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. Last Updated: 07/27/2016

An Arbitration Court of No Resort

Israeli businessman Alex Sekler looked at TTI-Kauchuk in 1994 and saw piles upon piles of expandable plastic pipes.

His Liral company signed a joint venture with the 85-year-old Moscow plastics and rubber factory and handed over $4.2 million to set up a line to produce those pipes.

But by 1997 the joint venture had turned sour and the partners decided to split up. Sekler tried to reach a deal with the plant to recoup his investment. Failing, he pulled out of the joint venture and turned to the courts.

The businessman worked his way up the Russian court system, losing, appealing and refiling lawsuits. Finally, unable to win a ruling in his favor, Sekler turned to the London international arbitration tribunal.

The tribunal — one of several arbitration bodies recognized by 120 countries, including Russia, as having the power to give the final word in commercial disputes — awarded him $15 million.

Such a saga is far from unique in the business world. But Sekler's tale faces a twist. Despite his three-year fight, Sekler is seeing the tribunal's ruling overturned.

The Supreme Arbitration Court — defying Russia's international obligations — reviewed the case on substance this month and refused to enforce the ruling.

Some legal experts worry that such a move may become standard practice. The reason is a State Duma bill that they say would break Russia's obligations to the New York Convention, a treaty under which signatory nations agree to enforce the rulings of international tribunals. The Soviet Union was one of the first signatories of the pact in 1958.

Legal experts fear that if the Duma passes the Arbitration Procedural Code in its current form it will scare off foreign investors and possibly deal a bodyblow to investment.

Parliament will accept on Friday final amendments for a second reading on the code. A date for the hearing has not been set.

"Russian companies are more or less trusted now because they can be prosecuted under international law if something goes wrong," said Boris Karabelnikov, an assistant law professor at the federal government's Academy of the National Economy.

"But if the new code is passed, it would effectively mean that Russia is breaking its international obligations and pulling out of the New York Convention. In such circumstances, many investors and creditors will immediately demand back the money they already invested in the country's economy," he said.

At issue in the new Arbitration Procedural Code is a stipulation in Chapter 30 that provides grounds for Russian courts to review the rulings of a treteisky sud, or an arbitration tribunal, on substance.

Moreover, Article 319 of the draft code lists reasons under which a Russian court can refuse to enforce foreign arbitrage awards.

Both stipulations, when applied to international tribunals, would contradict the New York Convention.

Sources in Russia's Supreme Arbitration Court, which prepared the draft legislation, denied that Chapter 30 has anything to do with international tribunals and is intended for the domestic tribunals that resolve disputes between Russian organizations and individuals.

Current laws "are outdated because they were prepared when everything was controlled by the KGB, the military and the government," said one high-placed court source on condition of anonymity.

The official also said the bill's terms for enforcing rulings by international tribunals remain compatible with the New York Convention and existing Russian laws.

But the terms have been changed in the draft code, according to a copy of the code that was reviewed by The Moscow Times. Article 319 contains 11 grounds under which enforcement of an international tribunal's rulings may be nullified, while the New York Convention states only seven. Unlike the New York pact, the bill contains grounds such as a previous Russian court ruling on the dispute that contradicts the tribunal's decision and the expiry on the statute of limitations.

"These grounds must follow word by word the grounds already listed by Russian law in accordance with Russia's international obligations. Otherwise, there is room for misinterpretation and confusion," said Professor Alexander Komarov, head of Moscow's International Commercial Arbitration Tribunal, in an interview.

The International Commercial Arbitration Tribunal, or MKAS, and the Maritime Arbitration Commission are Russia-based international tribunals for commercial disputes.

The wording of the controversial Chapter 30 also leaves room for broad interpretation. It does not specify whether the "arbitration tribunal" being referred to is a domestic or international arbitration tribunal.

Although Russia was one of the first to sign on to the New York Convention, its signature was all but meaningless under a Soviet economy regulated by the government. But since the collapse of the Soviet Union in 1991, Russian companies have started to file suits with increasing frequency and, in turn, find themselves facing lawsuits abroad over overdue loans and disputed contracts.

While only about several dozen of the cases are filed each year in the European tribunals located in Stockholm, Paris and London, the number of cases filed to Russia's two international arbitration tribunals is growing. Four hundred suits were heard last year at MAC and MKAS.

Most of those rulings have been enforced, said Professor Sergei Lebedev, the head of MAC.

However, the enforcement of such rulings may come under threat if the new arbitration code is implemented. The code opens the window for enforcement to be assigned to state arbitration courts instead of the civil courts, which currently are charged with the matter.

The source in the Supreme Arbitration Court said civil courts are not qualified to "check the rulings of tribunals."

Lebedev disagreed, saying, "I think moving enforcement to the state arbitration courts just for the sake of preparing a new arbitration code is not a sufficient reason to change a longrunning practice."

Under Russian law, an arbitration tribunal shares the same status as a state court and can be asked to review a dispute at any time, regardless of whether the case has been, is, or will be heard in state courts. The tribunal's ruling is binding under the New York Convention.

However, Professor Tatyana Neshatayeva — a judge at the Supreme Arbitration Court and the architect of the Arbitration Code's sections on international tribunals — apparently has a different understanding.

"An [international] arbitration tribunal is an alternative to a trial in court as a way to resolve a commercial dispute at its pre-judicial stage," Neshatayeva wrote in a textbook for law students that was published this year.

Neshatayeva refused to comment for this article.

"Knowing that our Supreme Arbitration Court has such misunderstanding of what the international tribunal is, it is simply dangerous to trust it to deal with the tribunals' rulings," said Sergei Marinich, partner in the Moscow office of international law firm Salans, Hertzfeld and Heilbronn, which handles cases involving the enforcement of international tribunal rulings.

"The law on enforcement of international arbitration awards must not be changed because the Russian Federation remains bound by the New York Convention," said Per Runeland, partner in Kilpatrick Stockton's London and Stockholm offices and an international arbitration lawyer.

"If Russia is to remain a member in good standing of the international community, then Russia must not repeal its own law securing the enforcement of international awards, and certainly not leave the New York Convention, one of the most widely accepted international conventions," he said in an e-mail interview.

The arbitration code needs to pass a third reading in the Duma before it is handed over to the Federation Council for approval. President Vladimir Putin then needs to sign it into law. The Duma gave the legislation a nod in first reading last month.

In the meantime, Israeli businessman Sekler is waging a battle of words in hopes that the London tribunal's ruling will not fall by the wayside.

"According to the [New York] Convention, any international tribunal's ruling is binding and cannot be reviewed on substance," Sekler wrote in an strongly worded appeal to Supreme Arbitration Court head Veniamin Yakovlev, which was published in several Russian newspapers this week. "However, you are giving a green light to the members of the Supreme Arbitration Court to break Russia's international obligations.

"You know that Ms. Neshatayeva [of the Supreme Arbitration Court] says at every opportunity that the rulings of international tribunals should not be recognized in Russia," the letter said. "In other words, the signature of Russia on international conventions is meaningless to her."

Sekler could not be reached for comment.

The Supreme Arbitration Court official said investors like Sekler were the very reason the new Arbitration Procedural Code needed to be passed.

International tribunal rulings "are often done circumventing Russian laws and through corrupted procedures," the official said.

"Say, this company [Liral] that claims $15 million invested only $1.5 million in the enterprise and now claims 10 times more. What must a state court do? Legalize and seal such a ruling as we are required to do? But what will happen to that enterprise?

"So far we do not know how to deal with such cases," the source added. "But our job at the next stage will be to put all of the [international tribunal] rulings under strict state control."

The Ins and Outs of Arbitration

To turn to an international arbitration tribunal, the feuding parties must belong to two different countries, and both countries must be signatories of the New York Convention.
The parties must have an arbitration clause in their contract that specifies which tribunal is to be used in commercial disputes.
When a dispute comes up, each side chooses an expert of any nationality to act as representatives. Those two experts then select a chairman. Then the two experts each pick their own group of experts to review the dispute, a process that usually takes several months. The two experts and the chairman then reach a ruling, called an award.
The award, if not fulfilled voluntarily, must be enforced in the country of the loser by a local court.
The process of making the decision is confidential and the ruling is final and must not be reviewed on substance in the country where it is enforced, according to the New York Convention and a Russian law on international commercial arbitration. The Russian law was adopted in 1993 and based on a model prepared by a United Nations Commission on International Trade Law.
"The arbitrage award, despite the country it was made in, is binding and is enforced after being applied to a competent court," the law states.
The grounds on which the ruling may be rejected are few and must be proven to the court. They include unspecified incapabilities of one of the parties and proof that the losing party was not given proper notice of the appointment of an arbitrator.
The ruling can also be rejected if its enforcement is contrary to the public policy of Russia, the law states. Public policy includes state secrets.