An Arbitral Award Set Aside “At Home” and then Recognised in Russia

Commercial Court for the Western Siberian District

It happens that even if arbitral awards were set aside in jurisdiction where they were rendered they are still enforced in other jurisdictions. The Pakistan v. Dallah case where French court refused to set aside an award which the UK Supreme Court rendered unenforceable. In Hilmarton and Putrabali cases French courts recognized and enforced an arbitral award set aside outside France. These cases have been widely discussed by international arbitration community. A Russian court recently recognised an arbitration award which had been annulled elsewhere.

On November 1, 2011 Federal Commercial Court of Western Siberian Circuit will hear the cassation appeal of the lower court judgment which recognized a foreign arbitral award canceled in the country where it had been rendered.

On July 20, 2011 Commercial court of the Kemerovo region recognized an ICC award rendered in Turkey and set aside by a Turkish state court (case No. A27-781/2011). The Russian court considered that if the arbitral award has been rendered in a state party of the European Convention on International Commercial Arbitration of 1961 (“The European Convention”), setting aside of such award by court of this state does not always form basis for refusal in its recognition and enforcement in other contracting parties, including Russia. In particular, it forms such basis where the award has been annulled on a ground provided in this international treaty, rather than in the domestic legislation.

It was the first case where a Russian court recognized an arbitral award annulled in the country where it had been rendered.

Briefly, circumstances of the case are as follows. A French company Ciments Français, applied for recognition of the partial arbitral award rendered on December 7, 2010 in Istanbul, Turkey in case No. 1624/GZ between the Russian OJSC “The Siberian Cement” Holding company and a Turkish joint-stock company “Cimento Istanbul” (“Arbitral award”). The dispute arose out a a share purchase agreement. The applicant did not request enforcement of the foreign arbitral award.

By the time of the hearing in Russia the award has been annulled by Turkish court. Russia and Turkey are contracting states of the 1961 European Convention which provides in Article IX that “the setting aside in a contracting state of an arbitral award covered by this Convention shall only constitute a ground for the refusal of recognition or enforcement in another contracting state where such setting aside took place in a state in which, or under the law of which, the award has been made, and only for one of the reasons provided by this Convention”.

The Russian law “On International Commercial Arbitration” of 1993 as well as the New York Convention establish a broader range of grounds for refusal to recognize or enforce the arbitral award: it is enough that the decision has been annulled (irrespective of a basis for setting aside), or its execution has been suspended by state in which, or under the law of which, the award has been made. However the Russian court in Kemerovo held that under Article 13(4) of Commercial Procedure Code of the Russian Federation if an international treaty of the Russian Federation establishes other rules, than those provided by the law, the court applies the rules of the international treaty.

Moreover, the European Convention as lex specialis has a priority over provisions of the New York Convention owing to the Article VII of the latter. Taking into account all this the court in this case applied provisions of the European Convention providing a more narrow list of grounds for refusal to recognize and enforce the award.

The Turkish court annulled the arbitral award explaining that the European Convention does not constitute a ground to refuse recognition or enforcement. Namely, it found that the award has not been taken out within the time limit; the arbitral tribunal did not consider an argument of the debtor about the purchase agreement being rescinded under principle of good faith, and by that exceeded the powers; the award contradicts public policy of Turkey (since contrary to Turkish law it provides its preliminary execution, besides, the parties waived the right to apply to set aside the award).

The Russian court came to a conclusion that the arbitral award has been annulled by Turkish court on the grounds provided by the domestic law which are absent in Article IX of the European Convention.

It is important to note that the court did not consider a question of recognition in Russia of the Turkish judgment by which the arbitral award has been annulled, and did not refer to any procedural violations admitted by such court, either on absence of impartiality or on violation by such act of Russia public policy. Therefore this Russian judgment does not create a reason not to recognize Russian judicial acts (including those on setting aside of arbitral awards) on the basis of reciprocity.

The Russian court judgment, unless it will be annulled or amended by courts of higher instances, only demonstrates the following. Russian courts do not consider in all cases the fact of setting aside of the arbitral award by a court in the jurisdiction where it was rendered as a basis for its non-recognition in Russia. Instead Russian courts resolve this issue depending on a basis for such setting aside, namely, whether it is provided by the applicable international treaty.

In other words, Russian courts will distinguish between a situation when the foreign arbitral award rendered in a contracting state of the European Convention, is annulled on a basis provided by the European Convention, or it is annulled on a basis provided only in the internal law of such foreign jurisdiction. In the latter case Russian court will not consider the fact of setting aside of the foreign award as grounds for its non-recognition in Russia.

Accordingly, the Russian judgment gives an occasion only to foreign courts of the contracting states of the European Convention also to make a distinction between awards annulled by Russian court on a basis provided in the European Convention and other awards.

In this case the Russian court gave priority to international law, confirmed the rights of the foreign litigant and wisely approached the foreign court decision. By ruling in favor of international arbitration it facilitated recognition of foreign arbitral awards in Russia.

Dmitry Davydenko
Muranov, Chernyakov & Partners Law Firm

About the Author:

Dr Davydenko is the Director and co-editor of the CIS Arbitration Forum. He is Vice Chairman of the Panel of Mediators at the Russian Chamber of Commerce and Industry and advises Russian and international clients on 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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