In the beginning of September 2012, the Presidium of the Supreme Commercial Court of the Russian Federation (the “SCC”) published its Ruling No. 1831/12 dated 19 June 2012 on the validity of optional arbitration clauses in agreements (the “Ruling”).
An “optional” arbitration or split jurisdiction clause is a clause which provides for several alternative options for parties to resolve a dispute. There are numerous variations of the clause but, as a general rule, the main option is that both parties to the agreement may refer a dispute to an international arbitration tribunal (a bilateral clause), and the additional option is that disputes may be referred to state courts in a particular jurisdiction or jurisdictions. However, the latter option is usually available to only one party (a unilateral clause) to the contract.
Optional arbitration clauses have become very popular in the business environment and, in particular, in corporate finance.
Circumstances of the case
Two companies entered into a supply agreement containing an optional arbitration clause specifying the ICAC at the International Chamber of Commerce as the main venue for submission of disputes and a “state court of competent jurisdiction” as an exclusive option available to the defendant only.
Notwithstanding the arbitration clause, the claimant filed a claim against the defendant for improper performance of its obligations with a Russian commercial court.
Position of commercial courts
The commercial courts of the first three instances dismissed the claim without hearing it on its merits, noting that there was a valid and enforceable arbitration agreement between the claimant and the defendant (paragraph 1(5) of Article 148 of the Arbitration Procedure Code of the Russian Federation).
Position of the SCC
However, according to the Presidium of the SCC, the lower courts did not take into account the fact that the optional arbitration clause contains elements of an agreed jurisdiction clause and allows the parties to refer a dispute to either arbitration or a state court.
The Presidium of the SCC stated that granting one party the unilateral option to bring a case before a state court disrupts the balance between the interests of the parties and does not meet the requirements of a fair trial.
Given the above, the SCC found that the optional arbitration clause as a whole was invalid, i.e. not only the part of the clause giving the defendant the right to submit a dispute to the courts was invalid, but the entire arbitration clause as well. Therefore, a party whose rights had been violated could go to a state court of competent jurisdiction, bypassing arbitration.
This Ruling significantly undermines the widely used practice of including optional arbitration clauses in international agreements. In fact, in the current legal environment there is no sense in using such clauses in new agreements and parties should be considering whether they wish to amend existing agreements containing such clauses to give equal rights to both parties to submit disputes to arbitration and/or the state courts. This is the only way to eliminate the risks raised by the SCC Ruling.