Enforcing awards that have been set aside at the seat: the English and Dutch courts remind parties of the high hurdle that must be overcome
14 September 2017
There is sometimes an uneasy relationship between the courts of the seat of an arbitration and the courts of the place of enforcement of the resulting arbitral award. The relationship is perhaps under the greatest strain when the latter are asked to decide whether to enforce an award that has been set aside by the former. The recent judgment of the English Commercial Court in Nikolay Viktorovich Maximov v Open Joint Stock Company “Novolipetsky Metallurgichesky Kombinat” provides a reminder to parties of the English courts’ deference to an annulment decision at the arbitral seat and the different approaches taken by the courts of other New York Convention states to enforcing annulled awards.
On 21 June 2011, Judge N.V. Shumilina of the Moscow Arbitrazh Court set aside the award in an oral judgment. In the written reasons that followed, Judge Shumilina based her decision on the defendant’s argument that two of the arbitrators had failed to make certain disclosures, as well as on two additional grounds (based on public policy and the non-arbitrability of the dispute) that had not been argued or raised during the set aside hearing. The judgment was upheld by the Federal Arbitrazh Court of Moscow District (FAC) in September 2011 and the Supreme Arbitrazh Court of the Russian Federation (SAC) in January 2012.
Amongst other actions between the parties (including applications by the claimant to the Constitutional Court of the Russian Federation and to the European Court of Human Rights), the claimant sought enforcement of the award in Paris, Amsterdam and London.
The Paris judgments
The French courts’ approach to enforcing an arbitral award that has been set aside at the seat is well established and is based on French domestic law, which provides for more limited grounds for the refusal of the enforcement of awards than the New York Convention. In the seminal Hilmarton Ltd v Omnium de Traitement et de Valorisation case, the Court de Cassation found that a Swiss award was not integrated in the legal system of that state, such that it remained in existence despite being set aside in Switzerland.
The decisions of the French courts in the present case represent a continuation of this approach. The Tribunal de Grand Instance of Paris (in May 2012) and the Paris Court of Appeal (in April 2014) granted enforcement of the over £100 million award. The Paris Court of Appeal dismissed the defendant’s appeal, noting that under French law the setting aside of an award at the seat is not a reason for refusing enforcement. The court rejected the defendant’s arguments that the arbitrators had failed to make disclosures and that there had been a fraud.
The Amsterdam judgments
Mr Maximov also applied to the Amsterdam District Court for leave to enforce the award (in May 2011). In a decision dated 17 November 2011, the Amsterdam District Court found that an annulled award can only be enforced in the Netherlands “under exceptional circumstances”, namely where to give effect to the set aside judgment would violate Dutch public policy, for example because the judgment was rendered in proceedings that did not follow proper judicial procedure. The court was not satisfied on the evidence that exceptional circumstances existed to justify enforcement of the award.
Following an appeal by Mr Maximov, on 18 September 2012 the Amsterdam Court of Appeal decided that it required expert evidence to determine whether a fair trial in the Russian set aside proceedings had taken place. On consideration of the expert evidence, the court issued its judgment on 27 September 2016, finding that the award should not be enforced and thereby upholding the first instance decision. Although the court noted that the proceedings painted a negative picture regarding the workings of the Russian judicial system, it found that there was insufficient evidence to support the claim that Mr Maximov did not receive a fair trial in the Russian proceedings. Mr Maximov has raised an appeal with the Dutch Supreme Court, which has yet to be determined.
The outcome of this decision can be contrasted with the decision of the Amsterdam Court of Appeal in April 2009 in Yukos Capital s.a.r.l (Luxembourg) v OAO Rosneft (Russian Federation). In that case, faced with set aside decisions by the same Judge Shumilina of the Moscow Arbitrazh Court, the court found that it was not required to recognise the Russian judgments and went on to enforce the awards. The Court of Appeal found it very likely that the set aside judgments were the result of a dispensing of justice that was “partial and dependent”.
The English judgment
A further enforcement action was brought by Mr Maximov in London.
In a judgment dated 27 July 2017, Burton J considered the test for enforcing an award that has been set aside at the seat. The Commercial Court noted that there was no evidence of actual bias in Judge Shumilina’s judgment, but that the court was being asked to infer bias from the perverse nature of the Russian court’s conclusions and the manner in which they were decided. Burton J stated that the test – which was “on any basis a high hurdle for the Claimant to surmount” – 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 required cogent grounds and deliberate wrongdoing by the Russian court.
The court examined evidence, presented by the claimant, from which bias might be inferred, but was unable to reach a conclusion one way or the other. The court then considered the three grounds that Judge Shumilina had relied upon to set aside the award. Burton J was “uncomfortable” that Judge Shumilina had relied on two grounds that she did not raise and that the parties had not addressed during the hearing. On the non-disclosure ground, the Commercial Court found that the judge had “ducked” a difficult decision and “fell back on an unsupportable conclusion”. As to the public policy ground, the Commercial Court found that the finding was “hopeless” and that the judge must have known that it was “borderline arguable at best”. Finally, the Commercial Court described the finding on the non-arbitrability ground as “adventurous”. The court was equally sceptical of the decisions of the Russian appeals courts.
However, Burton J was nevertheless influenced by the experience of Judge Shumilina, her rejection of the defendant’s fraud allegations, the fact that three Russian courts had considered the matter and the fact that her non-arbitrability decision had subsequently been followed in Russia. Thus, notwithstanding the “severe criticism” of the non-disclosure and public policy grounds and the failure of Judge Shumilina to put the public policy and non-arbitrability grounds to the parties, the court was not persuaded that the decisions were so extreme and perverse that they could only be ascribed to bias against the claimant. The Commercial Court therefore reached the same outcome as had been reached in Amsterdam, namely that enforcement of the award should be denied.
The court also briefly addressed issue estoppel. It found that the decisions of the French courts were not relevant, but that it was common ground that the Dutch decisions would lead to issue estoppel on many of the issues being considered. However, in light of the ongoing appeal in the Dutch proceedings, the court did not reach a conclusion on issue estoppel.
What does this mean for parties to arbitration?
The decisions in this case paint a relatively bleak picture for those seeking to enforce an award that has been set aside at the seat. Such a party will bear a heavy burden to satisfy an English court that bias in the foreign proceedings should be inferred. However, the Commercial Court in this case showed that it is willing to carefully examine the set aside judgment(s) at the seat for signs of impropriety. In extreme cases, where it is clear that the foreign court(s) has acted in bad faith, the English courts will enforce the annulled award and therefore disregard the set aside judgment(s).
The differing approaches adopted in this series of enforcement proceedings reflects a lack of conformity amongst the courts of New York Convention states to the subject of the enforcement of annulled awards. This largely arises from a disparity of views as to the respective roles to be played by the supervisory court at the seat and the court at the place of enforcement. The more widely accepted approach, which is reflected in the hesitation of the English and Dutch courts to disregard the Russian judgments, provides another reason why parties ought to be cautious when choosing their seat of arbitration.
This article first appeared on the Practical Law Arbitration Blog on 7 September 2017.