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Ursula von der Leyen was re-elected Commission President w…
On 26 July 2024 the Russian Supreme Court decided on the enforcement and recognition of an arbitral award in case No. A45-19015/2023. It held that the question whether an award is recognizable and enforceable in Russia depends on, inter alia, the nationality of the arbitrators. The Russian Supreme Court assumed that arbitrators from “unfriendly states” are not impartial and objective. Therefore, awards issued by such arbitrators are not recognizable and enforceable in Russia. A Russian version of the decision can be found at JusMundi (C. Thywissen v. Novosibirskhleboproduct, Judgment of the Supreme Court of the Russian Federation А45-19015/2023, 26 July 2024 (jusmundi.com)).
On 23 July 2020 AO Novosibirskkhleboproduct, a Russian company, (the "Supplier") and C. Thywissen GmbH, a German company, (the "Buyer") concluded a contract through a broker for the supply of Russian-grown linseed. The contract was governed by the laws of England and Wales. It included a FOSFA (Federation of Oil, Seeds and Fats Association) arbitration clause with seat in London.
For the purposes of meeting its contractual obligations, the Supplier concluded a contract for the supply of linseeds with the company Dubrovinskoe, which operates in Novosibirsk Region.
Russia’s Novosibirsk Region experienced a drought in summer 2020 On 22 July 2020 the regional government issued Resolution No. 289-P, which declared a state of emergency covering 16 grain-growing municipal districts in the Region.
Due to the poor linseed harvest, the Supplier was unable to supply the linseed to the Buyer. It proposed to the Buyer citing force majeure that the delivery dates shall be deferred. However, the Buyer declined to extend the deadlines for delivery and filed a claim against the Supplier with FOSFA Arbitration. It asked to be compensated for losses in the amount of the difference between the agreed price of delivery and the market price of linseeds at the time of the breach of contract, to a total of USD 600,000.00. However, the Buyer did not actually enter into a replacement transaction.
The arbitral tribunal, whose members were from Ukraine, the United Kingdom, and Denmark, issued an award on 16 November 2022. It granted the Buyer’s relief regarding its claim for the compensation of losses in the amount of USD 600,000.00, with interest. Even though Art. 7 FOSFA Arbitration Rules foresee a proceeding for appeal, the Supplier did not appeal this decision. Thus, the award became binding on 28 December 2022.
The Buyer then initiated proceedings for recognition and enforcement of the award in Russia. The Commercial Court of Novosibirsk Region, decided that the award is recognisable and enforceable in Russia. The Court of Cassation dismissed the Supplier’s appeal and upheld the decision of the Commercial Court of Novosibirsk Region.
The Supplier filed an appeal with the Russian Supreme Court. He claimed that the court orders issued in the case were a breach of the public order of Russia and should be overturned.
The Russian Supreme Court granted the Supplier’s appeal, laying out the following key legal positions:
(a) The recovery of losses cannot be aimed at enrichment in the context of legal defence, but only at the restoration of an infringed right.According to the Russian Supreme Court, it is contrary to public order in Russia to collect funds to compensate for losses without providing evidence that the losses were actually incurred, for example by providing evidence that the party has entered into a replacement transaction.
(b) The courts of the first instance and cassation failed to take into account the "public significance of the Supplier" and the fact that "enforcement of the award risks creating financial instability for the Supplier and would have a material effect on public employment and social stability in the region."
(c) The arbitral tribunal, composed of citizens of "unfriendly countries" , cannot be impartial and objective. "Given there is no evidence to the contrary". The Russian Supreme Court has thus formulated a - questionable - presumption of partiality for any arbitration in which an arbitrator from an unfriendly country is involved. The Russian Supreme Court’s position is based on the position taken by the European Court of Justice in the cases of Kyprianou v Cyprus, case No. 73797/01 and Revtyuk v Russia, case No. 31796/10.
The Russian Supreme Court’s decision and newly developed approaches are currently the subject of lively discussion in the legal community in Russia and in arbitration communities around the world, with reference to both the positive and negative consequences of the approaches that have been developed.
First and foremost, it should be noted that the Russian Supreme Court went far beyond the scope of reviewing the grounds for non-recognition of an arbitral award set forth in Article V of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958). The Russian Supreme Court conducted a review of the merits of the dispute, including a reassessment of evidence in the case as to the existence of losses and occurrence of force majeure.
It should also be noted that the "public significance" of the Russian debtor in the dispute and the possibility of an adverse effect on social stability in the region, if the award were to be recognised and enforced, cannot constitute grounds for refusing to recognise and enforce the award. However, a similar position has been previously taken in the court decisions of commercial courts of various levels, for example, in the judgment of the Commercial Court of Volga-Vyatka District dated 27 December 2021 in case No. A79-9284/2020. With this approach, the Russian Supreme Court essentially negates the purpose of judicial protection of a violated right – to restore the rights of the injured party.
Finally, it is important to comment on the "presumption of partiality" of arbitrators from unfriendly countries as formulated by the Russian Supreme Court.
In the Russian Federation, it is common practice to follow the IBA Guidelines on Conflicts of Interest in International Arbitration and the Rules of the Chamber of Commerce and Industry of the Russian Federation when considering issues relating to the impartiality of arbitrators. Neither document considers citizenship as a reason for disqualifying a person from acting as an arbitrator, nor does it require disclosure of this information to the parties.
At the same time, the provisions of the UNCITRAL Code of Conduct for Arbitrators in International Investment Disputes should be noted. According to Article 3, an arbitrator shall not be influenced by loyalty to a party to the dispute or to any other person or entity, nor shall he take any action which might create an appearance of lack of independence or impartiality. A broad interpretation of these criteria may be considered a reason to doubt an arbitrator's impartiality if the arbitrator has taken a categorical position against one of the countries of domicile of a disputing party. Citizenship of an unfriendly country could be considered to fall under "other circumstances likely to raise doubts as to impartiality". However, in our view, the mere fact of citizenship is not sufficient to support an allegation of lack of impartiality. There must be other evidence of a lack of objectivity and impartiality. Otherwise it would be evidence of discrimination for nationality.
The Russian Supreme Court has formulated a presumption of the lack of impartiality, shifting the burden of proving an arbitrator’s impartiality to the procedural opponent of the Russian party. At the same time, the text of the decision does not contain any examples of evidence that could be used to confirm the impartiality of an arbitrator from an "unfriendly" country. Consequently, in the absence of any guidelines, it seems virtually impossible to provide evidence of an arbitrator’s impartiality (rebuttal of the presumption). In any case, the lack of criteria makes it possible to declare that the presumption of partiality has not been rebutted by admissible evidence, which excludes the possibility of recognising the award in Russia.
In addition, the Russian Supreme Court’s presumption raises several questions. Can an arbitrator from an unfriendly country consider a case administered by a Russian arbitration institution? Should an arbitrator who is to hear a case before the ICAC of the Russian Chamber of Commerce and Industry provide additional evidence to rebut the "presumption of partiality" before starting to hear the case? What are the consequences if a foreign arbitrator is chosen by the Russian party or if the parties to the dispute are all Russian persons or companies? Could that party later invoke the arbitrator’s "partiality", even though the Russian party itself chose the arbitrator? In any event, we will see fewer, if any, arbitrators with the nationality of "unfriendly states" being appointed to arbitration proceedings in the future if a potential award is also to be enforced in Russia.
The Russian Supreme Court’s example should not be followed by the courts in other countries. It’s stance severely damages the internationalism of arbitration.
