The Problem of ‘Pocket Arbitration Courts’ in Russia: Finally Resolved?

The recent decision of the Russian Supreme Court in the case of Geotrest LLC v Gazprom Invest Vostok LLC and an earlier decision of the Constitutional Court indicate a significant change in the approach of Russian courts to the so-called “pocket arbitration courts”. These decisions contradict the previous practice and will most likely lead to significant changes in Russian commercial arbitration.

This article aims to analyse the differences between the previous and current practice of the courts.

Previous Court Practice on “Pocket Arbitration Courts”

The term “pocket arbitration courts” refers to courts created by various organisations and, in many cases, dealing with cases involving these organisations or their subsidiaries. These courts are either created by the company, its subsidiary or, in other instances, through non-profit organisations.

Before the recent reform of the judiciary, which replaced the Supreme Commercial Court and Supreme Court with a unified Supreme Court of the Russian Federation, all disputes concerning the decisions of such courts fell under the jurisdiction of the Supreme Commercial Court, which had consistently put the impartiality of such courts in cases involving the companies which created them into question.

For instance, in 2012 in the case Lukoil Energoseti LLC v MK LLC the issue arose out of an award of the arbitration court created by Russian second-largest oil company, Lukoil.

While the commercial courts of the first instance and appeal enforced the award, the Supreme Commercial Court decided otherwise. It noted that Lukoil had created the arbitration court, the court’s arbitration rules provided for the appointment of the president of the tribunal by the president of the court and one of the parties was Lukoil’s subsidiary.

The Supreme Commercial Court reversed the decisions of the lower courts and refused enforcement, saying that the dispute resolution procedure was unjust and unfair to the parties, it clearly violated the principle of party autonomy and it contradicted the fundamental principles of Russian law.

After that a similar dispute arose on the award of an arbitration institution affiliated with Russia’s largest bank, state-owned Sberbank, in the case SOFID LLC v OJSC Sberbank. Initially the courts of first instance and appeal enforced the award stating that the parties voluntary concluded the contract, containing the “pocket court” arbitration clause without any proof of duress or pressure from one of the parties.

The Supreme Commercial Court overruled these decisions. It made a reference to the ECHR case Hauschildt v. Denmark and decided to look both into the impartiality of the arbitrators and of the arbitration court. The Supreme Commercial Court decided that in this case the arbitration court had failed to meet the latter test and the award contradicted fundamental principles of Russian law.

Changes Are Coming

For some time it looked as though this would be the final resolution of the problem; the Supreme Commercial Court had consistently said that “pocket arbitration courts” lack impartiality in cases involving their founders or the founders’ subsidiaries.

However, all of this started to change since 2014. This followed the case OJSC Institute Neftegazproject v CJSC Yamalgazinvest, a dispute involving Gazprom’s arbitration court.

Initially the courts of first instance, appeal and the Supreme Commercial Court unilaterally decided to annul Gazprom’s arbitration court’s award. The courts used the same reasoning, namely that the award could not have met the standards of fairness and impartiality as Gazprom had created the arbitration court and the dispute had involved one of Gazprom’s subsidiaries. In addition, Gazprom’s “pocket court” in question had played a significant role in the appointment of arbitrators.

However, after this Gazprom subsidiary Yamalgazinvest applied to the Russian Constitutional Court and requested a declaration that the Russian arbitration legislation’s provisions on impartiality are unconstitutional. Gazprom argued that the legislation had unreasonably broad provisions on many questions, including impartiality.

The Constitutional Court, after detailed analysis of the provisions, first of all came to the conclusion that they did not contradict the Russian Constitution. However, it clarified that the courts should look primarily into the impartiality of the arbitrators, without putting emphasis on the impartiality of the arbitration institutions in such cases, thereby criticising the approach used by the Supreme Commercial Court.

While this decision fell in line with the practice of many other countries, it was met by noticeable criticism from some of Russia’s arbitration specialists such as Alexander Muranov for various reasons including bad knowledge of the current situation concerning domestic arbitration courts and the overly positivist approach (without acknowledging such traditional features of arbitration as the importance of previous practice and soft law, like the IBA Guidelines).

As the Constitutional Court is the highest court of Russia, which can strike down all provisions of Russian law or acts of the executive branch of power which contradict the Constitution, this decision could not have been without consequences.

Recent application of the new approach

After the judiciary reform the Supreme Court of Russia assumed all the functions of the abolished Supreme Commercial Court which had yet to clear up its attitude to various aspects of commercial law, including commercial arbitration.

Its recent decision in the case Geotrest LLC v Gazprom Invest Vostok LLC concerning another of Gazprom’s subsidiaries shows that in the question of “pocket courts” the Supreme Court has decided to follow the logic of the Constitutional Court. In that case the courts of the first and appeal instances refused to enforce Gazprom’s arbitration court’s award on the same ground as in previous Supreme Commercial Court cases: the fact that the court had been created by Gazprom and had significant influence on the process of appointment of the arbitrators.

The Supreme Court disagreed with the decisions of the commercial courts and ordered enforcement of the award, repeating the Constitutional Court’s position. It said that the courts should concentrate on the impartiality of the arbitrator. For arbitration institutions it would be enough to go as far as to establish that at the stage of signing the contract all parties knew about the institution’s affiliation with one of the parties.

Conclusion: Possible Consequences

The Constitutional and Supreme Courts’ approaches, recommending the courts to use a significantly lower standard of impartiality for the “pocket courts”, could potentially lead to the increase in use of the “pocket courts” for the resolution of commercial disputes.

However, while being in line with the practice of the rest of the world (where courts normally look only into the impartiality of the arbitrators) and favouring the use of arbitration in the resolution of commercial disputes, it might also lead to unfairness for some of the parties.

Domestic arbitration is extremely popular in Russia – in Moscow alone there are around 330 registered permanent commercial arbitration courts. The registration of such courts does not require any especially rigid procedures and in many cases the impartiality of such courts can be questionable and many of them are very dependent on their founders. This can potentially benefit the parties directly or indirectly affiliated with such courts.

Ivan Philippov