Legal Regulation of Cross-Border Movement of Arbitral Awards

Kurochkina Ekaterina Mikhailovna ORCID: 0000-0003-2641-3818 PhD student, Chair of International Law, St. Petersburg State University 199034, Russia, Saint Petersburg, Universitetskaya Nab., 7-9 kurochkina.e.m@yandex.ru Other publications by this author

Participants in cross–border relations often choose international commercial arbitration (hereinafter referred to as ICA) to protect their rights and interests. The protection of rights in arbitration also includes the ability to enforce an arbitration award. The affiliation of the participants in the arbitration process to different legal systems quite obviously creates difficulties with the recognition and enforcement of the decision. To do this, international legal and national regulation should be aimed at the unhindered cross-border movement of arbitration awards.

The legal regime for the recognition and enforcement of arbitral awards in foreign countries is created, first of all, by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958 (hereinafter – the New York Convention of 1958) ^[1]. The 1958 New York Convention is one of the most successful international legal instruments in the field of private international law, it has been applied for more than half a century. Its main purpose is to ensure the enforcement of foreign arbitral awards in the legal systems of the participating States in the same way as their domestic decisions. This international agreement essentially provides an opportunity for foreign persons to obtain and execute the desired arbitration award.

The 1958 New York Convention regulates the mechanism of recognition and enforcement of arbitral awards in foreign countries. However, its provisions do not contain a clear settlement of some issues. For example, such issues include the recognition and enforcement of arbitral awards annulled at the place of their issuance.

Recognition and enforcement of cancelled arbitral awards in a foreign State is carried out on the basis of subclause "e" of clause 1 of art. V of the 1958 New York Convention The said provision establishes that the enforcement of an arbitration award may be refused if it "has been canceled or suspended by the competent authority of the country where it was made or the country whose law is applied."

The phrase "may be" used in the 1958 New York Convention to refuse recognition and enforcement of an annulled arbitral award leads to an arbitrary interpretation of this provision. So, Swedish Professor Ya. Paulsson believes that this norm has a conditional character (since the word "can" implies the opposite option – "can't") ^[12]. In turn, the German specialist K. Sachs is of the opinion that the phrase "may be refused" actually means "must be refused" ^[13].

In the judicial practice of States, there is also no unified approach to the interpretation and application of subclause "e" of paragraph 1 of art. V of the 1958 New York Convention In some cases, State courts have refused to recognize and enforce an arbitration award annulled at the place of its issuance. Thus, in the case of TermoRio S.A. E.S.P. v. Electranta S. P., the American court refused to recognize and enforce the arbitration award annulled by the Colombian court, with reference to sub-clause "e" of paragraph 1 of art. V of the 1958 New York Convention ^[8]. In the case of Pemex v Commisa, the Luxembourg court also refused to enforce the annulled arbitration award ^[10].

There are also known opposite cases when State courts recognized and enforced foreign arbitral awards that were annulled at the place of their issuance. The US State Court has enforced the arbitration award in the case of Chromalloy Aeroservices v. Arab Republic of Egypt, despite its cancellation. At the same time , the State Court referred to the discretionary provisions of art . V of the New York Convention of 1958, allowing both to refuse to execute cancelled arbitral awards and to execute similar decisions ^[7]. A similar decision was made in Yukos Capital SARL v. OJSC Rosneft Oil Co. The arbitration award annulled by the Russian court was submitted for execution in the Netherlands. The State Court recognized and enforced this decision ^[9].

Such a situation violates the principle of legal certainty and adversely affects the free cross-border movement of arbitral awards.

In addition, the execution of cancelled arbitral awards by itself leads to the following negative consequences. One of the consequences of the cancellation of the arbitral award is the possibility to re-apply to arbitration ^{[14, p. 809]}. The arbitration will have to re-examine the dispute and make a new decision on the case, and this decision may be the opposite. At this point, the original award may be enforced in one or more States. The party in whose favor the second arbitration award was made will certainly want to recognize it and enforce it. Thus, when executing the second arbitral award on the same dispute (between the same parties, on the same subject and on the same grounds), two directly opposite arbitral awards will be valid.

 This happened in the case of Soci?t? OTV v. Soci?t? Hilmarton. In the dispute between Soci?t? OTV v. Soci?t? Hilmarton, the Arbitration Institute of the Swiss Chambers (Swiss Chambers Arbitration Institution, SCAI) made an arbitration decision. It was later overturned by the Swiss State Court. However, the annulled award was submitted for execution in France. The French court recognized and enforced this decision ^[5]. Meanwhile, the parties again decided to resolve the dispute and appealed to arbitration. As a result, the arbitration court adopted a new arbitration decision, but in favor of the opposite party. The second arbitration award was recognized and enforced in the UK ^[6]. Thus, there was a situation in which in one State there was an arbitration award made in favor of one party, in another – an arbitration award made in favor of the opposite party. This situation leads to the fact that the legitimate rights and interests of one of the participants in the arbitration proceedings are not guaranteed equally in all States. The initial award, enforced, will violate the rights of the party in whose favor the second award was made.

At the same time, the arbitration award should have the same legal consequences for the parties as the court decision, since the ICA is called an alternative way of resolving the dispute (the state court does not have the right to consider the dispute and make a decision on the case if the parties have concluded an arbitration agreement), and the arbitration award is a complete substitute for the court decision. In this regard, the arbitration award should entail for the parties the same protection of their rights as the court decision guarantees.

Moreover, the execution of the cancelled award violates the legal logic of recognition and enforcement of arbitral awards, which follows from the meaning of the 1958 New York Convention. We dare to assume that the ICA decision and the acts adopted in relation to this decision form the following structure:

– arbitration clause,

– ICA decision,

– the decision of the state court on the cancellation of the arbitration award or the decision of the state court on the refusal to cancel the arbitration award (if any); taking into account the decisions of higher state courts (if any),

– a decision on recognition and enforcement of an arbitration award or a decision on refusal to recognize and enforce an arbitration award; taking into account decisions of higher state courts (if any),

– a decision on recognition and enforcement of a foreign arbitral award or a decision on refusal to recognize and enforce a foreign arbitral award; taking into account the decisions of higher state courts (if any).

The intent of the 1958 New York Convention assumes that all elements of the above structure should be recognized in aggregate and taken into account by the State court when considering an application for the enforcement of an arbitration award. Meanwhile, the enforcement of the annulled decision actually means that the decision of the state court to annul the arbitration award is simply ignored.

It seems that in the process of drafting and adopting the 1958 New York Convention, no significant importance was attached to the text of the rule providing for the refusal to recognize and enforce an arbitral award. The refusal to execute an arbitration award annulled by a State court at the place of its issuance was quite obvious, and therefore was not specifically stipulated. However, the practice of State courts has shown the possibility of a different interpretation of subclause "e" of clause 1 of art. V of the 1958 New York Convention

Unfortunately, contradictory rulings regarding the refusal to recognize and enforce an arbitration award have been introduced into Russian legislation.

Firstly, in the national legal provisions (Part 1 of Article 417 of the Civil Procedure Code of the Russian Federation ^[2], paragraphs 1, 3 of Article 36 of the Law of the Russian Federation "On International Commercial Arbitration" dated 07.07.1993 No. 5338-1 (hereinafter referred to as the 1993 Law) ^[4] it is established that in recognition and enforcement of the cancelled arbitration award "it may be "refused, i.e. the discretion of the state court is allowed in the execution of an arbitration award annulled at the place of its issuance.

Secondly, Part 3 of Article 244 of the APC of the Russian Federation ^[3] provides grounds for refusal to recognize and enforce a foreign arbitration award. The grounds for refusal are not listed in this article, but it contains a reference to the norm of the 1993 Law, which does not refer to the refusal to execute the ICA decision, but to the refusal to issue a writ of execution for the enforcement of the arbitration decision. The grounds for refusing to issue a writ of execution (paragraph 3 of Article 36 of the 1993 Law of the Russian Federation) only partially coincide with the grounds for refusing to execute a foreign arbitration award (paragraph 1 of paragraph 1 of Article 36 of the 1993 Law of the Russian Federation). In this case, it seems that we are talking about an inaccuracy made by the legislator, as a result which mixes the grounds for refusal to execute an arbitration award and the grounds for refusal to issue a writ of execution.

In this regard, it is proposed to make the following changes to Russian legislation:

– Part 3 of Article 244 of the APC of the Russian Federation should be worded as follows: "The arbitration court refuses to recognize and enforce a foreign arbitration award in whole or in part on the grounds provided for by the law on international Commercial arbitration for refusing to recognize or enforce an international commercial arbitration award, unless otherwise provided by an international agreement of the Russian Federation";

– in Part 1 of Article 417 of the Civil Procedure Code of the Russian Federation, the words "may be refused" should be replaced with the words "must be refused";

– in paragraph 1 of Article 36 of the Law of the Russian Federation of 1993, the words "may be refused" should be replaced with the words "must be refused";

– in paragraph 3 of Article 36 of the Law of the Russian Federation of 1993, the words "may be refused" should be replaced with the words "must be refused".

The introduction of such amendments to Russian legislation will contribute to the observance of the legitimate rights and interests of the parties to cross-border disputes on the territory of the Russian Federation. However, the settlement of the issue of cancelled arbitral awards may take a long time. As a temporary way to prevent a possible violation of the rights of one of the parties to the arbitration agreement, it is proposed that the parties themselves establish in the contract a ban on the execution of the canceled arbitration award. This provision can be formulated as follows: "The decision of an international commercial arbitration, annulled by a State court at the place of its issuance, must not be enforced either in the State where it was issued, or in any foreign State in which its enforcement will be sought."

 Clarification of the status of cancelled arbitral awards should also be carried out at the international legal level. Experts in the field of arbitration of disputes have repeatedly expressed ideas about reforming the New York Convention of 1958 ^[11]. It seems that it will be quite difficult to change the legal regime for the recognition and enforcement of arbitral awards established by the 1958 New York Convention, since the 1958 New York Convention is a successfully operating international treaty. However, taking into account that the enforcement of cancelled arbitral awards complicates the cross-border movement of arbitral awards and, as a consequence, leads to violation of the rights of participants in arbitration proceedings, we believe that an adjustment in the international legal regulation of the status of cancelled arbitral awards is still necessary.