Supreme Commercial Court Takes a Closer Look at Domestic Arbitration Institutions Established by Commercial Entities

Domestic arbitration institutions established by various commercial entities have become widespread in the Russian Federation. Their existence and perceived lack of impartiality have long been criticized by many. They were also presented as an example of why arbitration should not be used to resolve private disputes.  The situation is particularly problematic where the rules of the institution provide no mechanisms to prevent conflict of interests.

Supreme Commercial Court of the Russian Federation (the “SCC”) tackled this problem in two cases in May-June 2011. In the first case, the Presidium of the SCC ruled that enforcement of award should be refused, because the structure of arbitral institution may have affected independence and impartiality of the tribunal. In another case the Presidium of SCC apparently held that an arbitration clause in the contract in question was invalid because of perceived partiality of the arbitration institution (the text of the resolution has not yet been published).

Below we take a closer look  at the facts of those cases and the position of the SCC.

LLC Business-Lada et al v. Sberbank (case 17020/10)

In 2007 a branch of the largest Russian bank Sberbank provided several loans to a corporate entity Business-Lada securety by a guarantee of a third party. When the borrower failed to repay the loans, the bank submitted a claim in a domestic arbitration under the rules of arbitral court of CJSC Investment-Construction Company Sberbankinveststroy (as provided by contract). The tribunal ruled in favor of Sberbank and ordered both the borrower and the guarantors to repay the loans. The bank applied for enforcement of the awards to the state courts. Both the regional court and the circuit court ordered enforcement of the award.

According to the rules of the Arbitral Court of CJSC Investment-Construction Company SberbankInvestStroy the chairman of the court, as well as the list of arbitrators were to be approved by the general shareholders meeting of the company. The SCC found that Sberbank (its Volga branch) was the sole shareholder of the company and voted to appoint the chairman of the court and to approve the list of arbitrators during the most recent shareholders’ meeting.

SCC decision and reasoning

The Presidium of SCC first noted that state arbitrazh court may refuse enforcement of an arbitral award where the composition of the arbitral tribunal or the arbitral procedure is contrary to federal law. The court went on to observe that any arbitration proceedings should be based on such principles as independence and impartiality of the tribunal and party autonomy. The SCC then noted that the state courts “shall” examine whether those guarantees were complied with.

Applying those principles to the specific case, the SCC held that the arbitral tribunal was not independent and impartial. Relying on the jurisprudence of the ECHR with respect to state courts, the court distinguished between subjective impartiality (that of particular judge or arbitrator) and objective impartiality (which requires looking at the way the judges (or arbitrators) are appointed).The SCC held that:

[i]n this context [the fact of] the establishment and financing of the arbitral institution by one of the parties of the commercial contract, while it is possible that the disputes arising out of the same contract are settled by such arbitral institution, taking into account [the fact] that the other party was not able to perform similar actions, evidences breach of the guarantee of objective impartiality and, as consequence of fair hearing in the form of breach of equality of parties and [failure] to observe the party autonomy.

The court further observed that:

[the] Bank unilaterally set up arbitral institutions in Volga Region, and it chose and approved the arbitrators. After that, bank’s divisions in this Region proposed [inclusion of an] arbitration clause which referred the disputes to the arbitral institutions [so] created into the commercial contracts they signed with other parties.

Consequently the bank acted not only as the person, which created the said arbitral institution, but as the party to the dispute with its borrower resolved by this institution. This led to the breach of principles of equality and party autonomy.

We note that for the SCC it was not material that the company, which was administering the arbitral institution, and the company, which was the party of the dispute, were separate legal entities. It gave more weight to the fact that the bank, which was party to the dispute, was able to appoint the chairman of the institution and approve the list of arbitrators.

LLC First Excavator Company (“LLC FEC”) v. JSC Union of Industry RosProm (“Rosprom”) (case 1308/11)

This case concerned enforceability of an arbitration clause, which provided that the disputes should be resolved by an arbitral institution established by the defendant.

The parties entered into joint operations agreement, which contained an arbitration clause. According to it all disputes were to be resolved by an arbitral court under Rosprom. LLC FEC terminated the contract and claimed return of the funds it contributed in state arbitrazh court. The regional court refused to consider the claim referring to the arbitration agreement between the parties. This decision was upheld by the circuit court.

Position of the SCC panel

LLC FEC sought supervisory review of those decisions. The panel of SCC judges considering the request referred it to the Presidium of SCC citing in particular the invalidity of the arbitration clause due to inherent partiality of the arbitral institution. The Presidium of SCC decided to quash the lower court’s decisions and instruct them to consider the merits of the case. While the full text of the resolution of the Presidium is not available it is interesting to consider the reasoning of the SCC panel which recommended the review of the case.

The panel’s conclusion that the arbitral institution would be inherently partial was based on several factors. Firstly, the chairman of the arbitral court was appointed by the president of Rosprom. Secondly, in exercise of this power Rosprom’s president appointed the company’s head of legal as the chairman of the court. Thirdly, the arbitral tribunal to consider a specific dispute was to be appointed by the chairman of the court without participation of parties. The panel noted that:

…the procedure of formation of the arbitral tribunal does not secure compliance with the principle of impartiality of the court in the resolution of the dispute, which [principle] extends to the arbitral tribunal being a dispute resolution body.

Said principle finds its expression in the maxim “nobody should be a judge in his own cause” [nemo debet esse iudex in propria causa] [and] is one of the core elements securing right to fair hearing provided in Article 6 of European Convention…

The SCC panel concluded that the arbitration clause was invalid because the procedure of arbitral tribunal formation it provided for, was contrary to the principle of impartiality.

The exact effect of those decisions on the continued existence of arbitral institutions closely linked to commercial entities is yet to be seen. In the second case in particular, the SCC was dealing with an extreme example, where the arbitral tribunal was essentially appointed by one of the parties. Review of the decisions of the SCC does not disclose that any mechanisms for prevention of conflict of interests were implemented in the arbitral institutions scrutinized by the court.

However, on a more fundamental level those decisions raise two more questions.

First is the extent of party autonomy and the role of the state court in protecting parties’ interests. In both cases parties agreed to have disputes resolved by particular institutions. Apparently they were or should have been aware of the applicable procedure (at least there was no finding to the contrary). The Presidium of the SCC did not find that the parties were coerced into agreeing to those arbitration clauses. However, one may say that the basic guarantee of impartiality of adjudicator is so important that it supersedes parties’ will.

Second is the extent to which the due process guarantees applicable to proceedings before the state courts are applicable to arbitration. Recently, the Constitutional Court held that the right to fair hearing applies in the context of private arbitration (for a more detailed discussion see an earlier post on this blog). This conclusion was apparently taken on board by the SCC. While such basic requirements as impartiality of arbitrators stem not only from the basic right to fair hearing, but are in fact expressly laid down in Russian laws governing arbitration, it remains to be seen to what extent would other fair hearing guarantees be expected of arbitral proceedings.

Sergey Usoskin

About the Author:

Sergey Usoskin is an advocate (member of the Russian bar) and a senior associate at Ivanyan&Partners. He has experience advising clients on and representing them in commercial and investment arbitration matters as well as before the Russian court (including the Supreme Commercial Court). He is a graduate of St Petersburg State University, Faculty of Law and University College London Faculty of Laws.

2 Comments on "Supreme Commercial Court Takes a Closer Look at Domestic Arbitration Institutions Established by Commercial Entities"

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  1. Sergey Usoskin says:

    As a follow-up to the post, the full Resolution of the Presidium in Rosprom case have been published yesterday (Resolution of the Presidium of SCC No. 1308/11 of 28 June 2011) . The SCC Presidium held that the arbitration clause was unenforceable and void, because under the rules it provided for it would be impossible to have an impartial tribunal appointed. SCC found that both subjective and objective impartiality tests applied. It found that where: 1) the chairman of the tribunal is appointed by the CEO of the respondent party and 2) the other two arbitrators are appointed by the head of legal of the respondent, the tribunal would not meet those tests.

  2. masoom says:

    Hi, Sergey Usokin:

    Would you be having by anychance full text of verdict of both the judgements? or anyone of them.

    I want to read them?

    Please Reply,

    Much Obliged,


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