Government Procurement Disputes Still Arbitrable in Russia

The Russian courts have sent a state establishment and several state agencies to arbitration to have their claim for termination of a contract with a German contractor resolved pursuant to the agreed dispute resolution procedure (case reference No. А40-106514/2011).

The claimants argued in both the Moscow Commercial Court and the Ninth Appellate Commercial Court that the arbitration clause in the contract was not enforceable. According to claimants, any disputes arising out of such contracts should be resolved by state commercial courts under the applicable Russian law on government procurement.

This argument was rejected by the courts, which found that the purpose of the provision referring disputes arising out of government procurement contracts to state commercial courts was to allocate jurisdiction between the Russian state courts (that is between commercial courts and courts of general jurisdiction). The courts further explained that commercial disputes are generally arbitrable and a specific and clear exclusion is necessary to render a commercial dispute non-arbitrable. They cited the Federal Law On Bankruptcy as an example of such a clear provision.

Facts

In 2005 Glatt Engineering GmbH entered into a contract with the Federal State Establishment Rosplazma for the construction of a blood products plant in Kirov, Russia. The contract provided that any disputes between the parties should be resolved by arbitration under the Russian CCI ICAC Rules.

It appears from public sources that construction works were suspended in 2010 and Rosplazma sent several letters to Glatt first offering to terminate and then giving notice of termination of the contract. In September 2011 Rosplazma and several state agencies supervising its activities brought a claim before the Moscow Commercial Court seeking termination of the contract.

In March 2012 Rosplazma’s application was dismissed by the Moscow Commercial Court, which found inter alia that the dispute should be resolved by an ICAC arbitration tribunal pursuant to the provisions of the contract. On 23 May 2012 this judgment was confirmed by the Ninth Appellate Commercial Court.

Commentary 

The decisions of the courts in this dispute appear to strike a proper balance in interpreting provisions of Russian law vesting jurisdiction on state commercial courts. Indeed, there are a number of provisions the primary purpose of which is to allocate jurisdiction between the two branches of the Russian court system.

While on the face of it such provisions, which may inter alia provide, that a particular dispute shall be resolved by a state commercial court, may appear to exclude recourse to arbitration, they should be interpreted in their context. Given the general mandate under the Law On International Commercial Arbitration for arbitral tribunals to resolve any commercial disputes given to them it appears that in most cases a specific exclusion of recourse to arbitration would be necessary to limit it.

Obviously such an approach sits a bit uncomfortably with the stance taken by the Russian state courts towards the arbitrability of “corporate” disputes (including those arising out of share purchase agreements).   With respect to these disputes several Russian courts have recently found that they are not arbitrable, because under Article 33 of the Commercial Procedure Code such disputes should be resolved by state commercial courts.

In interpreting this latter provision the Russian courts failed to look at it in its context (explained above) and arguably arrived at the wrong conclusion: in interpreting Article 33 of the Commercial Procedure Code the courts relied on several policy grounds (the effect of corporate disputes on third party and company interests) to establish their non-arbitrability. While the persuasiveness of these arguments is doubtful they are clearly even less applicable to straightforward commercial disputes between two parties over the termination of a construction contract (the subject matter of the case reviewed).

The decisions are still subject to possible appeal to the Moscow Circuit Commercial Court.

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.

1 Comment on "Government Procurement Disputes Still Arbitrable in Russia"

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  1. Rimantas says:

    Arbitrability of Disputes Arising from Public Procurement Contracts – Lithuanian Example

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2086349

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