In a recent district court case the applicants applied to register and enforce an arbitral award issued by the Russian International Commercial Arbitration Court on April 7 2014.(1) The respondents objected to recognition and enforcement of the arbitral award, arguing that its recognition was contrary to public policy.
The applicants had granted loans to various companies which later defaulted on their repayments. Pursuant to an arbitration clause in the loan agreements, the applicants applied to the Russian International Commercial Arbitration Court and were granted arbitral awards in their favour. The district court restated the legal framework through which an arbitral award may be enforced in Cyprus through Article IV of the New York Convention and proceeded to assess whether there were grounds for non-recognition and enforcement of the award pursuant to Article V of the convention.
The district court initially referred to the judgment in Beogradska Bank highlighting that when examining an arbitral award, the court is limited to determining whether the arbitral award is contrary to public policy and will not examine the substance of the award.(2) The court subsequently proceeded to analyse the meaning of public policy, drawing on guidance from various jurisdictions and authors.
First, the court referred to Stair Memorial Encyclopedia Diligence and Enforcement of Judgments, Volume 8, p 441, which states the following:
"Resort to this ground for refusal to enforce a judgment will be allowed in exceptional circumstances. It has been suggested that public policy does not allow refusal to enforce a judgment on grounds of procedural irregularity or breach of natural justice; nor does public policy allow refusal to enforce a judgment merely because the court of origin did not apply the rules of international private law of the legal system of the court of enforcement."
Further, the court referenced International Commercial Disputes – Commercial Conflict of Law in English Courts, Volume 4, p 475, which states that:
"The public policy defence ought to operate only in exceptional cases… The Court of Justice has confirmed that the public policy defence must be narrowly construed. In Krombach v. Bamberski case C-7/98 (2000) ECR1-1935 the Court of Justice considered that recourse to the public policy defence can be envisaged only when recognition or enforcement of the foreign judgment would be at variance to an unacceptable degree with the legal order of the state in which enforcement is sought inasmuch as it infringes a fundamental principle."
The court also made reference to Attorney General of the Republic of Kenya v Bank Fur Arbeit Und Wirtschaft AG,(3) in which the following view from GH Treitel, The Law of Contract, Eighth Edition (1991), pp 424 and 425 was mentioned:
"Public policy is a variable notion, depending on changing manners, morals and economic conditions… The law does adapt itself to changes in economic and social conditions, as can be seen particularly from the development of the rules as to contracts in restraint of trade… The present attitude of the courts represents a compromise between the flexibility inherent in the notion of public policy and the need for certainty in commercial affairs."
The court also cited the Canadian case Schreter v Gasmac Inc,(4) which raised similar issues to the case at hand and stated that "the public policy prohibition ought to be invoked only if the judgment involves an act that is illegal in the forum or where the action involves acts repugnant to the orderly functioning of the-social or commercial life of the forum".
The respondents challenged the decision, arguing that the arbitral award was a political decision directed against the previous directors of the company in order to acquire incriminating evidence against them and this in turn was against public policy. The respondents alleged that the arbitral tribunal had been steered by the Russian president and prime minister who, they argued, were accused of carrying out allegedly undemocratic and authoritarian actions.
The district court concluded that these allegations were unfounded and had been presented in a vague and abstract manner. The court stated that the newspaper articles which allegedly linked the Russian government with the company's previous management were of no practical use. Further, any allegation that the directors had fled Russia because of acts of the Russian government could be explained on the basis that the directors faced allegations of monetary abuse through their affiliated companies. The content of the newspaper articles did not provide a direct link to the loan agreement in dispute or the companies to which the applicants had provided loans. Further, the court also noted that the allegations did not undermine the fact that two separate legal entities entered into a loan agreement, each with its own contractual obligations.
The respondents also argued that the ultimate aim of acquiring incriminating evidence against the two company directors was a possible liquidation application by the applicants against the company in order to gain access to its bank accounts. However, the court noted that the outcome of a liquidation application or the actions of a liquidator was not definitive and therefore the assertions were speculative at best. The court found that the registration or enforcement of the arbitral award did not infringe public policy in Cyprus based on the evidence presented.
Practitioners should be mindful of the various extracts presented in this update which highlight the scarcity with which the public policy defence is used and ensure that evidence presented in court proves the existence of exceptional circumstances which warrant court intervention and protection.