In 2020, Novosibirskkhleboprodukt and the German company Thywissen GmbH signed a contract for the supply of Russian-produced flaxseed to Ghent, Belgium. The contract provided for the parties' liability for breach of obligations in the form of compensation for direct losses excluding profits, but subject to reasonable debt collection costs. UK law applied to the provisions of the contract. The contract also contained an arbitration clause to resolve all disputes between the parties related to the interpretation and fulfilment of the contract in English FOSFA arbitration.
Due to a drought in the Novosibirsk region in 2020, Novosibirskkhleboproduct failed to fulfil the terms of the supply contract, so the German company, not agreeing to the postponement of delivery dates, initiated arbitration. The losses were calculated as the difference between the contract price and the market value of flaxseeds at the time of the breach, at which the company could have bought similar goods.
The first arbitral tribunal, which was formed in April 2021, was dissolved due to irregularities in the appointment of the first and second arbitrators. Thywissen GmbH then proposed the first arbitrator and asked FOSFA to appoint an arbitrator on behalf of Novosibirskkhleboproduct, which did not propose a candidate. In December 2021, FOSFA appointed a second arbitrator on behalf of Novosibirskkhleboproduct, a Ukrainian national. In November 2022 the applicant's claims were satisfied. The Russian company was charged not only USD 600,000 in damages, but also interest for the period from December 17, 2020 to the date of actual execution at the rate of 4% with capitalization and, in addition, was obliged to pay the representation expenses of Thywissen GmbH and the FOSFA fee for the appointment of the arbitrator.
The Russian company did not comply with the arbitration award and Thywissen GmbH applied to the Arbitrage Court of the Novosibirsk Region to recognize the English arbitration award and enforce it in Russia. The first instance and then the cassation court ruled that enforcement does not contravene the public policy of the Russian Federation - FOSFA started considering the case back in April 2021 and reasonably recovered damages, which by their nature are not punitive in nature, but are directly established for compensation both by English law and by Article 15 and 393.1 of the Civil Code of the Russian Federation and therefore the courts considered that their recovery cannot violate the public policy of the Russian Federation.
"Novosibirskkhleboproduct" disagreed with the courts' decisions and appealed to the Supreme Court of the Russian Federation. In the complaint, it stated that the decision to collect losses from it was made in November 2022, when “unfriendly” countries were already adopting new sanctions against Russia on a daily basis. Because of the sanctions, the company was unable to hire local representatives and participate in the FOSFA meeting in London, and the application of sanctions in itself prevented the Russian side from access to justice.
The Supreme Court of Russia pointed out that the fundamental principle of public policy of the Russian Federation is the objectivity and impartiality of the court. The imposition of anti-Russian sanctions for political reasons raises doubts as to whether the dispute will be heard in a foreign jurisdiction in compliance with fair trial guarantees, in particular those relating to the impartiality of the court. At the same time, FOSFA appointed citizens of Ukraine, the UK and Denmark as arbitrators, although these countries are recognized as unfriendly in Russia. "The lack of impartiality and objectivity in the consideration of the present case in the FOSFA arbitration by such a composition of judges is presumed until there is no data indicating the contrary." The Supreme Court thus introduced a presumption of partiality and shifted the burden of proving impartiality to the foreign person.
In addition, the Supreme Court of Russia noted that Thywissen GmbH had not proved that it had entered into a substitute transaction, had incurred any losses and had taken reasonable measures to reduce their possible amount. The courts also failed to assess the arguments of Novosibirskkhleboproduct that its right to defence had been violated: the firm was not explained the procedure for appealing the FOSFA decision, and because of the sanctions it was unable to obtain legal assistance in London. The courts also ignored the introduction of an emergency regime in the Novosibirsk region in 2020 due to climate problems, and the fact that the execution of the decision would harm the financial stability of the company. Taking into account these significant violations, the Supreme Court overturned the 1st instance ruling and the ruling of the court of cassation instance and sent the case for a new trial in the first instance.
Due to a drought in the Novosibirsk region in 2020, Novosibirskkhleboproduct failed to fulfil the terms of the supply contract, so the German company, not agreeing to the postponement of delivery dates, initiated arbitration. The losses were calculated as the difference between the contract price and the market value of flaxseeds at the time of the breach, at which the company could have bought similar goods.
The first arbitral tribunal, which was formed in April 2021, was dissolved due to irregularities in the appointment of the first and second arbitrators. Thywissen GmbH then proposed the first arbitrator and asked FOSFA to appoint an arbitrator on behalf of Novosibirskkhleboproduct, which did not propose a candidate. In December 2021, FOSFA appointed a second arbitrator on behalf of Novosibirskkhleboproduct, a Ukrainian national. In November 2022 the applicant's claims were satisfied. The Russian company was charged not only USD 600,000 in damages, but also interest for the period from December 17, 2020 to the date of actual execution at the rate of 4% with capitalization and, in addition, was obliged to pay the representation expenses of Thywissen GmbH and the FOSFA fee for the appointment of the arbitrator.
The Russian company did not comply with the arbitration award and Thywissen GmbH applied to the Arbitrage Court of the Novosibirsk Region to recognize the English arbitration award and enforce it in Russia. The first instance and then the cassation court ruled that enforcement does not contravene the public policy of the Russian Federation - FOSFA started considering the case back in April 2021 and reasonably recovered damages, which by their nature are not punitive in nature, but are directly established for compensation both by English law and by Article 15 and 393.1 of the Civil Code of the Russian Federation and therefore the courts considered that their recovery cannot violate the public policy of the Russian Federation.
"Novosibirskkhleboproduct" disagreed with the courts' decisions and appealed to the Supreme Court of the Russian Federation. In the complaint, it stated that the decision to collect losses from it was made in November 2022, when “unfriendly” countries were already adopting new sanctions against Russia on a daily basis. Because of the sanctions, the company was unable to hire local representatives and participate in the FOSFA meeting in London, and the application of sanctions in itself prevented the Russian side from access to justice.
The Supreme Court of Russia pointed out that the fundamental principle of public policy of the Russian Federation is the objectivity and impartiality of the court. The imposition of anti-Russian sanctions for political reasons raises doubts as to whether the dispute will be heard in a foreign jurisdiction in compliance with fair trial guarantees, in particular those relating to the impartiality of the court. At the same time, FOSFA appointed citizens of Ukraine, the UK and Denmark as arbitrators, although these countries are recognized as unfriendly in Russia. "The lack of impartiality and objectivity in the consideration of the present case in the FOSFA arbitration by such a composition of judges is presumed until there is no data indicating the contrary." The Supreme Court thus introduced a presumption of partiality and shifted the burden of proving impartiality to the foreign person.
In addition, the Supreme Court of Russia noted that Thywissen GmbH had not proved that it had entered into a substitute transaction, had incurred any losses and had taken reasonable measures to reduce their possible amount. The courts also failed to assess the arguments of Novosibirskkhleboproduct that its right to defence had been violated: the firm was not explained the procedure for appealing the FOSFA decision, and because of the sanctions it was unable to obtain legal assistance in London. The courts also ignored the introduction of an emergency regime in the Novosibirsk region in 2020 due to climate problems, and the fact that the execution of the decision would harm the financial stability of the company. Taking into account these significant violations, the Supreme Court overturned the 1st instance ruling and the ruling of the court of cassation instance and sent the case for a new trial in the first instance.