Law Applicable to Arbitrability

16.07.2014 Law Applicable to Arbitrability

a Russian cassation instance court suggested that foreign laws permitting certain disputes to be referred to arbitration should be respected. This should be the case even if under Russian law similar Russia-related disputes are not arbitrable. Apparently some restrictions on arbitrability have only limited effect.

The case before the court concerned enforcement of an arbitral award rendered by a tribunal seated in Serbia in a dispute arising out of a privatisation agreement. The Russian court held that even though privatisation disputes are not arbitrable in Russia, this restriction does not necessarily apply to disputes arising out of privatisations in other countries.

Facts of the Case

In August 2008 OJSC Avtrodetal-Service (“Avtodetal”) prevailed in a privatisation tender the Privatisation Agency of Serbia (“Privatisation Agency”) organised and acquired shares in Ikarbus, a well-known bus manufacturer, for c. 7 million Euro. It appears from media reports that in 2009 the Privatisation Agency sought to terminate the share purchase agreement alleging that Avtodetal had defaulted on various obligations.

Avtodetal commenced arbitration against the Privatisation Agency under the Rules of the Foreign Trade Arbitration of the Serbian Chamber of Commerce and the Privatisation Agency countersued. In October 2011 the tribunal rendered an award ordering Avtodetal to pay c. 5.8 mln Euro in fines and damages to the Privatisation Agency.

Avtodetal apparently commenced proceedings before the Serbian courts seeking setting aside of the award. The first instance court dismissed Avodetal’s application and an appeal is currently pending.

Decisions of the Russian Courts

The Commercial Court for the Ulianovsk Region refused to recognise and enforce the award. It reasoned that Russian law permits the submission of only private law disputes to arbitration. A dispute arising out of a privatisation is a public law dispute and therefore not arbitrable. The court also referred to the pending set aside proceedings as potential evidence of the award not having become final.

The Federal Commercial Court for the Povolz’e Circuit disagreed on both counts.

With respect to arbitrability it chastised the first instance court for failing to properly consider the position under Serbian law. Apparently, in order to determine whether a dispute is arbitrable the nature of the dispute under applicable substantive law is paramount (i.e. whether it is a private or a public law dispute). The cassation instance court also suggested that certain claims under a contract may be arbitrable (for instance payment claims) even if others are not.

With respect to the set aside proceedings the cassation court disagreed with the lower court’s decision on allocation of burden of proof. It pointed out that a party challenging enforcement of an award should prove that the pending set aside proceedings prevent the award from becoming final. In the absence of such evidence, the first instance court should not have refused to enforce the award.

Commentary

The Federal Commercial Court for the Povolz’e Circuit made some very important points.

First, not all Russian rules on arbitrability automatically apply to disputes concerning assets abroad. One may think of disputes concerning shares in Russian companies, which Russian courts have in many cases held not arbitrable. There appears to be no reason to extend this rule to disputes concerning shares in foreign companies.

Second, in deciding whether a dispute is arbitrable for the purposes of enforcement of an award the court should look at the specific dispute rather than the overall transaction. This approach appears to be at odds with the recent practice of the Supreme Commercial Court, but more in line with practice in many other jurisdictions.

The full text of the decision of the Federal Commercial Court can be found here (in Russian).

Author: Sergey Usoskin

First published on CIS Arbitration Forum 


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