Russian SCC to Consider a “Problematic” Arbitration Clause

Kemerovo Commercial Court

On 16 July the Supreme Commercial Court will consider whether an arbitration clause which consists of a reference to the ICC Rules of Arbitration is enforceable. The lower courts ruled that it was not, finding that it was not specific enough, with parties failing to agree on an institution to administer the arbitration.

At first sight, the issue appears to be rather straightforward. In fact, the parties to the underlying agreement appear to have used the model clause suggested by the ICC itself. However, an earlier Russian case decided by the Moscow Circuit court held that a similar reference to the Russian ICAC Rules meant that the parties agreed to ad hoc arbitration.

Elsewhere, the ICC itself advises the parties from mainland China to add to the standard wording that the International Court of Arbitration will administer the arbitration. The latter tweak is however explainable by reasons specific to PRC.

Another significant aspect of the case is that the European Convention on International Commercial Arbitration appears to be applicable to the dispute. The Convention provides a comprehensive mechanism for resolving any uncertainties in the parties’ arbitration agreement.

Finally, there is an important  parallel with the recent decisions of Singapore High Court in HKL Group Co. Ltd v. Rizq International Holdings Pte Ltd. There, the court found enforceable an arbitration clause which provided  for resolution of all disputes by an “Arbitration Committee in Singapore” pursuant to the ICC Rules. The court explained that  the parties are free to resort to either ICC arbitration seated in Singapore or an arbitration administered by a different institution pursuant to the ICC Rules.

The case gives the Presidium of the Supreme Commercial Court a welcome opportunity to reaffirm Russian Federation’s status as an “arbitration-friendly” jurisdiction. It may also serve as a platform for more general analysis of the approach the Russian courts should take towards “problematic” arbitration clauses.

Facts of the Case

In 2009 Avtosped Internationale Speditions GmbH, a German freight forwarding company entered in agreement with a Russian client, Bosh Termotechnic LLC. The contract contained an arbitration clause, which provided that “…If the parties fail to reach an agreement, the case should be referred to a court  at the respondent’s location and the dispute shall be settled under the laws of that state under the “Rules of Conciliation and Arbitration of the International Chamber of Commerce”.

In 2010, Bosh instructed Avtosped to deliver a cargo of boiler house equipment to Kemerovo, the capital of Kemerovo Region in Western Siberia. Upon delivery, the client claimed that the cargo had been damaged and demanded c. USD 160’000 in compensation.  When parties failed to settle the dispute amicably the client sued before the Kemerovo Commercial Court. Avtosped promptly invoked the arbitration clause, but both the Kemerovo court and appellate and cassation courts found the clause unenforceable.

Interpreting the Clause

The three-judge panel, which referred the case to the Presidium, identified the issue to be decided as follows: whether a reference to the arbitration rules is sufficient to make the arbitration clause enforceable.

The problem for the lower courts was that the parties failed to designate a particular institution to administer the arbitration. In that respect their finding echo earlier decision of the Federal Commercial Court for the Moscow Circuit in Regus v. Kubik. There the court found that a reference to the Russian ICAC Rules should not be interpreted as providing for an institutional arbitration administered by the ICAC, but rather  for ad hoc arbitration (case no. А40-29251/11-68-256).

These arguments appear unpersuasive. Indeed both the ICC Rules and the ICAC Rules refer to the roles of the ICC Court and the ICAC respectively and these institutions are deeply “embedded” within them. In these circumstances the parties’ agreement to have the dispute resolved under the “ICC Rules” implies that they agree to have the dispute administered by the ICC Court, unless they expressly indicate otherwise. To stress this Article 1 of the 2012 ICC Rules expressly provides that where the parties have agreed to arbitration under the ICC rules they should be deemed to have agreed to the arbitration being administered by the ICC Court.

The clause is Bosh v. Avtosped has several other peculiarities including a reference to the 1988 ICC Rules of Conciliation and Arbitration and an equivocal reference to “a court at the respondent’s location”. The former issue may be easily resolved and is, in fact, addressed in the ICC Court FAQs.

The latter one is more complex since it is not clear to what extent the wording has been affected by translation from either German or English (i.e. whether tribunal or arbitral tribunal is used in the relevant non-Russian version instead of Russian “cyд” (court)). In any event, the reference appears to reflect the parties’ agreement on the seat of arbitral tribunal, which they are free to choose. Since parties to the agreement are businessmen a reference to a “court” may have had the same connotation to them as a reference to a “tribunal”, the important matter being that  they agree to an ICC arbitration by referring to the relevant rules.

The European Convention Mechanism

The European Convention on International Arbitration was concluded in 1961 to facilitate resolution of disputes arising out of East-West trade. While pursuant to Article 1 it applies to “international trade” disputes it is argued that this notion should be interpreted broadly to include essentially any cross-border commercial relationship. It the past it has been applied in disputes dealing with provision of services or even joint venture agreements.

Article 4 of the European Convention creates a mechanism to resolve difficulties arising out of problematic drafting of arbitration clauses. Such difficulties include  parties’ failure  to agree on procedure to be followed by ad hoc arbitration or to designate an institution where they have agreed to institutional arbitration. Party facing any of the above difficulties may refer the matter to the President of the Chamber of Commerce and Industry of respondent’s residence (or the National Committee of the ICC in certain cases) or to a Special Committee established pursuant to the Convention.

Both Russia and Germany are parties to the European Convention. It follows that even if the clause in the agreement is problematic it should nevertheless be respected by the national courts with any difficulties to be resolved pursuant to the Convention.

Problematic and pathological disputes  will haunt international arbitration practitioners as long as contracts are negotiated by non-lawyers (which means forever). With the dockets of Russian commercial courts being filled up to the limit and beyond it is high time for them to stress once again that parties’ agreement to arbitrate should be enforced without hesitation.

The full text of the Ruling of the three-judge panel of the Supreme Commercial Court is available here (in Russian).