The public policy exception to the enforcement of arbitral awards has traditionally been applied very narrowly, for example, where a failure to vacate the award would violate the due process rights of the participants.
However a recent case illustrates the contrasting approaches of the Swedish and Russian courts in this regard. Mikhail Samoylov, Senior Associate at KIAP Attorneys at Law, discusses both the Swedish and Russian court rulings and considers the implications for both freedom of contract and arbitration as a method of dispute resolution in each jurisdiction.
On 21 March 2006, a Russian company, PAX-Designs LLC (PAX) and a Swiss company, Connyland AG (Connyland) entered into a contract under which PAX sold an amusement park ride ‘Cobra’ (the property) to Connyland. According to the agreement, PAX were to deliver and install the ride.
The contract contained an arbitration clause naming the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) as the forum. Swiss law was chosen as the governing law of the contract.
The parties subsequently became involved in two separate arbitration proceedings.
Arbitration proceeding 1
As a result of defects to the property and a delay in the delivery, Connyland commenced arbitral proceedings. On 15 May 2012, the panel of arbitrators, which included an arbitrator from Russia, awarded more than €500,000 in Connyland’s favour.
Arbitration proceeding 2
After the award of May 2012, PAX requested new arbitral proceedings, claiming that Connyland should be ordered to return the property to PAX. The grounds for PAX’s action were based on alleged gaps in the contract. Section 7.1. of the contract, regulating the issue of the transfer of ownership, read as follows:
‘The right of property to the ride shall be transferred to the Buyer after the signing of the final Acceptance Report by both Parties and the transfer the final amount’.
Section 4.3 of the contract prohibited the operation of the property without the final Acceptance Report, but the final Acceptance Report could only be signed after one year of operation. Connyland objected to PAX’s claims and on 14 November 2013, the arbitral tribunal found in favour of Connyland, affirming its right as the owner of the property
PAX challenged the arbitral award dated 14 November 2013. As one of the grounds for its motion, PAX submitted an argument based on public policy.
In Section 7.1 of the contract of sale, the parties agreed that the ownership of the property should be conditional upon the final Acceptance Report having been signed and the purchase price paid. Moreover, PAX argued that provisions of Swiss property law required registration of the transfer of ownership for the agreement to be legally binding.
As Connyland never signed the final Acceptance Report, PAX argued that the ownership of the ride had never been transferred. There was no registration of the transfer of ownership in accordance with Swiss law. Consequently, PAX considered that the arbitral tribunal violated fundamental principles of law on the protection of property and freedom of contract by deviating from the agreed contractual conditions.
In its judgment, the Swedish Court of Appeal noted the limited possibility of having an arbitral award declared invalid on public policy grounds. Such cases are intended to be the exception rather than the rule, and such judgments are rare. However, the case law has discussed the exceptional possibility of an arbitral award being voided on public policy grounds, where the application of the law leads to unreasonable results.
However, the facts of the present case were not so exceptional as to constitute an application of the law which lead to unreasonable results. The arbitral tribunal concluded that section 7.1. of the contract provided that the ownership of the property should be transferred the purchaser only after signing the final Acceptance Report. The arbitral tribunal held this clause was without effect and that ownership had been transferred to Connyland. Thus, the title did pass to the buyer. The Court of Appeal found that the award could not be deemed unacceptable, despite the parties having agreed that the ownership was subject to the condition set out in section 7.1. Moreover, the requirement for registration of reservation of ownership under Swiss law cannot in and of itself be deemed to violate fundamental principles of Swedish law.
In conclusion, the arbitral award could not be deemed to violate public law or policy. On 13 November 2014, the SVEA Court of Appeal rejected PAX’s motion challenging the arbitral award dated 14 November 2013.
Connyland sought recognition and enforcement of the arbitral award dated 15 May 2012 in a Russian court. PAX objected. Yet again it referred to public policy. One can assume the ground of the objection was the almost same as in the Swedish proceedings.
The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (the New York Convention), art V (2) (b) 2 provides:
Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought find that: … (b) The recognition and enforcement of the award would be contrary to the public police of that country.
The Russian procedural law has the same provision.
In considering the issue, the Moscow Arbitrazh Court came to a contrasting conclusion to that of the Swedish Court of Appeal. The Moscow Court emphasised that the basis of public policy of Russia is the Constitution of the Russian Federation and general principles of civil law, which, in my opinion, presumes a wide possibility for interpretation.
The Moscow Arbitrazh (Commercial) Court declared there was no transfer of ownership because the final Acceptance Report had not been signed. Consequently, the buyer had not received the right of the property, nor did the buyer have the right to repair the defects in the property. The court in Russia may not grant any judicial remedies to the person who has no corresponding right, therefore the arbitral award could not be recognised and enforced in Russia since it would be contrary to the public policy of Russia. Connyland’s attempt to refer to the arbitral award dated 14 November 2013 as the ground for the transfer of ownership was rejected by the court due to the fact that the arbitral award was challenged and was not recognised and enforced in Russia (ruling dated 25 March 2014, not available on Lexis Library). The Supreme Court of Russia upheld the ruling of the court (decision of the Supreme Court of Russia dated 12 January 2015, not available on Lexis Library).
On the one hand this case clearly shows how an ambiguously drafted contract may result in a number of disputes regarding the interpretation of the contract terms. On the other hand, this brief analysis clearly demonstrates the differences in approach of a Swedish court and a Russian court to the issue of public policy as well as to arbitration as a method of dispute resolution.
The Swedish court provides a broader interpretation of freedom of contract as well as an arbitration-friendly approach. In contrast, the Russian courts, including the Supreme Court of Russia, limits this freedom and puts public policy above the freedom of contract.
Author: Mikhail Samoylov, KIAP
First published on LexisNexis