Russia's highest court has issued a decree which potentially invalidates a jurisdiction clause which is widely used by investors and lenders in Russia.
Who is affected?
Anyone who contracts with a Russian counterparty or with a non-Russian party which has significant assets in Russia.
What should you do?
Affected parties who have entered into or are about to enter into agreements with sole option clauses should take legal advice and consider whether to amend such legal agreements so that they provide for arbitration only.
Background
On 19 June 2012 the Presidium of the Russian Federation Supreme Arbitrazh Court ("SAC") (the highest state commercial court in Russia) rendered a decree (the "Decree") according to which dispute resolution clauses that provide only one of the parties with an option to initiate state court litigation or arbitration while restricting the other party to arbitration only (also known as 'sole option' or 'split' clauses) are against one of the basic principles of Russian law that each party must have equal access to justice. The reasoned Decree has just been published on SAC's web site.
The dispute in this case involved a claim filed by CJSC "Russkaya Telefonnaya Kompaniya" ("RTK") against LLC "Sony Ericsson Mobile Communications Rus" ("Sony Ericsson") with the Arbitrazh Court1 of the City of Moscow under a contract for the sale of mobile phones.
The sales contract contained an ICC arbitration clause with the seat of arbitration in London. In addition to the standard ICC arbitration cause, the sales contract included a provision according to which the ICC arbitration clause did not preclude Sony Ericsson from bringing a claim before any court of competent jurisdiction to recover amounts payable for the goods supplied, which was in line with market practice.
During the consideration of the case at first instance, Sony Ericsson filed an application to dismiss the claim without prejudice on the basis of the existence of the arbitration clause. The Arbitrazh Court of the City of Moscow granted the application and dismissed the claim. This ruling was upheld by two superior courts (the appellate court and the cassation court).
However, the SAC, disagreeing with the lower courts, reversed the judgments rendered and remanded the case to the first instance court for consideration.
In setting aside the judgments, the SAC held that the dispute resolution clause in issue provided the option for only one of the parties to refer disputes to a state court of competent jurisdiction and, therefore, placed that party in a privileged position thus disrupting the balance of the parties' interests. Referring to the legal position of the European Court of Human Rights and the Constitutional Court of the Russian Federation, the SAC stressed the importance of the civil law principle of equality of participants in civil-law relations. The SAC noted that the principle of equality of the parties contemplate the parties' equal procedural rights to assert their respective interests.
Consequently, the SAC held that a dispute resolution agreement must not vest only one of the parties with the right to refer disputes to a state court of competent jurisdiction. The SAC considered such a restriction invalid on the basis that it disrupts the balance of the parties' rights. Accordingly, it was held that the party whose right is infringed by such a dispute resolution mechanism is also entitled to refer a dispute to a competent state court.
It is not entirely clear from the Decree whether SAC considered the whole dispute resolution clause to be invalid (including the arbitration agreement) or whether only the "sole option" part of the dispute resolution clause (that is restricting one party from choosing the forum) is invalid. The significance of the issue is whether a party can validly submit a dispute to arbitration on the basis of a dispute resolution clause containing unilateral enforcement option and then enforce an award. If the arbitration clause is invalid then enforcement of an award cannot be granted. We incline to the view that the arbitration clause is still valid.
It is likely that from now on there will be no advantage in including a unilateral right to choose the forum in contracts with Russian parties as, despite the contractually agreed unilateral option, the other party that is not given that option contractually will still have the right to validly refer any dispute to a state court of a competent jurisdiction.
Whether or not the existing agreements with the sole option dispute resolution clauses should be amended to leave either arbitration or jurisdiction of state courts depends on the circumstances of each transaction and we recommend that the parties seek legal advice for each particular case. The issues that need to be considered are the location of the principal assets, nature of the security, nationality of the parties, any possible breach of representations or covenants and potential cross-default implications.
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1 Commercial Court
Key contacts
Simon Chapman KC
Managing Partner, Dispute Resolution and Global Co-Head – International Arbitration, Hong Kong
Andrew Cannon
Partner, Global Co-Head of International Arbitration and of Public International Law, London
Kathryn Sanger
Partner, Head of China and Japan, Dispute Resolution, Co-Head of Private Capital, Asia, Hong Kong
Christian Leathley
Partner, Co-Head of the Latin America Group, Co-Head of the Public International Law Group, US Head of International Arbitration, London
Disclaimer
The articles published on this website, current at the dates of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.