Authors: Shelal Lodhi Rajput*
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In a world where borders blur and economies intertwine, the ripples of political decisions travel far beyond their points of origin. Notably, the repercussions of geopolitical tensions extend far beyond borders, infiltrating even the most sacrosanct domains of justice and law.
The recent decision of the Supreme Court of Russia (“SCR”) in C. Thywissen v. Novosibirskhleboproduct, which denied the enforcement of a foreign arbitration award on grounds of the impartiality of the arbitration process in the United Kingdom, a country that imposed sanctions on Russia, underscores the complex interplay between international relations and the rule of law. The SCR’s decision marks a significant development in the landscape of international arbitration.
Background
The dispute arose from a contract dated 23 July 2020, between AO Novosibirskhleboproduct, a Russian company (“Supplier”), and C. Thywissen GmbH, a German company (“Buyer”), for the supply of Russian-grown linseed. Governed by the laws of England and Wales, the contract included an arbitration clause under the Federation of Oil, Seeds and Fats Association (“FOSFA”) with its seat in London. Due to a drought in Russia’s Novosibirsk Region, the Supplier was unable to fulfill the contract and claimed force majeure, which the Buyer rejected. Subsequently, the Buyer initiated arbitration proceedings, resulting in an award in its favor for USD 600,000.00. The Supplier’s failure to appeal rendered the award binding, leading the Buyer to seek its enforcement in Russia.
Here, the Supplier did not nominate an arbitrator, leading FOSFA to appoint a Ukrainian arbitrator on its behalf. The arbitral tribunal was composed of arbitrators from Ukraine, the United Kingdom, and Denmark—nations that are considered “unfriendly” to Russia under Russian law through Decree No. 79 of February 28, 2022, due to their sanctions against Russia.
Decoding the SCR’s Ruling
The initial request for enforcement was granted by the first and second-instance courts in Russia. However, the Russian Supreme Court ultimately overturned these decisions on public policy grounds, citing Article V(2)(b) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (“New York Convention”) and Articles 234-244 of the Russian Arbitrazh (Commercial) Procedure Code (“APC”). Article V(2)(b) provides the court with discretion not to enforce if the award seems violative of public policy to protect the base principles of fair play and sovereignty but is applied only very limitedly. Articles 234-244 set out formal procedures under which Russian courts recognize and enforce foreign awards, mandating the production of particular documentation and adherence to certain formalities. Article 244 corresponds to Article V of the New York Convention by allowing a refusal to enforce where the award is contrary to public policy.
Two critical aspects of the Supreme Court’s reasoning have broader implications for international arbitration involving Russian parties.
First, the Court held that the composition of the arbitral tribunal violated the principles of objectivity and impartiality. The Court opined that the nationalities of the arbitrators from “unfriendly countries” created a presumption of bias, thereby violating these principles unless proven otherwise. This approach effectively shifts the burden of proof onto the party seeking enforcement to demonstrate the impartiality of the arbitrators.
Second, the Court emphasized that the lower courts had failed to adequately consider the difficulties the Russian party would face in participating in proceedings in the UK due to the sanctions. These difficulties included challenges in securing and compensating legal representation, which the Court viewed as significant enough to affect the fairness of the proceedings.
Public Policy and Impartiality: The Pillars of SCR’s Decision
The instant decision marks a significant broadening of the public policy exception under the New York Convention. Traditionally, this exception has been interpreted narrowly to prevent the enforcement of awards that are fundamentally at odds with the enforcing state’s most basic notions of morality and justice. However, the SCR’s interpretation extends this exception to include considerations of the arbitrators’ nationalities, particularly when those nationalities correspond to countries that have imposed sanctions on Russia.
This decision is consistent with a broader trend in Russian jurisprudence, where courts have increasingly issued orders to halt arbitration proceedings involving sanctioned parties, especially when the arbitration agreement stipulates a foreign seat. Article 248 of the APC has been a common basis for such orders, with the court reasoning that Russian parties might face insurmountable obstacles to accessing justice in countries deemed “unfriendly.”
The SCR’s reasoning in this case also mirrors the logic used in previous anti-suit injunctions under Article 248, where courts have presumed that Russian parties would face significant difficulties in accessing justice in jurisdictions that have imposed sanctions on Russia. By linking the arbitrators’ nationalities to the potential for bias, the Court effectively created a new ground for refusing enforcement that extends beyond the traditional scope of public policy.
The SCR’s approach contrasts sharply with established practices in other jurisdictions, particularly those adhering to the New York Convention. Article V of the Convention enumerates exhaustive grounds for refusing enforcement, none of which include the nationality of arbitrators. By extending the scope of public policy to include the nationality of arbitrators, the SCR has deviated from the international consensus, potentially undermining the predictability and neutrality that are hallmarks of international commercial arbitration.
In jurisdictions like the United States and the United Kingdom, courts have consistently upheld the principle of non-interference in the merits of arbitral awards, focusing instead on procedural fairness and adherence to due process. The SCR’s willingness to reassess the merits of the dispute and its introduction of a presumption of partiality represent a significant departure from these standards.
Implications vis-à-vis Significance of Ruling on International Arbitration
The significance and implications of this decision are profound for parties involved in, or considering, arbitration with Russian entities. The SCR did not specify whether the presence of a single arbitrator from an “unfriendly” country, a majority, or the entire tribunal would be sufficient to trigger a refusal of enforcement. This lack of clarity creates significant uncertainty for parties seeking to enforce arbitral awards in Russia. As a result, parties involved in arbitration with Russian counterparts should exercise caution when selecting arbitrators or agreeing on the method of their appointment. Given the fluid nature of the “unfriendly” countries list, parties should also consider the potential for changes in this list over time, which could impact the enforceability of awards in Russia.
FOSFA’s decision to appoint a Ukrainian arbitrator on behalf of the Russian party in this case, while procedurally sound, may have contributed to the SCR’s ruling. This highlights the necessity for arbitral institutions and parties to remain acutely aware of the geopolitical context in which they operate and the potential impact of arbitrators’ nationalities on the enforcement of awards. The SCR’s decision raises several critical questions about the future of arbitration involving Russian parties. The presumption of partiality could discourage the appointment of arbitrators from certain nationalities, potentially leading to a more insular arbitration milieu. This development might also influence the drafting of arbitration agreements and clauses, with parties potentially avoiding jurisdictions where enforcement may be compromised by such biases.
Moreover, the decision could lead to a chilling effect on foreign investment in Russia, which is already hit by sanctions, as investors may perceive a heightened risk of unfavourable judicial intervention in the enforcement of arbitral awards. This perception could be further exacerbated by the absence of clear guidelines for rebutting the presumption of partiality, leaving parties in a state of uncertainty.
Conclusion
By broadening the public policy exception under the New York Convention to include consideration of arbitrators’ nationalities, the SCR has introduced a new level of uncertainty for parties seeking to enforce awards in Russia. As the legal landscape continues to evolve, parties must remain vigilant and adaptable to navigate the complexities of international arbitration amid sanctions and geopolitical tensions. By creating a presumption of bias based solely on the arbitrators’ nationality, the Court has set a troubling precedent that undermines the core principles of neutrality and objectivity in international arbitration.
While the decision may be seen as a protective measure for domestic parties, it raises critical questions about the future of international arbitration. The potential for this approach to be applied in other cases involving “unfriendly” nationals could severely impact the global arbitration landscape and erode confidence in Russia as a participant in the international legal system. The SCR’s stance should serve as a cautionary tale for other jurisdictions, highlighting the importance of maintaining the internationalism and neutrality that are fundamental to the arbitration process.
This ruling not only reflects the deep-seated mistrust that sanctions breed but also raises critical questions about the neutrality of international arbitration in an era where global politics and economic sanctions increasingly dictate judicial outcomes. The decision serves as a potent reminder that in today’s world, no legal proceeding exists in a vacuum and the impartiality of justice itself may be compromised by the very forces it seeks to transcend. Just as a single stone cast into a river can alter the flow of water, the tremors of geopolitics can reshape the foundations of international law, leaving us to question: in the global arena of justice, can true impartiality exist when nations stand divided?
*Shelal Lodhi Rajput is an Associate with the Dispute Resolution Team at Tuli & Co., Delhi NCR. He has a keen interest in domestic and international arbitration as well as commercial and insolvency disputes amongst other area of interests. He is a recent graduate and gold medalist from Symbiosis Law School, Pune, with a BBA LL.B (Hons).