Sometimes in cases on foreign or domestic arbitral awards’ enforcement, or on setting aside domestic awards, debtors argue that the case was heard on the merits and the award was rendered by the arbitral tribunal despite the claimant’s non-compliance with the mandatory pre-arbitration procedure of dispute resolution agreed upon by the parties. As it is clear from the examples given below, Russian courts acted on the assumption that the issue of the parties’ compliance with the pre-arbitration procedure falls within the competence of arbitrators.

This issue was firstly considered by Russian courts in 2002. The Arbitration court at the Geneva Chamber of Commerce and Industry on April 6, 2000 obliged the Russian CJSC Neftekhimeksport to pay to the Swiss Cargill International S.A. over US$17 mln., including the indebtedness under the purchase agreement, penalty, interest and arbitration costs. The debtor did not execute this award voluntarily, and the creditor applied before the Moscow city Court to enforce the award (at that period the courts of general jurisdiction were competent to deal with such applications). The agreement provided that, should the parties fail to come to a mutually acceptable solution, the dispute shall be referred to a mediator to be appointed by the Geneva Chamber of Commerce and Industry. If such mediation does not result in a written settlement of the dispute within two months since the appointment of the mediator, any such dispute shall be finally resolved in accordance with the Arbitration Rules of the Chamber of Commerce and Industry of Geneva. The debtor declared that the creditor had not abided with the mediation clause. In the debtor’s opinion, the award as rendered could not be enforced under Article V(1)(c) New York Convention in respect of the dispute that is not covered by the arbitration clause.

The court rejected this argument and granted the award’s enforcement (case No. 5-Г02-23). The Supreme Court upheld the ruling and said that the pre-arbitration dispute settlement provisions do not form part of the arbitration agreement.

In 2005 a case of claimant’s failure to comply with the pre-arbitration procedure was heard by the Moscow Commercial Court which reached the same conclusion; however it took into account another significant aspect, this time of a procedural nature. The ad hoc arbitral tribunal in Stockholm, acting in accordance with the UNCITRAL Arbitration Rules, heard the dispute and rendered an award on recovery against OJSC Moscow Oil Refinery in favor of the Joy-Lad Distributors International Inc. (USA) of a penalty exceeding US$28 mln., interest and arbitration costs.

The contract provided: “The Parties shall take all necessary measures to settle any disputes, disagreements or claims which may arise out of or in connection with the present agreement, by mutual consultations. Should the Parties fail to reach an agreement on the said issues, then, with the exception of submission to courts of general jurisdiction, they shall be heard in the arbitration court of the city of Stockholm (Sweden) in accordance with the UNCITRAL Arbitration Rules (1976)”. The Stockholm Chamber of Commerce was specified as the competent body.

The court granted the enforcement and held: “In compliance with Article 30 of the UNCITRAL Arbitration Rules (1976), a party who knows that any provision of, or requirement under, these Rules has not been complied with and yet proceeds with the arbitration without promptly stating his objection to such non-compliance, shall be deemed to have waived his right to object”. The court found out that the defendant did not raise such objection in arbitration and thus have waived his right to object (case No. А40-64205/05-30-394). The higher court upheld the ruling.

In this case the non-compliance with the pre-arbitration procedure would have been impossible to prove anyway as its wording is too vague. Yet it is noteworthy that, unlike the Supreme Court in the aforementioned case, the Moscow Commercial Court found it necessary to determine whether the defendant had objected to non-compliance with the pre-arbitration procedure in the course of the arbitration proceeding.

Article 4 of the Law on International Commercial Arbitration is analogous to Article 30 of the UNCITRAL Arbitration Rules. Therefore, irrespective of the applicable arbitration rules, the defendant who failed to refer to the pre-arbitration procedure in the course of the arbitration proceeding, shall be considered to have forfeited the right to make such reference in future. Such approach appears reasonable.

In 2007 the Russian commercial courts addressed the issue of whether the failure by a claimant to comply with the pre-arbitration procedure might constitute a ground for the arbitral award’s cancellation. The International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (“the ICAC”) in 2006 issued an award (case No. 26/2006) on recovery from LLC Dunapak-Ukraine in favor of the Russian OJSC Oskoltsement of an amount about 2,300,000.00 roubles plus arbitration costs. The debtor applied to the Moscow Commercial Court to set aside the award.

The agreement between the parties stipulated that, if the parties fail to settle the disputes within 30 days since the start of the negotiations, such dispute shall be referred to the ICAC. The debtor argued that the parties had entered into a supplement agreement, and that the award creditor had not filed any demands in respect of performance of its terms and conditions but had filed a claim directly to arbitrate. In the debtor’s opinion, it proved that the pre-arbitration procedure was not adhered to, and that the dispute did not fall within the arbitration agreement, and hence the award was to be set aside. Nevertheless, the courts of first and cassation tiers in 2007 (case No. А40-15779/07-40-156) dismissed this argument stating that the issues of performance by the parties of the contractual obligations are irrelevant for the arbitral tribunal competence issue.

In case No. 18/2007 OJSC Gazprom v. Moldovan-Russian JSC Moldovagaz on recovery of payment for supply of goods, the ICAC found that the claimant failed to comply with the contractual pre-arbitration procedure of dispute settlement and terminated the proceedings. Though the Moscow Commercial Court dismissed the award on formal grounds, it did not question the termination of the proceedings. The court referred to Art. 19(2) of the Law on International Commercial Arbitration and held that, in the absence of an agreement between the parties on the procedure for initiation of the proceeding, the tribunal had conducted the arbitration in the manner as it considered appropriate. The ruling was upheld by the higher court (case No. А40-27465/08-50-207).

Thus in the said cases, the courts, having based their decisions on different rationale, concluded that the issue of compliance with the pre-arbitration procedure falls within the exclusive competence of the arbitral tribunal.

In my opinion, the parties’ compliance with the pre-arbitration procedure should be explored by the arbitral tribunal when deciding on its competence. It has nothing to do with Art. V(1)(c) of the New York Convention. If the arbitral tribunal hears the case despite an evident violation by the claimant of an explicit pre-arbitration procedure agreed upon by the parties, and the defendant expressly refers to such violation in course of the arbitral proceeding, the arbitral procedure is not in accordance with the agreement of the parties (Art. V(1)(d) of the New York Convention). Under Art. 21 of the Law on International Commercial Arbitration, unless otherwise agreed by the parties, the arbitral proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent. The parties’ arrangement on the arbitration proceeding starting only upon completion of the agreed pre-arbitration procedure may well be considered as “other” agreement. The compliance with the pre-arbitration provision is a condition precedent for hearing the case on the merits.

For example, let’s assume that the parties stipulated in the agreement that, should a dispute arise, one party shall send to the other party a written demand, and that the arbitral tribunal shall not be entitled to hear the case until such demand is sent and a fixed period for reply expired. Should the claimant fail to send the demand and to wait, and the arbitral tribunal ignored such violation notwithstanding the respondent’s objection, the court may refuse to enforce the award because the arbitration process did not conform to the parties’ agreement. However, much depends on the wording of the dispute resolution provisions and the specific facts of the case.

Dmitry Davydenko

Since the adoption of the Law “On International Commercial Arbitration” founded on the UNCITRAL Model Law, the compliance of its provisions with the Russian Constitution has been challenged four times. Three times the subject of the challenge was Article 34 (“Application for setting aside as exclusive recourse against an arbitral award”) and/or Article 35 (“Recognition and enforcement”) in 1999, 2000 and 2001. The applicants, in particular, alleged that the limited range of grounds for setting aside an arbitral award or for refusal to recognize and enforce an award established by the said articles infringed upon the party’s right to judicial protection, which includes the right of recourse against any judgment or award rendered against a party. In each claim, the Constitutional Court refused to review the constitutionality of these provisions finding that the applications were inadmissible as the said provisions nowise violated the constitutional rights of the applicants. The rationale of the court contributed to the development of making the jurisprudence more favorable to international commercial arbitration. Thus, in its decision of October 26 2000 No. 214-О the court stated that “the applicants while entering into the contract failed to exercise their right to provide for resolution of the arising disputes by commercial court procedure, but instead signed an arbitration agreement (clause) on submission of them to arbitration under the Law of the Russian Federation “On International Commercial Arbitration”. Thus, having exercised their right of freedom of contract, they voluntarily chose this particular dispute resolution technique and agreed to comply with the rules established for international commercial arbitration court”.

Furthermore, in May 2009 the Constitutional Court ruled on international arbitration in its decision of May 28, 2009 No. 623-O-O. This time it examined an application challenging the constitutionality of the Article 16(3) “Competence of the arbitral tribunal to rule on its jurisdiction” of the Law “On International Commercial Arbitration”. In my opinion, the case is interesting and even in some way bizarre, thus it deserves a closer look.

A foreign company Mellain LLC filed a claim before the International Commercial Arbitration Court at the Russian Chamber of Commerce and Industry (ICAC) to recover contractual debts from a Russian company. The ICAC ruled on its jurisdiction to hear the dispute. The Russian state courts of the first and cassation tiers set aside the ruling on the ground that the arbitration agreement was made by the claimant with another Russian company which did not act on behalf of the respondent. The courts rejected the arguments of Mellain LLC about the respondent having missed the time limit for submitting his application to the state court for setting aside the ruling of the arbitral tribunal on its jurisdiction.

Mellain LLC applied to the Constitutional Court of the Russian Federation challenging, in particular, the constitutionality of the provision of Article 16(3) of the Law “On International Commercial Arbitration” which provides that “the arbitral tribunal may rule on a plea referred to in paragraph (2) of this article [on the absence of jurisdiction] either as a preliminary question or in an award on the merits. If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, the court specified in article 6 to decide the matter, which decision shall be subject to no appeal. While such a request is pending, the arbitral tribunal may continue the arbitral proceedings and make an award”.

The applicant argued that the wordings “within thirty days after having received notice of that ruling” lacked clarity as it failed to specify the moment of commencement of the period for filing the application to set aside the ruling of the arbitral tribunal as a preliminary question on its competence. On this ground the claimant alleged that it is contrary to Article 46 of the Constitution which provides that “everyone is guaranteed judicial protection of his rights and liberties”.

Furthermore, the applicant requested the Constitutional Court to review the ICAC ruling and to compel the ICAC and the Russian specialized professional periodical “International Commercial Arbitration” to publish a research paper on the competence of ICAC. Unsurprisingly, the Constitutional Court rejected these requests noting that resolving such matters falls beyond the competence of the Constitutional Court.

The Constitutional Court found that the ICAC Rules clearly specify the procedure for mailing and delivering the documents by the ICAC Secretariat. The court noted that the Rules in force as of the time of the dispute in question provided in Paragraph 12(2) that “the statements of claim, statements of defence, notices of the hearing, arbitral awards, rulings and orders shall be sent by registered mail with return receipt requested, or otherwise, provided that a record is made of the attempt to deliver the mail”. (The ICAC Rules that are currently in force have practically the same wordings of Article 16(3)). The Constitutional Court concluded that Article 16(3) considering its application together with the Arbitration Rules of the ICAC cannot be interpreted as lacking clarity.

Indeed, Article 16(3) of the Law on International Commercial Arbitration does not need to provide details on how to prove the exact time a notice of the ruling was received by each party. However, such details should be specified elsewhere, namely in the applicable arbitration rules.

In 2005 a working group of the Russian Chamber of Commerce and Industry, consisting of some prominent legal practitioners and scholars, worked out a draft law on commercial mediation which was based on the UNCITRAL Model Law on International Commercial Conciliation and also adapted to Russian reality. Then a number of authorities such as the Russian Union of Industrialists and Entrepreneurs further worked on the draft law and made some amendments, in particular, expanding its scope of application to any civil matters. The draft law was subject to the Council of Europe expertise and was approved by it. It was introduced into the State Duma (the lower chamber of the federal parliament) but got held up for more than three years, which was disappointing for many specialists.

A new development overshadowed these past events. On 11 March 2010 the Russian President Dmitry Medvedev introduced into the State Duma a bill (draft law) “On Alternative Procedure of Dispute Settlement with Participation of Mediator (Mediation Procedure)” together with a complementary bill “On Amending Certain Legislative Acts of the Russian Federation in View of Adopting a Federal Law “On Alternative Procedure of Dispute Settlement with Participation of Mediator (Mediation Procedure)”. The bill is in many ways similar to the said draft law and to the UNCITRAL Model Law but is more scrupulous in some respects, especially with regard to the qualification standards for mediators and in the establishment and function of the self-governing organizations of mediators.

An obvious urge for this initiative is the judicial system being overwhelmed with work: average caseload of a commercial judge amounts to 55 cases per month and in some courts even 100 cases per month. A tremendous number of 25 million cases have been heard by Russian state courts in 2009. What is more, the procedural legislation establishes limited terms for hearing a case (usually a few months or even less), and judges must render final decisions within such terms. This alarming situation threatens to compromise the quality of dispute resolution through official state court procedure.

The scope of application of the President’s bill encompasses mediation in civil, commercial, labor and family disputes. Mediation cannot take place if its results can infringe upon the rights of third parties or public interests (in particular, in bankruptcy proceedings).

The bill provides regulation mostly with regard to connection between mediation and litigation or arbitration. Thus, the bill provides for a number of amendments to procedural legislation. In particular, it specifies the modalities of commencing a mediation procedure when a dispute is already at court, entering into the mediation agreement, establishing procedural guarantees of confidentiality of the mediation procedure and concluding mediated settlement agreements and conditions of its approval by court. The commencement of mediation will interrupt the limitation period. A mediator may not be called as a witness with regard to the facts which became known to him/her as a result of his/her activities as a mediator. Also, the bill confirms the legal effect of mediation clauses in contracts.

Furthermore, the bill proclaims that disputes can be mediated by any person with full legal capacity and with no previous record of convictions. However, those who position themselves as professional mediators must be at least 25 years old, have higher education and pass appropriate mediation training according to the program approved, as prescribed by the Russian Federal Government. The bill also provides for special amendment to the Federal law “On Advertising” to encompass those who failed to pass special professional training and have had no appropriate certificate issued by an NGO that is licensed in training mediators. Such people may not advertise themselves as professional mediators.

The bill does not consider mediation to be an entrepreneurial activity. At the same time it expressly stipulates that mediators and corporate mediation providers bear responsibility towards the parties for damages caused while exercising their activities as prescribed by civil law. The bill also states that public officials may not be mediators.

The bill also provides for self-regulation of the mediator community. There is no indication to government licensing of mediators or similar mechanisms. Both individual professional mediators and mediation services corporate providers may establish and join self-regulated organizations and introduce certifications. Such organizations must have at least 100 individual members and/or 20 NGOs providing mediation services.

The law does not appear to “aggressively” implement mediation in Russia, nor does it establish statutory grounds for a compulsory mediation procedure or provide for specific penalties for failure to participate in mediation, for abuse of rights and opportunities related to such procedure, and it does not set up particular incentives to use mediation. Mediated settlements are not endowed with expedited enforceability by notarization or other means other than approval by court. However, perhaps the first legislative steps should better be cautious and not too rigorous, as the mediation practice in Russia is so far very limited. It is clear that adoption of the law grounded on such bill will contribute to the development of ADR techniques in Russia, both in domestic and international disputes. The mere existence of a special federal law on mediation will increase confidence and trust in this method of dispute resolution.

In Russia the decisions on requests for enforcement of the arbitral awards made in disputes of commercial or other economic nature are vested with the commercial courts (“arbitrazhnyie sudy”). It should be mentioned that the arbitrazh courts have nothing in common with arbitral (non-state) tribunals, whether domestic or international. So the term “arbitrazh” (“arbitral” in the Russian language) as used in the modern Russian law has two meanings: the first stands for arbitral (non-state) tribunals while the second implies the state commercial courts. This is a particular heritage of the Soviet times, caused by historic peculiarities of domestic regulations.

A new noteworthy case is Venture Global Engineering LLC v. Avtotor-Holding Group OJSC heard by the Commercial Court of Kaliningrad region (court of first instance) and Federal Commercial Court of North-Western Circuit (court of cassation) in 2009. The arguments of the parties in this case as well as the courts’ approach in dealing with them are quite typical for the last years’ cases on foreign arbitral awards enforcement; hence worth special attention. The arbitration took place in Stockholm. On 22 December 2008 the ICC International Arbitration Court consisting of a sole arbitrator in case No. 13756/EBS/VRO ordered the Russian OJSC Avtotor-Holding Group to pay debt from the agency agreement in the amount of 1,233,917 USD, penalty at the rate of 8 % annually till the date the award was rendered, 63,000 USD of arbitration costs and 230,444.94 USD of attorney fees in favor of the US Venture Global Engineering LLC. Furthermore, upon the claimant’s request, the arbitrator obliged the defendant to prepare and provide to the claimant a complete and correct detailed list of items acquired from General Motors Corporation and some other information related to the agency agreement.

The debtor failed to fulfill the award voluntarily and the creditor applied at the Commercial Court of Kaliningrad region for its recognition and enforcement. The court granted recognition and enforcement by its ruling of 27 October 2009 in case No. A21-802/2009. The debtor challenged the court’s ruling at the Federal Commercial Court of North-Western Circuit. The range of grounds for refusal to recognize and enforce an award under the New York Convention being quite limited and the qualification of international arbitrators generally being high, yet as a matter of fact the debtors often advance plenty of reasons to oppose the recognition and enforcement. The case in question illustrates it well. The debtor advanced, to name but a few, the following objections:

1) The arbitrator rejected four of the five respondent’s motions to call for crucial evidence and the motion to demand and hear a witness and thus the respondent was unable to present his case;
2) The recognition and enforcement of the award would be contrary to Russian public policy as:

(a) the arbitrator incorrectly decided on the validity of the agency agreement;
(b) the arbitrator set the agent’s fees while neglecting the facts of the case and the evidence presented by the parties;
(c) the penalty in the amount of 8 % awarded under the law of the state of Michigan constituted punitive damages and was inadequate to the consequences of the breach. Such adequacy is an integral part of the Russian public policy.

However, the court of cassation rejected all the objections and upheld the lower court ruling.

The court clearly stated that the said debtor’s arguments amounted to attempts to review the case on the merits. In particular, the court refused to check the validity of the agency agreement and noted that this issue was fully in the competence of the arbitrator as it fell within the scope of the arbitration clause, and that the arbitrator thoroughly examined such validity. Any objections concerning reconsideration of specific facts of the case established by the arbitral tribunal are irrelevant in the case on the recognition and enforcement of the arbitral award.

The court dealt in detail with the public policy argument. It is worth mentioning that invoking Russian public policy by debtors in the proceedings on the enforcement of the awards has been very popular. This is due to the past inclination of the Russian courts to broadly interpret this exception. In this case the court expressly mentioned that an essential difference between a foreign law applied by the arbitrator and Russian law does not itself constitute ground to apply the public policy clause. Otherwise it would be impossible to apply foreign law in Russia at all, which would be contrary to the principles of Russian law. ‘Russian public policy’ is a totally different notion than ‘Russian law’ and embraces “the bases of the morality, core economic and cultural traditions which formed Russian society, main religious postulates and fundamental principles of Russian law”.

The court said that the public policy clause may be applied only in cases where the application of foreign law and/or enforcement of the arbitral award can engender a result inadmissible from the viewpoint of the Russian ‘legal sense’. The court held that there is no reason to believe that enforcement of an award of debt and penalty by a Russian company to a foreign company under agency agreement could engender such a result.

The case reflects positive trends in the practice of enforcement of arbitral awards in Russia. Indeed, there are already many a judgment which confirm that a judicial review on the merits of a case resolved by an arbitrator is inadmissible, including the judgments by the High Commercial Court of the Russian Federation which is the court of the highest instance in the system of Russian commercial courts.

In particular, in a recent case the Federal Commercial Court of Moscow Circuit (ruling of 27 August 2009 КГ-А40/8155-09) held that “an argument that the awarded damages amount does not correspond to the principle of adequacy of civil liability measure to the consequences of the breach falls into the merits of the resolved case and does not pertain to the grounds for refusal of recognition and enforcement of a foreign judgment and a foreign arbitral award”. As it happens, understanding the approach of this court is of great importance: many big Russian companies involved in international business are registered in the Russian capital, and thus in accordance with the Russian procedural rules many cases on the recognition and enforcement of foreign arbitral awards are heard by the Commercial Court of Moscow in the first instance and by the Federal Commercial Court of Moscow Circuit in the cassation instance.

One of the main points illustrated by the above case is that now to oppose a foreign arbitral award recognition and enforcement using the public policy exception the debtor must refer to some grave consequences which such recognition and enforcement would engender in Russia. What such consequences could be is a good subject for a separate discussion.