Law code, gavel and books.

In Maximov v NMLK[1] the English Commercial Court tackled again the thorny issue of the enforcement of a foreign arbitral award which has been set aside by the supervisory courts in the seat of the arbitration.  In this case the court refused to enforce a Russian arbitral award of almost nine billion roubles (RUB) which was subsequently set aside by the Russian courts. The application was dismissed on the basis that, while the Russian courts’ decisions were deeply flawed, they were not “so extreme and perverse that they can only be ascribed to bias”. Accordingly, the decision of the supervisory courts in the seat of the arbitration to set-aside the award should be recognised with the result that the award should not be enforced in England. The case highlights the differences in approach between jurisdictions as to the enforcement of arbitral awards that have been set aside and emphasizes the importance of choosing an appropriate arbitral seat when negotiating an arbitration agreement.

1. Background

A dispute initially arose between the billionaire Nikolay Maximov (“Maximov“) and the Russian steel group Novolipetsky Metallurgichesky Kombinat (“NMLK“), relating to a share sale and purchase agreement (“SPA“). In 2011, the dispute was referred to arbitration administered by the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation (“ICAC“). In the arbitration the arbitral tribunal awarded RUB 8,928,001,875.70 (around £115 million) plus interest to Maximov (representing the balance of the SPA purchase price owed to Maximov) (the “Award“).

NMLK subsequently sought to set aside the Award on the basis of alleged fraud (an argument raised late in the arbitration) and the failure of two arbitrators to disclose links to expert witnesses who gave evidence in the arbitration. The Moscow Arbitrazh Court (“Moscow Court“) set aside the Award in June 2011 on the pleaded grounds of the arbitrators’ non-disclosure relating to the expert witnesses as well as on the separate grounds of public policy and non-arbitrability (the latter two both being grounds not relied on by NMLK in the set aside application). The fraud ground however was rejected by the Moscow Court. The decision of the Moscow Court was upheld on appeal to the Federal Arbitrazh Court of the Russian Federation (“Appeal Court“) in October 2011 and permission to appeal to Russia’s Supreme Court was denied.

Alongside the set aside application, NMLK issued a claim in March 2011 to the Moscow Court that the SPA was null and void as it had been procured by fraud. This was challenged by Maximov on the basis that the arbitration clause in the SPA prevented the Moscow Court from hearing the fraud allegations on jurisdictional grounds. The Moscow Court upheld Maximov’s challenge at first instance. However, on appeal by NMLK, the Russian courts assumed jurisdiction on the basis that a dispute arising out of an agreement to transfer shares was not arbitrable as a matter of Russian law and set aside the SPA. This left Maximov needing to enforce the Award or face having no recourse to recover the unpaid SPA purchase price (with the shares having not been returned to him following the setting aside of the SPA).

Despite the Award being set-aside in Russia, Maximov sought to enforce the Award in France and the Netherlands. In 2012, the Tribunal de Grande Instance of Paris recognised and enforced the Award (a decision upheld on appeal) whilst conversely the Amsterdam District Court refused enforcement (though that decision is subject to appeal). Maximov then brought enforcement proceedings in the English Commercial Court.

2. Determination of the English Commercial Court

Maximov’s application for enforcement of the Award centred on the question of whether the Russian judgments setting aside the Award should be recognised.  With no evidence of actual bias, Maximov asked the court to infer bias from the perverse nature of the Russian courts’ conclusions.  The court determined that the relevant test was whether the Russian courts’ decisions were so extreme and incorrect as not to be open to a Russian court acting in good faith. This, as the court noted, is a heavy burden to discharge.

Maximov also tried to establish bias through relying on a number of other matters in context. These most notably included:

  • the danger of favouritism on the part of the Russian courts. Maximov referred to the influential position in the Russian establishment of NMLK’s majority owner; and
  • the fact that a letter from the offices of those close to Vladimir Putin and Dmitry Medvedev (the then prime minister and president of Russia respectively) was placed in front of the Moscow Court which ‘may have influenced’ the judge.

However, the judge hearing the enforcement application, Sir Michael Burton, found that this evidence of inferred bias was “only the context, and a context in which I can reach no conclusions one way or the other on the evidence before me…[2]

The judge subsequently explored whether the three grounds relied on by the Moscow Court to set aside the Award were “so wrong as to be evidence of bias”. The judge found that the non-disclosure ground was based on “an unsupportable conclusion” and that the public policy and the non-arbitrability grounds (which were not raised at the set aside hearing and on which the parties were not given an opportunity to provide submissions) were “hopeless” and “adventurous” respectively.  However, despite this, the judge was not persuaded that the Russian court decisions were “so extreme and perverse that they can only be ascribed to bias against [Maximov].” [3] As a consequence, the English court recognised the Russian courts’ decision to set aside the Award and refused to allow its enforcement.

3. Enforcement of a foreign award and the importance of the arbitral seat

This dispute highlights the inconsistent approach across Europe towards enforcement of arbitral awards which have been set aside in the jurisdiction where the arbitration was seated.

Article V of the 1958 Convention of the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention“) sets out the circumstances in which recognition and enforcement of an arbitral award may be refused. Under Article V (1)(e) of the New York Convention circumstances where recognition may be refused include where the award has been set aside or suspended by the competent authority of the country in which the award was made. The use of the word may gives the enforcing court a discretion as to whether to refuse to enforce an award that has been set aside and there is little consensus internationally on the approach to be adopted.  On the one hand, certain jurisdictions like France view the seat of the arbitration as a matter of convenience; arbitrators derive their authority from the validity of the arbitration agreement rather than the state so it is considered that the national courts should have little impact on an award’s validity. In contrast, jurisdictions like Italy and Germany view the law of the arbitral seat as integral in pinning the arbitration to the jurisdiction: the annulment of award at the seat therefore makes the award non-existent.[4]

The English court’s position at this moment in time is somewhere in between these two approaches.  While not needing to decide the point in this case, the judge expressed the view (consistent with previous authority[5]) that the fact an award had been set aside would not be an absolute bar to its enforcement.  However, the English court will not simply ignore a decision of the courts with supervisory jurisdiction over the arbitration and substitute that decision with its own assessment as to whether the award should be set aside. The compromise approach adopted by the English courts does not give complete deference to the decisions of the courts of the seat of the arbitration, but recognises that the parties, in choosing the seat of the arbitration, have expressly chosen the courts of that country to have supervisory jurisdiction over the arbitration (including resolving any challenge to an award).  Accordingly, in respecting the parties’ choice of seat, the decisions of those courts should be recognised save in extreme circumstances.

This deference to the supervisory court’s decisions highlights the importance of the choice of the seat of any arbitration. When choosing the seat, careful consideration should be given to the ability and inclination of the courts of the seat to become involved in the arbitration, including setting aside any award, and whether one can expect a fair hearing before those courts.

[1] [2017] EWHC 1911 (Comm)

[2] Sir Michael Burton per paragraph [13]

[3] Sir Michael Burton per paragraph [62]

[4] ‘Cutting the Gordian Knot: Enforcing Awards where an Application Has Been Made to Set Aside the Award at the Seat of the Arbitration’, Andrew and Keren Tweeddale (2015), 81, The International Journal of Arbitration, Mediation and Dispute Management.

[5] Yukos Capital SARL v OJSC Rosneft Oil Company [2014] EWHC 2188 (Comm)