The Supreme Arbitrazh Court Clarifies Russian Public Policy

by Dechert LLP
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The Presidium of the Supreme Arbitrazh Court (“SAC”) recently published Information Letter No. 156 approving the Review of the Arbitrazh Courts’ Practice of Considering Cases Concerning the Application of Public Policy as a Basis to Refuse the Recognition and Enforcement of Foreign Judgments and Arbitral Awards (the “Information Letter”). Although dated February 26, 2013 this Letter was only published in April 2013. This update deals with the letter in so far as it relates to the enforcement of foreign arbitral awards.

In Russia, the public policy defense has traditionally been widely invoked when trying to resist enforcement of foreign arbitral awards on the basis of 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This update looks at the most important interpretations of “public policy” issued by the SAC.

New interpretation of public policy

The Information Letter limits the concept of public policy and clarifies the SAC’s position based on an analysis of 12 specific cases.

Until recently, the most comprehensive definition of “public policy” in Russia was contained in Clause 29 of Information Letter No. 96 of the SAC’s Presidium dated 22 December 2005 which broadly defined public policy as basic Russian law principles, including those involving “equality of parties in civil relations, good faith behavior of parties, and proportionality between the extent of civil liability and the consequences of a culpable breach”.

In the 2013 Information Letter the SAC has sought to narrow the public policy concept to situations where enforcement would:

  • violate fundamental legal principles of supreme mandatory effect, supreme universality, particular social and public importance and which underlie the economic, politic and legal basis of the Russian state;
  • entail actions directly prohibited by Russian super imperative norms (Article 1192 of the Russian Civil Code);
  • entail actions that violate the sovereignty or security of the state, affect the interests of major social groups, and breach the constitutional rights and freedoms of private parties.

The Information Letter expressly states that the public policy concept is an independent ground for resisting enforcement, and should not be used as a “catch all” capturing other applicable grounds for refusing to recognize and enforce an award. Neither should it lead to a reassessment of the merits of the case.

Some examples of public policy invocations

Along with the above clarifications the SAC opined on a number of specific issues involving the applicability of public policy:

  • The absence in Russian law of substantive and procedural norms, analogous to those referred to in an arbitral award, does not itself constitute a reason to invoke the public policy exception.
  • Enforcing awards for punitive or liquidated damages and penalties does not offend Russian public policy unless the amount of such damages is clearly excessive compared to the amount the parties reasonably anticipated would be payable when executing their agreement, or unless the agreement to liquidated damages indicates a clear abuse of freedom of contract (e.g. where advantage was flagrantly taken of the party with weaker bargaining power).
  • The joint marital assets regime provided for by Russian family law should not prevent enforcement of an arbitral award against a Russian individual whose spouse was not a party to arbitral proceedings.
  • A typographical error contained in the text of an arbitral award including in the section dealing with relief should not preclude enforcement unless it affects the substance of the award.
  • Improper constitution of an arbitral tribunal may only be deemed a violation of public policy if a party was unable to file objections to such constitution during the arbitral proceedings or was unsuccessful in its challenge of the constitution of the tribunal in circumstances where bias or irregularity was clearly present.

    In this regard, the Information Letter describes a situation in which an arbitrator duly disclosed during arbitral proceedings that he had been appointed several times in recent years by the party who was ultimately successful in the arbitration. Given that the arbitrator had disclosed this fact and that the losing party had not challenged the arbitrator in a timely fashion during the arbitral proceedings (and thus waived the right to object), the Russian courts dismissed the losing party’s arguments advanced in the enforcement proceedings regarding improper constitution of the arbitral tribunal.

    However, the outcome was different where a losing party had been unsuccessful in challenging an arbitrator who had disclosed that he was head of the legal department of the claimant’s mother company. In this case, in reliance on the IBA Guidelines on Conflicts of Interest in International Arbitration the Russian courts found that the arbitrator was biased and thus enforcement of the award would violate Russian public policy.

  • The enforcement of an arbitral award to recover penalties for non-performance of a contract signed on behalf of a losing party by a bribed general director was unsurprisingly found to infringe public policy. However,, it is likely that this conclusion was reached not purely on the basis of the allegation of bribery but because the general director had already been convicted and sentenced in criminal proceedings for commercial bribery.

Conclusions

Despite this narrower interpretation of public policy it is probably premature to conclude that there will be an immediate dramatic decrease in the number of awards refused enforcement on public policy grounds. This is the case in part because in determining the applicability of the public policy concept, certain issues are necessarily still subject to the court’s discretion (e.g. the assessment of whether liquidated damages or penalties are reasonable).

That said, it is encouraging that the Russian courts have sought to elaborate on the applicability of public policy and reduce its applicability to a specific set of circumstances. Particularly positive is SAC’s declaration that the application of foreign law concepts unknown to Russian law does not breach Russian public policy. For example, the enforcement of an award based on an indemnity will not infringe Russian public policy merely because Russian law is unfamiliar with the indemnity concept.

Also of interest is the SAC’s approval of the lower courts’ reliance on the IBA guidelines which have rarely been referred to in Russian court proceedings. Similarly positive is the invocation of the waiver concept which thus far has also rarely been applied by Russian courts.

Overall, the SAC’s guidelines for the application of the public policy defense stipulated in the Information Letter are promising and in line with business expectations and international standards. It remains to be seen however, the extent to which these guidelines will be followed by the Russian courts.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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