It is well known that the New York Convention is widely recognized as a foundational instrument of international arbitration. In addition to this Convention, there are also international bilateral agreements in which Paragraph 1 of Article VII of the New York Convention specifically refers to and determines the relationship between its provisions and other agreements.
One interesting and noteworthy bilateral agreement is the Trade and Payments Agreement concluded between the USSR and Sweden in Moscow on 7 September 1940 (the “Agreement”). Although this agreement was entered into during the Soviet time, it still continues to operate in Russia, particularly with regard to Article 14 of the Agreement with the Annex “Agreement on Arbitration Courts” and Article 15 dealing with arbitral awards’ enforcement. (The articles are quite lengthy; therefore, their texts were omitted from the note).
This Agreement was signed 70 years ago during the Soviet era, yet after the collapse of the USSR, Sweden and new Russia decided to retain it. On 29 September 1993, a Protocol was signed in Stockholm on the termination of application with regard to the relations between the two countries concerning certain previous agreements. However, according to Article 3 of the Protocol, that termination did not affect the legal force of Articles 14 and Article 15 of the 1940 Agreement. The Protocol was ratified in Russia by Federal Law № 18-FZ on 17 February 1995 and became effective on 1 May 1995.
I would like to note five reasons why, in my opinion, the provisions of the 1940 Agreement require particular consideration.
Firstly, Stockholm is probably the city where the majority of arbitration cases to which Russia is a party to are considered, and the awards are subsequently enforced in Russia. This situation is inherited from the Soviet period.
Secondly, the provisions concerning recognition and/or enforcement of arbitral awards contained in the 1940 Agreement differ from the New York Convention’s provisions as they are less generous to the prevailing party. Accordingly, it should make quite a difference for such a party, as well as for debtors under such awards, whether the provisions regarding arbitration and enforcement of arbitral awards in the 1940 Agreement are applicable or not. This issue is also very important for Russian courts, especially for the High Arbitrazh Court which is responsible for shaping a uniform judicial practice.
Thirdly, the Agreement concerns provisions which have prevailing force over domestic Russian regulations. Their correct application by Russian courts do not merely constitute controversial issues which are imperative and sensitive for society, economy and state but also form a sphere which has not been completely mastered in Russia so far, and which involves a multitude of issues and problems.
Fourthly, the provisions of the Agreement are unique: there are no other ones of a like nature in any other international agreement to which Russia is a party to.
Finally, the analysis of such provisions results in rather curious and even somewhat unexpected legal conclusions.
There are two important points in the effective provisions of the 1940 Agreement: (1) the special procedure of constituting the arbitral tribunal according to the provisions of the Annex and; (2) the two grounds for refusal to recognize and enforce an arbitral award which differ from the grounds provided for in the New York Convention and the Russian Law “On International Commercial Arbitration”. The first ground for refusal to enforce an arbitral award under the Agreement is when an application to set aside an arbitral award is being considered at the seat of arbitration. This is sufficient ground to refuse recognition and enforcement of the award in Russia under Article 15 of the Agreement. A similar ground for refusal can be the fact that the time for challenging the arbitral award in its seat has not yet expired.
The second ground for refusal is “the award being contrary to the state legal principles of the country where arbitral award enforcement is requested”. The concept of “state-legal principles” is used in Article 15 along with the concept of “public order”, and not as a synonym to the latter. The concept of “state-legal principles” is distinct from the traditional public policy exception. The concept of “state legal principles of Russia” is similar to the “constitutional legal principles of Russia”, which is broader than the concept of “public order of Russia”, and would aggravate problems of enforcement of arbitral awards.
In 1940 nobody in the USSR thought there was a difference between the concepts of “public order” and “state legal principles”, except perhaps that the former was considered more acceptable for foreign states and the latter as more suitable for the USSR. From the viewpoint of modern Russian domestic law, the recognition of the two concepts as “separate” was confirmed in 1993. It is obvious that the possibility of using the concept as is in legal practice creates the risk that fewer awards will be enforced in Russia.
Despite highlighting the relevant provisions of the Agreement and their legal force as confirmed by the 1993 Protocol, it is high time for such provisions to be abolished. It is an outdated Agreement that most lawyers in Russia and Sweden are not aware of, and if they were aware of it, it would almost certainly lead to a movement to abolish the articles in effect.
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I felt eager to contribute several points relevant to the consideration of the situation, outlined above. They basically concern four spheres: the legislative history and drafting of the Bilateral Agreement; the validity period of the Agreement; the specificity of conflict of treaties rules, that might be applicable should the conflict indeed arise and the relevance of the seat of arbitration (Sweden) involving Russian parties to the applicability of the Agreement.
To start with, I tend to agree, that the provisions drafted some 70 years ago might not be completely compatible with the current realities of international commercial arbitration. This being said, at the time when the Sweden-USSR Agreement was concluded (1940), there was nothing strange therewith:
A) It was a product of the Pre- World War II period of the Soviet “era” of development in arbitration, characterized, overall, by the bilateral agreements, containing provisions, related to international arbitration;
B) As, at the relevant point of time, Soviet law did not contain any reference to international commercial arbitration mechanism, for the purposes of creation of functionable dispute resolution devise it was worth being detailed in regard to the description of procedural momenta and subsequent recognition and enforcement system;
C) Referring, in particular, to the two grounds for the denial of recognition and enforcement referenced above by Professor Muranov, those too were very compatible with then current arbitration reality.
The “finality” ground (Art. 15 (2)(b)) was drafted in reference to the Swedish Arbitration Law then in effect (Sec. 7(1)(5) of the 1929 Act Concerning Foreign Arbitration Agreements and Awards). This being taken into consideration, in its effect the language of the provision was not per se inconsistent with Art. V(1)(e) of the New York Convention, referring to the award “binding on the parties”, without defining the margins of such an effect and, thus, arguably, letting this task to the relevant national laws.
The “public policy-type” ground (Art. 15(2)(g) of the Agreement), in its turn, was put forth in a language, strikingly similar to that of the Sec. 7(2)(2) of the same Swedish Act of 1929. Moreover, the reference to the principles of law of the enforcing state was overall typical not only for the bilateral agreements concluded within the Pre- World War II period by the USSR, but also, for instance, for the Geneva Convention of 1927 (Art. 1(2)(e)).
In 1976 the arbitration-related provisions of the 1940 Agreement were indeed extended in their application to the contracts, concluded between the Swedish and Soviet parties under the terms of the newly concluded Long-Term Bilateral Trade Agreement of 1976 (see also Exchange of Notes dated April 7, 1976). The extension was overall not deprived of sense, inter alia as the national laws related to arbitration in each of the states had not yet changed. As to the accession of both states to the New York Convention, the wish to still keep the bilateral treaty might find different explanations, ranging from the idea, that the provisions at stake were overall compatible with the Convention, to the specific reading of the “compatibility” clause of Art. VII(1) of the Convention by the USSR (essentially, as a clause allowing the application of practically “any” other treaty concluded by the New York Convention member state in the recognition and enforcement proceedings instead of the Convention).
According to 1976 “extension”, however, the order of the dispute resolution prescribed was applicable only to the contracts, concluded within the framework of the long-term treaty of 1976. The 1976 Long-Term Agreement was terminated by the 1993 Protocol, subsequently ratified by the Russian Federation in 1995 together with the new Russian – Swedish Bilateral Trade (this time – essentially – of a RTA- type)Agreement. Indeed, the provisions concerned with the arbitration were left in force, yet, arguably, only being applicable to the disputes, arising out of the contracts concluded once the 1976 Long –Term Agreement was in effect (e.g. for Russian Federation – from February 1995, when the 1993 Protocol was ratified). This, at least, simplifies the potential of conflict of treaties applicable in recognition and enforcement issue, raised by Professor Muranov, to the extent that such a conflict will only arise if the dispute arising out of the contract, concluded between the Swedish and Russian party before February 1995 would be at stake.
To shortly dwell on the issue of conflict between the provisions of New York Convention and other treaties, the Russian Law overall reflects the reliance on the Vienna Convention on the Law of Treaties (in particular – Art. 30 thereof) in this regard. Yet, certain peculiarities have still to be noted. First, a specific reading of the “compatibility clause” of the Art. VII(1) of the New York Convention, as the provision not precluding the potential application of any other treaty governing recognition and enforcement (which, arguably, allows the court to rely on such a treaty (more favorable or not), even in absence of manifestation of interest by the party seeking recognition and enforcement, which seems to be necessary for the application of the “more favorable treatment” provision of the same article). This reading, developed by the USSR lawyers, seems to be well-spread to the CIS realities, as the cases, where the bilateral treaties were relied on instead of New York Convention in proceedings involving the parties to the latter are available at least in Ukrainian, Kazakh and Russian dockets (concerning USSR- Romania Mutual Legal Assistance Agreement of 1958, Kiev Agreement of 1992, Minsk CIS Mutual Legal Assistance in Civil Matters Agreement of 1993). Further, according to Sec. 3(2) of the Decree of Higher Arbitrazh Court of Russian Federation on Application of the International Treaties concluded by Russian Federation to the issues of Arbitrazh Procedure (1999), the bilateral treaty is considered to be lex specialis once contrasted with the multilateral treaty, governing the same subject matter. The above arguably leaves one at least with the anticipation of the potential of application of the provisions of the USSR- Swedish Agreement. Needless to say, that should such possibility become a reality, a “Pandora Box” will be opened, allowing the applicability of the other bilateral treaties (in particular, a number of mutual legal assistance treaties), dealing with the recognition and enforcement of foreign arbitral awards, each – in a sui generis, and, arguably – more restrictive, that that of the New York Convention – manner.
As a brief final note, for the purposes of the above discussion, it does not seem particularly relevant, that a number of the disputes, involving Russian parties, are arbitrated in Sweden, as the Bilateral treaty, even if applicable, would only concern the disputes between the Swedish and Russian parties, which are not particularly frequent.
The comments of Ms. Guglya are very interesting and helpful.
In my opinion the possibility that application of the provisions of the USSR-Swedish Agreement by Russian courts may become a reality should not be underestimated.
Besides, I would like to draw attention to 2 aspects:
1) it is not quite correct that the Bilateral treaty, even if applicable, would only concern the disputes between the Swedish and Russian parties, which are not particularly frequent. According to the provisions of the Bilateral treaty on enforcement that were confirmed in 1993, they are applicable to all awards made in Sweden and enforced in Russia, i.e. in disputes not only not only between the Swedish and Russian parties. It is very important should we fail to rely on the first interpretation discussed below;
2) indeed, it is possible to interpret the provisions of the Bilateral treaty that were confirmed in 1993 as only being applicable to the disputes, arising out of the contracts concluded once the 1976 Long–Term Agreement was in effect. However, this interpretation may be seriously argued against due to absence of direct provision in the Protocol of 1993 about such limited applicability, due to very general language of the Protocol of 1993 and to specific language of article 15 of the Bilateral treaty. Indeed, a special research may be written on this issue. The first interpretation is the most convenient and the easiest but it is exposed to rather strong counter-arguments.
Let’s hope that this issue will be resolved in Russia in a way favorable for arbitration.
It is rather remarkable, that the post giving a tribute to the Soviet past has brought up the discussion with which now I will still proceed and will share some of my personal views on the issues, as revisited by Professor Muranov, to whom I am extremely grateful for the feedback. I shall perfectly agree, that the interpretation I would elaborate on more below, is just one of the ways of seeing the situation, with both “pros” and “contras”, which might be well raised and advocated. Yet, the “truth” (if exists at all) could only be found in discussion.
There is no doubt that the Russian courts concerned may give a way to the application of the provisions of 1940 Agreement (over those of the New York Convention). The issue, at least for the purposes of this [academic] discussion, is should they reasonably (or, alternatively, following the pro-arbitration stance) do so. Here, it seems, my answer overall coincides with that, given by Professor Muranov, in that they should rather not. What we seemingly disagree on, is the probability, that the situation of the conflict of treaties, involving both – the pertinent dispute resolution provisions of the 1940 USSR – Sweden Agreement (in the form they have migrated to with the time) and the provisions of the New York Convention would arise. I suggest that the likelihood of its coming to reality is low.
Conceding, that the issue of continuing effect of the dispute resolution provisions concerned after the ratification of the 1993 protocol by Russian Federation in 1995 is debatable (and my position thereon is quite comprehensively laid down in the comment above), I will rather concentrate on the scope of application of the USSR-Swedish Treaty. Indeed, should the treaty apply to all awards rendered in Sweden and further enforced in Russia (and, hypothetically vice-versa), independently of who the arbitrating parties are by their nationalities, it might constitute a threat, should it be found still effective. However, I still suggest, that this is not the case and the dispute resolution provisions concerned were only addressed to the nationals of the Contracting Parties – e.g. Soviet (later – Russian) and Swedish parties.
To support the above suggestion, I would advance the following:
First, at no instance located by myself in course of the textual analysis, either of the relevant texts refers to the “place of arbitration” as a connecting factor, instead, however, emphasizing the application of the dispute resolution provisions to the disputes arising out of the “agreements and operations” carried out by the parties “[legally] belonging” to each of the contracting states and, even more so, anticipating the possibility of the arbitration in the third country (by linking the validity of the arbitration agreement to the “law of the country where the arbitration has taken (or would take) place”. Thus, the text of the provisions at stake, at least in my reading, does not really support the idea of the application of the recognition and enforcement regime of the 1940 treaty to all awards rendered in Russian Federation/ Sweden respectively.
Secondly, the interpretation, that might be given to the only arguably unclear provision, that could possibly be read as extending the scope of the 1940 Agreement to the awards rendered not only in the disputes between the nationals of Sweden and USSR – Art.15(3) of the 1940 Agreement – does not support the idea of such a “stretch”.
Art. 15(3) and refers to the recognition and enforcement of arbitral awards
“in disputes arising out of the agreements, that are or could be concluded outside of the 1940 Agreement, if the awards would be rendered on the basis of the arbitration agreement or arbitration clause, valid under the law of the country, where the arbitration would take place”.
Presuming, indeed, that the text might be somewhat unclear, its interpretation should be carried out in accordance with the rules of the Vienna Convention on the Law of Treaties (taking those as relevant rules of customary international law, as the Convention itself, by virtue of its Art. 4, is per se only applicable to “treaties which are concluded by States after the entry into force of the present Convention with regard to such States”, which is not the case).
According to the first and most basic rule of interpretation, embodied in the Art. 31(1) of the Vienna Convention,
“A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”.
Guided by the above and reading Art. 15(3) together with the Art. 15(1) of the Agreement (the provision, forming a part of the same “complex”), the conclusion could be made, that the recognition and enforcement undertaking of Art. 15 (3) also refers to the awards, rendered in disputes arising out of the agreements carried out by the “entities, organizations, firms or individuals” of the parties concerned, e.g. Sweden and USSR.
Such reading is further supported by the very context, in which the provision is placed – the agreement, regulating bilateral cooperation between the parties and aimed at fostering this exact phenomenon. The extended reading of the provision, covering the enforcement of all awards rendered in the respective territories of the contracting parties would not only look unreasonable in the context, but also hardly enforceable.
Moreover, the arguable lack of clarity in Art. 15(3) of the 1940 Agreement is further clarified in the Section 2 of the 1976 Diplomatic note, which, referring to the said provision, expressly states, that, inter alia
“[…] both Governments shall recognize valid and grant recognition and enforcement to the arbitral awards in disputes, arising out of the agreements, to be concluded between Soviet foreign trade organizations and Swedish organizations and firms at the time of the effect of the Long-Term Trade Cooperation Agreement, if the arbitral awards would be rendered […] according to the other arbitration clause or arbitration agreement, valid under the law of the country where the arbitration is to take place”,
this way filling the alleged phraseological gap in the Art. 15(3) itself.
Thirdly, the framework, created by the 1940 Agreement is not favoring the territoriality principle in furthering the character of enforcement prospects of the award per se. For instance, as could be read in the Section 10 of the Agreement on Arbitration, incorporated into the 1940 Agreement, and thus – making a part of “context” of the latter, the only determinative factor for the place of arbitration (in the case of the Agreement – USSR or Sweden) is the nationality of the claimant.
Above being said, I am optimistic to hope, that the inter-treaty collision, elaborated on in the above exchange, would rather never arise, than be subject to the resolution, and, even in the worst case, would meet careful scrutiny influenced by the pro-arbitration stance, which, in views of the authors of the other posts in this same Blog, seems to gain its “popularity” at least among some of the Russian judges.
With regards to the discussed Trade and Payments Agreement concluded between the USSR and Sweden in Moscow on 7 September 1940, and in particular the clauses dealing with arbitration, I would like to ask whether Russia is the only former Soviet Republic that decided to retain it, or whether any contributor to / reader of this blog is aware of a similar declaration by any of the other former Soviet Republics? Thank you in advance.