In Egiazaryan and Gogokhiya v. OJSC OEK Finance and The City of Moscow  EWHC 3532 (Comm), Mr. Justice Burton held that under Article 105 of the Russian Civil Code, the parent of a Russian company is subject to arbitration under an arbitration agreement between its Russian subsidiary and a third party. This holding, which rested on the arbitral tribunal’s findings and, apparently, a concession made by the parent in the litigation, applies Russian law in a novel way. Parties with interests in Russia should be aware of this ruling and its limitations.
The case arose out of contractual arrangements between the claimants and first respondent, OJSC OEK Finance, in connection with the redevelopment of the Moskva Hotel. In an LCIA arbitration, the claimants accused OJSC OEK Finance and its 100% shareholder, the City of Moscow, of tortiously orchestrating a corporate raid that ousted claimants from the project. The arbitral tribunal declined to consider the case for lack of jurisdiction, finding that the arbitration clause did not reach claims in tort. The arbitrators also declined to join the City of Moscow to the arbitration, finding that although Article 105 of the Russian Civil Code “makes a parent jointly and severally liable on the contract...includ[ing] liability to perform the Arbitration Agreement,” Russian law was inapplicable because the contracts were governed by English law.
The claimants successfully challenged the arbitrators’ decision before the High Court. On December 4, 2015, the Court held that the arbitration clauses in the contracts signed by the parties reached the claim in tort. With respect to the finding regarding the City of Moscow, the Court held that Russian law, as the law of the place of incorporation of the signatory to the arbitration clauses, determines whether the signatory’s parent can be bound to arbitration under the contract entered into by the signatory. The Court did not independently consider the relevant Russian law, but endorsed the tribunal’s interpretation of Article 105 of the Russian Civil Code. Based on that interpretation, the Court held that Article 105 established the City of Moscow’s liability for obligations of its subsidiary, and subjected the City to the obligation to arbitrate under an arbitration clause entered into by that subsidiary.
The application of Article 105 by the tribunal and the High Court appears to be a departure from the ordinary application of that provision of the Russian Civil Code by Russian courts for many years. Unfortunately, the parties’ submissions and considerations of the arbitral tribunal are not publicly available, and the High Court's judgment does not summarize the parties’ arguments or the tribunal’s analysis. What appears from the judgment is that (i) both parties presented “extreme positions” supported by expert reports, (ii) the arbitrators sided with the claimants, and (iii) during the judicial process, the respondents’ counsel “was driven to accept” the arbitrators’ finding. As a result, Mr. Justice Burton affirmed that, under Russian law, the parent of a Russian company can be joined as a respondent under an arbitration agreement that it never signed.
The result of this case appears to be inconsistent with existing Russian law. As an initial matter, Article 105 (which has been replaced by Article 67.3 since September 1, 2014) would seem to have no relevance to the dispute at all. That provision addresses the parent-subsidiary relationship between two for-profit business entities, such as joint-stock companies, limited liability companies or partnerships. Article 105 does not apply to non-commercial entities, such as the City of Moscow.
But even if Article 105 could apply to the City of Moscow, Russian courts have taken a strict approach to Article 105, requiring that (i) the right of the parent to give mandatory instructions to the subsidiary be formally envisaged in the subsidiary’s charter or in a contract between the subsidiary and the parent, and (ii) the transaction in question have been concluded as a result of those mandatory instructions. It is not evident from the High Court's judgment whether both elements were addressed or proven, as would be required by the Russian courts.
In practice, Russian courts have been extremely reluctant to hold a parent company liable under the contracts of its subsidiary in a non-bankruptcy context. (In the bankruptcy context, a different set of legal standards apply.) There is no published decision in which a Russian court has applied Article 105 to extend an arbitration agreement to a non-signatory.
In view of the foregoing, it must have required exceptional circumstances for the arbitrators to reach their finding on the effect of Article 105 and for the respondents to have accepted it.
Egiazaryan and Gogokhiya v. OJSC OEK Finance and The City of Moscow appears to be based on an unprecedented reading of Article 105 of the Russian Civil Code. Unless overturned on appeal, it is likely to be cited by claimants in future arbitrations as a vehicle to try to extend arbitral jurisdiction over parents of Russian companies. While such reliance would appear to be unjustified under the ordinary application of Article 105, understanding the proper scope and application of this provision (now Article 67.3 of the Russian Civil Code) remains important for commercial parent entities of Russian subsidiaries and those subsidiaries' counterparties. The judgment calls for a thoughtful approach when exercising control over the activities of a Russian subsidiary and its transactions.