Under article II of the New York Convention if a state court is seized of a matter covered by an arbitration agreement it shall refer the parties to arbitration if one of the parties requests such a referral. In a recent decision the Federal Commercial Court for the North-Western Circuit provided important guidance as to the timing of such a request.
Under Article 148 of the Commercial Procedure Code the party should submit such a request before any submission on the merits of the case and to the trial level court. The court clarified that the party does not lose the right to request referral to arbitration until either (i) it makes a submission on the merits of the case or (ii) the trial court renders a judgment on the merits. The party’s failure to participate in a hearing does not preclude it from submitting a request to refer the case to arbitration at a later stage.
Facts of the Case
In 2007 the claimant Tensbur Investment Inc (BVI) entered into an agreement with the respondent, Renaissance Capital Investment Management Ltd (BVI), and appointed the latter to manage its various investments. The agreement provided that any disputes between the parties shall be submitted to arbitration under the LCIA rules.
In 2013 the claimant commenced litigation against a different entity before the Kaliningrad Commercial Court, but then added Renaissance as a respondent and amended the claim to include claims under the investment management agreement.
A number of hearings took place with the respondent failing to take part in any of them. Eventually the respondent submitted a request to refer the case to arbitration one day before the next scheduled hearing.
The first instance court decided to discontinue the case and refer the parties to arbitration. The appellate court reversed the decision, finding that the respondent had waived the right to request referral to arbitration by making it at such a late stage of the proceedings.
Decision of the Federal Commercial Court for the North-Western Circuit
The court found that the respondent had not waived the right to request referral to arbitration. Under Russian law the request should be submitted at the time the trial court hears the case. This means that until the court renders the final judgment the respondent retains the right to invoke the arbitration agreement, provided it had not made submissions on the merits of the case. The respondent’s failure to participate in a hearing does not equate to submission to jurisdiction.
The approach the court suggested may appear to encourage respondents to employ delaying tactics and to wait until the very last moment before invoking the arbitration clause. The respondents though will do so at their own peril, since the court may proceed to render a judgment against them.
Moreover, the court in this case may have been influenced by the lack of any evidence of the respondent’s bad faith or abusive conduct. In fact, the respondent argued that it had not become aware of the nature of the claims against it until just a few days before it submitted a request to refer the case to arbitration.
The full text of the decision of the Federal Commercial Court for the North-Western Circuit is available here (in Russian).
Author: Sergey Usoskin
First published at CIS Arbitration Forum