Submission of Corporate Disputes to Arbitration

It is increasingly common in Russia for contracts to require arbitration rather than litigation as a binding means of dispute resolution. The Russian legal system recognizes both domestic and foreign private arbitration.1 However, the scope of matters subject to arbitration remains controversial because the Russian courts assert exclusive jurisdiction over certain types of disputes. Some recent cases have tested the boundaries of this exclusivity.

Particular attention has focused on Articles 33 and 225.1 of the Russian Commercial Procedure Code (the Code), which provide that commercial courts have jurisdiction over:

[D]isputes related to the creation of a legal entity, its management or participation in a . . . commercial organization[,] . . . including the following corporate disputes:

  1. disputes relating to the establishment, reorganization and liquidation of a legal entity;
  2. disputes relating to the ownership of shares or equity interests in the charter capital of business entities[,] . . . [and] creation of encumbrances [over such shares or interests] and enforcement thereof . . . ;
  3. disputes regarding claims of the founders [or] members of a legal entity . . . for damages caused by a legal person, invalidating transactions conducted by a legal entity, [and/or] the application of consequences of [such] invalidity . . . .2

This language has been subject to varying interpretations and has provoked some interesting litigation.

One prominent dispute involved a large Russian metals company, OJSC Novolipetsky Metallurgichesky Kombinat (NLMK), which was sued by Mr. Nikolai Maximov. The plaintiff claimed that NLMK owed him 9.5 billion rubles (approximately US$311 million) as payment for certain shares sold to NLMK under a sale-purchase agreement. The agreement provided for arbitration in Russia under the rules of the International Commercial Arbitration Court (ICAC), a well-known local arbitration body. Proceedings were held, and the arbitration tribunal found for Mr. Maximov, awarding him 8.9 billion rubles (approximately US$292 million) plus interest.

At that point, NLMK appealed to the Russian courts, which is allowed under local procedural rules.3 The Moscow City Commercial Court overturned the ICAC award on a number of grounds, including the rule that “corporate disputes” may not be resolved by arbitration. Mr. Maximov then appealed unsuccessfully to a higher court, the Federal Commercial Court for the Moscow Circuit, and to the Supreme Commercial Court. Both courts declined to grant relief and left in place the original lower court decision not to recognize the ICAC arbitration award.4

However, at the same time, the same parties were engaged in separate proceedings in the same Moscow City Commercial Court in which NLMK sought a ruling that the sale-purchase agreement was invalid and the purchase price should be returned to NLMK. In these proceedings, the court dismissed the complaint on the grounds that the parties had agreed to binding arbitration of their disputes. NLMK then appealed to the Ninth Commercial Court of Appeals, which reversed the lower court ruling primarily on the basis of Articles 33 and 225.1 of the Code. Mr. Maximov further appealed to the Federal Commercial Court for the Moscow Circuit. This court reversed the rulings of both the Moscow City Commercial Court and the Ninth Commercial Court of Appeals and sent the case to the Moscow City Commercial Court for reexamination of the issues, based on the limitations imposed by Russian law on the submission of certain disputes to arbitration. The case is ongoing.

In view of such inconsistent judicial practice, it is difficult to maintain full confidence that the Russian courts will respect the voluntary agreement of contract parties to submit certain types of disputes to arbitration. Such disputes include the amorphous category of “corporate disputes,” which in practice is being interpreted to include conflicts concerning sales and purchases of shares. Some prior authority suggests that the Russian courts are only intended to have exclusive jurisdiction over disputes that have a “public element,” such as real property disputes where the decision of a state agency to register title is at issue.5 However, the practical consequences and limitations remain unclear.

Nonexclusive Arbitration Clauses

In current Russian business practice, parties to a contract sometimes agree to so-called alternative or optional jurisdiction clauses, which provide that (1) either party may refer a dispute to the state courts or private arbitration (a “symmetrical” nonexclusive dispute resolution clause) or (2) only one of the parties may select the state courts and/ or private arbitration in its discretion (a “unilateral” clause). Unilateral clauses most often appear in cross-border loan agreements, where the lenders require that they be given the exclusive right to choose the forum. Such provisions are controversial in Russia. It has been argued that because it grants sole decision rights only to one party, a unilateral clause violates the rights of the other party to obtain equal access to justice and the courts.

Such discussions were largely hypothetical until late 2009, when the Federal Commercial Court for the Moscow Circuit considered a clause in a loan agreement that provided for arbitration to settle any disputes, but also gave the lender the option of bringing proceedings in English courts and any other courts that may have jurisdiction. The court upheld the clause since it complied with the governing law chosen by the parties (English law) and was not contrary to Russian law. However, although interesting, this decision was not binding precedent on other courts.

More recently, the Supreme Commercial Court, whose decisions are likely to be given substantial weight by lower courts, has considered the same issue in relation to another case. The relevant dispute arose between JSC Russian Telephone Company (Russian Telephone) as plaintiff and a Russian subsidiary of Sony Ericsson Mobile Communications AB (Sony Ericsson) as defendant, regarding claims for replacement of defective mobile phones under a supply contract. The dispute resolution clause gave Sony Ericsson the unilateral right to bring proceedings in any competent court or to arbitrate. The Moscow City Commercial Court upheld the clause and declined to hear the claim. Instead, it ruled that Russian Telephone needed to commence arbitration proceedings as per the agreement of the parties.

On appeal, both the Ninth Commercial Court of Appeals and the Federal Commercial Court for the Moscow Circuit upheld the lower court ruling. However, Russian Telephone then appealed to the Supreme Commercial Court, arguing inter alia that a nonexclusive arbitration clause violates the basic principle of equality of the rights of both parties before the law, and thus is contrary to the fundamental principles of Russian law.

On June 19, 2012, the Supreme Commercial Court reversed all previous court rulings and remanded the case for further consideration by the Moscow City Commercial Court. As the full text of the decision has not been published yet, the ramifications are unclear. We will be watching further developments closely, as this case could significantly affect future practice concerning dispute resolution clauses.