Reassessing Arbitrability – Supreme Court Clarifies the Impact of Exclusive Jurisdiction Rules on Arbitration Agreements

In December 2023, a landmark decision of the Supreme Court marked a significant step towards resolving the issue of inconsistent court practices regarding the interplay of exclusive jurisdiction rules and arbitrability. The decision confirmed that national rules governing exclusive jurisdiction only apply to litigation and do not affect the arbitrability of disputes, which reiterated Ukraine’s position in support of arbitration.

1. Introductive remarks – Distinguishing “exclusive jurisdiction” and “arbitrability” under Ukrainian law

For years, Ukrainian courts offered no clarity on whether disputes falling under the exclusive jurisdiction of the courts could be submitted to arbitration. This led to legal uncertainty regarding the enforceability of arbitration agreements, exposing parties to jurisdictional objections and procedural unpredictability.

Before analysing the Supreme Court’s decision, a clear distinction must be made between three relevant concepts under Ukrainian law: the Ukrainian courts’ international jurisdiction, territorial jurisdiction, and arbitrability.¹

• International juridiction determines whether Ukrainian courts can hear a dispute with a foreign element. International jurisdiction of Ukrainian courts is governed by Articles 75-77 of the Law “On Private International Law” (“PIL”).² Article 77 of the PIL lists 10 types of disputes which fall under the exclusive jurisdiction of Ukrainian courts, including: (i) disputes over immovable property located in Ukraine; (ii) family disputes; (iii) inheritance disputes; (iv) registration of intellectual property rights; (v) registration of foreign legal entities in Ukraine; (vi) disputes over the validity of entries in state registers in Ukraine; (vii) bankruptcy cases; (viii) disputes over securities issued in Ukraine; (ix) adoption cases; and (x) “in other cases determined by the laws of Ukraine”.³

• Territorial jurisdiction determines which of the local courts in Ukraine should hear a dispute with a foreign element if, (i) the dispute falls within the jurisdiction of Ukrainian courts in the first place, and (ii) no valid arbitration agreement and/or choice-of-court agreement in favor of a foreign court has been concluded between the parties. Territorial jurisdiction of commercial courts is governed by the provisions of Articles 28-31 of the Commercial Procedure Code of Ukraine (“CPC”). Article 30 of the CPC governs “exclusive territorial jurisdiction” (e.g. a case about immovable property located in the city of Kyiv must be brought before Kyiv-based commercial court).

• Arbitrability determines whether a dispute may be submitted to arbitration. Under Article 8 of the Law “On International Commercial Arbitration” (“ICA Law”), a Ukrainian court must refer a case to arbitration and decline [court] jurisdiction if: (i) the arbitration agreement is valid, and (ii) the dispute falls within its scope and concerns an arbitrable subject matter. Ukrainian courts assess arbitrability, inter alia, by considering whether the subject matter of dispute is barred from arbitration under Ukrainian law.⁴

The exceptions, i.e. categories of disputes that are barred from arbitration and must be resolved by national courts, are defined in Article 1 of the ICA Law, as well as Articles 20 and 22 of the CPC.⁵ These provisions set specific boundaries to “arbitrability” and exclude certain categories of disputes from arbitration (e.g. disputes concerning bankruptcy, state registration or recording of rights to immovable property, intellectual property rights, or rights to financial instruments etc.).⁶

Despite a clear distinction between the above three concepts, Ukrainian courts have frequently (mis)applied these concepts, and confused exclusive international jurisdiction (Art. 77 PIL) with exclusive territorial jurisdiction (Art. 30 CPC) or arbitrability (Art. 22 CPC).

This has led to several court decisions disregarding arbitration agreements where disputes fell under the rules of exclusive territorial jurisdiction as per Article 30 of the CPC or the rules of exclusive international jurisdiction under Article 77 of the PIL.

For example,a previous Supreme Court decision stated that:

“the ability to refer a dispute to arbitration is limited by [Art. 30 CPC and Art. 77 PIL], which define the exclusive jurisdiction of the Ukrainian courts”.⁷

Ukrainian courts have consistently held that, in assessing arbitrability, both the subject matter and the parties involved must be considered,⁸ which is an approach that reflects internationally accepted standards.⁹ That said, in practice, if the subject matter of the case fell within any category of the cases listed in Article 77 of the PIL, Ukrainian courts previously would refuse to recognise and enforce a respective arbitral award.¹⁰ The issue of exclusive jurisdiction of Ukrainian courts was often raised in the context of the recognition and enforcement proceedings, and Ukrainian courts have occasionally applied another provision on jurisdiction – specifically, Article 30 CPC and Article 77 PIL mentioned above, and mistakenly, treated such rules as limiting the arbitrability of disputes under Article V(2)(a) of the 1958 New York Convention.

2. 2023 Supreme Court Decision

A landmark decision of the Supreme Court in case No. 910/8659/23 (“2023 Supreme Court Decision”) marks a significant step towards resolving this uncertainty.¹¹

The 2023 Supreme Court Decision clarified that;

• Article 30 CPC and Article 77 PIL deal with court’s jurisdiction, not arbitrability of disputes submitted to arbitration;
• Such provisions are only relevant in litigation, and not in a situation where a valid arbitration agreement is in place.

As a result, the Supreme Court clarified that exclusive jurisdiction rules have no impact on the arbitrability of the disputes. Rather, the exclusive jurisdiction rules govern internal allocation of cases within the Ukrainian judicial system. These rules are distinct from, and do not override, the arbitrability rules that determine whether a dispute may be submitted to arbitration under Ukrainian law.

Background of case No. 910/8659/23

In this case, a dispute arose under a defense goods procurement contract between the Ministry of Defense of Ukraine (Ministry of Defense) and a foreign supplier Ahit Solutions (FZC). The contract included an arbitration clause referring disputes to the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry (ICAC). Despite a minor naming error in the clause, the courts found that the parties’ intent to arbitrate was clear and there was, in principle, a valid arbitration agreement.

When Ahit Solutions (FZC) filed a claim with the Ukrainian commercial court instead of submitting it to ICAC arbitration, the Ministry of Defense objected and invoked the arbitration clause requesting the court to dismiss the case under Article 226(1)(7) CPC, which provides that in case of an existence of an arbitration agreement in a contract a commercial court shall leave the case without consideration.

The first instance court honored the arbitration agreement and declined its jurisdiction.¹² The appellate instance court reversed the first instance decision citing Article 30 CPC and holding that the arbitration agreement was “inoperative” because the dispute fell within the exclusive territorial jurisdiction of the Kyiv City Commercial Court, which is designated as an exclusive forum for all disputes involving Ukrainian ministries and other central executive authorities as defendants. Therefore, in the appellate court’s view the dispute could not be subject to arbitration.¹³

On 19 December 2023, the Supreme Court overturned the appellate court decision and reinstated the first instance ruling.

Supreme Court’s analysis

In its decision, the Supreme Court determined the following:

1. Arbitrability is governed by Article 22 of the CPC and Article 1 of the ICA Law that outline specific types of disputes that may or may not be submitted to arbitration. Since the dispute in question did not fall within any of the exceptions listed in those provisions, i.e. categories of disputes that are non-arbitrable under Ukrainian law, the Supreme Court concluded that the dispute was in fact arbitrable.

2. Article 77 PIL limits the jurisdiction of foreign courts over certain disputes, which may only be decided by competent Ukrainian courts. The Supreme Court did not explicitly confirm that the disputes falling under Article 77 PIL may be submitted to arbitration but instead went on to conclude that the specific dispute in question did not fall under exclusive jurisdiction of Ukrainian courts.

3. Article 30 CPC addresses how cases are allocated among different local Ukrainian courts and does not address the issue of international jurisdiction of Ukrainian courts or whether disputes can be submitted to arbitration. The Supreme Court rejected the appellate court’s conclusion that Article 30 of the CPC barred arbitration:

“Article 30 of the Commercial Procedure Code of Ukraine outlines the rules of exclusive territorial jurisdiction, which cannot be broadly interpreted. Exclusive jurisdiction is a special type of territorial jurisdiction, prohibiting the application of other rules governing territorial jurisdiction as outlined in Articles 27-29 of the Commercial Procedure Code of Ukraine when filing a lawsuit. In other words, Article 30, referenced by the appellate court, specifies the exclusive territorial jurisdiction of the commercial court, not the exclusive jurisdiction of Ukrainian courts over cases with a foreign element.” (emphasis added)

These conclusions finally put an end to previously inconsistent Ukrainian court practices and confirm that Ukrainian courts must honor arbitration agreements in respect of arbitrable disputes despite Ukrainian jurisdiction rules that assign certain disputes to specific Ukrainian courts.

The following proper sequence should therefore be applied by Ukrainian courts:

1. assess whether there is a valid arbitration agreement; and only if there is none;

2. assess whether Ukrainian courts have international jurisdiction under the PIL; and if so

3. allocate jurisdiction to a specific Ukrainian court pursuant to Article 30 CPC.

Accordingly, the exclusive jurisdiction rules of Article 77 PIL and Article 30 CPC cannot override valid arbitration agreements and do not have impact the arbitrability of disputes.¹⁴

3. Practical implications of the 2023 Supreme Court Decision

The 2023 Supreme Court Decision provides important clarification on the interplay between arbitrability (Art. 22, CPC; Art. 1, ICA Law) and jurisdiction rules under Ukrainian law (Art. 77, PIL; Art. 30, CPC).

Although the Supreme Court’s stance does not directly address arbitral award recognition and enforcement, it clarifies how Article V(2)(a) of the 1958 New York Convention is applied, which is one of the grounds for refusal to recognise or enforce an arbitral award examined by Ukrainian courts ex officio. In the past, Ukrainian courts often relied on the exclusive jurisdiction rules to assess the arbitrability of disputes. The Supreme Court Decision now entails that recognition and enforcement of an arbitral award cannot be denied under Article V(2) (a) of the 1958 New York Convention solely on the basis that the subject matter of the dispute is governed by Ukrainian exclusive jurisdiction rules.

The 2023 Supreme Court Decision also strengthens confidence in the enforceability of arbitration agreements in contracts governed by Ukrainian law with a Ukrainian nexus. Even when a dispute involves matters that are usually assigned to litigation before Ukrainian courts, this by itself does not automatically exclude the possibility of international arbitration.

That said, to ensure the enforceability of any arbitral award, parties and arbitrators must ensure that:

• the subject matter of the dispute is arbitrable under Ukrainian law; and
• the arbitration agreement is valid.

If these conditions are met, Ukrainian courts are required to recognise the arbitration agreement and enforce any resulting arbitral award, without interference based on Ukrainian jurisdiction rules which, according to the 2023 Supreme Court Decision, apply specifically to litigation cases.