When the Deal Dies, Try Arbitration First

It is unfortunate that investors frequently pay too little attention to dispute resolution mechanisms when negotiating contracts -- especially in light of the number of deals that are not successfully concluded in Russia. The inclusion of a proper mechanism is essential.

With respect to foreign investors, part of the reason for this neglect may be an impression that there are no viable forums for resolution of disputes with Russian partners. In fact, there are numerous examples of foreign investors receiving favorable decisions from both arbitration tribunals and Russian courts and successfully enforcing such judgments in Russia. Indeed, there are several examples of foreign companies successfully contesting findings of Russian regulatory authorities, including tax authorities. Many of these decisions were rendered by Russian courts known as Arbitrazh courts.

To ensure that an investor's rights can be enforced in Russia, however, a contract should specify both the governing law and mechanism for resolving disputes. The choice of law will depend on the types of obligations and rights contained in the contract. For example, in the case of trade financing documentation, English law may be preferable, while Russian law may be more suitable for certain types of security (collateral) agreements or many types of common commercial transactions.

When it comes to choosing a tribunal for hearing a dispute, there are certain essential points to be considered. The Russian Federation is a member of a treaty on enforcement of court judgments with only a few countries (mostly Eastern European), but it is a member of the 1958 New York Convention on Enforcement of Arbitral Awards.

This means, for example, that while a foreign investor could not enforce the decision of a Russian court in the United States or Great Britain, such an investor could enforce an arbitral award in those countries -- and in Russia. Furthermore, although there are many fair and experienced Russian judges who are perfectly capable of rendering sound decisions in commercial disputes, arbitration permits the parties to ensure that the dispute will be heard by capable and neutral judges because the parties may choose specific arbitrators.

In choosing an arbitration tribunal, investors need not look to arbitral bodies in Stockholm or London. There will be cases in which the dispute is best heard by a tribunal in Russia, especially if the amounts involved are not great.

Professor William Butler, a partner with White & Case, has been practicing CIS law for 30 years; Maryann Gashi-Butler is head of the Moscow office of White & Case and has practiced law in Moscow since 1991.