Given the wide international response to the Russian recognition ruling in Ciments Français, one would expect some adequate follow-up on this matter as the case proceeded through the Arbitrazh court system. However, the recent decision of a cassation court, which reversed the recognition ruling, went largely unnoticed by the international arbitration community.

The Russian centuries old adage that can be loosely translated as ‘Catch the bear before you sell the skin’ warns against hasty conclusions. Although the Federal Arbitrazh court for the West Siberian district may be said to have finally ‘missed the bear’ as it overturned the recognition ruling of the lower court on 5th December 2011, some commentators might have already ‘sold the skin’ by tagging Russia as a ‘pro-arbitration jurisdiction’.

Merits in a nutshell

The dispute between Ciments Français and a Russian joint-stock company (OAO) Sibirskiy Tsement arose out of a share purchase agreement (SPA). According to the terms of the SPA, Ciments Français committed itself to sell shares in three Turkish entities, and Sibirskiy Tsement undertook to pay EUR 377 300 000 and to transfer its shares worth EUR 200 000 000 to the seller. Upon conclusion of the agreement Ciments Français received an advance payment of EUR 50 000 000. The deal fell through when Sibirskiy Tsement failed to effect the agreed transfer of shares towards the purchase price.

Ciments Français initiated an ICC arbitration in Istanbul pursuant to an arbitration clause of the SPA. The tribunal confirmed the claimant’s right to terminate the agreement unilaterally and held that Ciments Français was entitled to retain the amounts received.

Sibirskiy Tsement filed a motion to set aside the award at the seat of arbitration. A Turkish court vacated the award on the grounds that: i) the award was not made within ICC time constraints; ii) the arbitrators allegedly exceeded their mandate by failing to address some of the respondent’s arguments; and iii) the award violated the Turkish ordre public.

Nevertheless, Ciments Français sought to have the award recognized in the Russian Federation. The Arbitrazh Court of Kemerovo Region granted the application for recognition of the annulled award, thus allegedly marking a positive change of attitude of Russia’s judiciary towards the enforcement of foreign arbitral awards.

Reasoning behind the recognition of the annulled Ciments Français award

Although the recognition ruling of the Russian Arbitrazh court in Ciments Français has been commented upon extensively (see, e.g., a post of 28 September 2011, by Mike McClure), for ease of reference, a short summary of the reasoning employed by the recognizing court is provided below.

In an attempt to forestall recognition of the award in Russia, OAO Sibirskiy Tsement advanced two major arguments: (i) the said award was set aside at the seat of arbitration; and, (ii) the SPA was declared null and void by a Russian Arbitrazh court.

In its decision to grant leave to recognize the vacated ICC award, the court first noted that Russia, France and Turkey are member states of both the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention of 1958) and the European Convention on International Commercial Arbitration of 1961. The court then correctly observed that Article IX of the European Convention limits the grounds for refusal to recognize and enforce a vacated award, enumerated in Article V (1) of the New York Convention, to instances where the setting aside of an award was based on one of the following reasons: i) the parties to an arbitration agreement were under some incapacity or the said agreement is otherwise invalid; ii) the party requesting the setting aside of the award was not given proper notice or was otherwise unable to present her case; iii) the award deals with a difference not contemplated by the terms of the submission to arbitration; or, iv) the composition of a panel or the procedure was not in accordance with the agreement of the parties. The prevalence of Article IX (1) of the European Convention over Article V (1) (e) of the New York Convention is enshrined in Article IX (2) of the former.

Against this background, the Arbitrazh Court of Kemerovo Region held that the reasons for vacating the arbitral award in the dispute between Ciments Français and OAO Sibirskiy Tsement did not fall within the scope of Article IX (1) of the European Convention. It should be noted that Section 1 (i) of Article 36 of the Russian Law on International Commercial Arbitration provides that a court seized with an application for recognition and/or enforcement may decline to do so if an award has been vacated at the seat of arbitration. However, Article 13 (4) of the Arbitrazh Procedure Code (APC) states that provisions of international treaties, ratified by the Russian Federation, will prevail over domestic laws in case of discrepancy.

The court therefore rejected the argument of Sibirskiy Tsement that the setting aside of the ICC award by a Turkish court precludes its recognition in the Russian Federation.

The Arbitrazh Court also dismissed the respondent’s contention of inadmissibility of an application for ‘mere recognition’ of an arbitral award. The sole judge concluded that the Russian Arbitrazh Procedure Code does allow a party to seek either recognition of an award or recognition and enforcement thereof.

As to the respondent’s assertions that the award in Ciments Français contradicts the decision of a national court, which declared the SPA null and void, and, therefore, the recognition of the former would violate the Russian public order, the court made two observations. First, an ordre public objection is not named among the grounds for refusal of recognition in the European Convention. Second, the wording of Article 244 (2) APC clearly indicates that a court may decline to recognize and enforce an arbitral award if an act of enforcement would be inconsistent with public order. The sole judge held that, because Ciments Français did not seek to enforce the ICC award, the court could dispense with analysis of the consistency of the said award with Russia’s ordre public.

Decision of the Federal Arbitrazh court for the West Siberian District in Ciments Français

The recognition ruling in Ciments Français was overturned in less than a half a year as the Arbitrazh Court for the West Siberian District upheld an appeal of OAO Sibirskiy Tsement.

The court of cassation did not address the relevant provisions of the European Convention. Instead, the court concluded that the ruling of a lower court is incompatible with the national ordre public, and denied recognition to the arbitral award according to paragraph 2 (b) of Article V of the New York Convention and paragraph 1 (7) of Article 244 APC.

In the court’s view, recognition of a foreign arbitral award, which is at odds with a national court decision, is contrary to the domestic public order. Because the Ciments Français arbitral tribunal confirmed the validity of the SPA and the Russian Arbitrazh court declared the agreement null and void, recognition of the ICC award would lead to the existence of ‘conflicting decisions of equal legal force’.

It is noteworthy that a Russian court, which heard the dispute on the validity of the SPA contemporaneously with the arbitration proceedings in Istanbul, opined that a dispute on the validity of an agreement is not a dispute ‘arising out of an agreement’ and, as such, does not fall within the scope of the parties’ submission to arbitration. Having determined that the arbitrators lack competence to decide on the validity of the SPA, the Russian court proceeded with its own analysis of the matter.

The Russian APC and the Law on International Commercial Arbitration do not envisage such a ground for refusal to recognize and enforce an arbitral award as the latter’s incompatibility with a decision of a national court. Therefore, the Arbitrazh court of cassation could not base its decision to reverse the recognition ruling on this premise as such. Rather, it had to determine which ground for refusal, provided for in Article V of the New York Convention and the corresponding clause of the Law on International Commercial Arbitration, comes closest to the conflict between a foreign arbitral award and a national court decision. The court of cassation held that the ordre public reservation encompasses instances of conflicting decisions and reversed the recognition ruling of a lower court on this ground.

Thorough reading of the cassation decision reveals that the court failed to address three important points, which secured the recognition of the vacated ICC award in the lower court proceeding, namely: i) Article 13 (4) of the Russian APC, stipulating priority of the ratified international treaties over the norms of the Arbitrazh Procedure Code; ii) Article IX (2) of the European Convention, which limits the applicability of Article V (1) (e) of the New York Convention; and, iii) the fact that Ciments Français did not seek to enforce the award in the Russian territory. As was mentioned previously, Article 244 APC gives a national court the authority to deny recognition and enforcement to a foreign arbitral award if the enforcement thereof would be contrary to the public order of the Russian Federation.

It is not obvious why the Arbitrazh Court for the West Siberian District chose to disregard the provisions of the domestic law and international treaties, which provide a basis for recognition of annulled awards in certain settings. As a practical matter, the court of cassation had to determine whether the lower court correctly applied and interpreted the European Convention in Ciments Français. However, the cassation court did not discuss the applicability of the Convention and the conformity of the grounds for setting aside the ICC award with Article IX thereof.

Concluding points

The decision of the Arbitrazh Court for the West Siberian District poses more questions than it answers. From the perspective of the Russian national legislation, incorporating ratified international treaties, the decision does not appear to be correct. In sum, the decision to overturn the recognition ruling in Ciments Français, coupled with the poor reasoning of the court, signifies a rather conservative approach of Russia’s courts to the recognition of foreign arbitral awards.

Whereas Ciments Français is a rare example of a case falling within the scope of the European Convention, the Arbitrazh court of cassation merely skipped a comprehensive legal analysis in order to avoid ‘inconvenient’ conclusions.

It is a bit premature to put Russia in the ‘pro-arbitration jurisdiction’ category, although willingness of some courts (or judges) to grant recognition of awards, set aside on the ‘local standard’ grounds, may foreshadow a shift in the consciousness of Russia’s judiciary.

This post would not be the place for a full summary of the two days of speeches. Here are nevertheless a few highlights of the conference.

The first issue addressed was that of trust between in-house counsel of Russian companies and external counsel in Western law firms. Igor Tsibelman (legal counsel at Gazprom Neft) pointed to the fact that Russian in-house counsel are often junior and lack experience. This results in external counsel having to actually navigate the dispute themselves, which is rather unusual. The necessity to provide the in-house counsel with appropriate explanations was identified as being of utmost importance by Natalia Chumak (partner at Field Fisher Waterhouse LLP in London). It transpired that the decisive point was the understanding of the difference in cultural background. It was in addition made clear that you should not expect Russian clients to provide you with all relevant information at the initial meeting. This is, in any event, not even something you would expect from a non-Russian client. It was subsequently alluded to judges’ (mainly English and US) attitude towards Russian parties and it was suggested that they might be sometimes influenced by the media.

On the issue of interim relief, two recent decisions of New York Courts mentioned by John Fellas (partner at Hughes Hubbard & Reed LLP in New York) attracted significant attention. In Sojitz Corp. v. Prithvi Info. Solutions Ltd., the New York Supreme Court (First Judicial Department) confirmed that attachment was permissible if the respondent’s property was located in New York, even though the dispute had no connection at all to New York and even though the arbitration had not yet commenced. In Koehler v. Bank of Bermuda Ltd., the New York Court of Appeals held that it could order assets outside New York to be delivered into New York, provided New York had personal jurisdiction over the holder of the assets. In the case in question, the assets were held at a bank in Bermuda. The bank admitted New York’s jurisdiction over its branch in New York. It was submitted that the outcome of the case would most probably have been the same had the bank disputed jurisdiction.

Investment Treaty Arbitration was addressed on the second day. Noah Rubins (partner at Freshfields Bruckhaus Deringer LLP in Paris) stressed that when structuring an investment, attention should be paid to the wording of the different treaties in order to ensure appropriate coverage. Although similar, treaties are not identical. With respect to treaties concerning Russia, but not only, it was recommended to check the scope of the dispute resolution clauses to prevent undesired surprises. It was suggested that most tax-friendly countries have bad BITs, with the, until now at least, rarely known exception of the Lithuania-Russia BIT.

The decision in Tokio Tokeles v. Ukraine was also the subject of considerable attention. In that case, Ukrainian investors incorporated a company in Lithuania and then used that entity to invest in Ukraine. Although the company was 99% Ukrainian-owned, it was protected by the Lithuania-Ukraine BIT which defines nationality by reference to the place of incorporation. This decision confirms that, provided there is no wording indicating otherwise in the BIT, the origin of the capital is irrelevant.

Finally, the recent decisions of Russia’s Constitutional and Supreme Arbitrazh Courts in the Maximov case, affirming the non-arbitrability of corporate disputes, was addressed by Timur Aitkulov (partner at Clifford Chance LLP in Moscow). Although it was indicated that Russian Courts had a rather friendly approach until recently, determining on a case-by-case basis whether the dispute presented a public element, Russian Courts seem now to have adopted a far more stringent approach. In the case in question, the business man Nikolay Maximov had obtained an award ordering the payment of amounts due to him following a share purchase transaction. It was considered that the payment issue was inseparable from the underlying issue of transfer of title to the shares, which was not arbitrable. It was submitted that there would rarely be cases where the issue of title could be totally insulated, so that there was a risk that many disputes would be seen as non-arbitrable. This decision has been heavily criticized in Russia.

Although the title of the conference appeared to indicate otherwise, the specificities of arbitrations involving Russian parties were, it seemed, not always sufficiently addressed with the result that a few topics remained very generic. That being said, this conference evidenced that arbitration involving Russian and CIS companies is a field in expansion and that it rightly deserves closer attention.

Aileen Truttmann, Schellenberg Wittmer

While it is dubious that better access to the mousetrap gives much comfort to the unlucky mouse caught in it, bilateral investment protection treaties (BITs) provide arguably the only tools “to open the mousetrap” in the context of an investor-state dispute.

This post aims succinctly to identify some of the most problematic areas for investor protection, which are rooted in the wording of Russian BITs.

(Non-) Arbitrability of disputes over the occurrence of expropriation

Most Russian BITs contain a dispute resolution clause limiting jurisdiction of arbitral tribunals to hear disputes over the fact of expropriation.

For instance, the German-Russian BIT sets forth that “a dispute relating to the amount of compensation or the method of its payment” may be referred to an international arbitral tribunal by either party. An unofficial English translation of Article 10 of the Soviet Union-Belgium/Luxemburg Economic Union Treaty provides that “any dispute between one Contracting Party and an investor of the other Contracting Party concerning the amount or mode of compensation to be paid” can be submitted to the Arbitration Institute of the Stockholm Chamber of Commerce or an ad hoc tribunal.

Read narrowly, the dispute settlement clauses quoted above exclude claims concerning the occurrence of expropriation from the mandate of arbitral Tribunals constituted under the relevant BITs. Strict construction leads to the conclusion that no claim over the amount or mode of payment may be entertained absent a national court decision on the occurrence of expropriation or an acknowledgement of the host state to that effect.

The Berschader Tribunal seems to have followed this logic as it declared that it was “satisfied that the ordinary meaning of the [dispute resolution] provision [contained in the Russia-Belgium/Luxemburg BIT] excludes from the scope of the arbitration clause: … (ii) disputes concerning whether or not an act of expropriation actually occurred”.

The Tribunal in this case failed to have reasonably expounded this affirmation. The mere observation “it can only be assumed … that a dispute concerning whether or not an act of expropriation occurred [is] to be submitted to dispute resolution procedures provided for under the applicable contract or alternatively to the domestic courts of the Contracting Party in which the investment is made” is unpersuasive.

Although the Berschader Tribunal considered the issue of (non-) arbitrability of an act of taking under the Russian-Belgium/Luxemburg BIT obiter, restrictive interpretation of a dispute resolution clause appears to gain traction in investment jurisprudence.

The Tribunal in RosInvestCo UK Ltd. v. Russia dealt with the dispute resolution provision contained in Art. 8 of the UK-Soviet Union BIT conferring jurisdiction over “any legal disputes … in relation to an investment of the [investor] either concerning the amount or payment of compensation … or concerning any other matter consequential upon an act of expropriation.” The arbitrators in this case concurred with the Berschader panel on non-inclusion of controversies over the occurrence of expropriation and its lawfulness in the scope of a respective dispute resolution clause. However, the RosInvestCo Tribunal upheld its jurisdiction on MFN ground.

Narrow reading of similarly drafted dispute settlement clauses in Russian BITs yields preposterous results, turning a state – party to a dispute with an investor – into a judge in its own case. Should the host state deny that an act of taking occurred, an investor will be left with virtually no remedy to recover his losses. Is it what drafters of Russian BITs really meant?

In Renta 4 S.V.S.A. et al. v. Russia the Tribunal rejected the flawed logic of restrictive construction, having restated the problem as follows: “The Claimants allege expropriation. Russia denies any obligation under this head. There is therefore a dispute as to whether compensation is due”.

The arbitrators declined Russia’s submission on restrictive interpretation of the Spain-Russia BIT’s dispute resolution clause providing the following reasoning: “Russia considers that the words “amount or method of payment” allow nothing but a narrow debate about quantum or timing and currency. Even that might leave a door open to say that “amount” includes “no amount” (e.g. because the asset has nil value or because no expropriation has occurred).”

The Tribunal dispensed with the Respondent’s argument of non-inclusion of the occurrence of expropriation in the arbitration scope under the Spain-Russia BIT by establishing that an act of taking is indeed a “predicate to any amount being due”.

The arbitrators offered the following explanation: “Russia argues that there is no dispute as to quantification … The flaw in Russia’s argument is that there is more than one basis on which a respondent State could say “zero”. One might be indeed a divergence as to quantification. Another could be a denial of any obligation on account of alleged expropriation … Such an obligation is the evident predicate to any amount being “due” and thus the object of the type of debate allowed under Article 10.”

The Tribunal’s stance on jurisdiction over claims of expropriation in Renta sits comfortably with the principle of effective interpretation, living up to the investors’ legitimate expectations. However, the victory of the common sense over the formalistic approach is not sealed yet.

MFN clause as a second chance for investor

By including a Most Favored Nation clause into the body of BITs, Contracting parties seek to extend the application of benefits granted to nationals of third states to nationals of a Contracting partner. MFN clauses traditionally contain the word “treatment” that pertains to the bundle of substantive and arguably other rights and privileges. Controversy exists as to whether an arbitration provision is encompassed within the term “treatment”.

The RosInvestCo Tribunal answered this question in the affirmative. The Claimants invoked a generously drafted dispute resolution clause contained in the Denmark-Russia BIT by operation of an MFN provision of the Russia-UK BIT. The Tribunal accepted jurisdiction opining that: “As seen … the provision [of Art. 3] grants MFN-protection for “investors” … regarding their management, maintenance, use, enjoyment or disposal of their investments … It is difficult to doubt that an expropriation interferes with the investor’s use and enjoyment of the investment, and that submission to arbitration forms a highly relevant part of the corresponding protection for the investor … in case of interference with his “use” and “enjoyment”.

The arbitrators in Berschader have approached the issue of the applicability of an MFN clause to dispute resolution in a different way. The Tribunal referred to the Maffezini Award stating that “an MFN provision in a basic treaty does not incorporate by reference dispute settlement provisions in whole or in part set forth in another treaty, unless the MFN provision in the basic treaty leaves no doubt that the Contracting Parties intended to incorporate them.”

The Berschader Tribunal found no evidence of the Contracting Parties’ intention to that effect.

Without plunging into detailed analysis of the two approaches to operation of an MFN clause in regards to an arbitration provision, suffice it to say that finding of jurisdiction on MFN ground is highly case sensitive.

Indirect investments and investor status

Use of various types of “investment vehicles” and “investment conduits” has become common occurrence over the past decades. However, the wording of BITs concluded by the Soviet Union does not always accommodate modern methods of investing in a foreign economy.

Art. 1 of the Russia-Belgium/Luxemburg BIT sets forth that “the term “investment” also means indirect investments made by investors of one of the Contracting Parties in the territory of the other Contracting Party by the intermediary of an investor of a third state”.

Plain reading of this provision warrants the conclusion that an investment made by an investor through its intermediary incorporated in one of the states parties to the BIT does not enjoy protection under the Treaty.

Belgian nationals Vladimir and Moise Berschader were sole shareholders of the company Berschader International S.A. (BI) incorporated in Belgium. BI participated in the tender process for construction of new facilities of the Supreme Court of the Russian Federation and ultimately won it. Seven years later the contract was annulled by the Administration of the President of the Russian Federation. The BI’s personnel were physically ejected from the construction site. In the Supplemental Agreement the parties to the conflict agreed that the Supreme Court owed US $ 5, 673, 763 to BI. Subsequently, BI received around 6 per cent of the agreed amount. In the following two years BI was placed on bankruptcy.

The shareholders filed claims under the applicable BIT on their own behalf. Again, the Tribunal construed the BIT verbatim and found that the Claimants’ investments fall outside the ambit of the Treaty protection because BI was not incorporated “in a third state”. The decision was not unanimous as one of the arbitrators dissented.

Sedelmayer v. Russia provides a positive contrast to the unfortunate fate of the Berschader case. The Sedelmayer Tribunal found no difficulty in dispensing with Russia’s contention that Mr. Sedelmayer may not be deemed an investor under the USSR-Germany BIT for he has not made any investments in the Respondent’s territory.

Unlike the Claimants in Berschader, a national of Germany Franz Sedelmayer operated through the fully owned company SGC International, a juridical person under US law. The USSR-Germany BIT does not place any limitations on the investment vehicle nationality. It is therefore not the libertarian approach of the arbitrators to treaty interpretation but rather the language of the USSR-Germany BIT that secured the treaty protection for indirect investments.

The Foreign Investment Advisory Council’s official website (www.fiac.ru) apparently does not seek to increase awareness of the legal pitfalls lying in wait for current and potential foreign investors in Russia. A quick look at history reveals the Russian state to be continuing the legal traditions of the Soviet Union as it appears averse to the idea of being summoned to court or its equivalent let alone being held responsible for its actions. However, keeping this in mind and structuring investments in a sophisticated way might help stave off some legal problems before they arise. To put it bluntly, it is no crime to get smart about BIT-shopping.

The background is as follows:

To build a golf course in Moscow, a Russian company (the “Russian Borrower”) had borrowed 22 million Swedish Crowns from a Swedish bank (the “Swedish Bank”) under a loan agreement entered into on 24 January 1990 (the “Loan Agreement”). The Loan Agreement included an arbitration clause providing for arbitration under the Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce (“SCC”).

On 19 December 2008 the Swedish bank requested arbitration against the Russian Borrower seeking repayment of a certain capital amount under the Loan Agreement. The Russian Borrower rejected the claim and argued, inter alia, that the Loan Agreement violated then mandatory currency regulations in the former Soviet Union and that the dispute was therefore not arbitrable.

The SCC decided that the seat of the arbitration proceedings should be Stockholm.

The sole arbitrator held in the award, inter alia, that the Russian Borrower had not proved that the Loan Agreement violated then mandatory currency regulations in the former Soviet Union or in Russia and the Russian Borrower was ordered to pay a certain capital amount with interest thereon and compensation for costs.

The Russian Borrower turned to the Svea Court of Appeal and requested, inter alia, a declaration that the award was invalid on the basis that the award included the review of an issue which is regulated in mandatory currency regulations. Hence, the Russian Borrower argued that the issue was not arbitrable and the award should therefore be declared invalid. In the alternative the Russian Borrower requested annulment of the award on the basis that the arbitration agreement was not valid and binding as it violated mandatory currency regulations.

The Russian Borrower argued as follows: Rigorous currency regulations were in force in the beginning of the 1990s, both in Sweden and in the Soviet Union. Import or export of currency without authorization from the proper authorities was not allowed. Nor was the reduction of a loan amount or granting a respite for payment. In Sweden this followed from the Exchange Control Act (Sw: valutalagen (1939:350)) and the Exchange Control Regulation (Sw: valutaförordningen (1959:264)). The provisions were sanctioned by penalty and any currency could be forfeited. Since the Loan Agreement violated these provisions the Loan Agreement was invalid.

Further, the parties could not before or after a dispute had arisen “heal” the invalidity of the Loan Agreement. It was not amenable to settlement. Hence, issues arising out of the Loan Agreement were not arbitrable and no dispute under the arbitration clause could be referred to arbitration. This in turn meant that the arbitration agreement was invalid. The relevant point in time for assessing whether an issue is arbitrable is when the arbitration agreement is entered into.

The Swedish Bank disputed that the award was invalid or that it should be annulled. The issue tried in the award – whether the Russian Borrower had a payment liability under the Loan Agreement – is arbitrable. Further, the question whether an arbitration agreement is valid and binding has to be tried separately. The arbitration agreement is valid and binding under Swedish law which is the governing law of the arbitration agreement. Even though the main agreement may be invalid (which the Swedish Bank disputed) this does not mean that the arbitration agreement is invalid. The currency regulations are of no relevance for the validity of the arbitration agreement.

The Svea Court of Appeal held as follows:

Since the arbitration proceedings had been held in Stockholm it was clear that the arbitration agreement was governed by Swedish law. The question whether the dispute was arbitrable was therefore to be tried under Swedish law and under the Arbitration Act only disputes in respect of which the parties may reach a settlement may be referred to arbitration.

An arbitral award is invalid if it includes the determination of an issue which, in accordance with Swedish law, may not be decided by arbitrators (lack of arbitrability). However, the fact that there is mandatory legislation in a certain area of the law does not automatically mean that disputes in this area are not arbitrable. With respect to international disputes which involve foreign legislation it has to be decided on a case-by-case basis whether the foreign law is such that a voluntary settlement of the dispute before a Swedish court would not be accepted. With regard to economical-political regulations in a foreign state there is often no reason why the mandatory provisions should affect the possibility to settle in Sweden and, hence, the arbitrability under Swedish law. This view is in accordance with an international trend to accept that an international dispute may be settled by arbitration although a corresponding national dispute would not be arbitrable.

The relevant point in time for assessing whether the dispute in question is arbitrable is when the Loan Agreement was entered into, i.e. on 24 January 1990. At that time the parties should be able to foresee the consequences of any lack of arbitrability.

When the Loan Agreement was entered into, Sweden as well as the Soviet Union had mandatory currency regulations. The Swedish Exchange Control Act and Exchange Control Regulation included restrictions on the import and export of foreign currency and securities. The same applied to the purchase and sale of foreign currency and foreign claims. However, there were no restrictions for a Swedish legal entity to enter into a loan agreement whereby a foreign legal entity became indebted. The currency regulations were not aimed at disallowing a creditor-debtor relation as such; but concerned the making of payments cross the borders.

The parties’ claim and debt under the Loan Agreement could not be deemed subject to mandatory legislation in such way that this undertaking was not amenable to settlement. Hence, the parties could reach a settlement regarding this. The issue tried in the award was the debt undertaking; not how any payment should be made. The dispute was thus arbitrable.

Since the mandatory currency regulations did not mean that a non-arbitrable issue was tried in the award the arbitration agreement was valid and binding. This is regardless of whether said currency regulations may entail that parts of the Loan Agreement were invalid.

The ruling of the Svea Court of Appeal seems quite arbitration friendly and is in line with the international trend to maximize the scope of application of an arbitration agreement. The restrictions in the previous currency control regulations in Sweden were narrowly interpreted and the doctrine of separability was firmly adhered to. The currency regulations in the former Soviet Union were not analyzed at all by the Court of Appeal. However, the Court of Appeal seemed convinced that the issue in dispute – whether there is a payment liability under a loan agreement – was not subject to any mandatory currency regulations. Further, the Court of Appeal did not expressly address whether the Swedish law test for arbitrability – that the dispute must be amenable to settlement – should be determined under Swedish substantive law or the lex causae. It has been suggested in Swedish legal doctrine that the question whether the parties are capable of settling the dispute should normally be assessed under the law governing the main contract. If the governing law is foreign law the outcome of that test under foreign law is decisive for the question of arbitrability. In this case it is unclear whether lex causae was Swedish law or any foreign law. The reason why this was not dealt with by the Court of Appeal might be that it had no relevance here as the previous currency regulations, both in Sweden and Russia, did not prohibit debt undertakings per se.

Leave to appeal was granted by the Court of Appeal² and the Russian Borrower has appealed the judgment to the Supreme Court.

If time permits, I may do another list for 2011. But, first I thought I’d take a look back at last year’s list and offer a brief update on those cases. Rather, than do all of the heavy-lifting here, I’ll direct readers of this blog to relevant reporting in my Investment Arbitration Reporter newsletter (not to be confused with Kluwer’s ITA newsletter) where appropriate. (You won’t need a subscription to view the articles that are referenced below, as we’ll make them publicly available.)

Without further ado, here’s a run-down of the ten cases from last year.

Suez, Vivendi, Anglian Water, et al. v. Argentina

In August, decisions on liability were finally rendered, holding Argentina liable for breaching investment protections owed to a Who’s Who of foreign investors in that country’s water and sewage sector. However, for those interested in the running debate about the coherence or fragmentation of public international law, the decisions may be something of a disappointment. While the arbitrators found breaches of Argentina’s bilateral investment treaty obligations, they gave short shrift to Argentina’s invocation of international human rights law obligations in its defence of these claims. Check out our reporting for a fuller run-down of what happened.

Fraport v. Philippines

Next on last year’s list was Fraport’s bid to annul an ICSID jurisdictional decision which had grounded the company’s bid for compensation over an expropriated airport terminal. In 2007, a divided tribunal ruled that the company’s claim should fail due to the fact that the claimant had quietly circumvented local laws designed to limit foreign control of the terminal project.

Well, tell your friends that you read it on the internet: Fraport got an early Christmas present on December 23rd when an ICSID annulment committee annulled the 2007 ruling. The annulment paves the way for a new arbitration, and one imagines that this will land on ICSID’s doorstep early in the new year. Keep an eye on the IAReporter newsletter for the fuller story on this one.

Brandes Investment Partners v. Venezuela

Last year, we noted that a decision should be forthcoming by a panel of arbitrators in a telecoms nationalization claim whose viability hinges on the ambiguous-looking arbitration clause in a domestic investment protection statute. Yeah, that’s a mouthful. But you’ve got time to digest it because, as of this writing, a decision in the Brandes case is still awaited.

Mind you, a different ICSID panel weighed in earlier this year with a notably restrictive interpretation of the same statute at issue in the Brandes case. Our report on that dimension of the Mobil v. Venezuela case is here. Now it remains to be seen what the Brandes tribunal makes of the ruling in the Mobil case.

El Paso v. Argentina

Nothing new to report here. El Paso turned to arbitration against Argentina back in 2003, alleging that the country’s handling of an earlier financial crisis triggered breaches of protections owed to El Paso. Arbitrators are still dotting their ‘I’’s and crossing their ‘t’’s on this long-anticipated decision. El Paso must be thoroughly demoralized given that the most likely outcomes are A) a dismissal of its case or B) a “victory” followed by a protracted annulment process.

AES v. Hungary

There is rather more to report in relation to another claim highlighted in last year’s list. AES was one of three foreign power producers to sue Hungary for allegedly failing to respect the terms of long-term power purchase agreements. However, in September, arbitrators handed down a verdict in favour of Hungary, finding no breaches of the country’s obligations under the Energy Charter Treaty. A fuller accounting of the case can be read here.

Foresti and others v. South Africa

A group of foreign miners drew international headlines when they alleged that South Africa’s Black Economic Empowerment program – and the country’s new BEE-inspired mining regime – had breached protections owed under South Africa’s bilateral investment treaties.

As was noted last December, the politically contentious dispute seemed to be fizzling out after the claimants signaled that they were prepared to lay down their arms. However, the claimants and South Africa could not agree on the peace terms, so it fell to arbitrators to hold a hearing and issue an award which drew a line under the case. Read all about it here.

RosInvestCo v. Russian Federation

On December 19, 2010, we reported that an arbitral award in one of three pending Yukos-related arbitrations against Russia had been quietly rendered back in September. The ruling had remained under lock and key until the Russian Federation moved earlier this month to set aside the award. Here’s our quick run-down of what happened, but keep an eye on our newsletter for a full accounting of the award’s holdings.

Chemtura v. Canada

Canada walked away victorious after arbitrators ruled in August of 2010 that a U.S. chemical company had failed to make out any of its claims under the North American Free Trade Agreement (NAFTA). The case had been watched nervously by public health advocates as Chemtura was attempting to second-guess Canada’s phase-out of the controversial agro-chemical, lindane. But, in the end, Canadians were left only with a hefty legal bill – not an arbitral edict requiring them to put a teapoon of lindane on their morning oatmeal. See this report for the crux of the tribunal’s ruling.

Chevron v. Ecuador (Round One)

While a bruising multi-front legal fight over liability for Amazonian oil pollution gathered pace last year, arbitrators also weighed in with a ruling on a less-publicized under-card battle between the two combatants: Chevron corporation and the Republic of Ecuador.

In what could be a hefty victory for Chevron, arbitrators ruled that Ecuador was liable for delaying the judicial resolution of a series of contract disputes. As we made clear in an analysis of the arbitral ruling, the tribunal appeared to break new ground in ruling that an international tribunal can step into the shoes of domestic courts that are failing to deliver justice in a timely fashion.

Libananco v. Turkey


Various claimants came out of the woodwork to sue Turkey following that country’s winding up of the Uzan family business empire. Libananco, a Cyprus-based entity, has long maintained that it has the most credible claims. The off-shore company insists that it held stakes in two valuable electricity concessions prior to their being taken over by the government. With all of the other known arbitration claims brought by shell-companies now having been dispatched on jurisdictional grounds, a ruling in the Libananco case is the only thing left to be written.

However, if Libananco should prevail, it will have to contend with a recent ruling by a New York judge that any ICSID arbitration winnings must accrue to the benefit of those who suffered a Billion Dollar fraud at the hands of the Uzans. See our story here.

Luke Eric Peterson
Editor
http://www.InvestmentArbitrationReporter.com

In the underlying case, proceedings in Russia arose in connection with an arbitration commenced in 2009 in the London Court of International Arbitration (“LCIA”) by a Cypriot company “Edimax” against the Russian businessman Shalva Chigirinsky. Edimax is claiming approximately $32 million from Chigirinksy for debts allegedly owed by companies under his control, on the basis that he had issued a personal guarantee in the companies’ favour. In an effort to ensure any future enforcement of a potential LCIA award, Edimax applied to the Moscow Arbitrazh Court for interim relief in the form of an attachment over Chigirinsky’s Moscow apartment.

The issue of whether such relief may be ordered by Russian arbitrazh courts to support foreign arbitration has remained unclear for some time. Article 90(3) of the Russian Arbitrazh Procedure Code states that a party to arbitral proceedings may apply to an arbitrazh court to seek relief at either the place of arbitration, the debtor’s place of residence, or the place where the debtor or the debtor’s assets are located. Although the statutory provision does not on its face limit the availability of interim relief to a particular kind of arbitration, it was previously uncertain whether it extends to an international arbitration with a seat outside Russia.

Indeed, the lack of clarity on the availability of interim relief in such a scenario was illustrated by the progression of the Edimax v. Chigirinsky case through the Russian court hierarchy. The first instance arbitrazh court refused to grant Edimax interim relief on the basis that the request was not justified under the requirements of Article 90 of the Russian Arbitrazh Procedure Code. The Ninth Court of Appeal disagreed and reversed the decision, issuing the order of attachment. Chigirinsky then appealed to the Moscow Circuit Cassation Court, which annulled the decision below on the basis that the case did not involve a “commercial” element. The Cassation ruling stated that such a “commercial” element is necessary since Article 27(1) of the Procedure Code of the Russian Federation limits the jurisdiction of the arbitrazh (commercial) courts to matters involving entrepreneurial or other economic/commercial activities. In the opinion of the Cassation Court, Chigirinsky provided the personal guarantee in his private capacity, and not as an entrepreneur engaged in a business activity, and this placed his assets outside the jurisdiction of the arbitrazh (commercial) courts.

The issues in the proceedings were finally resolved by the Supreme Commercial Court, Russia’s highest court of commercial jurisdiction. The Presidium of the court decided that an individual in Chigirinsky’s position could be considered as an entrepreneur acting in his economic interests when issuing a guarantee against the debts of companies under his control. As such, Russia’s arbitrazh courts are competent to order provisional relief against him as a personal guarantor of corporate debts. Perhaps most significantly, the Supreme Commercial Court set a precedent in concluding that Russian arbitrazh courts can rely on Article 90(3) of the Arbitrazh Procedure Code to provide interim relief, such as an order of attachment over assets located in Russia, in aid of foreign arbitration.

The decision is a clear demonstration of a recent trend within the Russian judiciary towards greater support of arbitration and litigation taking place abroad. In the past, Russian authorities have exhibited some reluctance to enforce arbitration awards or court decisions rendered outside Russia against Russian entities. Although Russia is a party to the 1958 New York Convention and is therefore bound to enforce valid arbitration awards, domestic courts have previously refused enforcement on the basis of very broad interpretations of public policy. In the realm of litigation, Russia is not bound by any international obligation to recognize and enforce foreign judgments, and Russian courts have in the past commonly refused enforcement of judgments rendered abroad. However, the Russian Supreme Commercial Court appears to be changing its stance. In a 2009 decision, Rentpool BV v. Podyemnye Tekhnologii LLC, the court enforced a Dutch judgment in the absence of a treaty obligation to do so, citing international law principles of “comity” and “reciprocity.” On the arbitration side, following the ruling of the Supreme Commercial Court in Edimax v. Chigirinsky, Russia’s Ministry of Economic Development has reportedly requested information from Russian Embassies in Europe on other nations’ practices on granting provisional measures. Russian authorities are also said to be considering the adoption of the UN Model Law on International Commercial Arbitration that, with amendments as adopted in 2006, includes extended provisions on interim relief.

In addition to the positive court decisions coming out of the arbitrazh courts, as discussed above, there are other factors that support the view of the positive developments in the Russian courts, at least as far as the arbitrazh (commercial) courts are concerned. In particular, the Chairman of the Supreme Arbitrazh Court has issued clear instructions to the lower courts to treat decisions of the more senior courts as precedents. This combined with the recent practice of placing decisions of the Supreme Arbitrazh Court on-line is likely to be another major step in developing transparency and consistency in the arbitrazh court system in Russia.

One other development that is taking place is the introduction of electronic document systems into the arbitrazh courts, whereby it is possible to file court documents through electronic means. This system is in the process of being developed and, once the system is fully operational, it will arguably put the Russian commercial courts ahead of the latest accepted technological practices in the leading courts around the world.

While it remains to be seen whether the positive trend of Russian judicial co-operation with international dispute resolution will continue, the recent position of the Supreme Commercial Court and the other developments highlighted above certainly signal a positive message for foreign investors seeking to do business in Russia.

By David Goldberg and Eugenia Levine

* Arbitrazh courts in Russia are a system of State courts within the Russian judiciary with jurisdiction over most commercial disputes and various business entities. These arbitrazh courts are not arbitration tribunals and do not resolve arbitral disputes. They are commercial courts in the general sense of the phrase.

One interesting and noteworthy bilateral agreement is the Trade and Payments Agreement concluded between the USSR and Sweden in Moscow on 7 September 1940 (the “Agreement”). Although this agreement was entered into during the Soviet time, it still continues to operate in Russia, particularly with regard to Article 14 of the Agreement with the Annex “Agreement on Arbitration Courts” and Article 15 dealing with arbitral awards’ enforcement. (The articles are quite lengthy; therefore, their texts were omitted from the note).

This Agreement was signed 70 years ago during the Soviet era, yet after the collapse of the USSR, Sweden and new Russia decided to retain it. On 29 September 1993, a Protocol was signed in Stockholm on the termination of application with regard to the relations between the two countries concerning certain previous agreements. However, according to Article 3 of the Protocol, that termination did not affect the legal force of Articles 14 and Article 15 of the 1940 Agreement. The Protocol was ratified in Russia by Federal Law № 18-FZ on 17 February 1995 and became effective on 1 May 1995.

I would like to note five reasons why, in my opinion, the provisions of the 1940 Agreement require particular consideration.

Firstly, Stockholm is probably the city where the majority of arbitration cases to which Russia is a party to are considered, and the awards are subsequently enforced in Russia. This situation is inherited from the Soviet period.

Secondly, the provisions concerning recognition and/or enforcement of arbitral awards contained in the 1940 Agreement differ from the New York Convention’s provisions as they are less generous to the prevailing party. Accordingly, it should make quite a difference for such a party, as well as for debtors under such awards, whether the provisions regarding arbitration and enforcement of arbitral awards in the 1940 Agreement are applicable or not. This issue is also very important for Russian courts, especially for the High Arbitrazh Court which is responsible for shaping a uniform judicial practice.

Thirdly, the Agreement concerns provisions which have prevailing force over domestic Russian regulations. Their correct application by Russian courts do not merely constitute controversial issues which are imperative and sensitive for society, economy and state but also form a sphere which has not been completely mastered in Russia so far, and which involves a multitude of issues and problems.

Fourthly, the provisions of the Agreement are unique: there are no other ones of a like nature in any other international agreement to which Russia is a party to.

Finally, the analysis of such provisions results in rather curious and even somewhat unexpected legal conclusions.

There are two important points in the effective provisions of the 1940 Agreement: (1) the special procedure of constituting the arbitral tribunal according to the provisions of the Annex and; (2) the two grounds for refusal to recognize and enforce an arbitral award which differ from the grounds provided for in the New York Convention and the Russian Law “On International Commercial Arbitration”. The first ground for refusal to enforce an arbitral award under the Agreement is when an application to set aside an arbitral award is being considered at the seat of arbitration. This is sufficient ground to refuse recognition and enforcement of the award in Russia under Article 15 of the Agreement. A similar ground for refusal can be the fact that the time for challenging the arbitral award in its seat has not yet expired.

The second ground for refusal is “the award being contrary to the state legal principles of the country where arbitral award enforcement is requested”. The concept of “state-legal principles” is used in Article 15 along with the concept of “public order”, and not as a synonym to the latter. The concept of “state-legal principles” is distinct from the traditional public policy exception. The concept of “state legal principles of Russia” is similar to the “constitutional legal principles of Russia”, which is broader than the concept of “public order of Russia”, and would aggravate problems of enforcement of arbitral awards.

In 1940 nobody in the USSR thought there was a difference between the concepts of “public order” and “state legal principles”, except perhaps that the former was considered more acceptable for foreign states and the latter as more suitable for the USSR. From the viewpoint of modern Russian domestic law, the recognition of the two concepts as “separate” was confirmed in 1993. It is obvious that the possibility of using the concept as is in legal practice creates the risk that fewer awards will be enforced in Russia.

Despite highlighting the relevant provisions of the Agreement and their legal force as confirmed by the 1993 Protocol, it is high time for such provisions to be abolished. It is an outdated Agreement that most lawyers in Russia and Sweden are not aware of, and if they were aware of it, it would almost certainly lead to a movement to abolish the articles in effect.

Firstly, the international conference “Commercial Arbitration in Russia, Sweden and the UK: New Business Opportunities”, was held on 9-10 June at the Congress Center of the Russian Chamber of Commerce and Industry. The conference was jointly organized by the Center of Arbitration and Mediation at the Russian Chamber of Commerce and Industry in cooperation with the Stockholm Chamber of Commerce, CIA and BE Capital. More than 100 lawyers from Russia and abroad attended the conference with a wide range of interesting topics. In conjunction with this event, a meeting of the newly elected SCC Secretary General Annette Magnusson and Kaj Hobér with members of the Russian Young Arbitration Lawyers Group, MAF40 was held to discuss arbitration in Sweden in general, and activities of the SCC in particular (http://www.sccinstitute.com/?id=23696&newsid=34412).

Secondly, on June 23, 2010, the Russian Chamber of Commerce and Industry took some initiatives with regard to the International Commercial Arbitration Court (ICAC), which is acting under the auspices of that Chamber. To this, a new list of arbitrators of the ICAC was approved by the Russian Chamber of Commerce and Industry. The list currently includes 179 Russian and foreign practitioners. The previous list that was approved in 2005 with later amendments included 176 Russian and foreign arbitrators. The current list, taken into account the number of deceased arbitrators and those who were not included in the list, there are 30 newly listed arbitrators, among them 10 are foreigners.

The list is not mandatory for the parties to choose from in disputes to be considered by the ICAC; however, the Chairman of the arbitral tribunal (in case there are three arbitrators) shall be appointed by the Presidium of the ICAC only from that list. Should the Presidium of the ICAC decide that the dispute should not be resolved by a panel, a sole arbitrator shall also be appointed by the Presidium of the ICAC only from that list.

In addition, the Russian Chamber of Commerce and Industry has also introduced several important amendments to the ICAC Rules (the “Rules”).

The position of the First Deputy- Chairman of the ICAC has been created. The person in that position is intended to replace the Chairman of the ICAC in case of a need. Subject to the ICAC previous Rules, there were two Deputy- Chairmen with the same legal status.

Furthermore, the amendments increased the number of the members of the Presidium of the ICAC, who are elected during the general meeting of the ICAC arbitrators every 5 years, from fine to seven. Furthermore, the Rules of the quorum of the Presidium of the ICAC (important body in everyday activities of the ICAC) were also amended.

In addition, a new provision was added in relation to the number of copies of all documents that need to be submitted to the ICAC (one extra copy is to be provided); the additional copy is to be provided to the Rapporteur in an ICAC case. The involvement of a Rapporteur is a special procedural feature of every ICAC case: a Rapporteur is a knowledgeable person appointed by the secretary of the ICAC (subject to the proposal of the Chairman of the arbitral tribunal of the sole arbitrator) to help the arbitral tribunal or the sole arbitrator with the file. In the ICAC, there is a list of rapporteurs. A Rapporteur whose name is not included in the list of Rapporteurs can still be appointed subject to the prior approval of the ICAC Chairman.

Moreover, two major amendments were introduced to the Rules in order to promote transparency and efficiency. Firstly, the Rules provides that party in a dispute can request to submit its oral arguments via a video conference. This request is considered by the arbitral tribunal or the sole arbitrator subject to the circumstances of the case, opinion of the other party(s) and technical availabilities. Secondly, the Rules state that a person can hold a position of an ICAC Chairman for two terms only (not more than 10 years).

On June 28, 2010, the General Meeting of Arbitrators of the ICAC was held. Professor Alexey A. Kostin was elected as the Chairman of the ICAC, while Professor Ivan S. Zykin was elected as the First Deputy-Chairman of the ICAC, and Professor Evgeniy A. Sukhanov was elected as the Deputy-Chairman of the ICAC.

Professor Alexey A. Kostin, supported by 80 % votes of the ICAC arbitrators replaced Professor Aleksandr S. Komarov, who held that position for 17 years (since 1993). The following persons were elected members of the Presidium of ICAC for a five-year term: professor Nina G. Vilkova, professor Alexey N. Zhiltsov, professor Aleksandr S. Komarov, professor Sergei N. Lebedev, professor Aleksandr L. Makovskiy, professor Mikhail G. Rozenberg, professor Oleg N. Sadikov.

I believe that all amendments are positive with real intention to make the ICAC more transparent and more competitive.

Just to mention one last thing that I found is interesting, thus worth noting. A few mass-media in Russia broadcasted a rumors on the potential relation between the new elections and the cases heard by ICAC arbitrators almost four years ago (http://www.kommersant.ru/doc.aspx?fromsearch=32838547-ebbf-4c10-bab5-a749b20307c6&docsid=1405322). among the cases were Yukos Capital s.a.r.l. (Luxembourg) v. OJSC Yuganskneftegaz (former subsidiary of Yukos Oil Company, which was held insolvent by Russian courts due to huge tax liabilities because of its involvement in tax scams. OJSC Yuganskneftegaz was finally acquired by the Russian state oil company Rosneft). The claimant sought to enforce four loan agreements. In the four similar cases, the ICAC Arbitral Tribunal found in favor of the claimant. Later on, the debtor successfully challenged the awards before the Russian Commercial (Arbitrazh) Court, which set the awards aside for a number of procedural violations. Then Yukos Capital s.a.r.l. applied to Dutch courts to enforce the awards. The Court of the First Instance rejected enforcement while the Appellate Court found in favor of Yukos Capital s.a.r.l.

On June 25, 2010, three days before the ICAC Meeting, the Dutch Supreme Court denied Rosneft the right to appeal in that case on enforcement. That decision of the Dutch Supreme Court provided a good ground for rumors. It was rumored that the ICAC Chairman was replaced for political reasons, i.e. perhaps due to his influence on the outcome of the said arbitral cases in 2006 or for failing to prevent granting the awards by the ICAC Tribunals in favor of Yukos Capital s.a.r.l. In my opinion, such rumors are mere gossip by people who are not aware of the ICAC procedures taken to resolve the cases and the amount of preparation needed, or that they have an intent to distort the ICAC procedures. You may believe everything you read in the newspapers or hear in the media unless you were a witness to an event. I was.

Alexander Muranov

Russian law stipulates that an arbitrator must disclose any circumstances which may give rise to justifiable doubts as to his impartiality or independence. Based on such disclosure, a party to the arbitration may decide whether to challenge the arbitrator. The arbitrator’s failure to provide such information at the time of his appointment may serve as grounds for appealing an arbitral award in the future.

Departing from the law and the facts of the case, the court set aside the arbitral award. However, the court did not explicitly rule whether the participation in the conferences may per se speak for the partiality of the arbitrators. This led to a vivid discussion regarding whether the arbitrators are biased if they appear at academic events organized and sponsored by the opposite party’s counsel (law firm).

There was no subsequent case law regarding this matter until the Court of Cassation of the Moscow Federal Circuit recently rejected the claim of the partiality of an arbitrator based on a similar set of facts. In Erick van Egeraat Associated Architects B.V. (Netherlands) v Capital Croup LLC (Russia) (Case No. А40-51596/09-68-437), Capital Group LLC alleged that a co-arbitrator once spoke at a conference organized and sponsored by the law firm of the opposite party’s counsel. In addition, Capital Group LLC reported that the counsel representing Erick van Egeraat also spoke at the same conference.

The court rejected Capital Group LLC’s claim and based its ruling on two specific arguments. Firstly, it was established that the law firm acted only as a so-called ‘information sponsor’ (promoting the conference among its clients and partners) and certainly had no influence on either the program of the conference or on the speakers’ list. Secondly, the participation of the co-arbitrator in the conference did not create any dependence or commercial interest with the counsel (law firm). Therefore, the arbitrator fulfilled the impartiality criteria set forth by international laws and the SCC Arbitration Rules.

The decision of the Court of Cassation of the Moscow Federal Circuit is timely and welcomed as it brings some clarity to the issues of arbitrators’ impartiality.

Russian courts adopted the position that an arbitrator’s involvement in academic events must be made known to the other party, otherwise this is a ground for setting aside awards. Yet, the courts did not answer the main question of whether the mere participation in a conference biases an arbitrator.

The recent decision illustrates that the impartiality test is based on establishing whether or not any interaction creates dependence or commercial interest between the counsel (law firm) and the arbitrator. Therefore, it is at the court’s discretion whether or not to define in each individual case whether any form of sponsorship may speak for an arbitrator’s partiality. In this particular case, the court ruled that ‘information sponsorship’ does not create any special relationship between the counsel (law firm) and arbitrator.

Furthermore, the court held that the fact that the arbitrator and counsel spoke at the same conference does not necessarily lead to the partiality of the arbitrator.

The court also underlined another important aspect in that the standards of impartiality should also be found in the applicable arbitration rules. In our opinion, any relevant guidelines by arbitration institutes on the impartiality of arbitrators would be of a significant value in cases concerning setting aside awards or in enforcement procedures in Russia.

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