Supreme Commercial Court invalidates “asymmetrical” alternative arbitration clauses

19.09.2012

Legal Update No. 385, 19 September 2012

Goltsblat BLP advises of publication, on 3 September 2012, of the full text of the resolution of the Supreme commercial court on case А40-49223/11-112-401 (the Resolution) based on a claim by CJSC Russkaya Telefonnaya Companiya (RTC) against Sony Ericsson Mobile Communications Rus (Sony Ericsson).

The Resolution formulates an unexpected conclusion, of major significance for law enforcement practice, invalidating unilateral (or asymmetrical) arbitration clauses in agreements, i.e., ones granting only one of the parties the right to choose the means of dispute resolution (arbitration or a state court).

This sort of clause is often used in practice (especially in credit and investment agreements) and their invalidation by courts in the RF might entail serious problems for the parties: an issued arbitration award might be challenged or refused enforcement on this ground; there is a risk of two, parallel sets of proceedings being held, such as arbitration abroad on the basis of a motion filed by one party and court litigation in Russia on the basis of a motion filed by the other party, since the Russian court may consider the dispute on the merits, having recognised the arbitration clause as invalid.

In order to minimise these risks, going forward it is essential to be extremely careful about the wording of provisions in the agreement on dispute resolution, to avoid including asymmetrical clauses in future agreements and, if possible, to have them deleted from current ones.

I. Circumstances of the case

Sony Ericsson (the supplier) and RTC (the buyer) concluded an agreement on supply of mobile telephones, including a condition in it that all disputes would be subject to arbitration (the International Chamber of Commerce) but also entitling Sony Ericsson to file a claim with a court of any competent jurisdiction for recovery of debt for goods supplied.

When a dispute arose between the parties concerning the quality of the goods supplied, RTC, despite the arbitration clause in the contract, filed a suit with the state commercial court of Moscow.

II. Approach taken by courts of three instances

The commercial court of Moscow (1st instance) rejected the suit without consideration on the basis of clause 148(1)(5) of the Code of Commercial Procedure of the Russian Federation (in connection with the arbitration clause in the agreement and absence of grounds for invalidating it). The appeals and cassation courts agreed with this approach.

Having considered the claim by RTC for supervisory review of the given judicial acts, the Supreme commercial court reversed them and remanded the case for reconsideration.

III. Approach taken by the Supreme Commercial Court of the Russian Federation and its significance for practice

In remanding the case for reconsideration, the Supreme commercial court concluded that the unilateral alternative clause on dispute resolution “disturbs the balance of interests of the parties”, “the principles of contentiousness and equality of the parties”, and “the general principles of protection of civil rights”, without indicating any specific rules of law on which the conclusion was based.

In justification of its position, the court refers to resolutions of the Constitutional Court fixing provision to the participants in litigation equal procedural opportunities to support their rights and interests and an analogous position and practice of the European Court of Human Rights.

Unfortunately, the Supreme commercial court does not explain how court practice relating to human rights in civil proceedings might relate to the choice of means for settling disputes by the parties to a commercial transaction and why the possibility of applying only for arbitration to resolve a dispute constitutes infringement of the procedural rights of RTC (after all, arbitration would be quite capable of ensuring fair and comprehensive consideration of the dispute).

The conclusions contained in the Resolution run counter to global practice and differ fundamentally from the existing practice of lower courts in the Russian Federation, which have repeatedly confirmed the validity of alternative arbitration clauses (see, for example, case Nos. А40-59802/09-97-533, А40-59800/09-52-555, А40-59798/09-69-546). These cases related to loan agreements in which the arbitration clause entitled the bank to refer to any competent court. Recognition of these arbitration clauses as valid by the courts supported a certain commercial logic: in the majority of cases, the right to choose the means of dispute resolution in such clauses is granted to the party bearing the maximum risk under the agreement (in a loan agreement, this is the bank). Considering that all the conditions of the agreement are, as a rule, agreed between the parties, an alternative arbitration clause is the result of comprehensive agreements between the parties, which have the right to exist, since they do not violate any rules of the effective legislation. Moreover, a unilateral arbitration clause is often included in an agreement precisely as one means of maintaining the balance of interests of the parties. Unfortunately, the Supreme commercial court did not support this logic.

The position taken by the Supreme commercial court in the Resolution may be appraised as a continuing trend of scepticism on the part of the supreme judicial instance towards commercial arbitration. It will undoubtedly affect future court practice in the Russian Federation, which must be taken into account when agreeing contracts, by avoiding unilateral alternative clauses and selecting wordings for dispute resolution provisions providing both parties with equal opportunities for dispute resolution.

For additional information, please contact: Elena Trusova, Partner, Dispute Resolution, Goltsblat BLP, by telephone +7 (495) 287 44 44, or by email: Elena.Trusova@gblplaw.com; or Natalia Belomestnova, Senior Associate, Dispute Resolution, Goltsblat BLP, by telephone +7 (495) 287 44 44, or by email: Natalia.Belomestnova@gblplaw.com.

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