Russian Court (Yet Again) Finds an Optional Dispute Resolution Clause Partially Void

In a decision rendered on 27 November 2014 the Rostov Region Commercial Court voided an optional dispute resolution clause (“lender’s option”) in a facility agreement. The said provision empowered only one of the parties to institute proceedings before any competent state courts despite the arbitration clause and an alternative provision providing for the exclusive jurisdiction of English courts. This decision is yet another example of the Russian courts’ negative attitude towards optional/asymmetrical dispute resolution clauses, which frequently appear in financial transactions.

Facts of the Case

Deutsche Bank AG  (London) commenced proceedings against two Russian companies – Agrofirma “Razdolye” Ltd and Rassvet Ltd – before the Rostov Court seeking debt collection 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 for an alternative dispute resolution mechanism, arbitration under LCIA Rules.

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

Decision of the Rostov Commercial Court

The Rostov Court upheld the respondents’ position on the following grounds.

First of all, the Court decided that the issue before it had a procedural nature and therefore the court should apply Russian procedural law rather than the English law the parties had chosen to govern the contract itself. The Court further emphasised that the claimant (by submitting its claim to the Rostov Court) voluntarily agreed to the application of Russian procedural law.

Secondly, the court found the optional clause conferring on Deutsche Bank the right to sue in any national court void due to incompatibility with the generally accepted principle of parties’ equality. The Rostov Court reasoned that according to the general principles pertaining to exercise and protection of civil rights, an agreement cannot empower only one party to submit a dispute to a competent state court, while depriving the other party of this right. Such a provision upsets the balance of parties’ rights and is void.

The Court cited several judgments of the Constitutional Court of the Russian Federation and mentioned an ECtHR case Batsanina v. Russia (App.no. 3932/02) as supporting the court’s understanding of the equality of arms principle.

On the basis of these findings, the Rostov Court left the case without consideration. Since the “optional part” of the jurisdiction clause was declared void and the remaining provisions conferred jurisdiction on the English courts and the LCIA, the Russian courts had no jurisdiction.

Comment

The Rostov Court’s approach should not surprise people familiar with Russian practice. In fact, the foregoing reasoning represents almost word for word repetition of the text of the Supreme Commercial Court’s decision dated 19 June 2012 in Sony Ericsson v. RTC. In that case the then highest Russian commercial court found an optional arbitration clause unfair. The Supreme Commercial Court similarly referred to the ECtHR and the Constitutional Court’s jurisprudence and the equality of arms principle.

However, the Rostov Court unlike the Supreme Court restored the balance of rights by eliminating the lender’s option, rather than acknowledging that the respondents may similarly choose between litigation before any competent court and arbitration.

It should be noted that many financial transactions incorporate an optional clause in order to secure the rights of the party bearing higher financial risks. Under such a clause, the financing party acquires an effective remedy in case of the borrower’s default.

For instance, the LMA standard loan facility agreement contains the following example of optional jurisdiction clause:

(a) The courts of England have exclusive jurisdiction to settle any dispute arising out of or in connection with this Agreement (including a dispute relating to the existence, validity or termination of this Agreement [or any non-contractual obligation arising out of or in connection with this Agreement]) (a “Dispute”).

(b) The Parties agree that the courts of England are the most appropriate and convenient courts to settle Disputes and accordingly no Party will argue to the contrary.

(c) This Clause is for the benefit of the Finance Parties only. As a result, no Finance Party shall be prevented from taking proceedings relating to a Dispute in any other courts with jurisdiction. To the extent allowed by law, the Finance Parties may take concurrent proceedings in any number of jurisdictions.

Even though optional/asymmetrical dispute resolution clauses give arise to a lot of controversies in academic discussions, the Rostov Court’s decision is more likely to be criticised than welcomed.

Firstly, such a “leveling the playing field” approach has a negative real-life outcome: it leaves the party bearing the higher financial risk without effective remedies. The stakes become even higher in the context of loans to Russian borrowers if one takes into account the lack of a treaty on mutual recognition and enforcement of judgments between Russia and the United Kingdom.

Secondly, one may question the cogency of the Rostov Court’s reasoning. For instance, the ECtHR case of Batsanina v. Russia the Rostov Court refers to has nothing to do with the equality of arms principle as applied to optional dispute resolution clauses. In reality, the case concerned the prosecutors’ intervention in civil proceedings. Moreover, the ECtHR ultimately ruled in Batsanina that Russian courts had respected the equality of arms principle. Similarly, the cited case law of the Constitutional Court does not deal with optional arbitration clauses at all.

Interestingly, the Commercial Court of St Petersburg and Leningrad Region has recently enforced quite a similar clause. The court permitted the lender to commence proceedings on the basis of the “lender’s option” clause. In that case, the judge, unlike her Rostov colleague, was not troubled by the contractually agreed dispute resolution mechanism and rendered the decision in favour of the creditor.

Thus the practice of the Russian courts on the validity of the lender’s option to pursue its claims before national courts remains unsettled. In case of appeal higher instances may disagree with the Rostov Court’s decision. Therefore, one has to watch out for further developments of the case.

Maria Kiskachi

Associate, Muranov, Chernyakov & Partners