Public policy: a threat to transnational legal order?

[AMICUS CURIAE] JSC Ryazansky Plant of Ceramic Metal Instruments (Russia) and Lugana Handelsgesellschaft mbH (Germany) entered into a distribution agreement. The agreement included an arbitration clause, which provided arbitration before the German Institution of Arbitration (DIS).

In 2005, Lugana initiated arbitration proceedings.  The tribunal ruled in favor of Lugana and the award was enforced in Russia in 2010. In 2013, Lugana initiated a new proceeding based on the same contract before the same institution, although two heads of claims had not been raised in the first arbitration proceeding. The tribunal again ruled in favor of Lugana. Since Plant did not comply with the latter award and Lugana started an enforcement proceeding before a Russian national court. The final decision was made by the Russian Supreme Court which ruled that the award is not enforceable in Russian Federation due to the violation of Russian public order. According to Article 1193 of Russian civil code, public order clause prevents application of a foreign law norm if the conséquences of its application would obviously be in conflict with the fundamentals of law and order of the Russian Federation.

This court decision seems quite controversial and caused a discussion. What are the limitations of public order (if there should be any)? To answer these questions, it is important to draw a line between common-law concept of public order and a civil law concept. According to English approach, public policy is unitary and shall be applied both in international and domestic legal relationships, and the application of this concept in relation to foreign awards is quite limited. For example, in case Yukos Capital SARL vs. OJSC Rosneft Oil, English court denied to issue estoppel on the ground that English public policy cannot be equated with Dutch public policy. On the contrary, in the continental jurisdictions public order is seen as an exception to conflict of laws rule and is applicable only in relation to international relationship. The definition of public order clauses in codified legislation is usually quite broad.

The most relevant aspect of this decision is the reasoning of the court. It was pointed out that the initiation of a second arbitration from the same contract violates the principle of legal certainty which forms part of the Russian ordre public. One could argue that the reasoning of the decision can be compared to the principle of estoppel. If so, there is a risk that such practice in a continental law system can threaten the ambitions of upholding international arbitration as a system of transnational legal order.

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