Immovable Property Disputes – Non-Arbitrable in Russia?

The Presidium of the Russian Supreme Commercial (arbitrazh) Court filed a request in the Constitutional Court to evaluate the constitutionality of a several provisions of the Russian Law “On International Commercial Arbitration” and the Federal Law “On Arbitration Tribunals in the Russian Federation”. In particular, provisions of these laws related to arbitrability of disputes related to real property. Supreme Commercial Court (the SCC) requested to evaluate

the extent within which the norms of the said laws do not ensure realization of the legal certainty principle regarding determination of specific categories of disputes that may or may not be subject to jurisdiction of arbitration tribunals (international commercial arbitration tribunals), i.e. fail to fix strict rules of the disputes’ arbitrability and non-arbitrability.

The above mentioned laws do not contain an exhaustive list of arbitrable or non-arbitrable disputes. Although the SCC believes that it creates a legal uncertainty, this position is questionable because the arbitrability of certain categories of disputes follows from other Russian laws. Thus, the federal law on bankruptcy expressly provides in Article 33 that bankruptcy cases are non-arbitrable.

In addition, the SCC questioned the conformity with the Constitution of Article 11.1 of the Russian Civil Code and Article 33.1 of the Federal Law “On Mortgage (Pledge) of Immovable Property”, Article 28 of the Federal Law “On State Registration of the Rights to Immovable Property and Transactions Therewith.”

The alleged uncertainty was detected in consideration of two cases with identical facts by the SCC Presidium (the respective case numbers 530/10 and 634/10) which were first considered by the Commercial Court of the Republic of Tatarstan, further by the Federal Commercial Court of the Povolzhsky Circuit, then by the collegiums of judges of the Presidium of the SCC on 11 March 2010 and by the Presidium of the SCC on May 18 2010. These cases, which made the SCC Presidium apply to the Constitutional Court, dealt with the enforcement of Russian arbitration awards.

The arbitration tribunal resolved the dispute on recovery from the pledgor in favour of the pledgee of indebtedness under credit and on levying execution on the subject of pledge. SCC believes that matters involving transfer of property rights relate to the domain of public interest and for this reason are not arbitrable. However SCC found that certain provisions of Russian law allow arbitral tribunal to levy execution on the subject of pledge. However, SCC doubts their constitutionality.

Article 11(1) of the Russian Civil Code contains a broad notion of “court” applying the same both to state courts included by the Russian Constitution into the Russian judicial system, and to arbitration tribunals. This article states: “The violated or disputed civil rights shall be protected by the court of justice, the commercial court or the arbitration court (hereinafter referred to as the court), in conformity with the liability of the cases to these bodies’ jurisdiction, established by the procedural legislation.”

Article 33(1) of the Federal Law “On Mortgage (Pledge) of Immovable Property” stipulates:

If other persons file claims against the pledgor for recognition of their ownership title or other rights to the pledged property, for seizure (requisition) or encumbrance of the said property or other claims, where satisfaction thereof may entail reduction of value or deterioration of that property, the pledgor shall immediately notify of it the pledgee, if known to him/her. In case of filing of the relevant claim against the pledgor in the court of justice, the commercial court or the arbitration tribunal (hereinafter referred to as the court), he/she must ensure such pledgee’s joining the proceeding.

SCC doubts whether it is constitutional to qualify ‘arbitration court’ as a ‘court’. SCC refers to the Article 118 of the Constitution: “Justice in the Russian Federation shall be delivered only by court”. The SCC alleges that the term “court” shall be understood as “state court”, not as arbitration court. According to SCC, the said provisions of federal laws do not discern between state courts and arbitration tribunals, and arbitration tribunals are set equal to state courts.  Consequently, these provisions entitle arbitration tribunals to resolve disputes concerning real estate, i.e. with public interest. Thus according to SCC the said provisions give rise to uncertainty leading to controversial law enforcement practice, violating the interests of a wide range of the civil turnover participants as well as public interests.

However, SCC does not pay attention to the fact that term “court” in the Constitution and in the said laws has different meanings are. It is far-fetched to conclude from a wider scope of such term in said federal laws that arbitration courts are given the same status as state courts.

To put it into a nutshell, SCC tries in such an indirect way to reserve the disputes relating to immovable property rights to state commercial courts. One of the SCC reasons for this given by SCC is that such property is generally “expensive”. If the Constitutional Court agrees with the SCC, this would be an unusual approach because most European countries disputes relating to immovable property rights are arbitrable as a general rule.

Although there are indeed disturbing cases when arbitration is abused to unlawfully acquire legal title to immovable property, a general prohibition of arbitrability of disputes with expensive property would perhaps be a non-adequate and improper solution.

Dmitry Davydenko

About the Author:

Dr Davydenko is the Director and co-editor of the CIS Arbitration Forum. He is Vice Chairman of the Panel of Mediators at the Russian Chamber of Commerce and Industry and advises Russian and international clients on international business law matters. He is listed as a recommended arbitrator of International Commercial Arbitration Court and Maritime Arbitration Commission at Russian Chamber of Commerce and Industry, as well as some other arbitral institutions.

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