Arbitral award not recognised because arbitrators came from “unfriendly countries”

On July 26. 2024, another judgment of the Supreme Court of the Russian Federation (Case А45-19015/2023, judgment No. 304-ЭС24-2799) made headlines regarding a legal dispute between a German claimant and Russian defendant.

The underlying legal dispute was preceded by an arbitration award by an arbitration tribunal in London applying the FOSFA rules. The Supreme Court overturned the previous rulings by the Arbitrazh Court of the Novosibirsk Region and the Arbitrazh Court of the West Siberian District, which confirmed the recognition and enforcement of a foreign arbitral award in favour of the German claimant.

Overview

The case is based on the following facts in brief: Contracts were concluded between the two parties for the supply of flaxseeds in the amount of 3,000 tonnes from Russia to Ghent, Belgium. Due to delivery difficulties, the defendant was unable to fulfil its contractual obligations. The reasons given were drought and difficulties on the market. The claimant then filed a claim with the Federation of Oils, Seeds and Fats Associations (FOSFA) in London and was awarded $ 600.000 in damages.

The claimant then applied for recognition and enforcement of this award in Russia, where the Arbitrazh Court of the Novosibirsk Region and Arbitrazh Court of the West Siberian District upheld this application. However, the defendant then appealed to the Supreme Court of the Russian Federation, arguing that the enforcement of the award violated Russian public policy and that there were “deficiencies” in the arbitration proceedings.

The issue

These “deficiencies” in the arbitration proceedings are the central issue here. The Russian defendant argued that the nationality of the arbitrators who made the award in London was those of “unfriendly states” – Ukraine, United Kingdom and Denmark.

The defendant argued that the impartiality and independence of the arbitrators were compromised due to their nationality. This argument was ultimately recognised by the Supreme Court, which found that the composition of the arbitration panel might have violated the principles of fairness and impartiality, leading to the overturning of the previous rulings.

Conclusion

The Supreme Court’s decision misses the opportunity to reach a consensus while disregarding personal characteristics such as the nationality of the arbitrators. Nationality has no effect on the arbitration award as such, as this is reached by means of an objective decision based on facts. As nationality as a personal characteristic is directly linked to individuals, more than half the world would probably be blocked under this approach.

It should also be considered that Article 11 of Chapter 3 of the UNCITRAL Model Law states that no person shall be excluded from acting as an arbitrator on the basis of his or her nationality, unless the parties have agreed otherwise.

Nevertheless, one should not throw in the towel or in this case, the flaxseeds.

Foto von Maria Bolshakova