The Kingdom of Tonga becomes 164th state to accede to the New York Convention

On 12 June 2020, Tonga acceded to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention“). With this, Tonga becomes the 164th state party to the Convention, following the recent accession of Palau in March this year. Under Article XII (2), the Convention will come into force for Tonga on 10 September 2020 and will be applicable to arbitral awards issued on or after that date.

Under Article I.3 of the New York Convention, contracting states are able to ratify or accede subject to certain reservations. The UNCITRAL website indicates that Tonga has acceded to the Convention subject to one common reservation, namely that it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered commercial under the laws of the Kingdom of Tonga.

For more information please contact Andrew Cannon, Partner, Gitta Satryani, Partner, Brenda Horigan, Partner, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

Andrew Cannon
Andrew Cannon
Partner
+44 20 7466 2852
Gitta Satryani
Gitta Satryani
Partner
+65 68688067
Brenda Horrigan
Brenda Horrigan
Partner
+61 2 9225 5536
Vanessa Naish
Vanessa Naish
Professional Support Consultant
+44 20 7466 2112

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.

Continue reading

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.

Continue reading

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.

Chris Parker
Chris Parker
Partner
+44 20 7466 2767

Maguelonne de Brugiere
Maguelonne de Brugiere
Senior Associate
+44 20 7466 7488

AWARD CREDITORS SUCCESSFULLY CHALLENGE AWARD TO CLARIFY IDENTITY OF A PARTY

In the recent and unusual case of Xstrata Coal Queensland P Ltd (Company Number 098156702) (aka Rolleston Coal Holding PTY Ltd) & Anor v Benxi Iron & Steel (Group) International Economic & Trading Co Ltd [2020] EWHC 324 (Comm), the award creditors challenged an arbitral award under s68 of the Arbitration Act 1996 (the “Act”). The application was made after the award creditors’ attempt to enforce the award in China under the New York Convention had failed. The English Court found that there was uncertainty or ambiguity as to the effect of the award, relating to the identity of a party to the relevant sale contract and the arbitration agreement contained within the contract.

This decision highlights the risk that parties may seek to exploit alleged ambiguities in the identity of a party at the enforcement stage, even if the issue has not been raised in the arbitration itself. The case is accordingly an important reminder of the need to ensure that any known ambiguity in the identification of any party has been dealt with in the course of submissions, and to seek to have this covered in the award.

Background 

The dispute arose in relation to a contract for the sale of coking coal. The resulting award was held to be unenforceable in China, as the award debtor successfully argued that one of the claimants named in the award was not a party to the contract or the arbitration agreement.

The English Court then granted the award creditors an extension of time under s79 of the Act to make an application to the tribunal under Article 27 of the LCIA Rules to correct the award (in Xstrata Coal Queensland Pty Ltd v Benxi Iron and Steel (Group) International Economic and Trading Co Ltd [2016] EWHC 2022 (Comm), which we discussed in our earlier blog post here)

However, the Tribunal denied the award creditors’ application for a correction of the award. It was emphasised that the issue of the identity of the relevant party had never been covered during the proceedings and so was not the subject of any finding in the award. The Tribunal also stated that any application under Article 27 “is limited to correction of computational, clerical and typographical errors or errors of a similar nature.” Any subsequent finding in relation to the identity of a contracting party would be an “addition to the Award, not a mere correction.”

High Court decision

The award creditors then made an application to the English Court challenging the award for serious irregularity, under sections 68(2)(f) and 68(2)(c) of the Act, on 19 December 2016. There was a substantial delay at this stage, due to difficulties in effecting service in China. When the case ultimately came before the Court, it considered two key questions; (i) whether the application had been made in time; and (ii) whether s68(2)(f) had been engaged.

Was the application brought in time?

The application was opposed on the basis that the s68 challenge was out of time under s70(3) of the Act.

S70(3) requires any challenge to an Award under s68 to be brought within 28 days of the award or, if there has been any arbitral process of appeal or review, the date when the applicant was notified of the result. The award creditors argued that the s68 application was made within time, as the 28 day period only ran from the date that the tribunal had rejected the application under Article 27 of the LCIA Rules.

The Court assessed whether the relevant date for the purposes of the s70 time limit was the date on which the decision that there should be no correction is made known, or the date of the Award. The Court found that where a material application is made to correct an award under s57 of the Act or an equivalent agreed process, such as Article 27 of the LCIA Rules, the 28 day time period will begin to run from the date when the decision on the application is known to the parties.

The Court was also required to determine whether the application under Article 27 was material to the s68 application. The Court decided that it was material and in this context it was emphasised that the Article 27 application was permitted by the Court in 2016, “specifically in order to seek that the Arbitrator should clarify a matter which rendered the Award unclear or ambiguous.” That Article 27 application was found to be directly relevant to the s68 application, as “had it been successful, there would have been no basis for the present application.”

Accordingly, the s68 application was found to have been brought in time, within the 28 day period specified in s70(3).

Had s68(2)(f) been engaged?

The award creditors argued that there was uncertainty or ambiguity as to the effect of the Award, which had not been resolved by the Article 27 application. They argued that the uncertainty or ambiguity in question had caused, or would cause, substantial injustice by making it either impossible or difficult for the award to be enforced. The award debtor took the position that there was in fact no such uncertainty or ambiguity and that, if there had been any uncertainty or ambiguity this was not in respect of the effect of the award, but only related to its reasoning.

On this point, the Court found in favour of the award creditors, noting that “Section 68 is not…confined exclusively to cases in which the tribunal has gone wrong in its conduct of the arbitration, if that is understood to mean that the tribunal has done something which it should not have done in the circumstances which were presented to it.”  The Court determined that if an award was open to being misunderstood by an enforcing court then that award could be uncertain or ambiguous, even where English lawyers would understand the award’s meaning and effect. In this case enforcement had been refused by the court in China, demonstrating that the award was ambiguous.

The award debtor argued that allowing ambiguity or uncertainty under s68(2)(f) to encompass correction of the identity of a party “would open the door to unmeritorious applications”, where the award had a “clear meaning and effect as a matter of the curial law.” However, the Court did not consider this a real danger, as future award creditors would have to show that the ambiguity or uncertainty either had already caused, or would cause, an enforcing court to fail to enforce the award in line with what the English Court would consider to be its true meaning and effect.

Accordingly, the Court granted the Claimants’ application under s68(2)(f), and remitted the award to the tribunal to reconsider the identity of the parties to the contract. Given the successful finding under s68(2)(f), the Court did not see any need to deal with the alternative application under s68(2)(c).

Comment

This is a relatively rare example of a successful challenge under s68 of the Act. The decision demonstrates the English courts’ willingness to deal robustly with ambiguities or uncertainties in awards where these amount to serious irregularity under s68. The judgment also reconfirms the high threshold in respect of a challenge to an award for alleged uncertainty or ambiguity under s68(2)(f).

For more information, please contact Chris Parker, Partner, Rebecca Warder, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.

Chris Parker
Chris Parker
Partner
+44 20 7466 2767

Rebecca Warder
Rebecca Warder
Professional Support Lawyer
+44 20 7466 3418

ETHIOPIA ACCEDES TO 1958 NEW YORK CONVENTION

On 13 February 2020, Ethiopia’s parliament approved accession to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention” or the “Convention“). Ethiopia will become the 163rd state signatory and the 39th African state to accede following the recent accessions of the Seychelles, Cabo Verde and Sudan.

Continue reading

THE SEYCHELLES ACCEDES TO 1958 NEW YORK CONVENTION

On 3 February 2020, the Seychelles became the 162nd State party to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention“).The Seychelles is the latest state to have joined the New York Convention framework following the most recent accessions of Papua New Guinea, Maldives, Cabo Verde and Sudan.

Continue reading

DISPUTE RESOLUTION CHOICES FOR BANKS AND FINANCIAL INSTITUTIONS IN A POST-BREXIT WORLD: OPTING FOR ARBITRATION?

Partner Andrew Cannon and Senior Associate Hannah Ambrose have authored an article for Butterworths Journal of International Banking and Financial Law, discussing the suitability of arbitration as a dispute resolution mechanism for banks and other financial institutions post-Brexit.

The article explores the current uncertainty surrounding the enforcement of English court judgments post-Brexit, whilst comparing and contrasting arbitration as a means of resolving disputes with traditional litigation from the perspective of the banking and finance industry. The article goes on to highlight important considerations that industry players ought to take into account if they are considering arbitration as an alternative means of resolving their disputes.

The full article can be accessed by clicking this link.

This article first appeared in the October issue of Butterworths Journal of International Banking and Financial Law and is reproduced with the agreement of the publishers.

If you have any questions or would like discuss any aspect of this post, please contact Andrew Cannon, Partner, or Hannah Ambrose, Senior Associate, or your usual Herbert Smith Freehills contact.

Andrew Cannon
Andrew Cannon
Partner
+44 20 7466 2852
Hannah Ambrose
Hannah Ambrose
Senior Associate
+44 20 7466 7585

 

THE MALDIVES ACCEDES TO THE NEW YORK CONVENTION

The Maldives recently became the latest state party to the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention“).

The Maldives acceded formally to the New York Convention on 17 September 2019, which will come into force for the Maldives on 16 December 2019, 90 days thereafter. The Maldives becomes the 161st state party of the New York Convention in a year that marks the 60th anniversary of its coming into effect on 7 June 1959.

Continue reading