For nearly a decade, the Supreme Arbitrazh Court was at the forefront of the development of various aspects of commercial law in Russia, before it was wound up in August 2014. It remains to be seen whether the commercial division of the newly established Supreme Court will follow suit. In the field of arbitration, the Supreme Arbitrazh Court will be remembered, among other things, for its consistent crusade against so-called 'pocket' arbitral institutions.
From around 2011, the Supreme Arbitrazh Court began to develop the concept of 'objective impartiality' of arbitral institutions in a line of cases. Essentially, it held that arbitral awards issued by tribunals acting under the auspices of arbitral institutions affiliated with a party to the dispute are contrary to Russian public policy.
In November 2014 the Constitutional Court found that an arbitral institution's affiliation with one of the parties to the dispute did not automatically imply partiality on the part of the arbitral tribunal hearing a particular matter. Only proof of the arbitrators' partiality constituted grounds for setting aside or refusing enforcement of arbitral awards. While all of the decisions in question were issued in the context of domestic arbitration, they will be of interest and importance in the context of international arbitration as well.
The concept of 'pocket' arbitral institutions is likely unfamiliar to many readers outside Russia and therefore deserves clarification. At some point it became common in Russia for major corporations with significant networks of subsidiaries across the country to create arbitral institutions to settle disputes (predominantly domestic) involving their subsidiaries and third parties. This was perhaps done to remedy the lack of arbitration services offered for Russian domestic (rather than international) disputes. The corporations had the necessary resources to create the arbitral institutions and to provide them with offices, hearing rooms and IT equipment, as well as the resources to staff the secretariat. While this situation clearly created potential conflicts of interest, for quite some time the criticism fell on deaf ears.
Meanwhile, other local and regional entities and associations were creating their own arbitral institutions. While unable to match the major corporations' offerings on many accounts, these players were supposedly enjoying the possibility of having disputes involving themselves or their affiliates and members to be settled by their own arbitral institutions.
Objective impartiality of arbitral institutions
The Supreme Arbitrazh Court became concerned with the situation and in 2011 and 2012 issued a number of decisions which essentially established the concept of the objective impartiality of arbitral institutions.
In May 2011 the presidium of the Supreme Arbitrazh Court issued a resolution in a case concerning an arbitral award issued by an arbitral institution created by Sberbank in a dispute involving Sberbank's 100% subsidiary.(1) Sberbank had appointed the president of the arbitral institution and his deputies, as well as the approved list of arbitrators. The Supreme Arbitrazh Court concluded that under these circumstances, the arbitral institution was unable to settle impartially the dispute involving Sberbank's subsidiary.
Another case involved an award from an arbitral institution under the auspices of oil company LUKOIL in relation to a claim filed by one of its subsidiaries. According to the rules of this arbitral institution, the parties to the dispute were to choose an arbitrator (and a substitute arbitrator) from the list provided by the secretariat in the notice of acceptance of the request for arbitration. The deputy chairman of the arbitral institution was to serve as the presiding arbitrator, unless the chairman of the arbitral institution appointed another person from the list of arbitrators to serve as presiding arbitrator. The presidium of the Supreme Arbitrazh Court concluded that in these circumstances, the guarantees of objective impartiality were breached.(2)
In another case, OAO Industry Union RosProm created an arbitral institution. A claim was brought in this arbitral institution against RosProm itself. Interestingly, the rules of the arbitral institution provided that the chairman of the arbitral institution was to be appointed by the founder (RosProm, the respondent in the case) and RosProm's general counsel was appointed chairman. Moreover, according to the rules, the arbitral tribunal was to be appointed by the chairman of the arbitral institution with no involvement of the parties to the proceedings. In these circumstances, the presidium of the Supreme Arbitrazh Court concluded that the guarantees of objective impartiality were not complied with.(3)
The essence of the Supreme Arbitrazh Court's reasoning seemed to be as follows. Impartiality has two sides: subjective (whether an arbitrator is subjectively impartial) and objective (whether the necessary guarantees of impartiality have been put in place). The Supreme Arbitrazh Court took the position that guarantees of impartiality are by definition unavailable in situations where the arbitral institution was created by one of the affiliates of a party to a dispute.
However, the Supreme Arbitrazh Court – for better or for worse – went further. Essentially, the practice developed to establish an overall positive prohibition against hearing disputes involving one of the arbitral institution's founders or affiliates. This prohibition was recently used to invalidate the arbitration clause in a contract.(4)
Constitutional Court position
In 2013 the presidium of the Supreme Arbitrazh Court refused to enforce an award rendered in favour of Sberbank by an arbitral tribunal acting under the auspices of the Centre of Arbitral Proceedings – a non-commercial organisation which had three founders, including Sberbank itself. The case concerned Sberbank's claim for enforcement of rights under certain facility agreements and the tribunal issued an award in favour of Sperbank. However, the award was not complied with voluntarily and Sperbank sought enforcement in the state courts. The first-instance and cassation courts granted enforcement, but the presidium of the Supreme Arbitrazh Court concluded that the fact that Sberbank was one of founders of the Centre of Arbitral Proceedings was sufficient to refuse enforcement of the award.
Sberbank challenged the position of the Supreme Arbitrazh Court in the Constitutional Court, which issued its resolution on November 18 2014.(5) The court found that the Supreme Arbitrazh Court had gone too far and actually created a new ground for refusal of enforcement of arbitral awards. The court referred to the practice of the European Court of Human Rights, which also underlined the need for guarantees of objective impartiality. Nevertheless, the court pointed out that courts need to look at the impartiality of the arbitrators (ie, the arbitral tribunal), not the institution itself, but noted that the arbitral institution's corporate links to one of the parties to the dispute can be taken into account. The court concluded that Russian legislation does not provide for refusal of enforcement of the award solely on the basis that it was rendered by the tribunal acting under the auspices of a non-commercial organisation in favour of one of its founders.
Another case where the courts followed the Supreme Arbitrazh Court practice and the relevant companies also went to the Constitutional Court involved an award issued by an arbitral institution acting under the auspices of Gazprom.(6) Interestingly, in this case the award was rendered against one of the subsidiaries of Gazprom – Gazprom Invest Vostok – but the latter failed to honour the award and the claimant sought its enforcement in the state courts. The state courts refused to enforce the award against the Gazprom subsidiary on the basis of the lack of objective impartiality of the arbitral institution. Following Constitutional Court Resolution 30-P, the case was referred to the commercial division of the Supreme Court for cassation review.
During the hearing, as far as it can be seen from the available sources, the claimant relied on the position of the Constitutional Court, whereas the respondent maintained that awards of pocket arbitral institutions should not be enforceable. However, the respondent confirmed that the neither the jurisdiction of the tribunal nor its impartiality was questioned during the proceedings, and that the arbitration clause was included in the agreement with the claimant at the initiative of the respondent (due to the policies of the respondent's parent company). The Supreme Court quashed the lower court decisions and ordered enforcement of the award.(7)
The decisions of the Constitutional Court and Supreme Court may signal a departure from the trend initiated by the Supreme Arbitrazh Court. Many commentators believe that the highest court endorsed the use of pocket arbitral institutions. It seems that the earlier practice – which considered the affiliation between an arbitral institution and a party to the dispute as an absolute and sufficient ground for refusal to enforce the award – seems to be reversed. However, several points should be made in this regard.
First, the Constitutional Court left it open for the courts to take into account the corporate links between the arbitral institution and the party to the dispute. From this perspective, the concept of objective impartiality (of the arbitral tribunal, rather than the institution) seems to remain in effect. However, the standard of proof would now be higher, as it would be insufficient to show that the party (or its affiliate) was involved in creating the arbitral institution. Arguably, the applicant will now have to show that the involvement of such party or its affiliate in the activity of the arbitral institution – particularly the procedure for forming the arbitral tribunal – was such as to cast reasonable doubt over the impartiality of the tribunal.
As exemplified by the earlier court practice, the most clear-cut cases involve arbitral institutions that:
- were formed under the auspices of a corporation closely related to one of the parties to the dispute;
- were funded by such a corporation; and
- were managed by the members of the governing body of the corporation.
Most importantly, such arbitral institutions usually have a short and closed list of arbitrators from which the parties may choose (if at all). These lists are formed by the governing bodies of the arbitral institutions – and thus indirectly by the corporations that founded the arbitral institutions. Moreover, such governing bodies usually have certain appointing authority and the authority to allocate arbitrator fees. On top of this, in many cases the arbitrators on the list are not in private practice, but rather practising as arbitrators full time or (most commonly) in addition to their academic work. Presumably, from a third-party observer's perspective, these circumstances still create justifiable doubts as to the impartiality of the arbitrators, whose relationships with one of the parties are tainted by a range of factors, including to some extent the potential dependency on the party in relation to their appointment and fees (ie, their access to the profession). It seems that such arbitral institutions' ability to administer fairly disputes involving their affiliates remains restricted.
Second, while the short and closed lists of arbitrators raise natural concerns, the possibility for one of the parties to appoint an arbitrator of its choice will not eliminate the risk of a biased arbitral tribunal in all cases. Thus, if the presiding arbitrator is to be appointed by the chairman of the arbitral institution, who in turn was appointed by one of the parties to the dispute, the guarantees of objective impartiality may not be fulfilled anyway. Most likely, a reasonable third-party observer would recognise the risk of one of the parties indirectly having the ability to appoint two arbitrators out of three.
However, it is hoped that the ongoing reform of the arbitration legislation will address these issues.(8) At the end of the day, one of the reasons for the reform was to combat pocket arbitral institutions. The last published draft laws required that the appointment of arbitrators be made by appointment committees – rather than the governing body of the institution – which may provide at least some guarantee of impartiality of the appointed arbitrators. Nonetheless, no matter how good the legislation is at addressing these points, the abuses cannot be definitively eliminated. Therefore, the courts should remain on alert and continue to police the impartiality of arbitrators. From this perspective, it is important that the Constitutional Court confirmed the existence and applicability of the principle of objective impartiality of arbitrators. Without this confirmation, the parties would need to establish positively the subjective impartiality of a particular arbitrator, which in most cases is a mission impossible.
Third, the lesson to learn from the commercial division of the Supreme Court is that the issues arising from a lack of impartiality need to be raised in arbitration. Therefore, as a practical matter, if a party finds itself – for one reason or another – before a pocket arbitral institution, objections as to impartiality should be raised from the outset in the arbitral proceedings. Otherwise, the courts may not allow the party a second bite of the cherry upon learning of the outcome of the case in arbitration.
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