Spain – Review of arbitration awards and public order

17 März 2021

  • Spanien
  • Schiedsgerichtsbarkeit

Arbitration is a procedure for resolving disputes between parties that is very successful in the Anglo-Saxon legal system. But much less in our country.

Arbitration has advantages and disadvantages; it is more expensive than the Courts, but it is much quicker; and speed is essential for justice to be such.

Typically, an arbitration lasts six months plus a couple of months for the appointment of the arbitrator; in total, a dispute, however important and difficult it may be, can be definitively resolved in eight months.

To compare with the Courts, in Spain today it takes on average eighteen months to obtain a judgement at first instance and another eighteen months for an appeal; without considering the possibility of an appeal to the Supreme Court.

The cornerstone on which arbitration rests is that the arbitral award is final and definitive and cannot be reviewed or appealed; this statement has certain exceptions, mainly of a formal or procedural nature: basically, the legality of the arbitration agreement, the arbitrability of the matter and the procedural regularity in the conduct of the arbitration proceedings. These defects can be attacked by means of an action for annulment, which is heard by the ordinary courts.

But in addition to the possible “formal” defects, the action for annulment can be based on the allegation of a breach of “public order”, which the Constitutional Court has defined and outlined as “those public and private, political, moral and economic legal principles which are absolutely obligatory for the preservation of society in a given people and at a given time”.

As this definition of “public order” is undoubtedly broad and unspecific, the use of the violation of public order as a tool for declaring the nullity of arbitral awards by the ordinary courts has produced an “overflow” effect that has required, in the words of the Constitutional Court, “a restrictive interpretation of it, on pain of violating the autonomy of the will of the parties and their waiver of judicial protection”.

This is what the Court has proclaimed in the very important judgement of 15 February 2021, which is the reason for this legal note.

In recent years, the High Court of Justice of Madrid has resorted to the argument of “public order” in an extensive and “overwhelmed” manner to annul arbitral awards and “supplant the arbitral tribunal in its function of applying the law”, becoming “a second instance reviewing the facts and rights applied in the arbitral award, a control mechanism for the correct application of jurisprudence”.

And this expansive and “overwhelmed” interpretation of public order as a tool for annulling arbitral awards by the High Court of Justice of Madrid had become a serious problem for the arbitral institution and for the confidence of the contracting parties when including arbitration agreements in their contracts.

The principle that the arbitral award was the final and definitive solution to the dispute it was intended to resolve, except for procedural breaches or breaches of public order limited to those cases in which the arbitral award was arbitrary, illogical, absurd or irrational, was called into question and was a clear deterrent to contracting parties deciding to resolve their discrepancies through arbitration.

Well then, the Constitutional Court, in a categorical and explicit manner, repeating what it had already stated in its judgement of June last year, confirms that the need for the arbitral award not to contravene public order cannot result in the judicial body replacing the arbitrator in his function of applying the law, nor can it become a second instance reviewing the facts and legal grounds applied in the arbitral award, nor a mechanism for controlling the correct application of case law.

The principle of party autonomy prevails; and this means that when there is submission to arbitration, the parties have agreed that it should be through this channel that disputes between them are to be resolved, by means of the arbitrator’s decision, which can only be annulled through the strict channels that the Arbitration Act regulates; we insist, for procedural reasons or for violating public order in the restricted interpretation explained in the judgement we are commenting on; but in no case, by way of a second instance where the facts and legal grounds applied are re-evaluated once again.

In short, Spanish arbitration is to be congratulated, and will be able to recover the momentum that caused it to lose, in part, the extensive interpretation of public order defended by some High Courts of Justice. From now on, the Courts will not be able to ignore the Constitutional Court’s interpretation, which is a breath of fresh air for Spanish arbitration.

In an important and very reasoned judgment delivered by the Court of Cassation of France on September 30, 2020, relating to the enforceability of arbitration clauses in international consumer contracts, the Supreme Court judged that these clauses must be considered unfair and cannot be opposed to consumers.  

The Supreme Court traditionally insisted on the priority given to the arbitrator to decide on his own jurisdiction, laid down in Article 1448 of the Code of Civil Procedure (principle known as „competence-competence“, Jaguar, Civ. 1re, May 21, 1997, nos. 95-11.429 and 95-11.427). 

The ECJ expressed its hostility towards such clauses when they are opposed to consumers. In Mostaza Claro (C-168/05), it referred to the internal laws of member states, while considering that the procedural modalities offered by states should not “make it impossible in practice or excessively difficult to exercise the rights conferred by public order to consumers (“Directive 93/13, concerning unfair terms in consumer contracts, must be interpreted as meaning that a national court seized of an action for annulment of an arbitration award must determine whether the arbitration agreement is void and annul that award where that agreement contains an unfair term, even though the consumer has not pleaded that invalidity in the course of the arbitration proceedings, but only in that of the action for annulment”).  

It therefore referred to the national judge the right to implement its legislation on unfair terms, and therefore to decide, on a case-by-case basis, whether the arbitration clause should be considered unfair. This is what the Court of Cassation decided, ruling out the case-by-case method, and considering that in any event such a clause must be excluded in relations with consumers.  

The Court of Cassation adopted the same solution in international employment contracts, where it traditionally considers that arbitration clauses contained in international employment contracts are enforceable against employee (Soc. 16 Feb. 1999, n ° 96-40.643). 

The Supreme Court, although traditionally very favourable to arbitration, gradually builds up a set of specific exceptions to ensure the protection of the „weak“ party.

Unfair commercial behaviours between professionals are sanctioned in Sections L442-1 and seq. of the French Commercial Code. French Courts tend to consider that those dispositions of the Commercial Code are mandatory, in particular Section L442-1, II of the Code on abrupt termination of commercial relationships. Based on this section, an operator can be held liable if he terminates a commercial relationship without respecting a prior notice which duration depends on the duration of the relationship.

Although this is considered to be a mandatory law, the French Supreme Court considers that it does not preclude to bring a dispute before foreign Courts in compliance with a jurisdiction clause (Civ.1, 8 July 2010, Doga, n°09-67013). Moreover, Courts have ruled for a long time now that arbitrators are entitled to apply national mandatory laws (Court of Appeal of Paris, 19 March 1993, Labinal, n°9221091). In the case Doga above quoted, the Court concluded that arbitrators are also entitled to apply Sections 442-1, II of the Commercial Code related to the conditions of termination of commercial relationship. Therefore, if a contract contains an arbitration clause, the judge is obliged to give priority to the arbitrators to decide on their own jurisdiction to decide on the case (principle « compétence-compétence ») in conformity with Section 1465 of the French Procedural Code. This solution was confirmed in a recent decision rendered on 5 September 2019 by the Court of Appeal of Paris in  Charlivari v. Sté Equivalanza, n°17/03703.

It is noteworthy to underline that two sets of sanctions are considered under Sections 442-1 and seq. of the Commercial Code: the first sanction allows the victim of unfair practice to seek damages (for instance for abrupt termination of commercial relationship) against the author of unfair practices;  the second sanction is decided by the public administration, under the authority of the Ministry of Economics : the Ministry is entitled to bring the case to Courts, which can then decide to fine the party who is liable of unfair practices (the fine can be up to 5% of the turnover made in France by the person liable or 5 Million EUR).

Therefore, one single matter can give rise to two procedures at the same time, the first one initiated by the victim and the second one at the request of the Ministry of Economics (Section L442-4 of the Code). In a case Apple v. Ministre de l’Economie, the Supreme Court (Civ.1, 6 juillet 2016, n° 15-21811) considered that the action of the Ministry of Economics cannot be decided by arbitrators, even if the contract contains an arbitration clause, because of the specificity of this action, which is not based on the contract by itself but on powers that the Ministry draws from the law.

Therefore, a clear distinction must be made between the two procedures: one is subject to the application of the dispute resolution clause (either national Courts, even foreign, or arbitration tribunals), when damages are sought from the author of unfair practices, including abrupt termination; the other one can be brought only before French national Courts, and the dispute resolution clause has no effect, in cases which are brought by the Ministry of Economics for administrative sanctions against the same author.

The arbitration procedure in Spain is characterized, and constitutes one of its great advantages, by the difficulty of judicially annulling or revoking the award; the parties know that the award that is issued is in most cases firm and final and ends the conflict.

The art. 41 of the Spanish Arbitration Law only allows the annulment of the award for formal reasons (nonexistence or invalidity of the arbitration agreement, failure to notify any of the parties of the appointment of the arbitrator or of the arbitration proceedings, improper appointment of the arbitrators or that the arbitrators have ruled on matters that were not or could not be arbitrated by rule of law). And additionally the award is also voidable when it is contrary to „public order„.

That „public order“ is such as to give rise, in case of violation, to the annulment of the award, is a matter that has always been controversial and debated; already in the 1958 New York Convention, “public order” is alluded to as a cause of refusal to recognize foreign awards. As the Constitutional Court (“CC”) recalls in the judgment that we commented, citing its own jurisprudence, “the material public order is the set of public and private, political, moral and economic legal principles that are absolutely obligatory for the preservation of society in a town and in a certain time and the procedural public order is configured as the set of formalities and necessary principles of our procedural legal order and only arbitration that contradicts any or some of such principles may be considered null and void for violation of public order”.

As an example, during 2018, 38 requests for annulment of awards were filed before the Superior Courts of Justice (“SCJ”), of which 31 were based on violation of public order; 8 of the lawsuits (21%) were estimated, 5 for violation of public order, and 3 for invalidity of the arbitration agreement.

The Madrid SCJ has been maintaining in recent times a very „expansive“ interpretation of public order, which has generated doubts and fears in the institutions and Arbitration Courts, due to the dissuasive effect that this position could have when choosing Madrid as the seat of arbitrations, national or international.

And in the interpretative line to which we refer, the Madrid SCJ has maintained the following and surprising criterion: once an award was made and a request for annulment was filed by one of the parties, the litigants reached an out-of-court agreement and jointly requested the filing of the cancellation request; that is to say, both gave the award as good and final; the SCJ rejected the petition and continued to issue a judgment annulling the award, arguing that since the application for annulment was based on the violation of public order, then the matter was no longer available to the parties and was not, in the opinion of the Court, subject to transaction or resignation.

This was not the first time that the SCJ of Madrid had adopted this position: impeded the annulment of an award as being contrary to „public order“, the parties no longer had the possibility to compromise and renounce the demand for annulment.

For the first time the matter has reached the Constitutional Court (CC): in a recent ruling on June 15, 2020, the CC has been clear and resounding; recalls in its ruling that the civil process is based on the principle of „the parties‘ willingness to regulate their private interests, that is, to initiate jurisdictional activity, determine the purpose of the process and end it when they deem appropriate“. It is what we call „justice begged for“; and this principle applies not only to civil proceedings before ordinary courts but also to arbitration proceedings. The judgment also affirms that arbitration is configured by law as a heteronomous mechanism for conflict resolution, to which the minimal intervention of the judicial bodies in favor of the autonomy of the will is essential.

And it concludes by stating that the annulment action must be understood as a process of external control over the award that does not allow a decision on the merits of the arbitrators‘ decision, since the causes are assessed, which justifies that “the control of the awards are limited and annulment of the award can only be obtained in exceptional cases”.

Summarizing, the CC understands and proclaims that it is contrary to the right to effective judicial protection protected by art. 24 of the Constitution, the Court’s refusal to recognize the validity of an agreement reached between the litigants based on the parties‘ power to act without a prohibitive norm authorizing it, and imposing a decision that subverts the „justice“ principle that inspires the civil process; reason why it grants the requested protection and orders to roll back the proceedings to the moment before the order that denied validity to the joint request for file, so that the SJC dictates another resolution accompanied by the CC’s criteria.

Therefore, the SCJ will no longer be able to prevent litigants from settling and ending a claim for annulment of the arbitration award (as it usually occurs peacefully and with appeals or cassation remedies) and it must also take into consideration the restrictive interpretation of the concept of public order that the CC has established in this important judgment. Indeed, Spanish arbitration is greatly reinforced by this judgment of the CC.

Are arbitration and jurisdiction clauses contained in insurance contracts enforceable against a third party which is acting directly against the insurer in third party liability insurances?

Such direct action is admitted by French law in liability insurances, as defined in article 124-3 of the Insurance Code.

In just a few months two radically different approaches have been taken by the French Cour de cassation (Civ.1, 19 December 2018, n°17-28.951) and the ECJ in Assens Havn v. Navigator Management UK Ltd (13 July 2017, C-368/16) and KABEG v. MMA IARD (20 July 2017, C-340/16).

The case submitted to the Cour de cassation represented a third party exercising a direct right of action before French Courts against the insurer of a floating barge which had caused him a damage. The Supreme Court accepted that the insurer could validly oppose the arbitration clause, which was in the policy against the third party, and therefore judged that French Court had no jurisdiction to decide on the case. The Supreme Court applied the well-established principle of Compétence-Compétence – materialized in article 1448 of the French Code de Procédure Civile – to stay the case, considering that the arbitration clause could not be set aside. The Court therefore judged that the applicability of the arbitration clause should be determined by the arbitrators by priority.

A year before, the ECJ had ruled in the opposite direction in a case where a jurisdiction clause was applicable in the insurance policy. In Assens Havn v. Navigator Management UK Ltd, the ECJ stated that the clause could not be opposed to the third party acting directly against the insurer. According to the Court, the insurers’ liability towards the insured has a contractual nature when based on the policy, whereas it is extra-contractual when the liability is based on a direct action from a third party. In a previous ruling the Court had considered (Sté financière et industrielle du Peloux (12 May 2005, C-112/03) that the jurisdiction clause cannot be opposed to the beneficiary of an insurance policy if he is not the policyholder (for instance in a collective insurance).

One sees a clear difference in treatment between arbitration clause and jurisdiction clause when it comes to deciding on their opposability to the victim exercising a direct action against the insurer.

Article 2061 paragraph 2 of the Civil Code states that an arbitration cannot be opposed to a party which has not contracted for the purpose of its business activity. The French Cour de cassation grounded its decision on the fact that the clauses of the main contract could be opposed to the third party. If the latter was entitled to apply the insurance contract, it was therefore entitled to invoke article 2061 paragraph 2 of the Civil Code.

On 29 March 2019 new amendments to the federal law “On arbitration in the Russian Federation” entered into force. This law regulates the order of establishment and activities of arbitration courts and permanently acting arbitration institutions (PAAI) in Russia and applies to resolution of both international and local disputes by arbitration in Russia.

The key amendments relate to granting of rights to foreign arbitration centers to perform functions of PAAIs in Russia. Earlier such rights were granted by the government, but as from 29 March 2019 such functions were transferred to the Ministry of Justice. Ministry of Justice grants the rights to perform functions of PAAIs in Russia to foreign arbitration centers based on recommendations received from the Council on improvement of arbitrations.

As of 31 March 2019, there are only 4 (four) PAAIs authorized to administer disputes by arbitration in Russia and all of them are Russian organizations. In accordance with the latest news the Hong Kong International Arbitration Center (HKIAC) is the first international arbitration center that has recently received a recommendation from the Council on improvement of arbitrations to establish PAAI in Russia and has been approved by the Ministry of Justice to establish PAAI in Russia. In accordance with the law an arbitration center is included in the list of PAAIs in Russia within 15 days from the date of approval by the Council, i.e. by the end of April 2019 HKIAC could become the first international arbitration center authorized to administer international disputes in Russia.

Another issue that should be carefully considered by choosing an arbitration center relate to resolution of disputes between companies established in Russia (local disputes) by international arbitration centers not included in the list of PAAIs in Russia and not authorized to consider local disputes in Russia.

Though there is no direct prohibition established by the Russian law to settle disputes between Russian companies by foreign arbitration centers with the seat of arbitration outside of Russia, the possibility of referral of local disputes to foreign arbitration centers is still questionable. In one of the court decisions that caused disputes in legal community (case# А40-219464/16-52-430) the Russian court of first instance ruled that resolution of local disputes by the foreign arbitration institutions violates public policy in Russia. Notwithstanding the fact that such ruling was dismissed by the higher court instance the risk that the Russian courts might deny recognition of awards of foreign arbitration institutions not included in the list of PAAIs in Russia and not authorized to consider local disputes in Russia cannot be excluded.

Therefore, in situations when the disputes arise between companies established in Russia it would be reasonable to choose arbitration institution included in the list of PAAIs in Russia and authorized to administer local disputes in Russia or, alternatively, agree on resolution of disputes by the Russian commercial courts.

Takeaways

  • if you agree in international contracts that the seat of arbitration is in Russia, it would be reasonable to choose the arbitration center included in the list of PAAIs in Russia and authorized to resolve international disputes in Russia.
  • If you agree in local contracts to resolve disputes by arbitration, it would be reasonable to choose the arbitration center included in the list of PAAIs in Russia and authorized to resolve local disputes in Russia.

Arbitration is a well-known system for dispute resolutions, and works as an alternative to judicial procedures. Parties are free to choose this system and to submit their conflicts to specific arbitrators or institutions.

It is usually considered that arbitration is a good way to solve conflicts but preferable to those arisen between big corporations or involving important amounts of money. Although this assumption is generally accepted, there is an alternative for distribution disputes suitable for smaller companies and cases with lower amounts claimed.

And here is the essential question: why a manufacturer/franchisor or a distributor/agent/franchisee should choose a specialized arbitration for their agreements instead of a more general one or, even, a judicial procedure? The answer seems clear: an arbitrator with knowledge not only in procedural questions but in substantive matters will be able to better understand the conflict between the parties and, therefore, to grant a better award. Take into account that, for instance in my Country, Spain, a Judge of First instance can deal in the same day with a distribution contract, a construction case, a conflict between heirs, and a discussion in a community of owners. All of this requires the analysis of different facts and completely different legislations and it is true that specific commercial problems do not usually have judges experts in international trading. But, how to choose a good specialized arbitrator? And, how to choose the arbitral procedure and the institution in terms of organization, neutrality, costs and time?

The IDArb was created in 2016 by the International Distribution Institute (www.idiproject.com) in collaboration with the Chambre de Commerce d’Industries et de Services de Genève (CCIG www.ccig.ch) and the Swiss Chambers’ Arbitration Institution (SCAI www.swissarbitration.org) and offers to the distribution sector (distribution, agency, franchising, selective distribution) a specialized, expedited and affordable arbitration procedure, not only for big international corporations but also for smaller cases. In fact, the expedited procedure is particularly foreseen for amounts below one million CHF (approx. 880.000 €).

The objectives and main characteristics of IDArb which make it suitable for all the distribution disputes are:

  1. A list of specialized arbitrators experts in this particular field is available for ad hoc or institutional arbitration and IDArb is able to assist the parties to choose one of them.

Specialized arbitrators from different countries and legal cultures have been appointed by a Selecting Committee reviewing their experience in one or more fields of distribution law. Therefore, parties can trust that the arbitrator will have concrete skills in the business with an in-depth understanding of the disputed issues. This is not a general knowledge on commercial law, but a concrete one on distribution, expressly verified by the Committee. Parties can even examine some examples of cases in which every arbitrator has been involved in.

  1. In order to maintain its high quality, the IDArb organizes training seminars for its appointed arbitrators. In these seminars, they are able to discuss about the general management of the arbitration, the procedural aspects and how to solve possible incidents in collaboration with the Institutions and their Rules. This will make all the proceedings more manageable and the possible difficulties more easily solved. Last seminar took place in Geneva in November 8, 2018 and participants have discussed, amongst other subjects, on evidences, witnesses and document production.
  2. The expedited arbitration procedure permits the parties to have a tailored procedure managed by SCAI under the Swiss Rules of International Arbitration, specially adapted for small disputes in the field of distribution.
  3. Time is also an essential element: the award in the expedited procedure will be issued in a maximum term of six months (only exceptional circumstances permit the Court to extend such time-limit), and, if parties agree, it can be decided only on documentary evidence.
  4. Costs are reasonable and known in advance.
  5. And, as final but important remark, IDArb has also adopted some recommendations where, upon request of the parties, mediation is favoured, the arbitrator my consider giving a preliminary non-binding and provisional assessment of the dispute and should have a pro-active position in order to facilitate an amicable settlement.

To have further information about the clause to use in the contracts, the list of specialized arbitrators, their skills, experience and complete CV, and the recommendations for expedited arbitration, you can follow the link: https://www.idiproject.com/content/idarb-idi-arbitration-project

State commercial court in Russia is named in the Russian language – Арбитражный суд. This name of the state commercial court is often translated into English as Arbitration court. Such translation in its turn often causes actual misunderstanding between the parties, since the Russian party will most probably consider the term “Arbitration court” as a state commercial court and the other (non-Russian) party might consider that it agreed to resolve disputes by arbitration rather than in a state court.

Below are some examples of dispute resolution clauses specified by the parties in commercial contracts that caused actual misunderstanding:

“…if there is no agreement, any disputes and claims between the parties relating to the contract will be resolved by arbitration under the Rules of International Chamber of Commerce in Moscow by one or more arbitrators appointed in accordance with the said rules. The Arbitration court shall use the Russian law.”

“…if a dispute is not resolved within 30 days of written notification of the dispute by one party to the other, anyone of the parties may submit the dispute arising out of or in connection with this agreement shall be finally settled under the Rules of Arbitration of the Moscow City Arbitration Court”.

The wording of such clauses and its translation, specifically translation of the term “Arbitration court” might result in resolution of claims by the state commercial courts in Russia, rather than by arbitration. In such situations failure of the non-Russian party to defend itself in the Russian state commercial courts might lead to serious negative consequences.

One of the well-known arbitration institutions in Russia – the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation recommends the following arbitration clause:

“Any dispute, controversy or claim which may arise out of or in connection with the present contract (agreement) [in case a separate arbitration agreement is concluded a particular contract (agreement) is to be indicated], or the entering into force, conclusion, alteration, execution, breach, termination or validity thereof, shall be settled by arbitration at the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation in accordance with its applicable regulations and rules. An arbitral award shall be final for the parties. It shall not be allowed to submit a motion to a state court to make a decision on the lack of jurisdiction of an arbitral tribunal in connection with the issuance by the arbitral tribunal of a separate order on existence of jurisdiction as a matter of preliminary nature”. (http://mkas.tpprf.ru/en/documents/)

As you can see the full name of the arbitration institution is “International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation” and using its short name “Arbitration court” might result in resolution of disputes by the state commercial court.

Another situation is when the parties actually wish to resolve commercial disputes in a state commercial court in Russia but fail to specify the name of the state commercial court correctly. Believe it or not, but there are many lawyers who consider Russian state courts as an effective and less expensive judicial body to resolve commercial disputes as opposed to arbitration.

There was one interesting case mentioned by the Supreme Court of Russia in this regard in its recent overview of court practice on resolving of disputes connected with protection of foreign investors in Russia.

A foreign company filed a claim with the state commercial court in Russia against another foreign company. The court determined that the parties of the dispute concluded prorogation agreement (choice of forum clause) in accordance with which all disputes arising from the specified contract and in connection with it shall be resolved in the courts of general competence of Russia.

The state commercial court of first instance considered that it lacked jurisdiction to resolve this case, because the parties did not agree to resolve their disputes in the state commercial courts, with that the courts of general competence do not resolve commercial disputes between companies in Russia. As a result, the court of first instance returned the claim to the claimant due to the lack of competence of the state commercial court to resolve this dispute.

In the appeal claim the claimant argued that the prorogation agreement was unenforceable, since the court specified by the parties (the courts of general competence) do not consider commercial disputes of legal entities in Russia. The foreign company also argued that there was a close connection of the dispute with the territory of the Russian Federation, and therefore the state commercial court had competence to consider this case.

The appeal court dismissed the ruling of the court of first instance and the case was returned for re-consideration to the court of first instance based on the following grounds.

The appeal court ruled that the enforceable prorogation agreement shall provide possibility to determine the actual intent (true intent) of the parties regarding competence of the state court to resolve disputes.

The appeal court determined that the prorogation agreement agreed by the parties was unenforceable, since such agreement failed to determine the intent of the parties to resolve disputes in a specific court or a system of competent state courts where the specific state court shall be determined based on the rules of internal competence of courts.

The appeal court further ruled that if prorogation agreement is unenforceable the competent court of the Russian Federation shall use general rules of competence of state commercial courts of the Russian Federation set forth in the Commercial procedural code of the Russian Federation.

In this specific case the subject of the disputed transaction was a sale of share in the charter capital of the company registered at the territory of the Russian Federation. The appeal court in this case established close connection of the dispute with the territory of the Russian Federation and ruled that the state commercial court was competent to consider such dispute.

Therefore, if the parties of the contract fail to correctly stipulate the specific state commercial court to consider their disputes in Russia, such prorogation agreement (choice of forum clause) might be considered by the state commercial court in Russia unenforceable and the claim might be returned to the claimant due to the lack of competence of the state commercial court to resolve such dispute.

Conclusions

If you wish to resolve disputes in the state commercial court in Russia, make sure that the full name of the state commercial court is specified correctly. 

If you wish to resolve disputes by arbitration in Russia it would be reasonable to use a recommended arbitration clause of respective arbitration institution.

And, of course, be sure to check translation of the English version of the contract into Russian.

Javier Gaspar

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    France | Arbitration clauses in international contracts with consumers are not enforceable

    16 Februar 2021

    • Frankreich
    • Schiedsgerichtsbarkeit
    • Verträge
    • Rechtsstreitigkeiten

    Arbitration is a procedure for resolving disputes between parties that is very successful in the Anglo-Saxon legal system. But much less in our country.

    Arbitration has advantages and disadvantages; it is more expensive than the Courts, but it is much quicker; and speed is essential for justice to be such.

    Typically, an arbitration lasts six months plus a couple of months for the appointment of the arbitrator; in total, a dispute, however important and difficult it may be, can be definitively resolved in eight months.

    To compare with the Courts, in Spain today it takes on average eighteen months to obtain a judgement at first instance and another eighteen months for an appeal; without considering the possibility of an appeal to the Supreme Court.

    The cornerstone on which arbitration rests is that the arbitral award is final and definitive and cannot be reviewed or appealed; this statement has certain exceptions, mainly of a formal or procedural nature: basically, the legality of the arbitration agreement, the arbitrability of the matter and the procedural regularity in the conduct of the arbitration proceedings. These defects can be attacked by means of an action for annulment, which is heard by the ordinary courts.

    But in addition to the possible “formal” defects, the action for annulment can be based on the allegation of a breach of “public order”, which the Constitutional Court has defined and outlined as “those public and private, political, moral and economic legal principles which are absolutely obligatory for the preservation of society in a given people and at a given time”.

    As this definition of “public order” is undoubtedly broad and unspecific, the use of the violation of public order as a tool for declaring the nullity of arbitral awards by the ordinary courts has produced an “overflow” effect that has required, in the words of the Constitutional Court, “a restrictive interpretation of it, on pain of violating the autonomy of the will of the parties and their waiver of judicial protection”.

    This is what the Court has proclaimed in the very important judgement of 15 February 2021, which is the reason for this legal note.

    In recent years, the High Court of Justice of Madrid has resorted to the argument of “public order” in an extensive and “overwhelmed” manner to annul arbitral awards and “supplant the arbitral tribunal in its function of applying the law”, becoming “a second instance reviewing the facts and rights applied in the arbitral award, a control mechanism for the correct application of jurisprudence”.

    And this expansive and “overwhelmed” interpretation of public order as a tool for annulling arbitral awards by the High Court of Justice of Madrid had become a serious problem for the arbitral institution and for the confidence of the contracting parties when including arbitration agreements in their contracts.

    The principle that the arbitral award was the final and definitive solution to the dispute it was intended to resolve, except for procedural breaches or breaches of public order limited to those cases in which the arbitral award was arbitrary, illogical, absurd or irrational, was called into question and was a clear deterrent to contracting parties deciding to resolve their discrepancies through arbitration.

    Well then, the Constitutional Court, in a categorical and explicit manner, repeating what it had already stated in its judgement of June last year, confirms that the need for the arbitral award not to contravene public order cannot result in the judicial body replacing the arbitrator in his function of applying the law, nor can it become a second instance reviewing the facts and legal grounds applied in the arbitral award, nor a mechanism for controlling the correct application of case law.

    The principle of party autonomy prevails; and this means that when there is submission to arbitration, the parties have agreed that it should be through this channel that disputes between them are to be resolved, by means of the arbitrator’s decision, which can only be annulled through the strict channels that the Arbitration Act regulates; we insist, for procedural reasons or for violating public order in the restricted interpretation explained in the judgement we are commenting on; but in no case, by way of a second instance where the facts and legal grounds applied are re-evaluated once again.

    In short, Spanish arbitration is to be congratulated, and will be able to recover the momentum that caused it to lose, in part, the extensive interpretation of public order defended by some High Courts of Justice. From now on, the Courts will not be able to ignore the Constitutional Court’s interpretation, which is a breath of fresh air for Spanish arbitration.

    In an important and very reasoned judgment delivered by the Court of Cassation of France on September 30, 2020, relating to the enforceability of arbitration clauses in international consumer contracts, the Supreme Court judged that these clauses must be considered unfair and cannot be opposed to consumers.  

    The Supreme Court traditionally insisted on the priority given to the arbitrator to decide on his own jurisdiction, laid down in Article 1448 of the Code of Civil Procedure (principle known as „competence-competence“, Jaguar, Civ. 1re, May 21, 1997, nos. 95-11.429 and 95-11.427). 

    The ECJ expressed its hostility towards such clauses when they are opposed to consumers. In Mostaza Claro (C-168/05), it referred to the internal laws of member states, while considering that the procedural modalities offered by states should not “make it impossible in practice or excessively difficult to exercise the rights conferred by public order to consumers (“Directive 93/13, concerning unfair terms in consumer contracts, must be interpreted as meaning that a national court seized of an action for annulment of an arbitration award must determine whether the arbitration agreement is void and annul that award where that agreement contains an unfair term, even though the consumer has not pleaded that invalidity in the course of the arbitration proceedings, but only in that of the action for annulment”).  

    It therefore referred to the national judge the right to implement its legislation on unfair terms, and therefore to decide, on a case-by-case basis, whether the arbitration clause should be considered unfair. This is what the Court of Cassation decided, ruling out the case-by-case method, and considering that in any event such a clause must be excluded in relations with consumers.  

    The Court of Cassation adopted the same solution in international employment contracts, where it traditionally considers that arbitration clauses contained in international employment contracts are enforceable against employee (Soc. 16 Feb. 1999, n ° 96-40.643). 

    The Supreme Court, although traditionally very favourable to arbitration, gradually builds up a set of specific exceptions to ensure the protection of the „weak“ party.

    Unfair commercial behaviours between professionals are sanctioned in Sections L442-1 and seq. of the French Commercial Code. French Courts tend to consider that those dispositions of the Commercial Code are mandatory, in particular Section L442-1, II of the Code on abrupt termination of commercial relationships. Based on this section, an operator can be held liable if he terminates a commercial relationship without respecting a prior notice which duration depends on the duration of the relationship.

    Although this is considered to be a mandatory law, the French Supreme Court considers that it does not preclude to bring a dispute before foreign Courts in compliance with a jurisdiction clause (Civ.1, 8 July 2010, Doga, n°09-67013). Moreover, Courts have ruled for a long time now that arbitrators are entitled to apply national mandatory laws (Court of Appeal of Paris, 19 March 1993, Labinal, n°9221091). In the case Doga above quoted, the Court concluded that arbitrators are also entitled to apply Sections 442-1, II of the Commercial Code related to the conditions of termination of commercial relationship. Therefore, if a contract contains an arbitration clause, the judge is obliged to give priority to the arbitrators to decide on their own jurisdiction to decide on the case (principle « compétence-compétence ») in conformity with Section 1465 of the French Procedural Code. This solution was confirmed in a recent decision rendered on 5 September 2019 by the Court of Appeal of Paris in  Charlivari v. Sté Equivalanza, n°17/03703.

    It is noteworthy to underline that two sets of sanctions are considered under Sections 442-1 and seq. of the Commercial Code: the first sanction allows the victim of unfair practice to seek damages (for instance for abrupt termination of commercial relationship) against the author of unfair practices;  the second sanction is decided by the public administration, under the authority of the Ministry of Economics : the Ministry is entitled to bring the case to Courts, which can then decide to fine the party who is liable of unfair practices (the fine can be up to 5% of the turnover made in France by the person liable or 5 Million EUR).

    Therefore, one single matter can give rise to two procedures at the same time, the first one initiated by the victim and the second one at the request of the Ministry of Economics (Section L442-4 of the Code). In a case Apple v. Ministre de l’Economie, the Supreme Court (Civ.1, 6 juillet 2016, n° 15-21811) considered that the action of the Ministry of Economics cannot be decided by arbitrators, even if the contract contains an arbitration clause, because of the specificity of this action, which is not based on the contract by itself but on powers that the Ministry draws from the law.

    Therefore, a clear distinction must be made between the two procedures: one is subject to the application of the dispute resolution clause (either national Courts, even foreign, or arbitration tribunals), when damages are sought from the author of unfair practices, including abrupt termination; the other one can be brought only before French national Courts, and the dispute resolution clause has no effect, in cases which are brought by the Ministry of Economics for administrative sanctions against the same author.

    The arbitration procedure in Spain is characterized, and constitutes one of its great advantages, by the difficulty of judicially annulling or revoking the award; the parties know that the award that is issued is in most cases firm and final and ends the conflict.

    The art. 41 of the Spanish Arbitration Law only allows the annulment of the award for formal reasons (nonexistence or invalidity of the arbitration agreement, failure to notify any of the parties of the appointment of the arbitrator or of the arbitration proceedings, improper appointment of the arbitrators or that the arbitrators have ruled on matters that were not or could not be arbitrated by rule of law). And additionally the award is also voidable when it is contrary to „public order„.

    That „public order“ is such as to give rise, in case of violation, to the annulment of the award, is a matter that has always been controversial and debated; already in the 1958 New York Convention, “public order” is alluded to as a cause of refusal to recognize foreign awards. As the Constitutional Court (“CC”) recalls in the judgment that we commented, citing its own jurisprudence, “the material public order is the set of public and private, political, moral and economic legal principles that are absolutely obligatory for the preservation of society in a town and in a certain time and the procedural public order is configured as the set of formalities and necessary principles of our procedural legal order and only arbitration that contradicts any or some of such principles may be considered null and void for violation of public order”.

    As an example, during 2018, 38 requests for annulment of awards were filed before the Superior Courts of Justice (“SCJ”), of which 31 were based on violation of public order; 8 of the lawsuits (21%) were estimated, 5 for violation of public order, and 3 for invalidity of the arbitration agreement.

    The Madrid SCJ has been maintaining in recent times a very „expansive“ interpretation of public order, which has generated doubts and fears in the institutions and Arbitration Courts, due to the dissuasive effect that this position could have when choosing Madrid as the seat of arbitrations, national or international.

    And in the interpretative line to which we refer, the Madrid SCJ has maintained the following and surprising criterion: once an award was made and a request for annulment was filed by one of the parties, the litigants reached an out-of-court agreement and jointly requested the filing of the cancellation request; that is to say, both gave the award as good and final; the SCJ rejected the petition and continued to issue a judgment annulling the award, arguing that since the application for annulment was based on the violation of public order, then the matter was no longer available to the parties and was not, in the opinion of the Court, subject to transaction or resignation.

    This was not the first time that the SCJ of Madrid had adopted this position: impeded the annulment of an award as being contrary to „public order“, the parties no longer had the possibility to compromise and renounce the demand for annulment.

    For the first time the matter has reached the Constitutional Court (CC): in a recent ruling on June 15, 2020, the CC has been clear and resounding; recalls in its ruling that the civil process is based on the principle of „the parties‘ willingness to regulate their private interests, that is, to initiate jurisdictional activity, determine the purpose of the process and end it when they deem appropriate“. It is what we call „justice begged for“; and this principle applies not only to civil proceedings before ordinary courts but also to arbitration proceedings. The judgment also affirms that arbitration is configured by law as a heteronomous mechanism for conflict resolution, to which the minimal intervention of the judicial bodies in favor of the autonomy of the will is essential.

    And it concludes by stating that the annulment action must be understood as a process of external control over the award that does not allow a decision on the merits of the arbitrators‘ decision, since the causes are assessed, which justifies that “the control of the awards are limited and annulment of the award can only be obtained in exceptional cases”.

    Summarizing, the CC understands and proclaims that it is contrary to the right to effective judicial protection protected by art. 24 of the Constitution, the Court’s refusal to recognize the validity of an agreement reached between the litigants based on the parties‘ power to act without a prohibitive norm authorizing it, and imposing a decision that subverts the „justice“ principle that inspires the civil process; reason why it grants the requested protection and orders to roll back the proceedings to the moment before the order that denied validity to the joint request for file, so that the SJC dictates another resolution accompanied by the CC’s criteria.

    Therefore, the SCJ will no longer be able to prevent litigants from settling and ending a claim for annulment of the arbitration award (as it usually occurs peacefully and with appeals or cassation remedies) and it must also take into consideration the restrictive interpretation of the concept of public order that the CC has established in this important judgment. Indeed, Spanish arbitration is greatly reinforced by this judgment of the CC.

    Are arbitration and jurisdiction clauses contained in insurance contracts enforceable against a third party which is acting directly against the insurer in third party liability insurances?

    Such direct action is admitted by French law in liability insurances, as defined in article 124-3 of the Insurance Code.

    In just a few months two radically different approaches have been taken by the French Cour de cassation (Civ.1, 19 December 2018, n°17-28.951) and the ECJ in Assens Havn v. Navigator Management UK Ltd (13 July 2017, C-368/16) and KABEG v. MMA IARD (20 July 2017, C-340/16).

    The case submitted to the Cour de cassation represented a third party exercising a direct right of action before French Courts against the insurer of a floating barge which had caused him a damage. The Supreme Court accepted that the insurer could validly oppose the arbitration clause, which was in the policy against the third party, and therefore judged that French Court had no jurisdiction to decide on the case. The Supreme Court applied the well-established principle of Compétence-Compétence – materialized in article 1448 of the French Code de Procédure Civile – to stay the case, considering that the arbitration clause could not be set aside. The Court therefore judged that the applicability of the arbitration clause should be determined by the arbitrators by priority.

    A year before, the ECJ had ruled in the opposite direction in a case where a jurisdiction clause was applicable in the insurance policy. In Assens Havn v. Navigator Management UK Ltd, the ECJ stated that the clause could not be opposed to the third party acting directly against the insurer. According to the Court, the insurers’ liability towards the insured has a contractual nature when based on the policy, whereas it is extra-contractual when the liability is based on a direct action from a third party. In a previous ruling the Court had considered (Sté financière et industrielle du Peloux (12 May 2005, C-112/03) that the jurisdiction clause cannot be opposed to the beneficiary of an insurance policy if he is not the policyholder (for instance in a collective insurance).

    One sees a clear difference in treatment between arbitration clause and jurisdiction clause when it comes to deciding on their opposability to the victim exercising a direct action against the insurer.

    Article 2061 paragraph 2 of the Civil Code states that an arbitration cannot be opposed to a party which has not contracted for the purpose of its business activity. The French Cour de cassation grounded its decision on the fact that the clauses of the main contract could be opposed to the third party. If the latter was entitled to apply the insurance contract, it was therefore entitled to invoke article 2061 paragraph 2 of the Civil Code.

    On 29 March 2019 new amendments to the federal law “On arbitration in the Russian Federation” entered into force. This law regulates the order of establishment and activities of arbitration courts and permanently acting arbitration institutions (PAAI) in Russia and applies to resolution of both international and local disputes by arbitration in Russia.

    The key amendments relate to granting of rights to foreign arbitration centers to perform functions of PAAIs in Russia. Earlier such rights were granted by the government, but as from 29 March 2019 such functions were transferred to the Ministry of Justice. Ministry of Justice grants the rights to perform functions of PAAIs in Russia to foreign arbitration centers based on recommendations received from the Council on improvement of arbitrations.

    As of 31 March 2019, there are only 4 (four) PAAIs authorized to administer disputes by arbitration in Russia and all of them are Russian organizations. In accordance with the latest news the Hong Kong International Arbitration Center (HKIAC) is the first international arbitration center that has recently received a recommendation from the Council on improvement of arbitrations to establish PAAI in Russia and has been approved by the Ministry of Justice to establish PAAI in Russia. In accordance with the law an arbitration center is included in the list of PAAIs in Russia within 15 days from the date of approval by the Council, i.e. by the end of April 2019 HKIAC could become the first international arbitration center authorized to administer international disputes in Russia.

    Another issue that should be carefully considered by choosing an arbitration center relate to resolution of disputes between companies established in Russia (local disputes) by international arbitration centers not included in the list of PAAIs in Russia and not authorized to consider local disputes in Russia.

    Though there is no direct prohibition established by the Russian law to settle disputes between Russian companies by foreign arbitration centers with the seat of arbitration outside of Russia, the possibility of referral of local disputes to foreign arbitration centers is still questionable. In one of the court decisions that caused disputes in legal community (case# А40-219464/16-52-430) the Russian court of first instance ruled that resolution of local disputes by the foreign arbitration institutions violates public policy in Russia. Notwithstanding the fact that such ruling was dismissed by the higher court instance the risk that the Russian courts might deny recognition of awards of foreign arbitration institutions not included in the list of PAAIs in Russia and not authorized to consider local disputes in Russia cannot be excluded.

    Therefore, in situations when the disputes arise between companies established in Russia it would be reasonable to choose arbitration institution included in the list of PAAIs in Russia and authorized to administer local disputes in Russia or, alternatively, agree on resolution of disputes by the Russian commercial courts.

    Takeaways

    • if you agree in international contracts that the seat of arbitration is in Russia, it would be reasonable to choose the arbitration center included in the list of PAAIs in Russia and authorized to resolve international disputes in Russia.
    • If you agree in local contracts to resolve disputes by arbitration, it would be reasonable to choose the arbitration center included in the list of PAAIs in Russia and authorized to resolve local disputes in Russia.

    Arbitration is a well-known system for dispute resolutions, and works as an alternative to judicial procedures. Parties are free to choose this system and to submit their conflicts to specific arbitrators or institutions.

    It is usually considered that arbitration is a good way to solve conflicts but preferable to those arisen between big corporations or involving important amounts of money. Although this assumption is generally accepted, there is an alternative for distribution disputes suitable for smaller companies and cases with lower amounts claimed.

    And here is the essential question: why a manufacturer/franchisor or a distributor/agent/franchisee should choose a specialized arbitration for their agreements instead of a more general one or, even, a judicial procedure? The answer seems clear: an arbitrator with knowledge not only in procedural questions but in substantive matters will be able to better understand the conflict between the parties and, therefore, to grant a better award. Take into account that, for instance in my Country, Spain, a Judge of First instance can deal in the same day with a distribution contract, a construction case, a conflict between heirs, and a discussion in a community of owners. All of this requires the analysis of different facts and completely different legislations and it is true that specific commercial problems do not usually have judges experts in international trading. But, how to choose a good specialized arbitrator? And, how to choose the arbitral procedure and the institution in terms of organization, neutrality, costs and time?

    The IDArb was created in 2016 by the International Distribution Institute (www.idiproject.com) in collaboration with the Chambre de Commerce d’Industries et de Services de Genève (CCIG www.ccig.ch) and the Swiss Chambers’ Arbitration Institution (SCAI www.swissarbitration.org) and offers to the distribution sector (distribution, agency, franchising, selective distribution) a specialized, expedited and affordable arbitration procedure, not only for big international corporations but also for smaller cases. In fact, the expedited procedure is particularly foreseen for amounts below one million CHF (approx. 880.000 €).

    The objectives and main characteristics of IDArb which make it suitable for all the distribution disputes are:

    1. A list of specialized arbitrators experts in this particular field is available for ad hoc or institutional arbitration and IDArb is able to assist the parties to choose one of them.

    Specialized arbitrators from different countries and legal cultures have been appointed by a Selecting Committee reviewing their experience in one or more fields of distribution law. Therefore, parties can trust that the arbitrator will have concrete skills in the business with an in-depth understanding of the disputed issues. This is not a general knowledge on commercial law, but a concrete one on distribution, expressly verified by the Committee. Parties can even examine some examples of cases in which every arbitrator has been involved in.

    1. In order to maintain its high quality, the IDArb organizes training seminars for its appointed arbitrators. In these seminars, they are able to discuss about the general management of the arbitration, the procedural aspects and how to solve possible incidents in collaboration with the Institutions and their Rules. This will make all the proceedings more manageable and the possible difficulties more easily solved. Last seminar took place in Geneva in November 8, 2018 and participants have discussed, amongst other subjects, on evidences, witnesses and document production.
    2. The expedited arbitration procedure permits the parties to have a tailored procedure managed by SCAI under the Swiss Rules of International Arbitration, specially adapted for small disputes in the field of distribution.
    3. Time is also an essential element: the award in the expedited procedure will be issued in a maximum term of six months (only exceptional circumstances permit the Court to extend such time-limit), and, if parties agree, it can be decided only on documentary evidence.
    4. Costs are reasonable and known in advance.
    5. And, as final but important remark, IDArb has also adopted some recommendations where, upon request of the parties, mediation is favoured, the arbitrator my consider giving a preliminary non-binding and provisional assessment of the dispute and should have a pro-active position in order to facilitate an amicable settlement.

    To have further information about the clause to use in the contracts, the list of specialized arbitrators, their skills, experience and complete CV, and the recommendations for expedited arbitration, you can follow the link: https://www.idiproject.com/content/idarb-idi-arbitration-project

    State commercial court in Russia is named in the Russian language – Арбитражный суд. This name of the state commercial court is often translated into English as Arbitration court. Such translation in its turn often causes actual misunderstanding between the parties, since the Russian party will most probably consider the term “Arbitration court” as a state commercial court and the other (non-Russian) party might consider that it agreed to resolve disputes by arbitration rather than in a state court.

    Below are some examples of dispute resolution clauses specified by the parties in commercial contracts that caused actual misunderstanding:

    “…if there is no agreement, any disputes and claims between the parties relating to the contract will be resolved by arbitration under the Rules of International Chamber of Commerce in Moscow by one or more arbitrators appointed in accordance with the said rules. The Arbitration court shall use the Russian law.”

    “…if a dispute is not resolved within 30 days of written notification of the dispute by one party to the other, anyone of the parties may submit the dispute arising out of or in connection with this agreement shall be finally settled under the Rules of Arbitration of the Moscow City Arbitration Court”.

    The wording of such clauses and its translation, specifically translation of the term “Arbitration court” might result in resolution of claims by the state commercial courts in Russia, rather than by arbitration. In such situations failure of the non-Russian party to defend itself in the Russian state commercial courts might lead to serious negative consequences.

    One of the well-known arbitration institutions in Russia – the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation recommends the following arbitration clause:

    “Any dispute, controversy or claim which may arise out of or in connection with the present contract (agreement) [in case a separate arbitration agreement is concluded a particular contract (agreement) is to be indicated], or the entering into force, conclusion, alteration, execution, breach, termination or validity thereof, shall be settled by arbitration at the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation in accordance with its applicable regulations and rules. An arbitral award shall be final for the parties. It shall not be allowed to submit a motion to a state court to make a decision on the lack of jurisdiction of an arbitral tribunal in connection with the issuance by the arbitral tribunal of a separate order on existence of jurisdiction as a matter of preliminary nature”. (http://mkas.tpprf.ru/en/documents/)

    As you can see the full name of the arbitration institution is “International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation” and using its short name “Arbitration court” might result in resolution of disputes by the state commercial court.

    Another situation is when the parties actually wish to resolve commercial disputes in a state commercial court in Russia but fail to specify the name of the state commercial court correctly. Believe it or not, but there are many lawyers who consider Russian state courts as an effective and less expensive judicial body to resolve commercial disputes as opposed to arbitration.

    There was one interesting case mentioned by the Supreme Court of Russia in this regard in its recent overview of court practice on resolving of disputes connected with protection of foreign investors in Russia.

    A foreign company filed a claim with the state commercial court in Russia against another foreign company. The court determined that the parties of the dispute concluded prorogation agreement (choice of forum clause) in accordance with which all disputes arising from the specified contract and in connection with it shall be resolved in the courts of general competence of Russia.

    The state commercial court of first instance considered that it lacked jurisdiction to resolve this case, because the parties did not agree to resolve their disputes in the state commercial courts, with that the courts of general competence do not resolve commercial disputes between companies in Russia. As a result, the court of first instance returned the claim to the claimant due to the lack of competence of the state commercial court to resolve this dispute.

    In the appeal claim the claimant argued that the prorogation agreement was unenforceable, since the court specified by the parties (the courts of general competence) do not consider commercial disputes of legal entities in Russia. The foreign company also argued that there was a close connection of the dispute with the territory of the Russian Federation, and therefore the state commercial court had competence to consider this case.

    The appeal court dismissed the ruling of the court of first instance and the case was returned for re-consideration to the court of first instance based on the following grounds.

    The appeal court ruled that the enforceable prorogation agreement shall provide possibility to determine the actual intent (true intent) of the parties regarding competence of the state court to resolve disputes.

    The appeal court determined that the prorogation agreement agreed by the parties was unenforceable, since such agreement failed to determine the intent of the parties to resolve disputes in a specific court or a system of competent state courts where the specific state court shall be determined based on the rules of internal competence of courts.

    The appeal court further ruled that if prorogation agreement is unenforceable the competent court of the Russian Federation shall use general rules of competence of state commercial courts of the Russian Federation set forth in the Commercial procedural code of the Russian Federation.

    In this specific case the subject of the disputed transaction was a sale of share in the charter capital of the company registered at the territory of the Russian Federation. The appeal court in this case established close connection of the dispute with the territory of the Russian Federation and ruled that the state commercial court was competent to consider such dispute.

    Therefore, if the parties of the contract fail to correctly stipulate the specific state commercial court to consider their disputes in Russia, such prorogation agreement (choice of forum clause) might be considered by the state commercial court in Russia unenforceable and the claim might be returned to the claimant due to the lack of competence of the state commercial court to resolve such dispute.

    Conclusions

    If you wish to resolve disputes in the state commercial court in Russia, make sure that the full name of the state commercial court is specified correctly. 

    If you wish to resolve disputes by arbitration in Russia it would be reasonable to use a recommended arbitration clause of respective arbitration institution.

    And, of course, be sure to check translation of the English version of the contract into Russian.

    Alexandre Malan

    Tätigkeitsgebiete

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