The Russian Supreme Court rejected a request for enforcement of an award issued by a London panel alleging that the Ukrainian nationality of one of the members of the arbitration panel deprived it of the requirements of impartiality and independence.
1. Factual background
On July 26, 2024, the Supreme Court of the Russian Federation – contrary to what the Russian courts had ruled in the previous instances – refused to recognize and enforce an arbitration award issued by the Federation of Oils, Seeds and Fats Associations Ltd in London (‘FOSFA’) in connection with a dispute arising from the imposition of sanctions against Russia by the European Union and the United Kingdom.
The case stems from the conclusion, in 2020, of a contract for the supply of flaxseed between the Russian supplying company Novosibirskkhleboprodukt, and the German purchasing company C. Thywissen GmbH. The contract, governed by English law, provided under Article 9 that the parties could claim compensation only for direct losses resulting from contractual breaches. In addition, the contract contained an arbitration clause under which the resolution of any dispute arising between the parties in relation to the contract (including its interpretation and execution) would be referred to an arbitration tribunal established at FOSFA. The arbitration tribunal would be composed of three arbitrators, two appointed by each party and the third appointed by FOSFA.
A few months after the conclusion of the contract, the Russian supplier, invoking force majeure related to a period of drought, asked the buyer for an extension of the delivery time. The German company, however, objected the extension and, relying on Article 9 of the contract, initiated the arbitration proceedings before FOSFA, seeking compensation for the damages suffered, allegedly equal to the difference between the contract price stipulated by the parties and the market price of the goods at the time of the breach of obligation.
2. The arbitration process and the award
Following the dissolution of a first arbitration tribunal due to an irregularity in the appointment of two of the three arbitrators, a second arbitration tribunal was established. Pursuant to the arbitral clause, the German company appointed a first arbitrator.
However, as the Russian company did not provide for the appointment of the second arbitrator, in compliance with paragraphs 2(c) and 2(b) of the Arbitration Rules , FOSFA proceeded to appoint that arbitrator as well, designating a person of Ukrainian nationality (the other arbitrators had British and Danish nationalities). The arbitration, duly instituted in December 2021, was concluded by Decision No. 4760 in November 2022, awarding the German company compensation in the amount of $600,000 for damages suffered, plus accrued interest.
Ultimately, since the Russian counterpart did not voluntarily execute the arbitration award, the German company appealed to the Russian courts for recognition and enforcement of the arbitral decision in the Russian Federation. The instance of recognition and enforcement was granted in the first and second instance. Following the above, the Russian company appealed to the Russian Supreme Court, arguing that (inter alia) the recognition and enforcement of the arbitral award conflicted with Russian public policy rules.
3. Russian Supreme Court decision
La The Russian company filed the appeal with the Russian Supreme Court in relation to (i) the lack of independence and impartiality of the three members of the
Studio Legale Padovan from left to right Pierluigi Salvati, Marco Padovan, Pierluigi Salvati
arbitral tribunal and (ii) its own inability to defend itself. In the appellant’s view, these circumstances would render the award contrary to Russian public policy and would preclude its recognition and enforcement under Article V(2)(b) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1957, as well as in Articles 234 and 244 of the Code of Arbitration Procedure of the Russian Federation, which establishes the possibility for the Russian court to refuse to recognize and enforce a foreign judicial judgment or award if it is contrary to the public policy of the Russian Federation.
Relying on these principles, the Russian company therefore opposed the recognition of the award, arguing that the onset of the restrictive measures against the Russian Federation by the European Union and the United Kingdom due to the conflict with Ukraine had undermined the impartiality and independence of the judges, undermining the procedural guarantees of the arbitration proceeding. This reasoning was based on the fact that one of the judges was a Ukrainian national, and therefore, could not be able to judge the case in question in an impartial manner. Second, the impartiality of the arbitration panel was challenged, by the Russian company alleging that the appointment of the first arbitrator by the German company had occurred in violation of the Arbitration Rules. In support of this argument, as indicated in the ruling by the Russian Supreme Court, the Russian company had already argued before FOSFA that the lack of independence and impartiality of the first arbitrator could be inferred from the fact that the latter, as well as the German company’s supervisor, were members of the same FOSFA committees.
Finally, the Russian company referred to the impossibility to obtain legal aid in the UK, as the restrictive measures imposed against the Russian Federation prevented Russian citizens from paying court fees as well as necessary representation services. In the appellant’s view, this would have led to a violation of the right to defense. In fact, the Russian counterparty pointed out the Russian courts of first and second instance did not take into consideration the existence of restrictive measures imposed on the Russian Federation and and difficulties that the Russian company faced in providing sums in order to get a proper technical defence before the Arbitral Tribunal. In addition, the company argued that it had not received any explanation or guidance regarding the procedures and manner of recourse to the FOSFA arbitration award.
The Russian Supreme Court therefore upheld the appellant’s grounds of grievance, finding that (i) the award was contrary to Russian public policy, as well as that (ii) under Article 291 of the Code of Arbitration Procedure of the Russian Federation, the lack of recognition was justified due to the violation of substantive law and procedural law norms. The court therefore denied the enforceability of the award in Russia, remanding the case to the Russian court of first instance for the latter to consider the legal position of the Russian company in light of the current geopolitical context.
In this regard, it is worth briefly noting that the Russian Supreme Court’s arguments raise a number of questions. Indeed, it should be recalled that the parties, at the time of the conclusion of the contract, had agreed to resolve any dispute through the establishment of an arbitration tribunal composed of three arbitrators, two of whom were chosen by the parties. The Russian company, prior to the imposition of restrictive measures against the Russian Federation, had not exercised its right to appoint a member of the arbitration tribunal and, therefore, in accordance with the FOSFA arbitration rules, the appointment was made by the arbitration administrative structure.
In addition, as also emphasized by the case law of the European Court of Human Rights shows that, in order for the objective impartiality of a judge to be questioned, objective evidences of the absence of impartiality may subsist and that the personal impartiality of the judge is presumed until proven otherwise. From what emerges from examined decision, however, contrary evidence were in no way considered within the Russian Supreme Court assessment.
Lastly, concerning the alleged infringement of the right of defense, it suffices to point out that – in circumstances such as those at issue – it is possible to obtain an authorization from the UK Office of Financial Sanctions Implementation (OFSI) in order to be able to allow payment by a Russian to a British legal representative by reason of the representation provided.
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