The Supreme Court of the Russian Federation on 26 July 2024 issued a ruling (the 26 July Ruling) which effectively restricts enforcement of international arbitration awards against Russian parties rendered by arbitrators from the so-called “unfriendly” states. This ruling is rooted in a presumption of bias against Russian parties in countries imposing sanctions on Russia.
The ruling stems from a dispute involving a 2020 grain supply contract between a Russian seller and a German buyer, governed by English law. The seller refused to comply with an arbitration award in favor of the buyer, and the case reached the Russian Supreme Court.
2020: Contract and Arbitration Clause
In 2020, JSC Novosibirskhleboproduct (the Russian seller) and C. Thywissen GmbH (the German buyer) entered into a grain supply contract. The contract was governed by English law and included an arbitration clause under the rules of the Federation of Oils, Seeds and Fats Associations (FOSFA), with a seat in London.
2021–2022: Arbitration in the UK
Following the Russian seller's failure to supply under the contract, the German buyer initiated a FOSFA arbitration in 2021. The FOSFA tribunal, composed of arbitrators from Ukraine, the United Kingdom, and Denmark, ruled in favor of the German buyer in November 2022, awarding damages.
2023–2024: Enforcement in Russia
The Russian seller refused to comply with the arbitration award. In 2023, the German buyer sought enforcement in a Russian lower court, which initially ruled in its favor. The Russian seller appealed to higher courts, but the lower court's judgment was upheld. The case then reached the Supreme Court in 2024.
In the 26 July Ruling, the Supreme Court reversed the lower court judgment and remanded the case for reconsideration. The Supreme Court ruled that enforcing the arbitration award violates the Russian public policy based on several grounds, including (a) bias and lack of impartiality of “unfriendly” state arbitrators, (b) violation of the Russian seller’s right to due process in a non-Russian arbitration, and (c) failure to consider the social and economic importance of the Russian seller, should it be forced to pay under the award.
Bias of ‘Unfriendly’ Arbitrators
A key aspect of the 26 July Ruling involved the presumption of bias and lack of impartiality by arbitrators from "unfriendly" states, which include the United States and other countries that have imposed sanctions on Russia (unfriendly states). This list of the unfriendly states is maintained by the Russian government and also includes, among others, Ukraine, the UK, and Denmark. While the Supreme Court acknowledged the general principle of presuming judicial impartiality and even referred to several decisions of the European Court of Human Rights to that effect, it held that the imposition of sanctions on Russia shifts this presumption.
Therefore, arbitrators from unfriendly states (unfriendly arbitrators) are presumed to lack impartiality and independence, unless proven otherwise. The Supreme Court criticised the lower courts for not addressing the potential bias and independence of the arbitrators involved.
Violation of the Russian Seller’s Right to Due Process
The Supreme Court found that the Russian seller's right to due process was violated. The Russian seller argued that it was unable to obtain legal assistance in the UK, as banks refused to process payments of the legal and arbitration fees from a Russian entity. The Supreme Court ruled that the lower courts should have recognised that a Russian party would, with a high degree of certainty, face challenges in securing legal representation due to sanctions on Russia, and it would affect its ability to participate in the arbitration proceedings.
Importance of the Russian Party
The Supreme Court ruled that the courts should have recognised the economic and social importance of the Russian seller, and that enforcement of the award against the Russian seller would result in its financial distress and also negatively impact employees and social stability in the region where the Russian seller is located.
The Supreme Court's approach in the 26 July Ruling is not surprising, given the broader context of Russia's current judicial climate. It reflects a prevailing trend, as Russian courts have increasingly adopted an anti-Western stance. Courts frequently agree with Russian parties to rule in their favour in disputes with parties from unfriendly states (unfriendly parties), even in disputes unrelated to sanctions. Among other things, if requested by a Russian party, a Russian court will likely accept jurisdiction over disputes with an unfriendly party, disregarding the contractually agreed non-Russian (foreign) arbitration clause.
The 26 July Ruling emphasises Russia's current approach to enforcing international arbitration awards, especially in cross-border disputes where arbitration is seated in an unfriendly state and involves unfriendly arbitrators. Given the presumption of bias against Russia in the unfriendly states, parties engaging in transactions with Russian entities should consider the choice of arbitration venue, carefully draft arbitration clauses, and anticipate potential challenges in enforcing arbitration awards in Russia.
It remains unclear whether the Russian Supreme Court's findings will extend to domestic international arbitration involving arbitrators from unfriendly states. This is an area of legal uncertainty that should be monitored closely.
The Supreme Court’s emphasis on public policy, coupled with the presumption of bias from unfriendly states and unfriendly arbitrators, is likely to influence future enforcement actions and dispute resolution tactics involving Russian entities.
Parties should also thoroughly consider litigation and enforcement strategy before proceeding with launching an arbitration against Russian parties, including to explore possible protections against Russian anti-suit injunctions and attempts of Russian parties to enforce these injunctions in states “friendly” to Russia.
Parties involved in disputes with Russian entities are strongly encouraged to seek legal advice tailored to their specific circumstances to navigate this evolving landscape.
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