Russia’s highest court has issued a decree which potentially invalidates a dispute resolution clause which is widely used by lenders and investors in Russia. The decision impacts on the drafting of dispute resolution clauses in contracts with Russian counterparties or where relevant assets are in Russia.
On 19 June 2012 the Presidium of the Russian Federation Supreme Arbitrazh Court (“SAC”) (the highest state commercial court in Russia) rendered a decree (the “Decree”) (No. VAS-1831/12). According to the Decree, which has just been published, dispute resolution clauses that provide only one of the parties with an option to initiate court litigation while restricting the other party to arbitration only (also known as ‘sole option’ or ‘split’ clauses) violate one of the basic principles of Russian law: that each party must have equal access to justice. Such clauses are frequently used in the banking sector to give maximum flexibility to the lending party to bring a dispute in the optimum forum at the time the dispute arises.
However, it would appear that rather than invalidating an entire clause, the effect of this ruling is to convert a unilateral option into a bilateral option. Despite the express unilateral wording, the Russian courts would interpret the option to give access to the courts to both parties should they choose to exercise that option. In the context of enforcement, it appears that awards previously rendered as a result of a clause encompassing a unilateral element will still be enforceable in Russia, although the ruling is as yet untested in this context.
Whilst there is no system of case law precedent in Russia, we would expect a decision of this level to be followed. Therefore, affected parties who plan to enter into agreements with unilateral option clauses should consider whether to amend such agreements. 'Arbitration only' clauses will usually be advisable, although other options should be considered.
The dispute in this case involved a claim filed by CJSC “Russkaya Telefonnaya Kompaniya” (“RTK”) against LLC “Sony Ericsson Mobile Communications Rus” (“Sony Ericsson”) with the Arbitrazh Court of the City of Moscow under a contract for the sale of mobile phones.
The sales contract contained an ICC arbitration clause with the seat of arbitration in London. In addition to the standard ICC arbitration cause, the contract included a provision entitling Sony Ericsson to bring a claim before any court of competent jurisdiction to recover amounts payable for the goods supplied, which was in line with market practice.
During the consideration of the case at first instance, Sony Ericsson filed an application to dismiss the claim without prejudice on the basis of the arbitration clause and arguing that the right to go to court only operated in its favour. The Arbitrazh Court of the City of Moscow granted Sony Ericsson's application and dismissed the claim. This ruling was upheld by two superior courts (the appellate court and the cassation court). They found, (following previous Russian case law) that the parties had the right to agree on such a dispute resolution procedure in accordance with the principle of freedom of contract.
The decision of the Supreme Arbitrazh Court
Disagreeing with the lower courts, the SAC reversed the judgments and remanded the case to the first instance court for consideration.
In setting aside the judgments, the SAC held that the unilateral option for Sony Ericsson to refer disputes to court placed that party in a privileged position disrupting the balance of the parties’ interests. Referring to the case law of the European Court of Human Rights (including Steel and Morris v. The United Kingdom) as well as to cases issued by the Constitutional Court of the Russian Federation, the SAC stressed the importance of the civil law principle of equal access to justice, which grants parties equal procedural rights to assert their respective interests. Accordingly, it was held that the party whose right is infringed by such a dispute resolution mechanism is also entitled to refer a dispute to a competent State court.
It is not entirely clear from the Decree whether an Award rendered on the basis of the arbitration element of such a clause would still be enforceable in Russia. Whilst this is not yet tested, the Decree seems to suggest that the bilateral arbitration provision within the clause would be upheld.
Impact of the decision
Whether or not existing agreements with unilateral option clauses should be amended to leave either arbitration or court jurisdiction will depend on the circumstances of each transaction. The issues that need to be considered are the location of the principal assets, nature of the security, nationality of the parties, any possible breach of representations or covenants and potential cross-default implications.
Going forward, lenders contracting with Russian parties or with non-Russian parties where the relevant assets are in Russia should consider carefully the drafting of their dispute resolution clauses. It is likely that from now on there will be no advantage in including a unilateral right to choose the forum in contracts with Russian parties where Russian law will seemingly give an equal option to select a preferred forum to the other party.
Given that English court judgments are not formally recognised and enforced in Russia, the safest option for lenders who wish to avoid proceedings being brought by borrowers or guarantors in the Russian courts is likely to be a pure arbitration clause. The major advantage of arbitration in the context of international transactions is of course the worldwide enforceability of arbitral awards (pursuant to the New York Convention).
Of course, if assets or security were available in England, English court jurisdiction may be an option (whether as part of a clause incorporating arbitration or otherwise).
For the time being we consider this issue to be restricted to a few jurisdictions, including also China and Poland. Many other jurisdictions have upheld unilateral option clauses and they are commonly used in the banking sector, providing ultimate flexibility to lending parties and ensuring enforcement. However, we will continue to monitor the situation.