Optional Arbitration Clauses to be Scrutinised by the Russian Supreme Commercial Court

Up until now optional arbitration clauses have come before Russian commercial courts only indirectly, in cases where lenders have chosen to exercise their option to bring claims before Russian state courts. In a line of cases decided by the Moscow Circuit Commercial Court the validity of such an option was upheld and it was held that such an option was a valid exemption from the arbitration agreement between the parties.

Optional arbitration clauses are complex devices most frequently used in financing transactions. By virtue of such a clause both parties agree that any dispute between them shall be submitted to arbitration, though one of the parties (the lender) is given an option to submit the dispute to any competent state court. The argument goes that the lender is thus assured that the most efficient remedies will be available to it if the borrower defaults on its obligations.

However, in a recently published ruling by a three-judge panel of Supreme Commercial Court (No. ВАС-1831/12 of 28 March 2012) the validity of an optional arbitration clause was questioned. According to the ruling a clause giving only one of the parties the right to choose between two fora is contrary to the fundamental principles of equality of parties and equal access to justice. The case will now be heard by the full Presidium of the Supreme Commercial Court which will decide whether to support the position taken by the panel.
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The hearing date has not yet been set.

Facts of the case

In 2009 Sony Ericsson Communication Rus entered into a general distribution agreement with Russian Telephone Company. The distribution agreement provided that any dispute between the parties shall be resolved by arbitration under the ICC rules and seated in London. However, Sony Ericsson was given an option to submit any dispute to any competent state court.

In 2011 Russian Telephone Company submitted a claim to the Moscow Commercial Court seeking replacement of phones supplied to it by Sony Ericsson. However, the Moscow Commercial Court refused to consider the claim relying on the arbitration clause in the general distribution agreement. This decision was upheld by the Ninth Appellate Commercial Court and Moscow Circuit Commercial Court. All the courts in question held that there was a valid and enforceable arbitration agreement between the parties.

Position of the Supreme Commercial Court panel

In essence the panel concluded that an optional arbitration clause was not valid, because it violated the principle of equality of parties. The panel began its analysis by stating that equality of parties is a general principle of commercial law. It went on to note that in dispute resolution both parties should have equal right to defend their interests and that this principle applies equally in litigation and arbitration.

The panel then recited several decisions of the European Court of Human Rights, where the principle of equality of parties in litigation had been confirmed.
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Finally, the panel held that enforcement of an arbitration clause which gives one party (but not the other) the right to submit the dispute to a state court would violate the above principles and Article 6 of the European Convention.

Commentary

If upheld by the Supreme Commercial Court the panel’s position will have a significant effect on the market because optional arbitration clauses constitute commonly accepted practice in regard to facility agreements between foreign banks and Russian borrowers. Because the panel’s view is that the whole arbitration clause becomes invalid due to the option being granted to one of the parties this will mean that parties will not be able to compel arbitration under such clauses.

The argument that optional arbitration clauses are not enforceable for the reasons given by the panel has been made before by certain Russian academics. However it appears to confuse several distinct concepts. Firstly, all parties have equal rights, though in their commercial dealings they are equally free to establish a balance they see fit and reasonable, which may include giving preferential rights to one of the parties (e.g. the right to unilaterally terminate the contract or refer a dispute to the state court).

Secondly, though both parties should be treated equally in dispute resolution, this requirement is not affected by the presence of an optional arbitration clause because once the dispute is submitted to any of the chosen fora (be it the state court or an arbitral tribunal) both parties will be treated equally. For these reasons it may be argued that optional arbitration clauses constitute a valid exercise of parties’ freedom of contract and should be upheld.

Sergey Usoskin