On Certain Cases of Court Intervention in the Sphere of International Commercial Arbitration

In accordance with the Civil Code of the RF, the defense of violated or disputed civil rights is conducted according to the jurisdiction of matters established by procedural law, court, arbitration court or arbitration tribunal (art.11). An arbitration tribunal (arbitrage) is actively used as a method for resolving disputes in the sphere of international economic cooperation. Complex regulation of questions of international commercial arbitration is envisaged in the RF Law "On international commercial arbitration" of 7 July 1993 No.5338-1 (hereinafter – ICA Law), formulated on the basis of a model law passed in 1985 by the UN Commission on international trade law and approved by the UN General Assembly.

Allowing for such a form of resolving disputes as arbitration, the legislator nonetheless retains the possibility of limited legal control in this sphere. In questions regulated by the ICA Law, there should be no legal intervention except in cases envisaged by this law (art.5).

An exceptional method of disputing an arbitration ruling is an appeal for revocation of the decision, submitted to a court (p.1 art.34 ICA Law).

A court may revoke an arbitration ruling only if:

1) the party calling for revocation produces evidence that:

one of the parties of the arbitration agreement was not competent to some degree, or that the agreement is invalid under the law to which it was subordinated by the parties, and in the absence of such an indication – the law of the Russian Federation; or

it was not duly notified of the appointment of an arbiter or arbitration hearing, or could not present its explanations for some other reason; or

the ruling was made on a dispute not envisaged by the arbitration agreement or not covered by its conditions, or contains provisions on issues beyond the limits of the arbitration agreement with the proviso, however, that if decisions relating to issues coming within the arbitration agreement may be separated from those that do not, then only that part of the ruling may be revoked that contains decisions on matters not included in the arbitration agreement; or

if the composition of the arbitration tribunal or arbitration proceedings did not correspond to the agreement by the parties, if only such an agreement does not contradict any provision of the present Law, from which the parties may not depart, or in the absence of such an agreement did not correspond to the ICA Law; or

2) the court rules that;

the object of the dispute cannot be the subject of an arbitration examination under the laws of the Russian Federation; or

the arbitration ruling contravenes public order in the Russian Federation (p.2 art.34 ICA Law).

It should be noted that the court might, for the same reasons, refuse to recognize or realize the execution of an arbitration decision, irrespective of the country where it was ordered (art.36 ICA Law). Similar provisions are contained in the Convention on the recognition and execution of foreign arbitration rulings (art. 5) and the European Convention on foreign trade arbitration (art. IX).

Thus, the ICA Law and the above-mentioned Conventions contain a comprehensive list of reasons for the revocation or refusal to recognize or execute the decisions of international commercial arbitration. At the same time, the ICA Law and the Conventions do not permit a court review of an arbitration decision in substance. Domestic and foreign literature on international private law habitually draws attention to this particularity in the process of international commercial arbitration.

On the basis of the above legislative provisions, the Civil chamber of the Moscow City Court, ruling on 6 July 1998 on a petition in one case for the revocation of a decision taken by the International Commercial Arbitration Court if the Chamber of Trade and Industry of the RF (hereinafter – ICAC of the CTI RF), indicated the following: “Other circumstances, cited by the respondent as a basis for revocation of the ruling: incorrect determination of the sum of the arbitration fee; insufficient investigation of the circumstances of the matter; inflated expenditures of the claimant, connected with the defense of his interests through representatives, not envisaged by art. 34 of the RF Law “On international commercial arbitration” cannot be accepted as a basis for revocation of the ruling by the ICAC of the CTI RF.”

The Civil chamber of the Supreme Court of the RF justly noted in one of its determinations that: “In accordance with art.5 of the given Law, a general jurisdiction court, examining a petition for the revocation of an arbitration ruling, does not have the right to review the conclusions of the ICAC of the CTI RF on the substance of the dispute, with the exception of matters indicated under sub-p. 2 art. 34 of the above-mentioned Law.”

Despite the cited provisions of the ICAC Law and Conventions concerning the powers of courts in the sphere of international commercial arbitration, and also examples of court rulings, legal practice shows that in some cases it is difficult to establish the limits of court intervention and that the courts do not always act within the boundaries of their authority in this area.

In May 1998, a bank filed a claim with the ICAC of the CTI RF against an open joint-stock company (hereinafter – OJSC) concerning debts connected with a credit agreement that contained a clause about resolution of disputes by this arbitration tribunal. During the arbitration examination, the respondent disputed the competence of the ICAC of the CTI RF and asserted that the arbitration agreement was invalid.

Among the reasons on which the OJSC based its claim that the agreement was invalid, were the following. Firstly, in accordance with the ICA Law, by agreement of the parties, disputes arising from contractual and other civil and legal relations, occurring during the realization of external trade and other international economic relations, may be referred to international arbitration if the commercial enterprise of at least one party is located abroad, and also disputes of enterprises with international investments and international associations and organizations, created on the territory of the Russian Federation, between themselves, disputes between their members, and equally their disputes with other subjects of Russian law (p.2 art.1). The bank and the OJSC are juridical persons under Russian law, have no commercial enterprises abroad, do not enjoy the status of an international organization or enterprise with foreign investments, as they are not entered in the united state register of enterprises with foreign investments that is maintained by the State Chamber of Registrations of the RF. Consequently, the ICAC of the CTI RF is not a competent body to examine this dispute. Secondly, in contradiction to the law, the arbitration clause was concluded on behalf of the OJSC by an unauthorized person.

The ICAC of the CTI RF carried out a special investigation concerning the status of the bank and came to the conclusion that despite the fact that the bank did not figure in the register of enterprises with foreign investments, it was an organization with foreign investments, because a significant number of shares issued by the bank were, in the order established by and with the permission of the Central Bank of the RF, acquired directly from the bank by foreign investors, who are its shareholders. Furthermore, the ICAC of the CTI RF conducted a special investigation on the authority of the person who concluded the credit agreement that contained the arbitration clause, and evaluated the relevant evidence. As a result, the ICAC of the CTI RF decided that there was no foundation for the objections of the respondent in this part. Finally, on 20 April 1999, the ICAC of the CTI RF ruled in favor of the bank.

The OJSC refused to accept this ruling and applied to the Moscow City Court with an appeal for its revocation. The Civil chamber of the Moscow City Court ruled in favor of the OJSC on 27 September 1999, revoking the decision of the ICAC of the CTI RF of 20 April 1999. Moreover, the court carried out a new investigation of the status of the bank and the authority of the person signing the credit agreement on behalf of the OJSC, and even added new documents to the materials of the case that had not been examined by the ICAC of the CTI RF. The court acknowledged the bank to be an organization with foreign investments, but agreed with the OJSC claim that, in contravention of the law, the transaction on behalf of the OJSC was carried out by an unauthorized person. Furthermore, the court decided that the ruling of the ICAC of the CTI RF “contradicts the basic principles of social law and order established by the Constitution of the RF, the social, political, economic organization of society and is subject to repeal.”

On a private appeal by the bank, the case was examined by the Civil chamber of the Supreme Court of the RF and, in accordance with its decision of 2 November 1999, was returned for a new consideration by the Moscow City Court. After considering the OJSC appeal for revocation of the ICAC of the CTI RF ruling of 20 April 1999, the Civil chamber of the Moscow City Court satisfied the claim on 27 January 2000 on the basis that as the bank was not entered in the register of enterprises with foreign investments, it is not an enterprise with foreign investments. The case came up again before the Civil chamber of the Supreme Court of the RF, which in this instance agreed with the determination of the Civil chamber of the Moscow City Court of 27 January 2000, having decided that in view of the claimant’s lack of status as an enterprise with foreign investments, the ICAC of the CTI RF examined a dispute the object of which, in accordance with p.2 art.34 of the ICA Law, may not be a matter for arbitration examination.

It would appear that the position of the courts outlined above is questionable. In essence, the courts examined not the issue of the validity of the arbitration agreement, but the question of the bank’s status. This matter, however, was the subject of a special investigation by the ICAC of the CTI RF, which reached its own conclusions on this question. Justifiably, the ICAC proceeded on the assumption that one of the parties involved in the dispute is an enterprise with foreign investments and the dispute (payment of debts arising from the credit agreement) arose from contractual relations in the course of the conduct of foreign trade and other forms of international economic relations. Under such circumstances, there is no reason to question the validity of the arbitration agreement. Moreover, one cannot agree with the decision of the Civil chamber of the Supreme Court that in this case, “the object of the dispute cannot be subject to arbitration examination.”

In another case, there appears to have been an even more evident exceeding of its authority by the court in the sphere under discussion. The Civil chamber of the Moscow City Court examined a filing by a foreign firm for the granting of an enforced execution of an arbitration ruling, made by the Arbitration Institute of the Stockholm Chamber of Commerce.

In considering the dispute, arbitration was carried out on the basis that Russian law was applicable to the parties involved. The court, having analyzed the arbitration decision, came to the following conclusions, among others.

In satisfying the claim for termination of the contract, arbitration declared it terminated from a certain date, and not from the moment of the arbitration ruling coming into legal effect, as is required by art. 450 of the Civil Code of the RF. The arbitration body’s reasoning that the parties were unanimous concerning the termination of the contract on a given date, has no legal basis. According to art. 450 p.1, consent concerning changes to or termination of an agreement is carried out in the same form as the agreement. In this instance, there was no written agreement concerning termination of the contract.

Furthermore the court, concurring with the respondent’s reasoning, indicated in its determination that indirect costs and decrease of productivity do not come under the concept of “losses.” The court noted that evaluation of losses, calculation of indirect costs and decrease in productivity were made by the arbitration body on the basis of the procedural norms of Swedish law, which arbitration did not have the right to apply “as the understanding of losses and order of estimating losses is determined by the norms of substantive, and not procedural law.”

The court finally ruled against granting enforced execution of this arbitration decision on the territory of Russia.

It would seem that reasoning similar to the judgements mentioned above cannot, in principle, serve as the foundation for court decisions concerning applications for enforced execution of any arbitration ruling whatsoever on Russian territory. Such conclusions, irrespective of other possible reasons for a court decision, indicate that the court reviews the arbitration decision in substance. It should be noted that the view of the applicant or even the court concerning incorrect application of the norms of Russian law by the arbitration body cannot serve as the foundation for a legal ruling on the revocation of arbitration decisions or refusal to recognize them and enforce execution on the territory of the Russian Federation.

Any doubts about the existence of reasons, envisaged by the law or by international agreement, for the revocation of an arbitration decision or refusal of recognition or enforced execution of such a decision should be interpreted in favor of the arbitration ruling. Against a background of not invariably convincing court practice in this field, there is a debatable point of view that “in considering the question of recognition of a foreign ruling, the court takes into account not just legal, but also social and economic factors.” With such an approach, the prospects for international commercial arbitration in Russia are unenviable.

Yu.A. Timokhov

Source publication: International Private Law: Contemporary Practice. [Mezgdunarodnoye chastnoye pravo: soveremennaya praktika]. M., 2000. pp.274-279.