In its Ruling No 10-P dated 26 May 2011 (the "Ruling") the Constitutional Court of the Russian Federation issued a landmark decision confirming that domestic arbitral tribunals have jurisdiction over real estate claims. The Ruling was issued following a request by the Supreme Arbitrazh Court in connection with a case it was hearing in its supervisory capacity.

Background to the dispute

LLC Bulgarregionsnab (the "Mortgagor") provided a mortgage over loans granted by the Bank of Kazan (the "Bank") to LLC Trade Alliance and LLC DataDot-Zakamye (the "Debtors"). Due to the Debtors' failure to repay the loans when due, the Bank filed a claim with the domestic arbitral tribunal (treteisky sud) seeking repayment of the loans and enforcement of the mortgage.

The tribunal found in favour of the Bank and granted an award, but the Mortgagor refused to comply with the award. The Bank filed an application to the Arbitrazh (commercial) Court of Tatarstan seeking enforcement of the award. The application was granted by the court of first instance and its ruling was reconfirmed by the Court of Cassation.

The Mortgagor is in the process of challenging these rulings with the Supreme Arbitrazh Court on the basis that state arbitrazh courts have exclusive jurisdiction over real estate disputes and that therefore an arbitral tribunal, a non-state judicial body, lacks jurisdiction.

The Supreme Arbitrazh Court stayed the proceedings and for the first time filed a request of its own motion with the Constitutional Court to confirm the status of arbitral tribunals and their jurisdiction over real estate disputes. In particular, the Supreme Arbitrazh Court queried whether certain provisions of the domestic and international arbitration laws of the Russian Federation, the Civil Code and the Law on Registration of Title to Real Estate and Real Estate Transactions violate the Constitution.

Jurisdiction

The arbitrability of real estate disputes has been the subject of debate in Russia over the last decade. The core problem is Article 248 of the Arbitrazh Procedure Code of the Russian Federation which provides, among other things, that "disputes concerning real estate" fall within the exclusive jurisdiction of state arbitrazh courts. Article 248 was deemed by many, rightly or wrongly, to specify the matters that are not arbitrable.

However, in recent years jurisprudence has attempted to distinguish real estate cases that involve state registration from those that do not. In some cases state arbitrazh courts have refused to enforce awards rendered in real estate disputes, while in other instances courts have demonstrated a selective approach and granted the enforcement of awards that do not involve or affect state registration of title to real estate or encumbrances.

Arguments of the Supreme Arbitrazh Court

The Supreme Arbitrazh Court's primary reason for filing the request was the level of uncertainty surrounding the relevant provisions of the Civil Code, the domestic and international arbitration laws and the law on State Registration of Title to Real Estate and Real Estate Transactions. The Court argued that the various provisions in these laws render unclear whether arbitral tribunals have jurisdiction over real estate disputes, in particular those involving state registration of title or encumbrances.

According to the Supreme Arbitrazh Court the uncertainty regarding these statutory provisions has given rise to inconsistent court practice in breach of the constitutional principle of stable business practice, and as such, puts into question the constitutionality of certain provisions of those statutes.

Position of the Constitutional Court

The Constitutional Court held that everyone is entitled to protect his or her rights by any means permitted by law. Arbitration as a means of dispute resolution is well-recognised. The public interest is protected by the use of rules establishing the procedure for each arbitration.

The Court reaffirmed the proposition propounded in the more persuasively reasoned of recent court decisions on this point, namely, that compulsory registration of title to property by state bodies does not affect the title itself or the nature of the legal relationships between the parties. Therefore, the compulsory nature of this registration cannot be deemed an obstacle preventing arbitral tribunals from considering real estate disputes, since it does not affect the parties' rights to the real estate in question.

Importantly, the Constitutional Court pointed out that Article 248 of the Arbitrazh Procedure Code should not be deemed to delineate the jurisdiction of arbitral tribunals. That article, in the opinion of the Constitutional Court, only stipulates the jurisdictional boundaries between Russian and foreign state courts in international disputes. Its purpose is not to define the arbitrability of various matters.

The Ruling also criticises Information Letter No 96 issued by the Presidium of the Supreme Arbitrazh Court on 22 December 2005 entitled "An overview of court practice in relation to the recognition and enforcement of foreign judgments, arbitral awards, challenging arbitral awards and the issuance of writs of enforcement for arbitral awards". Paragraph 27 of this Letter provides that a court should reject any application seeking to enforce an award which orders that title to real estate be registered by the Federal Registration Service. The reasoning behind this recommendation is that state registration is considered an act with a 'public element' which cannot constitute the subject matter of an arbitral award. This position has been heavily criticized for tilting the subtle balance of court decisions towards a more conservative and formal approach.

The Constitutional Court stated that the view expressed in Letter No 96 derived from an incorrect understanding of the legal concepts involved; state registration only confirms title, it does not alter the civil relationship between the parties nor does it introduce a public element to that legal relationship until registration is effected.

Based on the above, the Constitutional Court concluded that the provisions in question do not contravene the Russian Constitution.

Conclusion

The Ruling is a significant step towards a greater and more secure role for international and domestic arbitration in Russia, as it brings to an end the long period of debate concerning the arbitrability of real estate disputes at least in so far as domestic arbitration is concerned.