Legal: From Russia without love

International construction arbitration practitioners often stress the positives of arbitration: using the so-called “five Es” of efficiency, expedition, expertise, evenhandedness and enforceability.

The Russian Supreme Court has placed enforceability in serious doubt by holding that a standard form ICC arbitration clause is unenforceable under Russian law because there was insufficient evidence that the parties had agreed on a specific institution to administer the dispute.

The jurisprudential and procedural consequences of this decision are significant.

What does this ruling mean for those contractors, consultants and suppliers that have arbitration agreements with Russian parties? 

Contractors and consultants on international projects need to think carefully: if things go wrong, how will we get paid and how and where would we enforce an arbitration award?

The case concerns a building contract between Luxembourg-based Dredging and Maritime Management SA and Russian construction firm  InzhTransStroy. It contained a standard ICC arbitration clause providing that all disputes would be settled through ICC arbitration seated in Geneva.

The clause stated “all disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said rules”. 

Experienced readers may now be saying “What’s the problem?” since the first article of the ICC rules agreed between the parties refers to the International Court of Arbitration of the International Chamber of Commerce as the administrative body for resolving disputes under those rules.

In May 2014, the tribunal hearing the case – chaired by a Swiss arbitrator and including an English QC and an England and Wales High Court judge – awarded Dredging and Maritime Management €3.6m in damages, plus interest at 5% per annum from November 2010 until the date of payment. In 2015 InzhTransStroy was made the subject of bankruptcy proceedings and eventually reached settlement with its creditors, agreeing to pay the debts in instalments.

Dredging and Maritime Management filed to enforce its award in the Russian courts in September 2017. In February 2018 the Moscow Arbitrazh Court refused enforcement on two grounds: first, it found that since InzhTransStroy was still subject to insolvency proceedings, enforcement of the arbitration award could prejudice other creditors and would be in violation of Russian public policy.

Those who have the standard ICC arbitration clause in their contract with a Russian party should consider amending it

Second, it found the failure of the standard ICC arbitration clause to nominate a specific arbitral institution to administer the proceedings meant the tribunal had lacked jurisdiction. The Russian Supreme Court upheld that conclusion. 

What does this mean in practice?

For one thing, those who have the standard ICC arbitration clause in their contract, appointment or supply contract with a Russian party should consider amending it (and the standard arbitration clauses of any arbitral institution) to make it clear that all disputes shall be referred to arbitration and administered by a specific named arbitration institution as recorded in that institution’s rules.

The problem may not be limited to the ICC standard clause – for example, the London Court of International Arbitration standard clause refers to the arbitration rules but does not expressly name the arbitration court. 

While the Russian Supreme Court judgment does not set an automatic binding precedent under Russian law, it may well have a strong persuasive effect and perhaps indicate a Russian response to more recent geo-political issues and the sanctions.

The arbitration world is concerned, and the president of the ICC Court has already written to the chair of the Russian Supreme Court for a clarification on how the Supreme Court was able to undermine the enforceability.

Putting aside academic debates and jurisprudential thoughts on the application of the rule of law, this judgment sends a tangible warning to all of us who participate in cross-border trade and commerce.

Contractors and consultants on international projects need to think carefully and strategically about the “road-map to the money”. Put another way: if things go wrong, how will we get paid and how and where would we enforce an arbitration award? Too often the temptation to press the dispute button trumps rational analysis of this “road-map to the money”. 

The problem in this sector is that standby letters of credit, guarantees and bonds can only provide a partial solution. With the UK domestic market weakening, the desire for international engagements increases, bringing greater risks. 

Many will say that international construction arbitration is the lifeblood of international construction and trade, but it may just be more pragmatic for us to treat international arbitration as a design code and thus stress test it robustly for the gaps and failure points.

Hamish Lal is a partner in Akin Gump Strauss Hauer & Feld