The Russian Supreme Court has refused enforcement of an arbitration award issued under the Federation of Oils, Seeds and Fats Associations (FOSFA) rules. The decision was made on the basis of the "public policy" exception in the New York Convention and, among other things, on the basis of the arbitrators' nationalities. The Supreme Court has noted that there is a presumption of lack of impartiality in cases where the tribunal consists of arbitrators who are nationals of countries deemed "unfriendly"[i] under Russian legislation.
Background
The dispute arose under a contract for the supply of flaxseed between JSC "Novosibirskhleboprodukt" (Nhp), the seller and C. Thywissen GmbH (Thywissen), the buyer. The contract was governed by English law and contained a FOSFA arbitration clause with a seat in London. When Nhp failed to supply flaxseed, Thywissen initiated arbitration proceedings alleging breach of contract. As Nhp did not nominate its arbitrator within the stipulated deadline, Thywissen requested that FOSFA appoint an arbitrator on Nhp's behalf. FOSFA appointed an arbitrator of Ukrainian nationality. The arbitrators, who were nationals of Ukraine, UK, and Denmark, ruled in favour of Thywissen, awarding damages for non-delivery under s. 51 of the UK Sale of Goods Act 1979.
The Ruling of the Supreme Court
Thywissen sought to enforce the arbitration award in Russia. The enforcement application was granted by a first instance court and confirmed by an appeal court. However, by its Ruling No. 304-ЭС24-2799 (Ruling) the Supreme Court overturned these decisions and ordered a reconsideration of the application by the first instance court. The Supreme Court's decision hinged on two key principles of Russian public policy: the principle of proportionality of civil liability and the principle of impartiality.
Proportionality of civil liability
The Supreme Court found that the lower courts had failed to take into account the force majeure event that prevented timely delivery under the contract and to consider the absence of evidence that Thywissen had, in fact, incurred damages.
The Court also highlighted that the lower courts overlooked the potential repercussions of enforcing the arbitration award against Nhp, given its societal importance. The Court added that enforcing the award would "put at risk its financial stability and [would] have a significant impact on employment and social stability of the region".
Impartiality
The Court observed that sanctions imposed by foreign countries had political motives and expressed doubt that the relevant dispute could be decided in a foreign state fairly and impartially. In this case, the arbitrators were nationals of countries designated as "unfriendly" under Russian law, resulting in a presumption of lack of impartiality. In particular, the Court noted that "[t]he lack of impartiality and objectivity … by such a panel of arbitrators is presumed, unless there is evidence to the contrary".
Although the Court took into account Nhp's argument that sanctions prevent Russian participants from making payments, thereby creating difficulties in obtaining legal advice in the UK and participating in arbitration proceedings, it did not address the fact that Nhp participated in the proceedings despite sanctions.
Comment
This decision highlights the difficulty of enforcing international arbitration awards in Russia. It illustrates that one element of risk is the nationality of potential arbitrators in disputes involving Russian entities. In this particular case, appointing arbitrators who were nationals of an "unfriendly" country created an additional barrier to enforcement. While the Supreme Court indicated that the presumption of partiality could be rebutted, it remains unclear how this could be achieved.
There is no definition of public policy in the New York Convention. Many Contracting States to the Convention apply notions of international and transnational public policy and/or regard the public policy ground as being applicable in only very narrow circumstances, such as when enforcement of the award would violate the forum state’s most basic notions of morality and justice.
In this case the Supreme Court took a very broad approach to the question of public policy, evaluating both the reasoning in the award and the practical and economic implications of its outcome on Nhp and the broader region. Even if the tribunal is composed such as not to give rise to a public policy argument regarding the nationality of an arbitrator, such an approach to the public policy ground indicates that there would, in any case, be a risk that the Russian courts would refuse recognition and enforcement of a foreign arbitral award on public policy grounds.
[i] The term “unfriendly countries” refers to a list of nations that the Russian government considers to have taken actions against Russia, its companies, or its citizens. At the time of writing, the list includes the US, all EU members states, the UK, Australia and other countries.
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Maria Popova
Associate, London
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