1 September 2010
RUSSIA: You have an award, but now what?

Front Cover

Victor Dumler, a senior international commercial arbitration and litigation specialist at Egorov Puginsky Afanasiev and Partners in St Petersburg, considers the ease of enforcing foreign arbitral awards in Russia – particularly recent cases where parties have resisted enforcement saying they were not notified of necessary information regarding the arbitration or that it breached public policy.

The article is based on a talk given at the British-Russian Law Association Seminar in January 2010, at the British Embassy in Moscow

Russia remains a challenging jurisdiction for a legal practitioner. But in spite of widely publicised and criticised bad judgments, there are positive recent cases that are influencing the current approach of Russian courts in the area of arbitration.

Lack of proper notice

The most widely used reason courts give for preventing recognition and enforcement of foreign arbitral awards in Russia is that the defendant was not properly notified of important information regarding the case. During the last three years there have been at least five cases in which the court finally refused to enforce an arbitral award on a “lack of notice” basis.

Two recent examples are the 2008 case of Agroconcernas v Russian Avtotor –Agro (between a Lithuanian and a Russian company) and BELINTERTRANS v TransEurope-Europe (between a Belarussian and a Russian company).

In the first case the court refused to enforce an arbitral award on the ground that the defendant had been unaware of the date and place of hearings. It held that notice had been served only on its registered address not its actual address, of which the claimant was aware.

In the second, the court declined to enforce an arbitral award rendered in Belarus because the notice of arbitration, although sent to the address specified in the contract, was received by a person who was not authorised to receive correspondence and lacked the power of attorney or any labour relations with the defendant (Russian legislation allows employees of the legal entity to act as representatives of the employer in certain circumstances). The court also noted that the address specified in the contract was not the defendant’s registered address.

Both cases show the attention parties should pay to notification, with the second providing an alarming example of the broad interpretation courts sometimes give to what constitutes proper notice.

Not all Russian courts, however, overturn awards on this basis. A Supreme Commercial Court case on the recognition and enforcement of an LCIA award, Loral Space v Globalstar, is of particular interest. In this case – in which an arbitration award had been overturned by the lower courts – the court examined the issue of what constitutes proper notification of a party to the arbitration in detail.

The defendant argued that though it received notification of the arbitration by fax, it was not given all the necessary information regarding the date and place of hearings at the outset. Ultimately, the Supreme Commercial Court said that the allegation of improper notice should be examined with reference to the rules of the relevant arbitration institute – in this case the LCIA.

In the LCIA Rules, the arbitral tribunal is given freedom to run the case as it pleases, provided fair, effective and quick dispute resolution is ensured. The rules are not prescriptive about the form of notification. As a result, the court held, the claimant does not necessarily need to notify the defendant of all the relevant information in a single document but can send several documents over the course of the arbitration proceedings.

In another recent case on the recognition and enforcement of a Grain and Feed Trade Association (GAFTA) arbitral award rendered in London, VALARS v Agro-Holding, the Supreme Commercial Court stated that, where copies of the notification provided to the defendant are missing, correspondence between the defendant and the tribunal referencing it are sufficient proof.

The court also reasoned that the Hague Service Convention, a 1965 treaty allowing service of judicial documents from one signatory state to another without recourse to consular and diplomatic channels – is not applicable to arbitration as it applies only to notices issued by the public authorities. And, in rulings that extend beyond the issue of proper notification, it said that in certain circumstances a fax copy of a contract has legal force under Russian law, and that an arbitral tribunal is free to decide whether oral hearings are necessary or not.

Notice: Practical tips

Court practice on this issue is highly inconsistent, however, there are several recommendations that can be made:

• use both the registered and contractual addresses of the company when serving notifications regarding the arbitration;
• take into account the addresses used in last business correspondence; and
• in new contracts tie a notice clause together with the arbitration clause; as long as the arbitration clause is in effect, the notice clause should correspondingly remain in effect.

Public policy

There is probably no Russian case on the recognition and enforcement of foreign arbitral awards in which defendants don’t refer to a violation of public policy (including cases raising notice arguments). It is worth highlighting, however, that in recent years courts have upheld public policy arguments sparingly.

Public policy is a very broad concept. It is worth considering how the courts have received arguments to set aside an award on grounds of public policy when a tribunal has applied a penalty clause in a contract. Recently, they have tended to find that such clauses do not infringe public policy.

This tendency manifested itself as far back as 2006, when Russia’s Supreme Commercial Court said that: “The penalty is a part of the Russian legal system and, therefore, its collection does not contradict the public policy of the Russian Federation” (decree dated 19 September 2006, N5343/06). Since then, a number of courts have followed that approach.

One example is a remarkable decision on the recognition and enforcement of an ICC award that was rendered in December 2009 by the Federal Commercial Court of the North-West District (Venture Global Engineering LLC v Avtotor – Holding Group). In that case, the court not only confirmed the legality of a penalty imposed by the tribunal under the laws of the State of Michigan, but also drew a number of important conclusions.

In particular, the court stated that “the meaning of Russian public policy does not coincide with the content of the rules of national laws of Russia. Insofar as Russian legislation allows the application of the rules of foreign states, substantial differences between Russian law and the laws of another state do not in themselves create a ground for using a public policy clause. Any other approach would mean totally denying the possibility of applying foreign laws in Russia.”

As far as we know, this is the first time the Commercial Court has applied such reasoning, although similar logic was used by the Supreme Court of Russia as far back as 2001, at a time when cases on the enforcement of arbitration awards were heard by the general courts rather than the commercial ones. It is notable that the Commercial Court also enforced, at first instance, an arbitration award against a major company based in that region of Russia.

But what if the penalty imposed by a tribunal is disproportionate to the party’s breach of a contractual obligation and its consequences? In these circumstances, Russian law gives the court a right to reduce the penalty. As the Constitutional Court of the Russian Federation explained in 2001 this safeguard is intended “to prevent the abuse of the [tribunal’s] right to freely determine the amount of the penalty”. The court therefore has an obligation to find a proper balance between the remedies applied and the actual consequences of the breach […]”

In a recent case between Dutch firm Eric Van Egeraat Associated Architects and Russia’s Capital Group on the enforcement of an award under SCC rules, the Federal Commercial Court of the Moscow District appeared to place the ball back in the arbitral tribunal’s court, however.

The court stated that the question of whether the remedies imposed by the tribunal are proportionate to the consequences of the breach is part of the merits of the case – and should be determined by the arbitration tribunal. It refused to consider the issue itself.

Although it concerned domestic arbitration, a recent case considered by the Supreme Commercial Court of the Russian Federation [see decree N BAC-10607/09, dated 25 August 2009: Torgovy Dom Severo-Zapadniy LLC v Nauchno-proizvodstvennaya firma “Sibekoservis” LLC] may also be enlightening. The court upheld the position of the lower courts, stating that any issue regarding the disproportion of a penalty to the consequences of the breach of an obligation is part of “the factual matrix of the case and should be examined by the arbitration tribunal”.

Recent court practice also recognises that, whether the penalty is reduced or not, it does not affect the recognition and enforcement of the arbitral award (see the decision of the Federal Commercial Court of the Moscow District in a case between Belarus’s Ministry of Defence and Russian company TechPromInvest).

But are there any negative decisions on this issue? As far as we know, the only case in the last three years in which a defendant successfully prevented recognition and enforcement of a foreign arbitral award on these grounds is the well-known case of Kruken v Avtotor-Agro. In this, the Russian commercial courts refused to enforce an arbitration award under Federation of Oil, Seeds and Fats Association (FOSFA) rules. Among other things the court reasoned that a breach of public policy can be held to have occurred if a tribunal holds a party more liable than it should be under the terms of the contract. The case is rather exceptional – and was never examined by the Supreme Commercial Court.

The court has, however, recently handled a remarkable case between a German company, Lugana Handelsgesellschaft, and a plant in the Ryazan region of Russia (see the decision of the Supreme Commercial Court on case number 13211/09 of 2 February 2010). In that case, the court considered the legality of accruing interest on the penalty sums and judicial costs connected with the arbitration, after the lower courts found that such interest contradicts public policy.

The Supreme Commercial Court, in line with its own recent practice, stipulated that the interest on the penalty and judicial costs do not contradict public policy, even though such mechanisms are not available in the Russian legislation. It thus ordered the enforcement of awards rendered by the German Arbitration Institution (DIS). However, it diplomatically noted in its reasoning that the sums of interest claimed must be considered reasonable by the court.

One more case should be mentioned on public policy. There is a case between Swedish company Stena Ro Ro AB and Baltiysky Zavod, one of the major shipbuilding companies in Russia, which has come before the Supreme Commercial Court: a last and gloomy example of a case in which a lower court refused to enforce an award made in Stockholm on the grounds of public policy. There were two major findings of the lower court. First, it stated that the claim may cause the bankruptcy of the defendant, a strategic company in the area – so to enforce it would have a detrimental effect on Russian state security. Second, it found that the disputed contracts had possibly never come into force as there was no proper approval of them by the Swedish counterparty – a second possible violation of public policy. In this case, the lower court actually revised the reasoning of the tribunal in respect of the corporate approvals under Swedish law. The Supreme Commercial Court, in contrast, in the interim decrees reasoned that there were no grounds for re-examining the conclusions made by the tribunal in the course of arbitration proceedings. The court emphasised that the difference in corporate procedures existing under applicable laws doesn’t violate the principle of equal rights of the parties to the international contract.
Unfortunately the Supreme Commercial Court’s consideration of the case has been postponed due to the award being challenged in the Swedish courts by the Russian shipbuilding company.

Conclusion

Notice and public policy aside, there are other factors that can upset enforcement of an award in Russia. As is true throughout the world, a poorly drafted arbitration clause can give rise to expensive and time-consuming satellite litigation and jeopardise your chances of successfully enforcing an award. A recent case between Hebenshtreit-Rapido and the Saratovskaya confectionary plant, in which the lower courts declined to recognise and enforce an award because of the mismatch between the institution referred to in the arbitration clause and the institution rendering the awards, illustrates this. On appeal the Supreme Commercial Court referred the case back to the lower courts for re-examination (see the decision of the Supreme Commercial Court on case number 5604/09 of 22 September 2009).

But despite remaining problems, the Russian judicial system works – and works in favour of arbitration. A recent World Bank report, meanwhile, notes its efficiency, ranking it among the 20 most efficient dispute resolution systems worldwide. Sometimes a little patience is needed to successfully enforce an award, but, what’s important, is that attempts are generally successful.