Russian Supreme Commercial Court enforces SCC award for liquidated damages.
Practical Law Company
On 13 September 2011, in Stena RoRo AB v Baltic Plant JSC, the Russian Supreme Commercial Court annulled the decisions of the lower courts and enforced an SCC award for liquidated damages.
In 2005, Stena RoRo AB (a Swedish company, specialising in the development of transportation, passenger vessels and chartering services) and Baltic Plant JSC (one of the oldest and biggest ship manufacturers in Russia) concluded contracts for the construction of two RoPax ships. There was an option agreement that granted Stena RoRo the right to order four more ships of the same class, with Baltic Plant being liable for liquidated damages (EUR 5 million for each ship) if they failed to supply the ordered ships.
After a change of management at Baltic Plant, the contracts with Stena RoRo were considered unprofitable. Baltic Plant refused to construct the four extra ships. Stena RoRo then initiated arbitration.
In 2008, the arbitral tribunal, acting under Stockholm Chamber of Commerce (SCC) rules, issued an award ordering Baltic Plant to pay Stena RoRo liquidated damages in the amount of EUR 20 million.
In 2008, attempts were made by Stena RoRo to enforce the SCC award in Russia. The commercial court of first instance in Saint-Petersburg refused enforcement on the ground of public policy. The court held that enforcement of an award for such a substantial amount would make Baltic Plant (a strategic Russian enterprise) bankrupt, which would jeopardise the interests of Russia. The court also noted that the arbitration clause in the contract had not been validly concluded, as the duly formalised consent of the board of directors of Stena RoRo to enter into the contract (which was a condition precedent for the entry into force of the contracts), was not presented to the court.
The court of cassation upheld the refusal of enforcement, finding that, without clear proof that the underlying contracts had entered into force, enforcement of the award would be contrary to the basic principles of equality of the parties, party autonomy and principles of civil liability (that is, contrary to Russian public policy).
Despite upholding the judgment of the first instance court, in general, the court of cassation considered that the court had been wrong to conclude that the risk of bankruptcy of the strategic enterprise would be sufficient to apply the public policy exception.
On 13 September 2011, the Supreme Commercial Court annulled the decisions of the lower courts and granted enforcement of the award. In doing so, the court noted that the question of validity of the contracts was considered by the arbitral tribunal and could not be reconsidered at the enforcement stage by the state court. Regarding the notion of liquidated damages, the court stated that since the liquidated damages were awarded on the basis of Swedish law, which applied to the contracts and the option agreement, their enforcement in Russia would not be contrary to public policy. With this comment, the court made clear that even if the Russian legal system does not recognise the concept of liquidated damages and generally does not allow for penalties which do not correspond to the amount of actually sustained losses, this cannot preclude the enforcement of arbitral awards ordering liquidated damages under any other applicable law.
Having won this battle with the Russian court system, Stena RoRo will now have to actually enforce the award, which could also be a challenging exercise. Baltic Plant has recently been facing bankruptcy proceedings upon application of one of its creditors.
If you would like to receive our legal alerts and updates highlighting current legal issues relevant to your areas of interest and providing expert commentary by our lawyers, please click on "Sign Up" and fill out the form.