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You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Maximov v Open Joint Stock Company "Novolipetsky Metallurgichesky Kombinat" [2017] EWHC 1911 (Comm) (27 July 2017) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2017/1911.html Cite as: [2017] EWHC 1911 (Comm), [2017] 2 CLC 121, [2017] 2 Lloyd's Rep 519 |
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QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
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B e f o r e :
(sitting as a Judge of the High Court)
____________________
NIKOLAY VIKTOROVICH MAXIMOV |
Claimant |
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- and - |
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OPEN JOINT STOCK COMPANY "NOVOLIPETSKY METALLURGICHESKY KOMBINAT" |
Defendant |
____________________
for the Claimant
Michael Brindle QC, Ciaran Keller and Thomas Munby (instructed by Debevoise & Plimpton LLP) for the Defendant
Hearing dates: 19-22 and 26-27 June, and 3-4 July 2017
____________________
Crown Copyright ©
Sir Michael Burton:
"No less important is the fact that during this long period the Company, being the controlling shareholder of the Issuer, had sufficient opportunity to discover all the circumstances affecting the Purchase Price for the Shares and to provide such circumstances in due course during these arbitration proceedings.
If any violations of the Company's rights as a buyer took place due to any actions or omissions on the part of the Individual as seller, the buyer is still entitled to file the corresponding claims according to the law and the agreement and seek legal recourse to protect its civil rights (article 12 of the RF CC). This however, does not exempt the buyer from an obligation to pay the purchase price if such an obligation was not duly performed. Thus, the seller is entitled to demand timely performance of said obligation.
The Company had the opportunity to make a counter-claim to defend its rights during this arbitration proceedings, however it did not use it. Moreover, the Company still has the procedural ability to file a claim on these grounds within separate proceedings.
Under the given circumstances the arbitrators find no grounds to satisfy the motion to suspend the proceedings.
Given the above …….the arbitrators rule as follows:
1. To not allow the Company to amend its counter-claim and its statements in relation to the initial claim, given the delay;
2. To dismiss the Company's motion to suspend arbitration hearings in the present case;
3. Taking into account the stage of the proceedings and conclusions of the arbitrators regarding submissions made by the Parties upon conclusion of the oral hearings, to dismiss any additional submissions of the Parties on the issues reviewed in this ruling."
(1) The Defendant had issued a claim in the Moscow Arbitrazh Court on 16 March 2011 that the SPA was null and void on the basis that it was procured by fraud: this was challenged by the Claimant on the basis of the arbitration clause in the SPA, which was upheld at first instance by the Arbitrazh Court ('the jurisdiction challenge').
(2) The Defendant applied to ICAC that the Arbitrators should be recused on grounds of their delay, which was first rebutted by the Arbitrators and then refused by the ICAC Presidium on 30 March 2011, the day before rendition of the Award.
(1) The Claimant's expert, Professor Boris Karabelnikov, gave a persuasive account of what he calls 'political cases', in which favouritism on the part of the Russian courts is at the least a real risk. He refers to the long-running Rosneft dispute in Russia, which led to decisions in Holland and indeed the UK (summarised in Yukos Sarl v OJSC Rosneft Oil Co [2012] EWCA Civ 855), in the course of which Judges Shumilina. Neshateva and Sarbash, all judges in this case, were also involved. Mr Brindle and his expert, Dr Ilia Rachkov, do not accept that political cases extend beyond cases in which the Russian government has a direct or indirect interest, which is not the case here. The Claimant refers to (i) the very influential position in the Russian establishment held by Mr Lisin, who is the majority owner, and controller, of the Defendant (ii) the fact that in somewhat unexplained circumstances a letter which the Defendant had received direct from the offices of those known to be very close to both Mr Putin, then Prime Minister, and Mr Medvedev, then President, giving support to the Defendant's case that the decision of the CCI that they were functus in respect of the recusal application was wrong, was placed in front of Judge Shumilina during the hearing and thus may have influenced her, by showing that important personages were on the Defendant's side and (iii) the eventual outcome, bitterly resented by the Claimant, that as a result of the various Russian court cases he has now lost his interest in the company which he founded (no shares having been returned to him by the setting aside of the SPA) without any recovery of money. Mr Brindle, however, points out that at least some of the decisions in Russia, particularly the early ones, went in favour of the Claimant, and in any event I am completely unable to assess the competing positions put forward in the witness statements for the Claimant and Defendant, to which I will make some further reference below.
(2) The Claimant points with some force to the criticism of the Russian system of courts and justice made in published articles by practising and recently retired judges of the Russian courts, by the UN special rapporteur dated 30 April 2014, with whose conclusions Professor Bevzenko, the Defendant's own expert as to Russian court procedure, expressed agreement in evidence, and indeed to the published public statements by Professor Bevzenko himself as to the Russian judiciary's lack of independence.
(3) It is clear, and almost common ground, that there has been exemplified in the Russian courts, at least until amendments taking effect last year, a bias against international arbitration and against cases being decided by arbitrators rather than in the Russian courts. As long ago as 2006, Professor Karabelnikov wrote an article in Arbitration entitled 'The Supreme Arbitrazh Court of the Russian Federation does not trust international arbitration', and he and Dominic Pellew, a partner in the Russian branch of Lovells, wrote a similar article in the ICC International Court of Arbitration bulletin in 2008.
(4) There was to my mind a disturbing passage in the evidence of the Defendant's expert Dr Rachkov, this against the background of unchallenged evidence from Professor Karabelnikov that this was probably the largest case in terms of amounts at stake then to have come before the Arbitrazh Court. Dr Rachkov said as follows, in answer to a question in cross examination and then continuing in an exchange with me:-
"A. I can imagine that the courts were very cautious, especially in this particular case, because the amount at stake was very substantial, and I think the state is also interested that the value which one party pays to the other party is in line with the market value at least, because the state wants to collect its taxes from the profit generated by Mr Maximov as the seller, and would like to make sure that NLMK does not decrease…..
JUDGE: Is this a motivation for the Court of Appeal to uphold the judgment of Judge Shumilina?
A. My Lord, that's only my guess. I don't know what the judges of the final appeal court had in mind.
JUDGE: But it wouldn't be an acceptable reason, would it, for upholding the judgment that they were worried about the public effect of the judgment?
A. But I think the public effect of the judgment for, I would say, Russia as a whole is considerable, because if the parties substantially overstate the price of the shares, then the payer of the money can deduct these expenses from the profit tax base, and pay less taxes to the state, and this is what the state leaks from. This is not said in the judgment. Perhaps if I would be such a pro-state judge sitting in that panel, I would say that plainly there is an issue with the tax nature of these payments as well, and this is why there is some state interest in not keeping this award alive, but to decide this question from the very beginning before state courts, which happened, as far as I understand, afterwards.
Q. So you're saying that the court could be motivated to conclude that the dispute was not arbitrable, so that it could look into that issue?
A. I wouldn't use the word "motivated" because it has various connotations. I would say the court, or the members of the court being Russian citizens, and getting salaries currently, may have thought this way."
(1) The Non-Disclosure Ground. Although the case was put on a more diffuse basis before Judge Shumilina in submissions, it was in the event argued by the Defendant (and addressed by the judge) on the basis that:
(i) the Arbitrator Professor Zykin did not disclose that as Head of the Section of Legal Issues in International Economic Relations of the Russian Academy of Sciences, he was said to be in a subordinate position at that Institution to one of the experts instructed by the Claimant, Professor Shulzhenko, who was (and described himself in his Report) as Deputy Director; and
(ii) the Arbitrator Professor Belykh, who was Head of Department of Business Law at the Ural State Law Academy, did not disclose that Professor Bublik, one of the experts instructed by the Claimant, also from the same Academy, was Rector of it, and therefore that he was similarly subordinate to him. The position of subordination alone (i.e. not the fact of their being based at the same Institution) was not disclosed, and there was not specifically any discrete finding by Judge Shulimina as to whether that was material to disclose (and Professor Karabelnikov is of the view that the question of alleged subordination as between such distinguished academics is of no materiality).
The Claimant complains as evidence of bias of the way in which the issue of waiver was addressed by Judge Shumilina (and the FAC). The Claimant submits that there was evidence before Judge Shumilina which she could and should have considered, as to what precisely was or could have been known to the Defendant by the expiry of the 15 day period limited for a challenge to the Arbitrators, and certainly long before the Award was delivered. Judge Shumilina made no such finding and concluded, as did the FAC, that such waiver was irrelevant. The SAC does not seem to have addressed the issue at all.
(2) The Public Policy ground. This ground was not raised by either party at the hearing before the judge and she did not raise it herself until it appeared for the first time in her judgment. She concluded that the Arbitrators, in making their assessment of the Net indebtedness of the Maxi-Group companies for the purpose of calculating the amount of Overall Business Value in clause 4 of the SPA, and hence the price payable by the Defendant, did not follow the terms of the SPA and hence (i) there was a breach of the obligation that is imposed (I assume upon the arbitrators as well as the parties) by Article 424 of the Civil Code of the Russian Federation ('the Civil Code') that "performance of a contract is paid for at a price established by agreement of the parties" and (ii) consequently, as she put it, in breach of "the fundamental principle of the Russian law i.e. the legality of the award and in conflict with the public order of the Russian Federation". This the Claimant contends to be a plain evasion of the well-established position, accepted in Russia as elsewhere, that even if arbitrators commit an error of law, that is not a ground for interference by a court with their decision. This ground was upheld by the FAC, and not addressed at all by the SAC. The Dutch Court of Appeal concluded that the SAC was not thereby upholding that ground, but the SAC did not, as it could have done, disapproved of it. The Claimant asserts that this conclusion was so manifestly wrong as to be evidence of bias.
(3) The Non-Arbitrability ground. Again, this was not a ground relied upon by the Defendant, and no notice of it was given to the parties, both of whom had of course consented to and taken part in the Arbitration. Judge Shumilina (upheld on appeal) concluded that (i) corporate disputes even between two parties were not arbitrable but could only be heard in the Arbitrazh Court (ii) the Claimant's claim for the purchase price, which was the only award made by the Arbitrators, was such a corporate dispute. The Claimant submits that this decision, and particularly (ii), was wrong and again evidence of bias.
The Law
(1) The fact that a foreign court decision is manifestly wrong or is perverse is not sufficient (see for example Dicey, Morris and Collins, The Conflict of Laws 15th Ed at 14-163, OJSC Bank of Moscow v Chernyakov [2016] EWHC 2583 (Comm) and Erste Group Bank AG (London) v JSC (VMZ Red October) [2013] EWHC 2926 (Comm)). The decision must be so wrong as to be evidence of bias, or be such that no court acting in good faith could have arrived at it.
(2) The evidence or grounds must be 'cogent'.
(3) The decision of the foreign court must be deliberately wrong, not simply wrong by incompetence.
Evidence
(1) He was driven to abandon as insupportable two of the propositions, highly developed in his reports, in relation to the Non-Disclosure Ground, namely that at Russian law non-disclosure was not waivable (notwithstanding the terms of the Rules), and that the time for challenge did not expire 15 days after awareness of the relevant matters which had allegedly not been disclosed, but 15 days after a disclosure, so that if there was no disclosure then time never ran, meaning that the party could sit on a known defect and only raise it after the arbitration had been completed.
(2) He also abandoned two of his prime propositions in relation to Ground 2, Public Policy. He withdrew his case that the Arbitrators should have determined the purchase price in accordance with the PricewaterhouseCoopers report which they (rightly) found to be totally flawed by virtue of its lack of independence, and he also abandoned his case that the Arbitrators changed or created their own formula for calculation of the price; and he came up with a criticism, not suggested by anyone previously, that the Arbitrators ought to have, on their own account, instructed their own experts. He should have, in my judgment, abandoned, but did not abandon, the rest of his support of Ground 2, given that he was unable satisfactorily to explain what universal principle of public policy the Arbitrators had breached.
Ground 1: Non-Disclosure
(1) The Law of the Russian Federation "On International Commercial Arbitration" dated 7 July 1993 5338-1
"Article 4. Waiver of Right to Object
A party who knows that any provision of … this Law from which the parties may derogate or any requirement under the arbitration agreement has not been complied with and yet proceeds with the arbitration without stating his objection to such non-compliance without undue delay or, if a time-limit is provided therefor, within such period of time, shall be deemed to have waived his right to object.
…
Article 12. Grounds for challenge of an arbitrator
1. When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances likely to give rise to justifiable doubts as to his impartiality or independence. An arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall without delay disclose the emergence of any such circumstances to the parties unless they have already been informed of them by him.
2. An arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his impartiality or independence, or if he does not meet the requirements imposed by the law or the agreement of the parties. A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.
Article 13. Challenge Procedure
1. The parties are free to agree on a procedure for challenging an arbitrator, subject to the provisions of paragraph 3 of this article.
2. Failing such agreement, a party who intends to challenge an arbitrator shall, within 15 days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstances referred to in article 12(2), communicate the reasons for the challenge in writing to the arbitral tribunal. Unless the challenged arbitrator withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge."
(2) Rules of ICAC
"§ 18. Challenge of an Arbitrator
1. Either of the parties may challenge an arbitrator if circumstances exist that give rise to justifiable doubts as to the arbitrator's impartiality or independence, in particular, if it may be assumed that he personally, directly or indirectly, is interested in the outcome of the proceedings. A challenge also may be made if an arbitrator lacks the qualifications stipulated by an agreement between the parties.
A party may send a written notice of challenge stating the reasons therefore to the ICAC within 15 days after being notified of the composition of the arbitral tribunal, or having become aware of circumstances that can serve as a reason for challenge. Unless a party makes a challenge with the period of time referred to above he shall be deemed to have waived his right to challenge."
"However, in breach of above-mentioned provisions arbitrators Zykin L.S. and Belykh V.S. who took part in case consideration did not disclose the information about the inferior relations between them and the consultants who provided the opinions.
Said circumstance is confirmed by the data from official websites of RAS Institute and USLA.
Taken that the parties agreed on the procedure including the determination of the composition of arbitral tribunal according to the Rules providing both the procedure for determination of composition of the tribunal and reasons for challenge of arbitrators, the violations committed testify the violation of the provisions of the Law of the Russian Federation "On International Commercial Arbitration" and the Rules of ICAC at the RFC CI which is reason for setting aside the arbitral award because the composition of the arbitral tribunal and arbitral procedure was not in accordance with the agreement of the parties.
The reference of the interested person's representative to Art.4 of the Law of the Russian Federation "On International Commercial Arbitration" is unsound because the waiver of the right to traverse has no cause-effect relation with the violation by the arbitrator of his duties."
(1) The Defendant had so submitted in the court of argument, as is clear from the transcript.
(2) It formed a significant part of the Claimant's submissions to the FAC on appeal that the judge had (wrongly) so decided.
(3) This was plainly the interpretation of her words by the FAC, which as will be seen below, upheld it on appeal
(4) Although Professor Karabelnikov agreed with Mr Brindle that it was unclear, Dr Rachkov accepted that this is what the judge was saying.
I am satisfied that she was saying that a non-disclosure was not waivable and Dr Rachkov accepted in his evidence that this was wrong.
"The court gave the reasoning that the arbitrators had failed to disclose the fact that they and the signatories of the expert opinions provided by the applicant as part of the arbitration case files were employed in the same educational and scientific research institutions, which raised reasonable doubts with respect to the impartiality and independence of the arbitrators…
The judicial panel of the court cassation instance also agrees with the conclusion of the court of first instance on the contravention of the arbitral award to public order as a result of the violation of the principles of independence and impartiality…..
The judicial panel rejects the objections of the representatives of N.V. Maximov that such circumstances could be established by the counterparty independently on the basis of the case files and that the counterparty was familiar therewith and that the provisions of the relevant Articles 4,13(2)(3)….were not applied; because in this situation it is of legal relevance to exclude doubts as to the impartiality of the tribunal during the arbitration proceedings by way of fulfilment by the arbitrators of their obligations to disclose the circumstances…. Herewith it is not of legal relevance whether a party would have in fact realised its right to oppose the attachment of the expert opinion to the case files or its right to challenge the arbitrators, or the possibility (or lack thereof) of satisfying the challenge [to] arbitrators on such grounds.
It is a fact that the arbitrators did not fulfil their legal obligations to disclose circumstances which would cause reasonable doubts that it is a violation of the principle of impartiality and independence. Such violation of law by the arbitrators is irreversible and undermines the legality of the arbitral award."
"The courts have found that the arbitrators had failed to disclose the information that they and the signatories of the expert opinions adduced by N.V. Maximov to the case files had employment relations with the same educational and scientific research institutions, which raises reasonable doubts as to the impartiality and independence of the arbitrators."
Ground Two: Public Policy
"4. Overall Business Value
….
For the purposes of this Agreement and for the Transaction B the Overall Business Value shall be calculated according to following formula: 73,298,400,000…rubles minus "net" indebtedness of the Group's Companies. "Net" indebtedness of the Group's Companies shall be considered as a difference between (i) total sum of short-term and long-term indebtedness of the Group's Companies and (ii) total sum of current assets of the Group's companies (in each case as per Closing Date).
For the purposes of Overall Business Value calculation the Parties shall arrange due diligence procedures in relation to the Group's Companies with participation of (in the part of financial audit) external financial advisor – PricewaterhouseCoopers, which shall draw up an unqualified reasonable assurance engagement report prepared in accordance with International standard on Assurance Engagements (ISAE) 3000, … regarding accuracy of calculation of the Group's Companies "net" indebtedness (for the purposes of Transaction B, the data of RAS financial accounting of the Group's Companies as per date of transfer of OSJC Maxi-Group shares in favor of OJSC NLMK shall be used….). The Parties shall do their best to calculate Overall Business Value within 90 days from the date of this Agreement…"
"6.4. Given these circumstances the arbitrators find that (i) the case files contain various financial report date from Group Companies (Source Data 1and Source Data 2) presented by the same party – OJSC "Maksi-Grupp" with a gap of more than 1 year (September 2008 and December 2009); (ii) neither of the Parties presented evidence unambiguously showing that the source data to which the other Party refers to was inaccurate; (iii) the numbers in the source data do not match.
6.5. The arbitral tribunal has repeatedly taken steps to establish the causes for the discrepancies between the figures in Source Data 1 and Source Data 2 and suggested that the Parties compare the Source Data used in the Net Indebtedness calculation or present joint suggestions regarding a third-party expert evaluation of the disputed issues (letter from ICAC of May 25, 2010, ICAC ruling of September 6, 2010).
The Parties elected not to have a third-party expert review conducted, despite the fact that the arbitrators repeatedly pointed out to the Parties' representatives that appointing a third-party expert panel review would be in the interest of both Parties, since such a review, in any scope, given the serious disagreements between the Parties, carried out by a competent and independent party could help determine the correct amount of the Net Indebtedness and, consequently, the price of Shares.
Despite the suggestions of the arbitrators, the Parties also failed to compare Source Data 1 or Source Data 2 and establish the reasons for the discrepancies in their numbers.
Moreover, according to the Parties, confirming the reliability of Source Data and identifying the reasons for the divergences between their figures is no longer possible because, inter alia, neither the Parties nor the Issuer are able to present the original financial documents of all the Group Companies as of December 3, 2007 for an expert to review.
In these circumstances, the arbitrators, in accordance with the authority granted to them under article 19, paragraph 2 of the Law on the ICA and paragraph 31 of the ICAC rules, are forced to use their own estimate of the accuracy and reliability of any given data which was used to calculate the Net Indebtedness on the basis of the evidence available in the case files..
….
7.1 Since in these circumstances the unreliability of Source Data 1 and Source Data 2 cannot be unambiguously established, there is insufficient grounds for not taking these data into consideration in the Net Indebtedness calculation and performing the calculation using solely Source Data 1 or Source Data 2. However as mentioned in paragraph 4 of the Opinion, for the purposes of calculating the Net Indebtedness the accounts receivable must only be include as current assets of the Group Companies.
Accordingly, the amount of the Net Indebtedness has been calculated based on Source Data 1 and Source Data 2."
"Article 421. The Freedom of the Contract…
4. The contract terms provisions) shall be defined at the discretion of the parties…
Article 422. Contract and the Law
1. A contract must comply with the rules mandatory for the parties established by law as well as other legal acts (imperative norms) which are in effect at the time of its conclusion…
Article 424. Price
1. Performance of a contract is paid for at the price established by agreement of the parties…
3. In cases when in a compensated contract a price is not provided and may not be determined proceeding from the terms of the contract, performance of the contract must be paid for at the price that, under comparable conditions, usually is taken for analogous goods, work or services.
…
Article 485. The Price of the Goods
1. The buyer has the duty to buy the goods at the price provided by the contract to purchase and sale or, if it is not provided by the contract and cannot be determined proceeding from its terms, at the price determined in accordance with paragraph 3 of article 424 of the present code…"
"The above-mentioned arbitral award is in conflict with the public order of the Russian Federation.
In accordance with Art 1193 of RF CC, the public order is understood as the basics of the law and order of the Russian Federation including, above all, the fundamental principles of the Russian Law, i.e. the principle of independence and impartiality of tribunal and the principle of legality of the award.
Item 1 of Art. 485 of RF CC states that the buyer is obliged to pay for goods at the price, specified by the contract of sale or, if it is not provided in the contract and may not be defined proceeding from the contract terms, at the price fixed in accordance with Item 3 of Article 424 of this Code.
In accordance with Clause 3 of Art.424 of the RF CC, in the cases, when the price in the pecuniary contract has not been stipulated and cannot be defined proceeding from the contract terms, the performance of the contract shall be re-numerated by the price, which is usually paid under the comparable circumstances for the similar kind of commodities, works or services.
The above norms are imperative and establish the procedure for the definition of the price and are not subject to extended interpretation.
However, the arbitral award goes that the price of shares was calculated by arbitrators as a sum of two summands: the purchase price of shares based on the data submitted by the parties divided by two(item 8.2 page 73 of arbitral award).
That this method of price definition is in conflict with the civil legislation.
Based on the above, the tribunal comes to a conclusion that the challenged arbitral award is not in compliance with the fundamental principle of the Russian law, i.e. the legality of the award, and is in conflict with the public order of the Russian Federation which is a reason for setting aside the arbitral award (paragraph 2 of clause 2 of items 2 of Art.34 of the Law of the Russian Federation "On International Commercial Arbitration"
The judge did not address the fact that in carrying out the exercise the Arbitrators had resolved the disputed issue of accounts receivable.
(1) Whether the Arbitrators failed to comply with the contract.
(2) Whether there was a breach of Articles 424/485.
(3) Whether this, if a breach at all, amounts to more than an error of law, i.e. a breach of fundamental and universal rules of law.
Ground Three: Non-Arbitrability
"Article 33. Special jurisdiction of the arbitrazh courts over cases
1. Arbitrazh courts shall consider the following cases:
…
(2) Over the disputes specified in article 225.1 of this Code.
…
Article 225.1 Cases involving corporate disputes
The arbitrazh courts try cases involving disputes connected with incorporation of a legal entity, its management or participation in a legal entity which is a commercial organisation, as well as in a non-profit partnership, association (union) of commercial organizations, other non-profit organization which unites profit-making organizations and/or sole proprietors, a non-profit organization with the status of a self-regulating organization in accordance with the federal law (hereinafter referred to as corporate disputes) including inter alia the following corporate disputes:
…
2) disputes connected with the ownership of stocks, shares in the authorized capital of business companies and partnerships, participatory interest of cooperatives' members, creating of their encumbrance and exercise of the rights arising out of them, except for disputes resulting from the depositaries' activity connected with registration of rights to stocks and other securities, disputes appearing from distribution of inherited property or severance of community property including stocks, shares in the authorized capital of business companies and partnerships, participatory interest of cooperatives' members"
(1) The contention which was relied upon to suggest that corporate disputes had to be tried in the Arbitrazh Court, and could not thus be arbitrated, was dependent upon an interpretation of Articles 33 and 225.1 set out above. However it is clear that Article 225.1, which was brought in by amendment in 2009, was intended to address allocation between courts, and neither it, nor any of the transitional provisions when it was introduced, in any way addressed arbitration.
(2) There were academic commentators taking opposite positions. Professor Komarov, the leading Russian exponent of arbitration and arbitrability, explained, as did Professor Karabelnikov, that the overriding legal position at Russian law was that arbitration was permitted unless expressly prohibited. Notwithstanding this, Professor Karabelnikov confirmed that there were "divergent opinions".
(3) Only one decision was referred to prior to Judge Shulimina's decision, in the FAC in 2006, which suggested that a corporate claim was not arbitrable, though it was not based upon Article 225.1, which it long antedated, and there were several decisions to the contrary: though Professor Komarov had in 2010 written that an appellate decision would be welcome.
(4) A Constitutional Court decision (10P) of 26 May 2011 dealing with Article 248 of the Arbitrazh Procedural Code which expressly provides for "exclusive jurisdiction of the arbitrazh courts of the Russian Federation over cases involving foreign persons", concluded, notwithstanding the express use of the word exclusive, that Article 248 did not rule out arbitration.
(5) Judge Shumilina's decision on arbitrability was contrary to the decision made only two months earlier by another judge of the Arbitrazh Court, upholding the Claimant's jurisdiction challenge and dismissing the defendant's claim to set aside the SPA on the basis that it should be heard in arbitration, consistent with the earlier decisions on arbitrability to which I refer above. After Judge Shumilina there are many decisions to the same effect as hers, although there continued to be decisions to the contrary until in 2016 the law was changed (though not retrospectively) to encourage and facilitate arbitrability.
(6) The experts have differing views as to the import of the two applications made by the Claimant to the Constitutional Court in this case, and I do not draw any conclusions on them.
"In accordance with …. Article 33 of the Civil Procedural Code…, disputes stated in Article 225.1 .. fall within the jurisdiction of [arbitrazh courts]. In accordance with … Article 225… [arbitrazh courts] consider disputes relating to the ownership of shares, stocks in the authorized (share) capital of corporations and partnerships, stocks of members of cooperative societies, define encumbrances thereof and exercise of rights arising therefrom except disputes arising from the activities of depositaries connected with the consideration of the title to shares and other securities, disputes arising in relation with the severance of property of spouses including shares, stocks in the authorized (share) capital of corporations and partnerships, stocks of members of cooperative societies.
The text of the above-mentioned decision goes that the dispute was considered by the arbitral tribunal under the Agreement of 22.11.2007 which is a share purchase agreement in the legal nature. According to the said agreement, Maksimov N.V. undertook to transfer to OAO NLMK the title to 50 % plus one shares, and OAO NLMK undertook to pay the purchase price to Maksimov N.V.
Share is an equity security fixing the right of its owner (shareholder) to receive a part profit of the joint-stock company in the form of dividends, to participate in the management of the joint-stock company and to a part of property remaining after its liquidation. A share is a registered security …
The dispute related to the transfer of the title fall into the category of corporate disputes
…………
Whereupon, the arbitral award on the claim to collect money contains a conclusion about the performance of the agreement and the transfer of shares (page 59 of arbitral decision) while the conclusion relating to the ownership of shares recorded using a special procedure may be made only by the [arbitrazh court]"
In accordance with Art. 33 of RF CPC containing a direct reference to Art. 225.1 of RF CPC, the case on the dispute between the parties is within the special jurisdiction of the [arbitrazh court], and, consequently, was not subject to consideration by ICAC at the RF CCI.
Said violation is a reason for setting aside the arbitral award on the basis of par. 1 of clause 2 of item 2 of Art. 34 of the Law of the Russian Federation "On International Arbitration."
"The judicial panel of the court of cassation instance accepts that conclusion of the court of first instance as to the non-arbitrability of this dispute by reason of restrictions under federal law.
The court of first instance correctly referred to Articles 33 and 225.1 of the Arbitrazh Procedural Code of the Russian Federation which stipulate the special jurisdiction of arbitrazh courts in corporate disputes.
It was established by the court [of first instance] that the dispute considered by the ICAC was based on the shares in OISC 'Maxi-Group' on 22 November 2007
In addition the court [of first instance] correctly established that the agreement relates to the title to the shares in OJSC 'Maxi-Group'.
Based on a literal construction of the provisions of the agreement dated 22 November 2007, the agreement has a mixed nature. Transaction B (clause 3 of the agreement), being the subject matter of the dispute, does not merely govern the sale of shares but also represents a set of legal relations: the execution of the transaction was subject to the fulfilment of a number of conditions precedent, including the execution of an agreement on corporate governance (clause 3 para 5) an additional issue of shares equalling the total enterprise value and conditions for the payment of the additional issue of shares by the parties (clause 3 para 4). Taking into consideration the mixed nature of the agreement dated 22 November 2007 and the complexity of transaction B under the agreement, it is impossible to sever the payment for the shares from the other terms in transaction B without establishing whether the conditions precedent to the transaction have been fulfilled, the additional issue of the shares has been undertaken and the relevant payment terms complied with, and without considering questions as to the title to such shares. Accordingly, it is unlawful to consider the severability of the arbitrable private law dispute in relation to payment for the shares as a result of compliance with the entire set of conditions in the transaction B and in relation to corporate governance.
…………
The judicial panel of the court of cassation instance has concluded that the indication in federal law (the Arbitrazh Procedural Code of the Russian Federation) of the special jurisdiction of corporate disputes not only evidences the delimination of jurisdiction between the courts of general jurisdiction and arbitrazh courts but also means that such disputes cannot be referred to arbitration. This is due to the specific character of the legal relations which give rise to such disputes in light of the systematic construction of the provisions of Articles 4 and 33 of the Arbitrazh Procedural Code of the Russian Federation. Such position does not contradict either the principle of discretion, which provides that citizens and legal entities acquire and realise their rights by their will and in the interest based on freedom of contract, or the power of the legislation to ensure the balance of public and private interests by way of determining the list of disputes which can be considered only by state courts. Based on the statutory criteria set forth in the form of general rules, the state determines the proper court and procedure for consideration of a particular category of disputes, and thus ensures the balance between private and public interests and provides legal certainty in the state protection of such rights and freedoms. The panel further takes into consideration the fact that arbitral tribunals, by their nature, are private law institutions dealing with dispute resolution.
Given the above, the panel of judges considers that when determining the jurisdiction of the arbitral tribunal, the ICAC failed to examine the nature of transaction constituting the basis for the dispute in sufficient detail, its complexity exceeding the narrow limits of the civil law relations and preventing any severability of the private law dispute regarding the payment of the shares from the entire sent of legal relations in transaction B.
By virtue of Article 34(2)(2) of Law No. 5338-1 "On International Commercial Arbitration" dated 07 July 1993, an arbitral award may be set aside by the court if the court rules that the subject matter of the dispute cannot be the subject matter in arbitration proceedings under the law of the Russian Federation.
The court of first instance lawfully applied this rule of law."
"Furthermore the courts have agreed that the dispute considered by the ICAC is non-arbitrable pursuant to rules in Article 33 and 225.1 of the Russian Arbitrazh Procedural Code in support of such position relying upon paragraph 29 in Letter of Information no. 96 of Presidium of the Supreme Arbitrazh Court of the Russian Federation "Summary of the proceedings before and rulings of the Arbitrazh courts on recognition and enforcement of foreign judgments, challenging the awards of the arbitral tribunals and issuance of writs of execution in respect of the arbitral awards" dated 29.12.2005.
Accordingly, the first and second instance (cassation) courts have reached a proper conclusion to the effect that the ICAC had failed to examine in sufficient detail the nature of the transaction serving as the grounds for asserting a claim, which in turn, resulted in a wrong conclusion in respect of the arbitral tribunal's jurisdiction"
(1) The Claimant's representatives themselves had relied upon and drawn attention to Article 225 at the outset of the hearing in their very first motion made before Judge Shumilina to contend that the application should not be heard in the Arbitrazh Court, but in the ordinary courts because the claim was not a corporate dispute. A ruling was not made on that motion until the end of the hearing, but the application continued in the Arbitrazh Court.
(2) Both parties referred to and relied upon the existence of the fraud allegations, which the Defendant was seeking to bring in by way of support for their set aside application and the Claimant successfully resisted. The Claimant's representatives themselves pointed out the potential inconsistency between the decision in their jurisdiction challenge recently made, and subject to appeal, in relation to the Defendant's claim to set aside the SPA on grounds of fraud, and the application before Judge Shumilina, on the basis that if the SPA were set aside then no purchase price would be due.
(3) Mr Brindle heavily relied upon the use in Article 225 of the words "connected with" and submitted that the claim for the price was "connected with the ownership of…shares".
(4) The Arbitrators had only made an award on the price, having ruled out the counterclaim, but the SPA itself made clear the conditionality of the payment of the price with compliance by the Claimant with his obligations, and he submitted that, albeit that the Arbitrators only decided what was before them, the total dispute involved both the price and the claims of fraud/breach of conditions, with which they were "connected". The arguments as to non-severability, by reference to which the FAC directed itself, and its reference to the "mixed nature" of the SPA, are derived from the Defendant's written submissions in support of their appeal. He submits, though it is not as clearly spelt out by Judge Shumilina as by the FAC, that the dispute could not be seen as one limited to the claim for the purchase price, even though that was the only subject matter of the Award.
Conclusions
(1) Although in general terms academic views were divergent, I am satisfied that there was no or no material judicial authority and certainly none in relation to a case in any way similar to that before her.
(2) It was not raised by the parties. Both of them had taken part in the arbitration, both advised by experienced lawyers, and had appeared before Arbitrators who too were very experienced.
(3) The claim was simply a claim for the price of shares which had been delivered.
(4) Judge Shumilina's own first instance decision, before it was flavoured by non-severability, mixed nature and the persuasive submissions of Mr Brindle, was very thin indeed as her second method of bolstering up the original flawed first ground: the Award contained no "conclusions relating to the ownership of shares".
(1) Mr Brindle may be right, although she did not make this clear, that Judge Shumilina derived the argument about corporate dispute and Article 225 from the submissions that had been made before her at that very hearing, and was influenced in her thinking by it.
(2) The counterclaims had been part of the arbitration until they had been ruled out, and it is right to say that the two are interrelated in the sense that if, as unfortunately for the Claimant subsequently occurred, the SPA were set aside, the claim for the purchase price would fall with it. This would not be a ground for refusing to enforce an award, but it might be a ground for concluding that the whole question ought to be heard in one place and, in the light of Article 225, in the Arbitrazh Court.
(3) Although as I have said in paragraph 22 above, I have derived most of the support for the decisions on Ground 3 from Mr Brindle and his team, it is fair to say that Dr Rachkov, albeit with no great persuasiveness, supported those decisions, and, with a degree of uncertainty, so did the Dutch Court.
Issue Estoppel
Result