On Dispute Resolution in Controlled Arbitration Courts

Banks like arbitration courts that are established by banks. It’s easy to see why: you tend to trust those who know your business. It is not infrequent for an arbitral tribunal to demonstrate more competence and deeper insight than a state court. This is due to the huge work burden of the state judges and, on the other hand, to the profound knowledge of banking that arbitrators, carefully selected and appointed by the parties, usually display.

Dmitry Davydenko
senior lawyer

Muranov, Chernyakov & Partners
+7 495 783-74-50

At the same time, some banks, and not only banks, insert into arbitration agreement clauses that refer dispute resolution to tribunals they control. What’s interesting here is why the other party agrees to this.

Sometimes the other party lacks bargaining power. Yet very often it simply neglects going through the dispute resolution clause, thus demonstrating carelessness or a certain degree of legal nihilism, to quote President Medvedev who voiced this notion as a general problem of Russian legal culture. After an award is delivered, such a party refers to the tribunal’s lack of independence.

What’s interesting is why the other party agrees to unfair terms

A recent example is the following case. Biznes-Lada LLC, with the help of its three guarantors Firma Lada-Forward LLC, Biznes-Trans LLC and Mr. Lechi Akhmadov, entered into loan and guarantee agreements with Sberbank. All these contracts contained a clause referring resolution of disputes to the arbitral tribunal of joint stock company SberbankInvestStroy, which is affiliated with Sberbank.

Biznes-Lada did not pay on time and Sberbank applied to arbitration for the recovery of money owed from the debtor and its guarantors. The award was for the bank. The defendants, however, refused to comply with the decision claiming that the tribunal did not meet the requirements of independence and impartiality.

The bank filed a suit in a state court seeking to enforce the award. The court satisfied the claim, and this decision was later upheld in cassation. The debtor applied to the Supreme Commercial (Arbitrazh) Court (“SAC”) and the panel of judges transferred the case to the SAC Presidium (SAC No. ВАС-17020/10). The judges referred to the fact that the arbitrators were appointed by the company affiliated with and controlled by the bank.

What will the SAC decree be like? Given the fact that its Chairman Anton Ivanov has frequently demonstrated his

critical view of arbitral tribunals affiliated with private entities, the Presidium will most likely refuse to issue the writ of execution on the basis of its contradiction to fundamental principles of Russian law, that is that "no one should be judge in his own cause" or the principle of impartiality of arbitral tribunals (the SAC panel of judges referred to these principles and also invoked cases of European Court of Human Rights which formulate and apply them).

Undeniably, some judges have a grudge against arbitration, especially those arbitration courts set up by commercial entities. This can partly be explained by such human feelings as rivalry and jealousy. Also, there is an understandable scepticism as to the impartiality of such tribunals when they (i.e., their arbitrators) hear cases of their founders’ affiliates. In such cases an arbitrator is rarely independent and impartial. Arbitration is discredited by such puppet tribunals.

Undeniably, some judges have a grudge against arbitration

However, there were cases when courts issued the writ of execution following the award of the arbitral tribunal at UralSib bank, which was rendered, unsurprisingly, in favour of the bank (case No. A76-17909/2010-6-692). The courts found that the arbitrators were not the bank’s employees and there was no evidence of their dependence on the bank’s management.

In my opinion, the dispute resolution by the arbitration court at a commercial entity (including banks) is quite acceptable where neither party is affiliated with it or, vice versa, both of them are affiliated with it (disputes within a group).

Moreover, I suppose that if a commercial entity entered into a voluntary agreement with another commercial entity (such as a bank) with a clause providing for dispute resolution by the arbitral tribunal at the same commercial entity (the bank), it waives its right to challenge the award on the ground of partiality: the agreement was entered into with its consent.

The courts should, generally, recognize validity of such clauses and resulting awards unless there is evidence of partiality. This should encourage businesspeople to act more responsibly when entering contractual obligations.

Muranov, Chernyakov & Partners