Enforcement of an arbitral award is at risk if the State interest is at stake

Jul 18, 2019

A recent case is a good illustration of how Russian courts apply the concept of public policy when it comes to the enforcement of foreign arbitral awards.

Background

On 24 April 2008, Banwell International Limited (the "Secured Party", "Claimant," "Applicant"), a foreign company, and PJSC Rosshelf (the "Pledgor" / "Defendant"), a Russian company, entered into a Share Pledge Agreement (the "SPA") under which the Pledgor would agree to pledge the shares of JSC Lotos (the “Shares”) to the Secured Party. The SPA contained a clause referring disputes to arbitration at the London Court of International Arbitration issued an award (the "LCIA Arbitration").

When a dispute arose, the Claimant referred it to the LCIA arbitration, and thereafter, on 5 April 2018, an arbitral tribunal issued an award (the "LCIA Award") in favour of the Claimant by which the Claimant is entitled to enforce the SPA by sales of the Shares on public auction, or in such manner as may be prescribed by a court in a country where such enforcement will occur.

As the Defendant did not comply with the LCIA Award voluntary, the Claimant brought an action before the Arbitrazh Court of the City of Moscow (the "Court") seeking recognition and enforcement of the LCIA Award in Russia (case А40-117331/2018, hereinafter referred to as the "Banwell I case"). The Court has refused the enforcement of the LCIA Award by its ruling dated 21 November 2018.

The Court's findings

Russian legislation limits the activities of foreign companies in participating in companies that are of strategic value to Russia (‘strategic companies’). [1] The Court has established that JSC Lotos is a strategic company under the Presidential Decree dated 4 August 2004 No 1009, and listed in a relevant register. Having established that fact, the Court has concluded:

the recognition and enforcement of the arbitral award on which assets of an entity included in the Register of the Strategic Enterprises are subject to the sale would impair the Russian Federation. Consequently, the recognition and enforcement of such award would contrary to the public policy of the Russian Federation.

An appeal against the Court's ruling was unsuccessful. The Russian Supreme Court refused to reconsider the case by its opinion on 24 April 2019.

Conclusion

Unfortunately, the Court's decisions in the Banwell I case, even being in the Russian language, give little useful information about the Court's approach and its reasons. However, a few days ago, the same Court, but another judge, rendered its ruling in a case between the same parties and under the same, or close facts (the Banwell II case). We would hope to see clear reasons for justifying the courts' approach in both cases. We will report, once the reasons become clear.




[1]    See, e.g., KPMG, Doing Business in Russia. Your Roadmap to Successful Investments, July 2018, https://assets.kpmg/content/dam/kpmg/ru/pdf/2018/07/ru-en-doing-business-in-russia-300718.pdf (last accessed 16 July 2019), p. 12.

Mikhail Samoylov