Based on a recent Russian judgment, Danish companies should review their contracts with Russian cooperation partners to clarify whether they contain arbitration clauses that prevent enforcement through the Russian courts.

At the end of September 2018, the commercial court in Russia, as the court of second instance, delivered a spectacular judgment which overruled the validity of an arbitration award delivered by an arbitration tribunal under the International Chamber of Commerce. An attempt was made to appeal against the judgment, but the Russian Supreme Court has now dismissed the case in a way that is considered an approval of the judgment.

THE RUSSIAN COMMERCIAL COURT REJECTED ASSISTANCE TO ENFORCE AN ARBITRATION AWARD

The parties were a company from Luxembourg, CMM SA, and the largest contracting company in Russia at that time, Inzhtransstroy.

The arbitration tribunal - sitting in Geneva - had been set down based on the parties’ agreement which contained an ICC standard clause:

"All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules".

In 2014, the arbitration tribunal had ordered Inzhtransstroy to pay approx. EUR 3.6 million plus interest. Shortly after, proceedings similar to bankruptcy or restructuring proceedings commenced in Russia against Inzhtransstroy.

These proceedings ended in 2017 with an agreement between the creditors, and - strangely enough - DMM SA was not registered as creditor. Consequently, DMM was not part of the solution to the company’s financial problems. Subsequently, DMM tried to get the Russian courts’ assistance to enforce the arbitration award.

But the commercial court dismissed DMM’s request stating that the arbitration award was contrary to the Russian legal system and that the arbitration tribunal had not had jurisdiction to deliver the award.

THE RUSSIAN LEGAL SYSTEM

The reference to the Russian legal system has formal authority in the convention governing the question concerning international arbitration.

Article V of the convention concerns all the reasons which may result in dismissal of recognition of an arbitration award and enforcement thereof, and one of the reasons is therefore if enforcement will violate the state’s “public policy” or “ordre public”. The convention’s provision has, almost literally, found its way to section 37 of the Danish Arbitration Act.

The Russian commercial court found that enforcement would be a serious threat to the restructured financial basis of Inzhtransstroy and to the full payment of the creditors participating in the solution.

It is difficult to make this reason consistent with the overall narrow scope which has been intended with the provision and which has been applied in case law for decades. Fundamental legal and moral principles must have been infringed - and to trigger an economic burden on a debtor will not normally qualify as doing so. But to this should be added that the details of the case are unknown so it is not possible to make a certain assessment.

THE ARBITRATION TRIBUNAL’S LACK OF AUTHORITY

The commercial court found that the arbitration tribunal did not have any authority to settle the dispute between DMM and Inzhtransstroy as the arbitration agreement was invalid.

The reason for this view is that the standard clause only provides that the ICC’s rules must be applied, but the clause does not state that the International Court of Arbitration should preside. The omission makes the clause so unclear and ambiguous that it cannot be considered validly agreed between the parties.

The arbitration agreement’s validity should be settled under Swiss law (as the tribunal was located in Geneva). But what is most important is that the standard clause from the perhaps most important and distinguished institution in the world was rejected.

The judgment is also hard to take seriously in the sense that the clause clearly and unambiguously states that the ICC’s rules must be applied, which define and regulate the International Court of Arbitration in Article 1.

But the extent and implications of existing agreements with Russian parties agreeing on this clause are immeasurable.
Several other internationally recognised arbitration institutes’ standard clauses are worded in the same way.

However, the Danish Institute of Arbitration's far-sighted wording of the clause is: “Disputes are to be settled by arbitration at the Danish Institute of Arbitration in accordance with its Rules of Procedure, ...”.

COMPANIES ARE RECOMMENDED TO TAKE A CLOSER LOOK AT THEIR CONTRACTS WITH RUSSIAN PARTIES

Companies which are about to conclude agreements involving Russian parties or which have framework agreements concerning current orders should be aware of this new problem.

These companies should therefore take a closer look at the clauses involving Russian parties or involving a risk of enforcement in Russia becoming necessary.

Finally, companies which are already involved in arbitration proceedings with a Russian party should consider the risk of bringing action which will not provide the expected value - under the strains of heavy costs.

contacts

Poul Hvilsted

Partner