Velgevos Enterprises Limited v. Kompaniia KMT, Obiednana Torhivelna Merezha

At a glance

Parties

Velgevos Enterprises Limited (Cyprus) v. TOV "Kompaniia KMT" and TOV "Obiednana Torhivelna Merezha" (Ukraine)

Case no.

No. 916/2591/16

Court

South-west Commercial Court of Appeal (Pivdenno-zakhidnyi apeliatsiinyi hospodarskyi sud), Odesa, Ukraine

Forum and rules

Ukrainian commercial courts; New York Convention 1958, Article II(3)

Treaty

None. The Court relied on the New York Convention, Article II(3), and the Ukraine–Cyprus Agreement on Legal Assistance in Civil Matters of 6 September 2004

Court

L.O. Budishevska (presiding), S.V. Taran, M.A. Myshkina

Sector

Cross-border loan financing

Outcome

Appeal dismissed (29 May 2019). The arbitration clause naming no institution in Limassol was held incapable of being performed, and the first-instance judgment for the lender was upheld.

Amount

Upheld first-instance award, payable jointly by both respondents: USD 1,764,987 principal, USD 987,528.91 interest and USD 514.94 penalty. Costs: UAH 211,500 cassation court fee payable by each respondent; KMT bears the appeal fee.

The dispute

Velgevos Enterprises Limited, a Cyprus company, signed Loan Agreement No. 6 on 28 April 2011 with the predecessor of TOV "Kompaniia KMT" (KMT). The agreement provided for a loan of up to USD 3,000,000, and Velgevos advanced USD 1,954,987 between May and August 2011. TOV "Obiednana Torhivelna Merezha" (OTM) guaranteed the loan. The agreement was governed by Cyprus law. Clause 11 sent disputes to an arbitral tribunal "located in Limassol, Cyprus" acting under the "International Commercial Arbitration Law of 1937 (Law No. 101/87)", but it named no institution. KMT did not repay. Velgevos sued both companies in the Odesa Region Commercial Court for repayment, interest and a penalty. KMT argued that the arbitration clause excluded the jurisdiction of the Ukrainian courts. It also filed a counterclaim to annul a 2012 supplementary agreement that extended the repayment date and the guarantee, and to have the clause interpreted.

Key holdings

1. Under Article II(3) of the New York Convention, a commercial court may hear a case despite an arbitration agreement if it finds the agreement null and void, inoperative or incapable of being performed. p. 10
2. The clause in clause 11 cannot be performed. It names no arbitral institution, and no entity in Limassol has 'arbitration' in its name. The Cyprus International Commercial Arbitration Law of 1987, obtained through the Ministries of Justice, contains no procedure for identifying the tribunal that is to hear the case. Because the respondents are Ukrainian residents, the Odesa Region Commercial Court had jurisdiction. p. 11
3. Where the arbitral institution is undetermined, a party need not first apply to one or more arbitral institutions before going to the competent State court. KMT's argument that Velgevos had not applied to any Cypriot body was therefore rejected. p. 11
4. KMT did not dispute that it had failed to repay the loan, interest and penalty. The only open issue on the main claim was jurisdiction. p. 9
5. The supplementary agreement of 30 July 2012 was never registered with the National Bank of Ukraine. Under clause 6 of the loan agreement and Regulation No. 270, it therefore never entered into force. A transaction that was never concluded cannot be declared invalid, so the counterclaim to annul it fails. p. 12
6. The first-instance judgment of 27 November 2017 is upheld. KMT bears the appeal court fee, and each respondent pays Velgevos UAH 211,500 for the cassation court fee. p. 13

Procedural history

1. September 2016Velgevos sued KMT and OTM in the Odesa Region Commercial Court for USD 2,963,120.85.
2. 7 November 2016The court sent a request for legal assistance to Cyprus's Ministry of Justice and Public Order, asking about the content of the arbitration law named in the clause.
3. 24 April 2017Velgevos reduced its principal claim to USD 1,764,987 after assigning USD 190,000 of the debt to the enterprise VIDAS.
4. 22 September 2017KMT filed its counterclaim to annul the supplementary agreement and the guarantee and to have the loan agreement interpreted.
5. 27 November 2017The Odesa Region Commercial Court granted the claim in part and dismissed the counterclaim.
6. 19 December 2018The appeal court set aside the first-instance judgment and left both claims without consideration because of the arbitration clause.
7. 5 March 2019The Supreme Court (Cassation Commercial Court) quashed the 19 December 2018 ruling and sent the case back to the appeal court. It held that doubts about an arbitration clause must be resolved in favour of its validity, but that the appeal court had to assess whether the clause could be performed.
8. 29 May 2019On remand, the South-west Commercial Court of Appeal dismissed KMT's appeal and upheld the first-instance judgment.

Tribunal, counsel and experts

Decided by

• L.O. Budishevska Judge, South-west Commercial Court of Appeal (presiding judge)
• S.V. Taran Judge, South-west Commercial Court of Appeal
• M.A. Myshkina Judge, South-west Commercial Court of Appeal

For the claimant

V.H. Doskovska

For the respondent

P.V. Havryliuk

Run a conflict check on these names →

Keywords

• New York Convention Article II(3)
• incapable of being performed
• pathological arbitration clause
• unspecified arbitral institution
• Limassol
• Cyprus International Commercial Arbitration Law 1987
• Ukraine
• loan agreement
• suretyship
• guarantee
• National Bank of Ukraine registration
• foreign currency loan
• Ukraine–Cyprus legal assistance agreement
• international jurisdiction
• remand
• supplementary agreement invalidity

Summary generated with AI from the published documents — refer to the award for the authoritative text.