Award Based on a Void Bylaw Found Unenforceable

The Supreme Arbitrazh Court of Russia in the Decree No. 10848/10 dated 14.12.2010 refused recognition and enforcement of an arbitral award on the ground of contrariety to the Russian public policy. The Court upheld the reasoning of the lower instances stating that the arbitral award violated the fundamental principles of the Russian law.

Arbitration court at the “Law and Economy of Fuel and Energy Complex” Foundation issued a monetary award against OJSC “Interregional main distribution company of Siberia” as a compensation for the services delivered by the “Rusenergosbyt” LLC under the service contract for energy transmission. Though the services were duly and timely furnished, Defendant did not make a proper payment.

As the Defendant failed to execute the arbitral award voluntarily, the Claimant applied at the Arbitrazh Court of Moscow for recognition and enforcement of the award. Simultaneously, the defendant brought a motion for annulment of the arbitral award. Both applications were heard in a single case. Both of them were denied on the following grounds. First, courts ruled that there are no valid reasons for challenging the arbitral award, since the contract concluded between the parties explicitly provides for the binding and final nature of the decisions of Arbitration court at the Fund “PETEK”.

Second, court outlined that the enforcement shall not be granted, since the monetary award was calculated on the basis of the tariff set up by the Order No. 1/38 dated 26.12.2008 of the Republican Tariff Service of Republic of Buryatia. In the meantime, on 14.09.2009 the above-mentioned order was recognized as unlawful (Order of the Republican Tariff Service of Republic of Buryatia No. 1/22 dated 14.09.2009).

Since the arbitral award was based on such unlawful Order and the claimant had no procedural right to claim review of the award upon discovery of new facts, courts ruled that the right of the company to have a relief in court was violated and, therefore, the arbitral award shall be deemed contrary to the fundamental principles of Russian law.

The Supreme Arbitrazh Court of Russia applied the Article 309 of the Civil Code of Russia, providing that obligations are to be fulfilled in compliance with the conditions of the obligation and requirements of law. Thus, monetary award based on the tariff set up by the unlawful regulation breaches the principle of fulfillment of the contractual obligations in good faith.

Dmitry Davydenko, Natalya Karetnaya

About the Author:

Dr Davydenko is the Director and co-editor of the CIS Arbitration Forum. He is Chief expert of Arbitration and Mediation Center at the Russian Chamber of Commerce and Industry. He also provides expert opinions on Russia-related international business law matters. He is listed as a recommended arbitrator of International Commercial Arbitration Court and Maritime Arbitration Commission at Russian Chamber of Commerce and Industry, as well as some other arbitral institutions.

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