Ukraine's Awards are Under Close Scrutiny

Jul 10, 2019

It is generally accepted that an enforcing court has no authority to review arbitral awards on the merits. Both the New York Convention and the UNCITRAL Model Law on International Commercial Arbitration have clear provisions to that effect. Nevertheless, Russian courts have developed an approach that, it seems, lies beyond these international instruments. Recent cases demonstrate that.

Background

On 8 June 2015, MigPlus LLC, a Russian entity, hereinafter referred to as "Buyer" and Virovskiy Karer LLC, a Ukraine entity, hereinafter referred to as "Seller", entered into a supply contract under which the Seller would supply goods to the Buyer against payment. The contract contained a clause referring disputes to arbitration at the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry (the "ICAC").

A dispute arose between the parties when the Buyer failed to pay the purchase price for the goods. In 2015, the Seller commenced ICAC arbitration as provided for in the contract, and a sole arbitrator issued an award in favour of the Seller in 2015 (hereinafter referred to as "Award"), by which, the Buyer was ordered to pay the Seller 18 031 EUR.

The Buyer did not comply with the Award voluntary, and the Seller brought an action before the Arbitrazh Court of the City of Moscow (the "Court") seeking recognition and enforcement of the award in Russia (case А40-78411/2017). The Buyer did not appear before the Court, nevertheless, the Court has refused the enforcement of the Award by its ruling dated 27 July 2017.

The Court's findings

The Court, as it usually happens, referred to the Russian notion of public policy. The Court's approach is based on the following steps.

  1. The Court looked at the contract, and the Court established that the total contract value was 3 000 000 EUR;

  2. Having found out that the total contract value, the Court inquired whether a transaction was significant for the Buyer under Russian law. The Court established the contract was a significant transaction. The Court reached this conclusion by a simple comparison the total contract value (3 000 000 EUR) with the Buyer's share capital, which according to the Russian Register of Legal Entities was RUB 35 000 (approximately 500 EUR in 2015);

  3. Having concluded that the contract was the significant transaction, the Court inquired whether the Buyer's stockholders approved this transaction, and the Court discovered that there was no approval decision. As a result, the Court noted:
(a) a transaction that does not comply with the requirements of the law on approval is a voidable transaction;

(b) the ICAC arbitrator should have examined (i) whether the contract was a significant transaction for the Buyer under Russian law (!), and (ii) whether adverse consequences could occur on the Buyer side due to such transaction.

Eventually, having established that the ICAC arbitrator had failed to examine (i) whether the contract was a significant transaction for the Buyer in accordance with Russian law, and (ii) whether adverse consequences could occur on the Buyer side due to such transaction; the Court had concluded the enforcement of the Award would contrary to public policy. Consequently, the Court has refused the recognition and enforcement of the Award. An appeal against the ruling was unsuccessful

Conclusion

The Court's approach is a manifestly erroneous one, there are no legal justifications to handle arbitral awards in such manner. However, users shall be aware of it due to the following reasons:

First, the approach was consistently invoked against other ICAC awards. At least the following cases from the Arbitrazh Court of the City of Moscow are known: (1) case А40-221976/2018, a ruling dated 29 November 2018; (2) case А40-221986/2018, a ruling dated 12 November 2018; (3) case А40-77123/2018, a ruling dated 30 July 2018; (5) case А40-77102/2018, a ruling dated 6 July 2018 and (5) case А40-63575/2018, a ruling dated 13 June 2018. Appeals against these rulings were also unsuccessful. Moreover, the Russian Supreme Court refused to reconsider all of these cases;

Second, the approach will likely be invoked in other enforcement proceedings of ICAC awards;

Finally, any foreign arbitral award could encounter the same approach.

All court decisions are available at kad.arbitr.ru — the official web site of the Russian State Arbitrazh courts.

Mikhail Samoylov