Three Levels of Russian Courts Review Arbitrators’ Choice-of-Law Determination

Russian courts recently found that an arbitral tribunal’s choice of law determination is subject as a matter of procedure to state court control. Consequently, an “incorrect” determination of substantive law can amount to a violation of public policy in Russia.

On October 14, 2006, a Russian buyer, OJSC Efirnoe (hereinafter “Efirnoe”) and a Ukrainian seller, LLC Delta Vilmar CIS (hereinafter “Delta Vilmar”) concluded a contract of sale and delivery of products made from palm. Article 6 of the contract provided:

The parties shall try to resolve all disputes arising out of insufficient or non-performance of the terms of the contract using negotiation. In the event the parties cannot come to an agreement through negotiation, then if the seller files a claim, the parties agree to refer their dispute to the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry to be resolved under its Rules by three arbitrators; if the buyer files a claim, the parties agree to refer their dispute to the International Commercial Arbitration Court at the Russian Chamber of Commerce and Industry to be resolved under its Rules by three arbitrators. In considering the dispute, the given arbitrators shall apply the substantive and procedural rules of law of the claimant’s state.

On October 3, 2008, the Ukrainian seller, Delta Vilmar, filed a claim with the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry (hereinafter “the Ukrainian ICAC”) and on April 9, 2009, the arbitrators concluded that the substantive law of Ukraine applied to the case at hand.

While these proceedings were still pending before the Ukrainian ICAC, the buyer, Efirnoe filed its own claim against Delta Vilmar with the International Commercial Arbitration Court before the Russian Federation Chamber of Commerce and Industry (hereinafter “the Russian ICAC”), which ultimately rendered an award on November 11, 2009, in favor of Efirnoe. Later, Delta Vilmar petitioned the Arbitrazh Court of the City of Moscow to set aside this award.

The petitioner alleged that the Russian ICAC proceeding violated the agreement of the parties and the requirements of Russian Law on International Commercial Arbitration. In particular, it was alleged (1) that the Russian ICAC incorrectly determined the law applicable to the dispute—which should have been Ukrainian; (2) that the award was contrary to Russian public policy; and (3) that the arbitration clause was invalid.

The Arbitrazh Court of the City of Moscow was persuaded by some of Delta Vilmar’s arguments and set aside the award of the Russian ICAC. According to the City Court, the Russian ICAC had failed to follow the procedure agreed to by the parties, as required by article 28 of the Russian Law on International Commercial Arbitration. Regarding the award rendered by the Ukrainian ICAC, the parties apparently agreed there to the application of Ukrainian law and the arbitrators consequently applied that law to resolve the dispute. From the perspective of the City Court, therefore, Ukrainian law should have been applied to any further legal relationship arising out of the same contract between the same parties, including by the Russian ICAC.

However, the Russian ICAC applied the United Nations Convention on Contracts for the International Sale of Goods (hereinafter “CISG”), incorporated into Russian law, to resolve the dispute. As the applicable choice-of-law is, according to the City Court, a procedural issue, the Russian ICAC’s failure to comply with fundamental principles of procedural legislation violated the public policy of the Russian Federation. Efirnoe appealed, but the court of appeals, the Federal Arbitrazh Court of the Moscow Region, upheld the decision of the trial court.

Still hoping to prevail, the Russian party Efirnoe applied for supervisory review with the Supreme Arbitrazh Court of the Russian Federation. In support of its request to set aside the decisions of the Arbitrazh Court of the City of Moscow and the Federal Arbitrazh Court of the Moscow Region, Efirnoe argued state arbitrazh courts were not entitled to examine whether the Russian ICAC had correctly applied the rules of substantive law while resolving the dispute.

The Presidium of the Supreme Arbitrazh Court of the Russian Federation vacated the lower court rulings, finding that they had failed to consider that both the Russian Federation and Ukraine were parties to the CISG and, consequently, the CISG constituted an integral part of Russian and Ukrainian law. As the parties did not expressly exclude the CISG’s application to their relationship, the Ukrainian ICAC and the Russian ICAC each applied the CISG, so any error was negligible.

The Supreme Arbitrazh Court relied on article 7 (2) of the CISG and concluded that the violation of public policy had to involve violation of certain fundamental principles of law and have certain legal consequences for the claimant in the form of impairment of rights and legitimate interests. However, the lower courts did not establish such violations and the claimant failed to even refer to them. Thus, the application by the Russian ICAC of Russian law—i.e. the CISG and provisions of the parties’ agreement— could not be interpreted per se as violating public policy. As result, the decisions of the lower courts were vacated as violative of the uniformity of construction and interpretation of rules of law required of arbitrazh courts.

That being said, courts in the majority of developed jurisdictions disregard arguments that arbitrators’ “incorrect” determination of choice-of- law violates the agreement of the parties. Usually such issues are regarded as substantive ones and are subject to very limited judicial review, if any. In the case at hand, the Supreme Arbitrazh Court vacated the decisions of the lower courts. The straightforward way in which to have done this would have been to find, as most developed jurisdictions do, that the determination of the applicable law constituted the substance of the parties’ dispute and thereby could be subject to no judicial review. The Supreme Arbitrazh Court did not do this. Rather, it examined the merits of whether choice-of-law, indeed, had been correctly determined. Thereafter, the lower courts’ decisions were annulled because application by the arbitral tribunal of the CISG as part of the Russian law did not amount to a clear violation of public policy. Thus, even though the Supreme Arbitrazh Court came to the correct conclusion, it did so for the wrong reason—it impliedly endorsed examining the substance of whether the correct law was applied. In this way, the approach taken by all the three Russian courts is consonant and unfortunately demonstrates that allegations of violation of public policy on the ground of “incorrect” determination of the substantive law still can succeed in Russia.

A side issue also dealt with by the Supreme Arbitrazh Court in this case was a motion for one of the members of the Presidium of the Supreme Arbitrazh Court to recuse himself. Delta Vilmar based its challenge on the fact that the justice in question and the presiding arbitrator at the Russian ICAC that rendered the contested award worked together at the same university. The Supreme Arbitrazh Court of the Russian Federation rejected the challenge as being insufficient to raise doubt on the impartiality of the justice.

Dilyara Nigmatullina, Association for International Arbitration