RUSSIAN COURTS TO HAVE EXCLUSIVE JURISDICTION OVER SANCTIONED PERSONS

On 8 June 2020, the Russian President signed a new federal law (No.171-FZ), which will significantly change the dispute resolution landscape involving Russian sanctioned individuals and entities. It will come into force on 19 June 2020.

It is significant as it provides for exclusive jurisdiction of the Russian state arbitrazh (commercial) courts with respect to disputes involving Russian sanctioned individuals and entities as well as foreign entities controlled by them.

Even if the parties have agreed to the jurisdiction of a foreign court or an arbitral tribunal seated outside of Russia, sanctioned persons will be able to disregard the dispute resolution provisions if they cannot be enforced due to sanctions. A sanctioned person affected would need to assess the effect of sanctions on the contract, and, if there are grounds to believe that the applicable dispute resolution provisions cannot be enforced, it can refer the dispute for adjudication by the first-instance Russian arbitrazh courts at the place of its registration (for legal entities) or residence (for individuals). Such referral will be possible only if no similar dispute between the same parties is being considered by a foreign court or an arbitral tribunal seated outside Russia.

If the applicable dispute resolution provisions cannot be enforced, a sanctioned person will be entitled to apply to the Russian arbitrazh courts for an anti-suit injunction preventing the commencement or continuation of foreign court or international arbitration proceedings (where such proceedings are pending, this is the only way to seek protection from the Russian courts). The onus will be on a sanctioned person to demonstrate that either such proceedings have already begun or are imminently pending. At the same time, at the request of a sanctioned person, a foreign party failing to comply with the injunction imposed by a Russian court may be held liable to pay monetary compensation up to the amount claimed in the foreign court or arbitration proceedings. There is also a high risk that a decision rendered by a foreign court or arbitral tribunal as a result of such proceedings will not be enforceable in Russia.

Of course, it remains to be seen how the Russian courts will determine that the arbitration and other dispute resolution clauses involving sanctioned persons are unenforceable.

Even before the adoption of this new law, a disputable approach to enforceability of the dispute resolution clauses has already been tested by a Russian court. At least one controversial case exists (А40-149566/2019), where the Arbitrazh Court of Appeal held that an ICC arbitration clause is unenforceable due to the US sanctions and instead established the jurisdiction of the Russian courts. According to the court, the claimant, a Russian company subject to US sanctions, could not recover a debt from the defendant, a Russian branch of a US company, in reliance on the arbitration clause in the contract. The court concluded that the clause placed the defendant in a more favourable position, and an arbitral award in favour of the claimant would not be enforceable due to bank transfer restrictions as a result of sanctions. As the decision has been appealed, and the cassation court is due to hear the appeal at the end of June 2020, there will be many eagerly awaiting the judgment.

It is worth noting that the new law clarifies that a foreign court decision or an award of an arbitral tribunal seated outside Russia affecting a sanctioned person can still be recognised and enforced in Russia in accordance with general recognition and enforcement rules. Russia has been a party to the New York Convention since 1960 (replacing the former Soviet Union as a member state in 1991), and is a party to a number of international treaties that provide for enforcement of foreign court judgments and arbitral awards, and so the foreign party could rely on the relevant international instrument to ensure recognition and enforcement of the relevant decision or award in Russia.

However, according to the new law, enforcement will only be possible where either a sanctioned person filed a claim or did not make an objection to the jurisdiction of the foreign court or foreign-seated arbitral tribunal and did not make an application for an anti-suit injunction in the Russian courts.

So there are major changes in the offing.

It means that businesses dealing with Russian counterparties will need to carefully monitor whether the counterparty is a sanctioned person and whether the sanctions could affect the enforceability of the dispute resolution clauses in their contracts or provided by international treaties.

If this is the case, their disputes may be forcibly referred to the Russian arbitrazh courts, even though the parties have agreed to, or an international treaty provides for, an arbitration with a non-Russian seat; or opted for the jurisdiction of a foreign court.

In general, this law correlates with the trend determined by the draft amendments to the Russian Constitution providing for priority of Russian law and the Constitution over the international law. It will be interesting to see if these amendments are also adopted on a referendum scheduled for 1 July 2020.

Furthermore, as Russian law does not have extraterritorial effect, the relevant counterparty could nevertheless succeed in obtaining and enforcing abroad a foreign court decision or a foreign arbitral award in spite of the anti-suit injunction granted by the Russian court. However, it will still have to deal with and bear the consequences of any parallel proceedings in the Russian courts initiated in accordance with the new law and both assess whether a sanctioned person has any assets outside Russia and whether the Russian court judgment (including anti-suit injunction order) can be enforced against such party’s assets in Russia.

Enforceability of such Russian judgments abroad shall also be subject to supplemental analysis by foreign counterparties of sanctioned persons. So, in addition to monitoring sanctions legislation and its effects on the relevant contract with a sanctioned person, the foreign counterparty will need to consider whether any contractual mechanisms are available to protect its interests in the circumstances where the sanctioned person decides to rely on the new law.

It is also worth bearing in mind that the enforceability of the dispute resolution provisions could be misinterpreted by the Russian courts and confused with the possibility to enforce the decision of a foreign court or an arbitral award, as occurred in the example above. Hopefully, the cassation court will amend the approach taken by the Court of Appeal.

This law may complicate even further the already complex arbitration regime established as a result of the Russian arbitration reforms of 2016 and 2019, which were launched with the aim of eliminating the widespread practice of companies setting up their own “pocket” arbitration institutions to administer disputes. It could also lead to a deterioration of the investment climate in Russia.

This article was first published on Global Arbitration Review on 10 June 2020

For more information, please contact Alexei Panich, Partner, Olga Dementyeva, Associate, Polina Podoplelova, Associate, or your usual Herbert Smith Freehills contact.

Alexei Panich
Alexei Panich
Partner
+7 495 36 36515

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 7644

Polina Podoplelova
Polina Podoplelova
Associate
+7 495 78 37499

U.S. SUPREME COURT PAVES THE WAY FOR NON-SIGNATORIES TO ENFORCE ARBITRATION AGREEMENTS UNDER DOMESTIC EQUITABLE ESTOPPEL PRINCIPLES

On 1 June 2020, the U.S. Supreme Court unanimously held in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC[1] that the New York Convention does not preclude non-signatories from enforcing arbitration agreements based on the application of domestic equitable estoppel doctrines.

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AWARD ENFORCEMENT ORDERS: TO SET ASIDE OR NOT TO SET ASIDE? – THAT IS THE QUESTION

In a judgment handed down by the English High Court last month (A v B [2020] EWHC 952 (Comm)), the court delivered a stern warning to claimants considering the enforcement of an arbitration award which fails to establish a clear “right to payment”. The judgment also serves as a timely reminder that an application for leave to enforce an arbitration award should be made on solid legal grounds, and with full disclosure of all relevant points if made on an ex parte basis.

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RECENT DEVELOPMENTS IN INDIA-RELATED ARBITRATION

Herbert Smith Freehills has issued the latest edition of its India arbitration e-bulletin.

In this issue we consider various court decisions, which cover issues such as the constitutional validity of s87 of the Arbitration Act, setting aside an award on the grounds of bias, and the time limits surrounding enforcement of awards. In other news, we consider the latest developments regarding COVID-19, the UAE becoming a reciprocating territory for the enforcement of judgments, as well as India-related bilateral investment treaty news and other developments. Continue reading

MALAYSIAN FEDERAL COURT CONFIRMS THAT ONLY DISPOSITIVE SECTIONS OF ARBITRAL AWARDS ARE TO BE REGISTERED

The Malaysian Federal Court has resolved the recent debate about whether courts should recognise and enforce whole arbitral awards under Malaysian law. The Court clarified that only the dispositive sections of arbitral awards will be enforced by Malaysian courts under Section 38 of the Malaysian Arbitration Act 2005 (AA). Parties seeking to enforce arbitral awards before the Malaysian courts need no longer disclose any other section of their awards, including the tribunal’s reasoning or summary of findings.

The Siemens decision widens the confidentiality of arbitral awards under Malaysian law, which carries practical implications for parties to Malaysian-seated arbitrations going forward. Parties intending to take advantage of this enhanced protection should also be mindful that their awards may not be afforded a similar degree of confidentiality by other rules connected to their arbitrations.

Siemens Industry Software Gmbh & Co KG (Germany) (formerly known as Innotec Gmbh) v Jacob and Toralf Consulting Sdn Bhd (formerly known as Innotec Asia Pacific Sdn Bhd) (Malaysia) & Ors, Civil Appeal No: 02(f)-115-12/2018(W)

Background

On 31 July 2008, the appellant and respondents concluded an agreement for the full and final settlement of all matters and certain legal proceedings between them (Settlement Agreement). The Settlement Agreement contained an arbitration clause requiring the resolution of any dispute arising from it through Singapore-seated arbitration under the arbitration rules of the International Chamber of Commerce (ICC).

A dispute subsequently arose between the parties in relation to the Settlement Agreement. This dispute was eventually referred to a panel of three arbitrators.

On 8 May 2015, the arbitral tribunal delivered its final award and dismissed the appellant’s claim. In arriving at its decision, the tribunal made certain findings against the appellant and about the circumstances in which the Settlement Agreement was concluded. These findings were recorded in the tribunal’s reasoning but not in the award’s dispositive section. The “dispositive section” refers to the section of the award, usually at the very end, declaring which of the parties’ claims/counterclaims succeed and the reliefs they are entitled to.

The respondent subsequently applied to the Malaysian High Court for the recognition and enforcement of the arbitral award pursuant to Section 38 AA. Where enforcement was granted, the entire arbitral award would be registered as if it were a judgment of the High Court.

The appellant did not resist the recognition and enforcement application on any of the grounds under Section 39 AA, which largely mirror Article 36 of the UNCITRAL Model Law. However, the appellant challenged the extent to which the High Court should register the award, arguing that the award should not be registered in its entirety, but confined to the award’s dispositive section only. The appellant argued that a bifurcated registration would fit the statutory enforcement scheme and protect the arbitration’s confidentiality.

The High Court accepted the appellant’s challenge and held that only the dispositive section of the award was capable of being registered and enforced as a judgment of the High Court under Section 38 AA. This was subsequently overturned on appeal to the Malaysian Court of Appeal.

Dissatisfied with the Court of Appeal’s decision, the appellants raised an appeal to the Federal Court.

Federal Court decision

The Federal Court allowed the appeal, and agreed with the High Court that only the dispositive section of an arbitral award was capable of being registered and enforced under Section 38 AA.

In so deciding, the Federal Court drew an analogy between arbitral awards and judicial decisions, which comprise two separate parts, namely the:

  • order or judgment, which sets out the reliefs or prayers granted by the court. The Federal Court considered that the dispositive section of an arbitral award was equivalent to an order/judgment; and
  • Grounds of judgment, which refer to the court’s reasoning and findings that form the basis of the order/judgment. The Federal Court found that this was akin to the reasoning and findings of an arbitral tribunal.

Emphasising this distinction, the Federal Court noted that, as a matter of law and practice, a successful party to a court action would only file and rely upon an order/judgment for execution, and not the grounds of judgment. Arbitral awards, which the Federal Court viewed as analogous to court decisions, should therefore be given similar treatment for the purposes of recognition and enforcement. The court considered that this was consistent with the approach of Malaysian courts when enforcing foreign judgments under the Reciprocal Enforcement of Judgments Act 1958 (REJA), which could be adopted for the purposes of enforcing arbitral awards. Under REJA, Malaysian courts are concerned only with the registration of the operative part of the judgment and not with the foreign court’s findings or reasoning underlying its decision. Accordingly, this meant that the ambit of Section 38 AA should be confined to the dispositive section of an arbitral award only, which the Federal Court found reflected the practice of other jurisdictions.

A further reason for the Federal Court’s decision was that the bifurcation of awards functioned to protect the confidentiality of the arbitration. The court found that the registration of the entire arbitral award would have undermined its confidentiality. Further, as Malaysian courts are not required to assess the merits of the tribunal’s award when enforcing it under Section 38 AA, the registration of the entire award was unnecessary.

Another point of interest was the Federal Court’s view that the wording of the relevant AA provisions supported the bifurcation of awards, notably the court’s view on the statutory definition of “award” under the AA:

“[I]f the intention is to register the findings as part of the decision of an arbitral tribunal, the definition of “award” in section 2 of the AA 2005 ought to be “a decision of the arbitral tribunal and the substance of the dispute…” rather than the present definition “a decision of the arbitral tribunal on the substance of the dispute”.”[1]

While this definition was interpreted within the context of recognition and enforcement of arbitral award, the Federal Court did not expressly limit its discussion to this part of the AA. It will be interesting to see how this aspect of the Federal Court’s decision will be interpreted in the future.

Implications for Malaysian-seated arbitrations

The Federal Court decision in Siemens strengthens the confidentiality of arbitrations in Malaysia. It was not uncommon for parties to produce entire arbitral awards when seeking enforcement under Section 38 AA, making the award publicly accessible. Siemens makes it clear that parties should dispense with this practice.

However, parties intending to rely on this enhanced confidentiality should note that different confidentiality regimes may apply to their arbitral awards under the rules applicable to their arbitration. This is particularly relevant in ICC-administered arbitrations, where awards made as from 1 January 2019 may be published in their entirety, unless parties object to publication or restrict this by agreement. Therefore, a party intending to keep the tribunal’s findings confidential must make sure to take such steps. Failure to do so can result in the award’s unintended publication by the ICC.

A further discrepancy may arise where a party seeks to enforce awards in investor-state arbitrations under the UNCITRAL Rules in the Malaysian courts. Such awards may be published in whole under the UNCITRAL Transparency Rules, which apply by default to investment treaties concluded after 1 April 2014 or, in the case of earlier investment treaties, where Contracting States or disputing parties have agreed to their application. While there are exceptions to this publication requirement, it remains to be seen how they will interact with Malaysian law and the Siemens decision.

Parties intending to take advantage of the Siemens decision should, therefore, revisit the rules applicable to their arbitration and ensure that confidentiality standards are consistent across the whole arbitration regime chosen by parties.

[1]       Siemens, at [33]

 

For further information, please contact Peter Godwin, Regional Head of Practice – Dispute Resolution, Asia and Managing Partner, Kuala Lumpur, Lim Tse Wei, Associate, or your usual Herbert Smith Freehills contact.

Peter Godwin
Peter Godwin
Managing Partner
+60 3 2777 5104
Tse Wei Lim
Tse Wei Lim
Associate
+60 3 2777 5135

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.

PARIS COURT OF APPEAL REFUSES TO SET ASIDE AN AWARD AND CONFIRMS THAT AN ARBITRAL TRIBUNAL DOES NOT EXCEED ITS MANDATE WHEN APPLYING UNIDROIT PRINCIPLES TO DECIDE ON THE MERITS OF A DISPUTE

In a judgment issued on 25 February 2020, the Paris Court of Appeal (the “Court”) refused to set aside an ICC award, dismissing all four grounds of annulment on which the claimant relied (Cour d’appel de Paris, 25 February 2020, n° 17/18001). The judgment, which reiterates well-established principles of French arbitration law, is a helpful illustration of how the Court, as the annulment court for an award issued in France, addresses the grounds to set aside an award under article 1520 of the French Code of Civil Procedure (“CPC”).

Background and arbitration proceedings

Prakash Steelage Ltd, a company incorporated in India (“Prakash”) and Uzuc SA, a company incorporated in Romania (“Uzuc”, and together with Prakash the “Parties”), entered into a sales agreement under which Prakash would deliver stainless steel tubes (the “Tubes”) to Uzuc (the “Sales Agreement”). Uzuc then planned to use the Tubes to build heat exchangers that would ultimately be delivered to QAFCO Qatar. Uzuc alleged that the Tubes were defective and filed a request for arbitration with the ICC on 19 December 2014, claiming compensation from Prakash.

On 13 June 2017, the tribunal issued an award ordering Prakash to pay EUR 1 million in damages to Uzuc for breach of its contractual obligations under the Sales Agreement (the “Award”).

The Court’s decision

In November 2017, Prakash commenced annulment proceedings before the Paris Court of Appeal on the grounds that (i) the tribunal had wrongly upheld its jurisdiction (article 1520 1° of the CPC); (ii) the tribunal had ruled without complying with the mandate conferred upon it (article 1520 3° of the CPC); (iii) due process was violated (article 1520 4° of the CPC); and (iv) enforcement of the award would be contrary to international public policy (article 1520 5° of the CPC). The Court rejected all four grounds and refused to set aside the Award. We consider each of the alleged grounds of annulment in turn below.

Lack of jurisdiction

Prakash argued that the tribunal should not have accepted jurisdiction as the reference to “Paris Court of arbitration (Cour d’arbitrage de Paris) in an email between the Parties was not an effective arbitration clause. Prakash argued that the reference (i) was part of the negotiation process, and was not an expression of consent to arbitration; and (ii) did not include any indication as to the scope of the submission to arbitration, rendering it “impracticable”. According to Prakash,  it was entitled to rely on this ground before the Court as it had raised it previously in its answer to the request for arbitration (the “Answer”).

The Court rejected Prakash’s argument and held, consistent with previous decisions[1] and on the basis of article 1466 of the CPC,[2] that a party which actively participates in the arbitration proceedings is deemed to have waived its right subsequently to rely on any irregularities which it knowingly refrained from raising before the arbitrators. The Court noted that while Prakash did comment, in its Answer, that the Parties had not agreed to submit their disputes to arbitration, it did not in fact argue that the tribunal did not have jurisdiction in that document or at a later stage in the proceedings. Further, during the hearing, Prakash had expressly accepted the tribunal’s jurisdiction. The Court therefore concluded that Prakash could not challenge the Award on the basis of the tribunal’s alleged lack of jurisdiction.

Decision beyond the scope of the tribunal’s mandate

Prakash argued that the tribunal exceeded its mandate by applying the UNIDROIT Principles to the dispute. Prakash claimed that Indian law was applicable and that the tribunal’s decision to apply the UNIDROIT Principles instead amounted to a ruling in equity rather than in law, which exceeded the tribunal’s mandate.

The Court rejected this argument and held that the tribunal had not exceeded its mandate. The Court noted that, in light of the Parties’ disagreement as to the applicable law (with Prakash arguing that Indian law was applicable and Uzuc arguing that Romanian law was applicable), the tribunal issued two procedurals orders: (i) procedural order No. 1 which invited the Parties to examine the application of substantive norms and to consider the application of transnational principles such as the UNIDROIT Principles; and (ii) procedural order No. 3, which asserted the tribunal’s decision to apply the UNIDROIT Principles in accordance with article 21.1 of the ICC rules and article 1511 of the CPP. On the basis of those provisions and the Parties’ agreement on the direct application method of choice of law, the tribunal held that it enjoyed broad discretion to apply substantive norms it deemed appropriate, taking into account trade usages and without the need to refer to conflict of law principles. Applying this method to determine the law applicable to the dispute, and on the basis of the “largely international” character of the Sales Agreement, the tribunal applied the UNIDROIT Principles. The Court held that that this was a decision in law rather than in equity and that it did not exceed the tribunal’s mandate.

Breach of due process

Prakash alleged that the tribunal breached due process by (i) denying Prakash its right to be heard within a reasonable period of time, and adopting “an intolerable attitude tantamount to harassment”; and (ii) endorsing an expert report which was allegedly neither impartial nor independent.

The Court of Appeal rejected Prakash’s arguments and held that:

  1. in accordance with established case-law,[3] the obligation for tribunals to comply with due process only requires that each party be given an opportunity to make its arguments known to the other party and to challenge the other party’s arguments. The Court further observed that, although the ICC Secretariat refused two of Prakash’s requests for extensions of time for the service of its Answer, it also granted several extensions at various stages of the proceedings, as did the tribunal. The Court concluded that there was no basis for a finding that due process had been breached; and
  2. both Parties had instructed experts and had had an opportunity to cross-examine the other Party’s expert. It was not for the Court to consider whether the tribunal had erred in choosing not to rely on the evidence presented by Prakash’s expert.

Breach of international public policy

Finally, Prakash asserted that the Award breached international public policy by awarding Uzuc damages that were disproportionate to Uzuc’s loss.

The Court rejected this argument and reaffirmed, in accordance with its recent case-law[4], that awards could only be set aside for breaching international public policy if they manifestly, effectively and concretely conflict with the principles and values included in the notion of international public policy. The Court held that, while the award of punitive damages is not, by itself, contrary to French international public policy, the situation would be different if the amount awarded was disproportionate with respect to the loss suffered and the breaches of the debtor’s contractual obligations. In the circumstances, however, the Court noted that the tribunal in this case did not award punitive damages (which had not been claimed in any event) and therefore rejected the fourth ground of challenge.

Comment

The Paris Court of Appeal’s decision does not break new ground and, as discussed above, it mainly reiterates established principles. However, this case does provide useful guidance as to how the Court approaches the grounds for setting aside an arbitral award (such as the tribunal’s jurisdiction, due process, and international public policy). The judgment also provides useful guidance as to the arbitrators’ broad discretion under French law to apply transnational principles, such as the UNIDROIT Principles, where the parties have not expressly agreed an applicable law to their arbitration proceedings.

For more information, please contact Emily Fox, Of Counsel, or your usual Herbert Smith Freehills contact.

Emily Fox
Emily Fox
Of Counsel
+33 1 53 57 72 48


[1] See for example, Cour d’appel de Paris, Pôle 1, Chambre 1, Arrêt du 22 janvier 2019, Répertoire général nº 16/23370 and Cour de cassation, Deuxième Chambre civile, Arrêt nº 799 du 11 juillet 2002, Pourvoi nº 00-21.823

[2] Article 1466 of the CPC is applicable to international arbitrations seated in France pursuant to article 1506 3° of the CPC

[3] See for example, Cour d’appel de Paris, Pôle 1, Chambre 1, Arrêt du 10 janvier 2017, Répertoire général nº 14/21345

[4] See for instance, amongst others, Cour d’appel de Paris, Pôle 1, chambre 1, Arrêt du 14 Juin 2016, n° 14/16113 and Cour d’appel de Paris, Arrêt du 26 septembre 2017, n° 16/15338

ENGLISH COURT UPHOLDS SCC AWARD DESPITE RESPONDENT’S ARGUMENT THAT ARBITRATION AGREEMENT WAS SIGNED BY DEFUNCT PREDECESSOR

In Carpatsky Petroleum Corp v PJSC Ukrnafta [2020] EWHC 769 (Comm), the Commercial Court has upheld the enforcement of a US$147 million Stockholm Chamber of Commerce (the “SCC”) award issued in 2010 in favour of Carpatsky Petroleum Corporation, incorporated in Delaware (“Carpatsky”), against PJSC Ukrnafta (“Ukrnafta”), Ukraine’s oil and gas producer (the “Award”). Enforcement was allowed despite an argument from Ukrnafta that the arbitration agreement was signed by Carpatsky’s predecessor, which had ceased to exist in 1996. Given that the parties had already fought this issue on the enforcement front in a number of jurisdictions, including Ukraine and Sweden (the seat of arbitration), the Court had to consider whether an issue estoppel arose as a result of the foreign courts’ findings, noting that there was a public interest in sustaining the finality of supervisory courts’ decisions on properly referred procedural issues arising from the arbitration.

Background

The parties and the Agreements

In 1995, Carpatsky Texas (“CT”) and Ukrnafta’s subsidiary SE Poltavanaftogaz (“PNG”) entered into a joint activity agreement to develop and exploit a gas field in Ukraine (the “JAA”). In June 1996, CT was merged into Carpatsky: CT ceased to exist, Carpatsky assuming CT’s rights and obligations. In October 1996, PNG and “Carpatsky Petroleum Corporation, registered in Texas” entered into a restated JAA, which contained an arbitration clause. In 1998, the parties executed an addendum to the restated JAA (the “JAA Addendum”, and together with the JAA and the restated JAA, the “Agreements”).The JAA Addendum (i) replaced PNG with Ukrnafta; and (ii) amended the arbitration clause such that it referred disputes to SCC arbitration. All the Agreements were signed by the President of “Carpatsky Petroleum Corporation” and stamped with CT’s seal.

Arbitration proceedings

In 2007, Carpatsky filed a request for arbitration with the SCC. Ukrnafta submitted an answer without a reservation as to jurisdiction. Following two rounds of submissions by each party, Ukrnafta served objections to the tribunal’s jurisdiction alleging that there was no valid arbitration agreement under Swedish law because the Agreements were made with CT, which had ceased to exist. The tribunal determined that it had jurisdiction, at the very least because the parties had entered into an arbitration agreement by engaging in the arbitration without raising an objection to jurisdiction. The arbitration proceeded on the merits, and the tribunal issued the Award in favour of Carpatsky.

Ukrainian proceedings

In early 2009, upon the application of the Ukrainian Deputy Public Prosecutor, the Kyiv Commercial Court held that the Agreements had not been executed as they were signed by CT, which had ceased to exist as at the date of the Agreements (the “Kyiv Court Decision”).

After the tribunal issued the Award, Carpatsky commenced enforcement proceedings in Ukraine. In 2013, the application was dismissed with reference to the Kyiv Court Decision on the ground that there was no written arbitration agreement (the “Kyiv Enforcement Decision”, and together with the Kyiv Court Decision, the “Kyiv Decisions”).

Swedish proceedings

In 2009, Ukrnafta brought proceedings before the Stockholm District Court arguing, with reference to Swedish law, that the tribunal lacked jurisdiction. The proceedings were stayed pending the arbitration. In 2011, the District Court rejected Ukrnafta’s argument, confirming that the tribunal had jurisdiction.

In addition, Ukrnafta sought to set aside the Award on the basis that the tribunal had exceeded its mandate and had made errors which affected the outcome of the arbitration (the “Swedish Challenge Proceedings”). In 2015, the Svea Court of Appeal rejected all Ukrnafta’s challenges to the Award (the “Swedish Challenge Proceedings Decision”).

US proceedings

In February 2009, Ukrnafta sued Carpatsky in the 190th District Court of Harris County, Texas asserting a number of causes of action, including negligent misrepresentation, fraud and misappropriation of trade secrets, and contending that all amendments to the JAA after the date of the merger were void ab initio. The case was removed to federal court, and the US District Court for the Southern District of Texas (“SDT”) stayed the litigation pending the arbitration proceedings. The stay was lifted following the termination of the Swedish Challenge Proceedings. In October 2017, the SDT granted Carpatsky’s motion to confirm the Award. Ukrnafta appealed.

In April 2020, several days after the Commercial Court in London upheld enforcement of the Award, the US Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) dismissed Ukrnafta’s challenges to the District Court’s order confirming the award. In its ruling, the Fifth Circuit found that under Delaware law, the President of “Carpatsky Petroleum Corporation” had authority to enter into the JAA Addendum on behalf of Carpatsky and the use of CT’s seal was irrelevant. The Fifth Circuit also noted that Ukrnafta waived its right to challenge the tribunal’s jurisdiction by submitting to arbitration proceedings, and, in any event, an arbitration agreement was created during the arbitration. The Fifth Circuit dismissed the due process violations pleaded by Ukrnafta, noting, in particular, that the merits hearing looked “like a full-blown federal trial”. Finally, the Fifth Circuit held that allowing the Kyiv Decisions to prevent enforcement would “gut international arbitration and interfere with the global commerce it promotes.”

English proceedings

Carpatsky successfully applied to the English court to enforce the Award. Ukrnafta sought to set aside the order granting permission to enforce before the Commercial Court. Ukrnafta argued that under Ukrainian law there was no valid arbitration agreement given that the JAA Addendum was executed on behalf of CT. Ukrnafta also contended there was a serious procedural irregularity in that the tribunal (i) dealt with an issue concerning a limitation of liability clause on a basis which had not been pleaded; and (ii) took a procedurally irregular approach to the agreed methodology for assessing damages, which resulted in a serious mathematical error.

Overview of the Commercial Court decision

There was a valid arbitration agreement

The Court held that Ukraine was estopped by conduct from arguing that Ukrainian law governed the arbitration agreement given that it had argued that Swedish law was applicable in the arbitration and Swedish proceedings. It concluded that under Swedish law there was a valid arbitration agreement in the JAA Addendum between Ukrnafta and Carpatsky, noting, in particular, that the parties intended both objectively and subjectively, to enter into the JAA Addendum with each other. It further noted that both (i) the conduct of the parties’ representatives in the arbitration under the SCC Rules and (ii) the parties’ participation in the arbitration and exchange of pleadings gave rise to an arbitration agreement even if there had not been one before.

No issue estoppel on the validity of the arbitration agreement

The Court reminded the parties that an issue estoppel can arise from foreign court decisions in relation to enforcement, referring to Diag Human SE v Czech Republic (discussed in one of our previous blog posts). However, given that the Ukrainian courts did not address the existence of an arbitration agreement as a matter of Swedish law, an issue estoppel did not arise. The Court noted that to the extent its determinations related to the validity of the JAA Addendum under Ukrainian law it would be unjust to recognise an issue estoppel as precluding Carpatsky from successfully contending that the JAA Addendum was valid.

Issue estoppel on limitation of liability and on damages methodology

The Court held that there was a public interest in sustaining the finality of decisions of the supervisory courts (the Swedish courts in this instance) on properly referred procedural issues arising from the arbitration. It also noted that, in assessing whether there was an issue estoppel arising from a decision of the supervisory courts in respect of an arbitration-related procedural issue, English courts should not adopt an overly-narrow approach to whether the same issue has been decided by the supervisory court. The Court considered the arguments raised by Ukrnafta in the Swedish proceedings, concluding that Ukrnafta’s procedural irregularity complaints were either substantially the same (in the case of the limitation of liability point) or the same (in the case of the damages methodology) to those pursued before the Court. These arguments had been considered (and rejected) in the Swedish Challenge Proceedings Decision, which gave rise to an issue estoppel.

Comment

The Commercial Court’s decision in this case is another clear example of the English courts’ pro-enforcement stance. The judgment is also an important reminder to commercial parties that their participation in the arbitration proceedings may in itself be capable of constituting an agreement to arbitrate, even if the arbitration agreement in the relevant contract is in some way defective. In addition, the decision reiterates that the principle of issue estoppel may affect the parties’ ability either to enforce an award or resist enforcement in the English courts where there have already been attempts to enforce or challenge the award in foreign courts, especially before the courts of the seat of arbitration.

For more information, please contact Brenda Horrigan, Partner, Chiara Cilento, Associate, Olga Dementyeva, Associate, or your usual Herbert Smith Freehills contact.

Brenda Horrigan
Brenda Horrigan
Partner
+61 2 9225 5536

Chiara Cilento
Chiara Cilento
Associate
+1 917 542 7842

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 7644
 

MALAYSIA: COURT OF APPEAL SUSPENDS RECOGNITION AND ENFORCEMENT OF AN AWARD ON THE BASIS IT IS NOT YET BINDING

In Malaysian Bio-Xcell Sdn Bhd v Lebas Technologies Sdn Bhd and another appeal (Civil Appeal Nos. W-02(IM)(C)-1532-07/2018 and W-02(IM)(C)-1533-07/2018), the Court of Appeal determined, for the first time, an application to suspend the enforcement of an award on the basis that the award has not yet become binding on the parties to the award. Faced with an application to refuse the recognition of the award, the Court of Appeal was asked to consider the circumstances in which an award is deemed to be ‘not yet binding’ under Malaysia’s Arbitration Act 2005 (“Act”).

Background

Malaysian Bio-Xcell Sdn Bhd (“Bio-Xcell” or “appellant”) was the main contractor in a build, lease and transfer agreement dated 1 November 2010 to design, build, equip, test and commission a biotechnology facility for the production of propanediol on a piece of land located in the appellant’s biotechnology park in Johor Bahru. The appellant subcontracted the engineering, procurement, construction and commissioning works to the Lebas Technologies Sdn Bhd (“Lebas” or “respondent”) on 21 June 2011 (the “EPCC Contract”). The EPCC Contract included the procurement of specific salt and water removal equipment from two German manufacturers for the appellant (“Equipment”).

On 15 March 2013, the appellant terminated the EPCC Contract. The respondent subsequently commenced arbitration against the appellant to challenge the validity of the termination and obtain damages for unlawful termination (the “1st Arbitration”).

On 2 February 2015, the tribunal in the 1st Arbitration rendered its final award, which found the appellant’s termination of the EPCC Contract to be unlawful, and ordered the appellant to pay the respondent the sum of MYR6,559,440.37 with interest and costs (“Award”). The sum was made up of the balance sum due under the Final Account and the value of the performance bond which was found to have been wrongly called. This monetary award also included payment for the Equipment that the appellant was to procure under the EPCC Contract.

The appellant became concerned that if it paid out the monies ordered under the Award, there is nothing to ensure that the respondent would deliver the Equipment already purchased. The appellant was also particularly concerned that there would be little assets that would remain in the respondent, given that the latter is a special purpose vehicle incorporated in Malaysia (parent company in France) specifically to carry out the EPCC contract. Its parent company is established in France. If the respondent does not deliver the Equipment after the appellant’s payment, the appellant considered that there would be no realistic recourse against the respondent.

As a result, on 8 August 2017, the appellant commenced civil proceedings against the respondent in the Kuala Lumpur High Court, claiming delivery and transfer of the ownership of the Equipment (“Suit 87”). On 15 November 2017, the respondent successfully applied to stay the court proceedings in Suit 87. The Kuala Lumpur High Court ordered – on terms consented to by the respondent –that (i) the appellant issue its notice of arbitration within one month, (ii) the arbitration proceedings be heard before the same arbitrators in the 1st Arbitration, and (iii) if any arbitrator was indisposed, the procedure for appointing a new arbitrator would be commenced in accordance with the arbitration agreement.

In the interim, on 20 September 2017, the respondent commenced separate proceedings in the Kuala Lumpur High Court pursuant to section 38 of the Act to recognise the Award as a judgment of the court. In response, the appellant applied to stay the application for recognition and suspend the enforcement of the Award pending the hearing and disposal of what was then considered an intended arbitration between the parties.

Pursuant to the High Court’s order dated 15 November 2017, a second arbitration was commenced on 13 December 2017 (before a tribunal which eventually consisted of different arbitrators from the 1st Arbitration) by way of a Notice to Arbitrate, which sought to determine: (i) whether pursuant to the EPCC Contract, Bio-Xcell is entitled to the legal and/or beneficial ownership of the Equipment upon payment of the Arbitration Sum Awarded; (ii) whether Bio-Xcell’s right to the Equipment is incidental and consequential to the decision of the Learned Arbitrators in giving full value to the Equipment based upon the final account; (iii) whether Lebas’s right to payment of the Arbitration Sum Awarded co-exists with a reciprocal obligation on the part of Lebas to deliver and/or transfer of ownership of the Equipment to Bio-Xcell; (iv) whether the Arbitration Award is conditional upon and/or subject to Lebas’s ability to deliver and/or transfer ownership of the Equipment to Bio-Xcell; and (v) whether in the event of Lebas’s inability to deliver and/or transfer of ownership of the Equipment to Bio-Xcell, Lebas is estopped and/or precluded from enforcing the Arbitration Award and is liable to account to Bio-Xcell for monies paid by Bio-Xcell to Lebas in respect of the said Equipment (the “2nd Arbitration”).

Issues

The application to recognise the Award, being a summary procedure, would be granted, in the event the appellant is unsuccessful in staying the recognition of the Award. As such, the main issues are (i) whether court has power to suspend enforcement of Award; and (ii) whether the binding force of the Award rendered in the 1st Arbitration is conditional upon the outcome of 2nd Arbitration?

According to Bio-Xcell, the Award has yet to become binding by reason of the 2nd Arbitration that was ordered on 15 November 2017 upon terms of reference consented by both parties. The appellant argued that, due to external facts and circumstances underscoring the issues addressed in the Award, it has not yet become binding within the meaning of section 39(1)(a)(vii) of the Act; until those facts or circumstances are overcome or spent, the Award remains yet to be binding on the parties. As a result, Lebas is prevented from recognising and enforcing the Award in breach of principles of estoppel and unjust enrichment.

In response, Lebas argued that the court has no jurisdiction to suspend the binding force of the Award, and that the Award was not conditional upon the outcome of the 2nd Arbitration, given that both arbitrations dealt with distinct and unrelated issues.

Decision of the High Court

On 25 June 2018, the appellant’s application to stay the recognition of the Award was dismissed, and the respondent’s application for recognition was allowed. Having failed to stay the application for recognition, the High Court allowed the Award to be recognised as a judgment of the Malaysian courts. At the time of the High Court’s decision, the 2nd Arbitration was already underway.

The High Court considered that there was no power or jurisdiction to grant the orders sought, and that the Malaysian courts cannot call on its inherent jurisdiction to grant the order of stay or suspension. The High Court found that considerations of estoppel and unjust enrichment were not successfully proved, in any event.

Further the High Court held that “it is a fallacy to suppose that merely because the issues in dispute in the second arbitration are somehow connected to those in the first arbitration, and thus the award has not binding on the parties.”. It held that an application to set aside the Award – which the appellant did not make – was significant to any challenge to the binding effect of the Award.

Decision of the Court of Appeal

The Court of Appeal allowed the stay application, and set aside the High Court’s decision to recognise the Award. In doing so, the Court of Appeal adjourned the decision on the recognition pending the disposal of the 2nd Arbitration, and ordered that the sums ordered in the Award be paid as security pending the disposal of the 2nd Arbitration.

The Court of Appeal considered that any application to refuse the recognition of an award under section 39(1)(a)(vii) of the Act must be considered together with section 39(2) which, cumulatively, read as follows:

(1) Recognition or enforcement of an award, irrespective of the State in which it is made, may be refused only at the request of the party against whom it is invoked –

(a) where that party provides to the High Court proof that –

(vii) the award has not yet become binding on the parties or has been set aside or suspended by a court of the country in which, or under the law of which, that award was made.

(2) If an application for setting aside or suspension of an award has been made to the High Court on the grounds referred to in subparagraph (1)(a)(vii), the High Court may, if it considers it proper, adjourn its decision and may also, on the application of the party claiming recognition or enforcement of the award, order the other party to provide appropriate security.

The Court of Appeal acknowledged that section 39 of the Act is taken from Article 36 of the UNCITRAL Model Law, and is also the embodiment of Article V of the New York Convention. Section 39 in fact mirrors much of what may be found under the New York Convention and Model Law, save for differences in drafting.

Recognising the lack of Malaysian judicial precedent on this issue, the Court of Appeal made reference to treatises on international arbitration, and decisions of the courts of other New York Convention signatories and jurisdictions adopting the UNCITRAL Model Law, including Canada, England, Spain, and the USA, noting that “[s]uch guidance is highly persuasive and of much assistance given the importance and acknowledged role that arbitration plays in dispute resolution quite aside from the need for consistency and uniformity in how arbitration awards are received in member States”. The Court of Appeal was of the view that there was a “consistent approach” in these jurisdictions to stay or adjourn an application to recognise an award where the resisting party proves that the award is yet to be binding; the court is not restricted to being binary between refusing or granting recognition only under such circumstances. In this respect, the Court of Appeal considered that the grounds for refusing recognition under section 39(1)(a)(vii) are not limited to the existence of an application to set aside or suspend an award, but also to circumstances where the award has not yet become binding on the parties.

The Court of Appeal agreed and adopted the consistent approach taken by these jurisdictions, but did not see a need to lay down any hard and fast rules in determining when an award is yet to be binding; instead, each application under section 39(1)(a)(vii) and (2) of the Act would require the court to carefully scrutinise the factual and legal circumstances surrounding the award before exercising its discretion to stay or adjourn the recognition of the award.

The Court of Appeal disagreed with decision of the High Court which held that the disputes from the 1st Arbitration and 2nd Arbitration stem from the same EPCC Contract, but were discrete and distinct disputes. The subject matter in Suit 87 – which was referred for determination in the 2nd Arbitration – concerns the interplay between the Award and the Equipment, and alleged misrepresentations which led to the findings in the Award. In the 2nd Arbitration, the appellant sought reliefs which, if granted, would effectively vary and even set off against the terms of the Award. It was pertinent that both parties had – in the application to stay Suit 87 –  agreed to the disputes to be referred to the 2nd Arbitration in that manner. For these reasons, the Court of Appeal considered that the Award had not yet become binding.

Comment

Malaysia’s decision to model the Act on the UNCITRAL Model Law demonstrates a fundamental policy choice to support arbitration by ensuring that its legal framework meets the needs of its users, both domestically and internationally. One of the most obvious means by which this objective is achieved is through harmonisation of not only arbitration legislation, but also of the interpretation and application of the legislation. The implications of this objective in terms of the interpretative approach taken by the Malaysian judiciary is clear: a Malaysian judge should strive to look for consensus positions globally, and should take seriously the shift in the hierarchy of sources that this requires.

In what appears to be the first written judgment addressing section 39(a)(vii) and (2) of the Act, the Court of Appeal’s decision to consider not only Commonwealth common law decisions, but also the decisions of other jurisdictions (including civil law jurisdictions) which are signatories to the New York Convention and/or adopters of the UNCITRAL Model Law, is very much welcome. Though not the first decision which draws reasoning from decisions of other New York Convention signatories and UNCITRAL Model Law jurisdictions, the Court of Appeal’s interpretative reasoning here sends a strong signal of its own increasingly frequent approach of interpreting the Act harmoniously with the New York Convention and the UNCITRAL Model Law in a way that achieves the harmonisation objectives of these instruments. The increasingly frequent comparative enquiries taken by Malaysian courts and references to authoritative comparative treatises in search for international consensus on arbitration demonstrates the Malaysian judiciary’s ability to make important contributions to the legal harmonisation project pursued by UNCITRAL.

The judgment of the Court of Appeal is available in English here.

For further information, please contact Peter Godwin, Regional Head of Practice – Dispute Resolution, Asia and Managing Partner, Kuala Lumpur, Daniel Chua, Associate or your usual Herbert Smith Freehills contact.

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.

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PALAU ACCEDES TO THE 1958 NEW YORK CONVENTION

On 31 March 2020, Palau acceded to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention” or the “Convention“). With this, Palau becomes the 163rd State party to the Convention, following the recent accessions of Ethiopia, the Seychelles, the Maldives and Papua New Guinea. Palau deposited its instrument of accession on 31 March 2020 and, under Article XII (2) of the Convention, it will come into force on 29 June 2020, 90 days thereafter.

Consistent with Article I.3 of the New York Convention, contracting States are able to ratify or accede subject to certain reservations. Palau is reported by the Secretary-General of the United Nations to have acceded to the New York Convention subject to two common reservations. Palau will apply the Convention (i) on the basis of reciprocity to the recognition and enforcement of arbitral awards made only in the territory of another contracting State, and (ii) only to differences arising out of legal relationships, whether contractual or not, which are considered commercial under the laws of the Republic of Palau.

Palau’s accession is also subject to the Convention only being applicable to arbitral awards concluded after the date of Palau’s accession. The implication of this provision is that any outstanding awards made prior to the Convention coming into effect on 29 June 2020 will not be enforceable in Palau under the Convention. Parties seeking to enforce such awards will need to rely on Palau’s existing domestic enforcement regime.

For more information please contact Chris Parker, Partner, Maguelonne de Brugiere, Senior Associate, or your usual Herbert Smith Freehills contact.

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Maguelonne de Brugiere
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RUSSIAN SUPREME COURT DECIDES PARTY CANNOT CHALLENGE AWARD DUE TO ARBITRATOR’S REMOVAL FROM LIST OF RECOMMENDED ARBITRATORS

The Russian Supreme Court (the “SC”) has seemingly put an end to the enforcement battle in Atlantic Hermes Shipping Limited v OOO Strakhovaya Kompaniya Soglasie (Limited Liability Company Insurance Company Soglasie) (Case No. A40-153265/2019). In its decision dated 27 February 2020, the SC confirmed that the removal of a party-appointed arbitrator from the list of recommended arbitrators published by an arbitral institution administering the arbitration (the “List”) did not, in itself, enable the other party to challenge the arbitral award. The SC also confirmed that parties are not prohibited from instructing, as their legal representative in the arbitration, a person who was also a recommended arbitrator on the List.

Background

Arbitration proceedings

In June 2019, an arbitral tribunal administered by the Maritime Arbitration Commission at the Russian Chamber of Commerce and Industry (the “MAC”) issued an award (the “Award”) in favour of the claimant, Atlantic Hermes Shipping Limited (“Atlantic”). The defendant in the arbitration, Limited Liability Company Insurance Company Soglasie (“Soglasie”) refused to honour the Award voluntarily.

Russian court proceedings: first instance court decision

Atlantic sought to enforce the Award in the Russian courts. Soglasie resisted enforcement and applied to set aside the Award, arguing that it violated Russia’s public policy for two reasons:

  • During the arbitration proceedings, the arbitrator appointed by Atlantic was removed from the List recommended by the MAC. However this removal was not communicated to Soglasie. As a result, Soglasie was allegedly precluded from challenging the arbitrator on this basis.
  • Atlantic’s legal representative in the arbitration was listed as a recommended arbitrator on the MAC List. Soglasie argued that this was contrary to the MAC Arbitration Rules, which provided, in the relevant section, that arbitrators had to be impartial and independent, and could not act as counsel in the same arbitration in which they sat as an arbitrator.

In September 2019, having joined the parties’ applications in the same proceedings, the first instance court sided with Soglasie, dismissing Atlantic’s enforcement application and setting aside the Award (the “Set Aside Decision”). The court held that the Award was issued in breach of Russia’s public policy, as the arbitrators blatantly violated the well-established principles of administration of justice and principles of Russian law.

Set Aside Decision overturned

Russian court proceedings: Cassation Court Decision

In November 2019, the Moscow District Court (the “MDC”) overturned the Set Aside Decision and sent the case back to the court of first instance for re-consideration (the “Cassation Court Decision”).

The MDC noted that the parties were not under an obligation to appoint arbitrators from the MAC List (there was no such requirement either under Russian law, or in accordance with the MAC Arbitration Rules, or indeed in the parties’ agreement). It was therefore open to Atlantic to appoint an arbitrator who was not listed on the MAC List. Although the removal of the arbitrator appointed by Atlantic was a matter of public knowledge, Soglasie failed to raise its objections during the arbitration, and had therefore waived its right to do so.

Further, according to the evidence provided by the parties, while the arbitration was still on-going, five months after the Atlantic-appointed arbitrator was removed from the MAC List, the parties entered into a written agreement confirming that they agreed to the composition of the tribunal and there were no grounds for challenge of the arbitrators; it was therefore not open to Soglasie to renege on its agreement in this respect. The MDC determined that Soglasie’s failure to raise the objections during the arbitration constituted a clear waiver of its right to raise the same objections during Russian court proceedings.

On Soglasie’s second argument, the MDC held that Atlantic’s legal representative acted solely in his capacity as counsel and he was not appointed to act as an arbitrator in this case. Therefore, he was not under a duty to act impartially, or to act as an independent and neutral party, in this arbitration.

Finally, the MDC reiterated that the notion of “public policy” (which we discussed in more detail in one of our previous blog posts) was to be construed as comprising only highly imperative and universal fundamental principles, which had particular social and public importance, and formed the basis of the Russian economic, political and legal system. It concluded that the factual circumstances referred to by Soglasie were not related to public policy.

Russian court proceedings: re-consideration by the first instance court

In December 2019, the first instance court followed the directions given by the MDC in the Cassation Court Decision, issuing an execution writ long-sought by Atlantic (the “Re-consideration Decision”). Soglasie attempted to challenge the Cassation Court Decision in the SC and the Re-consideration Decision in the MDC. Both appeal attempts were unsuccessful. We discuss the SC decision in more detail below.

Russian court proceedings: Supreme Court decision

The SC carried out a limited review of the case, deciding that there were no circumstances that would merit a full review. The SC agreed with the conclusions in the Cassation Court Decision. It has therefore confirmed that, as a matter of Russian law, a removal of a party-appointed arbitrator from a list of recommended arbitrators published by the administering arbitral institution does not, in itself, enable the other party to challenge the arbitral award. It has also determined that parties are not prohibited to instruct, as their legal representative, a person who is also a recommended arbitrator on such a list.

Comment

The SC decision in this case follows its previous guidelines, which attempted to narrow down the scope of “public policy” and suggested that Russian courts should refuse recognition or enforcement of an arbitral award on public policy grounds only in exceptional circumstances. Although, strictly speaking, the SC decision is not binding on the lower courts, it may also prove to be a helpful point of reference for parties seeking to enforce arbitral awards in Russia.

For more information, please contact Nicholas Peacock, Partner, Alexei Panich, Partner, Alexander Gridasov, Associate, Olga Dementyeva, Associate, or your usual Herbert Smith Freehills contact.

Nicholas Peacock
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Alexander Gridasov
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Associate
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Olga Dementyeva
Olga Dementyeva
Associate
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