Summary

On 1 September 2012, the Presidium of the Supreme Commercial Court of Russia (the "SCC") issued the full reasoning of its decision dated 19 June 2012 in the case of Russian Telephone Company ("RTC") v Sony Ericsson Communication Rus ("Sony Ericsson"), holding that an arbitration clause that gave one of the parties the additional, unilateral option of bringing a claim at courts of competent jurisdiction was invalid as a matter of Russian law.  This decision has brought an element of certainty to Russian court practice but with an unwelcome result.  Unilateral option clauses – a mainstay of dispute resolution in international financing documentation – should now be viewed as unenforceable in Russia.  

What is a unilateral option clause?

A unilateral option clause is a dispute resolution clause that provides a general dispute resolution mechanism (such as arbitration) but gives one of the parties the additional right to bring a claim in some other forum (such as a state court).  The usual formula provides both parties with the right to arbitrate, and one of them with the additional right to litigate in any court with jurisdiction.  There are other variants, however, and this formula is sometimes reversed, providing both parties with the right to litigate in a particular forum and one of them also having the right to commence a claim in arbitration.  Even though such clauses give greater procedural options to one of the parties to the contract, they are enforceable in a number of common law jurisdictions including England.

The use of such clauses is particularly common in international finance transactions, where the lender typically has the option of suing the borrower in the English courts and any court of competent jurisdiction, in addition to the mutually-available right to arbitrate.    

The case

The underlying dispute related to a general distribution agreement which was entered into between Sony Ericsson, as seller, and RTC, as buyer, in 2009.  The governing law of the agreement was English law.  Pursuant to the jurisdiction clause of the agreement, any dispute between the parties was to be resolved by arbitration under the ICC (International Chamber of Commerce) Rules, by three arbitrators appointed in accordance with the said Rules with the seat of arbitration in London.  In addition, however, the clause gave Sony Ericsson a right – as an alternative to commencing arbitration - to commence suit in any court having jurisdiction.  RTC, however, only had the right to arbitrate. 

Instead of filing a request for arbitration with the ICC, RTC filed a claim with the Moscow Commercial Court on 6 May 2011 claiming for the replacement of telephones supplied to it by Sony Ericsson.  The Moscow Commercial Court refused to consider the claim, referring the parties to the arbitration clause in the general distribution agreement. This decision was upheld by the Ninth Appellate Commercial Court and the Federal Cassation Court of the Moscow Region.  These courts held that there was a valid and enforceable arbitration agreement between the parties and that RTC was obliged to arbitrate.  However, the Presidium of the SCC did not agree.

Rationale

In its brief reasoning, the Presidium of the SCC explained its view that a clause which gave one party the right to go to court to the exclusion of the other party, breached the balance of interests of the parties.  Citing decisions of the Russian Constitutional Court and the European Court of Human Rights, the Presidium referred to the fundamental principles in civil litigation of equality of arms and equal procedural rights.  The judgment states that such an agreement "is invalid as it breaches the balance of rights of the parties".  The party which did not have an express right to claim in state courts (RTC) should therefore have the same right to go to court as the party which did have such an express right (Sony Ericsson).

Effect

The Presidium has referred the case back to the first instance Moscow Commercial Court and RTC will now have the opportunity to have its claim heard on the merits.  Also, as this is a decision of the Presidium of the SCC, it has precedential value and must be followed by lower courts which are seized of cases involving the enforcement of unilateral option clauses.

The main risks of the judgment for parties intending to use unilateral option clauses in transactions involving Russian parties in the future are twofold.  First, the party without the option may be permitted simply to ignore the arbitration provision and commence suit in the Russian court, as has happened in the Sony Ericsson case.  Secondly, the judgment might be used to support an argument, not only that the unilateral option is unenforceable, but that the arbitration provision in the unilateral option clause is also invalid.  Although the Presidium did not expressly refer to the arbitration provision when stating that the dispute resolution agreement was invalid, the Presidium's statement might be referred to by litigants in future to support such an argument.  There is a potential threat, therefore, to the future enforceability of arbitral awards rendered on the basis of such clauses.   

Is the scope of the judgment limited in any way?

The reasoning of the Presidium of the SCC is far from comprehensive.  There is no investigation of the enforceability of unilateral option clauses under English law; the governing law of the contract and, arguably, of the arbitration clause.  Furthermore, the Presidium has referred to some very general principles of international law without really examining the nuances involved when parties, of their own free will, come to a bargain which distributes rights and obligations in an unequal manner.  Freedom of contract is, after all, also a fundamental principle which finds widespread recognition in national and international law.  It is tempting to consider, therefore, whether there are limitations on the application of this decision. 

In our view, however, it would be rash to try and fill the gaps in the reasoning or to draw distinctions between different factual or contractual situations.  The 2009 case of Red Burn Capital v ZAO Factoring Company Eurocommerz appeared to confirm that the Russian courts were sympathetic to unilateral option clauses in finance transactions.  In that case, the Federal Cassation Court of the Moscow Region considered it reasonable for the finance party to be able to elect between different dispute resolution fora, because the finance party bore the risks associated with advancing a loan.  The Sony Ericsson judgment, though, supercedes previous practice and, even though concerned with a seller / buyer relationship, is of very general application.  It makes no distinction between different types of contractual relationship in coming to the conclusion that unilateral option clauses breach the balance of interests between the parties.

How to react?  

Because the Sony Ericsson judgment may be applied broadly, the risk that unilateral option clauses in other contracts may not be enforced by the Russian courts is very high.  The safest approach, therefore, is to completely avoid  unilateral options in drafting contracts in the future where Russian parties are involved and/or enforcement in Russia may be required.  Dispute resolution clauses should instead provide exclusively for either litigation or, more appropriately given the opportunities for enforcement under the New York Convention, arbitration.

Although the Russian court will probably now refuse to halt proceedings brought in breach of a unilateral option clause, anti-suit injunctions may still be available against the breaching party from the English court where the latter has jurisdiction to enforce the relevant clause.  The effectiveness of this form of relief will depend largely, however, on whether the breaching party has assets or a presence in UK.  Foreign interim remedies are not enforceable in Russia and, with the Sony Ericsson judgment, the Russian courts have support from the highest level to hear cases brought in breach of such clauses.