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Olga Prokaeva
National Research University, Saint Petersburg
olgaprokaeva@me.com

 

The conflict of international arbitral proceedings and domestic insolvency proceedings tends to be resolved differently in various jurisdictions. Issues arise due to the difference in nature of the two. While international arbitration is based on party autonomy, insolvency is governed by mandatory rules of national jurisdictions. The different approaches adopted by various states in such situations may be explained by the divergence of states’ laws and policies and each state’s respective understanding of national sovereignty and public order. The established practice of the Russian Federation demonstrates a broad approach regarding public order, which is in some instances inter-mixed with the issue of arbitrability.

The validity and the scope of an arbitration agreement (both ratione materiae and ratione personae) must be distinguished from objective arbitrability, although insolvency proceedings may impact all of these aspects.^[1] The concept of objective arbitrability refers to the subject matter of a dispute and addresses the question whether it can lawfully be submitted to arbitration.^[2] This article focuses on the arbitrability of a dispute where one of the parties becomes insolvent.

Russian courts apply Russian law to the issue of arbitrability in all cases, including situations of enforcement of foreign arbitral awards in Russia. The Russian Constitutional Court stated in 2011^[3] that the federal legislator, within the granted framework of discretion, has the right to determine the types of disputes that can be referred to arbitration. This is based on a balance of private and public interests and depends on social significance, specific conditions for the development of the socio-economic system and other factors.

According to article 27 of the Russian Code of Arbitration Procedure (dated 24 July 2002, N 95-??), Russian commercial courts have exclusive jurisdiction over insolvency (bankruptcy) cases. In some jurisdictions, such as Switzerland, the exclusive jurisdiction of national courts does not, in the majority view of scholars, restrain the objective arbitrability concept that any pecuniary claim may be submitted to arbitration.^[4] In Russia, exclusive jurisdiction of national courts over some types of disputes is commonly understood as non-arbitrability of these disputes.

Article 27 determines the exclusive jurisdiction of arbitration courts and courts of general jurisdiction, but it does not address the issue of arbitrability. The arbitrability of disputes is determined in article 33 of the Russian Code of Arbitration Procedure. This article establishes the following criteria for a dispute to be submitted to arbitration:

• the dispute must be a civil dispute;

• there must be a valid arbitration agreement between the parties; and

• there must be no legislative prohibition in the federal legislation (as in case of, for instance, public procurement disputes).

Article 33 of the Federal Law of October 26, 2002 N 127-??(‘On insolvency (bankruptcy)’)directly prohibits the resolution of bankruptcy cases by means of arbitration. This provision is consistent with the Constitutional Court’s approach to arbitrability, because bankruptcy procedure is a public dispute of high social significance,affecting state interests and the economic system.

Although the abovementioned provisions are sufficient to declare all bankruptcy cases non-arbitrable, it is not entirely clear whether they apply to situations where a party to an arbitration becomes insolvent after the conclusion of an arbitration agreement or even after the start of arbitral proceedings. The bankruptcy case is an independent, separate litigation, in which all creditors’ claims against the insolvent party are concentrated. The Supreme Arbitration Court of the Russian Federation states^[5] that if a party to a dispute before a state court becomes insolvent,the court decision constitutes a sufficient ground to include the claim in the register of creditor claims, despite the resolution of this dispute beyondthe bankruptcy case.

On the contrary, an arbitral award requires a writ of execution issued by a Russian court to be included in the register of creditor claims. The claims included in the register are satisfied first. There may or may not be sufficientdebtor’s property remaining to satisfy those claims beyond the register.Parties to arbitrations involving the debtor are therefore at a disadvantage to parties to proceedings in a state court.

An arbitral award can be challenged in court only by submitting an application for the annulment under Russian law. In case the arbitration agreement provides that the arbitral award is final, the annulment may be initiated only by a competent court on the grounds of non-arbitrability or public order violation. Recognition and enforcement of an arbitral award, regardless of the country in which it was made, may be refused on the same grounds. Although both annulment and non-enforcement are possible on the other grounds at the request of the party against whom it is invoked, as under article V(1) of the New York Convention, these grounds are not directly related to the issueaddressed in this article. 

Hence, if the dispute is arbitrable and does not violate public order, a state court issues a writ of execution of an arbitral award. For this reason, Russian courts, given the lack of any direct prohibition against submitting civil disputes with insolvent organisations to arbitration, commonly refer to public order while declaring the dispute non-arbitrable.

In one of the leading cases on the matter, for instance, the judicial board on economic disputes of the Supreme Court of the Russian Federation declaredthat a dispute was non-arbitrable since actions taken within the framework of the bank’s re-organisation procedure to prevent its bankruptcy were of a public nature.^[6] However, the court at the same time referred to article 33 of the federal law which proclaims bankruptcy cases non-arbitrable.  

In another case, the Court cancelled the decision of the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation because the challenged decision was found to violate fundamental principles of Russian law.^[7] The Court explained that the dispute was non-arbitrable because financial activities for the implementation of measures to prevent the bankruptcy of a credit institution were carried out by an agency representing the Russian Federation and thus should be considered as government activities of a public nature, and with an economic and social orientation. Further, the Constitutional Court of Russia expounded that the intervention in relations with this organisation was required as such bank reorganisation indicates an unstable financial situation of a credit organisation, which threatens the interests of its creditors (depositors) and the stability of the overall banking system.^[8]

In their decisions, the courts usually do not indicate which precise public interests or fundamental principles of Russian law are violated. However, Russian higher courts have explained that these principles are violated if actions taken might damage the sovereignty or security of the state, affect the interests of large social groups, or violate the constitutional rights and freedoms of individuals.

Supposedly, in case ofa bank insolvency, the arbitration of a dispute might constitute a threat to the financial interests of investors as a large social group, because participants in a bankruptcy case can file objections to creditors' claims in courtwhile objections to the arbitral awards cannot be filed.Nevertheless, it is not likely that any resolution of a civil dispute between two non-credit organisations would constitute any threat to the interests of large social groups, sovereignty of a state, or other public interests. The approach could perhaps be justified in situations involving bad faith of the parties to an arbitration agreement, in the knowledge that an insolvency procedure is about to start and with the intention to evade the legitimate interests of the creditors. However, this approach should not be applied where there was no bad faith.

Moreover, it would be incorrect to declare all disputes with insolvent organisations non-arbitrable if they do not involve ‘government activities of a public nature’. The insolvency of an organisation does not transform a civil dispute into a public one.Finally, the broad interpretation of the concept of a bankruptcy case as embracing something other than the organisation’s own bankruptcy procedure seems to be unjustified. The recognition of these disputes as arbitrable may have certain advantages, such as the acceleration of proceedings and the heightened possibility of enforcing decisions outside of Russia.

In conclusion, the current interpretation of the legal provisions by Russian courts may lead to the violation of the principle of pacta sunt servanda in relation to an arbitration agreement. In addition, the current approach results in the courts' refusal to issue writs of execution for the enforcement of arbitral awards, which, according to the Russian legislation, are required for the award to be included in the register of creditor claims.

A broad interpretation of what constitutes bankruptcy cases may lead to the unjustified and arbitrary violation of good faith private interests. Without any decision to the contrary, it appears that disputes in which one of the parties to the arbitration becomes insolvent (bankrupt) are non-arbitrable in Russia at present.

 

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