Dispute Resolution Publications

Russian Court Ruling raises doubts over the Enforceability of International Arbitration Awards in Russia

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.

Background

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):

  1. 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.
  2. 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.

Our Comments

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.

The au­thors are Johannes Ericson and Carl Rother-Schirren.

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