Ukrainian businesses face challenges recovering damages from Russia

In a collaborative project, Pinsent Masons has teamed up with Ukrainian law firms Antika and Avellum to explore how affected companies are turning their attention to obtaining compensation for their losses from the Russian state – and the challenges that lie ahead for those businesses as they take their cases to the courts or through arbitration.

Antika and Avellum both said that some Ukrainian businesses are already taking steps, mostly through the Ukrainian courts, which are fully operational, to obtain damages awards against Russia; others are choosing to wait before taking legal action – some because of concerns about their ability to enforce damages awards outside of Ukraine.

Practical difficulties in evidence-gathering

According to Antika, many of its clients that have suffered losses as a result of Russia’s war prefer to act now in relation to recovering their losses, rather than wait for the fighting to end.

Currently, most of the action being taken is concentrated on quantifying the damages and collecting evidence in preparation for initiating court proceedings. Some clients are facing difficulties in building their cases, though.

For example, Antika cited a client whose factory flooded in the aftermath of the destruction of the Kakhovka Dam – an act condemned by the UK government. It said that, because the factory is located in territory where neither Russian nor Ukrainian forces have control, this has complicated evidence-gathering activities.

Other Antika clients have property located in territory that had been seized by Russian forces but has since been liberated by the Ukrainian military. In those cases, there remains a risk that the frontline fighting will return to the area. Some businesses consider that they will struggle to complete their preparatory work for bringing claims amidst that risk and uncertainty.

According to Avellum, many of its clients are electing to wait for now and pursue their claims in jurisdictions outside of Ukraine. Their clients are also facing significant difficulties in collecting evidence where their assets are located in areas occupied by Russian forces.

Many businesses anticipate further damages to accumulate as the fighting continues – Avellum highlighted in this respect how many large industrial companies had experienced blackouts as a result of extensive attacks on energy infrastructure last winter and how those businesses expect similar attacks to occur in the winter ahead, with further blackouts probable.

The forum for raising claims

Antika said that its clients are choosing to pursue their causes of action before the Ukrainian courts, rather than before arbitral tribunals or the courts in other countries.

One of the reasons for this, it said, is the fact that claims can be heard and determined by the Ukrainian courts in a relatively short period of time – within months, rather than years. Antika said its clients also have a good understanding of Ukrainian court processes – including the approaches of the courts regarding calculation of damages – and further cited the fact that it is often cheaper to litigate in Ukraine rather than to bring claims via arbitration.

For Avellum’s clients litigating in Ukraine, this is being done with a view to obtaining a court decision awarding damages, which businesses in many cases would then need to seek enforcement of abroad.

Avellum said that it is supporting clients with bringing claims in foreign jurisdictions too. This reflects the fact that there are vast numbers of Russian assets which have been frozen by Western governments as part of sanctions packages designed to hit Russian entities, government officials, and businesspeople. Avellum added that it also reflects the perception that it is easier to enforce some foreign judgments issued in other jurisdictions, rather than Ukrainian court rulings.

Investor-state arbitration is the preferred forum for raising claims among other Avellum clients. Those proceedings can be costly and take longer to conclude than litigation, Avellum said, but it highlighted the fact that arbitral tribunals had issued damages awards in the context of claims made by investors in Crimea after Russia annexed the region in 2014. Businesses may view that positively in the context of raising claims that concern assets located in other areas of Ukraine occupied by Russia today, although Avellum said that there is no guarantee that the tribunals would accept jurisdiction for hearing such claims or rule in their favour just because they had done in the case of investors originating from Crimea.

The issue of Russian immunity and other enforcement challenges

There are barriers to Ukrainian businesses raising claims against Russia.

One issue concerns state immunity and Russia’s claims of state immunity over Russian assets, seeking to protect such assets from enforcement procedures.

Both Antika and Avellum highlighted how the courts in Ukraine have paved the way for businesses to sue Russia in respect of damages arising from its war and counter any arguments Russia may raise that it has state immunity against such claims.

In spring 2022, in two decisions, the Supreme Court of Ukraine recognised that the Russian Federation does not have judicial immunity in Ukraine. Avellum noted that the court found that upholding the jurisdictional immunity of the Russian Federation would deprive the claimant of rights they enjoy under the European Convention on Human Rights to effective access to the court. The court also considered that Russia’s right to judicial immunity does not apply – including because of how Russia had violated Ukraine’s sovereign rights – and that maintaining that immunity would further run contrary to Ukraine’s international legal obligations in the field of counter-terrorism.

According to Avellum, other Ukrainian courts – for example, the commercial courts in Kyiv and Zaporizhzhya – have subsequently extensively relied on the Supreme Court of Ukraine case law when determining cases brought before them concerning claims for compensation for damages caused by the Russian aggression.

There is less certainty currently about whether courts in other jurisdictions would take a similar view on the question of Russian rights to state immunity, however.

There are further issues to overcome too. While there are international efforts to support damages claims against Russia linked to the war in Ukraine, a new international compensation mechanism has not been implemented yet. Antika flagged an international resolution adopted earlier this year that provides for a new register of damage caused by Russian aggression against Ukraine to be set up, and the US and UK recently signalled support for an EU plan to impose a windfall tax on profits generated by frozen Russian sovereign assets to help finance the reconstruction of Ukraine.

Together with the immunity issue, Avellum said that this poses a challenge for Ukrainian businesses to effectively foreclose on Russian frozen assets as well as those of individuals on the sanctions lists.

Contributors to this article were Oleksiy Kot, Maksym Korchahin, and Vadym Karnaukh of Antika, Vadim Medvedev and Anna Vlasenko of Avellum, and Michael Fenn, Slava Tretyak, and Helen Garforth of Pinsent Masons.