Violation of Public Policy of the Russian Federation as a Ground for Refusing Recognition and Enforcement of Foreign Judgments and Arbitral Awards

Sergey A. Kurochkin, Candidate of Law, Associate Professor, Department of Civil Procedure, Ural State Law University, Yekaterinburg, Russia

Russian commercial courts have accumulated a huge practice of applying legal rules that allows to annul international arbitral awards and to refuse their recognition on public policy violation ground. The article is a brief review of the current theory and judicial practice in Russia in applying violation of public policy as a ground for refusing recognition and enforcement of foreign judgments and arbitral awards. The author shows how the ordre public clause designed to maintain foundations and basic principles of Russian legal system from possible violations works as a universal protective legal device.

Key words: international public policy, public policy of the Russian Federation, fundamental principles, foreign judgment, arbitral awards

A rule of a foreign law subject to application in a case with foreign elements shall not be applicable in exceptional cases if the consequences of its application are obviously in conflict with the foundations of law and order (public policy) of the Russian Federation (Art. 1193 of the Civil Code of the Russian Federation). This order public clause is a bar designed to protect foundations and basic principles of the Russian legal system from possible violations. “Public policy is a protective legal mechanism, regime of exception, urged to protect legal order foundations that has been formed on certain time, that are effective and necessary for functioning of a society; it is legal mechanism of dispute resolution, resolution of two legal rules collisions”[1].

Public policy exception is not only a substantial law institution; it is also a phenomenon of procedural legal mechanism. The necessity of  integration in the  Russian legal order of some jurisdictional deeds external in respect of the ordinary State court system, especially foreign judgments, domestic and foreign arbitral awards,  requires creation of  a defence  mechanism in order to protect foundations of the domestic legal system from probable distortions. Public policy (or order public) has become a universal protective legal device.

The commercial court refuses to recognise and enforce a foreign court judgment fully or in part, if the enforcement of the foreign court judgment would contradict the public policy of the Russian Federation (Art. 244 of the Commercial Procedure Code of the Russian Federation – CPCRF). Russian legislation contains an analogue for public policy – a category of “fundamental principles of Russian law”. It functions in the same way as does public policy. For instance, the commercial court reverses the arbitral award if it establishes that the award violates fundamental principles of Russian law (Art. 233 CPCRF). The commercial court refuses to issue a writ of execution for the enforcement of an arbitral award, if it establishes that the award violates the fundamental principles of Russian law (Art. 239 CPCRF). Similar provisions can be founded in the Civil Procedure Code of the Russian Federation (Art 421, 426).

Russian commercial courts have accumulated a huge practice of applying legal rules that allows to annul international arbitral awards and to refuse their recognition on grounds of public policy violation. In 2013, this practice was summarised by the Supreme Commercial Court of the Russian Federation, which issued a special Review[2]. Precedent cases included in the Review became a good guide for court practice development, and stated provisions which are fundamental for modern exequatur system.

A few years ago, in order to understand the essence of public policy, one was forced to analyse doctrinal provisions. Today there are a lot of public policy interpretations in commercial court judgments. Thus, courts offer to rate public policy of the Russian Federation as foundations of the Russian State’s social formation the violation of which, including the case of enforcement of foreign judgments or arbitral awards, could form a result inadmissible from the point of view of the Russian legal sense[3]. The Federal Commercial Court of the Moscow region mentioned that a concept of “public policy” includes such components as basic principles of law, i.e. its foundations which are universal, supremely imperative and especially significant, so only their violation can be the basis to deny recognition and enforcement of foreign judgment[4]. We can agree with such a definition, but we should note that “foundations” of law are basic provisions, guiding ideas and philosophic principles marking the facets of law as a social phenomenon. “Foundations” of law are an integrative category for the entire system of legal principles. Ordinary rules not rising to a high level of normative synthesis must not be evaluated as a component of public policy.

National public policy is not an isolated phenomenon; now it is inside the whole system of international law. National public policy is an element of international system of civil right protection, a strong guarantee of its effective operation in a particular state. A significant part of national public policy is its international component. In the  “Final Report on Public Policy as a Bar to Enforcement of International Arbitral Awards” of International Law Association, the expression “international public policy” is used to designate the body of principles and rules recognised by a state, which, by their nature, may bar the recognition or enforcement of an arbitral award rendered in the context of international commercial arbitration when recognition or enforcement of the said award would entail their violation on account either of the procedure pursuant to which it was rendered (procedural international public policy) or of its contents (substantive international public policy)[5].

Analysis of the category “international public policy” seems very relevant from the standpoint of the problem of the Russian commercial court system competitiveness. The international public policy of any state includes: (i) fundamental principles pertaining to justice or morality that the state wishes to protect even when it is not directly concerned; (ii) rules designed to serve the essential political, social or economic interests of the state, these being known as “lois de police” or “public policy rules”; and (iii) the duty of the state to respect its obligations towards other states or international organizations[6]. As an example of a substantive fundamental principle, International Law Association offers prohibition of abuse of rights. An example of a procedural fundamental principle is the requirement that tribunals be impartial. An example of a public policy rule is anti-trust law. An example of an international obligation is a United Nations resolution imposing sanctions[7]. Similar examples can be found in Russian commercial court practice[8].

The problem of indicating fundamental principles that the state wishes to protect is simplified in Russia by a possibility to apply to normative documents forming strategy plans. As a direction, federal principal programs, different strategies, Decrees of the President of the Russian Federation and Government of the Russian Federation regulations may be considered. Such documents, in our opinion, should definitely be a base for conclusions about violation of fundamental principles and basic values, protected by the state as a part of public policy, in order to deny recognition and enforcement of international arbitral awards.

Can fundamental moral principles be considered as a part of public policy of the Russian Federation? The Federal Commercial Court of the North-West region successively pronounces decrees based on the position that Russian legal order includes basic moral principles, main religious postulates, main economic and cultural traditions which have formed the Russian civil society, and basic principles of Russian law; among the first ones principles contained in the Constitution of the Russian Federation, as well as foundations of Civil law can be mentioned[9]. Similar provisions can be found  in published judgments of the Federal Commercial Court of the Moscow region[10]. Certain Russian scientists adhere to the opinion about necessity to include generally accepted moral principles in the legal order foundations[11].

Is it defensible to apply to abstract moral principles as a criterion for an assessment of arbitral awards at this conjuncture? In our opinion, the far-sighted position has been stated by Sergey Krokhalev, who firmly rejects the possibility to use Common law countries experience in the issue under discussion, and mentions that Russian courts appeal to morality while delivering justice is appropriate only in cases indicated directly in law and is inadmissible for public policy clause application[12]. Although morals and law are normative regulators, moral provisions should not become an instrument for assessing the possibility to incorporate foreign judgments into a national legal system. Only formalised in legal rulings principles of morals, main economic and cultural traditions can be regarded as constitutive elements of public policy, of social order of the Russian State and the system of basic legal principles.

As an issue of current importance for court practice development, we can mention the problem of comparison of public policy and mandatory norms (lois de police). In the Russian Federation, mandatory norms, due to indication contained in them directly or due to their special importance (including safeguarding the rights and law-protected interests of participants in civil law relations), regulate relevant social relations, irrespective of the applicable law (Art. 1192 CCRF). For a guideline, we can cite the following passage:

“All rules of public policy are of mandatory character, because they reflect the “basic notions of morality and justice”. But not all mandatory rules rise to the level of public policy, because the interests protected may not concern the society’s fundamental values”[13].

As an example of such mandatory rules not rising to the level of public policy, in our opinion, the rules of Art. 1209 of CCRF (part 2), Art. 160 of CCRF (part 1), Art. 434 of CCRF (part 2) concerning the form of foreign transaction can be considered. These rules were declared by state courts as regulations governing the relationships notwithstanding the law to be applied[14].

French leading legal scholars reasonably regard the relationship between international public policy and domestic public policy as purely negative:

“[A]s international public policy is at the heart of domestic public policy, a rule which is not even a matter of domestic public policy could not be considered as belonging to international public policy” [15].

The reverse conclusion can be practically useful. It was right to mention that national public policy should not be constrained to defend domestic interests, but equally it should serve to protect universal values, generally accepted by the world community, when such values form fundamental principles of domestic law[16]. Quoted rulings may become guidelines for judges in evaluation of some circumstances to be the elements of public policy.

Systems theory teaches us that relations in a legal system transmit features of each element to others. Constituent parts of national public policy are fundamental values, basic principles of legal government system but not ordinary rules of law. “Public policy can be mentioned as an expression of basic principles and values which direct national society and the maintaining of which is necessary for supporting its existence and stability”[17]. Unfortunately, we can see another interpretation at inferior courts. That is the reason for the Supreme Commercial Court of the Russian Federation to have wisely inserted (in the Review) a clarification that a presence of a misprint in arbitration award which do not influence  its essence and meaning, must not be considered as a bar for recognition and enforcement on the ground of public policy violation. It may be assumed that general reference points for public policy components retrieval should be supplied by particular directions based on concrete mistakes from court practice.

The Review evolves a significant normative provision that the evaluation of foreign judgment or arbitral award consequences should not produce a retrial of the judgment or the award on the merits. Such interpretation is important because it clarifies conditions of action of the one of the basic principles of Russian law – principle of legality – in the context of recognition and enforcement of foreign judgments and arbitral awards, of recourse and enforcement of domestic arbitral awards. Some of the Russian commercial courts judges start to proceed from narrow assumptions that legality is a simple aggregate of requirements closely related with legal rulings and their putting into effect: a requirement to everyone to maintain legal provisions punctually and steadfastly, to keep the hierarchy of laws. Legality as a phenomenon is much better off. The outstanding Russian legal scholar Sergey Alexeyev marked out three elements of legality: a mandatory aspect of law, the idea of lawfulness and their implementation in a special regime of social and political life, in legal system requirements. The idea of lawfulness and кудумфте principles (equal protection of the law, the absence of privileges, the rule of law, unavoidable legal responsibility for delinquency, etc.) can be regarded as an idea of political consciousness, as basic principles of political democracy[18].

In the author’s opinion, such comprehensive, social and political interpretation of legality should be assumed as a basis of public policy of the Russian Federation. Legality, as a strong requirement to maintain all legal rulings, and public policy are not convertible terms. Public policy is the heart of legality, but not vice versa. Ordinary, sometimes occasional violations of legal rulings which do not infringe basic social principles, legal system elements and relationships should not be considered as a ground to deny recognition and enforcement of foreign judgments and arbitral awards. It is generally agreed that arguments of violation of legality by an arbitral award in fact are aimed at total review of the arbitrator’s conclusions on the merits of a dispute[19].  Russian arbitration law currently in force prohibits arbitral award’s appellate review and provides means of recourse.

An approach mentioned above has been coordinated with international practice and doctrine provisions. International Law Association states that an award’s violation of a mere “mandatory rule” (i.e. a rule that is mandatory but does not form part of the state’s international public policy so as to compel its application in the case under consideration) should not bar its recognition or enforcement, even when the said rule forms part of the law of the forum, the law governing the contract, the law of the place of performance of the contract or the law of the seat of the arbitration[20]. In general, Russian commercial courts do not consider improper application of substantive law rules in itself to be valued as a ground for annulling arbitral award for violation of basic Russian legal principles[21]. In our opinion, a good guideline for court practice development is the binding interpretation included in the Review that recognition and enforcement of foreign judgment and arbitral award are not contrary to public policy of the Russian Federation only on the ground that the applied foreign law provisions differ from similar Russian legal rulings.

In addition to procedural public policy in doctrine, public policy requirements concerning the merits of a dispute have been marked. For instance, in France “[i]t is very rare for an award to be set aside or refused enforcement on such grounds”[22]. The practice of Russian courts develops in a different way. Foundations of civil legislation – the equality of civil relations participants, the immunity of property, the freedom of contract, the inadmissibility of interference in private affairs, the necessity of unhampered exercise of civil rights, violated rights recovery and its protection by court –are serially declared as a part of Russian public policy[23].

Proportionality of civil liability to culpable tort, good conscience and equality of civil relations parties have also been regarded by commercial courts. The fundamental nature of the specified principles is beyond any doubt, as well as their role in constituting the entire system of legal regulation of civil sphere. What actions particularly can produce a menace of violation of civil law foundation? Judges’ answers to this question compel us to give thought. For instance, as a violation of public policy of the Russian Federation today, commercial courts declare the following:

1. Nullity of a deal on the grounds mentioned in Art. 169 CCRF, or application of foreign legal rulings that are incompatible with the Russian legal system (e.g., polygamy)[24];

2. Creation of a civil dispute pro forma to take it to arbitration in order to exclude the award’s court control on the merits of the dispute, to deprive insolvency creditors of their rights to challenge the arbitration award, to comply with creditors demands out of turn from a bankrupt’s estate[25];

3. Evasion of law concerning immovable property rights registration, which establishes the guarantees of civil relationships durability, assures the private property immunity[26];

4. Bringing a dispute to the arbitration in order to receive formal legal grounds for immovable property rights registration, illicit substitution of state institution’s functions for immovable property rights registration[27].

One can mention that not all of the listed circumstances really violate basic public principles of the Russian Federation. Perhaps, there is no need for switching to the “order public machine” in such cases. For reference, the German court practice can be cited as an example. Thus, as a violation of substantive public policy the following grounds have been recognised: assignment of an obligation to execute a void contract; compulsion to perform an action that can be qualified as a crime; assignment of an impossible, unrealizable duty; infringement of statutory requirements for admittance permission or exporting prohibition violations; infringement of antitrust law provisions, including appropriate European Community legal rulings[28].

In the Russian Federation, the question of correspondence of punitive damages foreign judgments and arbitral awards to basic principles of Russian law is still urgent. The Supreme Commercial Court of the Russian Federation has frequently stated its position on this problem; nevertheless, the practice of commercial courts is varied. Some courts come to the conclusion that a foreign arbitral award violates public policy of the Russian Federation because the forfeit that has been recovered is punitive[29]. The Presidium of the Supreme Commercial Court of the Russian Federation disaffirms such commercial courts’ judgments and gives instructions that Russian civil legislation provides a penalty as a possible measure of responsibility for nonfulfillment or unduly fulfillment of contract obligations. For this reason, the penalty is a part of the Russian legal system and its recovery cannot violate the public policy of the Russian Federation[30]. In 2011, the Supreme Commercial Court of the Russian Federation repeated that a penalty and damages are provided for by Russian civil legislation and should be considered as a part of the Russian legal system, and that application of such forms of responsibility in itself cannot violate the public policy of the Russian Federation[31]. We are of the opinion that it has been appropriate to include in the Review an additional clarification that foreign arbitral award execution must be declared as corresponding to the public policy of the Russian Federation if evidence produced by a respondent does not show that recovered damages (forfeit, complicated interests, etc.) agreed on in advance are of punitive character.

Resolving the problem of violation of Russian public policy by a foreign court judgment or foreign arbitral award, in our opinion, one should place high emphasis on issues of equal access to justice, guaranteed by the Constitution of the Russian Federation (Art. 46), and the right to a fair trial, guaranteed by the Convention for the Protection of Human Rights and Fundamental Freedoms (Art. 6). Fair legal procedure maintenance in court or arbitral proceedings should be considered as a basic condition for recognition and enforcement of a foreign court judgment or arbitral award. Such requirements constitute procedural international public policy, and its full implementation is an international obligation of the Russian Federation. In this aspect, we can support the aspiration of Russian courts to recognise the following circumstances as a case in point of violation of Russian public policy:

- Creating and financing an arbitration court by a contracting party (or its affiliated person) with an opportunity to resolve  disputes arising from such a contract in this arbitration court (taking into account that another contracting party has been deprived of the opportunity to take similar actions)[32];

- Recognizing and enforcing  an arbitral award that has been taken on the basis of arbitration agreement signed by an unauthorised person[33];

- Arbitrators’ resolving the issues of rights or obligations of persons that have  not  participated in arbitration proceedings and have not  expressed their consent to arbitration[34].

Russian commercial courts, by way of applying the public policy mechanism sequentially, form the practice aimed at consolidation of national jurisdictional sovereignty, at improving the efficiency of the Russian court system. A part of public policy of the Russian Federation is reasonably considered to be a provision in Art. 6 of  Federal Constitution Law “On the  Court System of the Russian Federation” (dated  December 31,1996, No. 1-FKZ) that court judgments that have come into force are mandatory for all (without exception) state agencies, institutions of local government, public-service institutions, public officials, persons and companies and should be rigorously fulfilled on the entire territory of the Russian Federation[35]. The prospect of the appearance on the territory of the Russian Federation of court judgments with equal legal force, including mutually exclusive conclusions, as a result of recognition and enforcement of foreign arbitral award, violates the principle of mandatory nature of Russian courts’ judgments, the principle which is a concurrent part of Russian public policy[36]. The same provision can be referred to in respect of exclusive competence of Russian state courts concerning a well-defined scope of legal cases[37]. Russian scholar Nicolai Yeliseev, on the basis of world practice analysis, mentioned that certain types of court jurisdiction are declared imperative and are considered to be an element of public policy[38].

In our opinion, such an approach deserves encouragement. To do justice, we should mention that abroad the res judicata provisions are not regarded as part of international public policy[39]. For these reasons, the attitude of the mandatory nature of Russian courts’ judgments as a concurrent part of Russian public policy must be clear and logically formalised in court practice with the purpose of its correct perception. It will be a significant step forward on the road of consolidation of Russian jurisdictional sovereignty.

It is also important to be consistent in implementing the accepted approaches. The Supreme Commercial Court of the Russian Federation, federal commercial district courts frequently repeat that a judgment can be declared contrary to Russian public policy if, as a consequence of its execution, the actions to be performed would be directly prohibited by law, cause damage to state sovereignty and security, infringe public interests, are incompatible with basic principles of economic, political, legal systems of the state, affect constitutional human rights and liberties, contradict basic principles of civil legislation, such as equality of participants, immunity of property, freedom of contract[40].

De facto, judges have considered execution of an arbitration award for recovery of a joint venture’s charter capital deposit value without simultaneously resolving the issue of the destiny of shares passed as a payment of a deposit, as well as the destiny of property abroad, to be a major threat to sovereignty and security of the state contradicting public interests and incompatible with basic principles of economic, political, legal systems of the state. Let us refrain from comment on the comparison mentioned above[41].

In our opinion, creation of the uniform judicial practice plays an important role in future development of a system of commercial disputes resolution, in international economic relations. “Public policy is functional by its nature and, consequently, it can develop and be changeable… Public policy is a relatively flexible concept. It has to conform to real life; simultaneously, public policy has to be inspired by life and impregnate the life entirely”[42]. Inspired by Russian present-day reality, the institute of public policy ceased to play any special protective role and became a moderator for  state control of jurisdictional decisions, imposed from the outside of the national court system (in other words, foreign court judgments, foreign arbitral awards).

In conclusion, we would like to express our assurance that the enlargement of applying truly international public policy as a bar to recognition and enforcement of foreign judgments and arbitral awards will play a positive role in formation of a proper system of official control. Today judges might turn their attention not only to past decisions already executed by parties, but also to the  future in order to create intelligible incentives for lawful behavior for participants in civil circulation.

Bibliography:

1. C. Verbar. Opredelenie publichnogo poriadka vo vnutrennem prave Rossii cheres franzuzskoe pravo [Public Policy Definition in Domestic Law of Russia through French law]. The Russian yearbook of civil and arbitral procedure. № 1 (2001). Moscow, 2002. p. 292.
2. D.V. Litvinsky. Priznanie inostrannykh sudebnykh reshenii’ po grazhdanskim delam [Recognition of Foreign Judgments on Civil Cases]. Saint Petersburg, 2005. p. 509.
3. Kommentarii‘ k zakonu Rossiiskoii Federatsii “O mezhdunarodnom kommercheskom arbitrazhe” [Commentary to the Law of the Russian Federation “On International Commercial Arbitration”]. Edited by A. Komarov, S. Lebedyev, V. Musin. Saint Petersburg, 2007. pp. 160-161.
4. Mezdunarodnoe chastnoe pravo [International Private Law]. Edited by G.K. Dmitrieva. Moscow, 2003. p. 184.
5. N.G. Yeliseev. Grazhdanskoe protsessualnoe pravo zarubezhnykh stran [Civil Procedural Law of Foreign Countries]. Moscow, 2006. p. 312.
6. P. Fouchard, E. Gaillard, B. Goldman. O mezhdunarodnom kommercheskom arbitrazhe [On International Commercial Arbitration]. Hague, 1999. p. 954.
7. S. Alexeyev. Obshchaia teoriia prava [General Theory of Law]. Moscow, 2008. pp. 154–155.
8. S.V. Krokhalev. Kategoriia publichnogo poriadka v mezdunarondom grazdanskom processe [Public Policy Category in International Civil Procedure]. Saint Petersburg, 2006. pp. 47, 51.
9. V. Shaleva. “Gosudarstvennaia politika” Isklyucheniia v priznanii i ispolnenii arbitrazhnykh reshenii‘ v teorii i praktike organizatsii tsentral'no i vostochnoi evropei‘skikh strani i Rossii [The “Public Policy” Exception to the Recognition and Enforcement of Arbitral Awards in the Theory and Jurisprudence of the Central and East European States and Russia] // Mezhdunarodnyi‘ arbitrazh [Arbitration International]. 2003. Vol. 19. № 1. p. 72.
10. Yu.G. Morozova. Otkaz v priznanii i privedenii v ispolnenie inostrannykh sudebnykh i arbitraznykh reshenii’. Osnovanii’a publichnogo kharaktera [A Refusal of Recognition and Enforcement of Foreign Judgments and Arbitral Awards. Public Character Grounds) // Vestnik Vysshego Arbitrazhnogo Suda Rossiiskoi’ Federatsii [Herald of the SCC of the Russian Federation]. 2000. № 7. p. 145.