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Russian courts consider corporate disputes to be non-arbitrable
Practical Law UK Legal Update 2-518-2616 (Approx. 4 pages)
Russian courts consider corporate disputes to be non-arbitrable
by Practical Law
| Published on 29 Feb 2012 �� Russian Federation |
Natalia Belomestnova (Senior associate), Goltsblat BLP
On 30 January 2012, the Supreme Commercial Court of the Russian Federation supported the conclusions of the lower courts in Novolipetsky Steel Mill v Maximov (case No. A40-35844/2011-69-311) that corporate disputes are not arbitrable in Russia.
Novolipetsky Steel Mill (NLMK) challenged, in the commercial court of Moscow, an arbitral award upholding the claims of Maximov NV related to his sale of shares in JSC Maxi-Group to NLMK. The tribunal had ordered NLMK to pay to Maximov NV approximately US$300 million.
The court of first instance annulled the arbitral award on the grounds that:
- The composition of the arbitral tribunal and the arbitral procedure were not in accordance with the parties' agreement because two arbitrators had failed to disclose that they worked for the same institution as the legal experts whose expert reports were submitted by the parties in the course of arbitration.
- The award breached public policy due to the failure of arbitrators to disclose the above mentioned circumstances, which could give rise to doubts about their impartiality.
- This was a corporate dispute and, as such, could not be referred to arbitration.
These conclusions were supported by the appeal court, the court of cassation and the Supreme Commercial Court, which upheld the judgments of lower courts in its ruling of 30 January 2012.
While the first two grounds for annulment of the award are perhaps debatable in themselves, it is the third ground that has major consequences.
In using the non-arbitrability ground to annul the award, the courts have interpreted Articles 33 and 225.1 of the Russian Code of Commercial Procedure (COP) very narrowly. These provisions simply state that corporate disputes are within the "specific competence" of state commercial courts. The courts' conclusion, that corporate disputes cannot be arbitrated and must instead be referred exclusively to state commercial courts, does not follow directly from the text of these provisions.
It has been a long standing view in Russia that "specific competence" provisions in the COP allocate competence between the state courts, that is commercial courts and the so-called courts of general jurisdiction, which does not mean such disputes cannot be referred to arbitration. Therefore, the Supreme Commercial Court and the lower courts appear to have taken a radical approach to the interpretation of Articles 33 and 225.1 of the COP in this case.
It is interesting to note that in a parallel case between the same parties about the validity of the underlying shares purchase agreement (Case No. A40-26424/11-83-201), while the courts of first and second instance adopted the same approach as above, the court of cassation remitted the case to the first instance court for reconsideration noting, among other things, that the court must analyse whether the "specific competence" of Article 33 of the COP can be read to mean non-arbitrability of the disputes listed therein, including corporate disputes. The hearing for that case is scheduled for March 2012.
Although it is likely that the court will follow the Supreme Commercial Court in the first case and confirm non-arbitrability of corporate disputes, it is to be hoped that the court will reach a different conclusion in the course of reconsideration. In any case, the Supreme Commercial Court will soon have a chance to correct, reconsider or confirm its conclusions in the ruling of 30 January 2012 as Maximov NV's application for supervisory review in this second case (No. A40-26424/11-83-201) was accepted on 10 February 2012. This ruling is much anticipated, as it should clarify whether the non-arbitrability of corporate disputes will become the norm in Russia or whether this will be a stand-alone case.
It is also worth noting that the debate over the arbitrability of corporate disputes is reminiscent of the situation which existed in Russia until recently regarding the arbitrability of real estate disputes. The Supreme Commercial Court had for many years considered real estate disputes to be non-arbitrable, despite the absence of any clear non-arbitrability provision in Russian legislation, relying on its interpretation of another "exclusive competence" article of the COP (Article 248). However, in May 2011, the Constitutional Court put a stop to this approach, confirming that real estate disputes are arbitrable and that Article 248 of the COP allocates "exclusive" competence as between commercial courts and courts of general jurisdiction, rather than between courts and arbitration (see Legal update, Russian Constitutional Court confirms arbitrability of real estate disputes).
While it remains uncertain as to whether corporate disputes are arbitrable in Russia, it may be prudent, where appropriate, to include in contracts which could potentially lead to corporate disputes in Russia, an optional arbitration clause (giving a party a choice between state courts and arbitration), that is, to leave the party's decision about the forum for dispute resolution to a later stage when the uncertainty of arbitrability of corporate disputes in Russia is resolved. However, such clauses must be carefully drafted, given the risk of parallel proceedings and problems with enforcement of an award.