Introduction

A recent decision from the commercial bench of the Supreme Court has reopened the question of whether an agent must be specifically authorised to enter into an arbitration agreement or the general authority to conclude contracts on behalf of the principal is sufficient. It previously seemed to be settled court practice, endorsed by the Supreme Arbitrazh Court, that no special authority is needed. Moreover, this position was reconfirmed in the 2013 amendments to the conflict of laws section of the Civil Code. Article 1217.1(6) of the Civil Code now states that it is presumed that the agent's authority includes the power to choose the method of dispute resolution and the applicable law, unless otherwise follows from the applicable law or nature of the relationships, or otherwise is indicated in the power of attorney. However, the recent ruling makes the position less certain.

Decision

Izhvodokanal v Management Company Expert(1) concerned a domestic award for recovery of certain fees for water supply and sewage services payable by the respondent to the claimant. The respondent failed to comply with the award voluntarily and the claimant applied for enforcement with the arbitrazh (commercial) courts in Izhevsk. The respondent applied to set aside the award, alleging a number of defences, including lack of proper notice and lack of a valid and enforceable arbitration agreement. In relation to the latter, the respondent argued that the agent acting on behalf of Izhvodokanal in concluding the contract in question did not have a specifically designated power to enter into the arbitration agreement.

This argument was accepted by the first-instance(2) and cassation courts,(3) which found that the person that entered into the underlying contract on behalf of the claimant had only a general authority to conclude contracts and had no specific authority to enter into arbitration agreements. Oddly, the courts referred to the provisions on agency in Russian law, which allow ex post ratification of the transaction by the principal, even if the agent was not initially authorised to enter into a contract on the principal's behalf. Nevertheless, the courts considered that there was no ex post ratification in the present case, despite the fact that the claimant actually commenced arbitration relying on the arbitration clause.

Interestingly, to support their reasoning both courts also relied on Article 62(2) of the Arbitrazh Procedural Code. This provision deals with the procedural powers of attorney needed for counsel to act in state court litigation. It lists certain particular procedural powers which need to be specifically granted to counsel in the power of attorney, including the power to refer disputes to arbitration. On this basis, the application for enforcement was dismissed, while the award was set aside.

Izhvodokanal appealed the lower court decisions to the Supreme Court.(4) The Supreme Court judge granted leave to have the case heard by the panel of the commercial bench judges. The Supreme Court agreed with the lower courts' reasoning that power of attorney must specifically grant the power to enter into arbitration agreements. Further, the Supreme Court confirmed the lower courts' interpretation of Article 62(2) of the Arbitrazh Procedural Code as requiring the power of attorney to specify the power to enter into arbitration agreements.

However, the Supreme Court quashed the lower courts' decision on the basis that the setting-aside application (and raising the defence in an enforcement context) was made in an abusive manner. In particular, the court specifically mentioned that no such allegations were raised before commencement of the enforcement proceedings – neither at the time of contracting nor in the course of arbitration. Moreover, apparently the parties discussed this provision in correspondence when the dispute arose; the respondent rejected the claimant's proposal to agree to refer disputes to the state courts instead of arbitration. All this showed that raising these arguments at the enforcement stage amounted to abuse of rights and therefore should not be protected. On this basis, the Supreme Court dismissed the setting-aside application and ordered the enforcement of the award. In doing so, the Supreme Court confirmed its own position and that of the Supreme Arbitrazh Court that all known objections must be raised during the arbitral proceedings, rather than reserved until the enforcement or setting-aside stage.

Comment

The courts' decisions in this matter stand out for a number of reasons. As stated, the case significantly departs from settled case law which suggests that the authority to enter into an arbitration agreement is presumed. From this perspective, the case is a significant step back. Further, the courts were manifestly wrong when applying the procedural law provision on powers of attorney in the context of the agent's authority to enter into an arbitration agreement. It is a pity that this interpretation was endorsed by the Supreme Court. Hopefully, this will remain a standalone deviation from the usual court practice.

Nevertheless, the most immediate implication of this decision is that many existing arbitration clauses may be subject to challenge, because specific authority to conclude arbitration clauses is rarely seen in powers of attorney. For this reason, those contemplating cross-border deals with Russian parties would be well advised to ensure that the specific authority to enter into an arbitration agreement is granted in the relevant powers of attorney.

The cassation court raised an additional interesting point in this matter. The claimant had requested dismissal of the setting-aside application, alleging that the parties had agreed on the finality of the award – which, in accordance with the domestic arbitration legislation, meant that setting-aside remedies were excluded. However, this argument was dismissed. The cassation court reasoned that, since there was no arbitration agreement in the first place (because it was signed by an unauthorised person), there was no agreement on finality by implication.

This approach is interesting in the context of the recently adopted arbitration reform legislation (for further details please see "Russia passes legislation to effect reform of arbitration law"). The new laws, which enter into force on September 1 2016, allow parties to agree on the finality of an award rendered by a Russian-seated arbitral tribunal acting under the administered rules and thereby exclude recourse to Russian courts for setting aside. While this feature of the new legislation may be of interest to parties that are concerned with the interventionist approach of the Russian courts, the interpretation suggested in the present case may significantly limit its application. If a respondent can challenge the validity of an arbitration clause for any reason, it may be able to do so in Russian courts, as there would be "no agreement to arbitrate", let alone an agreement on finality. While this would be an unacceptable way of reintroducing setting-aside proceedings through the back door, there is still a risk that the Russian courts will be somewhat sympathetic to this approach.

For further information on this topic please contact Andrey Panov at Norton Rose Fulbright (Central Europe) LLP by telephone (+7 499 924 5101) or email (andrey.panov@nortonrosefulbright.com). The Norton Rose Fulbright website can be accessed at www.nortonrosefulbright.com.

Endnotes

(1) Case A71-15240/2014.

(2) Ruling of the first-instance court available (in Russian) at http://kad.arbitr.ru/PdfDocument/a015ab39-3b16-4cdf-8285-c1cd1a8e944b/A71-15240-2014_20150409_Opredelenie.pdf.

(3) Resolution of the cassation court available (in Russian) at http://kad.arbitr.ru/PdfDocument/5af4f161-878e-4cc2-a4d1-452bf3058224/A71-15240-2014_20150707_Reshenija%20i%20postanovlenija.pdf.

(4) Ruling of the Supreme Court (February 29 2016, 309-??15-12928) available (in Russian) at http://kad.arbitr.ru/PdfDocument/0d9d2ea1-d7b1-4a9c-be1f-8a98c01362d8/A71-15240-2014_20160229_Opredelenie.pdf.

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