In a nutshell

On 19 June 2012, the Presidium of Russia's Supreme Commercial Court ("SCC") considered the validity of an arbitration clause that gave only one of the parties to a contract the additional option to bring a claim through the courts of competent jurisdiction. Such unilateral split jurisdiction clauses are commonly used in agreements governed by English law and between Russian and non-Russian counterparties. The Presidium of the SCC decided to set aside the decisions of the lower courts in relation to the unilateral split jurisdictional clause and sent the case back for reconsideration to the Moscow Commercial Court. The case was referred to the Presidium of the SCC on 28 March 2012 by the panel of the SCC on the basis that the unilateral split jurisdiction clause violated the Russian principles of equality of arms and the balance of the parties' interests. The final judgment of the Presidium of the SCC is expected to be published in late July or early August 2012. There is a risk that judgement will hold such clauses to be unenforceable in Russia on the basis that they violate the right to a fair trial.

The background

The underlying dispute related to a general distribution agreement, which was entered into between Sony Ericsson Communication Rus ("Sony Ericsson") and Russian Telephone Company ("RTC") 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 settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce (the "ICC") by three arbitrators appointed in accordance with the said Rules with the seat of arbitration in London.  In addition, Sony Ericsson had the option to take action in any court having jurisdiction. RTC 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.  All the above courts held that there was a valid and enforceable arbitration agreement between the parties and that RTC was obliged to arbitrate.

The rationale

The reason why the SCC set aside the original decisions of the lower courts is not yet known as the full text of the resolution has not been published, but there are a number of possible explanations. The unilateral split jurisdiction clause with an option for only one party to make a claim to a court may have been found to be void because it contradicts Russian public policy. It may have been decided that the option should not be enforceable on a purely unilateral basis and that both parties should have the right to go to court as an alternative to arbitration.  Lastly, the unilateral split jurisdiction clause may still have been upheld in its entirety if the Supreme Commercial Court remitted the case for reconsideration on a more technical basis, for example, because it considered that the lower courts did not hear all the evidence necessary to justify their decisions in the first place (such as evidence on the validity of such provisions according to English law).

A change in approach?

Previously, the validity of unilateral split jurisdiction clauses was confirmed in the case of Red Burn Capital v ZAO Factoring Company Eurocommerz (the "Red Burn case"). The Red Burn case related to the validity of a split jurisdiction clause in a facility agreement governed by English law with an option of applying to courts given to Red Burn Capital, the financing party (as is typical in such cases). The Federal Cassation Court of Moscow Region held that since the financing party bore the risks associated with advancing the loan, it was entitled to elect either of the dispute resolution mechanisms provided by a unilateral split jurisdiction clause. The court considered the validity of the clause on the basis of English law rather than Russian law and relied on an expert opinion provided by an English solicitor, who stated that the clause in question was valid as a matter of English law.

The decision of the Presidium of SCC in the Sony Ericsson case, when issued, will supercede previous court practice and the reasoning of the Presidium will need to be followed by the lower Russian courts.

Managing risk

The risk we have identified in relation to the Sony Ericsson v RTC case is that the Presidium may adopt the arguments that were put forward by a panel of the SCC on 28 March 2012 when it referred the case to the Presidium. Namely, the Presidium of the SCC may have found that such unilateral split jurisdiction clauses violate article 6 of European Convention on Human Rights 1950 relating to the right to a fair trial.

Until the Presidium of the SCC issues its full judgment, the reason for its decision remains unclear. This means that there is a risk that Russian courts will not uphold unilateral split jurisdiction clauses and will allow both parties to litigate and arbitrate or conclude that the clause is void. To minimise these risks, foreign parties may wish to avoid unilateral options to litigate in arbitration clauses involving Russian parties and, instead, to provide for the resolution of all disputes only by means of arbitration or to allow both parties to arbitrate and litigate. Once the full judgment is released, we will need to revisit the issue and we will update you with our views at that time.