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Annulment of the awards of the international commercial arbitration

Setting aside the awards of the international commercial arbitration
by the national courts
Vadim IVANOV (Legal Week, № 49, December 8-14, 2009)

Setting aside the awards of the international commercial arbitrationAppling to the international commercial arbitration a claimant seeks to obtain a final and binding arbitral award and the enforcement of awards are often made in another state. However, the recognition and enforcement of awards of the international arbitration in Ukraine are quite rare, despite the fact that the country is already quite a long time a member of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards (hereinafter - the Convention). In the world practice, this is the international instrument that allows the possibility of the cross-border recognition and enforcement of arbitral awards in over 140 countries worldwide, establishing the uniform requirements for the recognition and enforcement.

The presence of such a mechanism distinguishes the system of dispute settlement in the international commercial arbitration from the consideration of the disputes in the national courts, because at present there is unimpeded opportunity of recognition and enforcement of foreign judgments in other countries of the world.

Powers of the State Courts

Practice of application of the Convention by the Ukrainian courts is not simple. One reason for this situation is the lack of the clear settlement of the individual categories used in the Convention in the Ukrainian legislation. In particular, we are talking about the possibility to refuse the recognition and enforcement of the arbitral award, if the court finds that the object of the dispute cannot be a subject matter to arbitration under the laws of Ukraine.

Powers of the State CourtsSmall list of such disputes is contained in the Code of Economic Procedure of Ukraine, and includes disputes about recognition of acts to be valid, as well as disputes arising from the conclusion, modification, termination and execution of economic agreements related to the satisfaction of the state needs. More extended list of such exceptions is contained in the Law of Ukraine On Arbitration Tribunals and also covers cases involving state secrets, bankruptcy cases, cases, in which one party is a public authority, and others.

According to art. 16(3) of the Law of Ukraine On International Commercial Arbitration (hereinafter - the Law of 1994) the state courts of appeal may consider pleas as to the jurisdiction of the arbitration court. In cases stipulated by the international agreement or by law, any party to the arbitration may apply to the court with the request for annulment of the ruling of the arbitration court on the presence of its jurisdiction.

The powers of the state court also include determining the validity of the arbitration agreement. A court may declare that a transaction is invalid, inoperative or incapable of being performed. This formulation of the Ukrainian legislation complies to the New York Convention of 1958, according to which the court of the state party to the Convention must in the case of party’s appeal to it on the claim, which is the subject matter of an arbitration agreement, refer the parties to the agreed arbitration, “unless it recognizes that this arbitration agreement is invalid, inoperative or incapable of being performed.”

The jurisdiction of the state court also includes solution of questions of the prior ensuring of the claim brought in the manner of arbitration proceedings. The function of this nature can be made only by the state court, because only it and not international commercial arbitration has the appropriate powers.

Setting aside the Arbitral Award

The jurisdiction of the state court also includes the consideration of applications for setting aside the arbitral awards. According to the art. 34 of Law of 1994 application for setting aside is regarded by this Law as an exclusive method to challenge the arbitral award. Law of 1994 established the following list of reasons for setting aside the awards is subject to proof by the party filling the applications for setting aside:

  • one of the parties to the arbitration agreement was incapable in some way;
  • this agreement is not valid under law, to which the parties have subjected it to, failing any indication thereon, under the law of Ukraine;
  • one of the parties was not properly notified of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case;
  • the award was made regarding a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside;
  • the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or the mandatory provisions of the Ukrainian legislation and the international treaties.

Researchers of this issue have repeatedly drawn their attention to the fact that these grounds are quite limited and include those related to violation of the procedural aspects of arbitration. In other words, challenge of the award of the arbitration court is not allowed on the grounds relating to the merits of the dispute, its material side.

Setting aside the arbitral award may also occur if the court finds on its own initiative that:

  • the subject-matter of the dispute is not capable of settlement by arbitration under the law
      of Ukraine; 
  • the arbitral award is in conflict with the public policy of Ukraine.

It should be noted that contrary to public policy is not identical to the concept of contradiction to the Ukrainian legislation. According to the practice of the Supreme Court of Ukraine the basis of the social system of our state is meant under the public policy of Ukraine. Clause of the public policy is possible only in those rare cases where the application of the foreign law may lead to an outcome unacceptable from the viewpoint of the Ukrainian justice.

Under the provisions of the New York Convention of 1958 and the legislation of Ukraine the state court may refuse recognition and enforcement of an arbitral award on the same basis that are set for setting aside the arbitral award. The list of such grounds is not exhaustive. Establishment of such a possibility of failure to enforce the awards in some cases must be regarded as an exception to the general rule that the awards of the arbitration court shall be final and not subject to appeal and revision.

Execution of the Awards of the International Arbitrations

In Western countries, most of the awards are implemented voluntarily, a request for compulsory enforcement is satisfied in more than 90% of cases. In Russia as well as in Ukraine, in recent years cases of voluntary implementation of the awards of the international arbitrations are not often observed, 50% of the applications for the enforcement are positively considered.

It should be noted that the most important awards of the International Commercial Arbitration Courts against the Russian respondents are set aside. There is a growing trend of arbitration awards against Russian respondents, enforcing abroad.

The Russian Federation has a negative practice on setting aside the awards of the international commercial arbitration courts. Evidence of this is:

  • increase in the number of contracts between Russian companies that refer to foreign arbitrations.
  • courts of the Western European countries increasingly refer in their awards on the bad reputation of the Russian judicial system in general (Cherney v Deripaska, Yukos Capital SARL v Rosneft)
  • the emergence of the issue of state responsibility for the failure of its courts to enforce the arbitral awards (Sapiem SpA v Bangladesh).

With respect to Ukraine, there currently is no established court practice on enforcement of the awards of the international arbitrations.

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