WIND OF CHANGE IN RUSSIAN ARBITRATION: REVIEW OF SUPREME COURT CLARIFICATIONS

The Russian arbitration landscape is undergoing some major changes. Just a few years ago, in 2016, the arbitration regime in Russia was radically reformed with clarifications around the use of arbitration in corporate disputes, and the introduction of an accreditation regime for "permanent arbitration institutions". While these reforms were aimed at strengthening the legitimacy of commercial arbitration in Russia, two years later, in the Autumn of 2018, arbitration practitioners and representatives of the business community in Russia were left concerned by several Russian court decisions which seemed to indicate that the standard ICC clause may not be enforceable in Russia (see our blog post on the decisions here). However, 2018 ended on a more positive note. On 26 December 2018, the Russian Supreme Court (the "SC") issued its guidance in relation to various issues concerning international commercial arbitration (the "Overview"), where, in particular, it confirmed that arbitration clauses recommended by arbitration institutions are valid. On the following day, the Russian President signed a Federal Law modifying the current arbitration regime, which entered into force on 29 March 2019.

Standard institutional arbitration clauses now deemed enforceable

In the Overview, the SC dealt with an unexpected approach of the Russian lower courts (also supported previously by the SC itself) in case N А40-176466/2017 between Dredging and Maritime Management SA as the claimant and JSC “InzhTransStroy” as the respondent (the "Dredging case"). In the Dredging case, the SC held that a contractual arbitration clause drafted based on the ICC recommended wording was unenforceable. In doing so, the SC supported the lower courts’ view that the arbitration clause lacked a reference to a specific arbitration institution that would administer the case, given that it only referred to the ICC Rules (albeit the ICC Rules themselves refer to the ICC Court's role in administering ICC arbitrations).

The SC's approach in the Dredging case caused considerable concern among the international arbitral community. The President of the ICC International Court of Arbitration reportedly sent a letter to the SC requesting clarification of the court's decision. In the meantime, the ICC swiftly modified its standard clause providing for a special regime for parties resolving their disputes by ICC administered arbitration with a seat in Russia. In particular, this (modified) clause expressly referred to the ICC as the institution administering the arbitration (as opposed to referring to the ICC Rules only).

Now, happily and seemingly in light of the concerns expressed, the SC has changed its opinion and chosen to adopt a more liberal approach to the interpretation of arbitration clauses. In the Overview, the SC explains that arbitration clauses recommended by a particular arbitration institution are valid and enforceable, and courts should be slow in doubting their enforceability. It further clarifies that if such a clause refers to certain "arbitration institution rules", it is clear that the parties have agreed to have their dispute resolved by a tribunal constituted in accordance with such rules.

Following publication of the Overview, the ICC has removed the special reference to Russia from its recommended arbitration clause, once again inviting commercial parties and their legal counsel to use the standard version of the ICC recommended arbitration clause.

Enforceability of unilateral option clauses

In the Overview, the SC also deals with the vexed question of the enforceability of unilateral option clauses ("UOCs") entitling only one party to a contract to choose the dispute resolution forum once a dispute arises, i.e. whether to resolve a dispute by way of arbitration or in a state court.

This follows from the 2012 decision of the Presidium of the Russian Supreme Arbitrazh Court ("SAC") - the highest state commercial court in Russia at the time - in the case of CJSC "Russkaya Telefonnaya Kompaniya" ("RTK") against LLC "Sony Ericsson Mobile Communications Rus" ("Sony Ericsson") (the “Sony Ericsson case"). The dispute resolution clause at issue entitled Sony Ericsson to bring a claim before any court of competent jurisdiction or initiate arbitration, while restricting RTK to arbitration only. The SAC held that the UOC placed Sony Ericsson in a privileged position thus disrupting the balance of the parties' interests, and the party whose right was infringed by such a dispute resolution mechanism (RTK) was also entitled to refer a dispute to a competent state court (see our blog post on the Sony Ericsson case here). It was not entirely clear from the SAC reasoning in the Sony Ericsson case whether the SAC considered only part of the UOC invalid (i.e. the part that provided the option to choose the forum), or whether it considered the UOC invalid as a whole. This resulted in a number of somewhat contradictory cases in the following years. In some such cases, Russian courts have found that the whole UOC was invalid and general rules on (court) jurisdiction should apply. In other cases, it was held that none of the parties could exercise the option.

As with the decision in the Sony Ericsson case, the position set out by the SC in the Overview focuses on the issue of equality between the parties to the clause. Thus, if the right to choose the forum is granted to the "claimant" in any dispute, then there is no inequality as all parties to a contract are on an equal footing since it is unknown at the stage when the clause is negotiated which party will become the claimant in any arbitration. Since such a clause would not be taken to impede or limit either party’s procedural or substantive rights or interests, it would be valid and enforceable as a matter of Russian law.

However, if a UOC gives the option to a named party (Party A, e.g. the lender in a financing transaction), then the clause will be held to be invalid to the extent that it deprives the other party (Party B, e.g. the borrower) of the same option. The SC invites Russian courts to interpret such a clause in a way that gives Party B the same option, i.e. the UOC in this instance effectively becomes a bilateral option clause.

The effect of the SC's clarifications is that UOCs, as they are used and held to operate under many other systems of law (including English law where such clauses, if clearly drafted, are enforceable) will not be effective as a matter of Russian law. More positively, the clarifications should bring an end to the sometimes contradictory approach to such clauses by Russian courts where one party has claimed that they are invalid and it was unclear whether the dispute would proceed by arbitration or litigation.

Comment

The SC Overview has generally been welcomed as a positive and pro-arbitration step, confirming that standard institutional arbitration clauses should be enforceable. The SC's guidance in the Overview will hopefully also align the views of Russian courts on UOCs, so that judicial practice on these issues may become more predictable and stable in future, albeit the use of UOCs as understood by many finance parties in particular, will remain problematic for Russia-related transactions.

For more information, please contact Nicholas Peacock, Partner, Alexander Khretinin, Senior Associate, Olga Dementyeva, Associate, or your usual Herbert Smith Freehills contact.