The state court ruled that the revising of the case by the arbitral tribunal after the reversal of the award was a violation of the public policy of the Russian Federation and the award was reversed again. Also, the state court concluded that the arbitral tribunal was convened unlawfully since the presiding arbitrator was appointed to resolve the issue of jurisdiction, but it proceeded to the hearing on the merits.

Facts of the case: On June 1, 2016, the towing contract was concluded between JSC “BELOMORTRANS” and LLC “NEVA-CHARTER” on the terms of daily rental fee.

On November 7, 2016, JSC “BELOMORTRANS” sent to LLC “NEVA-CHARTER” an invoice and a certificate of work performed in extent of 10,316,800.00 rubles.

LLC “NEVA-CHARTER” admitted that services were rendered to it in amount of 3,150,000.00 rubles. However, subsequently, LLC “NEVA-CHARTE” did not pay off the debt, even partially.

It was set out in clause 9.3 of the Contract that in case of non-settlement of disputes and disagreements through negotiations, they shall be brought to the Maritime Arbitration Commission at the Chamber of Commerce and Industry of the Russian Federation (hereinafter – the MAC).

JSC “BELOMORTRANS” filed a claim to the MAC against LLC “NEVA-CHARTE” to recover the debt in the total amount of 12,351,736.80 rubles, including the penalties for non-fulfillment of the monetary obligation. The MAC established its jurisdiction over the dispute.

On July 27, 2018, arbitration tribunal found partially in favour of JSC “BELOMORTRANS”. 8,351,736.80 rubles, as well as penalties in the amount of 528,163.13 rubles and arbitration fee in the amount of 266,396.95 rubles, were recovered from LLC “NEVA-CHARTER” in favour of JSC “BELOMORTRANS” (case No. 8/2017).

On September 13, 2018, 3,199,063.20 rubles were recovered through additional award from LLC “NEVA-CHARTER” in favour of JSC “BELOMORTRANS”. The additional award was rendered because some of the damages had not been awarded previously.

LLC “NEVA-CHARTER” filed a claim to the Commercial court of Moscow to reverse the award of the MAC in case No. 8/2017 dated July 27, 2018.

On March 6, 2019, the Commercial court of Moscow found fully in favour of LLC “NEVA-CHARTER” and reversed the MAC award. It established that “during the consideration of the cases, the fundamental principles of independence and impartiality of arbitrators, considering disputes, which form the basis of procedural international public policy, were violated. Moreover, in the process of considering the case, the fundamental principles of Russian law were violated”. The court found the relevant violation in the fact that after the main award, the MAC arbitral tribunal rendered an additional award. It recovered additional sums which were not mentioned in the award dated July 27, 2018.

In the opinion of the court, rendering such an award with reference to the correction of a technical mistake and its content contradicts the conclusions set out in the main award partially in favour of the Claimant.

In the summer of 2019, JSC “BELOMORTRANS” repeatedly filed a claim to the MAC against LLC “NEVA-CHARTER” recover the debt in the amount of 11,550,800 rubles and penalties in the amount of 2,653,685.14 rubles.

On May 14, 2020, by the award of the MAC in case No. 1/2019, the arbitral tribunal found partially in favour of the Claimant. The debt in amount of 9,110,800.00 rubles, penalties in amount of 1,863,378.25, and registration and arbitration fees in amount of 51,888.11 rubles were recovered from LLC “NEVA-CHARTER” in favour of JSC “BELOMORTRANS”. The rest of the claims of JSC “BELOMORTRANS” was dismissed.

LLC “NEVA-CHARTER” and JSC “BELOMORTRANS” separately applied to reverse the award of the MAC in case No. 1/2019. The Commercial court of Moscow consolidated the claims into one proceeding and assigned the joint case number A40-127542/20.

Position of JSC “BELOMORTRANS”, the claimant to the case, pleading for reversal of the arbitration award:

1) the MAC award in case No. 1/2019 violated the public policy of the Russian Federation;

2) there is no information regarding the arbitrator Kosmachevsky A. A. on the MAC website, therefore, the terms in regard to the composition of arbitral tribunal are violated.

The position of LLC “NEVA-CHARTER”, the defendant to the case, pleading for the reversal of the arbitration award:

1) the MAC award in case No. 1/2019 violated the public policy of the Russian Federation since the initial award was reversed due to violation of the public policy of the Russian Federation. That means that the arbitral tribunal was not entitled to reconsider the case;

2) the presiding arbitrator exceeded its competence. In this case, two arbitrators did not come to the common opinion on the jurisdiction of the arbitral tribunal to revise the dispute, therefore, according to the MAC Rules the Appointing Committee appointed the third arbitrator – A.G. Arkhipova as the presiding arbitrator to adjudge in regard to the jurisdiction of the arbitral tribunal. After resolving the issue of the jurisdiction, A.G. Arkhipova announced the transition to the hearing on the merits, even though she was not entitled to.

Judgments reversing the Maritime Arbitration Commission award.

The court of first instance found in favour of LLC “NEVA-CHARTER”, reversed the MAC award in case No. 1/2019 on the following grounds:

1. By the Ruling of the Commercial court of Moscow dated March 3, 2019, in case No. A40-239401/18, the MAC award in case No. 8/2017 and an additional award dated September 13, 2018 were reversed. According to part 2 of Art. 69 of the Commercial Procedure Code the circumstances established by an effective act of a commercial court in a previously considered case shall not be proved again if the arbitration court considers another case with the same parties. During the consideration of the case No. A40-239401/18, the court established that the MAC award dated July 27, 2018, in case No. 08/2017 violates the principles of equality of the parties to the dispute, adversarial procedure, impartiality, fairness of the award. In the event of such violations, the arbitral tribunal is not entitled to hear the case again (part 4 of Art. 234 of the Commercial Procedure Code of the Russian Federation).

2. The MAC award in case No. 1/2019 violates the public policy of the Russian Federation. There was a violation of the fundamental principles of Russian law, namely, if the award of the arbitral tribunal was fully reversed by the commercial court due to the fact that the award of the arbitral tribunal violates the public policy of the Russian Federation, the parties to the commercial dispute may apply for a resolution of such dispute to a commercial court on accordance with the general rules provided for by the Commercial Procedure Code of the Russian Federation.

3. The procedure for appointing an arbitrator was violated. In accordance with subparagraph 7 of paragraph 15 of the MAC Rules in the event that during the proceedings two arbitrators do not come to a common opinion on issues of law, the presiding arbitrator shall be appointed by the Appointing Committee, as a rule, from the list of arbitrators. In the notice of the MAC dated September 9, 2019, it is set out that A. G. Arkhipova was appointed as a presiding arbitrator. As follows from the above she was appointed only to resolve the issue of jurisdiction, at the same time, this arbitrator proceed to the hearings on the merits. In this case, there is an excess of the jurisdiction of the chairman, i.e. the arbitral tribunal exceeded its jurisdiction.

The cassation court found no grounds for rendering judgment in favour of JSC “BELOMORTRANS” and supported the reasoning of the court of first instance.

The Supreme Court Judge N.V. Pavlova found no grounds for referring the case to the Judicial Chamber of the Supreme Court of the Russian Federation for Economic Disputes.

Comment: the present dispute was triggered by the reversal of the MAC initial award due to the violation of the public policy of the Russian Federation. The position of the court on the violation of public policy seems to be controversial since it remains unclear why a gross violation of the norms of Russian law, which led to negative result, took place¹. The arbitral tribunal found in the main award partially in favour of the Claimant and through additional award recovered the remaining sum, while all the evidence were examined during the consideration of the case. Of course, the court committed a technical violation. However, there is a doubt as to whether this violation leads to the result that is inadmissible according to Russian law.

The reconsideration of the case in the MAC and the subsequent reversal of the arbitration award by the state court suggests several issues of law, which have practical relevance and deserve to be analysed. We also can assess what result turns out to be more harmful for the portrait of the Russian legal order – the recovery of debt in favour of the creditor through the main and additional awards of the arbitral tribunal or the deprivation of the right to recover debt due to procedural violations of the arbitral tribunal.

1. Is the arbitral tribunal entitled to reconsider the dispute after the state court had reversed the initial arbitration award due to violation of public policy of the Russian Federation?

The transfer of a possible dispute to a non-state court (arbitration) is the result of the expression of the parties’ will. Therefore, when deciding on the jurisdiction of arbitral tribunal, it is necessary to consider the will of the parties, expressed in the contract. If the arbitration award is reversed due to invalidity of the arbitration clause, i.e., the state court has established the absence of the will of the parties to arbitration, reconsideration of the case in arbitration is impossible. In all other cases, the situation is different, the violation committed by the arbitral tribunal can be eliminated when the case is being reconsidered.

In search of an answer to the question of the arbitral tribunal’s right to reconsider the case after the state court has reversed its award, one should refer to Рarts 3–4 of Art. 234 of the Commercial Procedure Code of the Russian Federation, which establish the following: the reverse of a tribunal’s award shall not interfere with the right of the parties of the arbitration procedure to turn to the arbitration tribunal again, if the possibility of turning to the tribunal is not lost. However, inadmissibility of reconsideration of the case in arbitration is established in the part 4 of this article. It takes place the arbitration agreement is invalid, or the nature of the dispute exceeds the scope of this agreement, or the public policy of the Russian Federation is violated.

Then it is necessary to rely on the interpretation of Parts 3–4 of Article 234 of the Commercial Procedure Code of the Russian Federation. The interpretation can be grammatical, when the lawyer establishes the literal meaning of the words used in the statute, and it can be teleological, when the lawyer tries to comprehend the meaning of the norm, its place in the legal system and the purpose of the rule formulated by the legislator.

In the case under comment, the state courts followed the path of a literal grammatical interpretation of Part 4 of Article 234 of the Commercial Procedure Code of the Russian Federation and did not endeavour to establish what was the violation of public policy of the Russian Federation during the initial consideration of the case by the MAC.

The teleological interpretation of Part 4 of Article 234 of the Commercial Procedure Code of the Russian Federation requires determining the correlation of the rule where it is impossible to reconsider the case in arbitration after violation of public order, with the necessity to take into account the will of the parties to resolve the dispute in arbitration. It is necessary to find a balance between, on the one hand, the will of the parties to the contract, and, on the other hand, the necessity for public policy to be obeyed by the arbitral tribunal. Such a balance can be provided by an assessment of the eliminability of violations committed by the arbitral tribunal when the case is being revised by the arbitral tribunal. In other words, if the arbitral tribunal can eliminate the violation of public policy during the revising of the case, it is entitled to hear the case; if it cannot, the party concerned has the right to take legal action only with the state court.

In this case, from the point of view of the criterion of the eliminability of the violation, the conclusion offers itself that the arbitral tribunal is entitled to revise the case. The recovery of the debt by the main and additional award is an eliminable violation, which the arbitral tribunal will not repeat at a reconsideration of the dispute.

Determining the circumstances when the arbitral tribunal is entitled to revise the case after the reversal of the initial award due to a violation of public policy, on the basis of the eliminability of the violation, seems to be a more flexible approach.

2. Is the arbitrator appointed to resolve the issue of jurisdiction entitled to proceed to the hearing on the merits?

In consideration of the present case, the courts gave a negative answer to the question raised and thereby sustained the defendant’s argument. However, the position that the arbitrator, who is appointed to resolve the issue of the jurisdiction of the arbitral tribunal, is not entitled to proceed to the hearing on the merits is highly controversial.

In the Russian legal order, the general rules for appointing arbitrators are established by Article 2 of the Federal Law “On Arbitration (Arbitration Proceedings) in the Russian Federation”, and are specified in the rules of arbitration courts. By virtue of Article 2 of the aforementioned Federal Law, an arbitrator is always and only elected or appointed to resolve a dispute, and not to resolve a separate issue, for example, the issue of jurisdiction. In other words the position where the appointment of an arbitrator to resolve as separate issue and not the case altogether, contradicts to the above article of law.

3. Why was the new award reversed with the reference of the state court to res judicata in regard to the judicial act on the reversal of the initial award (part 2 of Article 69 of the Commercial Procedure Code of the Russian Federation)?

Res judicata, that is, the exemption from proofing the facts established in another dispute between the same parties, is one of the most mysterious institutions of Russian procedural law. The rules on res judicata adopted in Russian law are very different from the similar institution in other jurisdictions. In this case, the court formulated another res judicata mystery.

The point is that the court refers to the prejudicial nature of the state court’s judgment, which reversed the initial arbitration award, and on this basis comes to the conclusion that the new arbitration award shall also not be enforced. At first glance, the reasoning is not clear, since the new award is different and it may contain elimination of errors that were the basis for reversal of the initial decision.

The reasoning of the court becomes clear when referring to Part 4 of Article 234 of the Commercial Procedure Code of the Russian Federation, where it is expressly stipulated that the arbitral tribunal is not entitled to revise the case if public policy was violated at the first consideration. However, for the application of Part 4 of Article 234 of the Commercial Procedure Code of the Russian Federation, a reference res judicata is not required, this reference only complicates the comprehension of the court’s position.

4. Is the creditor entitled to the third attempt to recover the debt for non-payment of services under the towing contract? The problem of a prescriptive period.

When studying the case under comment, an anecdote of the early twentieth century can be recalled. It is about a young and verbose lawyer who represented the defendant, and an elderly counsellor-at-law who acted on behalf of the claimant. The young lawyer tried to sustain the dismissal of the claim on the basis of ornate legal constructions, and the counsellor-at-law said only a couple of words: if there is a debt, it shall be recovered. The court found in favour of the claimant.

In this case, the claimant rendered services, maybe with a delay, but services were not paid. How can the debt be recovered in the Russian jurisdiction after the two-fold reversal of the arbitration award by state courts?

The claimant is entitled to file a claim to the state court for the recovery of the debt under part 3 of Article 233 of the Commercial Procedure Code of the Russian Federation. However, in this case, there is a chance that the claim will be time-barred.

A one-year prescriptive period is established for disputes arising from towing contract (Article 409 of the Merchant Shipping Code). When the dispute is heard before the arbitration court, the running of the prescriptive period shall be suspended (Part 3 of Article 202 of the Civil Code of the Russian Federation), and when it is heard before the state court – the prescriptive period shall not run (Part 1 of Article 204 of the Civil Code of the Russian Federation). If, after the suspension or the period when the prescriptive period was not running, the dispute is still not resolved, the prescriptive period shall be extended to six months (Part 4 of Article 202 and Part 3 of Article 204 of the Civil Code of the Russian Federation).

It is impossible to deal with the issue of the prescriptive period without studying the case materials, but there are reasons to believe that this period expired since the violation of the right was committed in the fall of 2016, and there were six-month breaks between the proceedings in the arbitration.

It seems that the issue of further defence of the claimant and the situation with the prescriptive period should have been taken into account by the state court when it reversed the new arbitration award on formal grounds.

5. Why does the court find in favour of the respondent and reverse the arbitration award, but not in favour of both parties? The claimant also pleaded for the reversal of the new arbitration award.

Both parties asked the state court to reverse the new arbitration award, but the court finds only in favour of LLC “NEVA-CHARTER”. This entitles LLC “NEVA-CHARTER” to recover reimbursement of legal costs from JSC “BELOMORTRANS”, which has not succeeded to recover the debt in the Russian jurisdiction for the services rendered.

Once again, the procedural action of the court is questionable. Apparently, the reasoning of the court was as follows: the arguments in favour of reversal the arbitration award provided by LLC “NEVA-CHARTER” are more convincing, therefore its appeal should be allowed.

At the same time, by virtue of Articles 168 and 170 of the Commercial Procedure Code of the Russian Federation, when taking a judicial act, the court is not bound by the legal arguments of the parties but is bound only by the evidence submitted by the parties. This means that the court shall first assess whether the applicant is entitled to the result that he is seeking for. Consequently, the court was entitled to find in favour of both parties, to reverse the arbitration award and thereby leave on each side the legal costs incurred.

Conclusion

The case under comment is an example of the grammatical interpretation of part 4 of Article 234 of the Commercial Procedure Code of the Russian Federation and brings us to the conclusion that if the arbitration award is reversed by a state court due to a violation of public policy of the Russian Federation, the arbitral tribunal is not entitled to reconsider the case, regardless of whether the violation committed during the first consideration of the case is eliminable. This is a controversial formal position that can be changed over time with the help of the teleological interpretation of the statute.

Each reader can evaluate which of the results is more harmful to the portrait of the Russian jurisdiction: 1) the upholding of the recovery of the debt in favour of the creditor through the main and additional arbitration awards, which is essentially a technical violation; or 2) the arbitration award of the debt in favour of the creditor during a reconsideration, despite the reversal of the previous award on the grounds of violation of public policy (and not on the grounds of invalidity of the arbitration agreement or because the nature of the dispute goes beyond the scope of this agreement), because the arbitration agreement, given its autonomy, has been concluded and continues to be valid; or 3) the creditor is deprived of the right to recover the debt due to the two-fold reversal of the arbitration awards amid a reduced prescriptive period for its claim. ■

Notes