The clearest indication of a shift in the approach of the Russian arbitrazh (commercial) courts* came in April 2010, when the Presidium of Russia’s Supreme Arbitrazh (Commercial) Court issued a precedential decision, holding that interim relief measures may be ordered by Russian arbitrazh courts in aid of foreign arbitration. The ruling has resolved an ongoing debate over the issue in the lower courts, and has suggested a positive shift in the attitude of the Russian judiciary towards supporting foreign dispute resolution proceedings.

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.

It is well known that the New York Convention is widely recognized as a foundational instrument of international arbitration. In addition to this Convention, there are also international bilateral agreements in which Paragraph 1 of Article VII of the New York Convention specifically refers to and determines the relationship between its provisions and other agreements.

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.

Last month a number of noteworthy arbitration-related developments took place in Moscow.

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

In 2007, the Russian Supreme Arbitrazh (State Commercial) Court in OAO NK Rosneft v. Yukos Capital S.a.r.l ruled that arbitrators must disclose their connection to the legal counsel of the other party at the time of their appointment. The facts of the case suggested that one of the arbitrators spoke at a conference organized and sponsored by the law firm representing Yukos Capital S.a.r.l. in the arbitral proceedings.

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.

Dispute resolution clauses often provide for negotiations, conciliation or a similar procedure before arbitration. Both UNCITRAL Model Law on International Commercial Arbitration and the Russian law contain no provisions on the legal effect of the pre-arbitration procedure of dispute settlement. In particular, they are silent on whether its non-fulfillment precludes the arbitral tribunal’s competence. Accordingly, state courts have to determine whether and where a failure to comply with such procedure forms grounds for refusal to enforce an arbitral award.

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

Under the Russian legal system, the last resort a party has with respect to challanging a court decision is to apply to the Constitutional Court of the Russian Federation with a claim to review the decision’s compliance with the Russian Constitution in terms of the provisions of laws and/or regulations applied by lower courts. There are very few cases in which the Constitutional Court opined on matters related to international arbitration.

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.

Unlike arbitration which is quite solidly supported by legislation (the law of the Russian Federation “On International Commercial Arbitration”, which is almost completely based on the UNCITRAL Model Law, was adopted in 1993. The Federal Law “On Arbitration Courts” governing domestic arbitration entered into force in 2002), mediation in Russia lacks adequate legal framework. The Commercial Procedure Code and the Labor Code expressly declare that disputes can be resolved by mediation, but many important issues are not yet specified in law. Furthermore, there are no guarantees of confidentiality of the procedure and no prohibition to call for mediators as witnesses of what they have learnt of during the mediation procedure. The enforceability of a settlement agreement concluded as a result of mediation has not been clearly specified.

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 post-Soviet time Russian courts have already developed quite a vast practice of recognition and enforcement of international arbitral awards. One can even already fetch out some trends in such practice. Thorough case study shows that certain distrust to international arbitration and unexpected obstacles to the enforcement of the awards caused by lack of experience in dealing with foreign-related matters, reflected in some early judgments, gradually go.

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.