Another piece of troubling news for arbitration in Russia-related matters came to light. The Russian Supreme Court ruled in Case No. А45-19015/2023 (the “Ruling”) that lack of impartiality and independence of arbitrators is presumed when the tribunal is formed of nationals of states that are designated in Russia as “unfriendly” states. Although the possibilities to enforce foreign arbitral awards in Russia have been slim for political reasons in any case, the Supreme Court’s conclusions in the Ruling significantly lower such chances for cases where arbitrators are nationals of such states as, for example, all EU Member States, the USA, the UK, Switzerland, Singapore, etc. The Ruling is also likely to result in even more appointments for arbitrators coming from jurisdictions that have not imposed sanctions against Russia and are not included in the list of “unfriendly states”, which has been a tendency in any case.
Background
The dispute related to a supply contract for the supply of agricultural products by a Russian supplier to a Germany counterparty concluded in 2020, which was subject to English law and FOSFA arbitration. As follows from the court case file, the Russian supplier did not deliver the goods relying on force majeure events, specifically drought. The claimant claimed damages in FOSFA arbitration and succeeded in its claim. The Tribunal in the case consisted of nationals of Ukraine, the UK and Denmark. The claimant applied to Russian courts to enforce the award, and the courts of first and second instance satisfied the request. The respondent appealed to the Supreme Court.
The Rationale and Conclusions of the Supreme Court
The Supreme Court analyzed the case from different perspectives and, as a result, reversed the case to the lower courts for reconsideration on the basis of the directions of the Supreme Court. In practice, this means that the lower courts are almost certain to render decisions opposite to the previous ones.
The case is rather fact specific, as the Supreme Court first analyzed the factual circumstances, specifically whether the Tribunal’s conclusions on the damages claim corresponded to the principle previously established in Russian court practice that the liability had to be proportionate. Russian courts do regard the principle as part of public policy, which sometimes leads to the reconsideration of awards on the merits. In this case, the Supreme Court pointed that the claimant failed to prove the actual damages incurred. Similarly, it in effect disagreed with the conclusions of the Tribunal on the force majeure defense.
However, the conclusion that is likely to affect further court practice and perspectives of enforcement of awards is the one in respect of impartiality and independence of the Tribunal members. The Supreme Court referred to the fact that all three Tribunal members were the nationals of the so-called “unfriendly states”, which is list maintained by the Russian Government in the Resolution No. 430-r since 5 March 2022. The list includes such jurisdictions as the UK, all EU Member States, Canada, the USA, Singapore, Switzerland, Ukraine, Japan, and others. It then concluded that:
“The lack of impartiality and independence when considering this case in FOSFA arbitration by such a Tribunal is presumed, unless proved otherwise.”
Possible Consequences of the Ruling
By its conclusions, the Supreme Court in effect established a presumption that any national of a state included in the list of “unfriendly states” will be presumed to lack impartiality and independence. Although the Ruling seems to establish a rebuttable presumption on its face, it is unclear how this presumption can be rebutted, i.e., how it can be proven that a specific national of an “unfriendly state” is impartial in fact.
As a result, the effect of such a presumption may be very far-reaching, specifically impacting and further lowering any chances of enforcing arbitral awards against Russian parties in Russia.
Moreover, in the recent years, the tendency has been the appointment of nationals of states that are perceived as (relatively) neutral in cases involving Russian parties. This tendency is likely to become stronger, with more arbitrators from states that are not included in the Russian Government’s list, such as Turkey, Egypt, the United Arab Emirates, China, etc., being appointed both by Russian parties and by their counterparts, as well as institutions.
