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A new legislative development for dispute resolution

On 1 September 2016 two laws came into effect, including the Federal Law “On arbitration (arbitral proceedings) in the Russian Federation” (Law No. 382-FZ dated 29 December 2015, the “Law on arbitral proceedings”) and a new version of the Law “On international commercial arbitration” (as amended by Federal Law No. 409-FZ dated 29 December 2015). This is an overview of amendments that may prove to be most relevant for alternative dispute resolution as a whole and for corporate disputes in particular.

Four blocks

In their daily economic operations, business entities conclude many agreements. In such agreements, the dispute resolution procedure is normally incorporated into the boilerplate provisions section and is not discussed with as much attention as, for example, the price, penalties or requirements for the quality of a product or services. Yet, as practice shows, all those rules to which parties originally agreed to adhere in their relationship may be devalued by state courts incorrectly interpreting such rules when disputes arise.

Therefore, it is increasingly frequent for contracting parties to prefer to stipulate alternative methods of settling their disagreements and disputes. One of the most popular alternatives to the state court system is the institution of arbitral proceedings. The new regulation which will be effective starting from this autumn apparently comes laden with a number of controversial points which show a different side of the system of non-state tribunals.

For the sake of convenience, we believe it reasonable to divide these new developments in the legislation into three nominal blocks:

1. Rules pertaining to introducing a new system of arbitral tribunals.

2. Requirements for arbitration clauses.

3. General conditions of arbitrability of corporate disputes.

4. The political and legal context and its influence on whether it is possible for arbitral awards to be enforced.

Rules of arrangement

It is suggested that all arbitral tribunals be divided into ‘permanent arbitration institutions’ and so called ‘ad-hoc arbitral tribunals’. What is the difference between them?

A permanent arbitration institution is a division of a non-commercial organisation functioning to provide organisational support for arbitration. This is a definition of the new type of arbitration institution contained in article 2(1)(9) of the Law “On arbitral proceedings”. Yet, the most important thing behind it is the question of competence. This is the only type of arbitration institution which is in principle able to issue awards in relation to corporate disputes; and the parties, in their arbitration clauses, treat as binding only awards issued by these arbitration institutions. Ad hoc arbitral tribunals have no competence to settle corporate disputes and the awards they issue are not binding on the parties and, therefore, cannot be enforced through the state court system.

The introduction of institutional arbitral tribunals to the Russian legal reality results from a persistent struggle with so called ‘pocket arbitral tribunals’ which were quite common in various commercial organisations. One of the most remarkable examples of the struggle is the Gazprom arbitration case which ended with a devastating resolution of the Presidium of the Russian Supreme Court and which also gave rise to the doctrine of ‘objective impartiality’. The provisions of the idea that was so much talked about introduced a number of new requirements for the system of arbitral tribunals.

– The right to act as a permanent arbitration institution is granted by an act of the Russian Government.

– A non-profit organisation under the auspices of which the above institution operates must possess a reputation and resources enabling it to ensure that the arbitration institution operates to a high level.

– The panel of an arbitral tribunal should be comprised of at least 30 arbitrators, with at least one third of the arbitrators having an advanced degree and at least half of them having 10-years of experience as a judge.

– For an arbitration institution to settle corporate disputes, it must adopt rules for the arbitration of corporate disputes.

– It must have its own website.

The measures above must (and, can, as we would like to believe) ensure the maximum independence and objective impartiality of the system of arbitral tribunals, while the complicated admission procedure and the governmental mandate will undoubtedly engender confidence among business entities and state courts in the system of alternative dispute resolution.

Requirements for arbitration clauses

The new requirements for arbitration clauses with regard to corporate disputes may be summarised in the following three points:

1. All parties to a corporate relationship should express their consent to settling a dispute by an arbitral tribunal. For these purposes, the law provides that it is possible to incorporate the agreement to arbitrate in the company’s charter.

2. The agreement to arbitrate (arbitration clause) should not run counter to certain boundaries of the competence of the arbitral tribunal with regard to corporate disputes.

3. Persons entering into the agreement to arbitrate should have duly documented powers.

The final condition stems from the practice of resolving the issue of the powers required to enter into agreements containing an arbitration clause under a power of attorney.

The line here was drawn by the Chamber for Economic Disputes of the Russian Supreme Court, when, in its Ruling No. 309-ES15-12928, it in fact pointed out that to conclude any agreement to arbitrate, special powers should be indicated in the power of attorney. Similarly, this is required by article 62 of the Russian Commercial Procedure Code, whether or not the arbitration clause was originally included in the commercial contract or any other deed of title.

General conditions of arbitrability

It is probable that the issue of arbitrability will at last be given legal certainty. From being torn between the position of absolute competence of state commercial courts and concessions towards arbitral proceedings, everything will now come down to the internal balance.

Since amendments were adopted to the Commercial Procedure Code, which introduced the competence of arbitral tribunals with regard to corporate disputes, it has been argued that only disputes over the matters below may be referred to an arbitral tribunal:

– the acquisition of shares and participatory interests

– shareholders’ agreements

– disputes over joint ventures being established

and only because the above types of disputes were confusingly similar to creditor-debtor relationships.

Now, the freedom of arbitrability of corporate disputes is restricted only by article 225.1(2) and 225.1(6) of the Commercial Procedure Code and, undoubtedly, by the validity of the arbitration clause (agreement to arbitrate).

The political and legal context

The final point deals with the political and legal context and its influence on the enforcement of arbitral awards. The current trend is that, when awards issued by arbitral tribunals and international commercial arbitration are revised, in whole or in part, by the system of state courts, such revision starts from the formal requirements for details and issues of competence and ends with the substance of a dispute and issues of public policy.

The distrustful attitude of the state court system to arbitration has already taken the form of resolutions issued by the highest courts. Based on such resolutions we may single out several points under which arbitral awards are set aside most frequently:

1. The issue of the competence of arbitral tribunals has been reinterpreted in the context of the above Ruling of the Chamber for Economic Disputes of the Russian Supreme Court dated 29 February 2016. In fact, previously, when deciding on competence, state courts should have examined closely who the parties in a dispute were and the background of their legal relationship, and should have searched for defects in the consent the parties gave to the competence of the arbitral tribunal. The above Ruling makes the task of the courts much easier and enables them to set aside an arbitral award only on the grounds of the lack of specifically documented powers in the power of attorney to enter into an agreement to arbitrate.

2. Another issue that allowed the courts to deny enforcement of arbitral awards is the issue of applicable law. Despite the fact that, formally, state courts may not revise the awards issued by arbitral courts, it is not rare for them nevertheless to act as courts of appeal with regard to the system of arbitral tribunals and international commercial arbitration. One of the most striking examples demonstrating the boundaries of a ‘judge’s curiosity’ was the Efirnoye case, which was subsequently considered by the Presidium of the Supreme Court. The Supreme Court was then extremely concerned about the issue of applicable law. Despite all the arguments of the representatives of the company Efirnoye, the Presidium issued a decision showing genius in its simplicity: the issue of applicable law is a procedural issue and, therefore, constitutes a ground for reversing the award issued by the arbitral tribunal if decided incorrectly.

3. The doctrine of objective impartiality, which literally emerged at the session of the Presidium of the Supreme Court, in fact drew a line under the matter of the trust of the state commercial court system in arbitral tribunals. When considering the Gazprom arbitration case, the members of the Presidium pointed out that arbitral tribunals established under the auspices of commercial organisations may not administer justice, because they are deprived of such an important quality as ‘objective impartiality’. The Supreme Court overruled the legal representatives’ arguments in defence of the arbitral tribunal stating that every arbitrator the parties chose for settling the dispute possessed the required impartiality, if taken individually. The Court also disallowed the motion to recuse the judges who demonstrated their negative attitude towards arbitral tribunals long before the session of the Presidium.

It is to be hoped that the ongoing reform of the system of arbitral tribunals has the effect inherent in it and from now on arbitrators resolve disputes between parties sine ira et studio (without anger and fondness), while state courts show more leniency to awards issued by arbitral tribunals and lawyers are able to lead the parties through all the twists of the modernised system of dispute resolution.