Russian Supreme Commercial Court finds unilateral hybrid dispute resolution clauses

06.09.2012

Practical Law Company

The full text of the Russian Supreme Commercial Court’s decision of 19 June 2012 has been published. In this decision, the highest instance commercial court declared unilateral (or one-sided) dispute resolution clauses to be invalid.

In its supervisory capacity, the Supreme Commercial Court considered the case of Russian Telephone Company v Sony Ericsson Mobile Communications Rus (for more detail on this case, please see Legal update, Validity of hybrid dispute resolution clauses to be considered by Russian Supreme Commercial Court (www.practicallaw.com/1-519-7171)). In May 2012, when accepting the case for supervisory examination, the Supreme Commercial Court noted that the ground for such examination was the failure of the lower courts to assess the validity of a unilateral dispute resolution clause.

The clause in question referred all disputes arising out of the supply agreement between the parties to arbitration under "the Rules of Conciliation and Arbitration of the International Chamber of Commerce". However, the clause provided for only one of the parties to the contract (Sony Ericsson) to have the right to apply to any competent court.

When a dispute arose regarding the quality of the supplied goods, the Russian Telephone Company, notwithstanding the arbitration clause, filed a claim with a Russian court. The court dismissed the claim, referring the dispute to arbitration on the basis of Article 148(1)(5) of the Russian Code of Commercial Procedure, which in essence states that the commercial court must dismiss a claim if filed despite the existence of an arbitration clause, unless the court finds such clause to be invalid.

The appellate courts (first appeal and cassation) both supported this position, confirming that there were no reasons to declare this particular clause invalid, and therefore dismissing the claim.

The Supreme Commercial Court disagreed and on 19 June 2012, overturned the lower courts' judgments. The Supreme Commercial Court ruled that the dispute resolution clause in question was invalid because it gave the right to choose the forum for dispute resolution to only one party. As such, it does not bind the Russian Telephone Company to refer all disputes to arbitration.

The position taken by the highest instance commercial court came as a surprise since there has been a steady court practice in Russia confirming the validity of such clauses (see Legal updates, Hybrid dispute resolution clauses: the story continues (www.practicallaw.com/9-501-3984) and Hybrid dispute resolution clauses: green light? (www.practicallaw.com/2-500-9264). However, these earlier judgements came from lower courts and not the Supreme Commercial Court.

Dispute resolution practitioners in Russia have anxiously awaited the publication of the full version of the Supreme Commercial Court's ruling of 19 June 2012 (which as a matter of practice appears only months after being issued), in the hope of a principled explanation for the Supreme Court's position. Unfortunately, the published ruling has not provided that satisfaction, as the Supreme Commercial Court did not provide any elaborate reasoning for its conclusion. The court simply repeated that unilateral dispute resolution clauses are contrary to the basic principle of procedural equality of the parties, adverse to the nature of the dispute resolution process and breach the balance between the interests of the parties.

It is noteworthy that the Supreme Commercial Court did not rely on any legal norm in Russian law when reaching this conclusion. Furthermore, in its analysis of the determination of law to be applied, it skipped altogether the question of the validity of the arbitration clause. The court simply relied on the European Convention on Human Rights, the practice of the European Court of Human Rights and the judgments of the Constitutional court of Russia, which relate to the courts' need to ensure that each party gets a fair trial and equal opportunity to present its case to the court. However, the Supreme Commercial Court failed to explain how the option to arbitrate limited the Russian Telephone Company's right to a fair trial and disadvantaged it in the proceedings compared to Sony Ericsson.

Even though the Supreme Commercial Court's point of view is not uncommon in other jurisdictions (as discussed in Practice note, Hybrid, multi-tiered and carve-out dispute resolution clauses (www.practicallaw.com/9-384-8595)), it is nevertheless remarkable for its failure to provide any reasoning which could justify such an approach in Russia.

Unfortunately, this ruling could appear to dispute resolution practitioners as a continuation of the growing hostility of the Supreme Commercial Court (and, notably, its head, Mr. Ivanov) towards arbitration (see Legal update, Aftermath of II International law forum: is Russia becoming more hostile to foreign arbitration? (www.practicallaw.com/2-520-2233)).

Case: No. А40-49223/11-112-401 (www.practicallaw.com/1-521-2685).

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