It is accepted that the impartiality and independence of arbitrators are cornerstones of arbitration. Pursuant to art 12(1) of the UNCITRAL Model Law on International Commercial Arbitration (the Model Law), any arbitrator may be challenged if there are circumstances that give rise to justifiable doubts as to the arbitrator’s impartiality or independence.
Many jurisdictions, including Russia, have adopted provisions based on art 12(1) in their domestic arbitration law. Unfortunately, the Model Law and Russian law are silent on the independence of arbitral institutions in general and, as a result, many Russian domestic disputes are resolved by arbitral institutions affiliated with only one of the parties to the dispute, which tends to be party with the greatest commercial power.
In this article, Mikhail Samoylov, Lexis®PSL Arbitration contributor and senior associate at Russian law firm Korelskiy, Ischuk, Astafiev and Partners (KIAP), discusses recent case law on this issue, including a decision of the Supreme Commercial Court of Russia.
The background case law
This issue arose in two recent cases, Sberbank “Business-Lada” LLC & Ors and Lukoil – Energy lines company LLC v MK LLC. The cases share a similar factual background as the defendant in each case was in breach of contract and the plaintiff referred the dispute to arbitration pursuant to an arbitration clause contained in the contract between them. In each case, the arbitration clause provided for domestic (ie Russian) arbitration. And, in each case, the tribunal rendered an award in favour of the plaintiff and then a court issued the writ of execution for the enforcement of the arbitral award.
In both cases, the arbitral institution charged with resolving the dispute was established by company affiliated with the plaintiff and the plaintiff company approved the list of arbitrators that the parties could select from. In neither case was the defendant given an opportunity to nominate arbitrators from which it could choose.
Both defendants argued that the arbitral institution charged with administering the disputes could not guarantee adherence to the principles of impartiality and independence in the course of the arbitral proceedings. The Federal Law No 102-FZ dated 24 July 2002 (On arbitral tribunals in the Russian Federation) which regulates domestic arbitration, provides that arbitrators hearing a case are required to be impartial and independent, but it does not explicitly lay down any such standards for domestic arbitral institutions administering disputes.
The Supreme Commercial Court of Russia applied test of ‘apparent bias’
The two cases were revised by the Supreme Commercial Court of Russia in 24 May 2011 and 22 May 2012. The court resolved the issue in accordance with the approach of the European Court of Human Rights (ECtHR). The ECtHR in Hauschildt v Denmark stated:
‘The existence of impartiality for the purposes of Article 6 para. 1 (art. 6-1) must be determined according to a subjective test, that is on the basis of the personal conviction of a particular judge in a given case, and also according to an objective test, that is ascertaining whether the judge offered guarantees sufficient to exclude any legitimate doubt in this respect. Under the objective test, it must be determined whether, quite apart from the judge’s personal conduct, there are ascertainable facts which may raise doubts as to his impartiality.’ [para 46]
These statements of the ECtHR were applied by the Supreme Commercial Court of Russia, which decided that the creation and funding of an arbitral court by one of the counterparties to a civil law contract and settlement of disputes arising out of such contract by the arbitral tribunal composed by that arbitral court, where the other party is deprived of such opportunities, is evidence of a violation of the guarantees of objective impartiality and, therefore, fair and equitable consideration of a case. The court decided that such a violation is in itself a sufficient ground for dismissal of an application for a writ of execution to be issued for the enforcement of an arbitral award.
Accordingly, in both cases the Supreme Commercial Court of Russia rejected the applications for enforcement of the arbitral awards (the decisions are dated 24 May 2011 and 22 May 2012).
Actual v apparent bias—the Gazprom case
Despite the above decisions, this issue fell to be considered by the Supreme Commercial Court of Russia once again in 2013, in the case of Institute Neftegasproect JSC v Yamalgazinvest JSC.
The Institute Neftegasproect case was distinguishable from the cases considered above. Institute Neftegasproect, who breached the contract, had an opportunity to choose an arbitrator from either a list of arbitrators or an independent arbitrator. Nevertheless, the case was administered by the Gazprom Arbitration Court, and Gazprom is the parent company of Yamalgazinvest, one of the parties in the case.
An award was issued in favour of the Yamalgazinvest, who then applied to the Arbitrazh Court of Moscow for a writ of execution for the enforcement of the arbitral award. On 27 February 2013, the Arbitrazh Court of Moscow rejected the application for enforcement of the arbitral award, but on 29 April 2013 the Federal Arbitrazh Court of Moscow Region reversed the ruling of the Arbitrazh Court of Moscow and enforced the arbitral award on the basis that the defendant chose (opted for) an arbitrator and there was no evidence that the other arbitrators on the tribunal were actually biased.
However, on review, the Supreme Commercial Court of Russia reversed the decision, citing in support of its decision the prior judgments of the court on this issue. Further, the Supreme Commercial Court of Russia stressed that the principle of objective independence is more important than actual bias and that there were sufficient grounds to assume that the principle of objective independence was breached due to the close connection between the plaintiff and the arbitral institution.
Accordingly, the Supreme Commercial Court of Russia reversed the ruling of the Federal Arbitrazh Court of Moscow Region and upheld the original ruling of the Arbitrazh Court of Moscow which rejected the application for enforcement of the arbitral award. The court’s decision dated 29 October 2013, published on 25 February 2014, is available here.
Although the Gazprom Arbitration Court has a good reputation in Russia and its arbitrators have a profound knowledge of the law, the approach of the Supreme Commercial Court of Russia will help to mitigate the reputation of Russian arbitration as a ‘pocket court’ (see: The Russian Arbitration Association—what you need to know).
There is no doubt that the decisions of the Supreme Commercial Court of Russia are going to influence the further, hopefully positive, development of arbitration in Russia and it is now clear that cases cannot be resolved by arbitration institutions affiliated with one of the parties to the arbitration.