By 19 November, 2013 0 Comments Read More →

Corporate Disputes’ Arbitrability in Russia: A New Opportunity

rainbowIn a case currently pending before the commercial courts of the North-Western Circuit, the Russian courts will get an opportunity to confirm that disputes arising out of share purchase agreements are arbitrable. Over the past few years several courts have ruled that they are not. With arbitration remaining the preferred means for Russian M&A disputes’ resolution this will be a welcome development.

Facts of the Case

In November 2009 Nestex AG agreed to sell a 65% participation interest in LLC A-N Holding, a major St Petersburg security services firm, to Mr Klimov. The parties agreed that any disputes arising under the agreement should be submitted to the Arbitration Institute of the Stockholm Chamber of Commerce.

In June 2013 Nestex commenced litigation against Mr Klimov before the St Petersburg Commercial Court claiming payment of the purchase price and penalty. Mr Klimov moved to have the proceedings terminated. He argued that a parallel claim had already been pending before an SCC arbitral tribunal.

Court Decisions So Far

On 18 September 2013 the St Petersburg Commercial Court terminated the proceedings. It relied on Article 148 of the Commercial Procedure Code, which essentially reflects the principle of lis pendens. The court found that the claimant had already commenced a parallel arbitration against the respondent.

On 15 November 2013 the Thirteenth Appellate Commercial Court confirmed this decision. The appellate court held that reliance on lis pendens was justified. Remarkably, the court refused to consider the claimants’ argument dealing with arbitrability of the claim arising out of the sale of a participation interest in a Russian limited liability company.

The claimant may now challenge the appellate court’s decision before the Federal Commercial Court for the North-Western Circuit.

Arbitrability of Corporate Disputes in Russia

The issue of corporate disputes’ arbitrability had long been a subject of academic debate. The uncertainly arose out of several provisions of the Commercial Procedure Code which confer special subject-matter jurisdiction over “corporate disputes” upon the commercial courts. The notion of “corporate disputes” covers disputes concerning title to shares and participation interests. There are no provisions expressly stating that these disputes are not arbitrable, while the Law on International Commercial Arbitration provides that any commercial dispute is arbitrable unless the law expressly provides otherwise.

However, in Maximov v NLMK the Federal Commercial Court for the Moscow Circuit held that a dispute arising out of a share purchase agreement was not arbitrable. In that case however the court relied on the complex nature of the transaction, which covered additional issue of shares and certain corporate governance matters. The case also led to two equivocal rulings of the Constitutional Court. Arguably the court confirmed that the law may restrict arbitrability of corporate disputes, but refrained from expressly stating that they are not arbitrable.

In several other cases the courts refused to enforce awards rendered in disputes arising out of sale of shares and participation interests in Russian companies. But in many instances the courts found that these awards were also contrary to the public policy of the Russian Federation since they were elements of various fraudulent schemes. The practice has not been entirely consistent. For example, in April 2013 the Federal Commercial Court for the Moscow Circuit refused to set aside an award ordering a party to pay the purchase price for the shares in a Russian joint-stock company.

Nestex v Klimov gives the courts an excellent opportunity to confirm that at the very least disputes concerning payment of the purchase price for the interests in Russian companies are arbitrable. Not only are these disputes purely commercial but they also do not affect title to the respective corporate interests.

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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