Russian Courts Approach Framework Agreement’s Arbitration Clause

Recent Russian commercial court judgments illustrate a new trend in the interpretation of framework supply agreements (“FSA”).

The newly developed approach is supposed to become more sensitive to good faith, party willingness and intentions and factual and legal discourse.

In Taganrog Automobile Plant v Hyundai Motor Company (case № 15AP-8173/2014) the courts implemented the Russian Supreme Commercial Court Presidium (“SCC Presidium”) position which says that a monthly supply contract constitutes an integral part of a FSA.

Prior to that, the courts had applied the opposite approach interpreting monthly supply contracts as separate and independent from FSA contract.

Facts of the Case

In 2001, Taganrog Automobile Plant LLC (“TagAz”) and Hyundai Motor Company (“Hyundai”) signed a FSA. Under the agreement the scope of the order, the price and terms of delivery of the goods were to be negotiated in monthly supply contracts, which were an integral part of the FSA.

The FSA contained an arbitration clause which provided that disputes arising from the agreement or in connection with it should be settled by arbitration under the ICC Rules.

The dispute between TagAz and Hyundai arose in connection with a partial violation of the obligation to pay for parts supplied in accordance with a monthly contract dated 23 April 2009. In May 2014, the 15th Commercial Court of Appeal (the “Court of Appeal”) did not uphold the challenge brought by TagAz regarding the first instance court ruling.

In April 2014, the first instance court ruled to leave without consideration the TagAz claim against Hyundai for debt collection under the supply contract. On appeal, the Court of Appeal ruled that the arbitration clause in the FSA extended to monthly contracts entered into pursuant to it.

Despite the TagAz arguments on separability of the monthly contract and the lack of any reference in it to the FSA, the courts of the first and appellate instances concluded that the dispute was not within the jurisdiction of the state courts because of an arbitration clause in the FSA.

FSA and Monthly Supply Contract – Joint or Separate?

According to a formal approach which used to be applied by the courts, FSA terms did not matter if they did not contain essential supply conditions. Nevertheless, the trend to take into account the parties’ intention and the nature of their relationship has become noticeable.

Paragraph 9 of the SCC Presidium Information Letter dated 25 February 2014 stipulates that the FSA is a part of the monthly contract unless otherwise specified by the parties and such an agreement is generally consistent with their intentions.

A supply agreement is deemed to have been concluded only upon the signing of a separate contract. However, the nature of the agreement indicates that the parties entering into a supply agreement are supposed to accept and apply the FSA conditions. Thus, the relations between the parties on the disputed supply are governed not only by the terms of the particular monthly contract, but also by the provisions of the FSA.

However, in November 2010, the SCC three-judge panel identified a monthly contract as an independent transaction that was not subject to the terms of the FSA. The dispute arose from a share sales contract which was designed as a confirmation letter to the framework agreement.

The SCC concluded that the confirmation letter is a separate and independent transaction and recognised the jurisdiction of the state courts over the dispute despite the framework agreement contained the arbitration clause. This caused the non-applicability of the FSA arbitration clause to the monthly-contract-regarded dispute (case T&IB Equities Ltd (Cyprus) v Clariden Leu AG (Switzerland) № A40-25189/09-131-305).

The Commercial Court for St. Petersburg and the Leningrad Region in April 2013 applied a similar approach in Metrostroy v Northern Capital Gateway (case № A56-39033/2012) on debt collection. The FSA terms were incorporated within the Memorandum of Understanding. The court found that, due to the lack of the essential terms of the supply agreement in the Memorandum of Understanding, the Memorandum terms were not to be applied to the disputed supply.

To sum up, the current approach, which is shown in the TagAz v Hyundai case, and tends to extend the application of the FSA Arbitration Clause to the monthly contract, is probably a positive indicator of an increasingly arbitration-friendly environment in Russia.