FIRST SECTION

DECISION

Application no . 62976/12 NAK NAFTOGAZ UKRAINY against the United Kingdom

The European Court of Human Rights (First Section), sitting on 23 May 2017 as a Committee composed of:

Kristina Pardalos, President, Pauliine Koskelo, Tim Eicke, judges, and Renata Degener, Deputy Section Registrar ,

Having regard to the above application lodged on 1 October 2012,

Having regard to the observations submitted by the respondent Government and the observations in reply submitted by the applicant,

Having regard to the comments submitted by the third party intervener Merchant International Company Limited,

Having deliberated, decides as follows:

THE FACTS

1. The applicant, Nak Naftogaz Ukrainy, is an open joint-stock company which was incorporated and registered in Ukraine on 2 June 1998. Its registered office is in Kiev. It was represented before the Court by Gowling WLG (UK) LLP, lawyers practising in London.

2. The United Kingdom Government (“the Government”) were represented by their Agent, Ms M. Valchero, of the Foreign and Commonwealth Office. The third-party intervener, Merchant International Company Limited (“MIC”) was represented by Hogan Lovells International LLP, lawyers practising in London.

A. The circumstances of the case

1. The background facts

3. On 31 December 1997 Ukrgazprom entered into an agreement for the supply of gas with Gazprom, a Russian oil and gas company (“the 1997 Agreement”). As part of the contractual arrangements, Ukrgazprom agreed to pay sums owing under the contract to Se verstudstroy, another Russian company, to offset debts owed to that company by a Gazprom subsidiary.

4. On 21 December 1998 Ukrgazprom and Se verstudstroy entered into an agreement as to the procedure, terms and conditions for payments due under the 1997 Agreement (“the 1998 Agreement”). Gazprom was not a party to the 1998 Agreement.

5 . On 28 December 1998 Se verstudstroy entered into an agreement assigning its rights under the 1998 Agreement to Merchant International Company Limited (“the Assignment Agreement”).

6. In 1999 the rights and obligations of Ukgazprom were assigned to the applicant.

2. The Ukrainian proceedings

7. In January 2002 MIC brought a claim against the applicant in the Commercial Court of Kiev alleging non-payment of sums due under the 1997 Agreement. The main point of contention was the validity of the 1998 Agreement.

8. This claim resulted in three sets of legal proceedings between MIC and the applicant before the commercial courts in Ukraine. In the third set of proceedings the Commercial Court re-examined the case. On 21 April 2006 it found in favour of MIC and awarded damages.

9. The applicant appealed to the Supreme Commercial Court. In a judgment of 29 June 2006 (“the 2006 judgment”) the Supreme Commercial Court affirmed the decision of the Commercial Court but reduced the damages payable. It ordered the applicant to pay to MIC 24,719,564.70 US dollars (“USD”) in damages and USD 5,050 in costs.

10. On 29 September 2006 an order for the compulsory enforcement of the 2006 judgment was issued.

3. The enforcement proceedings

(a) Enforcement attempt in Ukraine

11. On 7 August 2009 MIC sought to enforce the 2006 judgment in Ukraine. It was prevented from doing so because of a law, enacted in July 2005, which suspended execution of court judgments against energy companies. The enforcement officer issued a decree terminating the enforcement proceedings on 1 December 2009.

(b) Steps to enforce in England

12. On 13 April 2010 MIC issued a claim form and a without notice application in England for a freezing order against the applicant ’ s five per cent shareholding in JKX Oil and Gas plc, a company listed on the London Stock Exchange. It also sought permission to serve the applicant out of the jurisdiction.

13. On 15 April 2010 the High Court granted the freezing order and granted permission to serve out of jurisdiction. Service was effected in Ukraine in September 2010.

14. The applicant sought to set aside service on the ground that the exercise by the English Court of jurisdiction over the claim would circumvent the domestic law suspending enforcement in Ukraine. The application was heard and dismissed by the High Court on 28 January 2011.

15. The applicant subsequently stated an intention to defend but no defence was served.

16. On 28 February 2011 the High Court handed down a default judgment in favour of MIC in the sum of USD 24,719,564.70.

17. On 10 March 2011 an interim charging order was made in respect of the applicant ’ s five per cent shareholding in JKX Oil and Gas plc.

4. The review in Ukraine

18. Meanwhile, on 11 February 2011, the applicant lodged a petition in the Supreme Commercial Court of Ukraine under Article 112 of the Commercial Procedure Code (see “Relevant domestic law and practice”, below) for a review of the 2006 judgment on the basis of newly discovered circumstances.

19. In a judgment of 7 April 2011 (“the 2011 judgment”) the Supreme Court granted the applicant ’ s petition as regards the alleged lack of capacity of MIC, quashed the 2006 judgment and remitted the claim to the Commercial Court for a retrial (see paragraphs 36 to 38 below).

20. MIC subsequently made two unsuccessful applications to the Supreme Commercial Court to review the 2011 judgment. Its petition was finally refused on 3 August 2011.

5. The application in England to set aside the default judgment

(a) The High Court

21. On 14 April 2011, shortly after the 2011 judgment by the Supreme Commercial Court of Ukraine had been handed down, the applicant applied to the High Court to have the default judgment set aside. It relied on the 2011 judgment of the Supreme Commercial Court in Ukraine. It argued that there was now no foreign judgment which could be recognised or enforced in England. It contended that the court could only refuse to recognise a foreign judgment in the event of a flagrant breach of Article 6, and that no such breach had occurred in respect of the 2011 judgment.

22 . MIC ’ s position was that the High Court should not recognise the 2011 judgment. It complained that the decision did not respect the principle of legal certainty and the finality of judgments because the Supreme Commercial Court of Ukraine had simply responded to the applicant ’ s bare assertion that there were newly discovered facts and had not ruled on whether the evidence was credible and decisive or whether it could have been discovered by due diligence at the time of the original trial. MIC invoked Article 6 of the Convention and Article 1 of Protocol No. 1.

23. On 14 July 2011, while the request by MIC for a review of the 2011 judgment was still outstanding before the Supreme Commercial Court of Ukraine, the High Court ruled on the application to set aside the default judgment. The judge summarised the recent proceedings in Ukraine and observed that the question was “whether in those circumstances the fact that the Ukrainian judgment has been set aside should be ignored by this court”. He observed that the issue was “not so much the enforcement of the original judgment but the recognition of the judgment setting it aside”, explaining that if the latter judgment lacked due process then the default judgment would stand. In this respect, he referred to the well-established principle that where recognition of a judgment would be contrary to public policy it would be refused. This included, he said, where recognition would be contrary to the Convention.

24. The judge accepted that the court was required to approach the question whether the 2011 judgment fell short of the guarantees of a fair trial with “considerable caution”. The presumption was that the procedures in Ukraine were compliant. However, the judge accepted that the presumption was displaced here, explaining:

“32. ... There is no escaping the fact that the order of the Supreme Commercial Court involved a clear disregard of the principles of legal certainty.”

25. The judge found that the Supreme Commercial Court had allowed the entire case to be reopened by reference solely to the issue of the capacity of MIC to enter into the agreement. This would permit the applicant to raise the issue of whether the signatory of Ukrgazprom was authorised, even though this point was not expressly mentioned in the order. As regards the capacity issue, no finding had been made as to its evidential significance nor as to the extent to which the material could, with reasonable diligence, have been available at the earlier hearing. The judge considered that the requirement that a breach be “flagrant” before he could refuse to enforce a foreign judgment arose in respect of decisions of the courts in non-Convention countries only. He added that even if the applicant were right and any breach of Article 6 had to be “flagrant” before the court could refuse to enforce a foreign judgment, the 2011 order did indeed “flow from a glaring shortfall from compliance with principle”.

26. The judge therefore concluded that the recognition should not be accorded to the 2011 judgment and that, in consequence, the application to set aside the default judgment should be dismissed. He noted:

“36. My overall conclusion that recognition should not be accorded to the judgment of the Supreme Commercial Court is fortified by two further considerations:

a) The original (and final) judgment has been in existence for five years. The proceedings to enforce it in England began over a year ago. It was only shortly after the failure to set aside service that any challenge to the original judgment was first mooted. Such a challenge should accordingly be approached with some caution if not scepticism.

b) The observations of the ECHR in both Pravednaya [ v. Russia , no. 69529/01, 18 November 2004 ] and Lizanets [ v. Ukraine , no. 6725/03, 31 May 2007] call for the requirements of Article 6 to be approached with particular sensitivity where, as here, the outcome of the proceedings favoured a State-owned entity.”

The applicant was granted permission to appeal the judgment.

(b) The Court of Appeal

27. Before the Court of Appeal, the applicant argued that the High Court judge had asked himself the wrong question. Instead of considering whether he ought to recognise the 2011 judgment, he should have asked himself whether, at the time the matter was pending before him, MIC had a Ukrainian judgment which it could call on an English court to enforce. Since at the time of the High Court decision the 2006 judgment had been set aside, there was no final judgment to be enforced.

28. The applicant further contended, relying on Linberg v. Sweden (dec.), no. 48198/99, 15 January 2004 , that the judge had been wrong to entertain the question whether the 2011 judgment breached the Convention, since it was not for the courts of one Convention State to judge whether there had been a breach of the Convention in another Convention State.

29 . MIC contended that the 2011 judgment had breached its rights under Article 6 of the Convention. It considered the High Court judgment to be an example of the well-known principle that an English court would not give force to a judgment of a foreign court in circumstances where to do so would be contrary to public policy.

30. On 8 February 2012 the Court of Appeal refused the appeal. Lord Justice Toulson, delivering the lead judgment, began by emphasising that the applicant had had no defence to the claim in February 2011, when the default judgment was entered. Its failure to serve a defence was not through oversight, he said, but because it had at that time no defence that it could plead. MIC therefore had a judgment in its favour which was conclusive within the meaning of that term under English law. It was therefore proper that the High Court had proceeded by examining whether the 2011 judgment setting aside that conclusive judgment violated the principles of substantial or natural justice and MIC ’ s Convention rights. He rejected the contention that Linberg was authority for the wide principle that the courts of a Convention State should never concern themselves with the question whether there had been a breach of a party ’ s Convention rights in another Convention State.

31. As to whether there had been a breach of legal certainty by the making of the 2011 judgment, the judge considered that the factual basis for such a conclusion was “very strong”. He continued:

“72. ... There was no credible basis for suggesting that Naftogaz could not have investigated the status of MIC at the time of the assignment during the original litigation and it does not appear that any was put forward. The assertion that MIC lacked legal capacity to enter into the assignment was based on a partial record obtained from the Delaware Corporation Registry, which was corrected by the fuller version produced by MIC prior to the order dated 7 April 2011. It could not on any threshold examination have been described as decisive evidence not previously available through the exercise of due diligence (applying the test in Pravednaya ). If, as it seems, the [Supreme Commercial Court ’ s] rules prevented it from making that threshold assessment, an order setting aside the judgment and directing a retrial without such an assessment was a negation of the principle of legal certainty.”

32. The judge commented that it was clear from the 2011 judgment that the Supreme Commercial Court had carried out no assessment of whether there had been newly discovered circumstances of a decisive nature which could not have been ascertained with due diligence at the time of the original proceedings.

33. The judge then turned to examine the “critical question” whether, in light of the facts that the applicant had had no defence when the default enforcement judgment had been obtained and that the 2011 judgment offended again the principle of legal certainty, the High Court had been properly entitled to refuse to set aside the default judgment. He answered this question in the affirmative. He noted that Rule 13.3 of the Civil Procedure Rules (“CPR” – see “relevant domestic law and practice”, below) provided that the fact that a defendant would now have an arguable defence to the claim if the judgment were set aside was not a mandatory ground for setting aside the judgment: the court retained a discretion. Many factors might be relevant. The judge observed that an English judgment was a form of property and that to set it aside was to deprive the judgment creditor of an asset. In deciding whether to exercise its discretion under CPR 13.3, the court had to consider the question of what was just. He concluded:

“79. ... In this case the court was being asked to set aside a judgment, which had been properly obtained, on the basis of a later proceeding which involved a fundamental denial of legal certainty and fair process. The judge ’ s refusal to do so was just. ”

34. On 27 March 2012 the applicant applied for leave to appeal to the Supreme Court. It argued that in light of the 2011 judgment there was no longer a valid foreign judgment for the courts of England to enforce; that MIC could not establish a flagrant denial of justice in Ukraine; and that in any event the English courts, in refusing to set aside the default judgment, had acted incompatibly with the applicant ’ s rights under Article 1 of Protocol No. 1 to the Convention because the debt was not “provided for by the law” under the domestic law of Ukraine.

35. On 26 July 2012 the Supreme Court refused leave to appeal because the application did not raise an arguable point of law of general public importance for consideration by that court at that time, bearing in mind that it had already been the subject of judicial decision and reviewed on appeal, and because the appeal would have no prospect of success.

On 2 October 2012 the interim charging order on the JKX shares was made final in the sum of the amount arising from the default judgment plus interest, namely USD 28,718,464.29 and daily interest of USD 55,584.53.

6. The retrial in Ukraine

36 . Meanwhile, on 1 September 2011 the Commercial Court of Kiev resumed its examination of the remitted claim lodged by MIC and on 3 November 2011 it dismissed MIC ’ s claim. It accepted that the documents before it showed that at the relevant time MIC had had full legal capacity and was not restricted in the execution of any transactions. However, it found that the 1997 Agreement was governed by Russian law and that it was partly void because it had not been signed by the correct signatory on behalf of Ukrgazprom.

37. MIC ’ s appeal to the Commercial Court of Appeal was refused on 27 January 2012. Its further appeal to the Supreme Commercial Court was refused on 24 July 2012.

38 . On 30 August 2012 the applicant petitioned the Commercial Court of Kiev for an order to cease recovery under the 2006 judgment. On 6 September 2012 the Commercial Court ruled that recovery based on the 2006 judgment was terminated.

B. Relevant domestic law and practice

1. Ukraine

(a) Reconsideration of judgments based on newly discovered facts

39. Article 112 of the Commercial Procedure Code provides that where newly discovered facts have materialised, the Supreme Court of Ukraine has jurisdiction to reconsider a previous judgement of the same court. There are several circumstances in which such reconsideration can take place, one being where the newly discovered facts in question relate to circumstances that are material to the case, and which were not or could not have been known to the applicant at the time of the original proceedings.

40. Pursuant to Article 113 of the CPC, the parties have one month from the date of discovery of the newly discovered facts to file an application for reconsideration.

41. Article 114 governs the procedure that is implemented in cases involving reconsideration of a court decision on the basis that new facts have emerged. It provides that resolutions and rulings of appellate and cassation courts, which change or reverse the decision of a trial court, are to be reconsidered, by the court of the same instance that changed or adopted the new decision. In addition, in the event that an original decision is reversed following this process, the case is retried by the commercial court in Ukraine.

(b) Enforcement of judgments

42. Article 5.2 of Law no. 2711-IV was enacted on 23 June 2005 in order to protect against consequences of the crisis in energy supplies in Ukraine. It suspended execution of judgments against energy companies.

2. England and Wales

43. The relevant provisions of the Civil Procedure Rules on default judgments are in Parts 12 and 13.

Part 12 sets out when and how a default judgment may be obtained.

Part 13 sets out the grounds for setting aside a default judgment. CPR 13.2 lists the grounds on which the court must set aside a default judgment. The applicant does not suggest that any of the grounds applied in the present case. CPR 13.3.1 sets out discretionary grounds for setting aside a judgment. It provides:

“In any other case, the court may set aside or vary a judgment entered under Part 12 if–

(a) the defendant has a real prospect of successfully defending the claim; or

(b) it appears to the court that there is some other good reason why–

(i) the judgment should be set aside or varied; or

(ii) the defendant should be allowed to defend the claim.”

44. CPR 13.3.2 provides that in considering whether to set aside or vary a judgment, the matters to which the court must have regard include whether the person seeking to set aside the judgment made an application to do so promptly.

COMPLAINTS

45. The applicant complained under Article 1 of Protocol No. 1 of the Convention that the High Court ’ s judgment of 14 July 2011 was not lawful and interfered with the peaceful enjoyment of its possessions because it recognised the 2006 judgment finding that the applicant owed a debt to the third party, whereas the Ukrainian courts had set aside that judgment. Therefore the High Court ’ s judgment deprived the applicant of its property in a manner not provided for by law. The applicant also complained that as a consequence it was deprived of the benefit of the 2011 “setting aside” judgment of the Ukrainian Supreme Commercial Court, which was its “possession” within the meaning of the Protocol.

THE LAW

46. Article 1 of Protocol No. 1 of the Convention reads as follows:

“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law...”

A. The parties ’ submissions

47. The Government contested the applicant ’ s arguments.

48. The third party intervener, MIC, submitted that the 2011 judgment of the Ukrainian Supreme Commercial Court was an “overturning” judgment, and so was not a “possession”. They also argued that under Article 124 of the Constitution of Ukraine, judgments of the Ukrainian courts are enforceable within Ukraine and the United Kingdom has no treaty with Ukraine for the reciprocal enforcement of judgments. Therefore even if the 2011“overturning” judgment were a “possession” it could only have effect in Ukraine.

B. Admissibility

49. The Government argued that the applicant ’ s claim was inadmissible as it had not raised any arguments concerning the applicability and infringement of Article 1 of Protocol No. 1 before the High Court, or the Court of Appeal and so had failed to exhaust domestic remedies. In its application to the Supreme Court it did argue that the interference in its Article 1 of Protocol No. 1 rights was unlawful, but that was too late for the Convention arguments to be subjected to substantive examination by the domestic courts.

51. The Court notes in this connection that there is no doubt that it was possible for the applicant to raise its Convention arguments before the domestic courts. Indeed, Convention arguments were raised and examined before the High Court and Court of Appeal by MIC (see paragraphs 22 and 29 above). However, the applicant did not raise any arguments concerning the alleged infringement of Article 1 of Protocol No. 1 before the High Court or the Court of Appeal. This failing was not remedied by belatedly raising Convention arguments before the Supreme Court because the Supreme Court did not conduct any substantive review of the case, in part because the case had already been the subject of judicial decision and reviewed in a substantive appeal. The Court considers that raising Convention arguments before those lower courts would have been the “normal” use of the available domestic remedies, and would have provided the domestic courts with the possibility to remedy directly the impugned state of affairs. Indeed, once the High Court had granted permission for an appeal to the Court of Appeal, the applicant would have known it was likely that that appeal would be the final substantive review of all the issues. Accordingly, it must have been aware that its Convention arguments would need to be raised at least before the Court of Appeal in order to exhaust effective domestic remedies, yet it did not raise them. Nor has it provided the Court with any explanation of why it did not do so.

52. In light of the above, the Court agrees with the Government that the applicant did not allow the national judicial authorities to address the allegation of a violation of Article 1 of Protocol No. 1 in accordance with the rule on the exhaustion of domestic remedies.

53. The Court underlines that its conclusion in this case does not mean that that a failure to raise a Convention argument at some stage before the lower courts will always mean that an applicant has failed to comply with the rule on the exhaustion of effective domestic remedies. However, in the circumstances of the present case, taking into account the clear procedural possibilities available to the applicant to argue that its rights under Article 1 of Protocol 1 were infringed, and the fact that it was a litigant with access to extensive legal expertise throughout the litigation, the Court considers that it had a full opportunity to defend its interests, which it did not use (see Gromada Ukrayinskoyi Greko-Katolytskoyi Tserkvy Sela Korshiv v. Ukraine ( dec. ), no. 9557/04, § 30, 26 May 2016).

54. Accordingly, the complaint must be rejected pursuant to Article 35 § 1 of the Convention.

For these reasons, the Court, unanimously,

Declares the application inadmissible.

Done in English and notified in writing on 15 June 2017 .

             Renata Degener Kristina Pardalos              Deputy Registrar President