This alert provides an overview of the recent position of Russian courts in relation to validity of the arbitration clause in the concession agreement.
In particular, the Commercial Court of the North-West Circuit in its Resolution in case No. A56-9227/2015 dated 17 February 2016 (the Orlovsky tunnel case) held that disputes arising out of concession agreements may not be submitted to ad hoc arbitration under the UNCITRAL Rules with a foreign authority appointing arbitrators even if the arbitration is conducted in the Russian Federation. The Supreme Court of the Russian Federation confirmed this position and refused to transfer the case to the Judicial Chamber on Economic Disputes for review.1
Below we discuss the reasoning of the courts and possible implications of this case for the future practice, including taking into account recent changes to the Russian legislation on arbitration.
Background of the Case
On 19 June 2010, the City of Saint Petersburg (the "Grantor") and a company with foreign participation LLC "Nevskaya Concession Company" (the "Concessionaire") entered into a concession agreement to design, build and operate the Orlovsky tunnel under the Neva River in the city of Saint Petersburg.
As follows from the published court decisions in relation to this case, an arbitration clause included in the concession agreement provided that disputes were to be settled by an ad hoc arbitration tribunal in Moscow composed of three arbitrators appointed by the International Chamber of Commerce (in Paris), in accordance with the UNCITRAL Rules. The award of the arbitration tribunal was to be final.
Due to the Grantor's early termination of the concession agreement, the Concessionaire filed an application to the arbitration tribunal for the recovery of compensation and interest under the agreement. After receiving an arbitration award in its favor, the Concessionaire applied to the Commercial Court of the City of Saint Petersburg and Leningrad Region to obtain a writ of execution to enforce the arbitration award. The Grantor challenged this award in the Commercial Court of the City of Moscow (at the seat of arbitration).2
As a result, the proceedings on annulment of the arbitration award were dismissed on the grounds that under the arbitration agreement the arbitration award was final.3 The courts refused to issue a writ of execution since they supported the Grantor's arguments that the arbitration clause in the concession agreement was invalid.
The Position of Russian Courts on the Invalidity of an Arbitration Clause
The Grantor challenged the validity of the arbitration clause. Pursuant to Article 17 of Federal Law No. 115-FZ "On Concession Agreements" dated 21 July 2005 (the "Concession Law"), disputes arising out of concession agreements may be settled by "arbitration tribunals of the Russian Federation". The Grantor stated that such concept was not identical to the concept of an "arbitration tribunal on the territory of the Russian Federation" used in the Law on International Commercial Arbitration, which refers to arbitration tribunals seated in Russia.
The Grantor argues that the Concession Law is a special law and thus should prevail over the provisions of the Law on International Commercial Arbitration. Therefore, disputes arising out of concession agreements may be submitted to an arbitration tribunal for resolution provided that there is an "institutional connection between an arbitration tribunal and the Russian Federation, which is understood as:
- application of the procedural rules approved by the operative arbitration institutions of the Russian Federation, or Russian legal entities and Russian authorities;
- conducting the proceedings by a permanent arbitration institution of the Russian Federation or having arbitrators appointed by a legal entity or an individual of the Russian Federation;
- formation of an arbitration tribunal and conducting arbitration proceedings in the Russian Federation".
Therefore, as inferred from the court decisions in the Orlovsky tunnel case, ad hoc arbitration proceedings must be governed by the rules approved by a Russian body, the arbitration must take place in the Russian Federation and arbitrators must be appointed by a Russian body. However, such position is ambiguous regarding the requirement to apply rules approved by a Russian body for the consideration of a dispute by an ad hoc arbitration tribunal. The parties themselves agree on and approve the arbitration rules for ad hoc arbitration proceedings. They can agree either to apply any of the existing rules (e.g., the UNCITRAL Rules) or develop their own rules subject to compliance with the fundamental principles of Russian law, such as equality of the parties and the right to present their own position. Generally, arbitration rules do not differ significantly and provide an opportunity for parties to determine the arbitration procedure. In this regard, it is not clear how the provisions of the Concession Law and the rights of the public entity may be violated when applying rules approved by a foreign body.
Practical Implications for Future Projects in Light of the Arbitration Reform
As part of the arbitration reform, it is possible that foreign arbitration institutions that receive approval from the Russian Government to carry out activities in the Russian Federation will meet the required criteria for an institutional arbitration or an appointing authority for ad hoc arbitration. In particular, in accordance with Article 44 (4) of Federal Law No. 382-FZ "On Arbitration (Arbitration Tribunals) in the Russian Federation" dated 29 December 2015 (in effect as of 1 September 2016) foreign arbitration institutions that have received such governmental approval "are recognized as permanent arbitration institutions", i.e., such institutions may be treated as Russian arbitration institutions. However, it is not yet clear whether such provision will apply in order to determine what is "the arbitration tribunal of the Russian Federation" for the purposes of the Concession Law or whether courts, following this court case, will proceed based on the assumption that the Concession Law establishes special requirements for arbitration institutions.
Consequently, when drafting concession agreements and, in particular, their dispute resolution clauses, it is important to take into consideration the current court practice as well as future court practice, including after the entry into force of the Federal Law "On Arbitration (Arbitration Tribunals) in the Russian Federation". Therefore, taking into account the position of courts on this issue and, until further development of the court practice in view of changing legislation on arbitration, the safest option in terms of the risk of an arbitration agreement being deemed invalid is to refer disputes arising under a concession agreement to an arbitration tribunal in the Russian Federation administered by a permanent Russian arbitration institution that has received approval from the Russian Government or for which such approval is not required by law (e.g., the ICAC at the RF CCI).