Russian Dallah in the Making

In a pending case Russian courts are looking at whether the arbitral tribunal may extend its jurisdiction to the City of Moscow on the basis of an arbitration clause in a contract to which a department of the city government is a party.

In March 2013, the tribunal (Professor Sherstobitov (chair) and Professors Komarov and Sergeev) ruled that it has jurisdiction. However, the Moscow Commercial Court set the award aside in the end of May 2013. The Federal Commercial Court for the Moscow Circuit will hear the appeal on 5 September 2013.

Courts in various jurisdictions have tackled the extent to which non-signatory parties can nevertheless be bound by the arbitration clause. Famously, the English and the French courts disagreed on whether the government of Pakistan was bound by the arbitration clause in a contract between a private contractor and a trust created by the government.

The Russian courts faced with a case which resembles Dallah in many respects now have an opportunity to make their own contribution to this debate. The decisions in this case will definitely have a profound impact on the development of Russian arbitration law.

Factual Background of the Case

In 1992, S&T Handelsgesellschaft Mbx&Co KG (“S&T”) and the Construction Department of the City of Moscow (the “Department”) entered into a cooperation agreement. The purpose of the agreement was the reconstruction of the building housing the Department in the Nikistsky Pereulok (located a stone’s throw away from Red Square and the Kremlin). S&T was required to finance the reconstruction receiving office space in the building in return. Ultimately, in 1995 a 11-floor new building was erected on the site.

It appears from the various court decisions rendered in earlier proceedings that in 2002 the City of Moscow registered title to the whole building in its own name. S&T claimed that it was entitled to ½ of the building. The Presidium of the Supreme Commercial Court appears to have eventually found that pursuant to the terms of the agreement S&T was only entitled to compensation for its expenses.

The cooperation agreement between S&T and the Department provided that any disputes between them are to be resolved by arbitration administered by the ICAC of the RF CCI (the “Russian ICAC”). S&T commenced arbitration against the Government of the City of Moscow and the Department of Finance of the City of Moscow claiming about USD 5 million compensation (RUR 152 mln).

The Decision of the Russian ICAC tribunal

The full text of the decision is not publicly available, but one may deduce the reasoning from the order of the Moscow Commercial Court.

First, the tribunal held that at the time departments of Moscow had existed as elements of the government and in fact acted on behalf of Moscow, and its government. It follows that in fact S&T entered into the agreement with Moscow represented by the Department.

Second, the tribunal held that even though the Department had been a separate legal entity the arbitrators may pierce the corporate veil and look at the government of Moscow as the real party to the agreement.

The Order of the Moscow Commercial Court

The Moscow Commercial Court disagreed with both grounds employed by the tribunal to establish jurisdiction over the city of Moscow.

First, it held that the claimant had failed to establish that the Department had acted on behalf of the City of Moscow. The court looked at the regulations of the Department, which provide that any contract the Department enters into on behalf of Moscow needs to be signed by its head. The deputy head of the Department had signed the agreement with S&T.

Second, the Moscow Commercial Court disagreed with the application of the veil piercing. It noted that Russian law requires a written agreement between the parties for the arbitral tribunal to have jurisdiction. This can be seen as expression of scepticism as to whether a non-signatory may ever be bound by the arbitration clause. However, this was not the only reason the court relied on. It further observed that the arbitral tribunal failed to explain why lifting of the corporate veil was justified on the facts and whether the doctrine applied to public law entities.

The case will now come before the Federal Commercial Court for the Moscow Circuit. One may hope that the latter court will be more specific on whether non-signatories may be bound by arbitration clauses and what standard of review the courts should apply in dealing with arbitral tribunals’ decisions on their jurisdiction.

The full text of the order of the Moscow Commercial Court is available here (in Russian).