Do Russian Courts have Power to Set Aside Foreign Awards?

The recent decision of the Federal Commercial Court for the Moscow Circuit in CJSC Energo-Holding v JSC Reverta has reopened the discussion as to the Russian court’s power to set aside foreign awards. The court suggested that a Russian court may set aside a foreign award if the tribunal applied Russian substantive law.

This post begins with the analysis of Russian law and case law on this matter, followed by review of other jurisdictions’ practice. In the end it will be suggested that the Russian court’s approach goes against a clear international trend and finds no support in the international conventions the courts rely on.

Russian court’s jurisdiction over setting aside of foreign awards

Under Article 230 (5) of the Commercial Procedure Code of the Russian Federation (the “Code”):

In cases, envisaged in an international treaty of the Russian Federation, a foreign arbitration award, which is based on the law of the Russian Federation, may be challenged … by filing an application for the reversal of such a decision with the commercial court of the constituent unit of the Russian Federation…

The question that may arise is whether the European Convention on International Commercial Arbitration 1961 (the “European Convention”) Art. IX and New York Convention 1958 Art. V (1) (e) can be considered to be such “envisaged cases”? Both of them provide that the courts may refuse to recognise and enforce an award if it was set aside by the court of the state, the legislation of which was applied. As it will be shown below, these provisions are frequently misunderstood by the Russian commercial courts.

Stoilensky GOK case

In 2003 in OJSC Stoilensky GOK v Interconstruction Project Management S.A. Russian courts of the first instance and of appeal annulled an award made in Sweden on the basis of Article 230 (5) and the New York and European conventions.

The Supreme Commercial Court reversed these decisions. The court stated that the European Convention was inapplicable as the award was rendered in Sweden, which is not a party to it. In turn, the New York Convention applies only to the recognition and enforcement of foreign awards and not to setting aside proceedings.

Thus in Stoilensky GOK the Supreme Commercial Court, while expressly rejecting the applicability of the New York Convention as the basis for setting aside proceedings, did not do the same with respect to the European Convention.

Energo-Holding case

In Energo-Holding the claimant tried to rely on Art. 230 (5) seeking annulment by the Russian courts of an award made in Riga, Latvia.

The first instance court rejected Energo-Holding’s application. It found that the arbitral tribunal’s decision was final and therefore not subject to setting aside proceedings. It also noted that Art. IX of the European Convention sets out grounds for refusing the enforcement of an award, not for its annulment.

On appeal, the Federal Commercial Court disagreed with respect to the European Convention. It noted that the lower court’s interpretation of the convention was inconsistent with the above-described position of the Supreme Commercial Court. However, this was dicta as the court agreed with the finality of the award argument.

In both cases the courts refused to set aside foreign awards on the basis of the European Convention. Nevertheless, they have created potentially dangerous and misleading precedents. These precedents may allow Russian courts to set aside foreign awards in cases where the award of a foreign-seated tribunal is based on Russian law.

The upcoming reform of the Russian arbitration legislation may, however, soon put an end to this confusion. The current draft of the potential legislation provides for elimination of Art. 230 (5) from the Code.

International perspective

The courts of most jurisdictions interpret the above-mentioned articles of the New York and European conventions as referring only to the procedural law. Moreover, in most countries the courts may set aside an award only if the arbitration was seated in the state.

Previously the provisions of Art. V (1) (e) of the NYC had been causing problems in some countries. For instance, in India in National Thermal v The Singer Company the Supreme Court stated that if a foreign dispute has the closest connection with Indian laws, it would be improper to exclude the jurisdiction of the Indian courts. This decision was followed in Bhatia International v Bulk Trading.

Subsequently the practice changed. It is no longer possible to base the Indian court’s jurisdiction over setting aside proceedings on the application of Indian substantive law. The Bhatia decision was overruled Bharat v Kaiser, which was followed by Videocon v JMC Projects. Most recently the Supreme Court reaffirmed this position in Reliance Industries v Union of India.

The courts of some countries still accept jurisdiction over challenges to foreign arbitral awards. This was the position of the courts of Pakistan in Rupali v Dr Nael and Indonesia in Perusahaan v Karaha Bodas. The latter decision was highly criticised by the American and Hong Kong courts. The courts in both jurisdictions decided to enforce the award despite the fact that the Indonesian court had annulled it.

Conclusion

The example of Karaha Bodas case clearly shows that the line of interpretation some of the Russian commercial courts adopt may actually have little practical effect aside from creating further uncertainty.

The courts in the majority of the other states may still enforce the award. The New York Convention at Art. V(1)(e) provides for refusal of enforcement only in limited circumstances. A court may refuse enforcement only where the award was set aside by a court of (i) the state of the seat or (ii) the state the procedural law of which applied. Accordingly if the court bases its jurisdiction on application of substantive law, this provision of the New York Convention does not apply.

Besides, by using the permissive language (“may refuse enforcement”) the New York Convention does not impose any obligation on the other courts to refuse enforcement of the annulled awards.

In these circumstances the only practical effect of the Russian court’s annulment of a foreign award would be the impossibility to enforce it in Russia. However, the regular recognition and enforcement proceedings will achieve the same result.

Preference for regular recognition and enforcement proceedings seems to be even more reasonable for such countries as Russia. That is because the grounds for challenging of the award are not more extensive than the grounds for the refusal to enforce it.

Ivan Philippov

Intern, CIS Arbitration Forum

LLM candidate, Queen Mary, University of London