Arbitration in Russia Needs Even More Quality and Integrity

Valery Zorkin and Anton Ivanov spblegalforum.com

As we reported back in May 2011 the Russian Constitutional Court has confirmed that disputes relating to the transfer of title to immovable property are arbitrable, as well as other disputes of an essentially private law nature.

The decree rendered by the Constitutional Court resulted from a July 2010 request of the Presidium of the Russian Supreme Commercial Court (the “SCC”) to evaluate the constitutionality of several provisions of the Russian Law “On International Commercial Arbitration” and the Federal Law “On Arbitration Tribunals in the Russian Federation”.

In particular, they asked for an examination of the provisions of these laws with regard to the arbitrability of disputes related to real property. The court noted that these laws do not specifically set out which categories of disputes are arbitrable and which are not, and requested an assessment of whether the constitutional principle of legal certainty is thus undermined.

Though the SCC merely “questioned” the constitutionality of Russian law provisions on arbitration and on the status of arbitration courts, its position was that disputes relating to immovable property rights should be reserved for the state commercial courts. One of the reasons for this given by the court is that such property is generally “expensive”.

Indeed, unstable global and national economies make many Russians choose to invest their money in real estate, the value of which steadily grows in long term. As many other (and perhaps all) legal and social institutions, arbitration is not immune from abuse, which indeed can be especially sensitive where dwelling or other valuable property is concerned. However, a general prohibition of the arbitrability of disputes involving expensive property would clearly be an inadequate and improper solution.

Another reason given was that real property disputes, as well as corporate disputes, usually involve, and can infringe upon, rights of third parties and are not indifferent to public interest. It was argued that arbitration can more easily be abused to obtain legal title to real property, as well as to obtain shareholder’s rights, than litigation. There are indeed disturbing cases where arbitration has been abused in order to unlawfully acquire legal title to immovable property belonging to non-parties.

Nevertheless, an appropriate solution would be to allow third parties to challenge the awards which infringe their rights (as the Constitutional Court explained with regard to real estate disputes), rather than to disallow the arbitrability of the disputes in question. As the Constitutional Court Chairman Valey Zorkin recently said, “failure of the State to ensure genuine independence and an appropriate level of competence of arbitrators is not a sufficient reason for limiting freedom of contract”.

Recently the SCC Chairman Anton Ivanov in an interview with the leading newsletter Kommersant clarified his position as to the arbitrability of disputes and status of arbitral tribunals. In particular, he argued as follows:

There is an excessive number of arbitral tribunals which in reality are not true arbitral tribunals in our country. The Constitutional Court normally does not have to deal with such arbitral tribunals. Yet we face them every day. Tolerating this situation, the state runs the risk that one day it will lose major assets by the awards of such arbitral tribunals, and it will not be possible to do anything about it.

Therefore, the position of the SCC may be based on legitimate concerns, but the chosen method of dealing with the issue is inadequate.

The problem is that now in Russia no or few control mechanisms exist against abuse in founding and making use of an arbitral tribunal merely to misappropriate other persons’ property. To establish an arbitral tribunal in Russia is utterly simple. Therefore hundreds of arbitral institutions have already been set up in Russia. Unfortunately many of them are not trustworthy enough for the state courts. Some arbitration courts are organised by large holding companies which insist on including arbitration clauses in their contracts referring disputes to such arbitration courts. Such arbitral institutions are seriously opposed by the SCC who considers them as “pocket” (dependant) courts.

It appears that the SCC is not generally hostile to the idea of allowing arbitral tribunals to hear cases on real estate and corporate disputes. It is though against the possibility of granting such rights to all arbitral institutions. But there is no legal way of discriminating between arbitral institutions. This point is a very serious one and even results in a constitutional problem: a problem of equality and equal treatment of arbitral institutions.

One of the solutions would be to amend the Russian regulations by introducing qualifying requirements for the establishment/running of the arbitral institution with a view to reducing their numbers and allowing for the existence of only the most serious ones.

However, this issue is very sensitive. The mere attempt to improve this complicated situation would result in accusations being levelled against the Russian authorities for infringement of civil rights and freedoms. However, such an attempt would be necessary for arbitration to develop in Russia and would, indeed, have nothing to do with the infringement of civil rights and freedoms.

It goes without saying that, given the above-described situation, the issues of maintaining a high reputation among particular arbitral institutions, as well as the integrity of arbitrators and quality of awards becomes crucial for the future development of arbitration in Russia.

Dmitry Davydenko

Muranov Chernyakov & Partners Law Firm