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Arbitrability of disputes in the Russian Federation

Arbitrability of corporate disputes What"s the current position? Corporate disputes are currently not subject to arbitration in the Russian Federation due to the special (exclusive) jurisdiction of state commercial courts (clause 2, part 1, article 33 of Commercial Procedural Code of the Russian Federation (the CPC RF and RF)). This is reflected in the notorious case of Maxi-Group decided by the Supreme Commercial Court of the RF (Case No. А40-35844/11), as well as the case law of the Constitutional Court of the RF (Ruling of the Constitutional Court of the RF dated 21.12.2011 No 1804-О-О).

28.10.2014Lidings, www.lidings.com

The Supreme Commercial Court in Maxi-Group stated that commercial disputes are not subject to the commercial arbitration because:

  • first, the CPC RF enshrines that state courts exercise special jurisdiction over commercial disputes and such jurisdiction is an exclusive one, and
  • secondly, para 29 of the Informational Letter of the Presidium of the Supreme Commercial Court No. 96 of 22.12.2005 explains that if an arbitral award may violate rights of shareholders who were not parties to the arbitration clause, then the award shall be set aside on the ground of being contrary to public policy

The Austrian Code on Civil Procedure takes a different approach, based on a case-by-case examination of whose rights could be affected by awards. The Austrian Supreme Court heard a claim to set aside an arbitral award on the ground that it concerned the rights of the shareholders who had not signed the arbitration clause and did not participate in the hearing. The court rejected the claim to set aside on the grounds that the shareholders were not bound to participate in the arbitration and accordingly that the award would not have legal effect on all the shareholders (Case No. 7Ob 103/10p).

Under Russian law, the arbitrability of the corporate dispute is an essential prerequisite to the recognition and enforcement of the arbitral award in the particular jurisdiction. The recognition and enforcement of arbitral awards in the Russian Federation has a long, grievous history. Russian courts have declined to recognize awards in most categories of disputes that might affect public interest.

Proposed changes under the Draft Law

In order to modify the Russian model of arbitrability of corporate disputes, the Ministry of Justice of the RF proposed a package of draft laws on arbitral tribunals (the institution of alternative dispute resolution that is alike arbitration but hears disputes without foreign element) and arbitration, including both the Draft Law 'On arbitral tribunals and arbitration in the Russian Federation' (the Draft Law) as well as the amendments to legislative acts, including CPC RF (CPC RF as specified in the Draft Law) on 17 January 2014. The Draft Law permits arbitrability of corporate disputes if certain criteria are met:

  • corporate disputes are only subject to arbitration administered by a permanent arbitral institution (part 5 art 225.1 CPC RF as specified in the Draft Law)
  • special rules (Special rules) for consideration of corporate disputes are required (art 2 of the Draft Law);
  • some disputes require that a legal entity or its participants (shareholders) as well as any other persons acting on the side of claimant or respondent enter into an arbitration agreement (part 3 art 225.1 CPC RF as specified in the Draft Law).

As stated above, corporate disputes are to be administrated by the institutional arbitration as opposed to ad hoc. Therefore the following disputes will be arbitrable:

  • related to the ownership title over stocks and shares--require Special rules
  • arising from the activities of shares registry keeper, in respect to the rights to shares and other securities; regarding exercise of the keepers rights and fulfillment of obligations prescribed by the federal law in connection with the distribution of outstanding securities--require Special rules
  • on appeal of the decisions of management bodies of a legal entity

A second category of disputes can be subject to arbitration if they meet the condition of conclusion of arbitration agreement between all the parties, ie a legal entity, its participants (shareholders) as well as any other persons acting on the side of claimant or respondent:

  • related to the establishment, reorganization and liquidation of a legal entity
  • on claims for damages caused to a legal entity; on challenging of transactions of a legal entity, and (or) on the application of consequences of the invalidity of such transactions--require Special rules
  • related to the status and responsibility of persons acting (or acted) as managing bodies of a legal entity--require Special rules
  • arising of agreements of shareholders (or participants) about the management of the entity--require Special rules
  • related to emission of securities, challenging of non-legislative acts, decisions and actions (omissions) of state bodies, of local authorities, of any other bodies, officials, decisions of the management bodies, related to challenging of transactions made during the distribution of equity securities, reports (notifications) on the results of issue (additional issue) of securities--require Special rules

Nevertheless, even under the proposed revised regime, substantial numbers of corporate disputes will re-main under special (exclusive) jurisdiction of the state court, such as: on the compulsion of a legal entity to convene a general meeting of shareholders (participants); arising from the activities of notaries on witnessing transactions with shares in the chartered capital of limited liability companies; out of the activity of depositories connected with the rights to shares and other securities, from disputes arising in connection with the di-vision of inherited property and the division of marital property of spouses, including stocks, shares in the chartered capital of business entities, shares of the members of cooperatives; related to challenging of non-legislative acts, decisions and actions (omissions) of state bodies, local authorities, other bodies, organizations endowed by the federal law with certain state or other public authority, decisions and actions (omissions) of officials; regarding the companies having substantial significance for national defense and state security; disputes relating to the application of the provisions of Chapter IX (Acquisition and redemption of outstanding shares) and XI.1 (Acquisition of more than 30 percent of shares of the public company) of the Federal Law 'On Joint Stock Companies'; and, related to the exclusion of participants from legal entities.

The upcoming changes seem positive. They provide more discretion for parties to choose their method of dispute resolution. The changes represent a logical evolution of Russia's Romano-Germanic legal system.

Arbitrability of real estate disputes

What's the current position?

Arbitrability of real estate disputes is another crucial topic in relation to the recognition of arbitration awards in the RF.

Inasmuch as any changes regarding ownership title over the real estate require registration by state bodies, all disputes with immovable property were associated with state courts. The federal law provides that such changes to the registry of immovable property can be made by the virtue of judicial act but not an award. The position was further strengthened by the clause 27 of the Letter of the Presidium of the Supreme Commercial Court dated 22.12.2005 No. 96 according to which the state courts are to refuse to enforce an arbitral award, which obliges the registration authority to register a title to the real estate, since such issues are of a public nature (ie registration of immovable property) and cannot be subject to arbitration.

Moreover, the Letter of the Supreme Commercial Court dated 23.08.2007 No. ВАС-С06/ОПП-1200 general-ised the case law and established the list of arbitrable disputes. Additionally, the Supreme Commercial Court pointed out a number of real estate disputes that can be considered only by state courts. The Letter was criticized by the legal community, since the Supreme Commercial Court exercised functions of a lawmaking body, instead of a judicial body.

The question of arbitrability of real estate disputes was stable until the ruling of the Constitutional Court of RF No. 10-П of 26.05.2011. In that case, the Supreme Commercial Court of the RF, in connection with the is-sues raised during consideration of the case, applied to the Constitutional Court challenging provisions of the Civil Code and of the Federal Law 'On state registration of rights to immovable property and transactions with it', of the Federal Law of Federal Law 'On mortgage', of the Law 'On international commercial arbitration' and of the Federal Law 'On Arbitration Courts in the Russian Federation', which determine the jurisdiction of disputes to state courts.

The Constitutional Court stated that the challenged laws are constitutional and concluded that:

'...relations concerning state registration cannot be considered as a meaningful element of questionable legal relations, the essence of which is still private, and «public effect» occurs only after the state certification of the results of a trans-action or other legally significant actions.

...obligatory state registration of the rights to immovable property and transactions with it cannot be regarded as a circumstance precluding the possibility of real estate disputes to be considered by arbitration courts'

Proposed changes under the Draft Law

Case law has since then changed dramatically. The Draft Law is aimed to fill some gaps in the process of recognition and enforcement of arbitral awards in the RF.

The Draft Law of the Ministry of Justice introduces amendments to the Federal Law 'On state registration of rights to immovable property and transactions with it'.

The amended edition of the Federal Law directly provides that arbitral awards supported by a writ of execution are the cause for state registration of rights to immovable property. Moreover, if the right to immovable property is substantiated by the arbitral award, the amount of grounds for refusal of registration are limited.

In conclusion, the Draft Law is a step towards encouraging parties to choose commercial arbitration as an instrument for dispute resolution. Many gaps and uncertainties would be fixed, though a lot of limitations for arbitrations remains. The Draft Law has passed public hearings and now onto the final expertise before being adopted*.

*Currently the Draft is being finalized by the Ministry of Justice. The next stage is the approval by the two-chamber parliament (expected in spring of 2015). The final stage is approval and signing by the President.


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