In August 2014 Ukraine enacted sanction legislation for the first time in response to Russian aggression in Crimea and the Donbas region. However, the first sanctions were not introduced until September 2015 (and have been updated on an annual basis thereafter). Since then, the Ukrainian courts have released little jurisprudence with respect to the application of sanctions; however, this practice is now gaining traction. JSC (Avia FED Service) v SJSHC (Artem) is a recent example of a case in which a sanctioned entity sought recognition and enforcement of an arbitral award against a Ukrainian company.


The circumstances leading to the arbitral award in this case are largely connected with the history of cooperation between Ukraine and Russia in the defence industry and the impact of Russia's aggression in Crimea and the Donbas region on this cooperation.

Ukrainian and Russian defence industries had many years of fruitful cooperation, demonstrating a mutual interdependence. The idea that this cooperation may be substantially restricted or completely halted was hard to accept. Therefore, once the armed conflict broke out in Crimea and the Donbas region, the Ukrainian authorities took no active steps to restrict that cooperation. However, the situation changed in August 2014 when the Russian armed forces were reported to have been directly participating in the hostilities and the murder of Ukrainian soldiers in the humanitarian corridor that was used to exit the encircled city of Ilovaisk. Thus, on 27 August 2014 the Ukrainian government banned all supplies of military goods to Russia that were intended to be used by the Russian armed forces. Any supplies of military goods to Russia for the benefit of third countries remained unaffected.

In December 2014 SJSHC (Artem), a leading Ukrainian producer of aviation-related defence equipment, and private Russian company JSC (Avia FED Service) entered into a contract for the supply of certain military goods to Russia. The military goods were expected to be further supplied to certain Russian companies (eg, PJSC (Rosobornexport), PJSC (Rosvertol), JSC (Kazan Helicopter Plant) and JSC (Ulan-Ude Aviation Plant)) to enable them to meet their contractual obligations towards third-country buyers, such as India, Rwanda, Thailand and Iraq.

The contract was entered into when the Ukrainian government was close to completing its assessment of the reliability of the documents presented by Russian companies as proof that the military goods in question were designated for third-country purchasers and not the Russian armed forces. The results of this assessment were discouraging and, from January 2015, the Ukrainian government ceased issuing any export clearances for the supply of military goods, except those used in space programmes. In September 2015 the Ukrainian government began introducing sanctions against Russian companies and citizens whose actions were found to create real or potential threats to Ukraine's:

  • national interests;
  • national security;
  • sovereignty; and
  • territorial integrity.

Initially, sanctions were introduced against 105 Russian companies, including JSC (Kazan Helicopter Plant), JSC (Ulan-Ude Aviation Plant) and PJSC (Russian Helicopters). In October 2016 the list of sanctioned entities was extended to also cover PJSC (Rosobornexport) and PJSC (Rosvertol). The penalties included:

  • the freezing of assets;
  • a moratorium on the performance of commercial and financial obligations;
  • a ban on the establishment of business relationships; and
  • a suspension of financial operations.


Due to the unavailability of export clearances, SJSHC (Artem) defaulted on its contractual supply obligation. As a result, in December 2015 JSC (Avia FED Service) initiated arbitration under the International Commercial Arbitration Court Rules at the Chamber of Commerce and Industry of the Russian Federation for the reimbursement of the advance payment of $1.48 million. In October 2016 the arbitral tribunal rendered an award in favour of JSC (Avia FED Service).

In 2017 JSC (Avia FED Service) petitioned the Ukrainian courts for recognition and enforcement of the arbitral award. SJSHC (Artem) filed an opposition claiming that recognition and enforcement of the award would be contrary to Ukraine's public policy – that is, the main rules and principles relating to Ukraine's:

  • independence;
  • sovereignty;
  • integrity;
  • immunity; and
  • fundamental constitutional rights, freedoms and guarantees.

SJSHC (Artem) argued that although JSC (Avia FED Service) was the direct claimant under the arbitral award and not a sanctioned entity, due account must be given to the business relationship behind the contract and to the fact that JSC (Avia FED Service) had acted as an intermediary for the benefit of the companies which were now subject to sanctions. Should any proceeds of the award be used to make a payment to the sanctioned entities, which appeared to be highly probable, recognition and enforcement of the arbitral award would sponsor the activities of the sanctioned entities and create real or potential threats to Ukraine's national interests, national security, sovereignty and territorial integrity.

The Shevchenkivskiy District Court and the Kiev Court of Appeal concurred with the arguments of SJSHC (Artem) and refused to recognise and enforce the arbitral award. JSC (Avia FED Service) filed a cassation challenge with the Supreme Court.

Supreme Court decision

The proceedings before the Supreme Court were limited to the exchange of written submissions. After the written submissions were closed, the president passed new sanctions against Russian citizens and companies, explicitly including JSC (Avia FED Service) among the list of sanctioned companies. SJSHC (Artem) had no opportunity to articulate on this new development and the matter proceeded to the judgment of the Supreme Court based on what had been argued in the written submissions.

The Supreme Court cancelled the judgment of the lower instances and referred the case for reconsideration. This decision was welcomed by legal circles in Russia. However, in Ukrainian legal circles the decision was perceived warily, as some of the Supreme Court's findings were expected, while others were at odds with the facts of the case.

What was hardly reconcilable was the court's conclusion that the events that had taken place in Ukraine after February and March 2014 and the declaration of Russia as an aggressor state had not influenced the private relationships between SJSHC (Artem) and JSC (Avia FED Service) that arose out of the underlying contact. This conclusion dealt with the merits of the case, which the Supreme Court should have refrained from reviewing, and was reached despite the fact that the contract was not performed due to the unavailability of export clearances as a result of the policies adopted by the Ukrainian government in response to those events.

The Supreme Court also stated that the subject matter of the lower-instance courts' analysis was wrong. According to the court, the lower-instance courts had analysed whether the arbitral award was in itself contrary to public policy, whereas they should have analysed whether recognition and enforcement of the award would be contrary to public policy. This conclusion was hardy justifiable, as the lower-instance courts did not consider the award's compliance with public policy, but instead concentrated on whether the decision to recognise and enforce the award would create a situation that was contrary to Ukrainian public policy.

Although criticising the subject matter of the lower-instance courts' analysis, the Supreme Court commented that the decision was not contrary to public policy. Many would agree with such inference, as it has been never argued that the award as such is contrary to Ukrainian public policy. However, the Supreme Court's reasoning for this conclusion has created further questions. In the Supreme Court's view, the award is not contrary to public policy because it was rendered with respect to SJSHC (Artem) as a separate legal entity and independent participant of commercial operations. Thus, it applies only to SJSHC (Artem). Normally, whether an award is contrary to public policy would depend not on to whom it applies, but rather on whether the arbitral tribunal applied rules which constitute the public policy of the respective country. The Supreme Court could have stated that the sanctions that were pleaded in the written submissions were introduced against PJSC (Rosobornexport), PJSC (Russian Helicopters), PJSC (Rosvertol), JSC (Kazan Helicopter Plant) and JSC (Ulan-Ude Aviation Plant) were of a personal nature and thus there was no reason to extend them to JSC (Avia FED Service). However, this was not the case.

It seems that the Supreme Court concurred with the position of SJSHC (Artem) that recognition and enforcement of the award may be contrary to public policy if it resulted in a threat to Ukraine's national security and economy. However, it also held that SJSHC (Artem) did not provide proper and sufficient evidence that passing a decision to recognise and enforce the arbitral award would create such threats. This inference, which was not clearly stated, seems to mean that the Supreme Court refused to consider the action as a threat to Ukraine's national interests, security, sovereignty and territorial integrity or as an action that could facilitate terrorist activity. Thus, these circumstances need to be proven in court in future.

Unfortunately, the Supreme Court:

  • avoided making any express or even implied comments as to whether the Ukrainian sanctions regime constitutes Ukrainian public policy; and
  • did not refer to the fact that on the date of the Supreme Court judgment, JSC (Avia FED Service) had already been subject to sanctions on the basis that its actions were found by the Ukrainian government to create real or potential threats to the national interests, national security, sovereignty and territorial integrity of Ukraine or facilitate terrorist activity.

EU view

In the European Union, the national courts are prohibited from satisfying claims on enforcement of arbitral awards affected by sanctions (Articles 1 and 6 of EU Council Regulation 692/2014 and EU Regulation 267/2012). Due to this prohibition, the EU courts must evaluate sanctions through the prism of the public policy exception, as otherwise refusal to recognise and enforce an award would breach the New York Convention. Similar wording to that of the EU regulations is contained in Article 81(2) of the Law of Ukraine on International Private Law, which prohibits the recognition and enforcement of court judgments of an aggressor state against strategic companies in the Ukrainian defence industry. However, that wording does not expressly cover arbitral awards and it applies only to sanctioned entities.

However, Ukraine and Russia are parties to a set of treaties providing for mutual recognition and enforcement of judgments, and Article 81(2) of the Law of Ukraine on International Private Law may be given effect only if recognition and enforcement of respective judgments are treated as being contrary to Ukraine's public policy.


When the case came for re-litigation, the parties had an opportunity to refresh their positions. SJSHC (Artem) articulated that JSC (Avia FED Service) was now expressly subject to the sanctions.

In its second judgment, the Shevchenkivskyi District Court largely relied on and quoted from the Supreme Court's judgment, which it was bound to follow. However, the court also adopted and went far beyond the approach adopted by the Swiss and US courts. It not only stated that sanctions do not constitute Ukraine's public policy and that sanctions-related matters must be dealt with in execution proceedings, but also held that receivables due to JSC (Avia FED Service) under the award were not subject to sanctions since they did not constitute the assets of JSC (Avia FED Service). As such, some commentators have named Ukraine the most arbitration-friendly and most sanctions-unfriendly country in the world.

Unsatisfied with the Shevchekivskyi District Court's decision and, in particular, the conclusion that receivables under the arbitral award were not subject to sanctions, SJSHC (Artem) challenged the judgment before the Kiev Court of Appeal. The Kiev Court of Appeal rejected the challenge and upheld the Shevchekivskyi District Court's judgment.

In its reasons, the Kiev Court of Appeal stated that it could not legally derogate from the Supreme Court's inferences and that the circumstances invoked by SJSHC (Artem) did not justify a decision to refuse recognition and enforcement of the award, although they could be used as a ground to resist the award's execution. However, instead of referring to the application of execution laws in the context of sanctions, the Kiev Court of Appeal referred to the Law of Ukraine on Certain Aspects of the Indebtedness of Companies in the Defence Industry – Participants of the State Concern 'Ukroboronprom' and the Facilitation of their Sustainable Development, which applies irrespective of the sanctions regime and which ordered the closing of any existing and banned the opening of any new execution proceedings under the debts of the respective defence companies in favour of Russian or Russia-controlled companies. Strangely enough, the Kiev Court of Appeal did not comment on the Shevchenkivskyi District Court's finding that receivables due to JSC (Avia FED Service) under the award were not subject to sanctions since they did not constitute the assets of JSC (Avia FED Service), noting only in passing that all other arguments by SJSHC (Artem) had been fully and correctly assessed by the Shevchenkivskyi District Court.

SJSHC (Artem) disagreed with the Kiev Court of Appeal's findings and challenged its decision before the Supreme Court. The Supreme Court has just opened proceedings and its judgment will not be delivered for some time. It will be interesting to see how the Supreme Court treats the new circumstances which were not considered when it delivered its first judgment and whether it will:

  • comment on the presumptive effect of the Ukrainian government's decisions which introduced sanctions; and
  • reconcile the inconsistencies in its reasoning on the abovementioned matters and comment on the applicability of sanctions to receivables under arbitral awards that are rendered in favour of sanctioned entities.


The latter issue may have even more practical importance than the others, especially in cases where sanctioned Russian entities seek recognition and enforcement of arbitral awards against Ukrainian debtors which do not benefit from the Law of Ukraine on Certain Aspects of the Indebtedness of Companies in the Defence Industry – Participants of the State Concern 'Ukroboronprom' and the Facilitation of their Sustainable Development. Should the Supreme Court adhere to the Shevchekivskyi District Court's finding, the sanctions would not be a bar to decisions to not only recognise and enforce arbitral awards in favour of sanctioned entities, but also to execute them for the simple reason that receivables under such awards are not treated as receivables that fall under sanctions.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.