By 3 September, 2014 0 Comments Read More →

Notice of Arbitration to the Parent Company: Proper or Not?

SollersIn a recent decision the Supreme Commercial Court of the Russian Federation found that a notice of arbitration proceedings to the parent company’s general counsel was proper in the context of the facts of the case.

The decision has also raised discussions about other related issues: first, in which cases could such notice be improper and warrant refusal to enforce the award?
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; second, whether the Russian courts acknowledge the concept of piercing the corporate veil as applicable to notification in arbitration proceedings; and third, what is the extent of arbitrators’ duty of care to check the authority of the parties’ representatives? On all these issues the court has taken a rather liberal stance.

This article reflects on these issues based on Russian case law, comparing it with other jurisdictions.

Details of the case

An LCIA arbitration started between a Polish company Autorobot-Strefa Sp. z oo and a Russian company Sollers Elabuga LLC. During the proceedings the head of the legal department of the respondent’s parent company, OJSC Sollers, once contacted the LCIA Court from his business e-mail informing it that the respondent agrees to a hearing of the case by a single arbitrator.

In the e-mail Sollers’ head of the legal department did not expressly state that he acted on behalf of the respondent but simply indicated his company, business address and position. He then also discussed with the claimant the terms of the settlement. The parties reached a settlement and decided to suspend the arbitration proceedings with a right of renewing them in case the respondent fails to fulfill its obligation under the settlement agreement.

As the respondent did not abide by the settlement terms, the claimant requested the LCIA arbitrator to renew the proceedings. The arbitrator sent the notice about the recommencement of the proceedings not to Sollers Elabuga LLC (as the LCIA had done earlier), but to its parent company, Sollers. The arbitrator addressed it to the head of Sollers’ legal department who had previously contacted the LCIA Court in this matter.

Decisions of the courts

The courts of the first two instances refused to enforce the award for lack of due notice of Sollers Elabuga LLC about the commencement of the proceedings (Article V(1)(b) of the New York Convention) and on the basis of Article 4.2 LCIA Rules (effective as of 1998). The courts stated that the notice of arbitration should be sent to the last-known residence or place of business of the party.
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The courts also found that Sollers Elabuga bye-laws provided that only its general director could act on behalf of the company without a power of attorney. This argument was strengthened by the fact that the LCIA had first sent procedural documents to the general director of Sollers Elabuga, who in due course signed the settlement.

Decision of the Supreme Commercial Court

As noted above, the Supreme Commercial Court (the “SCC”) disagreed with the lower courts’ view and set aside the decisions of the lower courts. The SCC relied on the fact that Sollers was the sole shareholder of Sollers Elabuga. The director of the parent company’s legal department acted as attorney-in fact, i.e. his powers followed from the circumstances of the case. Thus the company had no right to rely on Art. V(1)(b) of the New York Convention, which under other circumstances could possibly lead to refusal of enforcement of the award. The SCC enforced the award.

Consistency or inconsistency?

At first sight, this decision appears to be inconsistent with some other decisions of the Russian courts and even the Supreme Commercial Court itself in several other cases. For instance, in OJSC Zhabinka Sugar Factory v Shramkov the SCC stated that a notice of arbitration should be received in person or sent to the party’s place of business, neither of which happened in this case. An Information letter issued by the Supreme Court in 2005 further supported the importance of this.

A number of court of appeal instances follow a similar line of argument, for example, SAHO Chemprom v Donskyh. That case was similar to the present one in that the notification about the arbitration was sent to the wrong address and the court on this ground refused to enforce the award.

However, it is important to separate the abovementioned cases from the recent decision of the SCC as in the Sollers case the head of the legal department of the parent company first contacted the court himself and actively participated in the pre-settlement part of the dispute. Thus, even if there is a contradiction it can be explained by the facts of the case.

Is head of legal a representative of all the company’s subsidiaries?
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Another important issue is the fact that the arbitrator did not check the authority of the non-signatory parent company official as a representative of the subsidiary, which was the respondent in this case. Was the arbitrator entitled to assume such authority merely due to the position of the official and the parent company right of control?

The LCIA Rules 1998 do not expressly clarify this issue. Rule 18.2 states that at any time the Arbitral Tribunal may require from any party proof of authority granted to its representative(s) in such form as the Arbitral Tribunal may determine.

Thus, it was left to the arbitrator to decide in this case whether this was an authorised representative or not.

Piercing the corporate veil

In the above case the Supreme Commercial Court de facto indirectly supported a wide application of the doctrine of piercing the corporate veil by stating that the mere fact that OJSC Sollers owned the subsdiary meant that it had full control over its actions in the ongoing arbitration proceedings.

This doctrine remains quite new for Russian practice. However, it has for decades been a subject of discussion of courts of other jurisdictions. Most US and UK courts decided that it can be applied only in exceptional, limited circumstances. It was said in one of the latest decisions of the UK Supreme Court on the topic in Prest v Petrodel Resources Ltd that “ownership and control were not in themselves sufficient to pierce the corporate veil”. The courts came to a similar conclusion in VTB Capital plc v Nutritek International Corp.

Thus, the approach of the Supreme Court appears not very consistent with this practice as there were no such exceptional circumstances in this case.

Possible implications

Although there is no doctrine of court precedent in Russian law, this decision may possibly have a big influence on both Russian arbitration and corporate law and practice as courts and parties frequently refer to the decisions of the higher courts on relevant issues.

It could potentially narrow the basis for refusal to enforce and annulment of arbitral awards due to pure procedural grounds and might even lead to a wider application in Russian courts of the doctrine of piercing the corporate veil.

Ivan Philippov

Intern, CIS Arbitration Forum, LLM candidate, Queen Mary, University of London

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