Supreme Commercial Court to Address Arbitral Tribunals’ Ability to Handle Complex Disputes

Reftinskaya power plant

Later this year the Presidium of the Supreme Commercial Court will hear an appeal in ENEL OGK-5 v CJSC ROS Postakva and Worley Parsons Europe Energy Services Ltd. The issues before the court are the arbitral tribunal’s power to assess evidence and the effect an alleged lack of jurisdiction over part of the dispute has on enforceability of the remainder of the award.

The Supreme Commercial Court will decide how arbitral tribunals should deal with disputes where underlying contracts contain conflicting dispute resolution clauses, and the validity of agreements with third parties is questioned.

Facts of the Case

In 2008 ENEL signed a Complex Contract with Rospostavka and Worley Parsons by which the parties agreed to enter into the Main Contract on certain terms. It also provided that in the meantime Rospostavka and Worley Parsons will perform certain works in connection with the Reftinskaya thermal electric power plant.
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All the disputes between the parties were to be resolved by the Moscow Commercial Court.

In late 2008, the parties entered into the Main Contract and extended its application to the contractors’ obligations under the Complex Agreement and liability thereunder. The Main Contract provided that all disputes shall be resolved by arbitration under the ICAC at the RF CCI Rules.

It appears that in 2009 the contractors fell behind in carrying out the works. In addition, the contractors provided certain bank guarantees, as required by the Main Contract, and the relevant banks advised ENEL that these guarantees were forged. ENEL terminated the Main Agreement and commenced arbitration, where it sought recovery of advances it paid under the Complex Contract and the Main Contract.

In January 2011, the arbitral tribunal (Professors Kabatova, Sherstobitov and Hober) rendered an award in favour of ENEL ordering Rospostavka and Worley Parsons to pay 2,088 billion roubles (c. 50 million Euro). It appears from the court decisions that earlier the tribunal issued a separate decision on jurisdiction.

ENEL submitted an application for recognition and enforcement of the award and Rospostavka and Worley Parsons applied to have the award set aside. In August 2012, the Moscow Commercial Court set the award aside. It held that the arbitral tribunal lacked jurisdiction over all of ENEL’s claims and it lacked the power to decide whether or not the bank guarantees were forged. The Federal Commercial Court for the Moscow Circuit upheld this decision.

Jurisdiction of the Arbitral Tribunal

The three-judge panel referring the case to the Presidium disagreed with the lower courts on several grounds.

Firstly, the lower courts held that the tribunal lacked jurisdiction over any claims under the Complex Contract, because the agreement provided for exclusive jurisdiction of the Moscow Commercial Court.
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For the panel this was not a sufficient reason to set aside the entire award, in particular the tribunal’s decision on ENEL’s claims under the Main Contract. In fact, Russian law expressly mandates such an approach and requires enforcement of the award to the extent covered by the tribunal’s jurisdiction even if the tribunal overstepped its jurisdiction in some other respect.

Secondly, the lower courts held that ENEL’s claim for return of the advance payments fell outside of the tribunal’s jurisdiction, because ENEL based its claim on the contractors’ unjust enrichment and not the contract. The panel disagreed. The Main Contract expressly required the contractors to return the advance in the event of the contract’s termination. Thus ENEL claimed on the basis of the contract.

The panel has not addressed two issues that in our view may deserve attention.

The tribunal apparently rendered a separate decision on jurisdiction. The respondents failed to challenge this decision before state courts as permitted by the Russian law on International Commercial Arbitration. Earlier, the Supreme Commercial Court repeatedly said in the context of foreign-seated arbitrations that a party’s failure to use this remedy means that it waives objections against jurisdiction (reported here). The case presents to the Supreme Commercial Court an opportunity to clarify whether the same rules apply to international arbitrations seated in Russia.

The parties’ agreement on dispute resolution was far from clear. The Complex Contract contained a jurisdictional clause, while the Main Contract contained an arbitration clause and a provision that the terms and conditions of the Main Contract apply to the Complex Contract. The tribunal apparently held that the Main Contract’s provisions on dispute resolution overrode the Complex Contract. The courts disagreed. In these circumstances, the paramount question is that of the state court’s scope of review: should it be de novo or should the court defer to the tribunal’s findings? One may say that the recent case law of the Supreme Commercial Court suggests certain deference to the arbitral tribunal. However, a clear statement would certainly create a more predictable and stable environment.

Power of the Tribunal to Assess Evidence

The lower courts set the award aside because they held the tribunal had no power to rule on validity of guarantees issued by banks, which were not party to arbitration. The panel disagreed. It noted that nothing prevented the panel from finding the guarantees’ “non-existence” where the evidence was clear.

The panel made a rather cautious statement. Indeed, one may wonder where the “clear evidence” test comes from. The tribunal had to consider whether the documents submitted by the contractors met the requirements of the Main Contract. If the claimant submitted sufficient evidence of their illegality or ineffectiveness to satisfy its burden of proof this was enough. The tribunal’s finding has no effect on any third party, including the banks. It does not bind them, precisely because they were not parties to the arbitration. In addition, the banks themselves claimed the ineffectiveness of the guarantees, so the award has not prejudiced their interests.
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In complex disputes arbitral tribunals frequently have to rule on issues implicating interests of third parties. These third parties do not participate in the arbitration because of its inherently consensual nature. However, the limited res judicata effect of the award and the right to challenge an award, which directly affects them, protects their interests. Hence, the courts should hesitate to interfere with the award on this ground, particularly where the challenge is brought by a party to the arbitration rather than a third party. 

The full text of the three-judge decision is available here (in Russian).