Russian Supreme Commercial Court: Not All Domestic Disputes Can Be Resolved in International Arbitration

Can an essentially domestic dispute be referred to an international arbitral tribunal sitting outside of the Russian Federation? Can an “international” dispute be resolved by a domestic arbitral tribunal? These questions may be troubling for a practitioner drafting an arbitration clause in a contract. This is especially true because figuring out whether the dispute is “international” may be challenging.

A three-judge panel of the Supreme Commercial Court has confirmed in a recent ruling that parties are free to refer any dispute they choose to a domestic arbitral tribunal («третейский суд») sitting in the Russian Federation.
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What is more troubling though is that the panel held that the parties do not enjoy the same freedom when dealing with a “domestic” dispute. In such a situation the dispute may not be referred to an international arbitral tribunal.

This dictum comes from a panel of judges regularly dealing with arbitration-related appeals brought to the Supreme Commercial Court (Valyavina, Dedov, Sarbash).  It may be seen as reaffirming the position taken by a different panel two years earlier, which held that a clause referring a “domestic” dispute to international arbitration was not enforceable. In that case the court was looking at an arbitration clause referring any dispute to the Arbitration Institute of the Stockholm Chamber of Commerce in an oil terminal services contract between two Russian companies.

The two cases

In order to understand the thrust of the Supreme Commercial Court rulings a closer look at the facts of the two cases is required.

The 2010 decision, OJSC Rosneft v LLC Oil Terminal Belokamenka (case no A42-6967/2008) arose out of a contract under which Belokamenka was providing oil transshipment services to Rosneft. Rosneft argued that Belokamenka improperly added 18% VAT to the price of the services it invoiced, where a 0% VAT rate was applicable, and claimed the c.
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USD 5 million that was allegedly improperly invoiced and paid. Belokamenka sought to stay the Russian court proceedings commenced by Rosneft relying on the arbitration clause.

While this application was upheld by the lower courts, their decisions were reversed by the North Western Circuit Commercial Court. In a decision essentially upheld by the Supreme Commercial Court the court held that the arbitration clause was not enforceable for two reasons. First, the underlying dispute between the parties concerned the application of tax laws of the Russian Federation and thus was not arbitrable.
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Second, the dispute was a domestic one and hence could not be referred to an international arbitral tribunal such as the Arbitration Institute of the Stockholm Chamber of Commerce.

The 2012 decision, Horizont S.r.l. v. LLC Mars-M (case no A55-1269/2011) concerned an application to set aside an award rendered by a domestic arbitral tribunal under the auspices of the Samara Chamber of Trade and Industry. Horizont, an Italian company, which was to pay c. EUR 170,000 in compensation under the award, argued that the dispute was “international” and as such could not be referred to a domestic arbitral tribunal.

Unlike in the Rosneft case, the courts were unanimously unimpressed by that argument. Dismissing Horizont’s application for supervisory review, the Supreme Commercial Court panel held that Russian law does not impose any restrictions on the type of commercial disputes that may be referred to a domestic arbitral tribunal. Hence, parties are free to choose whether an “international” dispute goes to an international or to a domestic tribunal.

What is an “International” Dispute?

Both decisions of the Supreme Commercial Court panels leave the definition of an “international” dispute not entirely clear.

The Rosneft Supreme Commercial Court panel held that international arbitration was permissible in “international commercial relations” featuring a “clash of jurisdictions and applicable law” and went on to note that a dispute between two Russian companies over provision of services on the territory of the Russian Federation was not “international”.

The Horizont panel did not directly deal with this issue, but it did quote the definition of a dispute that may be referred to an international arbitral tribunal under the Russian Law on International Commercial Arbitration. The definition (which is narrower than that in the UNCITRAL Model Law) encompasses commercial disputes between parties of which at least one has a commercial establishment in a different country and commercial disputes where at least one party is a company “with foreign investments”.

The two approaches would appear to contradict each other, with the Rosneft panel supporting a close scrutiny of the reality of commercial relations between the parties and the Horizont panel sticking to formal criteria. However, perhaps an alternative would be to look at them as complementing each other in that both disputes meet the formal requirements of the Russian law on International Commercial Arbitration and those featuring a genuine international element can be referred to international arbitration.

Sergey Usoskin

About the Author:

Sergey Usoskin is an advocate (member of the Russian bar) and a senior associate at Ivanyan&Partners. He has experience advising clients on and representing them in commercial and investment arbitration matters as well as before the Russian court (including the Supreme Commercial Court). He is a graduate of St Petersburg State University, Faculty of Law and University College London Faculty of Laws.

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