No absolute bar to award of interest on foreign arbitral awards—SCA 1981, s 35A (Yukos v Rosneft (No. 3))

No absolute bar to award of interest on foreign arbitral awards—SCA 1981, s 35A (Yukos v Rosneft (No. 3))

In a judgment dated 3 July 2014, the Commercial Court determined three preliminary issues relating to the claimant’s ability to recover post-award interest on sums awarded in four Russian (ICAC) arbitral awards.

The claimant claimed interest on two alternative bases: under art 395 of the Russian Civil Code and/or section 35A of the Senior Courts Act 1981 (SCA 1981).

The court held that interest on the awards could not be recovered prior to the date on which the awards received a writ of execution (exequatur) from the Russian courts, but that interest on the sums claimed in the English enforcement proceedings could be recovered, in principle, under SCA 1981, s 35A.

Further, the judge held that the court had power to enforce the claimant’s awards at common law notwithstanding decisions of the Russian courts that set the awards aside. In this article, we discuss the practical implications of the decision and highlight key points from the judgment.

Practical implications

The fact that a foreign court has issued a judgment annulling or setting aside an arbitral award does not mean that the English court is bound to recognise the foreign court's decision and must, without further enquiry, refuse enforcement of the award in England. If the decision of the foreign court offends basic principles of honesty, natural justice or domestic concepts of public policy, the English court is not bound to recognise it. As confirmed by Mr Justice Simon in this case, there is no ex nihilo nit fit principle which precludes the enforcement of awards.

The decision provides a useful reminder to practitioners that it is important to consider whether the law of the seat of your arbitration imposes any post-award procedural requirements which need to be satisfied before an award will be legally enforceable in that jurisdiction and/or capable of attracting interest. In this case, the court determined that under Russian law a writ of execution (exequatur) was required from the Russian court before an arbitral award became legally enforceable and, in the absence of exequatur, no interest on the sums awarded to the claimant could be claimed under Russian law.

This decision confirms that, in principle, there is no absolute bar to an award of interest in respect of the late payment of a foreign award pursuant to SCA 1981, s 35A. Although the court was not required to determine whether it should exercise its discretion to award interest in this case, the judge observed that the circumstances in which the arbitrators declined to grant an award of interest and, possibly, the circumstances in which another court of competent jurisdiction reused to order the payment of interest, may be relevant to the exercise of the court's discretion. Accordingly, the court will consider any applicable material factors when deciding whether to exercise its discretion.

Further key points from the judgment

SCA 1981, s 35A

As explained in para [69] of the court's judgment, the claim under English law was for interest on the amount of the awards (including principle, interest accrued up to the date of the awards, and costs) from various dates in 2006 when the sums fell due in accordance with the awards until the dates of payment. This interest was claimed (unsuccessfully) under Russian Law (see further below) and under the SCA 1981, s 35A.

It was common ground between the parties that the tribunal could have awarded interest and that it did not do so for the following reason (see para [73] of the judgment):

'The Plaintiff's request to compel the Defendant to pay interest on the amounts payable in favour of the Plaintiff, up to the date of the actual payment of these amounts, cannot be considered by the ICAC, since the request implicates - as it does in all other cases concerning material demands - an advance payment of the arbitration fees - [a] thing that has not been done in this case.'

Lord Grabiner QC, for the defendant, submitted that the parties by their arbitration agreements agreed that all questions of post-award but pre-judgment interest should be determined by arbitral tribunals in Russia; and since such tribunals have no power to award interest under SCA 1981, s 35A, the parties were taken to have excluded that power. He submitted further that it would be highly unsatisfactory if parties could claim post-award interest in any country where they were able to enforce the award. Counsel relied in support on the decision of the Court of Appeal in Dalmia Dairy. However, Simon J was not persuaded by the defendant's arguments, particularly as, on the facts, the arbitrators did not make any decision on interest (therefore, there would be no substitution of decision), nor was there a possibility of two rates of interest being applied, and, finally, any award of interest by the English court would not have the effect of altering the arbitrators' decision.

Accordingly, and as referred to above, the court held that interest on the sums claimed in the English proceedings could be recovered under the SCA 1981, s 35A, in principle. Whether it should be awarded as a matter of discretion was left for later determination.

How does the English court decide matters of foreign law?

The court was asked to determine the claimant's claim for interest under art 395 of the Russian Civil Code and provided a useful summary of the principles relevant to that task:

  1. the court is required to determine the foreign law as a question of fact on the basis of the evidence deployed by the parties, according to the usual civil standard

  2. it is not the court's function to interpret the foreign law. The court's task is to determine how the foreign court has (or would) interpret the law

  3. the burden of proving the foreign law rests on the party seeking to establish that law

  4. the task of expert evidence is to interpret its legal effect, in order to convey to the court the meaning and effect which a foreign court would attribute to it if it applied correctly the law of that country to the questions under investigation by the English court

  5. the degree to which the English court can put its own construction on the foreign law arises out of and is measured by its right to criticise the oral or written evidence of the expert witness

  6. if there is a clear decision of the highest foreign court on the issue of foreign law other evidence will carry little weight against it

  7. in determining the question of foreign law the court is entitled (and may be bound) to look at the source material on which the experts express their opinion

  8. the question for the court is not, in every case, what would the relevant 'Supreme Court' decide if the matter were before it

  9. where the foreign law is going through a period of change, the English court should decide what conclusion a foreign court would reach on a developing area of law, but the court should not make findings that are beyond the present state of the foreign law or anticipate its rational development

The position under Russian law

The judge considered the position under Russian law in paras [34] to [68] of the judgment and heard expert evidence on Russian law from both parties.

Simon J stated that the decision of the Presidium of the Supreme Arbirazh Court in OJSC Kurba v Slavneftestroywas directly on point and represented the law of the Russia Federation on the issue in dispute. It was held inKurba that interest under art 395 was available in principle, but only from the effective date of the writ of execution enforcing the award. Simon J considered that nothing stated explicitly in Resolution 10-P of the Constitutional Court of the Russian Federation undermined the approach in Kurba.

Judgment details

The preliminary issues hearing took place before Simon J in the Commercial Court between 13 and 16 May 2014. Judgment was handed down on 3 July 2014. For more information, please see the full judgment of the court.

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About the author:

Barry specialises in international arbitration and commercial litigation. He trained and practised at Jones Day before joining Pinsent Masons. At LexisNexis, Barry is Head of Arbitration and Head of the Lexis®PSL Dispute Resolution Group.

In practice, Barry’s work included commercial, aviation and technology arbitrations pursuant to international arbitral rules, involving UK and international clients. He also has a background in general commercial, civil fraud and IT litigation, including experience before the High Court. While in private practice, Barry worked with a broad range of clients from the private and public sectors.

At LexisNexis, when not focused on the strategic development and operational requirements of the Dispute Resolution Group, Barry’s content work focuses on the law and practice of international commercial arbitration and investment treaty arbitration. In addition to his work for Lexis®PSL, Barry contributes to the LexisNexis Dispute Resolution Blog and New Law Journal on litigation and arbitration matters