treaties with treaty partners.15 In other cases, agreement on new treaty language may be required to reflect government intent and preclude undesirable interpretations.
Members of the ECT including Ukraine are considering the scope of FET as part of the ECT modernisation process (Energy Charter Secretariat, 2019[25]). Most ECT Members agree on the need to update the existing provision on FET in the ECT to clarify further its scope. Issues for discussion include whether FET should be linked to the MST under customary international law, whether FET should be linked to other substantive protections or a stand-alone provision, and whether FET should refer to the concept of legitimate expectations. Some ECT Members, such as Switzerland, Turkey and the EU, propose a list-based definition of FET (European Commission, 2020[26]). Other Members propose MST-FET but are open to considering list-based formulations that are consistent with prevailing understandings of the content of MST-FET.
Most-favoured nation (MFN) treatment provisions in Ukraine’s investment treaties may have a range of unintended consequences
All of Ukraine’s investment treaties that contain investment protection provisions provide for MFN treatment. Like national treatment (NT) provisions, MFN clauses establish a relative standard: they require Ukraine to treat covered investments at least as favourably as it treats comparable investments by investors from third countries. As with FET provisions, most of the MFN treatment provisions in Ukraine’s investment treaties and the global sample of investment treaties are vague with little guidance on how to interpret or apply them. More specific approaches to MFN treatment provisions could improve predictability for the government, investors and arbitrators alike (Box 4.7).
Recent investment treaty policies and debates over MFN have centred on three key issues outlined below.
MFN clauses and treaty shopping. ISDS arbitral tribunals have frequently interpreted MFN provisions to allow claimants in ISDS cases to engage in “treaty shopping”.1 These interpretations allow claimants to use MFN provisions to “import” provisions from other investment treaties that they consider more favourable than the provision in the treaty under which their case is filed.2 This can create uncertainty and also dilute the effect of investment treaty reforms. While MFN claims in trade law have centred on domestic law treatment of traders from different countries, most claimant attempts to use MFN in ISDS have sought to use the clause to access other treaty provisions.
Some governments have clarified in recent treaties that MFN provisions cannot be used to engage in treaty shopping at all. Others have limited treaty shopping to the importation of substantive provisions or limited the application of MFN clauses to cases where government measures have been adopted or maintained under the third country treaty. Article 8.7(4) of the CETA between Canada, the EU and EU Member States, for example, clarifies that “substantive obligations in other international investment treaties do not in themselves constitute ‘treatment’, and thus cannot give rise to a breach of [the MFN provision], absent measures adopted or maintained by a Party pursuant to those obligations”. The CETA also prohibits “treaty shopping” for procedural provisions. The USMCA similarly clarifies that treaty shopping is excluded under its MFN clause for both substantive and procedural matters (Article 14.D.3 (1) (a) (i)(A), footnote 22): “For the purposes of this paragraph […] the “treatment” referred to in Article 14.5 (Most Favoured Nation Treatment) excludes provisions in other international trade or investment agreements that establish international dispute resolution procedures or impose substantive obligations”.
Comparison criteria in MFN treatment provisions. A second area of interest and government action with regard to MFN treatment provisions involves the determination of what investments or investors are comparable. Many older-style treaties do not provide any specificity on this issue, leaving it to arbitral interpretations in ISDS. Some recent treaties provide that comparability requires “like circumstances”. Further clarifications have also been added. For example, some recent clarifications have stated that deciding on whether there are “like circumstances” requires, among other things, consideration of whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives.3
Negative lists, carve-outs or conditions. A third area of interest and government action with regard to MFN treatment provisions involves exclusions or limitations. Some recent treaties include negative lists of exclusions from MFN clauses in their investment chapters. Thus, a schedule may specify exceptions to MFN treatment for existing benefits granted under customs unions, other international treaties or specific domestic law schemes.
← 1. Treaty shopping is a phrase used broadly herein to describe the power for a beneficial owner of an investment to choose between investment treaties or between provisions of different investment treaties. See further detail on treaty shopping below.
← 2. For a recent discussion of the uncertainty surrounding the interpretation of MFN clauses in ISDS, see (Batifort and Heath, 2017[43])
← 3. See, for example, United States-Mexico-Canada Agreement (2018), Article 14.5(4) (“For greater certainty, whether treatment is accorded in ‘like circumstances’ under this Article depends on the totality of the circumstances, including whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives”); CPTPP (2018), “Note on Interpretation of ‘In Like Circumstances’”, www.mfat.govt.nz/assets/Trans-Pacific-Partnership/Other-documents/Interpretation-of-In-Like-Circumstances.pdf.
Ukraine has had first-hand experience of these interpretations in at least two ISDS cases (OAO Tatneft v. Ukraine, PCA Case No. 2008-8; and Krederi Ltd. v. Ukraine, ICSID Case No. ARB/14/17) where the claimants sought to rely on an MFN provision to benefit from more favourable provisions in other Ukrainian investment treaties.
Some of Ukraine’s investment treaties include specifications or restrictions on MFN provisions that reflect recent treaty practices and debates. Almost all Ukrainian BITs that contain such provisions exclude benefits granted under existing customs, economic or monetary unions, double taxation agreements and/or multilateral investment agreements from MFN treatment.16 At least nine of these treaties also require an assessment of MFN treatment with respect to comparable investments,17 albeit using different formulations.18 Ukraine’s BITs with Turkey, Japan and the United Arab Emirates explicitly exclude the application of the MFN provisions to ISDS provisions in other treaties.19 A protocol to the Ukraine-United Arab Emirates BIT (2003) provides an energy-specific example of conduct that would breach the MFN provisions, specifying that “[r]estricting [activities involving the purchase, sale, and transport of raw and secondary materials, energy, fuels and means of production and operation of all types] shall be deemed “treatment less favourable” if directed in a discriminatory way against investors of the other Contracting State”.20 While the current text of the ECT does not contain any such specifications, the EU and several other ECT Members propose to update it to include them (Energy Charter Secretariat, 2019[25]).
Vague provisions referring to protection for indirect expropriation should be clarified where possible
All of Ukraine’s investment treaties contain provisions that protect covered investments from expropriation without compensation. Many of these provisions refer to direct takings of investor property by the government (direct expropriation) as well as other government measures that have effects equivalent to a direct taking without a formal transfer or outright seizure (commonly referred to as indirect expropriation). Provisions on indirect expropriation have become the second most frequently invoked basis for claims in ISDS cases after provisions on FET. Most of these provisions in Ukraine’s treaties and the global sample of investment treaties are vague with little guidance on how to interpret or apply them.
Since 2003, some countries have included a range of clarifications on the scope of indirect expropriation in newly-concluded investment treaties. Clarifications fall into four broad categories: (i) positive definitions of the concept of indirect expropriation, (ii) guidance on how to determine whether an indirect expropriation has occurred, (iii) clarifications that certain regulatory measures do not constitute indirect expropriation, and (iv) restrictions on the types of assets covered by this protection. Only one of Ukraine’s BITs – the Ukraine-Turkey BIT (2017) – contains language to circumscribe the notion of indirect expropriation, albeit limited to a clarification that certain regulatory measures do not constitute such expropriation. Some ECT Members have made proposals to update the existing ECT provisions on expropriation with these and other elements (Energy Charter Secretariat, 2019[25]).
Clarifications such as these are likely to improve predictability as to the scope of indirect expropriation and reduce the possibility for unintended interpretations in ISDS cases. They are also likely to continue to feature in debates regarding the balance between investment protections and governments’ rights to regulate in investment treaties, including as part of ongoing discussions at the OECD. The impact of these clarifications may depend, however, on the scope of other provisions in the same treaty such as FET that have often been invoked in ISDS cases as a substitute basis for indirect expropriation claims. It also remains to be seen how arbitrators interpret such provisions as very few investor-state arbitrations have been brought under treaties that contain these features. At least one government (Brazil) has responded to this residual uncertainty by excluding indirect expropriation altogether from its investment treaties concluded since 2015 through clear language to that effect.
Ukraine’s investment treaties contain relatively few specifications or clarifications in dispute settlement provisions
Aside from Ukraine’s treaty with the EFTA countries, all of Ukraine’s investment protection treaties in force today contain ISDS provisions. These treaties allow covered foreign investors to bring claims against host states in investor-state arbitration, in addition or as an alternative to domestic remedies. Investor-state arbitration generally involves ad hoc arbitration tribunals that adjudicate disputes in an approach derived from international commercial arbitration.
Recent treaty practice has seen both greater specification of ISDS and, in some cases, replacement of investor-state arbitration with more court-like systems. Treaties like the CPTPP and the EU-Canada CETA are among some recent treaties that have included investor-state arbitration reforms to reduce possible exposure to unintended consequences of ISDS. Common features in these treaties include time limits for claims, possibilities for summary dismissal of unmeritorious claims, mandatory transparency requirements, provisions for non-disputing party participation and possibilities for joint interpretations of the treaty by the state parties that are binding on the arbitral tribunal. The United States–Mexico–Canada Agreement (USMCA) contains many similar investor-state arbitration reforms but has reduced the scope for ISDS claims to direct expropriation and post-establishment discrimination (and only to Mexico-United States relations); only state-to-state dispute settlement (SSDS) is available for claims under other provisions, such as MST-FET claims. The EU, which supports the concept of a multilateral investment court, has included court-like dispute settlement in all its recent investment protection treaties. Brazil’s treaties omit ISDS and designate domestic entities (“National Focal Points”) to act as an ombudsperson by evaluating investor grievances and proposing solutions to a Joint Committee comprised of government representatives from both states. Under this model, state-state dispute settlement is also available if necessary. South Africa has terminated its BITs with European countries. South African domestic legislation governs the claims of foreign investors against the government in domestic courts and provides for the possibility of case-by-case agreement to arbitration.
ISDS provisions in some Ukrainian investment treaties contain reform elements that reflect recent treaty practice. Some of Ukraine’s BITs restrict the scope of ISDS to alleged breaches of specific provisions, i.e. only disputes relating to the amount of compensation owing due to an alleged expropriation.21 Others require investors to obtain prior written consent from the contracting parties before they can initiate ISDS claims.22 Ukraine’s BITs with Canada (1994), Japan (2015), and Qatar (2018) prescribe limitation periods for investor claims starting from when investors knew or should have known about the events giving rise to their claims. The Canada-Ukraine BIT (1994) also provides guidance on the types of remedy that an arbitral tribunal can grant. At least 15 Ukrainian BITs specify the governing law for ISDS cases,23 albeit using different formulations.24
The majority of Ukraine’s investment treaties, however, do not contain specifications or clarifications regarding investor-state arbitration procedures. These treaties thus give claimants and their counsel substantial power over key procedural issues in addition to allowing them to choose when to claim. For example, in ISDS, the appointing authority in a case plays a key role notably because it chooses or influences the choice of the important chair of the typical three-person tribunal (Gaukrodger, 2018[27]). Some recent treaties provide for a single appointing authority for all cases. Some Ukrainian treaties – including BITs with Armenia (1994), Italy (1995), Indonesia (1996), Iran (1996), and Oman (2002)25 – remove this choice by providing for a single forum for investor-state arbitration. However, most Ukrainian treaties give claimants and their counsel a choice between at least two and as many as four different arbitration institutions at the time they file a claim.26 This allows them to choose or influence the choice of appointing authority and exacerbates the competition for cases between arbitration institutions (Gaukrodger, 2018[27]).
Multilateral reform efforts for ISDS are underway in several fora, including at UNCITRAL and ICSID. The Ukrainian government participates actively in these discussions. Possible ISDS reforms under consideration at UNCITRAL and in the ECT modernisation process (no decisions have yet been reached in either setting) include both structural-type reforms (a permanent multilateral investment court with government-selected judges or a permanent appellate tribunal) as well as more incremental reforms such as a code of conduct for arbitrators or adjudicators.
Other possible aspects of investment treaty reform
Clearer specification of investment protection provisions would help to reflect government intent and ensure policy space for government regulation
Specifications on key provisions in investment treaties play an important role calibrating the balance between investor protection and governments’ right to regulate. Specifications seeking to achieve this balance should reflect policy choices informed by Ukraine’s priorities. Policy-makers should consider the costs and benefits of these choices and their potential impact on foreign and domestic investors, together with the government’s legitimate regulatory interests and potential exposure to ISDS claims and damages.
There are a range of techniques that governments can use to affect the balance between the right to regulate and investor protections in investment treaties (Gaukrodger, 2017[28]). The most obvious technique involves decisions about whether to include or exclude particular provisions, whether to draft them narrowly or broadly, precisely or in broader terms. The most important provisions in this regard are likely to be those that are most often the focus of an alleged breach in investor claims such as the FET provision.
Depending on whether the parties wish to clarify original intent or revise a provision in an existing treaty, it may be possible to clarify language through joint interpretations agreed with treaty partners or treaty amendments. These types of government action have been relatively rare in recent years, however, and can require significant time and resources to engage with individual treaty partners. Replacement of older investment treaties by consent in the context of new treaty negotiations may also be appropriate in some cases.
The government’s experiences with the COVID-19 pandemic may cause it to recalibrate the appropriate balance between investor protections and the right to regulate. Measures taken by governments to protect their societies and economies during the pandemic affect companies and investors. Investment treaties should be drafted with sufficient precision to provide flexibility for governments to respond effectively to the crisis and to take vital measures such as securing quick access to essential goods and services. While it may be too early to assess the consequences of the pandemic for this area of investment policy, it is likely that experiences with the crisis may refocus government attention on the balance between investor protection and governments’ right to regulate, especially in times of crisis (OECD, 2020[29]). Governments have been addressing the balance between investment protection and the right to regulate in investment treaties through analysis and discussion at the OECD (Gaukrodger, 2017[28]).
Investment treaties can be used as tools to liberalise domestic investment regimes
While liberalisation provisions are common features of international trade agreements, they have been much less common in BITs. Investment treaties can be used to liberalise investment policy by facilitating the making or establishment of new investments (Pohl, 2018[19]). This can be achieved by extending the national treatment (NT) and MFN treatment standards to investors seeking to make investments (i.e. the pre-establishment phase of an investment) or by expressly prohibiting measures that block or impede market access.
Overall, provisions that seek to foster liberalisation remain the exception in Ukrainian investment treaties. The Canada-Ukraine BIT (1994), for example, grants so-called pre-establishment NT and MFN treatment to Canadian investors in Ukraine, and vice versa. The government thereby agrees to allow Canadian investors to establish a new business enterprise on the same basis as domestic investors or investors from third countries. Provisions of this type are typically accompanied by lists of exclusions, known as negative lists. Ukraine’s on-going efforts to facilitate and attract new FDI could be an opportunity for policy-makers to consider a more widespread inclusion of such liberalisation provisions into new or existing treaties.
Opportunities for investment treaties to address investor responsibilities
Governments at the OECD are considering how trade and investment treaties can affect business responsibilities including through their impact on policy space for governments, provisions that buttress domestic law or its enforcement, or provisions that directly address business by, for example, encouraging observance of RBC standards (Gaukrodger, 2021[30]).
Some Ukrainian BITs contain provisions on RBC-related objectives and investor responsibilities. These provisions vary in terms of scope and level of generality; some are binding on arbitral tribunals in ISDS or SSDS but others may not be. Examples include provisions reiterating the importance of RBC-related objectives,27 seeking to preserve space for government policy-making in RBC-related areas, or reinforcing domestic law by clarifying the parties’ understanding that it is inappropriate to encourage investment by relaxing environmental or health measures.28
Almost all of Ukraine’s BITs contain provisions that address investors directly on RBC-related issues. Most Ukrainian BITs contain legality requirements that restrict the scope of treaty protections to investments made in accordance with Ukrainian law. These requirements appear most frequently in provisions defining covered investments but also appear in provisions on the scope of application of the treaty.
Investment treaties concluded by other governments address investor responsibilities in various other ways. For example, some treaties reaffirm government duties to regulate in key RBC-related areas, exclude non-discriminatory government measures in these areas from the scope of ISDS claims; exclude investments procured by corruption from the scope of ISDS, impose obligations on investors to uphold human rights and maintain an environmental management system, refer to the parties’ commitments to implement international standards related to RBC, or recognise that investments should contribute to the economic development of the host state (Gaukrodger, 2021[30]) (Gordon, Pohl and Bouchard, 2014[31]).
The government may wish to consider whether and how investor responsibilities could be included in its existing and future investment treaties. This may align with the goals of Ukraine’s National Contact Point for RBC under the OECD Guidelines on Multinational Enterprises and the government’s 10-year plan to achieve certain RBC-related targets by 2030 (Order of the Cabinet of Ministers of Ukraine, 24 January 2020, No. 66-r). The government should also engage with intergovernmental discussions on this topic, including as part of the ECT negotiations and at the OECD. Some ECT Members including the EU propose to update the ECT by including new provisions addressing sustainable development and RBC-related objectives (Energy Charter Secretariat, 2019[25]) (European Commission, 2020[26]).
Addressing the unique approach to claims for reflective loss in ISDS
Ukraine should continue to engage in multilateral fora such as at the OECD and UNCITRAL to develop proposals to address the unique approach to claims for shareholders’ reflective loss in ISDS. Shareholders incur reflective loss if a company in which they hold shares suffers a loss that results, in turn, in the shareholders suffering a commensurate loss, typically a loss in value of the shares. In contrast to the approach of domestic laws in many countries, many investment treaties have been interpreted to allow ISDS claims by covered shareholders for losses incurred by companies in which they own shares.
Governments have been considering these issues at the OECD since 2013 (Gaukrodger, 2014[32]) (OECD, 2016[33]).29 Ongoing discussions at UNCITRAL’s Working Group III on ISDS Reform are considering possible reforms to address these issues, which were underlined in a recent UNCITRAL Secretariat note (UNCITRAL Commission, 2019[34]). At the request of the Working Group, these discussions are being conducted jointly with the OECD. Given that the current approach towards reflective loss in ISDS provides claimants with exceptional benefits and greatly expands the number of actual and potential ISDS cases, however, only government-led reform is likely to address the issues.
Evaluating overlaps between investment treaties
Ukraine has two investment treaties in force simultaneously with 40 countries and three investment treaties in force simultaneously with one of its treaty partners as of May 2021 (Figure 4.3).
Note: *Belarus, Norway and the Russian Federation have signed but not ratified the ECT; Belarus applies the treaty provisionally. **Ukraine has signed BITs with Kyrgyzstan and Romania but they are not in force.
Note by Turkey. The information in this figure with reference to “Cyprus” relates to the southern part of the Island. There is no single authority representing both Turkish and Greek Cypriot people on the Island. Turkey recognises the Turkish Republic of Northern Cyprus (TRNC). Until a lasting and equitable solution is found within the context of the United Nations, Turkey shall preserve its position concerning the “Cyprus issue”. Note by all the European Union Member States of the OECD and the European Union: The Republic of Cyprus is recognised by all members of the United Nations with the exception of Turkey. The information in this document relates to the area under the effective control of the Government of the Republic of Cyprus.
Source: OECD investment treaty database (not public).
Overlapping investment treaties that apply to investments by investors from the same country may raise some policy concerns. As a general matter, Ukraine should strive to minimise inconsistencies between international obligations entered into with different countries. In the case of the ECT, any potential overlap with protections offered under BITs with the same partners applies to investments in energy or energy-related sectors – while the ECT applies only to these sectors, Ukraine’s BITs apply to investments in all sectors. In practice, this means that covered foreign investors in Ukraine’s energy or energy-related sectors may be able to rely on more favourably-worded provisions in Ukraine’s older BITs in their dealings with the government or in ISDS disputes. This approach could potentially undermine the impact of the ongoing ECT modernisation process if investors in the energy sector can circumvent reforms to ECT provisions by relying on older BITs that are still in force.
Ukraine may wish to evaluate the likely impact of these overlaps in treaty protection for investments in energy or energy-related sectors. It may also wish to consider engaging with relevant treaty partners to consider these overlaps and how they could be addressed as part of the ongoing ECT modernisation process.
Despite the concerns that may arise with overlapping treaties, some governments may consider that they need to provide certain extra incentives or guarantees to some treaty partners over others in order to attract FDI. This may be because they expect that investors from those countries are less likely to invest their capital in the absence of such treatment or assess that the broader benefits associated with attracting FDI from those countries are particularly lucrative. Some governments may also consider that similar provisions in different treaties, while framed differently, are likely to be interpreted in a consistent way. The balance between these interests and assessments is a delicate one and may evolve over time.
Developing approaches to prevention of ISDS claims and ISDS case management
Ukraine may wish to prioritise the development of strategies to prevent and achieve early settlement of investment-related disputes, as well as its approach to case management of ISDS cases. Aside from participating in inter-governmental discussions on these topics, the government may wish to consider taking certain steps at a domestic level.
As discussed in further detail in the 2016 Investment Policy Review of Ukraine (OECD, 2016[20]) and already addressed in previous chapters of this report, Ukraine has established the Business Ombudsman Council (BOC), which is the first point of contact for companies seeking redress against unfair treatment (Wehrle, 2015[35]). Such forms of dispute prevention mechanisms are important tools to manage the exposure of governments to investors’ claims because they can reduce the likelihood of formal investment treaty claims arising. Case studies published by the BOC in its annual reports indicate that investors have successfully sought redress through the Ombudsman without having to resort to arbitration. In the Ministry of Justice of Ukraine, there is a special department on international disputes which is responsible for representative of the state during the disputes settlements, including investments disputes settlement at different stages. Investors within the relevant bilateral investment treaties are able to send to the Ministry of Justice the notice of intent to claim against Ukraine in the specific investment dispute, and the Ministry of Justice from its side is authorised to do pre-claiming consultations with the investor, for example, by organising meetings or creation of working group on pre-claiming dispute settlement. The International Disputes department within the Ministry of Justice, which is responsible for representing the government in legal disputes with foreign investors, also conducts pre-litigation consultations aimed at the early resolution of disputes with aggrieved investors through informal meetings and the creation of inter-ministerial working groups in some cases.
The government may wish to consider drawing on examples of other institutional frameworks in other countries for the prevention of investment disputes and policy-setting activities. At a domestic level, some countries, such as Colombia and Peru, have adopted comprehensive legislative and regulatory frameworks to encourage the early detection and resolution of investment disputes (OECD, 2018[36]; Joubin-Bret, 2015[37]). Other countries, such as Chile, have opted for an informal prevention system where sectoral agencies directly manage disputes with investors. Some countries including Croatia and Thailand have reported successful outcomes with inter-ministerial committees established to advise line agencies on investor grievances and formulate proposals to update and revise the government’s policies regarding investment treaties and domestic legal frameworks for investment protection. As noted above, Brazil does not include ISDS in its investment treaties but instead establishes with each treaty partner a Focal Point or ombudsman within each government to address investor grievances, with a Joint Committee of government representatives to oversee the administration of the agreement. Korea has also had a successful track-record of early dispute resolution with its Foreign Investment Ombudsman since it was established in 1999 (Nicolas, Thomsen and Bang, 2013[38]). It may also be worth exploring options to build awareness within government ministries, agencies and local or sub-national government entities regarding Ukraine’s obligations under investment treaties and the potential impact that government decisions may have on investor rights under these treaties. Internal written guidelines or a handbook could be a useful way to disseminate this information and encourage continuity of institutional knowledge as personnel changes occur over time.
The government may also wish to explore ways to share and learn from its experiences with ISDS and those of other governments. Several states that have been frequent respondents in ISDS cases – including Argentina, Canada, Mexico, Spain and the United States – have developed dedicated teams of government lawyers to advise the government on investment disputes and investment treaty policy. Nurturing internal expertise to evaluate investor claims candidly before a legal dispute arises can be an important step in preventing time and cost protracted and costly legal disputes.
Procedural considerations: exit and renegotiation
A growing number of countries are considering ways to replace, update or exit older investment treaties that no longer reflect governments’ current priorities. Review and renegotiation of investment treaties takes time and significant governmental resources and the option to terminate a treaty is not necessarily available at any moment, as the relevant provisions on temporal validity in the treaty may place limits on exit options (Box 4.8).
Unlike most international treaties, which can be denounced at relatively short notice, investment treaties typically contain clauses that extend their temporal validity for significant periods of time. Three designs can be found, often cumulatively in the same agreement (Pohl, 2013[39]). First, most investment treaties set an initial validity period of often 10 years or more, counting from the treaty’s entry into force. After that period, many treaties only allow states parties to denounce the treaty at the end of specific intervals of often 10 years or more. Finally, treaty obligations almost universally continue to apply for a sunset period after the termination of the treaty, again for periods of typically 10 years or more. Many treaties thus bind the treaty parties for at least two decades, and in some extreme cases for up to 50 years.
Treaty designs that automatically extend the validity of the treaty for fixed terms are included in around 30% of the global treaty stock, but this design has been used less frequently in recent years. This design tends to prolong the period for which states parties are bound without granting additional benefits in terms of predictability for investors: on the contrary, the oscillating residual treaty validity is hard to predict without detailed study (see illustrative comparison in Figure 4.4).
Many Ukrainian investment treaties in force today contain temporal validity provisions that will operate to delay possibilities for unilateral exit from the treaty. Most of Ukraine’s investment treaties contain an initial validity period of 10 or 15 years. Ukraine’s BIT with Kuwait has a longer initial validity period of 30 years. At least 27 of Ukraine’s BITs in force today provide for automatic renewal of the treaty for a fixed time after the period of initial validity and allow either treaty party to denounce the treaty within six or 12 months (depending on the treaty) of the expiry of the renewed period. Treaties that renew for fixed terms require more monitoring as they limit the possibilities to update or unilaterally end the agreement. If no termination occurs in the defined notice period, the treaty automatically renews for the agreed period, thereby committing Ukraine to these treaties for a further five or ten years in most cases – and 30 years in the case of the BIT with Kuwait – before the next opportunity to terminate the treaty will arise.
Even if Ukraine were to terminate unilaterally some or all of its treaties, most of them would continue to apply for a survival period of at least 10 years (often referred to as “sunset” clauses). These provisions are often intended to provide a measure of legal certainty for investors who frequently make long-term capital commitments in the host country. This situation may leave the government potentially exposed to ISDS claims far beyond the termination date. An extreme case is Ukraine’s BIT with Belarus, which appears to envisage survival effects for an unlimited duration following termination. Treaty partners may be able to agree mutually to replace or exit an older treaty in such a way that the survival provisions no longer apply.
As a hypothetical example to illustrate the possible effects of these clauses, as of September 2021, the earliest occasion that the government could unilaterally withdraw from all of its investment treaties is 2033 (taking into account the automatic renewal periods in some treaties) and the effects of post-termination “sunset” periods could last until 2053 even if appropriate actions were started today (leaving aside the treaty with Belarus mentioned in the previous paragraph) (Figure 4.5).
Note: Projections based on a hypothetical scenario of unilateral denunciation of all treaties in the available sample at the earliest possible occasion. Line with black dots shows the share of Ukraine’s existing treaties that would remain in force in a given year. Line with white dots shows the share of those treaties that would remain in effect in a given year based on applicable sunset periods.
Source: Calculations based on OECD investment treaty database.
Unilateral action is not the only option to update or address older investment treaties but the impact of temporal validity provisions may influence how treaty amendments or agreed exits can be negotiated with treaty partners, especially if the renewal period is imminent. Ukraine may therefore wish to consider whether the current design of its temporal validity provisions can serve its interests in future discussions with treaty partners.
Ukraine has a comprehensive regulatory framework to protect intellectual property rights through local and international instruments, including the establishment of a High Intellectual Property Court and the Ukrainian Intellectual Property Institute (UkrPatent).
Judicial reforms have advanced substantially, particularly with the establishment of the High Council of Justice as an independent body that monitors the integrity of judges, nominates judicial appointments and dismiss judges. More recently, in August 2021, new legislation aiming at rebooting the High Council of Justice and the High Qualification Commission of Judges of Ukraine and ensuring the engagement of foreign professionals in the selection of members of the two bodies entered into force. However, there are still actions to be taken that could further enhance the business climate, particularly, by enhancing the transparency of court adjudications, increasing the use of ADR mechanisms and eradicating corruption in the judiciary.
Ukraine’s investment treaty policy also deserves continued attention. The government should be proactive in evaluating whether its existing BITs – many of which were concluded decades ago – align with current priorities. These treaties may play a role in attracting and retaining FDI in Ukraine, and they may be important for protecting Ukrainian investors abroad, but evidence of this impact would help to assess whether these and other objectives are being fulfilled. Some aspects of Ukraine’s older BITs discussed in this Chapter may render them out of step with the government’s assessments of the appropriate balance between investor protection and the right to regulate. Seeking to update these treaties in line with recent treaty practices is a challenge for many governments that involves time, cost and resource allocation constraints. The government is keenly aware of these issues through its participation in reform processes at UNCITRAL and for the ECT, as well as regular discussions about investment treaty policy at the OECD. Continued engagement in government and other action on investment treaty reforms should be a central part of the government’s strategy to address these issues in the coming years.
Increase the number of IP rights trained judges. The increase in the number of judges is likely to improve the quality and efficiency of IP dispute consideration. It will contribute to the Ukrainian court system and the state in general as the solution to the jurisdiction problem by boosting the effectiveness of decisions, creating an opportunity to set special court procedures and practice generalisations to enhance efficiency and accuracy, serving as a basis for the consistency and predictability of case outcomes and the source of progressive development and dynamism in IP cases.
Expedite the examination for green technology IP applications. As part of the strategy to enhance the protection of IP rights of green technologies, various national IP offices offer expedited examination for green technology patent applications. In the United Kingdom, the Green Channel platform is open to all patent applications that can make a reasonable assertion of having an environmental benefit.
Strengthen international co-operation to nurture innovation. To stimulate the breakthroughs necessary to advance renewable energy investments, existing platforms designed to foster international collaboration should be prioritised at a national level. This allows countries to share ideas, pool resources and capital, and co-develop programmes that support common interests.
Ensure independent, integral and rigorous work of the HACC towards adjudication of corruption without political interference and other undue influence. As mandated by the Law, the HACC must keep its independence and respect the separation of powers but it must solve the cases brought by NABU and SAPO against designated high-level officials (including ministers, deputies, members of parliament, agency leaders, judges, prosecutors, and heads of state-owned enterprises) for a specified set of corruption-related crimes that entail damage in excess of a monetary threshold (at the time of writing of this Review, and as indicated earlier in this report, NABU was conducting a pre-trial investigation into corruption offenses which incurred damages excessing UAH 1 189 500, roughly equivalent to USD 44 500). It is of utmost importance that this final element in the specialised anti-corruption criminal justice system functions effectively and with integrity. The backlog of cases from NABU and SAPO should be eliminated to ensure fair and transparent judgements in corruption cases. This should help strengthen trust in the judiciary, including on the behalf of investors.
Adopt a comprehensive legislative package that sets out a complete systemic enforcement framework. Ukraine should incorporate a comprehensive problem-solving mechanism for genuine enforcement reform. The proposed framework should involve an open discussion with representatives of the legal community, businesses and other service users, professional associations, and scholars, as well as international experts. The final enforcement framework must ensure institutional independence of the enforcement service from state intervention and deliver significant results of judgment enforcements.
Implement mediation and ADR mechanism legislation. It is recommended to further develop mediation and other ADRs in all types of process, which would have a positive impact on the court’s workload (the workload of the courts of first instance would be affected directly, also, agreements reached through ADR mechanism could prevent appeals; thus, reducing the workload of appeal courts) Compulsory attempt of pre-litigation settlement in certain categories of cases (mandatory pre-requisite for taking legal action) should also be considered.
Continue to reassess and update the government’s priorities with respect to investment treaty policy. An important issue in this regard is an evaluation of the appropriate balance between investor protections and the government’s right to regulate, and how to achieve that balance in practice. Many of Ukraine’s older investment treaties do not contain the clarifications and more specific design approaches to key clauses used in many newer investment treaties. Clearer specification of these provisions would likely help to reflect government intent and ensure policy space for government regulation, as well as providing greater predictability for covered investors, including in the energy sector. The interface between investment treaties and broader priorities for Ukraine and many other governments – such as tackling climate change, promoting responsible business conduct and fostering sustainable development – may also be important considerations. It has proven difficult for governments to update older treaties to reflect updated priorities but some multilateral reform initiatives are underway. Aside from multilateral action, it may be possible to clarify language through joint interpretations agreed with treaty partners or treaty amendments, depending on whether the parties wish to clarify original intent or revise a provision. Replacement of older investment treaties by consent may also be an appropriate option in some cases (as Ukraine appears to have done with Israel, Finland, Turkey and Slovakia).
Continue to participate actively in and follow closely government and other actions on investment treaty reforms at the OECD, UNCITRAL and for the ECT. Consideration of reforms and policy discussions on frequently-invoked provisions in ISDS cases and whether investment treaties are achieving their intended purposes are of particular importance in current investment treaty policy. The government should prioritise its engagement in these various inter-governmental initiatives.
Continue to improve ISDS dispute prevention and case management tools. The government may wish to consider drawing on examples of institutional frameworks in other countries for the prevention of investment disputes and policy-setting activities. It may also wish to consider ways to promote awareness-raising and inter-ministerial co-operation regarding the government’s investment treaty policy and the significance of investment treaty obligations for the day-to-day functions of line agencies. Whatever approach the government adopts towards international investment agreements, complementary measures can help to ensure that treaties are consistent with domestic priorities and reduce the risk of disputes leading to international arbitration.
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Notes
← 1. Following the dissolution of the Union of Soviet Socialist Republics (USSR), Ukraine confirmed its obligations under international treaties signed by the Ukrainian SSR before the announcement of the independence of Ukraine, including the New York Convention. See Law on Legal Succession of Ukraine, No. 1543-XII, 12 September 1991, Article 6.
← 2. See, for example, Ukraine-US Trade and Investment Cooperation Agreement (2008); Canada-Ukraine Cooperation Agreement (1994). Other trade agreements with Canada (2016) and Israel (2019), among others, do not contain provisions on investment protection.
← 3. Misen Energy AB and Misen Enterprises AB, ICSID Case No. ARB/21/15; Philip Morris Ukraine v. Ukraine, ICSID Case No. ARB/21/3; Emergofin B.V. and Velbay Holdings Ltd. v Ukraine, ICSID Case No. ARB/16/35; Gilward Investments B.V. v. Ukraine, ICSID Case No. ARB/15/33; Poltava Gas B.V. and Poltava Petroleum Company, ICSID Case No. ARB/15/9; Krederi Ltd. v. Ukraine, ICSID Case No. ARB/14/17; City-State N.V., Praktyka Asset Management Company LLC, Crystal-Invest LLC and Prodiz LLC v. Ukraine, ICSID Case No. ARB/14/9; Global Trading Resource Corp. and Globex International, Inc. v. Ukraine, ICSID Case No. ARB/09/11; GEA Group Aktiengesellschaft v. Ukraine, ICSID Case No. ARB/08/16; Bosh International, Inc and B&P Ltd Foreign Investments Enterprise v. Ukraine, ICSID Case No. ARB/08/11; Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine, ICSID Case No. ARB/08/8; Alpha Projektholding GmbH v. Ukraine, ICSID Case No. ARB/07/16; Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18; Western NIS Enterprise Fund v. Ukraine, ICSID Case No. ARB/04/2; Tokios Tokelés v. Ukraine, ICSID Case No. ARB/02/18; Generation Ukraine, Inc. v. Ukraine, ICSID Case No. ARB/00/9; Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB(AF)/98/1.
← 4. Olympic Entertainment Group AS (Estonia) v. Republic of Ukraine, PCA Case No. 2019-18; PJSC Gazprom v. Ukraine, PCA Case No. 2019-10; Igor Boyko v. Ukraine, PCA Case No. 2017-23; Ministry of Land and Property of the Republic of Tatarstan v. Ukraine; JKX Oil & Gas plc, Poltava Gas B.V. and Poltava Petroleum Company JV v. Ukraine, PCA Case No. 2015-11; OAO Tatneft v. Ukraine, PCA Case No. 2008-8; Laskaridis Shipping Co. LTD, Lavinia Corporation, A.K.Laskaridis and P.K.Laskaridis v. Ukraine, UNCITRAL, ad hoc.
← 5. Vnesheconombank v. Ukraine, SCC Case No. 2019/113; Littop Enterprises Limited, Bridgemont Ventures Limited and Bordo Management Limited v. Ukraine, SCC Case No. V 2015/092; Remington Worldwide Limited v. Ukraine, SCC Case No. V116/2008; Limited Liability Company Amto v. Ukraine, SCC Case No. 080/2005.
← 6. Skyrizon v. Ukraine; Gilead Sciences Inc. v. Ukraine; DCH Group v. Ukraine.
← 7. IA Reporter (2021): “Ukraine on notice of 750+ million USD treaty claim over allegations of government collusion and non-compliance with LCIA award”, 30 April 2021, https://www.iareporter.com/articles/ukraine-on-notice-of-750-million-usd-treaty-claim-over-allegations-of-government-collusion-and-non-compliance-with-lcia-award/; “Ukrainian business magnates to lodge second ICSID claim against the USA”, 23 February 2021, https://www.iareporter.com/articles/ukrainian-business-magnates-to-lodge-second-icsid-claim-against-the-usa/.
← 8. Under the ICSID Arbitration Rules: Artem Skubenko and others v. Republic of North Macedonia (ICSID Case No. ARB/19/9); Eugene Kazmin v. Republic of Latvia (ICSID Case No. ARB/17/5). Under the SCC Arbitration Rules: State Enterprise "Energorynok" (Ukraine) v. The Republic of Moldova (SCC Arbitration V 2012/175). Under the UNCITRAL Rules: NPC Ukrenergo v. Russian Federation; PJSC DTEK Krymenergo v. the Russian Federation; NJSC Naftogaz of Ukraine, PJSC State Joint Stock Company Chornomornaftogaz, PJSC Ukrgasvydobuvannya and others v. The Russian Federation (PCA Case No. 2017-16); Oschadbank v. Russian Federation (PCA Case No. 2016-14); Limited Liability Company Aberon Ltd, Limited Liability Company Libset, Limited Liability Company Lugzor, Limited Liability Company Ukrinterinvest, and Public Joint Stock Company DniproAzot v. The Russian Federation (PCA Case No. 2015-29); Aeroport Belbek LLC and Igor Valerievich Kolomoisky v. The Russian Federation (PCA Case No. 2015-07); Everest Estate LLC et al. v. The Russian Federation (PCA Case No. 2015-36); PJSC CB PrivatBank and Finance Company Finilon LLC v. Russian Federation (PCA Case No. 2015-21); Stabil LLC and Others v. Russian Federation (PCA Case No. 2015-35); PJSC Ukrnafta v. The Russian Federation (PCA Case No. 2015-34); Energoalians TOB v. Republic of Moldova. News reports at the time of writing in the second quarter of 2021 indicate that at least one other dispute has been formally notified by an Ukrainian investor: IA Reporter (2021), “Ukrainian energy company puts Russia on notice of treaty-based dispute”, 28 May 2021, https://www.iareporter.com/articles/ukrainian-energy-company-puts-russia-on-notice-of-treaty-based-dispute/.
← 9. Based on the indicative list of “Energy Materials and Products” in Annex EM I of the ECT and UNCTAD’s Investment Dispute Settlement navigator (https://investmentpolicy.unctad.org/investment-dispute-settlement), which indicates that 310 out of 1104 know ISDS cases concern investments in or related to these activities.
← 10. See IA Reporter (2021), “Ukraine is facing its first renewables arbitration; respondent’s counsel may be chosen through negotiated procedure”, 28 April 2021, https://www.iareporter.com/articles/ukraine-is-facing-its-first-renewables-arbitration-respondents-counsel-may-be-chosen-through-negotiated-procedure/; Kurylko, V. (2021), “Ukraine faces its first investment arbitration over clampdown on renewable energy sector”, Arbitration Ukraine, 28 April 2021, https://arbitrationukraine.com/ukraine-faces-its-first-investment-arbitration-over-a-clampdown-on-the-renewable-energy-sector/?fbclid=IwAR1DUe_T9D1JRsRCXdFoo5iXmzOx4XA_k78J0brRa3qCwVGg9FU-hfxZk8Y.
← 11. Based on publicly available information, at least five Ukrainian BITs contain no reference to fair and equitable treatment at all (see BITs with Armenia (1994), the Russian Federation (1998), Azerbaijan (1997), and Tajikistan (2001)) or refer to it only in the preamble (see Turkey-Ukraine BIT (1996): “Agreeing that fair and equitable treatment of investment is desirable in order to maintain a stable framework for investment and maximum effective utilisation of economic resources”). Most Ukrainian treaties refer to “fair and equitable” treatment but some refer to “fair and equal” treatment (e.g. Ukraine-Bulgaria BIT (1994), Ukraine-Georgia BIT (1995)) and others only to “equal” treatment (e.g. China-Ukraine BIT (1992)) or only to “fair” treatment (e.g. Ukraine-Kyrgyzstan (1993), Ukraine-Uzbekistan (1993), Ukraine-Viet Nam (1994)).
← 12. See Tokios Tokelés v. Ukraine, ICSID Case No. ARB/02/18; Western NIS Enterprise Fund v. Ukraine, ICSID Case No. ARB/04/2; Limited Liability Company Amto v. Ukraine, SCC Case No. 080/2005; Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18; Alpha Projektholding GmbH v. Ukraine, ICSID Case No. ARB/07/16; Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine, ICSID Case No. ARB/08/8; Bosh International, Inc and B&P Ltd Foreign Investments Enterprise v. Ukraine, ICSID Case No. ARB/08/11; GEA Group Aktiengesellschaft v. Ukraine, ICSID Case No. ARB/08/16; OAO Tatneft v. Ukraine, PCA Case No. 2008-8; City-State N.V., Praktyka Asset Management Company LLC, Crystal-Invest LLC and Prodiz LLC v. Ukraine, ICSID Case No. ARB/14/9; Krederi Ltd. v. Ukraine, ICSID Case No. ARB/14/17; JKX Oil & Gas plc, Poltava Gas B.V. and Poltava Petroleum Company JV v. Ukraine, PCA Case No. 2015-11. The number of actual FET claims against Ukraine may be higher on account of confidential pending claims. Based on publicly available information, arbitral tribunals found FET breach in at least five cases (City-State N.V., Praktyka Asset Management Company LLC, Crystal-Invest LLC and Prodiz LLC v. Ukraine, ICSID Case No. ARB/14/9; OAO Tatneft v. Ukraine, PCA Case No. 2008-8; Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine, ICSID Case No. ARB/08/8; Alpha Projektholding GmbH v. Ukraine, ICSID Case No. ARB/07/16; Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18).
← 13. See France-Ukraine BIT (1994), Article 3: “[…] In particular, although not exclusively, any restriction on the purchase and transport of raw and auxiliary materials, energy and fuels, as well as on the means of production and exploitation of any kind, any hindrance to the sale and transport of products within the country and abroad, and any other measures having a similar effect, shall be regarded as de jure or de facto obstacles to fair and equitable treatment”. Unofficial translation from French by the authors: “En particulier, bien que non exclusivement, sont considérées comme des entraves de droit ou de fait au traitement juste et équitable, toute restriction à l’achat et au transport de matières premières et de matières auxiliaires, d’énergie et de combustibles, ainsi que de moyens de production et d’exploitation de tout genre, toute entrave à la vente et au transport des produits à l’intérieur du pays et à l’étranger, ainsi que toute autre mesure ayant un effet analogue.”
← 14. Multiple references to FET occur in preamble text and substantive provisions in some treaties: see, for example, Ukraine’s BITs with Denmark (1992), Egypt (1992), Netherlands (1994), the United States (1994), Sweden (1995), Georgia (1995), Turkey (1996), Japan (2015), Turkey (2017) and Qatar (2018)). Other treaties refer to FET in several different substantive provisions: see, for example, Ukraine’s BITs Hungary (1994), Lithuania (1994), Czech Republic (1994), Sweden (1995), Estonia (1995), Indonesia (1996), Slovenia (1999), Congo (2000), Gambia (2001), Panama (2003), Equatorial Guinea (2005), and Singapore (2006)). Other formulations of FET in Ukrainian treaties may also leave scope for broad interpretations by arbitral tribunals. For example, the Belgium/Luxembourg-Ukraine BIT (1996) refers to FET as “in no case… less than [that] recogni[s]ed under international law”. Such a formulation creates a “floor” for FET, rather than a “ceiling” that would limit FET to the protections already afforded under international law. There is no guidance in this BIT or any other Ukrainian BIT about the extent to which protections may exceed those under international law.
← 15. (Gaukrodger, 2016[41]) (Reviewing the applicable law on joint interpretations of investment treaties without express provisions on the issue); (Gordon and Pohl, 2015[40]). For a recent example of a joint interpretation, see the Joint Interpretative Declaration between Colombia and India (2018) regarding the Colombia-India BIT (2009).
← 16. Some agreements contain more detailed sector-specific exclusions, e.g. Ukraine-United States BIT (1994); EFTA-Ukraine FTA.
← 17. See the EFTA-Ukraine FTA, Turkey-Ukraine BIT (2017), Japan-Ukraine BIT (2015), Kuwait-Ukraine BIT (2002), Slovenia-Ukraine BIT (1999), Turkey-Ukraine BIT (1996); Israel-Ukraine BIT (1994), Canada-Ukraine BIT (1994), Ukraine-United States BIT (1994).
← 18. Some treaties use the phrase “in like situations” (e.g. EFTA-Ukraine FTA), while other rather use the phrase “in like circumstances” (e.g. Turkey-Ukraine BIT (2017)) or “in similar situations” (e.g. Turkey - Ukraine BIT (1996)), “in similar cases” (e.g. Israel-Ukraine BIT (1994)), or “under similar conditions” (e.g. Canada-Ukraine BIT (1994)).
← 19. Turkey-Ukraine BIT (2017), Article 4(c); Japan-Ukraine BIT (2015), Article 5(4); Ukraine-United Arab Emirates BIT (2003), Protocol, Paragraph (5): “With respect to Article 3 – It is agreed by both contracting parties that the most favourable treatment shall not apply to any investment disputes’’.
← 20. Ukraine-United Arab Emirates BIT (2003), Protocol, Paragraph (2).
← 21. See, for example, the China-Ukraine BIT (1992), Article 10(1), which provides that “any dispute between a Contracting Party by an investor of the other Contracting Party concerning the amount compensation in case of expropriation can be submitted to an arbitral tribunal” (unofficial translation from Ukrainian by the authors).
← 22. See Article 9(3) of the Ukraine-United Arab Emirates BIT (2003) (“the dispute relating to the amount of compensation and any other dispute agreed upon by both parties may be submitted to an international Arbitral Tribunal including the ICSID only after the written consent of both contracting parties.”) See also Article 10(2) of the Poland-Ukraine BIT (1993) (“If the consultation is not completed by a decision within six months from the date of the written proposal to start consultations, the parties to the dispute may proceed as follows:(a) if the dispute concerns an obligation under Article 5 [transfers] and Article 6 [Withdrawal and reimbursement] of this Agreement, it is, at the request of investors, transferred to the decision to arbitration court; b) a dispute not specified in paragraph 2, paragraph a) of this Article shall be transferred with the consent of both parties to the dispute for arbitration court.”)
← 23. See Ukraine’s BITs with China (1992), Armenia (1994), Canada (1994), Argentina (1995), Belgium-Luxembourg Economic Union (1996), Latvia (1997), Spain (1998), North Macedonia (1998), India (2001), Morocco (2001), Albania (2002), Kuwait (2002) United Arab Emirates (2003), Jordan (2005), and Turkey (2017).
← 24. For example, Article 11(6) of the Jordan-Ukraine BIT (2005) provides that “the arbitral tribunal shall reach its decision in virtue if the present Agreement and pursuant to the rules of international law.” Article 9 of the Ukraine-United Arab Emirates BIT (2003) provides that “the arbitral Tribunal shall reach its award based upon the provisions of this Agreement, the relevant domestic laws, the agreements both Contracting States have concluded and the generally recognised principles of international law.” Article 10(6) of the Turkey-Ukraine BIT (2017) states “the arbitral tribunals shall take its decisions in accordance with the provisions of this Agreement, the laws and regulations of the Contracting Party involved in the dispute on which territory the investment is made (including its rules on the conflict of laws) and the relevant principles of international law as accepted by both Contracting Parties.”
← 25. For example, the Oman-Ukraine BIT (2002) only provides for arbitration by the ICSID (Article 10), and the Iran-Ukraine BIT (1996) only provides for access to an international ad hoc arbitral tribunal established under UNCITRAL Arbitration Rules (Article 8(2)).
← 26. For example, under the Turkey-Ukraine BIT (2017), covered investors may choose to submit a dispute to international arbitration to “an ad hoc tribunal established under the Arbitration Rules of Procedures of UNCITRAL, any other arbitration institution or any other arbitration rules, including though not exclusively Istanbul Arbitration Centre (ISTAC) or any relevant Ukrainian Institution if the disputing parties so agree”. See also the Japan-Ukraine BIT (2015), under which investors may choose to submit a dispute to arbitration in accordance with the ICSID Convention and Arbitration Rules, ICSID’s Additional Facility Rules, the UNCITRAL Rules or any other arbitration rules agreed by the disputing parties.
← 27. See, for example, Finland-Ukraine BIT (2004), preamble.
← 28. See, for example, Japan-Ukraine BIT (2015), Article 25; EU-Ukraine Association Agreement, Article 296.
← 29. See also Summary of 19th FOI Roundtable, October 2013, pp. 12-19; Summary of 18th FOI Roundtable, March 2013, pp. 4-9.