Supreme Court Rejects Formalistic Approach to Contractual Terms

On June 14, 2011 the Supreme Commercial Court of the Russian Federation rendered a decree (case No.А40-4113/10-25-33) to enforce an arbitral award which had been handed down by the International Arbitral Centre of the Austrian Federal Economic Chamber in Vienna on August 19, 2009. The award was in favour of Hipp GmbH & Co. Export KG (“Hipp”), an Austrian producer of organic food for children, against its Russian distributor OOO “SIVMA. DETSKOE PITANIE” (‘Food for Children’) and ZAO “SIVMA”.

The courts of lower instances refused to enforce the award on the ground that the arbitral tribunal exceeded its authority, misapplied the agreements between the parties and, generally, was incompetent to hear the dispute in question.

It is important to note that the case was heard by the courts of the first and cassation instances twice (at first, the Court of Cassation returned the case to the court of the first instance; then, paradoxically, it upheld the ruling of the court of first instance which was based on similar grounds as before).

In particular, on March 25, 2010 the court of the first instance refused the enforcement of the award on the ground that the contract applicable to the dispute failed to specify the competent arbitral tribunal. The arbitration clause stated that disputes must be resolved by the ‘arbitration court of the state of the Seller’ (in the English text of the contract, even simply by “Shiedsgericht”).

The courts found that the parties failed to agree upon the arbitral tribunal. The court held that the wording was insufficiently clear to create a valid arbitration agreement; the tribunal had applied a wrong agreement to the relations between the parties; the guarantee of ZAO “SIVMA” of the fulfilment of obligations by OOO “SIVMA. DETSKOE PITANIE” was void under Russian law as the principal obligation already ceased to exist by the time of entering into such guarantee.

The parties involved in the dispute had entered into several agreements:

  1. Contract of sale and delivery N 01/2000 between Hipp and OOO “SIVMA. DETSKOE PITANIE” of September 11, 2000 valid until March 15, 2002 (“Contract No.01/2000”);
  2. Contract of sale and delivery N 01/2001 between Hipp and OOO “SIVMA. DETSKOE PITANIE” of July 01, 2001 annually renewed and valid until December 31, 2007 (“Contract No.01/2001”);
  3. Exclusive distribution agreement between Hipp and OOO “SIVMA. DETSKOE PITANIE” of July 6, 2005 (“Distribution Agreement”);
  4. Guarantee of November 06, 2006 whereby ZAO “SIVMA” agreed to be joint and severally liable to Hipp for the obligations of OOO “SIVMA. DETSKOE PITANIE” resulting from delivery of goods (“Guarantee”).

Both the Distribution Agreement and the Guarantee contained similar arbitration clauses providing for resolution of all disputes under the Vienna Rules. Under article 8 of contract N01/2001 all disputes had to be referred to “the Arbitration court of the Seller’s state”. The court found that the applicable agreement was contract N01/2001, not the Distribution Agreement or the Guarantee.

The decision of the lower court was overturned by the Court of Cassation (Federal Commercial Court of the Moscow Circuit) on May 27, 2010. The court indicated that the arbitral tribunal had already established that two contracts had to be considered for the case at hand: contract N01/2001 and the Distribution Agreement.

Those findings pertained to the substance of the dispute. Under Russian law state courts may not review the awards on the merits.

The Court of Cassation also noted that the court of first instance failed to take into account the fact that the Guarantee provided for the resolution of all the disputes at the International Arbitral Centre of the Austrian Federal Economic Chamber under its Rules.

On the second consideration the same judge at the court of first instance reconsidered the case but came to similar conclusions notwithstanding the Federal Court’s request not to review the award on the merits and again refused recognition and enforcement of the award on the grounds of public policy and Article V(1)(c) of the New York Convention.

The panel of judges of the Supreme Commercial Court which transferred the case to the Presidium of the Supreme Commercial Court pointed out that neither of the parties had challenged the competence of the International Arbitral Centre of the Austrian Federal Economic Chamber in Vienna during the arbitration. The respondents actively participated in arbitration (appointed the arbitrators, provided written statements, took part in the hearings) with no objections to the competence of the arbitration and subsequently did not challenge the award in Austrian courts.

Thus, all the parties had agreed to the competence of this arbitral tribunal. Besides, the International Arbitral Centre of the Austrian Federal Economic Chamber in Vienna was, in fact, the only permanent international arbitration institution in Austria, so there was no area for misunderstanding between the parties.

The arbitral tribunal resolving the competence issue took into account that the distribution agreement formed a general basis for sale of food to OOO “SIVMA. DETSKOE PITANIE”.

The contracts of sale and delivery and any addenda provided for specific periods of time and specific amount of money and were necessary to comply with Russian currency and tax requirements.

The Presidium of the Supreme Commercial Court agreed with the approach of the panel of the Supreme Commercial Court judges.

Also, the Supreme Commercial Court disapproved the approach of the lower courts which ruled that the arbitral tribunal had applied the “wrong” agreement as such approach amounted to the review on the merits.

This is not the first time when the Supreme Commercial Court rejects formalistic interpretation of the rules applicable to arbitration and the arbitration clauses.

This case was “simple” enough as parties didn’t object to the competence of the arbitration tribunal during the hearings and made no efforts to challenge the award in Austrian state courts.

At the same time, in practice there are cases when parties which oppose competence of certain arbitration tribunal just have to participate in the hearings to protect their interests. It is no secret that abstention from participation in arbitration (even if you believe the tribunal is incompetent) aggravates the risk of loss. In such c