Russian Federation: Recognition And Enforcement Of Foreign Arbitral Awards In Russia

Under the terms of Article V of the New York Convention (which is repeated in Russian domestic legislation by Article 36 of the 1993 Law on International Commercial Arbitration), Russia is obliged to recognise and enforce foreign arbitral awards unless one or more grounds apply from a list of seven. (Russia elected, within the terms of the New York Convention, to treat "foreign awards" as meaning awards issued in other New York Convention countries, which in practice encompasses most of the rest of the world). The first five of those grounds relate essentially to procedural or technical irregularities. They are:

1. That the parties were, under the law applicable to them, under some incapacity, or the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made;

2. That the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case;

3. That the award deals with a difference not contemplated by or falling outside the scope of the submission to arbitration, provided that, if the decision on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognised and enforced;

4. That the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place;

5. That the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.

The burden of proving these grounds falls on the defendant.

The final two grounds are somewhat different in that they require consideration by the enforcing Court of its own domestic law and public policy, and no burden of proof is imposed on the defendant. Specifically, they are:

6. That the subject matter of the dispute is not capable of settlement by arbitration under the law of the country in which enforcement is sought ("arbitrability");
7. That recognition or enforcement of the award would be contrary to the public policy of that country.

It should be noted that the New York Convention does not permit the enforcing Court to re-examine awards on the merits (i.e. there is no "mistake of law" or "mistake of fact" ground). Generally, except in cases where there have been procedural violations, the enforcing Court must respect the award unless very exceptional considerations apply (i.e. the "arbitrability" and "public policy" grounds).

By a quirk of Russian procedural law, applications for the recognition or enforcement of foreign arbitral awards must be brought before the ordinary Courts rather than the commercial Courts. This is despite the fact that, since 1995, the commercial Courts in Russia have generally had exclusive jurisdiction over commercial disputes between Russian and foreign parties. This procedural peculiarity has been much criticised, not least by commercial Court judges themselves, who in practice have been happy to accept jurisdiction anyway (the ordinary Courts and the commercial Courts thus enjoying de facto joint jurisdiction). A new draft Commercial Court Procedural Code is currently before the Russian parliament and is likely to be enacted into law by the end of 2001. The new code will almost certainly grant the commercial Courts exclusive jurisdiction.

The question of which Court has jurisdiction is more than merely a procedural one. Historically, the ordinary Courts have tended to respect the letter and spirit of the New York Convention and instances of a refusal to recognise or enforce foreign awards were rare. The commercial Courts, by contrast, have been more inclined to interfere with awards, often on expressly economic or political grounds (see below). Enforcing parties therefore presently tend to opt for the jurisdiction of the ordinary Courts; defending parties, or those seeking to challenge awards, prefer the commercial Courts. The move towards the exclusive jurisdiction of the commercial Courts is therefore likely to make enforcement harder for foreign investors.

Part of the difficulty in assessing how the Russian Courts have applied the New York Convention in practice lies in the fact that very few Russian Court decisions (and none at the lower instances) are ever publicly reported.

Furthermore, the Courts do not publish relevant information or statistics which would demonstrate the success rate of enforcement applications, or the grounds on which those applications are refused when they are refused. Much of the evidence is therefore by necessity anecdotal. It should also be borne in mind that Court decisions are not in themselves a source of law under the Russian legal system, even if in practice they can have persuasive force. Analysis of "case law" is therefore of limited value at the best of times.

Despite these considerations, it is possible to discern, based on the available evidence, a trend away from enforcement and towards judicial intervention in Russia during the past few years.

It would seem that there are, in essence, two conflicting principles which influence the Russian judicial decision making process. In the first place, Russian jurists are more formal in their outlook than their common law counterparts and will generally apply the law literally, even, on occasion, mechanically. Vaguely worded laws are often ignored because they are so uncertain. Thus, for example, the Russian civil code contains a number of provisions which create non-contractual civil obligations similar to the common law concept of the duty of care: in practice the Russian Courts largely ignore them because their meaning and scope is so uncertain. On the other hand, purely formal provisions, such as the requirement under Russian law for certain documents to be signed by two signatories on behalf of a company or for shareholder or board approval to be obtained, are enforced to the letter (sometimes, to western eyes, at the expense of wider justice). Furthermore, the Russian Courts have always been respectful of international treaties, whose status under the Russian constitution is superior to domestic Russian law. As a result, most Russian judges (other things being equal in terms of political or other influences) are probably inclined to apply the New York Convention literally and to ignore the uncertain provisions of Article V concerning arbitrability and public policy (grounds 6 and 7 above). (It should be noted that the higher Courts can issue binding clarifications of the law in the form of "decrees" (postanovleniya) which the lower Courts will apply, but no such decree has been issued in respect of interpretation of Article V of the New York Convention).

The second principle, however, is anti-arbitration in effect and derives from a mix of social and political considerations. Certain senior judges, particularly in the commercial Court, have begun to question the passive role of the Courts in enforcing awards against Russian parties. They generally take a hostile view of foreign arbitrators, whom they perceive as "anti-Russian". They are also mindful that arbitration represents a threat to their own jurisdiction, and that it is often imposed on Russian parties by western companies with stronger bargaining power. Some judges also more or less expressly see it as part of their role to prevent social and economic "injustices" being perpetrated against Russia. For example, Y. Morozova, the Chief Consultant to the International Private Law section of the Supreme Commercial Court, has written that enforcement in Russia of an award which would have the effect of bankrupting an industry which is the main employer in a particular Russian town would be "doubtful" (Herald Of The Supreme Commercial Court No.7/2000, p.146). These tendencies have translated into a backlash against arbitration which has manifested itself in some surprising decisions on enforcement. It may be supposed that in many cases the logic of the decision masks this deeper hostility.

It would seem that the second principle is now gaining the upper hand. During the immediate post-Soviet era (i.e. up to the mid 1990s), foreign parties seeking to enforce awards in Russia generally encountered few difficulties on "arbitrability" and "public policy" grounds. In one 1992 case, for example, a Scandinavian company successfully enforced an award against a former state-owned Russian entity in the Moscow City Court (an ordinary Court), despite the latter raising the defence that payment of the debt depended on a decision being made by the Russian government on payment of its foreign debts. In 1995, the same Court granted an enforcement application brought by a foreign party where the Russian defendant argued that the arbitrator had misapplied Russian law and that the application should therefore be refused on "public policy" grounds. The Court emphasised in its ruling that it had no authority to review the award on its merits.

In 1999, however, the Federal Commercial Court of the Western Siberian Okrug refused to enforce a Swedish award made against a Russian company on the grounds that the tribunal had incorrectly applied Swedish law (the law of the contract) when it should have applied mandatory Russian laws, the dispute being related to the termination of a joint venture. This looks like a straightforward "error of law" ground (i.e. re-examination on the merits), which clearly contradicts the New York Convention. No doubt to circumvent this difficulty, the Court chose the logically tortuous route of finding that the tribunal "overstepped the limits of the arbitration clause agreed by the parties" (i.e. it applied New York Convention ground 3). This case perhaps puts in some perspective the assertion made by Professor Tatiana Neshatayeva, Head of the International Private Law Section of the Supreme Commercial Court, that the New York Convention ground most commonly applied by the Russian Courts is excess of jurisdiction (ground 3) rather than "public policy". If an error of law is effectively breach of jurisdiction, there is presumably little need for the Courts ever to consider the fallback public policy option.

Against this case should be compared a 1998 decision of the Supreme Court (the highest ordinary Court), in which it was held that allegations by the defendant to the effect that the claimant’s business activities were unlawful under Russian law (i.e. effectively error of Russian law) could not form the basis of a "public policy" defence. It is also noteworthy that the defendant in that case was a Russian local governmental organisation, and yet at all instances (including at first instance in the local Court) enforcement was granted.

As regards arbitrability, Russian law does not define what disputes may or may not be submitted to arbitration. Some Russian judges have therefore felt it incumbent upon themselves to create their own principles governing the application of this ground. Ms. Morozova cites one case where enforcement was refused against a Russian defendant (a private company) on the grounds that part of the funds with which the defendant was expecting to pay the claimant were supposed to come from the public purse. She comments that the dispute "fell outside the bounds of a purely private dispute and had a public character… such a dispute could not be decided by an arbitration tribunal, and if it were, the court would refuse to enforce it" (Herald of the Supreme Commercial Court No.7/2000, p.145). Clearly such views go well beyond the principles of arbitrability adopted by other countries, where disputes with a "public character" are generally limited to such areas as anti-trust and matrimonial law.

The most notorious recent instance of the Russian Courts refusing to enforce an international arbitration award occurred in April 2001, when the Presidium of the Supreme Commercial Court overturned, on its own motion, several previous first instance decisions granting enforcement of an English (LCIA) award against a Russian entity owned by Russian Credit Bank. The decree of the Presidium has not been published and the grounds relied on are therefore not clear. It is clear, however, that the Russian defendant had already applied to the Supreme Court (the highest ordinary Court) to have the arbitration award overturned and that application had been refused. Following the issuing of the Presidium’s decree, the claimant took the extraordinary step of publishing a long open letter addressed to the President of the Supreme Commercial Court in a national newspaper, in which, amongst other things, he accused the Deputy President of the Court, and the instigator of the motion to overturn the previous decisions, of corruption (the Deputy President was co-chairman of a fund for judicial reform set up by the Russian Credit Bank – i.e. the defendant – which so the claimant alleged distributed money to judges and other consultants). The allegations were extremely serious, but no formal response was ever made by the President of the Court.

The above examples are not intended to be statistically representative of all recent enforcement cases brought before the Russian Courts. For the reasons already given, a statistically representative survey would be impossible to produce. Most practitioners in fact agree that a majority of enforcement cases brought before the Russian Courts succeed. However, the above cases give a flavour of the kind of difficulties western companies are likely to face, and they do illustrate that enforcement of foreign arbitration is, on the whole, getting harder. At present, a literal and fair application of the New York Convention by the Russian Courts – certainly by the commercial Courts – is likely to occur only in very limited circumstances: i.e. where neither the defendant nor the subject matter of the dispute has any connection with the State, and where enforcement would have limited economic and social consequences on Russia or on a particular region or industry.

It would be a mistake to assume that Russian judges and legal experts are ignorant of practice in other countries, or of the proper meaning of the New York Convention. Many eminent Russian lawyers have criticised the practice of the commercial Courts, and in particular the views expressed by Professor Neshatayev and Ms Morozova cited above. However, the commercial Court judges are making the law, and represent the future. Until such time as the Russian legislature, and in particular the office of the President, take an interest in such issues (and there is no sign that they are, despite numerous legal reform packages currently before the Russian parliament), the misapplication – deliberate or otherwise – of the New York Convention may well be set to continue.

"© Herbert Smith 2002

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