The Russian Supreme Commercial Court has held that disputes arising out of investment agreements with Russian authorities are not arbitrable at least for the purposes of domestic arbitration. The court upheld the decisions of the lower courts refusing the enforcement of a domestic arbitral award in a dispute between a private investor and a Russian municipal authority.
The dispute arose out of an investment contract by which the investor agreed to develop a certain property and the municipality in turn agreed to provide a plot of land for the development as well as to arrange the necessary zoning documentation and permissions and secure access to the city grid.
The Supreme Commercial Court acknowledged that the fact that the municipality was a party to the agreement did not render the dispute non-arbitrable as a municipality may enter into commercial transactions. However, it went on to note that the obligations assumed by the municipality under the investment agreement concerned the performance of its public functions. Since under the Russian law on domestic arbitration only civil law (ie commercial) disputes may be submitted to arbitration, the court concluded that a dispute which concerned the performance of public law functions by the municipality could not have been submitted to arbitration.
Facts of the case
In December 2007 LLC Aldega and the City of Krasnozavodsk municipality (located in the Moscow Region) entered into an investment contract. The contract envisaged that LLC Aldega would build three apartment buildings on a plot of land provided by the municipality. The municipality further undertook to refrain from disposing of the plot of land, arrange issuance of the necessary construction permits and zoning documentation and procure access to the city’s electricity grid. Though the obligations of LLC Aldega are not reflected in the courts’ decisions, in similar transactions the investor normally agrees to transfer some apartments to the public authority.
Relations between the parties apparently went sour in 2010, when Aldega commenced arbitration alleging that the municipality had breached its obligations under the agreement and seeking c. USD 300,000 in actual damages and c. USD 5,000,000 in lost profits. Krasnozavodsk in turn applied to the Moscow Region Commercial Court arguing that Aldega was not authorised to carry out construction works on the site it was using and asking that Aldega be ordered to demolish the partially constructed buildings. In the event, both parties got what they desired from the respective dispute resolution bodies. Krasnozavodsk was ordered to pay compensation to Aldega by the arbitral tribunal and Aldega was in turn ordered to demolish the buildings by the Moscow Region Commercial Court.
However, Aldega was less successful in the enforcement of the award it obtained. Both the Moscow Region Commercial Court and the Federal Commercial Court for the Moscow Circuit refused enforcement holding that the dispute was of a public law nature and therefore could not have been resolved by an arbitral tribunal. Aldega was more successful with the three-judge Supreme Commercial Court panel which disagreed with the lower court’s reasoning on arbitrability and remitted the case to the Presidium. However, the Presidium disagreed with the panel (which happens quite rarely).
Significance of the Supreme Commercial Court decision to be clarified
The court’s decision is important in several respects. First, it confirms that the description of the disputes that may be submitted to domestic arbitration contained in the Law On Domestic Arbitral Tribunals defines the scope of arbitrable disputes. Secondly, the Supreme Commercial Court took quite a narrow view on what disputes would be considered civil law (commercial) rather than public. It appears that the holding is that if a public authority agrees in a commercial contract to do something which will involve the exercise of its public functions the resulting dispute will not be arbitrable.
From the international arbitration perspective the impact of the court’s decision is not entirely clear. First, the court was dealing with a domestic dispute and therefore the domestic/international arbitrability issues did not come into play. Secondly, while the Russian law On International Commercial Arbitration contains a somewhat similar clause describing the types of disputes which may be submitted to arbitration it has an additional provision which allows submission to arbitration of disputes between “companies with foreign investments” and any Russian law entity. The latter provision on its face does not limit the types of disputes which may be submitted to arbitration. However, given the Russian courts’ general position that only commercial disputes may be resolved by arbitration, the risk is high that the courts will adopt the same approach in international commercial arbitration cases.