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Russia’s Supreme Commercial Court Voids An Optional Arbitration Clause

Russia’s highest commercial court has ruled that an optional arbitration clause creates an unfair advantage for one of the parties and hence is contrary to the equality of arms principle.

Pursuant to the clause in question both parties were required to submit any disputes among them to arbitration under the ICC rules. However, the seller had an option to recover money due for the goods it supplied by submitting a claim to any competent court.

The Presidium of the Supreme Commercial Court heard the case in June, yet the ruling was only released last Saturday. It essentially endorses the view of the three-judge panel which earlier referred the case to the Presidium (reported here). The Presidium concluded that if a party to a contract has an advantage in access to state courts compared to the other party, this is contrary to the equality of arms principle. The court cited extensively the jurisprudence of the Constitutional Court and the European Court of Human Rights on the equality of arms principle in general to support this conclusion.

The decision is remarkable for two reasons. Firstly, the Russian courts appear to depart from the practice accepted in the majority of developed jurisdictions. Optional arbitration clauses have been held to be valid in Australia, France, Ukraine and the United Kingdom.
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Meanwhile, though the German courts would look at whether the optional clause was forced on the party they would still accept its general validity.

Secondly, the Presidium’s position gives short shrift to the parties’ freely negotiated agreement and the interests of those who are normally given the option by an optional clause. Optional clauses are common in loan agreements ensuring that the party, which lends money and accepts a commercial risk has access to the most efficient remedies.

Facts of the case

A detailed summary of facts can be found in our earlier report. The essence is as follows. Sony-Ericsson Mobile Communications Rus LLC (“Sony-Ericsson”, the seller) entered into a mobile phone supply agreement with Russian Telephone Company CJSC (“RTC”). The dispute resolution clause provided for ICC arbitration seated in London, but also entitled Sony-Ericsson to bring a claim to any competent court to recover the money due for the phones it supplied.

In 2011 RTC commenced proceedings before the Moscow Commercial Court to compel Sony-Ericsson to replace mobile phones it had supplied under the agreement. Three levels of Russian courts stayed those claims, referring RTC to arbitration.
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Resolution of the Presidium

The Presidium held that a clause, which entitles only one of the parties to refer a dispute to state courts creates an advantage for that party. The question was thus whether this advantage is lawful.

The Presidium began by holding that the equality of arms is a basic principle of any dispute resolution proceedings. It went on to hold that the same principle applies in arbitration citing the judgment of the ECHR in Suda v Czech Republic (although the latter concerned a non-voluntary arbitration). According to the court this principle requires that each party should have equal opportunity to present its case and equal procedural rights and remedies.

The Presidium concluded that the clause in question, which prevented one of the parties from submitting its claims to state courts, was void. Consequently, it found that RTC was entitled to commence proceedings against Sony-Ericsson in the Moscow Commercial Court.

The Presidium all but ignored the question of applicable law. The contract was governed by English law and provided for arbitration in London (which suggests that English law applied to the arbitration clause). Yet the Presidium’s decision is based on a Russian law analysis.

The reason for this approach to applicable law remains unclear. One can assume that either the Presidium decided that the rules it applied were mandatory and overrode the parties’ choice of law or the parties had agreed to the application of Russian law by failing to object to it.

Implications of the Resolution

The exact impact of the Resolution is difficult to predict. The Presidium held that an agreement which entitles only one of the parties to go to a state court is invalid with the effect being that the other party may also bring its claim before a state court. The court did not express a clear view on the validity of the “remaining part” of the arbitration clause – the right of each of the parties to submit their claims to arbitration.
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This is significant, because earlier this year the Presidium held that a clause giving each party an option to choose between state courts and arbitration is valid and enforceable (Resolution No. 11196/11 dated 14 February 2012). It follows that one can argue that an optional arbitration clause remains partially valid as a matter of Russian law with each party being entitled to choose between arbitration and litigation.

The full text of the Resolution of the Presidium is available here (in Russian).

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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