The Supreme Arbitrazh Court of the Russian Federation (the “SAC”) has ruled to transfer a case to the Presidium of the SAC on recognising and executing a ruling of the Arbitration Institute of the Stockholm Chamber of Commerce (the “Arbitrator”). The Arbitrator ruled in favour of a Swedish company in the company’s suit against a Russian firm. The Presidium of the SAC intends to render its ruling on the important legal matters of the case following a review.  

Facts of the case

A Swedish business customer (the “Customer”) and a Russian shipbuilder (the “Shipbuilder”) concluded contracts for the construction of two seafaring vessels. The parties also signed an option agreement which stipulates that the Customer has the right to order the construction of two additional vessels of the same class. The agreements stipulated that refusal to build a vessel resulted in  compensation of EUR 5 million for each vessel not completed (“liquidated damages”).

As a result of the Shipbuilder’s refusal to construct any of the vessels, the Customer filed a suit with the Arbitrator, which, in turn, ordered the Shipbuilder to pay EUR 20 million compensation for liquidated damages. However, the Customer ran into significant problems trying to have the Arbitrator’s ruling recognised in Russia.

First instance court

According to the Russian court, the Arbitrator’s ruling contradicts Russian public policy. The Shipbuilder is a strategically important company whose main customer is the Russian government. The Shipbuilder could go bankrupt if the court ruled in favour of the Arbitrator’s ruling, thereby threatening the sovereignty and safety of Russia.

The court also called into question the validity of the agreement on arbitration. The signed contracts stipulated that the board of directors of the Customer (the “BoD”) was required to approve the contracts within a set period; however, this did not occur. Therefore, because the BoD did not sign the contracts within the specified timeframe, thus rendering them invalid, the option clause was also considered invalid.  As a result, the arbitration clauses were found to be unconcluded.

Cassation court

The Russian cassation court upheld the ruling of the first instance arbitration court, concurring with the decision that there was no contractual relationship between the Customer and the Shipbuilder. Consequently, because the shipbuilding contracts and the option agreement did not come into force, there was no basis for imposing a penalty for liquidated damages.

Ruling of the SAC panel of judges

Having reviewed the Customer’s claim, the panel of judges of the SAC (the “Panel”) did not concur with the reasoning of the lower courts. In the Panel’s opinion, the lower courts did not have the right to review the Arbitrator’s ruling and to rule on the validity of the shipbuilding contracts and option agreement. Additionally, it was within the Arbitrator’s jurisdiction to rule on the issue of whether the BoD had approved the agreements.

The Panel noted that the liquidated damages (which were established as a fixed amount in the contract payable upon non-fulfilment of the obligations) were awarded by the Arbitrator based on the applicable material law of Sweden in accordance with a contract and option agreement. In a legal sense, these damages are similar to the penalties widely used in the Russian civil law. Consequently, applying these damages does not contradict Russian public policy.

The case will be transferred soon to the Presidium of the SAC for review.

It is worth noting that Russian courts have frequently ruled that the terms and conditions for the right to compensation for “liquidated damages” are invalid, as they release a claimant from the obligation of having to demonstrate the actual size of the damages. This approach has also been applied to cases on the recognition of the rulings of commercial arbitration courts.

Consequently, the results of the review of this case are important for establishing a precedent for these types of cases. Also, if the Presidium of the SAC agrees with the ruling of the Panel, then this will substantially simplify and assist companies who wish to have similar arbitration rulings recognised in the Russian courts.