Enforcement of Arbitration Awards in Russia: Public Policy on Excessive Damages

Sevmash Plant in Russia

In 2011, within the period of two months, the Supreme Commercial (Arbitrazh) Court of the Russian Federation rendered two important decisions concerning the enforcement of international arbitral awards.  In both cases enforcement applications were challenged on the ground, inter alia, of excessive damages as contrary to the public policy of the Russian Federation.

Pursuant to paragraph 29 of the Information Letter of the Presidium of the Supreme Commercial Court of the Russian Federation dated 22 December 2005 № 96 “Review of the practice of the commercial courts in relation to recognition and enforcement of decisions of foreign courts, appeal of arbitration awards”, public policy includes the principle of proportionality of the awarded damages to the prejudice suffered, having regard to fault.

However, a Russian court examining the enforcement issue shall not review the merits of the arbitral award of which enforcement is sought, nor shall the court review the facts as determined by the arbitral tribunal or the application of law.


In Odfjell SE v OJSC Sevmash (case no. A05-10560/2010), the parties entered into three shipbuilding contracts concerning the design and construction of 12 tankers.

As a result of a delay in the performance of the first contract by Sevmash, Odfjell rescinded all three contracts.  Sevmash then returned to Odfjell its advance payment plus interest incurred thereon.

In the award dated 30 December 2009, rendered by the arbitral tribunal under the rules of the Arbitration Institute of the Stockholm Chamber of Commerce, Odfjell was awarded damages, which amounted to the difference between the contractual price and the price of the acquisition of substitute vessels.

In the course of the enforcement proceedings brought by Odfjell in Russia, Sevmash raised, inter alia, the principle of proportionality of damages and argued that the return of advance payment with interest was sufficient compensation.

The court of first instance held (confirmed by the appellate court and the Supreme Commercial Court) that the objections raised by Sevmash amounted to a demand of review of the arbitral award on the merits and review of the facts, which is contrary to the applicable Russian procedural laws.

The courts also held that Sevmash did not satisfy the burden of proof and failed to show the lack of proportionality between the awarded damages and prejudice suffered as a result of the breach of the contract.

Consequently, Sevmash was ordered to pay the damages pursuant to the arbitral award.

In Oil & Natural Gas Corporation v OJSC Amur (case no. A73-1288/2009), the parties entered into a contract concerning the building of a seismic survey vessel for the total contract price of 89.9 million USD.

As a result of Amur’s demands for an increase of the contract price due to vessel design changes, ONGC rescinded the contract and retained the full amount of the bank guarantee of 8.99 million USD paid by Amur.

In the award dated 11 April 2009, rendered by an arbitral tribunal under to the Indian Arbitration and Conciliation Act, ONGC was awarded damages in excess of 57 million USD, which amounted to the actual prejudice suffered by ONGC, including, inter alia, the costs of chartering vessels from third parties for a period of nine months up to the date of the rescission of the contract with Amur.

In the course of the enforcement proceedings brought by ONGC in Russia, Amur raised, inter alia, the objection of public policy and more particularly the violation of the principle of proportionality of damages.

The court of first instance upheld (confirmed by the appellate court and the Supreme Commercial Court) the objections raised by Amur.  The courts reasoned that the penalties awarded to ONGC representing over 63% of the total contract price were excessive.

Furthermore, the courts held that the amount of the bank guarantee (being 10% of the contract price) retained by ONGC was sufficient compensation.

Therefore, the courts denied recognition and enforcement of the arbitration award.


It follows from the above decisions that the Russian courts examined whether the awarded damages were contrary to the contractual provisions – purportedly to decide on the proportionality of the awarded damages to the prejudice suffered.

In the ONGC case, the court decided that the arbitral award failed to take into consideration the specific contractual provisions on damages, i.e. that (i) the contracts excluded consequential damages and that (ii) penalties were fixed at 3% of the contract price for each month of delay in performance, but would in no event be greater than 10% of the total contract price.

In the Odfjell case, by contrast, the court decided that the contracts did not provide for any specific method of damages calculation or for any liquidated damages or penalties.

Hence, the Russian courts reasoned that the arbitrators disregarded the relevant contractual provisions concerning damages in the ONGC case.  Consequently, the awarded damages were disproportionate and contrary to public policy.

Apart from the fact that the interpretation of the contractual terms by the Russian courts in the ONGC case may be wrong, most importantly, the approach of the Russian courts seems to border on a review of the merits of arbitral awards.

Ekaterina Butler

LALIVE, Geneva


About the Author:

Ekaterina Butler is attorney with a Swiss law firm LALIVE. Her main areas of practice are international arbitration, international taxation and estate planning. Ekaterina holds a degree in law and economics from the University of London, SOAS, and a degree in linguistics from the University of St. Petersburg, Russia. See full profile.

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