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2018 July 12

Misen Enterprises AB and LLC Karpatygaz received a final partial award from the Stockholm Arbitration

 

On 11 July 2018, the Arbitral Tribunal rendered a final partial award in the arbitration proceeding commenced under the JAA No.3 dated 10 June 2002 (as amended and restated, further called as the “JAA”) in accordance to the Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce. This award is a final award on those issues that were decided at this stage of the proceedings. To sum up, the Arbitral Tribunal fully rejected the JAA’s invalidity arguments, as well as the overwhelming majority of PJSC Ukrgasvydobuvannya’s arguments concerning Misen Enterprises AB and LLC Karpatygaz alleged “breaches”. This in effect means that PJSC Ukrgasvydobuvannya’s damages claims are now largely baseless. In general Arbitral Tribunal’s findings are the following:

  1. The Arbitral Tribunal has fully, unanimously and unequivocally dismissed all the claims submitted by PJSC Ukrgasvydobuvannya in relation to alleged invalidity of the JAA. The Arbitral Tribunal found no corruption or collusion in the negotiation and approval of the JAA. The Tribunal did not establish any wrongdoing of present and / or former shareholders (beneficial owners) of Misen and Karpatygaz. Also there was no wrongdoing of management of Misen and Karpatygaz. Furthermore, the JAA complied with all relevant Ukrainian legislation. Specifically, the Arbitral Tribunal found that there is no basis to conclude that the JAA breached Article 7(4) of the Pipeline Transport Law or public policy. The Arbitral Tribunal established that PJSC Ukrgasvydobuvannya’s well stock, that PJSC Ukrgasvydobuvannya retained full rights to access and use its wells and there was no misappropriation of this of PJSC Ukrgasvydobuvannya’s property. Further, the Arbitral Tribunal has rejected claims of PJSC Ukrgasvydobuvannya that the JAA breached the prohibition on the sale of gas other than to Naftogaz pursuant to Article 10 of the Law on the Functioning of the Gas Market. Summarizing the Arbitral Tribunal findings on the above mentioned issues, Tribunal confirmed that the JAA is a legal and fully binding contract, which gave rise to substantial benefits for PJSC Ukrgasvydobuvannya (notably the ability to commercialise its gas at higher, unregulated prices, the obligation of Misen Enterprises AB to ensure additional financing to implement the Joint Activity Programs, and the revenues earned by providing services to the Joint Activity under the Services Agreement). The JAA was concluded in the interests of PJSC Ukrgasvydobuvannya, not contrary to its interests.
  2. Performing their respective contractual obligations, Misen Enterprises AB and / or LLC Karpatygaz did not make any material breaches of the JAA, and, therefore, Arbitral Tribunal has fully, unanimously and unequivocally dismissed all the claims submitted by PJSC Ukrgasvydobuvannya to terminate the JAA on the ground that Misen Enterprises AB and LLC Karpatygaz allegedly breached their contractual obligations. Specifically, the Arbitral Tribunal found that Misen Enterprises AB made no breach of its obligation to provide additional financing to implement the Joint Activity Programs; LLC Karpatygaz made no breaches of the JAA by entering into any of the sale of gas agreements; the was no failure to contribute know-how to the Joint Activity; there were no unjustified “threats“ to stop operation of certain booster compressor stations; LLC Karpatygaz had a right to enter into settlement agreements with respect to certain debts owed to the Joint Activity; and, finally, the Arbitral Tribunal declared that LLC Karpatygaz complied with its obligations under the JAA with respect to commissioning the booster compressor stations (including the major Khrestyshchenska BCS) and conducting repair works of the wells.
  3. The only instance where the the Arbitral Tribunal partially endorsed the position of PJSC Ukrgasvydobuvannya is the Tribunal’s findings that Misen Enterprises did not meet its obligation to make part of its contribution in the amount of approximately 8,5 mUSD by 31 December 2015 and that Karpatygaz was late under the JAA in equipping certain wells with metering stations. However, the Arbitral Tribunal decided that these breaches, whether considered alone or together, cannot be characterised as substantially depriving PJSC Ukrgasvydobuvannya of what it expected to receive when making the JAA and do not give right for PJSC Ukrgasvydobuvannya to terminate the JAA. Moreover, while the Arbitral Tribunal indicated that a failure to make the remaining part of Misen Enterprises contribution may lead to making appropriate adjustments to a Participant’s share of the joint property upon termination of the JAA, this does not result in the rescission of the parties’ original agreement on the value of their Contributions. Thus, the Arbitral Tribunal upheld that, as was contractually agreed, JAA entitled Misen Enterprises AB and LLC Karpatygaz to a 50,01 % share in the joint property.
  4. However, since the 70% royalty imposed by the Government of Ukraine brought a material change in circumstances and it is no longer possible to achieve the purpose of the JAA, the Arbitral Tribunal concluded that the JAA must be terminated as of 11 July 2018 solely on these grounds. As previously reported, Misen Enterprises AB and LLC Karpatygaz agreed on termination of the JAA particularly on these grounds. Again, the Arbitral Tribunal has fully upheld Misen Enterprises AB and LLC Karpatygaz pleadings in this respect.
  5. Therefore, the Arbitral Tribunal obliged Misen Enterprises AB, LLC Karpatygaz and PJSC Ukrgasvydobuvannya to take all steps necessary and appropriate to give practical effect to termination of the JAA. The parties agree that, following termination, the Joint Activity’s assets should be transferred to PJSC Ukrgasvydobuvannya, with Misen Enterprises AB and LLC Karpatygaz receiving compensation for their interests in those assets. If after the final partial award the parties will not be able to agree on the valuation of Misen Enterprises AB, LLC Karpatygaz share, this issue will be decided by the Arbitral Tribunal in its final award.

Misen Enterprises AB and LLC Karpatygaz will immediately undertake all the necessary actions to engage PJSC Ukrgasvydobuvannya in the meaningful discussion what regards enforcement of this final partial award.

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