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Tatneft v. Ukraine

United States District Court, District of Columbia

March 19, 2018

PAO TATNEFT, Petitioner/Plaintiff,
v.
UKRAINE, Respondent/Defendant.

          MEMORANDUM OPINION

          COLLEEN KOLLAR-KOTELLY United States District Judge.

         This matter comes before the Court on review of an arbitration award pursuant to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention” or “Convention”) and its implementing legislation, 9 U.S.C. §§ 201-208. Petitioner Pao Tatneft (“Tatneft” or “Petitioner”) seeks recognition and enforcement of the Award on the Merits (“Merits Award”) conferred in OAO Tatneft v. Ukraine, an arbitration conducted under the auspices of the Permanent Court of Arbitration, seated in Paris, France, and pursuant to the 1976 Arbitration Rules of the United Nations Commission on International Trade Law (“UNICITRAL”) and the 1998 Agreement between the Government of the Russian Federation and the Cabinet of Ministers of Ukraine on the Encouragement and Mutual Protection of Investments, otherwise known as the Russia-Ukraine Bilateral Investment Treaty. The arbitral tribunal issued its Merits Award in favor of Petitioner on July 29, 2014, Respondent Ukraine (“Ukraine” or “Respondent”) was directed to pay Tatneft 112 million in United States Dollars in damages plus interest. That Merits Award was upheld by the Paris Court of Appeal when Ukraine moved to overturn it.

         On March 30, 2017, Tatneft filed its Petition to Confirm Arbitral Award and to Enter Judgment in favor of Petitioner, which is opposed by Ukraine. On June 12, 2017, Ukraine filed a motion to stay proceedings in this Court, pending the outcome of a foreign set-aside proceeding, which was opposed by Tatneft. Subsequently, Ukraine filed both a motion to dismiss the petition and a motion for jurisdictional discovery. Because the Petition and three motions filed by Ukraine are interrelated, they will be considered by the Court together.

         For the reasons explained below, the Court shall DENY Respondent's Motion to Dismiss, DENY Respondent's Motion for Leave to take Jurisdictional Discovery, DENY Respondent's Motion to Stay, and HOLD IN ABEYANCE Tatneft's Petition for enforcement of the arbitration award until Tatneft submits additional briefing with regard to the issues raised in Ukraine's Opposition to Tatneft's Petition.[1]

         I. FACTUAL BACKGROUND

         A. Formation of Ukrtatnafta

         Pao Tatneft, formerly known as OAO Tatneft, is a “publicly-traded open joint stock company, established and existing under the laws of the Russian Federation.” See Pet. ¶ 1.[2] On July 4, 1995, Tatarstan and Ukraine entered into an agreement to create CJSC Ukrtatnafta Transnational Financial and Industrial Oil Company (“Ukrtatnafta”), a Ukrainian joint stock company that operates the largest oil refinery in Ukraine, with Tatneft, Ukraine and Tatarstan as its three major shareholders.[3] See Declaration of Jonathan I. Blackman in support of Petition (“Blackman Decl.”), ECF No. 1-3, Ex. A (Merits Award), ECF No. 1-4, ¶¶ 57-59.[4] Tatneft and Tatarstan were initially slated to make capital contributions of oil-related fixed assets to Ukrtatnafta, but later agreed to make contributions of cash and other assets in 1997 and 1998. Merits Award ¶¶ 61, 174, 176.

         In 1998 and 1999, the United States-based Seagroup International, Inc. (“Seagroup”) and Switzerland-based AmRuz Trading Co. (“AmRuz”) acquired shares in Ukrtatnafta, and together with Tatneft and Tatarstan (the four entities are collectively referred to as the “Tatarstan Shareholders”), they owned a majority 56% of Ukrtatnafta's shares, and they agreed to vote as a bloc. See Id. ¶¶ 141, 562 n.903. In January 2007, the Ukrainian Privat Group acquired a 1% interest in Ukrtatnafta. Id. ¶¶ 143, 223, 268. The Privat Group subsequently obtained Ukrainian judgments that purportedly invalidated the 1997 and 1998 shareholder resolutions whereby Tatartan and Tatneft obtained their interests in Ukrtatnafta, and resulted in the Tatarstan Shareholders being barred from management of Ukrtatnafta and ownership of its shares. Id. ¶¶ 126-28, 147, 156, 159-62, 169-71, 174-76, 221-38, 276-80, 316, 320, 325, 465.

         B. Arbitral Tribunal Proceedings

         On December 11, 2007, Tatneft sent a Notice of Dispute to Ukraine, requesting negotiations pursuant to Article 9(1) of the Russia-Ukraine Bilateral Investment Treaty (“Russia-Ukraine BIT” or “BIT”). Merits Award ¶ 6; Blackman Decl., ECF No. 1-3, Ex. B (Russia-Ukraine BIT), ECF No. 1-8, Art. 9(1). On May 21, 2008, after trying to resolve the dispute for approximately five months, Tatneft served Ukraine with a Notice of Arbitration and Statement of Claim under UNCITRAL, alleging that Ukraine had violated its obligations with regard to granting legal protection to and disallowing discrimination against investors from Russia, such as Tatneft, under the Russia-Ukraine BIT. Merits Award ¶ 7; Russia-Ukraine BIT Arts. 2, 3(1).

         Following written submissions and a hearing, the arbitral tribunal issued a September 28, 2010 decision confirming its jurisdiction over Tatneft's claims (the “Jurisdiction Decision”), and after receiving additional written submissions and documents, the arbitral tribunal held a merits hearing from March 18, 2013 to March 27, 2013, wherein fact and expert witnesses testified. Award ¶¶ 6-46. On July 29, 2014, the arbitral tribunal issued a Merits Award, whereby it concluded that Ukraine's actions resulted in a “total deprivation of [Tatneft's] rights as a shareholder of Ukrtatnafta” and further, that Ukraine had failed under the Russia-Ukraine BIT to provide “fair and equitable treatment” (FET) to Tatneft. Merits Award ¶¶ 464, 412. Ukraine was ordered to “pay [Tatneft] the amount of US$ 112 million as compensation for its breaches of the Russia-Ukraine BIT” along with interest at the U.S. dollar LIBOR rate plus 3% compounded every three months, with further instructions about the accrual of interest. Id. ¶ 642(1)-(3).

         C. Proceedings following the Arbitration

         On August 27, 2014, Ukraine brought an action before the Paris Court of Appeal in France to annul both the Merits Award and the earlier Jurisdiction Decision. Blackman Decl. ¶ 5. On November 29, 2016, the Paris Court of Appeal rejected Ukraine's annulment request, upheld both the Jurisdiction Decision and the Merits Award, and ordered Ukraine to pay fees and costs to Tatneft. Id. Ukraine filed a subsequent request for appeal, on March 21, 2017, to the French Court of Cassation.

         On December 29, 2016, Tatneft sent a letter to Ukraine demanding payment of the Merits Award amount and noting that if payment was not made by February 15, 2017, Tatneft would commence enforcement proceedings. See Blackman Decl., ECF No. 1-3, Ex. C (Dec. 29, 2016 Demand Letter), ECF No. 1-9, at 2. Tatneft filed its Petition to Confirm Arbitral Award on March 30, 2017, seeking recognition of the award in this Court. Ukraine requested that this Court stay its determination of the Petition pending the decision in the French Court of Cassation. Shortly after the briefing on the stay motion became ripe, Ukraine filed its opposition to Tatneft's Petition, and also filed a motion to dismiss and motion for jurisdictional discovery.[5] Ukraine's opposition to the Petition focuses on alleged doubts regarding the arbitrator's impartiality and independence, and asserts that recognition and enforcement of the award would be contrary to United States' public policy.

         In its motion to dismiss Tatneft's Petition, Ukraine argues that this Court lacks subject matter jurisdiction because Ukraine is entitled to foreign sovereign immunity and further, that dismissal is warranted on grounds of forum non conveniens. With regard to the jurisdictional challenge, Ukraine contends more specifically that the arbitration exception in Section 1605(a)(6) of the Foreign Sovereign Immunities Act does not apply because Tatneft is not a “private party” and the award was not made “pursuant to” any agreement to arbitrate. Ukraine moves for permission to conduct jurisdictional discovery in the event that this Court does not grant its motion to dismiss. Petitioner Tatneft opposes all of Ukraine's motions.

         II. LEGAL STANDARD

         Prior to beginning an analysis of the arguments raised in the motions and the petition which are pending before the Court, it may be useful to briefly set out the legal provisions underlying such analysis, i.e., the Foreign Sovereign Immunities Act and the arbitration exception thereto, which govern this Court's jurisdiction over Respondent Ukraine, and The New York Convention, which governs enforcement of foreign arbitration awards.

         A. Foreign Sovereign Immunities Act and the Arbitration Exception

         The Foreign Sovereign Immunities Act of 1976 (“FSIA”), codified at 28 U.S.C. §§1330, 1332, 1391(f), 1441(d), and 1602-1611, is the “sole basis for obtaining jurisdiction over a foreign state in the courts of [the United States].” Belize Social Development Ltd. v. Government of Belize, 794 F.3d 99, 101 (D.C. Cir. 2015) (quoting Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 433 (1989)). When considering enforcement of an arbitral award against a foreign state, the Foreign Sovereign Immunities Act, 28 U.S.C. § 1330, et seq “is ‘the sole basis for obtaining jurisdiction over a foreign state in our courts.'” Nemariam v Fed. Dem. Rep. of Ethiopia, 491 F.3d 470, 474 (D.C. Cir. 2007) (quoting Argentine Rep. v Amerada Hess Shipping Corp., 488 U.S. 428, 434 (1989)). Foreign states enjoy sovereign immunity under the FSIA unless an international agreement or one of several exceptions in the statute provides otherwise. See generally FSIA; see also Phoenix Consulting, Inc. v. Republic of Angola, 216 F.3d 36, 39 (D.C. Cir. 2000). Accordingly, “[i]n the absence of an applicable exception, the foreign sovereign's immunity is complete [and] [t]]he district court lacks subject matter jurisdiction over the plaintiff's case.” Id. (citation and internal quotation marks omitted).[6] Because “subject matter jurisdiction in any such action depends on the existence of one of the specified exceptions. . . [a]t the threshold of every action in a District Court against a foreign state. . . the court must satisfy itself that one of the exceptions applies[.]” Verlinder B.V. v. Cent. Bank of Nigeria, 461 U.S. 480, 493-94 (1983); see also Saudi Arabia v Nelson, 507 U.S. 349, 355 (1993) (“[U]ness a specified exception applies, a federal court lacks subject-matter jurisdiction over a claims against a foreign state.” (citations omitted))..

         The FISA provides an exception to foreign sovereign immunity for actions to confirm certain arbitration awards, as follows:

[a] foreign state shall not be immune from the jurisdiction of courts of the United States in any case - . . . in which the action is brought, either to enforce an agreement made by the foreign state with or for the benefit of a private party to submit to arbitration all or any differences which have arisen or which may arise between the parties with respect to a defined legal relationship . . . or to confirm an award made pursuant to such an agreement to arbitrate, if . . . the agreement or award is or may be governed by a treaty or other international agreement in force for the United States calling for the recognition and enforcement of arbitral awards.

28 U.S.C. § 1605(a)(6)(B).

         B. The New York Convention

         The 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention, codified into United States law through the Federal Arbitration Act (“FAA”), 9 U.S.C. § 201 et seq., is a multilateral treaty providing for “the recognition and enforcement of arbitral awards” across international borders. Pursuant to Section 202 of the FAA, “[a]n arbitration agreement or arbitral award arising out of a legal relationship, whether contractual or not, which is considered as commercial . . . falls under the [New York] Convention.” 9 U.S.C. § 202. The “district courts of the United States . . . shall have original jurisdiction over such an action or proceeding [falling under the Convention], regardless of the amount in controversy.” 9 U.S.C. § 203. See also BCB Holdings Ltd. v Gov't of Belize, 110 F.Supp.3d 233, 242 (D.D.C. 2015) (finding that the FAA affirms that the purpose of the New York Convention is to encourage recognition and enforcement of commercial arbitration agreements in international contracts), aff'd, 650 F. App'x 17 (D.C. Cir. 2016), cert den., 137 S.Ct. 619 (2017). This Circuit has made clear that “the New York Convention is exactly the sort of treaty Congress intended to include in the arbitration exception.” Creighton Ltd. v. Gov't of the State of Qatar, 181 F.3d 118, 123 (D.C. Cir. 1999). The arbitration exception set forth in Section 1605(a)(6) “by its terms” applies to actions to confirm arbitration awards under the New York Convention. Id.

         Federal courts in the United States have minimal discretion to refuse to confirm an arbitration award under the FAA, which provides that the district court “shall confirm the award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the [ ] Convention.” 9 U.S.C. § 207; see TermoRio S.A. E.S.P. v. Electanta S.P., 487 F.3d 928, 935 (D.C. Cir. 2007) (A district court “may refuse to enforce the award [under the New York Convention] only on the grounds explicitly set forth in Article V of the Convention.”), cert denied, 552 U.S. 1038 (2007); see also Int'l Trading & Indus. Inv. Co. v. DynCorp Aerospace Tech., 763 F.Supp.2d 12, 20 (D.D.C. 2011) (“Confirmation proceedings are generally summary in nature” because “the New York Convention provides only several narrow circumstances where a court may deny confirmation of an arbitral award.”) (citation omitted).

         Pursuant to the New York Convention: (1) an arbitral award may be refused at the request of the party against whom it is invoked where (a) the parties to the agreement were under some incapacity; (b) the party against whom the award is invoked did not receive proper notice of the arbitration proceedings; (c) the award deals with an issue not falling within the terms of the parties' submission to arbitration; (d) the composition of the arbitral tribunal was not in accordance with the parties' agreement; (e) the award has not yet become binding; or (2) recognition and enforcement of an arbitral award may be refused in the country where it is sought if (a) the issue arbitrated is not capable of being arbitrated under the law or (b) it would be contrary to the public policy of such country. New York Convention, Art. V, June 10, 1958, 21 U.S.T. 2517, 1970 WL 104417 (effective for the United States on Dec. 29, 1970).

         Ukraine argues against confirmation and enforcement of the Merits Award on N.Y. Convention Article V grounds; namely, Ukraine alleges there was a lack of impartiality of the arbitral tribunal, and further, that recognition and enforcement would be contrary to the public policy of the United States. Ukraine's previously-noted challenges based on sovereign immunity and forum non conveniens are outside of the confines of Article V and were raised in its Motion to Dismiss as opposed to its response to the Petition. The Court will first address Ukraine's jurisdictional and other non-Article V arguments before analyzing the merits of its Article V arguments.

         III. DISCUSSION

         A. Ukraine's Motion to Dismiss is based on alleged lack of subject matter jurisdiction

         Before a court may exercise subject matter jurisdiction over a proceeding to enforce an arbitral award against a foreign sovereign, first, “there must be a basis upon which a court in the United States may enforce a foreign arbitral award” and second, the foreign sovereign “must not enjoy sovereign immunity from such an enforcement action.” Diag Human, S.E. v. Czech Republic-Ministry of Health, 824 F.3d 131, 133-34 (D.C. Cir. 2016), cert denied, 137 S.Ct. 1068 (2017). In the event that the court lacks subject matter jurisdiction, the court must dismiss the action. Fed.R.Civ.P. 12(h)(3); see Arbaugh v. Y & H Corp., 546 U.S. 500, 514 (2006) (“when a federal court concludes that it lacks subject-matter jurisdiction, the court must dismiss the complaint in its entirety”). This Court considers the two Diag Human factors in reverse order, first considering the applicability of the foreign arbitration exception to sovereign immunity before examining the New York Convention, which is the basis for confirmation of an arbitral award.

         Under the FSIA, “a foreign state is presumptively immune from the jurisdiction of the United States courts, ” and “unless a specified exception applies, a federal court lacks subject-matter jurisdiction over a claim against a foreign state.” Saudi Arabia v. Nelson, 507 U.S. 349, 355 (1993). Accordingly, a district court charged with consideration of an action brought against a foreign state “must satisfy itself that one of the exceptions applies.” Verlinden B.V. v. Cent. Bank of Nigeria, 461 U.S. 480, 493-94 (1983); see also Practical Concepts, Inc. v. Republic of Bolivia, 811 F.2d 1543, 1548 (D.C. Cir. 1987) (“If an exception to the main rule of sovereign immunity applies, then the FSIA confers subject matter jurisdiction on the district courts.”).

         The petitioner bears the initial burden of supporting its claim that a FSIA exception applies, and this burden of production may be met where a party seeking to confirm an award produces “the BIT, [its] notice of arbitration against [the foreign sovereign], and the tribunal's arbitration decision.” Chevron Corp. v. Ecuador, 795 F.3d 200, 204 (D.C. Cir. 2015), cert denied, 136 S.Ct. 2410 (2016). In the instant case, Tatneft has satisfied its burden of production pursuant to Chevron. The burden of persuasion then shifts to Ukraine, the foreign sovereign that is claiming immunity, “to establish the absence of the factual basis by a preponderance of the evidence.” Id.; see also Belize Social Dev. Ltd. v. Gov't of Belize, 794 F.3d 99, 102 (D.C. Cir. 2015) (“Where a plaintiff has asserted jurisdiction under the FSIA and the defendant foreign state has asserted the jurisdictional defense of immunity, the defendant state bears the burden of proving that the plaintiff's allegations do not bring its case within a statutory exception to immunity.”) (citation and internal quotation marks omitted), cert denied, 137 S.Ct. 617 (2017).

         1. Arbitration Exception to FSIA

         Tatneft asserts that this Court may exercise subject matter jurisdiction in this case because the FSIA provides an exception to foreign sovereign immunity for actions to confirm arbitration awards that are made pursuant to an agreement to arbitrate and are governed by an international treaty in force in the United States calling for the recognition and enforcement of arbitral awards.[7]See 28 U.S.C. § 1605(a)(6)(B). Tatneft asserts that its Petition falls under this exception because the Merits Award was made pursuant to the Russia - Ukraine BIT and it is governed by the New York Convention. See Pet. ¶¶ 3, 11, 16.

         Tatneft's assertions are confirmed, first, by the language of the Merits Award, which indicates that it was made pursuant to the BIT, an agreement that provides for arbitration. ...


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