On 10 December 2019, almost four years after the Russian arbitration reform of 2016 and one year since the Russian Supreme Court (the “SC“) published its guidance in relation to various issues concerning international commercial arbitration, the SC issued an important resolution relating to arbitration. Resolution No 53 On the fulfilment by the Russian state courts of the assistance and control functions in relation to domestic and international commercial arbitration (the “Resolution“, available in Russian here), is a detailed and long-awaited document requiring Russian state courts to adopt a uniform approach when dealing with arbitration-related cases. In particular, the Resolution attempts to define the meaning of “public policy”, helpfully reminding the Russian courts that they should refuse recognition or enforcement of an arbitral award on public policy grounds only in exceptional circumstances.
Overview of the Resolution
The Resolution offers a comprehensive review of a wide variety of arbitration issues, ranging from the scope of jurisdiction of arbitral tribunals and of state courts in arbitration-related cases (including their supervision and supportive powers), to issues of enforcement and setting aside of arbitral awards in Russia. Most of the issues covered in the Resolution are helpful reminders of Russian arbitration legislation provisions and of the principles and approaches which have been more or less established across the Russian arbitration landscape. Given the wide range of points covered by the Resolution, this blog post will not look at every provision, but cover some of the key issues, which are among those most often encountered in practice at various stages of arbitration proceedings. These and other points raised by the SC in the Resolution will hopefully increase the transparency and awareness of the Russian arbitration regime principles.
Position on Unilateral Option Clauses remains the same
At paragraph 24 of the Resolution, the SC confirmed its position voiced in 2018 regarding unilateral option clauses (“UOC“) (discussed in detail in our blog post here). The SC reiterated that if a UOC gives the option to resolve a dispute by way of arbitration or in a state court to a named party (e.g. the lender in a financing transaction), then the clause will be held to be invalid to the extent that it deprives the other party (e.g. the borrower) of the same option, and in those circumstances a UOC should be construed so as to give both parties identical procedural rights. At the same time, the SC confirmed the validity of alternative bilateral clauses, which provide the claimant (rather than a named party) with an option to choose between arbitration and state courts, a permanent and an ad hoc arbitral institution, or between different arbitral institutions.
Clarifications on the nature and construction of arbitration agreements
The SC reminded courts and practitioners that, as in numerous other jurisdictions, as a matter of Russian law an arbitration agreement is separable from the underlying contract (paragraph 20 of the Resolution). It also confirmed, at paragraph 22 of the Resolution, that the parties may, pursuant to Russian law, enter into an arbitration agreement by email exchange, provided that the parties comply with the relevant legal requirements for the execution of a contract by electronic means.
The SC stressed that the parties and the court should endeavour to construe the arbitration agreement in a way that would secure its enforceability and legality (paragraph 26). At paragraphs 27, 29 and 30, the SC helpfully clarified the limited instances when an arbitration agreement can be treated as invalid (e.g. when there is exercise of undue influence over one of the parties) or unenforceable (e.g. when it is impossible to determine whether the parties intended for their disputes to be adjudicated by an institutional or an ad hoc tribunal).
Defectiveness of an award in part does not preclude enforcement
Paragraph 52 provides guidance on radical examples from the past, where Russian courts would refuse recognition of an entire award when only one part of the award was defective (e.g. parts of the award where the tribunal exceeded its jurisdiction). In the Resolution, the SC confirmed that the court may recognise such an award in part, provided this part is separable from the defective part of the award.
Grounds frequently raised by defendants opposing enforcement
The Resolution also deals with a number of issues that may be particularly relevant to businesses attempting to enforce an arbitral award in Russia. These are (i) a notorious ground, frequently raised by award debtors before Russian courts, which deals with the failure to give proper notice of the appointment of the arbitrator or of the arbitration proceedings etc. (Article V(1)(b) of the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention“)); and (ii) the infamous “public policy” ground (Article V(2)(b) of the New York Convention). According to a November 2018 Russian Arbitration Association study on the application of the New York Convention in Russia between 2008 and 2017 (discussed in detail in our blog post here here), violation of public policy and lack of proper notice were among the most common grounds raised by defendants opposing enforcement.
Failure to Give Proper Notice (Article V(1)(b) of the New York Convention)
An alleged failure to give proper notice of the appointment of the arbitrator or of the arbitration proceedings is a common ground referred to by defendants when resisting enforcement of arbitral awards in Russia. Award debtors often argue that only a notice in compliance with the 1965 Hague Service Convention can be deemed good notice. In this regard, the SC clarified at paragraph 48 of the Resolution that arbitration proceedings are non-mandatory in nature; therefore the parties may agree on a special notification procedure or may opt to comply with a notification procedure set forth in the relevant arbitral institution rules.
Public Policy Ground (Article V(2)(b) of the New York Convention)
Although generally Russian courts tend to look favourably on the enforcement of foreign arbitral awards, the relevant laws have not always been consistently applied. Indeed, there have been instances when the term “public policy” has been interpreted broadly. With this in mind, paragraph 51 of the Resolution may be seen as another attempt to define the term “public policy” and determine criteria for its application.
The SC clarified that “public policy”, in the context of recognition and enforcement of arbitral awards (or setting aside of awards rendered in the territory of Russia), is to be construed as comprising highly imperative and universal fundamental principles, which have particular social and public importance, and form the basis of the Russian economic, political and legal systems. The SC went on to say that a state court should refuse recognition or enforcement of an arbitral award on the grounds of public policy violation only if the following two conditions are met: first, the award violates fundamental principles of the Russian economic, political or legal systems; and, second, such violation (a) may damage the sovereignty or safety of the state, (b) concerns interests of significant social groups, or (c) infringes constitutional rights and freedoms of individuals or legal entities. Even though there remains a risk that these two requirements may be interpreted broadly (as the definition of the terms used by the SC may potentially change depending on the context in which they are used), arguably an award debtor would nevertheless have a higher hurdle to meet when attempting to resist enforcement. This is even more so given that a Russian court deciding whether an award should be enforced or recognised should consider the existence of public policy grounds of its own motion.
The SC did not provide any illustrations of cases where the above two conditions would be satisfied, however it did give three examples of circumstances, which, in themselves, would not evidence violation of public policy: (i) application by the arbitral tribunal of foreign laws unknown to Russian law; (ii) the defendant’s non-participation in the arbitration proceedings; and (iii) the award debtor’s failure to object to enforcement. Finally, the SC also provided an important reminder that Russian courts should refuse recognition or enforcement of an arbitral award on public policy grounds only in exceptional circumstances.
Guidance by the SC aimed at achieving a uniform approach to arbitration cases is undoubtedly a welcome development, following the relatively recent arbitration reform in Russia. With this in mind, the SC’s attempt in the Resolution to define the meaning of “public policy” and address other arbitration-related issues may well prove to be a helpful reference point for parties attempting to enforce arbitral awards in Russia, arbitral tribunals adjudicating Russia-related disputes and Russian state courts in future.
For more information, please contact Nicholas Peacock, Partner, Alexei Panich, Partner, Maria Dolotova, Senior Associate, Olga Dementyeva, Associate, or your usual Herbert Smith Freehills contact.