Russian courts have recently declined to enforce an ICC award on reasons arguably in conflict with former practice and universally accepted principles. The ruling necessitates an urgent assessment of dispute resolution clauses in new and existing contracts involving Russian parties, and may have an impact on the overall reliability of contracts between Russian and foreign entities.
The dispute concerned a European company (the “Claimant”) and a Russian contractor (the “Respondent”) in relation to the Respondent’s alleged breach of contract. The dispute resolution clause of the parties’ agreement contained the standard ICC arbitration clause reading “All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”
The award was rendered in 2014 whereby the Respondent was ordered to pay approximately EUR 3.5 million to the Claimant (the “Award”). Shortly thereafter, insolvency proceedings were initiated against the Respondent in Russia. These proceedings were finalised in 2017 in a settlement between the Respondent and its creditors, in which the Claimant did not take part.
Enforcement of the Award
The Claimant filed an application in Russia to have the Award enforced. The request for enforcement was rejected by Russian courts in the first and second instance for two reasons (of which only the latter is of interest for our commentary):
- The courts deemed the Award incompatible with Russian public policy with reference to the insolvency proceedings and the position of the Respondent’s other creditors.
- The courts found that the ICC tribunal lacked jurisdiction over the dispute since the parties’ agreement (i.e. the above standard ICC arbitration clause) did not specifically refer the dispute to the ICC, but only to the ICC rules.
The ruling has subsequently been upheld by the Russian Supreme Court.
We note that Article 1 of the ICC rules clearly states that the International Court of Arbitration of the ICC is the independent arbitration body of the ICC, and therefore the courts’ conclusion that the tribunal lacked jurisdiction is questionable at best.
It is too early to tell what implications the ruling will have on future rulings by Russian courts (Russian courts have previously upheld the standard ICC arbitration clause). It is obvious, however, that the ruling necessitates an addition to standard arbitration clauses to include a direct and express reference to the ICC International Court of Arbitration (or other institution, as applicable) in any contracts involving Russian parties. This applies not only to new contracts but also to existing contracts, which should be amended to minimise the procedural risks of enforcement in Russia.
In a larger perspective the ruling is somewhat discomforting, as it is arguably incompatible with former practice and universally accepted principles on recognition and enforcement of arbitral awards as codified in the New York Convention. It remains to be seen whether the ruling is a one-off decision of limited importance, or if it is a part of a trend where Russian courts are increasingly reluctant to enforce foreign awards. Until then, non-Russian entities and their counsel should pay increasing attention to the risks concerning enforceability when entering into contracts with Russian entities who lack substantial assets outside of Russia.