Appellate Court Restores “Lender’s Option to Litigate” Clause

On 12 March 2015 a Russian appellate court overruled the lower court’s decision invalidating the “lender’s option” part of a complex dispute resolution clause and referring parties to arbitration.

As discussed earlier on the CIS Arbitration Forum, the lender’s option clause empowers only one of the parties to the facility agreement to institute proceedings before any competent state court in spite of the arbitration clause.

Factual background and decision of the Rostov Commercial Court

In July 2014, Deutsche Bank AG  (London) commenced proceedings against three Russian companies – Agrofirma “Razdolye” Ltd, Rassvet Ltd and Razvilenskoye Ltd – before the Rostov Court to collect debt in the amount of approximately 500 million US dollars. Deutsche Bank relied on the optional clause in the facility agreement between the parties. The clause conferred jurisdiction on the English courts, but permitted Deutsche Bank (as the facility agent) to sue the guarantor in any competent national court.  The contract also provided, in the alternative, for resolution of disputes through arbitration under the LCIA Rules.

Since “Razdolye” Ltd, Rassvet Ltd and Rasvilenskoye Ltd. are incorporated and domiciled in Rostov, Russia, Deutsche Bank opted for the Rostov Commercial Court and submitted its claim there. The respondents in turn submitted a motion to stay proceedings and refer parties to arbitration.

Referring to the principle of equality of arms the Rostov Court voided the lender’s option part of the dispute resolution clause. According to the sole judge the said lender’s option was incompatible with procedural guarantees enshrined in Russian law as interpreted in several judgments of the Constitutional Court of the Russian Federation and the ECtHR case Batsanina v. Russia (App.no. 3932/02).

The Rostov Court’s approach was mostly inspired by the case of Sony Ericcson v. RTC, where the then highest judicial instance, the Supreme Commercial Court found an optional arbitration clause unfair. Despite several references to the jurisprudence of the constitutional court and almost word for word repetition of the Supreme Commercial Court’s reasoning in Sony Ericcson v. RTC, the decision of the Rostov Court did not survive during appeal.

Appeal court’s reasoning 

The Fifteenth Appellate Court concluded that the court must give effect to the lender’s option. Unlike the Rostov Court, the appellate panel of three judges relied solely on the text of the facility agreement and did not discuss any procedural guarantees. The Appellate Court observed that the optional dispute resolution clause was consistent with both Russian and English law and thus valid. Accordingly, the facility agreement did not prohibit the claimant from initiating proceedings in any competent court, including courts of the Rostov Region, where the respondents reside. The higher court remanded the case to the Rostov Court for reconsideration.

In support of its position, the Appellate Court cited jurisprudence of the Federal Commercial Court of the Moscow Circuit, where in similar circumstances a lender’s option clause was upheld.

All in all, one may notice an encouraging trend in the practice of Russian courts. Even though it remains to a certain extent inconsistent, the most recent case-law demonstrates a positive attitude towards optional clauses (see, for instance, the decision of the Commercial Court for St Petersburg and Leningrad Region).

Maria Kiskachi

Associate, Muranov, Chernyakov  & Partners