Does a representative need specific authority for an arbitration clause?

Russian courts of all instances have recently ruled that a general power of attorney is sufficient evidence of authority to include arbitration clause in a contract. The significance of this development should not be underestimated, especially bearing in mind the past practice of state courts on this matter.

The attitude of state courts to arbitration has always been ambivalent. On the one hand, the courts, willingly or not, acknowledged that arbitration is a viable alternative to litigation and parties may usually refer disputes to arbitration. On the other hand, the courts often applied the arbitration-related rules formalistically which lead to irritating and unjustified obstacles to arbitration in Russia. A flagrant example of such formalism is the past approach of the courts to the authority needed to enter into arbitration agreements. To put it briefly, the courts often reasoned that a general power of attorney (“PoA”) to enter into commercial transactions is not enough to conclude an arbitration agreement, unless the authority to do so is expressly mentioned in the PoA.

How did the courts substantiate such approach? Sometimes they referred to the autonomous character of the arbitration clause and the principle of its separability. This principle is widely established internationally: it means that if, for instance, a contract is found invalid, such finding does not automatically invalidate the arbitration clause contained in the contract. However, in international practice this principle does not infer that a person needs his or her power to enter into arbitration agreements to be expressly mentioned in the PoA.

Russian state courts used to make this strange inference partly due to their lack of experience in arbitration-related matters, partly due to their (half-hidden but well known) jealousy towards arbitral tribunals.

The state commercial courts also referred to the Code of Procedure in Commercial (Arbitrazh) Courts (Article 62): “The power of attorney … shall expressly provide for the right of the representative … to submit the case to an arbitration tribunal…”.

Obviously, the Code of Procedure is a part of procedural law and applies only to proceedings in state courts.

Therefore the rule quoted merely means that when the case is already pending at state commercial court, a party representative making such important procedural steps such as, for instance, submitting the case to an arbitration tribunal or renouncing the claim, requires special proof of authority. However, Russian courts have interpreted this rule very broadly: they found that even when the dispute had not yet been submitted to the state court, the conclusion of an arbitration agreement needs expressly specified authorities (even if it is an arbitration clause in a contract). They have effectively extended the scope of application of the said procedural law rule to substantive law.

Such court practice has contributed to legal uncertainty with regard to dispute resolution because many companies issue general powers of attorney without expressly mentioning the authority of entering into arbitration agreements. Since arbitration clauses in such deals could be deemed invalid in absence of special powers of attorney this was damaging to arbitration.

The most recent case (No.А72-14613/2009) culminating in the decree of the Supreme Commercial (Arbitrazh) Court (“the VAC”) of 12 April promises to reverse and denounce the courts’ former approach. In this case Svetlana Moiseeva, a sole entrepreneur, filed a claim with the arbitration court at the Ulyainovsk Chamber of Trade and Commerce against a Russian ZAO Tander for recovery of rent payments. The arbitral tribunal satisfied her claim. The respondent then filed a suit with the state court to invalidate the arbitration clause alleging that the director of its branch who entered into the contract was not authorized to bind the company by the arbitration clause. His power of attorney did not expressly provide the power to submit disputes to arbitration.

Interestingly, the state courts of first, appeal and cassation instances declined the claim and found the arbitration clause valid ruling that no special power of attorney was needed. ZAO Tander challenged their judgments at the VAC. The panel of three judges after initial consideration of the case decided to submit it to the Presidium of the Supreme Court.

The Presidium upheld the lower court’s judgments. The highest judicial authority found that a person having the power of attorney to enter contracts shall be deemed authorized to conclude agreements to arbitrate.

Thus, now the VAC established an interpretation of the law on this matter which other commercial courts must follow: if the claim is not yet filed at court, for a party’s representative a general power of attorney suffices to make an arbitration agreement.

Muranov, Chernyakov & Partners