Failure to Seek Annulment of the Award: Any Consequences for the Enforcement in Russia?

Sevmash Plant in Russia

In three recent cases Russian courts took the view, that the respondent may not object to enforcement of arbitral award on the basis of lack of jurisdiction of the arbitral tribunal, where it did not seek its annulment. Moreover, in two of those cases, this position have been approved by a three-judge panel of the Supreme Commercial Court.

Facts

In the first case (A05-10560/2010, Odfjell SE v. JSC PO Sevmash (“Odfjell case”)), Russian shipyard challenged enforcement of arbitral award rendered by a tribunal seated inSweden under the SCC Rules. One of the grounds invoked by the respondent was that the tribunal deriving its jurisdiction from a contract signed between the parties was not authorized to order Sevmash to pay damages for alleged breach of another contract between the same parties. Sevmash argued that the tribunal’s finding that the damages were based on the breach of the original contract was erroneous and that accordingly the tribunal acted outside of the scope of its jurisdiction.

The second case (A56-22667/2010, Living Consulting Group AB v. LLC Sokotel (“LCG case”)) concerned enforcement of another award rendered by a tribunal seated inSweden under the SCC Rules. In this case the respondent argued that the parties have agreed that all disputes should be resolved by the Commercial Court of Saint-Petersburg and this agreement superseded earlier arbitration clause.

The third case (А40-4113/10-25-33, Hipp GmbH & Co Export KG v. LLC SIVMA Detskoye Pitanie and CJSC Sivma (“Hipp case”)) concerned enforcement of an award rendered in Austrian under the VIAC Rules. In this case, the tribunal’s jurisdiction was based on distributorship and surety agreements between the parties both of which contained arbitrational clauses. The claims were based on non-payment for the goods supplied. During enforcement proceedings the respondents argued that the goods were supplied under another agreement between Hipp and Sivma which did not contain an enforceable arbitration clause.

Position of the Russian courts

In the first two cases courts rejected objections to enforcement of SCC awards.

In the Odfjell case the Federal Commercial Court for North-Western Circuit noted that the according to the arbitral tribunal all the damages awarded to the claimant were caused by breach of the contract between the parties, which served as basis of tribunal’s jurisdiction (and not by alleged breach of another contract as argued by the respondent). The court held that this was a substantive finding which it could not review exercising limited jurisdiction in the enforcement proceedings. However, the three-judge panel of theSupreme Commercial Court went further than that. In rejecting Sevmash’s petition to review the lower court’s ruling the panel noted that:

The [arbitral tribunal] considered [Sevmash’s] objections with respect to its jurisdiction over the dispute and concluded that it has jurisdiction to consider the claims made by [Odfjell]…

According to paragraph 2 of Article 2 of Sweden Arbitration Act (SFS 1999:116) the tribunal’s decision on jurisdiction is not binding, the procedure for challenging the decision on jurisdiction is set out in Articles 34 and 36 of the said Act.

It follows from the case-file and the rulings challenged that [Sevmash] did not submit evidence of Stockholm arbitration’s decision on jurisdiction being challenged before Swedish state courts.

This was the only reason given by the panel for rejecting the jurisdictional objection of Sevmash.

This logic was taken on board in the LCG case. There the Federal Commercial Court for North-Western  Circuit started by noting that the SCC tribunal found that the agreement between the parties to submit disputes to Saint-Petersburg Commercial Court did not extend to the dispute before the SCC tribunal. It went on to note that (i) no evidence was submitted by the defendant to challenge the finding of the SCC tribunal; (ii) it may not review the substantive finding of the tribunal that the agreement between the parties to have disputes resolved by state court did not extend to the dispute before the tribunal; (iii) the respondent did not produce evidence of the award being challenged in Sweden. For all those reasons, the Circuit Court rejected respondent’s objections to enforcement of the award.

Finally, in the Hipp case theFederal Commercial Court for Moscow Circuit confirmed the ruling of theMoscow Commercial Court to refuse enforcement of the award. The court reasoned that Hipp’s claim was based on an agreement which did not contain an enforceable arbitration clause and the tribunal was not entitled to rely on an arbitration clause in the distributorship agreement, because it was not the true basis of the claim. However, it was not the end of the story. Hipp successfully applied for supervisory review of the ruling by theSupreme Commercial Court. The latter decided to quash decisions of lower courts and permit enforcement of the award. The full decision of theSupreme Commercial Court is not yet available. However, the three-judge panel, which recommended supervisory review of the decisions, noted as one of the reasons for rejecting the jurisdictional objection the fact that the arbitral award was not challenged before Austrian state courts.

Observations

In the modern practice of commercial arbitration the question of coordinating positions taken by state courts in different jurisdictions with respect to the same arbitral award is becoming increasingly important. Some instruments to achieve consistency are provided by the New York Convention and the UNCITRAL Model Law. Those include the power of the court to suspend enforcement proceeding pending the outcome of the annulment proceedings and annulment of the award being a separate ground for refusal to enforce the award.

However, neither the New York Convention, nor the Russian law provide basis for a reverse conclusion – that an award, which has not been annulled, would automatically be enforced. In each case, the court which considers application for enforcement of an award may refuse it both on the basis of contradiction to public policy or lack of arbitrability and on any other basis listed in Article V of the New York Convention.

In fact the respondent may have good reasons not to seek annulment of the award, for example where its assets are located in one jurisdiction and it is entitled under the New York Convention to raise all its objections to the award in the enforcement proceedings. In this case requiring the respondent to commence annulment proceedings to preserve its objections would only lead to increase in unnecessary litigation.

For this reason the approach taken in the Odfjell and LCG cases appears to be too far-reaching. In the Hipp case the three-judges panel reasoning appears to be more balanced. Failure of the respondent to seek annulment the award is listed among a number of factors leading to rejection of respondent’s jurisdictional objections and not as stand-alone reason for their rejection. Indeed, in some cases, the court may be justified in taking this reason into account in assessing the parties’ position, but only to confirm its conclusion with respect to existence of grounds for rejecting the respondent’s objections. It is to be hoped that the final position of Russian courts with respect to this issue would be clarified in the Resolution of the Supreme Commercial Court in the Hipp case.

Contributed by a Moscow lawyer whose name cannot be disclosed because of a potential conflict of interest