Russia still stalling on arbitration

On 2 September the Supreme Arbitrazh Court of the Russian Federation - the highest judicial authority for state commercial courts - made public an important decree in the case of Russian Telephonic Company v Sony-Ericsson Mobile Communications Rus, by which it held that an asymmetrical arbitration clause is invalid.

An asymmetrical arbitration clause ensures that disputes must be referred to arbitration, but gives only one of the parties the option to disregard the arbitration clause and commence proceedings in a court of law.

The court’s decree held that an asymmetrical arbitration clause is invalid on the premise that it violates the procedural rights of one party as well as the adversarial principle and the principle of the parties’ equality.

It also made it clear that this legal position should be binding on lower courts when they are deciding similar cases.

As a result, all asymmetrical clauses may be declared invalid by the Russian courts, and Western parties to contracts containing such clauses will have to litigate before the country’s courts or, if they arbitrate, they may face problems enforcing arbitral awards in Russia.

Asymmetrical clauses, in which the right to litigate in court usually rests with the bank but not the borrower, are widespread and a common feature of loan and other funding agreements in the country.

The general rule of thumb in Russia is that a case is tried by the court based at the location of the defendant. This means that if an asymmetrical clause in a loan agreement is invalid and the loan was extended to a company based in, say, Vladivostok (where the Asia Pacific Economic Cooperation forum is currently taking place), banks must be prepared to sue the debtor in the arbitrazh courts based there.

The trouble is that Vladivostok is a nine-hour flight from Moscow and the aforementioned decree raises the question of how comfortable Western banks will be appearing before courts in what is seen as a remote part of Russia.

Since the collapse of the Soviet Union Russia has pursued an active anti-arbitration stance, although the situation has improved slightly in recent years - for example, the Supreme Arbitrazh Court has delivered a number of landmark decisions in which it has supported international arbitration.

Moreover, arbitration in Russia has traditionally enjoyed a friendly hearing from the Constitutional Court, which has recently overruled a practice of the commercial courts that was based on the assertion that real estate disputes fall within the exclusive jurisdiction of state courts and therefore, allegedly, could not be submitted to arbitration.

While there has been some softening of approach generally, the most recent decree underscores the fact that Russian courts are continuing to display a broadly anti-arbitration bias.