Russia: competence and the Convention on Protection of the Rights of the Investor

In the recent Russian cases Kyrgzstan v Lee John Bek and Kyrgyzstan v Stans Energy Corp the claimant State sought the revision of an arbitral tribunal’s interim award on grounds that it lacked competence. Although the Moscow Arbitrazh Court rendered two decisions (on 24 June 2014 in Lee John Bek and on 8 July 2014 in Stans Energy Corp) which confronted the issue of whether or not the arbitrators had competence to hear the disputes, the position of the court raised more questions on this issue than there were before. Mikhail Samoylov, Senior Associate at KIAP Attorneys at Law and Leixs®PSL Arbitration contributor discusses the decisions.

The scope of the Convention

The Convention on Protection of the Rights of the Investor was signed on 28 March 1997 in Moscow (the Convention). The Convention provides a certain guarantees for the protection of rights of the investors and has a number of features.

First and foremost, the Convention applies to investors both of the State signatories to the Convention and to the investor of non-member states as well (art 3). Moreover, the Convention provides a wide dispute mechanism option for disputes arising in connection with implementation of investments, namely, art 11 stipulates the following:

'Disputes as regards implementation of investments within the framework of this Convention shall be considered by courts of justice or courts of arbitration of the countries that are participants in disputes, the Economic Court of the Commonwealth of Independent States and/or other international courts of justice or international courts of arbitration.'

The Convention has entered into force for six signatories, namely, Armenia (with reservation), Byelorussia, Kazakhstan, Kyrgyzstan, Moldova and Tajikistan (Russia originally signed the Convention, but the signature was revoked in 2007) but in accordance with art 3 investors may be states or legal and physical persons both of the parties and investor a non-member state, unless the national legislation of the parties stipulates otherwise. Accordingly the above terms of the Convention allows both legal persons and individuals of a non-member state to ask to apply the Convention if they have invested in a signatory country. Lee John Bek (The Republic of Korea) and Stans Energy Corp (Canada) separately invested in Kyrgyzstan but the host country officials made it impossible for investors to continue working in Kyrgyzstan thus, cases Lee John Bek and Stans Energy Corpwere separately submitted to the Arbitration Court at the Moscow Chamber of Commerce and Industry under its rule.

Arbitration under the Convention in the Arbitration Court at the Moscow Chamber of Commerce and Industry

Usually, agreements on investment protection contain an explicit dispute resolution clause for resolving disputes relating to the implementation of investments, which will specify that such disputes are to be resolved by litigation or by arbitration or both. Provided such clauses are clear and certain, there should be no dispute as to who has jurisdiction to hear the relevant disputes. In contrast, art 11 of the Convention provides almost unlimited opportunities for arbitration around the world. Accordingly, Lee John Bek and Stans Energy Corp filed their action against Kyrgyzstan in the Arbitration Court at the Moscow Chamber of Commerce and Industry, and stated:

Wording of this Article does not contain a reservation to the effect that only the courts are concerned which will be agreed upon by the countries-parties to the Convention. Hence, Article 11 of the Convention for the Protection of Investor’s Rights contains an evident offer. The State grants to the Investor the right to apply to any international arbitration court. The Investor is entitled to choose such court on its own, taking into account that such court should have jurisdiction to examine international disputes (be international) and should have jurisdiction to examine investment disputes. The Investor has the right to apply to any of them. At the moment of application acceptance of offer takes place and an arbitration agreement is made (para 6 of the statement of claim).

Article 3(1)(3) of the Rule of the Arbitration Court at the Moscow Chamber of Commerce and Industry provides:

'Any dispute arising out of contractual and other civil law relations may be referred to the Arbitration by agreement of the parties, unless otherwise stipulated by the federal law, including: civil law relations disputes out of which may be referred to the MCCI Arbitration include, in particular…disputes in the sphere of investment activity.'

Accordingly, the claimant submitted that 'the Investor’s application to the Arbitration of the Moscow CCI should be considered as corresponding to the intention of the states-parties to the Convention for the Protection of Investor’s Rights'.

It should be noted that the Stans Energy Corp and Lee John Bek had the same legal representative; consequently, the motivation to submit the dispute to the Arbitration Court at the Moscow Chamber of Commerce and Industry in Lee John Bek case could be similar to that in the Stans Energy Corp case.

Unsurprisingly Kyrgyzstan failed to agree the competence of the arbitral tribunals, while, the arbitrators recognized its competence to resolve these disputes. Kyrgyzstan challenged the competence of the arbitral tribunals in the Moscow Arbitrazh Court.

Litigation in the Moscow Arbitrazh Court

The claimant’s reliance on the clause to found the tribunal’s competence of the Arbitration Court at the Moscow Chamber of Commerce and Industry was criticized in Russian legal press but it was accepted by the arbitrators. Kyrgyzstan asserted that art 11 of the Convention contains an 'open offer' and if Kyrgyzstan had accepted it the arbitration agreement would have been concluded. Furthermore, Kyrgyzstan brought a case before the CIS Economic Court (case No 01-1/1-14) regarding the interpretation of art 11 of the Convention and moved the motion to suspend litigation in the Moscow Arbitrazh Court pending the decision of the CIS Economic Court but the motion was dropped out by the Moscow Arbitrazh Court.

It was hoped that the Moscow Arbitrazh Court would give clear guidance on the competence of arbitral tribunals or come to a different conclusion about the absence of it but the Moscow Arbitrazh Court rendered even more strange decisions.

The decisions

The Moscow Arbitrazh Court, relying on art 150(1)(1) of the Commercial Procedural Code of the Russian Federation, decided to terminate both proceedings because the court found that it did not have jurisdiction to hear the cases due to following.

Currently, Russia has two arbitration regimes. The Federal Law No 102-FZ, 24 July 2002, 'On arbitral tribunals in the Russian Federation' which regulates domestic arbitration, ie internal commercial disputes without any foreign elements; and the Federal Law No 5338-1, 7 July 1993, 'On International Commercial Arbitration' which regulates international commercial arbitration, ie disputes with a foreign element such as when parties are located in different countries or when a foreign substantive law is to be applied.

In accordance with art 16(3) the Federal law 'On International Commercial Arbitration' if the tribunal rules that it has competence, any party may request a court to the revise of the arbitration tribunal’s interim award on its competence. Whereas, the Federal Law 'On arbitral tribunals in the Russian Federation' does not provide such an opportunity for a party if a domestic arbitration tribunal decided it has competence, parties cannot challenge it. The Supreme Commercial (Arbitrazh) Court confirmed it on Resolution № 9521/10 of 23 November 2010.

The Moscow Arbitrazh Court stated that issue of competence of the Arbitration Court at the Moscow Chamber of Commerce and Industry in Lee John Bek and Stans Energy Corp cases should be tried under the Federal Law 'On arbitral tribunals in the Russian Federation' but not under the Federal law 'On International Commercial Arbitration'. Consequently, as under domestic Russian law a party is unable to challenge a tribunal’s interim ruling on its competence, the Moscow Arbitrazh Court ruled to terminate both proceedings (one judge of the Moscow Arbitrazh Court heard both cases).

Conclusion

In my opinion, the decisions of the Moscow Arbitrazh Court are rather controversial especially in the absence of proper reasoning for the decisions. The decisions say nothing about which criteria were used to reach the conclusion that it is subject to domestic arbitration.

In its rulings, the court determined that these two cases were domestic arbitrations despite none of the parties being resident of the Russian Federation. In my view it is logical tht these arbitrations were international ones. Thus, the Russian law on international commercial arbitration should have been applied.

Moreover, the Moscow Arbitrazh Court noted that the decisions may be appealed only in the Federal Arbitrazh court of the Moscow District, the Court of the third instance, which examine subordinate decisions on cassation appeals to ensure compliance with the substantive and procedural law. However, in accordance with art 151 of the Commercial Procedure Code of the Russian Federation if a proceeding is terminated under art 150(1)(1) of the Commercial Procedure Code of the Russian Federation the parties have the right to appeal either in a Arbitrazh court of appeal (in this case, the Ninth Arbitrazh Appellate court) or in a court of cassation appeals (in this case, the Federal Arbitrazh court of the Moscow District).

Now, Kyrgyzstan has filed two cassation appeals but the hearing dates have not been set. So, it is not the end of this litigation story and perhaps participants will get a more clear guidance on the competence of arbitral tribunals under the Moscow Convention on Protection of the Rights of the Investor.

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