Necessary Joinder in Arbitration as a Way to Get an Enforceable Award

On 19 August the Federal Commercial Court for the Moscow Circuit rendered a decision showing how strong the chain of privity is. The Russian courts may quash an arbitral award if the tribunal has denied the claim of one of the joint creditors and the other one did not participate in the proceedings.

Common privity seems to make the findings in a case involving a joint creditor directly applicable in any subsequent proceedings involving the other. In turn, this makes joinder (or consolidation of cases) desirable or, in fact, inevitable. The decision of 19 August demonstrated that sometimes it is better to admit a third party to the case than face the consequences, indeed sometimes quite unpredictable consequences.

Facts of the case

The case arises out of one of the most prominent maritime accidents in 2009. On 11 May 2009 the 1,250 gt refrigerated cargo ship “Petrozavodsk” ran aground in heavy fog near the southern tip of Bjornoya (Bear Island) in the Arctic, between Norway and Spitzbergen. All the crew members survived, but the reefer subsequently spilled up to 60 tons of fuel and other pollutants into the sea. After the accident, the captain and his mate revealed high blood alcohol levels, which, apparently, served as the main cause for the grounding. In the days after the accident, due to weather conditions, the ship sustained serious harm and, eventually, was declared a total loss.

Karelskaya Shipping Company, based in Petrozavodsk, Karelia, bought Petrozavodsk in 2005. To pay for the ship, it took a loan from DNB Bank, a local, but Norwegian-owned, Murmansk institution, and the bank took a mortgage interest in the ship as security. Subsequently the shipping company took several other loans from the same bank and secured each of them, in part, with the mortgage over the same ship. At the end of March 2009, just 1.5 months before the accident, the claimant insured the ship with Soglasie, a major Russian insurance company.

Following the wreck, both the shipping company and the bank demanded the insurance indemnity arising out of the loss of the ship. Obviously, the shipping company would receive only the sum left after the bank executed its mortgage interest in the ship. Both disputes commenced, in accordance with the applicable arbitration clause, before the Maritime Arbitral Commission.

The Arbitral Commission registered the two disputes as separate cases. Nevertheless, the bank wanted to be admitted as a third party in the case involving the shipping company and the insurance company and asked for the relevant permission from the latter. The insurance company ignored the bank’s request and it remains unclear whether the bank requested the tribunal to permit joinder. Eventually, the tribunal dismissed the shipping company’s claim. It held that Petrozavodsk could not have been considered a navigable vessel and therefore the ship was not eligible for coverage.

The bank went on to challenge the award against the shipping company before the Moscow Commercial Court. The bank claimed that it was denied the right to take part in proceedings that would be having an effect on its own case. The insurance company argued that the outcome of the arbitration in the shipping company’s case would in no way affect the same in the bank’s case against the same insurance company, since it was a case between different parties.

The Moscow Commercial Court set the award aside. It stated that the tribunal’s finding that Petrozavodsk was not a navigable vessel made it essentially impossible for the bank to seek the insurance indemnity. Therefore, it concluded, the tribunal had rendered an award affecting the rights of a third party, i.e. the bank, which had not taken part in the proceedings. The court cited Article 46 of the Russian Constitution guaranteeing access to court and, on this basis, quashed the award. The insurance company filed a cassation challenge to the Federal Commercial Court for the Moscow Circuit.

Decision of the Federal Commercial Court for the Moscow Circuit

The circuit court upheld its lower court’s decision. It held that the award rendered by the tribunal in the dispute between the shipping company and the insurance company did affect the rights of the bank and therefore must be quashed. In the reasoning, it made several important points.

Firstly, the circuit court noted that the bank had requested the insurance company to agree to the bank joining the case as a third party and that the insurance company had left this request without an answer.

Secondly, it stressed that the shipping company and the bank were both entitled to one and the same insurance indemnity. Moreover, the shipping company could have counted only on the remainder of the indemnity left after the bank had executed its mortgage interest. In other words, the circuit court emphasised that the bank and the shipping company were essentially joint creditors in one privity.

Thirdly and finally, it also gave weight to the effect that, in its opinion, followed from the finding that Petrozavodsk was non-navigable: this finding essentially deprived the bank of a right to claim the insurance indemnity.

Therefore, the circuit court held that the arbitral award indeed affected the rights of the non-participating third party and must be quashed in full.

Impact of the decision

The circuit court’s decision represents an interesting development of the system of grounds for quashing of arbitral awards in Russia.

First of all, it essentially suggests a new way to interpret the notion of res judicata. Both in Russia and in transnational litigation and arbitration, res judicata, or the state of a judicial (arbitral) decision being in force, may apply only to the same dispute between the same parties. The decision at hand, however, implies that an award may have res judicata effect in an adjacent case between different parties if the two cases are interconnected by legal privity between two parties. The bank and the shipping company were joint creditors as against the insurance company. Therefore, in the Circuit Court’s opinion, the findings as to common facts will have effect on both cases involved.

This point is debatable. The Rules of the Arbitral Commission, as well as the rules of virtually any arbitral tribunal, do not provide for such legal effect in cases having multiple creditors or debtors. Russian law does not have any such kind of norms either.

Secondly, the Circuit Court has in a way inverted the traditional approach of arbitration as to necessary joinder and consolidation of cases. The traditional approach is to refrain from having additional parties in a case, which is reasonable given needs for expedience and confidentiality. In this vein, it would be the decision to admit another entity as a third party in the absence of the consent of the parties to arbitration that might contradict the rules. This inversion, however, has as a foundation and borderline in the facts that the Circuit Court emphasised in the reasoning.

Thus, the Circuit Court has referred to the existence of privity between joint creditors as a ground for a necessary joinder in a parallel proceeding. In order to make the privity chain work, however, the facts at issue in both disputes must be the same. Once, though, a party shows the privity and similar facts at issue the tribunal should join it in order to avoid the award being set aside. This approach will undoubtedly receive further attention. Still, one must bear in mind: sometimes it is better to admit a third party in order to get an award which is enforceable in Russia.

The full text of the decision of the Circuit Court is is available here (in Russian).

Anton Petrov

Center of European Law