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Legal alerts / 28.11.2018

Russian courts have deemed the ICC Model Arbitration Clause unenforceable

The Moscow Commercial Court issued a high-profile ruling in which it declined to enforce a decision of the ICC International Court of Arbitration on grounds not previously encountered in practice.

History of the dispute

The ICC decision was made in 2014 against Inzhtransstroy, Russia’s largest principal contractor. The panel of arbitrators awarded more than 5 million euro in favor of the dredging company Dredging and Maritime Management SA. Shortly after the arbitral award was handed down, the Russian court initiated the first stage of bankruptcy proceedings, supervision, in respect of Inzhtransstroy. In 2017, the bankruptcy case was terminated owing to a settlement agreement with the company’s creditors. The claimant in the ICC case was not taking part in the settlement, because by that time it had not been included in the register of bankruptcy creditors. Immediately after the termination of the bankruptcy case, Dredging and Maritime Management SA appealed to the Moscow Commercial Court with a request to enforce the ICC decision.

Position of Russian courts

The first instance commercial court held that it was impossible to enforce the ICC decision in Russia, based on two arguments:

  • The ICC decision contradicts Russian public policy, since, when it was adopted, the arbitrators did not take into account the defendant’s bankruptcy proceedings in a Russian court. The enforcement of the decision may entail a dramatic deterioration in the debtor’s financial condition and, as a consequence, may make it impossible to satisfy the claims of creditors participating in a settlement agreement in the bankruptcy case.
  • The panel of arbitrators did not have the competence to consider the dispute, since, according to the court, the arbitration clause did not contain a specific and direct reference to the consideration of all disputes by the International Court of Arbitration.

The Moscow Commercial Court confirmed that the decision of the first instance court was valid. A judge of the Supreme Court of the Russian Federation refused to consider the creditor’s complaint, thereby agreeing with the conclusions of the lower courts.

The arguments of the Russian courts are not in line with either the previous Russian practice, or with the global approach to the interpretation of arbitration agreements.

Arbitrability of disputes with a company in the bankruptcy process

The presence of a claim for bankruptcy in a state court cannot stop parallel judicial and arbitration disputes involving the company in question. Moreover, even the introduction of supervision (the first bankruptcy procedure) in accordance with Russian legislation does not exclude the competence of other courts and arbitration institutions in cases already started by this point: transferring a dispute to within the scope of a bankruptcy case is a creditor’s right, not an obligation.

The approval of a settlement agreement during the supervision stage does not preclude the satisfaction, subject to the standard procedure, of claims by those creditors who did not take part in the settlement agreement. Moreover, the Supreme Commercial Court back in 2005 recognized that a bankruptcy court must take into account the existence of such claims when assessing the enforceability of a settlement agreement submitted to it. If the terms of the settlement agreement did not provide the means to satisfy all the creditors of Inzhtransstroy equally, the court should not have approved such agreement. Instead, the court came to the conclusion that it was necessary to deprive Dredging and Maritime Management of its rights for the sake of saving a defective settlement agreement.

Russian courts often use the argument that there is a need to protect the creditors of an insolvent debtor as a ground to refuse to enforce arbitral awards. However, previously this argument was always based on some independent defect in the arbitration proceedings, which would make it possible to assert that arbitration was deliberately used to cause harm to creditors: collecting the debt of a creditor affiliated to the debtor; the confirmation of a non-existent debt by arbitration; or doubts regarding the impartiality of the arbitrators.

The case of Inzhtransstroy, on the contrary, is unique in that the court did not identify any defects in the award. On such basis, any decision of the arbitration against a debtor that subsequently falls into bankruptcy can be considered contrary to Russian public policy.

Defective arbitration clause

It can be seen from the judicial acts that the parties to the dispute used the model ICC arbitration clause:
“… the dispute shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce …” The Russian courts considered such a clause unenforceable on the grounds that it contains a reference to the arbitration rules but there is no direct reference to the specific arbitration institution – the International Court of Arbitration of the International Chamber of Commerce. The court stated that “this wording … bears all the characteristics to be classified as an ambiguous formulation and can be regarded by any of the parties as the right to appeal to another court similar in name”.

This position is at odds with many years of practice of successful enforcement in Russia of ICC decisions issued on the basis of similar arbitration clauses, and takes no account of the fundamental principle of interpreting arbitration agreements in favor of their validity and enforceability (explicitly established in the Russian arbitration law). Moreover, the reference in the arbitration clause to the ICC Rules of Arbitration leaves no room for ambiguous interpretation: according to these Rules, the International Court of Arbitration of the ICC is the only institution competent to conduct arbitration in accordance with the Rules.

The courts’ findings in the case of Inzhtransstroy make resolving disputes with Russian companies in arbitration significantly less predictable. Even an immaculate (in terms of content) decision of an authoritative arbitration institution may be rejected by a Russian court on non-transparent grounds. To minimize these risks, creditors are encouraged to:

  • Actively participate in bankruptcy cases of Russian companies from the earliest stages, and to challenge any decisions that may be in conflict with the interests of the creditor in question, even in the very distant future;
  • Engage advisers qualified in Russian law to carefully review arbitration clauses included in contracts with Russian companies.
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