Non-Arbitrability of Disputes Arising Out of Government Contracts in Russia

State contractingAs we reported earlier the Supreme Commercial Court has ruled that arbitral tribunals cannot resolve disputes arising out of government contracts.

The court quashed the decisions of lower courts granting enforcement of a domestic arbitration award in a dispute between a government agency and a company. The full text of the court’s resolution has been recently published.

Over sixteen pages the court adduced arguments in favour of the non-arbitrability of disputes arising out of contracts for the delivery of services for government needs.

The сourt concluded that the obligations assumed under the government contract concerned
the performance of public functions. The court pointed out that under Russian law only civil law disputes may be submitted to arbitration. On these grounds the court summarised that a dispute which concerned the performance of public law functions could not have been submitted to arbitration.

Arguments in Favour of Non-Arbitrability

The key idea of the court is that Russian legislation considers only civil law disputes as arbitrable. However, the obligations under government contracts concern the performance of public functions. A party to such contract is a state authority which pursues the public interest while concluding the contract. Hence, government contracts have a public law basis. Legal relations with such concentration of public elements must not be submitted to arbitration.  Other arguments of the court were as follows.

First, government contracts must be executed in accordance with principles of transparency and openness. Meanwhile, the arbitration process is based on the principle of confidentiality and must be closed and non-formal. The beginnings of arbitration contradict the main principles of government contracts. Thus, disputes out of government contracts are not arbitrable.

Second, resolution of disputes in arbitral tribunals assumes payment of various fees (arbitrator’s and institution’s fees). Such expenses contradict to the principle of economy of budgetary funds.

Third, according to Article 9 of Federal law No. 94 disputes connected with change, execution and rescission of government contracts shall be resolved by courts. Russian case law interprets the term “court” as a state court, not arbitration. In the context Russian legislation does not provide for resolution through arbitration of disputes connected with change, execution and rescission of government contracts.

Fourth, Federal law No. 94 does not stipulate any provisions in favour of consideration of disputes out of such contracts in arbitration.

Non-arbitrability Course and Its Consequences

The resolution of the Supreme Commercial Court corresponds with the reform of the Russian arbitration legislation currently being developed by the Russian Ministry of Justice. According to the draft new legislation on arbitration, disputes out of government contracts would not be arbitrable. The new legislation on arbitration most probably will come into effect in the beginning of 2015.  So the resolution passes ahead the reform.

The decision of the Supreme Commercial Court is another example of its non-arbitrability course. In a recent case Pryanizh Central Forestry v. Forest Group the court has held that a dispute arising out of a forest block lease contract cannot be resolved through arbitration. One year earlier in Aldega v. Urban Settlement Krasnozavodsk the Supreme Commercial Court held that disputes arising out of investment agreements with Russian authorities are not arbitrable at least for the purposes of domestic arbitration.

At the same time the representative of the Russian Ministry of Justice during his speech at the St. Petersburg International Legal Forum on 19 June 2014 acknowledged that disputes out of government contracts, save for disputes connected with the conclusion of such contracts, should be arbitrable.

The statement seems to be logical for the following reasons.

First, the non-arbitrability course of Russian state courts is based on their distrust of some “doubtful” arbitral tribunals. Meanwhile this distrust reflects negatively on “respected” forums and Russian arbitration as a whole.

Second, practically speaking the arbitrability limitations apply only on Russian territory, because foreign arbitrations usually ignore Russian arbitrability provisions. Therefore, a company may obtain a foreign arbitration award against a Russian company and enforce it outside the country. The circumstance indicates the substantial shortcoming of Russian arbitration legislation and case law in the context of the “deoffshorisation” policy of the government.

The above-referred statement of the representative of the Russian Ministry of Justice gives reason to hope that new arbitration legislation will be directed towards maximal liberalisation of the approach to arbitrability.

Application to the Constitutional Court

In the meantime, the Russian Union of Arbitration Tribunals has recently submitted a complaint to the Russian Constitutional Court. The court, upon receipt of complaints about violations of constitutional rights and freedoms of citizens, will check the constitutionality of a law applied or subject to be applied in that particular case. The applicant is requesting the review of Article 9 of Federal law No. 94 as applied by the Supreme Commercial Court in the case described above.

As noted the Supreme Commercial Court, in interpreting the article, concluded that the term “court” should be considered as a state court. The Russian Union of Arbitration Tribunals argues that the Supreme Commercial Court wrongly interpreted Article 9, because the term “courts” means both state courts and arbitral tribunals.

The Constitutional Court is considering arbitrability issues for the second time, as, earlier, in May 2011, this Court confirmed the arbitrability of real estate disputes.

Nowadays many government contracts include arbitration clauses. In this context the approach of the Supreme Commercial Court looks disappointing because the procedure for the resolution of disputes arising out of government contracts has become unclear.

Meanwhile, the problem of “doubtful” arbitral tribunals could be resolved more constructively. The legislator could oblige arbitral tribunals while considering disputes arising out of government contracts to comply with the principles of transparency and openness.

Andrey Kalimanov, Muranov Chernyakov & Partners Law Firm  

About the Author:

Andrey Kalimanov is an intern with CIS Arbitration Forum. He is an associate at law firm Muranov, Chernyakov & Partners, Moscow, Russia. His practice focuses on international arbitration, domestic litigation, enforcement of arbitral awards and foreign court judgments, advising clients on different Russian law aspects in foreign litigations and arbitrations. Andrey is a co-founder and member of the Russian Arbitration Association (RAA). Andrey graduated with honours from the Law Faculty of the State University of Management (GUU).

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