By 27 September, 2011 0 Comments Read More →

In the Long Run: a Story of One Award in Russia

Today, it seems, an epic story of enforcement of an SCC award in Russia came to an end. After almost three years of litigation in Russia and Sweden, the Presidium of Supreme Commercial Court of the Russian Federation ruled that the award should be enforced.

During the same session Presidium dismissed action seeking to invalidate the contract underlying the arbitration.

One has to acknowledge that this was an unusual case. Normally, enforcement proceedings in Russia would be completed within 6 months, but not this time. And there were many reasons that are exemplary of many ways in which enforcement may go wrong.

The lower courts dismissed enforcement application finding that the tribunal lacked jurisdiction. Then when the Presidium intervened to reconsider those decisions, the respondent challenged the award in Sweden and the Russian proceedings were stayed. Then respondent’s shareholders lodged a claim seeking invalidation of the underlying contact and this claim was initially supported by Russian courts. In the meantime the courts in Sweden dismissed annulment application. However this time the claimant had to acquiesce to the postponement of the hearing, because of the decision in parallel litigation.

The setting

In July 2005 Swedish shipowner Stena RoRo contracted a major Russian shipyard Baltiisky Zavod to build two vessels (EUR 58.8 mln. each) with an option to purchase two additional vessels. This option was exercised by Stena in 2006.  In April 2007 Stena unilaterally terminated the contracts and in December 2007 commenced arbitration proceedings seeking over EUR 145 mln in damages. In September 2008 SCC tribunal issued in award by which Baltiysky Zavod was ordered to pay EUR 20 mln in liquidated damages plus interest and costs.

Annulment Proceedings in Sweden

After the award was rendered, Baltyisky Zavod stroke first by lodging on 5 November 2008 an application to have the award set aside. In Swedish proceedings Baltyisky Zavod argued that the award should be set aside, because the shipbuilding contracts never came into force due to lack of approval from the Stena Board of Directors. Stena objected and claimed that the contract was properly approved submitting evidence from the members of its Board.

Those proceedings came to an end after 1,5 years in May 2010, when the Svea Court of Appeal rejected the application. The court found that the contracts were properly approved and thus the only basis of Baltyisky Zavod’s application had no basis.

Enforcement Proceedings in Russia

Shortly after the proceedings in Sweden began (29 December 2008) Stena went to the St. Petersburg Commercial Court to have the award recognized and enforced in Russia. Baltiysky Zavod objected to enforcement on three grounds: (i) the contract containing the arbitration clause had not materialized because conditions precedent were not satisfied and (ii) enforcement of the award would be contrary to Russian public policy, because (a) the damages were manifestly disproportionate and (b) enforcement would lead to bankruptcy of the respondent, a major employer and defense contractor and (iii) the award was not final as set-aside proceedings were pending in Sweden.

On 20 February 2009 (3 months after the application was lodged) St.Petersburg Commercial Court decided to refuse enforcement of the award. It found that the contracts never came into force due to lack of Board of Directors’ approval. It also found that enforcement of the award would be contrary to Russian public policy, because it may cause bankruptcy of Baltyisky Zavod, which will have adverse consequences for the state and adversely affect the citizens’ interests.

On 24 April 2009  (5 months after the enforcement application was lodged) Federal Commercial Court for North-Western Circuit upheld the refusal to enforce the award, albeit for different reasons. It found that because the contracts specifically provided that they would be unenforceable in the absence of proper approval by the Stena’s Board of Directors and due evidence of such approval was missing enforcement of the award would be contrary to public policy. It reasoned that enforcement of the award which defies express agreement of the parties is contrary to the principle of freedom of contract.

Obviously unsatisfied with the outcome, Stena sought supervisory review of the case before the Supreme Commercial Court. This application was first considered by a three-judge panel, which disagreed with the decisions of the lower courts and referred the case to the Presidium for reconsideration. The three-judge panel noted that the alleged lack of corporate approval was a substantive issue, which was to be addressed by the SCC tribunal and not by state courts. It further noted that Baltiysky Zavod expressly agreed to fixed liquidated damages and cannot be heard arguing that they are disproportionate. It concluded by pointing out that enforcement of liquidated damages award would not in principle be contrary to the Russian public policy.

This decision was adopted in September 2009, i.e. within about 9 months of the date the application for enforcement was lodged by Stena. However, when the case came before the Presidium Swedish set aside proceedings (on the same issue of corporate approval) were still pending and the Presidium decided to suspend the Russian proceedings pending their outcome.

However, when the Svea Court dismissed set aside application nobody initially applied to have the proceedings resumed. The parties apparently waited for the outcome of minority shareholders’ claim.

Minority Shareholders’ Claim in Russia

In early 2010 several individual shareholders of Baltiysky Zavod brought a claim seeking invalidation of shipbuilding contracts. They argued that the contracts should be invalidated because they resulted from the abuse of rights by Stena. Essentially, their factual argument was that (i) the actual price of the vessels was nearly twice the contractual price (ii) the management of the shipyard was pursuing its own interests and was acting against the interests of the company and (iii)  Stena knew about factors (i) and (ii) and took advantage acting in bad faith.

Shareholders’ claims are not unusual in arbitration-related litigation inRussia. Generally, shareholders (especially minorities) are not bound by the relevant arbitration proceedings and are free to start litigation parallel to the arbitration between the company and its counterpart. In addition, Russian law gives shareholders several causes of actions to seek invalidation of a contract (which may contain an arbitration clause). One of the backdrops of this is that conflicting decisions may be reached by arbitration tribunals and state courts and the Russian court will not enforce an arbitral award contrary to the Russian court judgment.

The Stena case was unique in that the shareholders relied not on lack of proper corporate approval (which is a more common ground) but on alleged bad faith of Stena. Under Russian law and practice of the Supreme Commercial Courtthis may be a separate ground for invalidation of a contract.

The shareholders’ claim was initially successful. St.Petersburg Commercial Court, 13th  Appellate Court and North-Western Circuit Court all held that the contract was void, because of abuse of rights. However, when the Stena sought supervisory review three-judge panel decided that the case should be referred to the Presidium of the Supreme Commercial Court. It noted Stena’s argument that there was no evidence of collusion between Stena and Baltiysky Zavod management and the low value of the vessels per se was not sufficient to establish bad faith.

The outcome

On 13 September 2011 Supreme Commercial Court heard both the enforcement case and the minority shareholders case. It dismissed the latter and ordered enforcement of the SCC award.

This decision serves as another example of Russian courts’ adopting a pro-arbitration stance. Though the “road to enforcement” was by no means short or easy this may well be explained by the peculiarities of the case and the complexity of multi-jurisdictional and multi-party litigation.

The full reasoning of the Supreme Commercial Courtis not yet available, but this post will be updated to reflect it.

About the Author:

Sergey Usoskin is an advocate (member of the Russian bar) and a senior associate at Ivanyan&Partners. He has experience advising clients on and representing them in commercial and investment arbitration matters as well as before the Russian court (including the Supreme Commercial Court). He is a graduate of St Petersburg State University, Faculty of Law and University College London Faculty of Laws.

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