Russian Courts Misinterpreted Article V(1)(c) of the New York Convention

Recent practice before courts of the Russian Federation demonstrates that courts there apply certain provisions of the N.Y. Convention in an inconsistent manner.  Specifically, if an arbitral award contains decisions outside the arbitral tribunal’s authority, article V(1)(c) of the N.Y. Convention permits courts to refuse recognition and enforcement of such an award. According to scholarly literature and case law, Article V(1)(c) is applicable where the matters resolved by an award either exceeded those presented by the parties to the tribunal in the arbitration or the award failed to address the matters that were submitted to the tribunal.

However, challenges to awards based on objections to the arbitrators’ substantive contract interpretations are usually regarded as not constituting a true Article V(1)(c) defense and consequently such objections are dismissed. For example, the Spanish Tribunal Supremo in its Judgment of 4 March 2003 rejected a challenge to recognition under Article V(1)(c) because the award debtor did not claim excess of authority but disagreed instead with the substance of the arbitrator’s determination. The following case where a foreign award has been examined twice by two levels of Russian courts shows that there is still a misunderstanding within the Russian judicial system as to how to apply provisions of the N.Y. Convention.

The Austrian seller, Hipp GmbH & Co. Export KG (hereinafter “Hipp GmbH”) applied to the Commercial Court of the City of Moscow seeking enforcement of the award rendered on August 19, 2009 by the International Arbitral Centre of the Austrian Federal Economic Chamber in Vienna (hereinafter “VIAC”) against Russian buyers, LLC “SIVMA. Infant food” & CJSC “SIVMA”. The Russian parties objected to recognition and enforcement of the award relying on Article V(1)(c) of the N.Y. Convention. On March 25, 2010 the City Court refused recognition and enforcement of the award because, in its view,  VIAC had incorrectly identified which contract applied to the dispute. The parties involved in the dispute had concluded several contracts:

a) contract of sale and delivery N 01/2000 between Hipp GmbH and LLC “SIVMA. Infant food” of September 11, 2000 valid until March 15, 2002 (hereinafter “contract N 01/2000”)

b) contract of sale and delivery N 01/2001 between Hipp GmbH and LLC “SIVMA. Infant food” of July 01, 2001 annually renewed and valid until December 31, 2007 (hereinafter “contract N 01/2001”);

c) exclusive distribution agreement between Hipp GmbH and LLC “SIVMA. Infant food” of July 6, 2005 (hereinafter “distribution agreement”);

d) guarantee of November 06, 2006 whereby CJSC “SIVMA” agreed to be joint-and-severally liable to Hipp GmbH for the obligations of LLC “SIVMA. Infant food” resulting from delivery of goods (hereinafter “guarantee”).

The distribution agreement and guarantee contained almost identical arbitration clauses providing for resolution of all disputes under the VIAC Rules. Under article 8 of contract N 01/2001 all disputes of the parties had to be referred to “the Arbitration court of the seller’s state”.

As, according to the City Court, Hipp GmbH’s claims arose out of contract N 01/2001 and not out of the distribution agreement as found by VIAC,  VIAC did not have jurisdiction over the dispute. Since VIAC lacked competence to resolve the dispute in respect of the first respondent, LLC “SIVMA. Infant food”, it did not have jurisdiction over the second respondent, CJSC “SIVMA”, either. Moreover, continued the City Court, under the guarantee the second respondent stood as guarantor for the first respondent’s obligations under contract N 01/2000, which expired on March 15, 2002. Because at the time when the guarantee was concluded the underlying relationship between the parties had already ceased to exist, the guarantee in respect of the expired obligation was invalid. Therefore, concluded the City Court, the VIAC award dealt with a difference not falling within the terms of the submission to arbitration.

Hipp GmbH not surprisingly appealed, and the lower court decision was overturned by the Federal Commercial Court of the Moscow Region on May 27, 2010. The Federal Court indicated that VIAC had already determined that two contracts had to be considered for the case at hand:  contract N 01/2001 and the distribution agreement. Since those findings pertained to the substance of the dispute and by virtue of article 243(4) of Commercial Procedure Code of the Russian Federation and para 20 of the Information Letter of the Presidium of the Supreme Commercial Court of the Russian Federation No. 96 of December 22, 2005, the City Court lacked lawful grounds to revise the awards.

As for the finding of the lower court that it did not have jurisdiction over the second respondent, the Federal Court added that the City Court failed to take into account the fact that the guarantee contained an article 4.1 providing for the resolution of all the disputes at  VIAC under its Rules. As the City Court had not examined all the circumstances of the case, the Federal Court vacated the lower court’s decision and remanded the case for reconsideration.

The same judge at the City Court reconsidered the case but ignoring the Federal Court’s request not to revise the award on the merits, conducted such an examination and based on violation of public policy and article V(1)(c) of the N.Y. Convention, again refused recognition and enforcement of the award.

Even more surprising is the fact that when Hipp GmbH appealed for the second time, the Federal Court, composed of judges other than those who heard the first appeal, upheld the refusal of recognition and enforcement of the award by the first instance.

Now the case has been transferred to the Supreme Commercial Court of the Russian Federation where the hearing will take place on June 14, 2011. Hopefully, the Supreme Commercial Court will clarify the meaning of Article V(1)(c) of the N.Y. Convention so that in the future, objections to award recognition and enforcement based on arbitrators’ substantive contract interpretation, raised under this article, do not have a chance to succeed in Russian courts.

Dilyara Nigmatullina, Association for International Arbitration

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