Russian Supreme Commercial Court confirms arbitrability of real estate disputes.

02.06.2011

Practical Law Company, PLC Arbitration

On 26 May 2011, the Russian Supreme Commercial Court confirmed that the law permitting arbitrability of real estate disputes does not contradict the Russian Constitution.

This issue has been in dispute for a long time. Courts of general jurisdiction took the view that arbitral awards over real estate disputes are enforceable. However, Russian Arbitrazh courts took an opposite approach, arguing that disputes which lead to changes in the federal real estate registry are not arbitrable because they bear a public element.

On 18 May 2010, the Russian Supreme Arbitrazh Court, in Kazan Bank v BulgarRegionSnab (case А65-9868/2009), considered the recognition of an arbitral award. KazanBank (lender) was seeking to enforce the debt against some immovable property mortgaged by BulgarRegionSnab as security for the debt.

The Supreme Arbitrazh Court raised an issue of arbitrability in such a dispute, asking the Supreme Commercial Court to decide whether only state courts are entitled to decide disputes which could lead to amendments in the real estate registry, or arbitral tribunals as well.

The Supreme Commercial Court decided that such disputes are arbitrable even if they lead to state registration of property because the registration itself does not fall under the dispute between the parties. In addition, an arbitral award itself does not affect real estate rights. If the award is satisfied voluntarily, the immediate ground for amendments in the title to the property is a public auction. If the award is not satisfied voluntarily, the award creditor has to apply to a state court for recognition and enforcement of the award. Only a state court ruling could be the ground for changes in the title.

The decision of the Supreme Commercial Court encourages the promotion of arbitration. Due to the reluctant attitude of Russian Arbitrazh courts towards arbitral awards affecting real estate rights, such disputes have usually been referred to domestic litigation. However, in some cases this has led to some worrying decisions. For example, when a lender wanted to bring one claim against a debtor and another claim against a pledger, who mortgaged immovable property as security for the debt, the lender either had to bring both claims before a Russian state court, or if he wanted to refer the dispute to arbitration, he could only do so in respect of a dispute arising out of the underlying contract. This has led to contradictory decisions in parallel arbitration and litigation proceedings. However, parties may now agree to refer all such disputes to arbitration.

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