Introduction

The Russian Supreme Court has denied the enforcement of an arbitral award issued by a tribunal seated in London, on the grounds that the arbitrators’ nationalities were “unfriendly”. This is the latest example of Russian courts interfering with arbitrations connected with countries which have imposed anti-Russian sanctions.

Arbitration proceedings, sanctions against Russia and Russian retaliatory measures

In late 2020 or early 2021, C. Thywissen GmbH, a German buyer, initiated London-seated arbitration proceedings against Novosibirsk (NS) Bread Products, a Russian seller, for breach of a contract to supply linseed. An arbitral tribunal was constituted, comprising Ukrainian, British and Danish arbitrators. The Russian party had failed to nominate an arbitrator, so FOSFA appointed the Ukrainian arbitrator on its behalf.

In February 2022, Russia invaded Ukraine. Following the invasion, countries including Ukraine, the UK and Denmark imposed restrictive measures on Russia. In retaliation, the same countries were designated as “unfriendly countries” by Russian decree No. 79 of 28 February 2022.

In November 2022, the tribunal rendered an award against NS Bread Products, which C. Thywissen GmbH submitted to the Russian courts for recognition and enforcement.

Russian Supreme Court Rejects Enforcement of Award because of Nationalities of the Arbitrators

The first and second instance courts granted C. Thywissen GmbH’s request, but the Supreme Court overturned those decisions on public policy grounds, relying on Art. V(2)(b) of the New York Convention and Articles 234 - 244 of the Russian Arbitrazh (Commercial) Procedure Code (APC).

Two aspects of the Supreme Court’s reasoning stand out due to their wider implications for parties involved in international arbitration proceedings against Russian parties.

First, the Supreme Court stated that the composition of the arbitral tribunal violated the principle of objectivity and impartiality. In the eyes of the Supreme Court, the fact that the members of the tribunal were nationals of “unfriendly countries” creates a presumption that the principle was violated, unless there is evidence to the contrary.

Second, the Supreme Court held that the lower courts had not attached sufficient weight to the fact that the Russian party was likely to experience difficulties in finding and paying representatives to participate in proceedings in the UK because of the restrictive measures imposed on Russia.

Commentary

The Supreme Court’s decision to deny enforcement of the award based, among other things, on the arbitrators’ nationalities is a striking step and marks a concerning broadening of the public policy exception under the New York Convention.

We had already seen a trend of Russian courts issuing orders to stop arbitration proceedings brought against sanctioned parties where the arbitration agreement stipulates a foreign seat, relying on Article 248 of APC.

This decision indicates the Russian courts are now also willing to shield Russian parties from enforcement under the New York Convention. In view of recent Russian cases, this should not be viewed with surprise, even if it is unwelcome. The Supreme Court’s reasoning in part resembles that of previous anti-suit injunctions under Article 248 of the APC, where courts assumed that a Russian party would face obstacles to access justice in a country deemed “unfriendly” for having adopted restrictive measures against Russia or its nationals and/ or entities. In this case, the Supreme Court referred to the relevant decrees that declared certain countries as “unfriendly” and inferred from the arbitrators’ nationalities a lack of impartiality and objectivity. In doing so, it seemed to place the burden of demonstrating impartiality on the party seeking enforcement, without elaborating on how this burden could be discharged in practice.

FOSFA perhaps acted injudiciously in this case in appointing a Ukrainian arbitrator on behalf of a Russian party. Nevertheless, this development is troubling for any party that may wish to enforce an award against Russian assets. The Supreme Court did not clarify whether the whole tribunal, the majority, the chair or a single arbitrator had to be from an “unfriendly” country to trigger such grounds for refusal. It therefore cannot be excluded at this stage that other Russian courts would deem one “unfriendly” national among the tribunal sufficient. Parties who may wish to enforce in Russia should therefore be cautious when selecting arbitrators or agreeing on the method of their appointment and bear in mind that the list of “unfriendly” countries may vary over time.