Arbitration - Russia

Introduction

The economic downturn is causing havoc in the world of finance. Lenders are calling events of default on loans, often on grounds which might be considered tenuous, while borrowers must consider the possibility that lending banks may default on their obligations or even, following the collapse of seemingly indestructible financial institutions, become insolvent. An increase in disputes over finance-related contracts makes it vital to ensure that dispute resolution clauses are correctly worded.

Financial contracts such as facility agreements commonly include optional arbitration clauses that give one party an election to choose between arbitration and the courts - this is usually a unilateral option for the lender, due to its bargaining power. Although international arbitration is an attractive dispute resolution method, lenders wish not to tie themselves to it, preferring to maintain access to other national courts and thereby take advantage of summary judgment, as this is a relatively quick and easy way to obtain judgment on debts and is unavailable in most arbitral systems. However, lenders may also wish to retain an option to arbitrate where issues of neutrality, confidentiality or enforcement are paramount.

Two types of clause are commonly used to provide such an option. An arbitration clause coupled with an option to litigate refers all disputes to arbitration, but gives the lender the option of recourse to the courts. Alternatively, a litigation clause coupled with an option to arbitrate refers all disputes to the courts, but gives the lender the option of recourse to arbitration. The enforceability of these clauses in the arbitrazh (ie, commercial) courts, which often rule on such matters at the time of enforcement, is an increasingly significant issue in relation to finance contracts involving a Russian party.

Pathological Arbitration Clauses

Arbitration has become the preferred method of dispute resolution in Russia for disputes involving a foreign party, as foreign court judgments are unenforceable in Russia unless the jurisdiction in question has a bilateral treaty with Russia providing for enforcement. Neither the United Kingdom nor the United States, for example, has such a treaty in place. Since Russia is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, arbitration is the only viable option for UK or US parties needing to enforce arbitral awards in Russia. However, an arbitral award may not be enforced in the Russian courts if the arbitration agreement is deemed invalid for being 'pathological' - in practice, this usually arises where an ambiguity or defect in the drafting prevents the court from establishing that the parties' true intention was to submit disputes to arbitration. In Russia, optional arbitration clauses can be problematic because retaining the option to litigate can lead to confusion on this point. Furthermore, if only one party has the option to arbitrate, a court may consider that the parties do not have equality of arms. Unfortunately, no reported cases from the arbitrazh courts have resolved this point, so the position remains unclear.

Russian courts may subscribe to the position in other jurisdictions (eg, the United Kingdom) that, in principle, the grant of a unilateral option to lenders is enforceable, whether as an option to arbitrate or to litigate. This view is based on the policy consideration that parties should be free to agree on the manner in which they resolve disputes arising between them. However, in order to avoid procedural confusion, such agreements should be carefully drafted and must outline the dispute resolution mechanism unambiguously. In theory, this reasoning should apply in Russia. Experienced Russian arbitrators consider that optional arbitration clauses are enforceable and that the arbitrazh courts should uphold their validity. However, this is the opinion of arbitration-friendly individuals and the danger remains that the arbitrazh courts, sometimes accused of judicial chauvinism and an anti-arbitration stance, might deem an optional arbitration clause invalid on certain grounds.

In the case of a litigation clause coupled with a unilateral option to arbitrate, a court might consider that as the prima facie agreement is to refer disputes to the courts, the parties' intention to refer disputes to arbitration is insufficiently clear. This may be the case even if the clause is carefully worded. It has been suggested in Russian academic articles that a unilateral right of recourse to arbitration does not fulfil the criteria laid out in Article 2(1) of the convention because it is not an agreement "under which the parties undertake to submit to arbitration". As only one party has the ability to submit a dispute to arbitration, the arbitrazh courts may deem that this criterion is not met and may consider such a clause invalid.

In the case of an arbitration clause coupled with a unilateral option to litigate, the prima facie agreement between the parties is to refer disputes to arbitration. This should reduce the risk of such a clause being ruled invalid, as both parties have clearly agreed to arbitrate and can submit disputes to arbitration. Therefore, this is probably a safer solution for lenders seeking flexibility. However, the fact that access to the courts is not excluded may be fatal to the clause's effectiveness and parties to such an agreement should consider this risk.

Moreover, either form of unilateral clause could be held invalid on grounds of inequality, as only one party has an option. This may be seen as unfair in terms of public policy. However, Russian courts have rightly found clauses that give an option to both parties to be pathological due to the absurd procedural confusion that would occur if each party opted differently in relation to the same dispute (ie, if one party were to choose arbitration and the other litigation).

Minimizing the Risk of Failure to Enforce

The only entirely risk-free option for contracting parties wishing to enforce an arbitration clause in Russia is to choose a straightforward arbitration clause with no options. The clause should specify an arbitral tribunal, rather than providing for a choice between different tribunals, in order to avoid jurisdictional confusion. If acting for a client seeking the flexibility of an option between arbitration and litigation, a clearly worded arbitration clause coupled with an option to litigate is the less risky choice. A party involved in an ongoing dispute over a finance-related contract should beware of relying on an optional arbitration clause, particularly one with a hint of ambiguity or defect, with a view to enforcement in Russia. Such a clause may be deemed invalid by the arbitrazh courts, in which case enforcement will be denied. However, where awards can be enforced against assets located outside Russia, the issue becomes moot. Parties wishing to dispute the validity of optional arbitration clauses should consider doing so at the earliest opportunity in the proceedings (eg, by means of a jurisdictional objection), not at the enforcement stage, by which point considerable time and money will have been expended.

It remains to be seen whether the likely wave of attempted enforcements of arbitral awards brought on by the global financial crisis will give rise to a body of arbitrazh court judgments that put this matter to rest.