Baker & McKenzie: On Arbitrability of Disputes over Real Estate

In its recent resolution of 26 May 2011, #10-P the Constitutional Court of the Russian Federation considered an argument of the RF Supreme Commercial (Arbitrazh) Court (SACRF) that arbitration tribunals have no competence to resolve disputes concerning title to (and certain transactions with) real estate.

In particular, the argument concerned disputes between pledgees and pledgors with regard to foreclosure on pledgees’ real estate to the extent that enforcement of an award granted by arbitration would require changes to the public register by a public registration authority.

The resolution closes a lengthy discussion about arbitrability of disputes concerning real estate in Russia and interpretation of provisions of the Code on Procedure in Commercial Courts on “exclusive jurisdiction” of the state courts.

Since the issuance of its Informational Letter No. 96 of 22 December 2005, de-facto guidance for all state (arbitrazh) courts of the Russian Federation, SACRF has maintained that all disputes arising out of real estate transactions where enforcement of a judgment would require making entries in the public register are, in essence, disputes with a public-law element and, as such, are not arbitrable and may only be submitted to state courts at the location of the real estate.

Background: it is widely accepted that this position of SACRF was inspired by a wave of arbitral awards granted by some arbitration tribunals allegedly involved in fraudulent acquisition of real estate property in the early 2000s. By refusing to acknowledge the competence of arbitration tribunals in disputes associated with real estate, SACRF intended to limit this nascent fraudulent practice.

While the SACRF information letter, as an attempt to stop abuse and disorderly practice, was clearly a good thing at the time when it was issued, after a while its legal implications have become more and more controversial because it cast doubt over the arbitrability of an extremely wide range of disputes.

In its submission to the Constitutional Court, SACRF admitted that the provisions of Russian law, on which SACRF based its position, are susceptible to conflicting interpretations and asked the Constitutional Court to review these provisions to identify which of them should prevail.

The Constitutional Court dismissed the arguments of SACRF and held that the mere fact that enforcement of arbitral awards may trigger changes to the public property register (kept by the state registration authorities) does not make the underlying disputes the public-law ones and, therefore, does not make such them non-arbitrable. In particular, the Constitutional Court held that the right of the parties to a contract to submit their dispute to arbitration stems from the concept of freedom of contract, and any refusal by the state to honour the awards of such arbitration would violate the essential rights of the parties to the contract.

In effect, the Constitutional Court ruled that any dispute between the parties to a real estate transaction is arbitrable, and state control over the arbitral awards should be exercised on a case-by-case basis when enforcement of the award is granted.

The resolution also clarifies the meaning of the “exclusive jurisdiction” term as an instrument of selection of the proper state court once the dispute is submitted to a state court. According to the Constitutional Court any dispute mentioned in Russian procedural law as falling under “exclusive jurisdiction” may nevertheless be resolved by arbitration.

Baker & McKenzie