Arbitration and Litigation: Same or Basic Guarantees?

An interesting case is due to be considered by the Russian Supreme Commercial Court within the next few months. Two issues before the court are: (1) whether an arbitral tribunal may fine a party to the arbitration for failure to comply with the tribunal’s order and (2) whether the procedural guarantees that are accorded to the parties to the arbitral proceedings should be the same as those accorded in state courts.

While the amounts in dispute are small this case may address a fundamental question of the scope of procedural guarantees that should be accorded to the parties to the arbitration. One of the two approaches suggested by the three-judge panel referring the case to the SCC is that “the same procedural guarantees as are accorded in state courts should apply in cases resolved by arbitration”. While it is universally accepted that  certain basic procedural guarantees should be observed in arbitral proceedings the suggestion that the guarantees should be equivalent may go too far.

The case was originally considered by the Starvopol Commercial Court and North Caucasus Circuit Court (case no. А63-11532/2010). Both courts upheld enforcement of an award which required the respondent to pay fines for failure to comply with the arbitral tribunal’s orders.
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Those orders in turn instructed the respondent to pay its part of advance covering costs of arbitration. It appears that the arbitral tribunal was empowered by the applicable procedural rules, accepted by both parties, to impose such fines.

In the ruling referring the case to the SCC the three-judge panel suggested two approaches to be considered by the full Presidium of the SCC

Under the first approach, the arbitral clause and the applicable rules of arbitration should be treated as a commercial contract between the parties, but also with the arbitration institution. The parties are free to agree to particular terms and conditions of such contract, including a provision providing for imposition of a fine in case of non-compliance. Consequently, an arbitral award which requires respondent to pay such fine may be enforced.

Under the second approach, the parties to arbitration should be accorded the same treatment as before the state courts. Under the Russian civil procedure rules the only consequence of failure to pay state duty (payment of which is required to commence a case before the court) is dismissal of the claim and no fine may be imposed. It follows from this proposition that no fine may be imposed on a party by an arbitral tribunal and enforcement of such award is contrary to the Russian public policy.

The second approach appears to be especially problematic. It purports to literally apply the Russian civil procedure rules to arbitration in an area where it is next to impossible.
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Indeed, unlike arbitration institutions Russian courts do not require parties to cover their costs and therefore the are no rules dealing with consequences of failure of one of the parties to pay its share of advance for costs. But this is just an example of the problem created by the proposition that all the procedural rules of the Russian civil procedure should apply to arbitration. Because application of such rules is not possible or practicable. In many cases parties agreed to arbitration essentially to avoid the more cumbersome and formalistic rules applicable in litigation. While it is true that basic guarantees should be preserved there can be no equation between the basic guarantees and all procedural rules.

At the same time imposition of fines for failure to pay advance on costs raises its own problems. While the tribunal definitely has certain powers to manage the proceedings it may be argued that it should not be entitled to compel the respondent to participate in them. To this argument one may respond that where a party agreed to the rules which empower the tribunal to exercise such function it may no longer object to it.
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It remains to be seen which approach would be supported by the Supreme Commercial Court. However, it is to be hoped that a more nuanced approach to the procedural guarantees applicable to arbitration would be adopted.