Russian Supreme Court refuses recognition of award finding that import ban prevented Russian buyer from performing under contract

Maxim Kulkov (Managing Partner), Sergey Lysov (Senior Associate), KK&P

In Case No. А21-4708/2018, the Supreme Court of the Russian Federation agreeing with the lower courts,   denied  recognition of an award against a Russian buyer  in light of an import ban imposed by the Russian Government.

The Russian Supreme Court has agreed with lower courts and denied recognition of an arbitral award obtained by a Ukrainian company (A), a producer of soybeans. A  applied to the Commercial Court of the Kaliningrad region for recognition and enforcement of an arbitral award rendered under the Federation of Fats and Oilseeds Association’s (FOSFA) arbitration rules against a Russian company (S).

The dispute arose because S (the buyer) refused to perform under the soybeans supply agreement (governed by the laws of England and Wales) referring to the import ban imposed by the Russian Government against Ukrainian soy products.

The Commercial Court of Kaliningrad region, supported by cassation court (Commercial Court of North-Western circuit), denied recognition of the award, holding that the award violated the mandatory ban on imports, which is part of Russian public policy.

The Russian Supreme Court confirmed the lower courts’ approach.

In particular, the Supreme Court confirmed   that Article 417 of the Russian Civil Code, which regulates termination of obligations due to public bodies’ acts, is an overriding mandatory rule (previously the Supreme Commercial Court in Information letter No. 156  had established that overriding mandatory rules are part of public policy).

However, courts had  not, to date,  reasoned to what extent an import ban prevents  a buyer from performing under an  agreement, that is, whether a buyer could accept the goods outside Russia for further resale.

By denying recognition of the award, the Supreme Court and lower courts have made a dangerous precedent, which makes it possible for buyers to unilaterally withdraw from a contract without compensation for damages and any other liability via reference to an import ban, or any similar public act, however irrelevant  such an act might be. Therefore, suppliers to  Russian companies should take into account that a potential import ban might protect the latter from liability for non-performance.

Case: No. А21-4708/2018, 15 February 2019

You can find the link to the full text of the article here (reproduced from Practical Law with the permission of the publishers).