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Recognition of foreign arbitral awards in Russia: redefined public order approach

legal updates
22 / 07 / 2024
In the existing geopolitical environment, Russian courts with increasing frequency face the necessity of revaluating conventional approaches to recognising and enforcing foreign arbitral awards. The issue of correlating imposed countersanctions-related restrictions with the concept of public order enshrined in Article 244 of the Arbitration Procedure Code of the Russian Federation (“Russian APC”) has become particularly relevant.

Background and court position

A Swiss company (“Applicant”) applied to a Russian court seeking the recognition and enforcement of an arbitral award against a Russian company (“Respondent”) under the Rules of the London Court of International ArbitrationResolution of the North Caucasus District Arbitrazh Court dated 16 October 2023 on Case No. A32-47144/2022. (“LCIA”).

The Respondent resisted the Applicant’s claims, referring to the violation of the public law order of the Russian Federation to the extent related to the performance of obligations to counterparties from unfriendly jurisdictions.

The first instance court dismissed the application and the cassation court upheld that decision.

The courts’ reasoning was based on references to the “countersanctions” decrees of the President of the Russian FederationPresidential Decrees No. 81 dated 1 March 2022, No. 95 dated 5 March 2022, No. 252 dated 3 May 254, No. 254 dated 4 May 2022 and Ordinance of the Russian Government No. 430-р dated 5 Match 2022., which introduced a new public law procedure regarding the fulfilment of obligations to foreign counterparties from “unfriendly” countries: they introduced prohibitions on the fulfilment of obligations to legal entities included by the Government of the Russian Federation on the sanctions list, and introduced restrictions and an approval-based procedure for the fulfilment of obligations related to transactions with those legal entities that are under the jurisdiction of unfriendly countries.

In addition, courts pointed out that the award creditor did not have a bank account with a Russian organisation or a treasury account that rendered the arbitral award unenforceable under the enforcement proceedings lawspara. 1 of Art. 2 of Federal Law No. 624-FZ dated 29 December 2022 “On Amending the Federal Law ‘On Enforcement Proceedings’”..

Comment

The interpretation of the “public order” concept in this case has been significantly expanded in comparison to the conventional approach set out in Information Letter of the Presidium of the Higher Arbitrazh Court of the Russian Federation No. 156 dated 26 February 2013 “Review of Practical Experience of the Consideration by Arbitrazh Courts of Cases on the Application of the Public Order Clause as a Ground to Dismiss or Enforce Foreign Court Decisions and Arbitral Awards”.

In this case, we see that the restrictions on the manner of performing obligations to foreign counterparties are treated by court as public order. This approach significantly expands the conventional understanding of public orderIn particular, the one set out in Resolution of the Plenum of the Supreme Court of the Russian Federation No. 53 dated 10 December 2019 “On the Performance by the Courts of the Russian Federation of the Functions Related to Assistance and Control over Arbitration Proceedings, International Commercial Arbitration”..

In addition, courts also specify that in view of the requirement introduced in enforcement proceedings laws that the award creditor should provide details of a bank account opened with a Russian credit institution or details of the award creditor’s treasury account, in the absence of information on such an account the arbitral award becomes unenforceable in Russia.

We have previously addressed anti-suit injunctions, the application of which is based on the provisions of Articles 248.1 and 248.2 of the Russian APC. We see that the decision in respect of this case is a continuation of the same course aimed at protecting Russian individuals/entities from foreign creditors and arbitral awards made in respect of their claims outside of Russia. Unfortunately, these measures also affect the credibility of dispute resolution through state arbitration in Russia as a whole.

The approach demonstrated in the case in question is also confirmed by other recent arbitral decisions. For example, the Central District Arbitrazh Court refused to include claims of a foreign creditor in the register of creditors’ claims of a Russian debtor, referring to the contradiction with the public order of the Russian Federation in light of the existing restrictive measuresResolution of the Central District Arbitrazh Court No. Ф10-1206/2024 dated 2 May 2024 with respect to case No. A48-10101/2022.. In another case, the same court circumducted a lower court’s ruling on the issuance of a writ of execution on an award issued by the ICAC at the RF CCI in favour of a foreign company, emphasising that it is necessary to verify the award enforcement compliance with the public order of the Russian Federation, taking into accountthe existing restrictionsResolution of the Central District Arbitrazh Court No. Ф10-58/2023 dated 27 February 204 with respect to case No. A14-13590/2022..

For the legal and business communities, these decisions represent red flags highlighting the need for a more careful approach to structuring international transactions and choosing mechanisms for resolving disputes arising from them. Foreign partners should also note the increased risks associated with the enforcement of arbitral awards in Russia in favour of creditors from unfriendly countries and consider alternative options for protecting their interests, such as the assignment of rights in favour of an individual/entity from a friendly jurisdiction, opting for arbitration in Russia, etc.
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