Russian Supreme Court upholds the validity of optional dispute resolution clause

This article considers Case No. A621635/2014, in which the Chamber on Economic Disputes of the Supreme Court of Russia (Russian Supreme Court) considered the validity of an optional dispute resolution clause.

Dmitry Vlasov (Senior Associate), KK&P

Optional dispute resolution clauses, also called hybrid clauses, provide for one method of dispute resolution (litigation or arbitration) but also allow the parties to choose an alternative route (arbitration or litigation, accordingly). Hybrid clauses can also be unilateral (otherwise known as onesided or asymmetrical). These types of clauses provide one party only with the right to refer a particular dispute to an alternative dispute resolution forum.

Unilateral clauses are a common feature, particularly in international finance transactions, but they should be treated with caution as in a number of jurisdictions their validity and enforceability have been successfully challenged (see Article, Unilateral option clauses in arbitration: an international overview (www.practicallaw.com/75353743).

In contrast to the English courts, which enforce such clauses, in 2012, the Presidium of the Russian Supreme Commercial Court found such clauses to be invalid under Russian law on the ground that they violated the principle that the parties to a dispute should have equal procedural rights to present their cases to the courts or arbitral tribunals (see Judgment No. 1831/12 dated 19 June 2012, Case No. А4049223/11 (Sony Ericsson case), discussed in Legal update, Russian Supreme Commercial Court finds unilateral hybrid dispute resolution clauses invalid (www.practicallaw.com/65212664)).

In 2014, the Russian Supreme Commercial Court was abolished and its functions were transferred to the Russian Supreme Court. In May 2015, in Case No. A621635/2014 (www.practicallaw.com/36194707), the Supreme Court heard an appeal against a lower court and a cassation court’s refusal to enforce a domestic arbitration award. Both courts had found that the underlying dispute resolution clause allowed the claimant only to decide between arbitration and litigation. As such the courts held that the optional clause was invalid as it was a unilateral (or asymmetric), and therefore not valid as a matter of Russian Law.

The decision presented an opportunity to see what approach the Supreme Court would adopt.

The facts of the case
A dispute arose between a supplier (Piramida LLC) and a purchaser (BOT LLC) under a supply agreement that provided for an optional dispute resolution clause. In particular, the agreement provided that all disputes should be resolved by a Russian commercial court or a domestic regional arbitral institution at the choice of the claimant.

Further to that, Piramida and BOT’s CEO entered into a guarantee agreement that also provided for a similar dispute resolution clause, namely, that disputes would be resolved by a court of general jurisdiction or by a domestic regional arbitral institution at the choice of the claimant.

After BOT failed to make payments under the supply agreement, Piramida commenced arbitration against both BOT and its CEO. Subsequently, an arbitral tribunal issued a monetary award holding both defendants jointly liable and awarding damages to Piramida. Thereafter, Piramida filed an application to the Commercial Court of Smolensk region to enforce the award. The Smolensk Court held that the dispute resolution clause in question, which comprised an arbitration clause and a jurisdiction clause, provided for a right of one party only – in this case that of Piramida – to refer a dispute to a forum of its choice. The Smolensk Court found that such clause put Piramida in a better position than that of BOT and its CEO. As such, it concluded that the clause violated the balance of interests between the parties. By referring to the position adopted by the Presidium of the Supreme Commercial Court of Russia in the Sony Ericsson case (see Legal update, Russian Supreme Commercial Court finds unilateral hybrid dispute resolution clauses invalid (www.practicallaw.com/65212664)), the first instance court concluded that the clause was invalid on the ground that it violated the balance of interests between the parties. On that basis, the Smolensk Court refused to enforce the award (Order of Commercial Court of Smolensk region dated 09.07.2014, Case No. A621635/14). That Order was upheld by the Commercial Court of the Central District (Cassation Court) (Judgment of Commercial Court of Central District dated 24 September 2014). The Cassation Court agreed with the reasoning of the lower court.

Piramida appealed to the Chamber on Economic Disputes of the Supreme Court (effectively a secondlevel Cassation Court). It argued that the courts had erred in applying the “balance of interests” principle and that the Judgment of the Supreme Court in the Sony Ericsson case was inapplicable to the current case given that the dispute resolution clause in question does not grant any privileges or additional rights to either of the parties.

Judgment of the Supreme Court
The Supreme Court quashed the judgments of the Smolensk Court and the Cassation Court.

The case was heard by the three Supreme Court judges, who were former Supreme Commercial Court judges and who were among the Presidium panel that considered the Sony Ericsson case.

The Supreme Court started with the analysis of the judgmen in the Sony Ericsson case, pursuant to which “the parties to civil proceedings should have equal procedural rights”. The judgment also directs that in light of “the general principles of protection of civil rights” an agreement to settle disputes may not grant just one party under the contract (the seller in that case) a right to bring proceeding in a competent court and deprive the other party (the buyer) of the similar right. Such a clause amounts to a unilateral jurisdiction clause which is void insofar it provides for unequal procedural rights to the parties in breach of “the balance of the parties’ rights”. As such, the other party should equally have a right to choose between the two alternative forums.

However, in the current case, the Supreme Court did not find that the dispute resolution clause was a unilateral clause that violated the rights of either of the parties as regards equal access to the dispute resolution means. Specifically, the Supreme Court held that the relevant provision gave “the claimant”, rather than a particular party or person, a right to choose whether to start proceedings in a state court or in arbitral proceedings. The court stated that unilateral clauses provide a particular party or person with such an option.

Where clauses merely provide that “the claimant” is the holder of such right, there is a legal difference in that any of the parties to the agreement may start the proceedings first and thus be in the position of the claimant.

Further, the Supreme Court held that the phrase “at the choice of the claimant” in the clause is a common practice and does not breach the balance of the parties’ rights. When the parties enter into such (symmetrical, optional) arbitration clauses, the equality between the parties as regards their procedural rights is not impaired: each of them has a right to start proceedings in court or in arbitration.

The Supreme Court concluded that Russian law does not prohibit such arbitration agreements and referred to previous case law confirming this position (Resolution of the Supreme Commercial Court No. 6920/07 dated 08.06.2007, Case No. A328964/2006). In this case, the Supreme Commercial Court held that an optional dispute resolution clause, similar to that considered in the Piramida case, is valid under Russian law.

In light of the above, the Supreme Court overturned the judgments of the lower courts and remanded the case back to the first instance court for consideration. On remand, the Commercial Court of Smolensk region found no difficulty in enforcing the award (Judgment of the commercial court of Smolensk region dated 21.07.2015).

Conclusion
The Supreme Court judgment is not a surprise. Indeed, as the court noted in its judgment, the position regarding optional dispute resolution clauses, similar to those reviewed in the Piramida case, was established by the Supreme Court several years ago. Moreover, there has been a number of judgments confirming the validity of optional dispute resolution clauses in Russia (see Resolution of the Supreme Commercial Court dated 27.03.2012 No. ВАС1943/12, case А4057887/11? Judgment of the Presidium of the Supreme Commercial Court of 14.02.2012 No. 11196/11, case А751836/2011).

However, this case is important for two reasons. Firstly, it confirms that the Supreme Court will follow the approach adopted by the abolished Supreme Commercial Court in the Sony Ericsson case regarding the validity of unilateral hybrid clauses, namely that they are not valid under Russian law. Secondly, the Supreme Court will uphold the validity of optional dispute resolution clauses that provide that a right to exercise the option to litigate or arbitrate is vested with the claimant.

The case is also good reminder that careful consideration should be given when drafting a hybrid clause in a contract governed by Russian law or which can be potentially enforced in Russia, in order to avoid any pitfalls in the future.

For further information on the validity of unilateral clauses in Russia and other jurisdictions, see Article, Unilateral option clauses in arbitration: an international overview (www.practicallaw.com/75353743).

This article has previously been published by Practical Law Arbitration on 14 October 2015.