Recently the Bulgarian Supreme Court of Cassation has rendered an important judgement[i] on the issue regarding the res judicata effect of an arbitral award.

In short, the Supreme Court of Cassation confirmed that the res judicata effect of the arbitral award rendered by a tribunal acting under the rules of ICC International Court of Arbitration is the same as the res judicata effect of a court decision issued by a state court. The award is binding only on the parties involved in the proceedings and only with regard to the subject matter of the claim at issue.

Background of the dispute and the relations between the parties

1. Energy Financial Group AD (EFG) filed a claim before Bulgarian Sofia City Court against NEK EAD (NEK) for the total amount of EUR 2 mln. EFG claimed that it acquired the receivables under an assignment agreement. The total amount of the assigned receivables was 18 million euros. The receivables arose from a consultancy contract in connection with the Nuclear Power Plant “Belene project” (Belene).

2. The consultancy contract was concluded between NEK and Worley Group (a company registered in the United Kingdom). With a subsequent novation agreement, the contractor was replaced by its Bulgarian subsidiary Worley Nuclear Services EAD (Worley Nuclear). The novation agreement stated that all rights and obligations under the consultancy contract are transferred to the subsidiary.

3. The court of first instance held that the applicable version of the Bulgarian Public Procurement Act prohibited amendment of a public procurement contract by the parties. Therefore, the court found that the replacement of the contractor was in violation of the Bulgarian Public Procurement Act and thus the novation agreement was null and void. The court held that Worley Nuclear and the claimant (EFG) had not acquired any rights under the consultancy contract. Hence, the court dismissed the claims.

4. The appellate court agreed with the conclusions of the first instance. However, during the appellate proceedings an ICC arbitral tribunal ordered NEK to pay Worley Nuclear remuneration under the consultancy contract. The seat of arbitration was Bulgaria. The tribunal held that the novation agreement to the consultancy contract (which substituted the original contractor with its subsidiary) was not in violation of the Bulgarian Public Procurement Act. However, the appellate court held that the arbitral award was not binding on the Bulgarian court, as it was not recognized and admitted to enforcement on the territory of the Republic of Bulgaria.

The judgement of the Supreme Court of Cassation

5. The Supreme Court of Cassation agreed to hear the appeal on the issue whether the New York Convention applies to awards rendered by tribunals seated in Bulgaria.

The Supreme Court of Cassation found that the applicable rules regarding the enforcement of the award where the arbitration is seated in Bulgaria are those of the Bulgarian International Commercial Arbitration Act (ICAA), but not the New York Convention.

In view of the above, the Supreme Court of Cassation ruled that the appellate court had incorrectly held that the arbitral award was not binding on the Bulgarian court. The New York Convention was not applicable to the award at issue, as the award was a domestic arbitration award by nature. According to the ICAA, the arbitral award enters into force and becomes binding and enforceable upon its service to the parties. The arbitral award was enforceable and no further court procedures were necessary.

The Supreme Court of Cassation ultimately found that the arbitral award does not have res judicata effect on EFG, as the latter was not a party to the arbitration proceedings. Furthermore, the subject matter of both cases (the one resolved in the award and the one pending before the Supreme Court) was different. Different claims have been filed before the ICC tribunal and the Sofia City Court, regarding different receivables, arising from different services. Based on the above, the Supreme Court found (though on different grounds) that the appellate court’s conclusion that the arbitral award was not binding on the Bulgarian court due to lack of objective and subjective identity between the subject matter of the arbitration.

In view of the above, the Supreme Court of Cassation upheld the decision of the appellate court.

Conclusion

The Supreme Court of Cassation concluded that if the parties have explicitly stated in the arbitration clause that the place of arbitration is in Bulgaria, even though the arbitral award has been rendered by an arbitral tribunal under the rules of a foreign arbitral institution (such as the ICC International Court of Arbitration) – the applicable rules regarding the enforcement of the award are those of the Bulgarian International Commercial Arbitration Act (ICAA), but not the New York Convention. Thus, the arbitral award would be enforceable and no further court procedures would be necessary.

The Supreme Court of Cassation also confirmed that the res judicata effect of the arbitral award rendered by a tribunal acting under the rules of ICC International Court of Arbitration is the same as the res judicata effect of a court decision issued by a state court. The award is binding only on the parties involved in the proceedings and only with regard to the subject matter of the claim at issue. Subsequently, the Supreme Court of Cassation issued a decision on another case with identical factual background and between the same parties[ii]. The Supreme Court of Cassation adopted the same position on the issue of the res judicata effect of an arbitral award.

Author: Alexander Georgiev

[i] Judgement № 60065 dated 01.07.2021 on case № 2883/2019 of the Supreme Court of Cassation. The decision is available in Bulgarian on the following link: http://www.vks.bg/pregled-akt?type=ot-delo&id=5870FDF7C879FA80C2258705002E0CB4

[ii] Judgement № 60081 dated 26.07.2021 on case № 95/2020 of the Supreme Court of Cassation. The decision is available in Bulgarian on the following link: http://www.vks.bg/pregled-akt?type=ot-delo&id=02318B85BD6ABD3DC225871E00365ADB