It has been a year since the new Supreme Court took over from the Supreme Arbitrazh Court as Russia’s highest court on commercial matters, including arbitration. Yaroslav Klimov and Andrey Panov look at recent arbitration-related cases resolved by the Supreme Court.
“The new Russian Supreme Court has ushered in an additional level of judical review.”
When the new Russian Supreme Court took over from the Arbitrazh Court last year, it ushered in an additional level of judicial review – the Commercial Division of the Supreme Court – which hears appeals against the decisions of lower courts (including the first instance courts, the Appellate Court and the Cassation Court).
A party may appeal the ruling of the courts of the Commercial Division to the Presidium of the Supreme Court. The interpretations of the legal principles by the Presidium will be binding on the lower courts.
As yet, there have been no arbitration-related cases considered by the Presidium, but the courts of the Commercial Division have made a number of interesting rulings which have been closely followed by the arbitration community in Russia. These decisions are not technically binding on other courts within the Commercial Division.
Arbitrators’ duty to apply the law and contract provisions, and the effect of public policy
Corradino Corporation Ltd. v JSC Russian Insurance Center1 concerned the enforcement of an award rendered by the Maritime Arbitration Commission at the Russian Chamber of Commerce and Industry. It had a somewhat odd underlying set of circumstances, which may have dictated the overall outcome.
The arbitral tribunal issued an award ordering the insurer to pay a certain amount to the foreign claimant under the maritime insurance agreement. The insurer subsequently applied to the tribunal for a correction of an error, which was understood by the tribunal to be a request to render an additional award. The tribunal issued this additional award in which it corrected the reasons for, and operative part of the original award by deducting an unconditional franchise which it had mistakenly failed to deduct previously.
As the additional award was rendered without giving proper notice to the parties or conducting a hearing, it was set aside by the Russian courts. The claimant then sought to enforce the original award, but the first instance court rejected the application, stating that enforcing the award – which contained obvious errors – would be contrary to the principle of legality, one of the fundamental principles of Russian law. The Cassation Court (which hears appeals from first instance courts) reversed the decision as interfering with the finality of the original award and ordered enforcement.
On appeal from the Cassation Court, the Commercial Division agreed with the first instance court’s position. In particular, it found that:
- The principle of legality of judgments – which means that the judgment should be rendered in accordance with the applicable law, well-grounded, reasoned and final – is equally applicable to arbitral awards as one of the fundamental principles of Russian law.
- The error in the award was accepted by the tribunal itself in the additional award, and therefore, the original award violated the principle of legality and was contrary to the provisions of the insurance contract.
“The principle of legality of judgments is equally applicable to arbitral awards as one of the fundamental principles of Russian law.”
Unlike the first instance court, however, the Commercial Division ordered partial enforcement of the original award, effectively deducting the unconditional franchise as per the insurance agreement on its own motion, and in effect implemented the additional award.
This ruling may encourage others to challenge awards on the basis of a tribunal error as to the effect of the applicable law or the provisions of the contract. It could also allow judicial correction of such errors by making adjustments to the way in which the award is enforced. The consequences of this approach are yet to be seen, as it is unclear whether this ruling will be followed by courts in future cases.
An arbitral award may be enforced in Russia at the place where a foreign entity holds its assets
This case2 concerned an attempt by a US company to enforce an SCC arbitral award against a Ukrainian respondent in Russia. It raises interesting questions as to when Russian courts have jurisdiction over enforcement cases against foreign persons.
The enforcement was attempted in Kaliningrad Region, where the Ukrainian respondent allegedly held certain equipment. Under Russian law, an application for recognition and enforcement of a foreign arbitral award must be filed with the Arbitrazh (Commercial) Court ‘at the place of the debtor’s location or residence or, if the debtor’s location is unknown, at the place where the debtor has property’. Technically, this provision could prevent the enforcement of an award against a foreign debtor’s assets located in Russia, if its location or residence is known.
The Commercial Division of the Supreme Court ruled that, in principle, the enforcement of an arbitral award is possible at the place where the debtor’s assets are located, even if the debtor’s location is known. However, the burden of proving that the assets are located in Russia and that they belong to the debtor lies with the applicant seeking recognition and enforcement of an award.
“The burden of proving that the assets are located in Russia and that they belong to the debtor lies with the applicant seeking recognition and enforcement of an award.”
In this case, the courts concluded that the burden was not discharged.
- The applicant sought to rely on information from a Russian entity which was allegedly storing the respondent’s goods in Kaliningrad, as well as warehouse receipts. However, the Russian entity in question had been dissolved by the time the application was filed before the Russian court, undermining the credibility of the evidence.
- The court noted that, even if the location of the equipment in question were proven, the applicant had failed to establish that the respondent owned it.
- The Commercial Division also suggested that the applicant could have sought disclosure of the debtor’s assets, but did not do so.
This ruling confirms that the Russian court located within the jurisdiction in which the debtor’s assets are held can enforce any arbitral award against such assets, but the applicant must be able to establish the location of the assets, and establish that they belong to the debtor.
Public policy argument should not open the door to a review on the merits
In this case3 there was a dispute over the enforcement of an award rendered by an international arbitral tribunal acting under the auspices of the Serbian Chamber of Commerce. The dispute arose out of the privatisation of a Serbian automobile producer, Ikarbus. Serbian authorities terminated the privatisation contract, claiming that a Russian company had breached some of its obligations. The Russian company commenced arbitration, seeking recovery of the payment price, and the Serbian authorities subsequently filed a counterclaim seeking contractual penalties. The tribunal dismissed the claim and partially awarded the penalties sought.
The Russian respondent sought to resist enforcement of the award, alleging that it was contrary to Russian public policy (due to the punitive nature of the penalty awarded) and that the penalty had also been rendered in breach of the applicable Serbian law. The first instance court found these arguments compelling, but the Cassation Court reversed the ruling and enforced the award against the Russian party.
The Commercial Division supported the Cassation Court’s position, as the Russian company was effectively disagreeing with the merits of the award. It is notable that the Commercial Division followed the Supreme Arbitrazh Court decision of 2013, which stated that public policy cannot constitute grounds for review of a case on its merits. This confirms that the Supreme Arbitrazh Court’s earlier rulings remain authoritative in arbitration cases.
Yaroslav Klimov is a partner and Andrey Panov a senior associate, both in the Moscow office of Norton Rose Fulbright.
Case No. A40-274/2014.
Case No. A21-8191/2013.
Case No. A72-15958/2013.
How will latest changes to Volcker Rule affect non-US banks?
Kathleen A. Scott discusses the final Volcker Rule, focusing on some of the issues raised by non-US banks in their comments.