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Enforcement of award at risk if punitive damages disproportionate


In April 2013, the Supreme Commercial (Arbitrazh) Court of Russia ruled that any punitive damages claimed for breach of contract must be proportionate to the value of the contract (or part thereof) or else an application for enforcement of an arbitral award ordering the payment of such punitive damages will be rejected. Mikhail Samoylov, Senior Associate at KIAP Attorneys at Law, discusses the court’s ruling and considers whether the Russian courts may take a similar approach to the enforcement of international arbitration awards.

Background

Federal Grid Company JSC and FNK Engineering LLC entered into a contract to develop a project in relation to high-voltage transmission lines. The contract was dated 22 October 2010 and had a final completion date of 30 September 2013 (the ‘Contract’).

The Russian Civil Code classifies contracts of construction and development as either divisible or indivisible. Divisible contracts divide the entire performance of the contract into stages, with each stage controlled and paid for independently. The Contract, in this case, was divisible and completion was determined in accordance with a series of milestones.

The parties agreed that if FNK Engineering LLC delayed performance against any of the milestones it would be liable to pay, as punitive damages, 0.1% of the total value of the contract, per day until full performance of the relevant milestone was achieved. Under Russian law, punitive damages are an enforceable legal remedy that parties are free to include in contracts.

The Contract also provided that any disputes arising out of it should be resolved by the Arbitration Court of the Russian Union of Industrialists and Entrepreneurs.

In breach of the Contract, completion of the first project milestone by FNK Engineering LLC was delayed by 59 days. As the result of this breach, Federal Grid Company JSC referred the dispute to arbitration. Federal Grid Company JSC sought to recover of RUB 2.7 million (approximately £54,000) of punitive damages for the delay. The total value of the Contract was approximately RUB 47 million (approximately £94,000) and the total value of the first stage of the project was just over RUB 2.4 million (approximately £48,000).

The tribunal’s award and attempted enforcement

The arbitral tribunal rendered an award in favour of Federal Grid Company JSC, including an award of punitive damages. However, FNK Engineering LLC failed to satisfy the arbitral award and Federal Grid Company JSC applied to the Arbitrazh Court of Moscow for a writ of execution for the enforcement of the arbitral award.

Both the Arbitrazh Court of Moscow and the Federal Arbitrazh Court of Moscow Region rejected the application for enforcement of the arbitral award.

On 24 April 2013, the Supreme Commercial (Arbitrazh) Court of Russia upheld the decisions of the lower courts.

In rejecting the application for enforcement, all courts referred to s 239(3)(2)of the Commercial Procedure Code of the Russian Federation:

‘The commercial court refuses to issue a writ of execution for the enforcement of an arbitration tribunal award, if it establishes that: the arbitration tribunal award violates the fundamental principles of Russian law.’

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