Thanks to the 1958 New York Convention, which established uniform rules for the recognition and enforcement of foreign arbitral awards, arbitration has become one of the most effective mechanisms for resolving cross-border disputes. However, Article 5(2) of the Convention provides one of the grounds for refusal to recognise and enforce arbitral awards – contradiction to the public policy of the state where enforcement is sought. The interpretation of this concept may vary across different jurisdictions, resulting in non-uniform court practice.
In recent years, Russian court practice has witnessed changes in the interpretation of the concept of “public policy”. Under the apparent influence of political and economic circumstances, additional barriers have been introduced to the recognition and enforcement of foreign arbitral awards, especially if they concern parties from the so-called “unfriendly countries”. This article discusses key aspects of these barriers.
1. Interim public policy
One of the first hurdles to emerge in Russia is the concept of “interim public policy”. According to this concept, Russian courts refuse to recognise and enforce arbitral awards if one of the parties to the dispute is located in the jurisdiction of an “unfriendly country”.
Such refusals are justified by decrees of the President of the Russian Federation introducing counter-sanctions measures, which provide for restrictions on the fulfillment of obligations vis-a-vis persons on the sanctions lists or legal entities registered in “unfriendly countries”, in particular:
- Decree of the President of the Russian Federation of 01.03.2022 No. 81 “On additional temporary measures of economic nature to ensure financial stability of the Russian Federation”;
- Decree of the President of the Russian Federation of 05.03.2022 No. 95 “On temporary procedure for fulfillment of obligations to certain foreign creditors”;
- Decree of the President of the Russian Federation of 08.09.2022 No. 618 “On the Special Procedure for the Execution of Certain Types of Transactions (Operations) Between Certain Persons”;
- Decree of the President of the Russian Federation of 03.05.2022 No. 252 “On Application of Retaliatory Special Economic Measures in Connection With Unfriendly Acts by Certain Foreign States And International Organisations”;
While these decrees do not directly prohibit the recognition and enforcement of foreign arbitration awards, they do impose restrictions on the enforcement of obligations to persons on sanctions lists and legal entities from unfriendly countries. Russian courts use these rules as a basis for refusing to recognise foreign arbitral awards. For example, this approach was applied by the Arbitrazh Court of the Central District in case No. A14-13590/2022, the Arbitrazh Court of the North Caucasus District in case No. A32-47144/2022 and the Arbitrazh Court of the Rostov Region in case No. A53-33710/2023.
2. Possible obstacles to access to justice for the Russian party to the dispute
The recognition and enforcement of an arbitration award, the seat of which was in an “unfriendly country”, may also lead to a violation of Russian public policy.
This was the conclusion reached by the Moscow City Arbitrazh Court in case No. A40-116183/2023. In this case, the court considered an application by a Czech company for recognition and enforcement of an ICC arbitration award with the seat of arbitration in Zurich, Switzerland.
Prior to the Czech party’s application for recognition and enforcement of the arbitral award, the Russian party to the arbitration applied for an injunction to continue arbitration proceedings pursuant to Article 248.2 of the APC RF (Case No. A40-127650/2022). However, the Moscow City Arbitrazh Court rejected the application because the arbitration proceedings had ended and an award had been rendered on the merits of the dispute. At the same time, the Arbitrazh Court pointed out that the refusal to satisfy the application had not deprived the applicant of the possibility to challenge the award on the grounds that the tribunal lacked jurisdiction to hear the dispute, since the Arbitrazh Court of the Russian Federation had exclusive jurisdiction on the ground that a Russian party had obstacles to access to justice (Article 248.1 of the APC RF), as well as to object to the claimant’s claims for enforcement of the international arbitration award in the territory of the Russian Federation. Thus, the Moscow City Arbitrazh Court, which considered the Russian party’s application for an injunction to continue the arbitration, formulated a position according to which recognition and enforcement of a foreign arbitration award may be refused even if the Russian party has not initiated proceedings in a Russian court in accordance with Article 248.1 of the APC RF or has not obtained an injunction to continue proceedings in a foreign arbitration in accordance with Article 248.2 of the APC RF.
In case No. A40-116183/2023, the Moscow Arbitration Court applied this conclusion formulated in the decision in case No. A40-127650/2022 by refusing to recognise and enforce the foreign arbitration award. From this we can conclude that the recognition and enforcement of any arbitration award with a seat of arbitration in an “unfriendly country” may be refused due to the exclusive competence of the Russian court to hear the dispute. A possible solution is to choose a neutral seat of arbitration, such as ADGM or DIFC.
3. Presumption of partiality of arbitrators from unfriendly countries
The third change in the approach of Russian courts to the recognition and enforcement of arbitral awards is the application of the presumption of partiality of arbitrators from unfriendly countries. This presumption was introduced by the Supreme Court of the Russian Federation in case No. A45-19015/2023.
In this case, a German company sought recognition and enforcement of a FOSFA arbitration award against a Russian company. The case was heard by the Supreme Court, which rejected the application. As one of the reasons for refusing to recognise and enforce a FOSFA arbitration award, the Supreme Court stated that all arbitrators (who were nationals of Ukraine, Denmark and the United Kingdom) were nationals of “unfriendly countries”, which, in the Court’s view, gave rise to a presumption of bias against the Russian party.
It is important to note that this presumption is rebuttable: a party seeking recognition and enforcement of an arbitral award may present evidence of the impartiality of the arbitrators. However, the Supreme Court has not provided clear guidance as to what kind of evidence is required to rebut such a presumption. A possible solution could be to appoint arbitrators with nationality of a neutral country or Russian nationality to minimise the risks of refusal to enforce the award.
4. Restrictions on the transfer of funds abroad
If recognition and enforcement of an arbitral award is sought by a foreign entity, the issue of transferring funds abroad is relevant.
At the moment, the Central Bank of Russia maintains restrictions on the transfer of funds for non-resident legal entities from unfriendly countries, which is an obstacle to the actual receipt of funds by a foreign company when enforcing an arbitration award in Russia. The relevant funds can be received only on bank accounts in a Russian organisation. In particular, this circumstance was pointed out by the Arbitrazh Court of Krasnoyarsk region in case No. A32-47144/2022, justifying the refusal to recognise and enforce the award. This restriction, however, does not apply to foreign companies controlled by Russian legal entities or individuals.
Conclusion
Changes in Russian court practice regarding the interpretation of the concept of “public policy”, as well as currency restrictions, have significantly complicated the process of recognition and enforcement of arbitral awards with a seat of arbitration in countries unfriendly to Russia, arbitral awards rendered by arbitrators from such countries and in favour of persons from such countries. Therefore, preparation for arbitration proceedings involving a party from Russia requires careful and competent planning of each step of the proceedings, from the appointment of arbitrators to the enforcement of the arbitral award.
Cardinals’ international arbitration practice specialises in arbitration proceedings, as well as the recognition and enforcement of arbitral awards. We offer expert advice on arbitration involving Russian parties and help you prepare for a successful arbitration.
