The Supreme Court of the Russian Federation resolved the question of pocket arbitration courts

The Supreme Court of the Russian Federation upheld the decision of the Gazprom Arbitration Court to award RUB 60.1 billion to Geotrest LLC in a claim against Gazprom Invest Vostok JSC (Gazprom Group) because the Gazprom subsidiary did not pay for work related to the construction of the Sakhalinsk-Khabarovsk-Vladivostok pipeline.

Geotrest, in compliance with an arbitration clause, originally applied to the Court of Arbitration of JSC Gazprom, which ruled in its favor. However, Gazprom Invest Vostok refused to pay, and Geotrest took the case to the Arbitration Court of the Tomsk Region. Gazprom Invest Vostok raised the question of impartiality because of its ties to the Gazprom Arbitration Court that Gazprom had established.

The courts of first instance and the cassational courts agreed with Gazprom Invest Vostok, and they cited the position of the Supreme Arbitration Court (SAC) that a violation of impartiality occurs if a counterparty in a dispute establishes and funds the arbitration court hearing a case involving the counterparty. The courts took the position that the presence of the defendant’s corporate communications with the arbitration court at Gazprom indicates bias in the court’s decisions.

Geotrest disagreed with the courts and appealed to the Supreme Arbitration Court, which had been disbanded. On 14 August 2014, the Supreme Court of the Russian Federation refused to review the case, claiming it found no grounds for reviewing the case. However, on 30 December 2014, the deputy chairman of the Russian Supreme Court, Oleg Sviridenko, stated that cassation appeal of Geotrest passed the Judicial Board on economic disputes. This was after the Constitutional Court of the Russian Federation, in its Resolution of 18 November 2014, in a case involving Sberbank of Russia, concluded that the proceedings of a pocket arbitration court do not constitute grounds for refusal to issue writs of execution. According to the Constitutional Court, it is necessary to establish the impartiality of each individual arbitration court, taking into account its organizational and legal ties with the parties in the dispute.

In the Supreme Court of the Russian Federation, the representatives of Geotrest maintained that the fact that Gazprom had considered a dispute with an affiliated party should not be a basis for refusing to provide a writ of execution. According to Geotrest, the parties had entered into an arbitration agreement involving a competent court, and the arbitration decision was not in favor of the party affiliated with Gazprom, therefore it did not violate the principal of impartiality. Moreover, the lawyers for Geotrest noted that Gazprom Invest Vostok abused its rights, forcing the contractor to agree to the arbitration clause in the contract and then not honoring the commitment.

The representatives of the Gazprom Invest Vostok tried to prove to the Supreme Court that the decision of the pocket courts should be respected, regardless of who won the lawsuit. The lawyers argued that, given current judicial practice, the court decision in favor of a party affiliated with an arbitration court should be a basis for overturning it. In such a case, one party has an unfair advantage.

In the end, the Supreme Court overturned the acts of the lower courts and concluded that the Arbitration Court of the Tomsk region must to issue Geotrest a writ of execution.

The legal community had various reactions to the decision of the Supreme Court. On the one hand, many lawyers agreed with the court, recognizing that bias on the part of a specific pocket arbitration court can exist but that not all pocket arbitration courts are bias. On the other hand, many lawyers believe that the Supreme Court ruling could trigger a growth in the number of pocket courts and could increase the confidence entrepreneurs have in the arbitration process.

The most appropriate solution is to determine the impartiality of arbitration courts on an individual basis. The legal community also discussed other ways to solve this problem. The Russian Ministry of Justice recently proposed an arbitration reform, requiring that only NGOs can establish arbitration courts and that they cannot resolve disputes involving their founders.

The Russian version of this posting is available at http://artdelex.ru/rus/news/vs-rf-postavil-tochku-v-voprose-o-karmannyh-treteiskih-sudah.