Impartiality of Arbitrators and Arbitrability of Corporate Disputes – Russian Courts’ View

Moscow Commercial Court

On June 21, 2011, the City of Moscow Commercial Court (the “City Court”) annulled an award of the International Commercial Arbitration Court at the Russian Chamber of Commerce and Industry (the “ICAC”) rendered on March 31, 2011. According to that award, Novolipetsk Steel JSC (“NLMK”) was ordered to pay 9.5 billion roubles (approximately 237 million euro) to Nikolai Maksimov (“Maksimov”).

The conflict between the parties dates back to 2007 when Maksimov, at that time the sole owner of the Maxi Group holding company, sold 50 percent of the company plus one share to NLMK. NLMK is one of the largest steel producers in Russia. Its principal owner is Vladimir Lisin, who holds 84.6% of NLMK shares. The terms of the share purchase agreement, as well as its implementation, gave rise to multiple disputes. Starting in 2008, Russian courts on the regional and federal levels, have rendered a range of decisions relating to different aspects of the dispute. Moreover, a number of criminal cases have been initiated by the parties against each other.

The parties also recently completed an arbitration concerning their various grievances before the ICAC.  The award was entered in Maksimov’s favour, and NLMK turned to the City of Moscow Commercial Court, petitioning that the composition of the arbitral tribunal and the arbitral procedure was in breach of the agreement between the parties.

NLMK argued that the members of the tribunal failed to disclose circumstances that gave justifiable doubts as to their impartiality or independence. In the course of the arbitral proceedings, Maksimov submitted a legal opinion from Ural State Law Academy (“USLA”), signed by a business law professor who is simultaneously the rector of USLA. At the same time, Belykh, a member of the tribunal, headed the USLA business law department and would have been the legal expert’s colleague. Another legal opinion submitted by Maksimov to the arbitrators was prepared at the Institute of Private Law (Yekaterinburg), by Professors Alekseev and Stepanov, who also teach at USLA together with Belykh. Moreover, yet another legal opinion presented by Maksimov to the ICAC tribunal was provided by Professor Shulzhenko from the Institute of State and Law (the “ISL”) of the Russian Academy of Sciences. A different member of the arbitral tribunal, Zykin, works at the ISL. None of the above-mentioned facts had been disclosed during the proceedings.

The City Court rejected as groundless Maksimov’s waiver objection raised under article 4 of the Law on International Commercial Arbitration (the “Law on Arbitration”), because in the opinion of the court, there was no casual connection between the waiver of right to object and the arbitrators’ breach of their duties.

Nonetheless, it seems that the City Court failed to take notice of one fact. Both the Law on Arbitration and the ICAC Rules in articles 13(2) and 18(1) respectively, set for a party intending to challenge an arbitrator, a time-limit of 15 days after being notified of the composition of the arbitral tribunal, or having become aware of circumstances that can serve as a basis for challenge.

Within the indicated time-limit, both the Law on Arbitration and the ICAC Rules require the challenging party to communicate in writing its rationale for the challenge to the arbitral tribunal.  Presumably the rationale here is challenges should be made “in real time,” and not just at the end of a proceeding when one party is dissatisfied with the result of the arbitration or expects that the end result will be adverse. The final sentence of article 18(1) of the ICAC Rules specifically provides that unless a party makes a challenge within the requisite period of time, the right to challenge shall be deemed to have been waived.

NLMK challenged the arbitrators on March 24, 2011, several months after the submission of the referenced legal opinions. Although the City Court did not specifically refer to the time limits set forth in the Law on Arbitration or the ICAC Rules, it nonetheless found that information regarding occupation and position of the members of the tribunal and the authors of legal opinions was available on the official websites of the Russian Academyof Sciences and USLA.  Consequently, NLMK acting with minimum diligence could and should have become aware of alleged circumstances serving as a reason for challenge far sooner than March 2011. Failure of NLMK to challenge arbitrators before it was clear what the inevitable outcome would be (on March 24, 2011, NLMK challenged arbitrators and on March 31, 2011, the award was entered) resulted in a waiver of the right to challenge.

Ignoring article 18(1) of the ICAC Rules, the City Court found that the facts referred to by NLMK violated the Law on Arbitration because they showed that the composition of the arbitral tribunal and the arbitral procedure contravened the agreement of the parties, which constituted the basis for setting aside the award.

Additionally, the City Court found that the subject-matter of the dispute was not capable of settlement by arbitration and consequently the award contravened the public policy of the Russian Federation. In view of the City Court, though a dispute between the parties arose out of a share purchase agreement, it still dealt with the transfer of share ownership and consequently belonged to the domain of corporate disputes which falls within the special jurisdiction of state commercial courts by virtue of article 33 and 225.1 of the Commercial Procedure Code of the Russian Federation (the “Commercial Procedure Code”).

Nonetheless, the City Court’s legal conclusions are suspect: the referenced Commercial Procedure Code provisions only establish the jurisdictional rules for dividing certain categories of disputes between different branches of Russian state courts: courts of general jurisdiction and commercial courts. Nothing in these rules expressly provides that the legislature intended to make such disputes non-arbitrable.

NLMK also argued that the ICAC award was contrary to the public policy. In this respect, the City Court found that the arbitral tribunal breached mandatory provisions of Russian law in calculating the purchase price of shares. Because the award contravened a fundamental principle of Russian law, it was in conflict with the public policy of the Russian Federation and was void. Despite the reluctance of the domestic court to uphold the validity of the ICAC award, a different approach has been taken by the District Court of Amsterdam where Maksimov applied to enforce the award. Having examined the matter, the foreign court ordered interim measures in respect of NLMK’s share in a joint enterprise with Duferco-Steel Invest & Finance (Luxemburg).

Maksimov also applied for the Constitutional Court of the Russian Federation (the “Constitutional Court”) to assess the constitutionality of the provisions of the Commercial Procedure Code relied upon by the City Court in finding the corporate nature of the matter rendered the dispute at hand non-arbitrable. On July 19, 2011, the Constitutional Court accepted this petition. According to experts, it will take no less than 4 months for the Constitutional Court to render its decision in this matter.

Dilyara Nigmatullina

Association for International Arbitration, Brussels