Arbitration Has Teeth, Litigation Treaties Lag

Contract disputes between Russian and foreign partners have become a common story. In England there are more than 200 court proceedings with a "Russian legal element," and likely an analogous number in Russia with a "foreign legal element."

The snags in enforcing an international judgement are also well publicized -- a judgment awarded in London, for example, that cannot be recognized and executed here, or a case in which a Russian party is awarded damages against a U.S. partner but cannot enforce the judgments in U.S. courts. These examples are the classic case for including an arbitration clause in commercial contracts.

Arbitration is normally less expensive and more expeditious than litigation, but in commercial relations between Russian and foreign entrepreneurs it is the availability of the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards that is decisive: The convention requires countries that are party to the convention to recognize and execute arbitral awards.

A few celebrated instances notwithstanding, arbitral awards are routinely enforced here and abroad. This reassuring scenario conceals a harsh but inescapable financial fact: Commercial arbitration is not always appropriate to investment transactions that depend upon rapid summary judicial remedies in the event of breach by another party -- injunctions, writs, garnishment, repossession and so on.

Like arbitral decisions, why should not the judicial decisions of one country be subject to recognition and execution in another? The answer is that sometimes they are, provided there is an international treaty between the countries concerned authorizing such recognition. This is the position of Russian law, and Russia has concluded treaties that allow the recognition of court decisions by most members of the CIS, as well as China, Mongolia, Eastern European countries, Italy and Greece.

Such a treaty, however, has never been concluded between a CIS member and a common law jurisdiction, and major foreign investors in Russia lack this elementary protection. A model does exist, prepared by a joint Anglo-Russian working party with the blessing of Russia's Foreign Ministry. It is addressed solely to commercial matters, and it successfully navigates the considerable conceptual differences between the British and Russian legal traditions.

The investment flow between Russia and foreign countries is now substantial and the volume of disputes sufficiently routine for such bilateral treaties to be at the very top of the agenda of measures to improve the investment climate here. There is no reason for the investment community of both sides to settle for less.

William Butler and Maryann Gashi-Butler are managing partners of Price Waterhouse CIS Law Offices BV.