REUTERS | Ilya Naymushin

Arbitration of shareholders disputes in Russia: bending natural limits of arbitration?

It is trite law that arbitration is a consensual matter. The source of arbitrators’ powers is found in the relevant arbitration agreement. By contrast, parties have access to at least some competent court as of right, and the court’s power is vested in the relevant procedural law. This distinction has a number of important practical consequences, in particular when it comes to the binding effect of decisions rendered by arbitrators and judges. Whereas courts are usually able to issue decisions binding on the third parties (be it an interim order, an order for production of documents or an order for joinder of a third party), arbitrators’ powers are limited by the consent of the parties, being the natural limits of arbitration.

However, this distinction usually has only limited practical relevance. Many contractual disputes involve two parties only, so the natural limits of arbitration do not cause any difficulties. However, as the world economy becomes more complicated, so do contractual relationships. For example, many large construction projects or financial transactions involve a significant number of parties playing different roles in fulfilment of the project. Accordingly, in many instances it is preferable to resolve all of their disputes in one go. To address this, most arbitral institutions have revised their rules recently to provide for multiple party arbitration, including disputes involving multiple contracts, joinder of additional parties and consolidation of the proceedings.

However, it seems that the recent Russian arbitration law reform has bent the natural limits of arbitration to the extreme (and possibly beyond) with respect to shareholder disputes.

By way of background, shareholder disputes within Russian companies can be resolved by Russian arbitrazh (commercial) courts. The legislature developed a number of checks and balances to limit the possibility of abuse, which is common to Russian corporate war practice. Importantly for the present topic, they included the right of shareholders to join a dispute, in particular where the dispute relates to challenges to various corporate resolutions, as well providing that shareholders who have not joined the proceedings are still bound by the decision and cannot bring a separate claim for the same remedy after the decision was made. Also, the procedural rules provide for the mandatory consolidation of the proceedings relating to the same issue (for example, challenges to the same resolution of a shareholders’ meeting). All these provisions were intended to ensure that a company does not have to fight multiple cases relating to the same issues, and that all parties wishing to litigate a particular issue must do it together with other shareholders, or be deemed to have waived the right to bring a new claim.

As the recent arbitration reform allowed these categories of cases to be arbitrated, in arbitration practice the relevant rules of the legislature were also to be imported.

The legislation imposed a requirement that all potential parties to a shareholder dispute (that is, all of the shareholders and the company itself) be parties to an arbitration agreement. This way, the fundamental requirement of consent could be met, as all of the potential parties to the arbitration would be bound by an arbitration agreement.

Unfortunately, the legislation is rather unclear as to the ways to meet this requirement. Clearly, there could be a separate arbitration agreement entered into between all of the shareholders and the company, but this may not work if the shares are sold to a third party, which is not willing to adhere to the existing arbitration agreement. The new laws also allow inclusion of an arbitration agreement into the charter (articles of association) of a company. However, the laws fail to clarify who would be bound by agreements incorporated in the charters, and in particular, to what extent and under which conditions they may be binding upon the new or former shareholders. While the arbitration rules for corporate disputes of the International Commercial Arbitration Court at the Russian Chamber of Commerce and Industry and the Russian Arbitration Association, try to tackle this issue by imposing a binding effect of the clause on both former shareholders (who held shares at the time the arbitration agreement was in place) and new shareholders, it cannot be certain that this approach will be supported by the state courts.

But the reason for introducing the requirement that all potential parties to the shareholder disputes shall be bound by an arbitration agreement is quite obvious. It is needed to ensure that all of the shareholders have similar rights in similar situations, irrespective of whether the case is resolved by the Russian court or by the arbitrators. Nevertheless, the legislator failed to draw the distinction between shareholder disputes, which potentially concern all shareholders (for example, invalidation of the shareholders’ meeting resolution), and the cases involving only two disputing parties. For example, it is not uncommon for two majority shareholders to enter into a shareholders’ agreement to govern their relationships. In reality, disputes under such an agreement rarely need to involve the remaining shareholders or the company, as their rights would not be directly affected by the outcome. However, the existing legislation does not allow for this. On the contrary; on the literal reading of the legislation, such disputes may only be arbitrated under an arbitration agreement extending not only to the parties to the shareholders agreement, but also to the remaining members of the company and the company itself.

Furthermore, the legislation provides for an unconditional right of each shareholder to join the arbitral proceedings at any stage. While the shareholders would have to accept the proceedings as they are at the time of joinder, the exact procedural status of the joining parties is not provided for in the relevant legislation. The laws only state that such joining parties would have the same rights and duties as the existing parties. The legislation also imposes no limitation for the introduction of new claims by the joining parties against the existing parties. This means that the arbitral proceedings may potentially become largely unmanageable as a result of multiple joinders and multiple cross-claims.

At the same time, the legislation provides for the mandatory consolidation of arbitral proceedings relating to the same issue. While this provision is intended to replicate the position under Russian procedural legislation, this could mean that a shareholder could be blocked from introducing its own claim in separate arbitral proceedings, where the same discreet matter is introduced as a cross-claim by one of the joining parties in the existing arbitration. The shareholder would, therefore, be precluded from running its own show, including participating in the appointment of the tribunal.

Oddly enough, this may potentially also jeopardise the claimant’s control over the proceedings it initiated. A situation may arise where, after a number of joinders and the consolidation of various cross-claims, the parties find themselves arbitrating a number of separate, albeit vaguely related, claims, which involve some of the claims in different combinations but in one set of proceedings. It is difficult to see how this result is desirable from an efficiency perspective, but it is even more difficult to see how any tribunal could manage these sorts of proceedings and still render an enforceable award.

Lastly, there is an issue as to what happens when not all of the shareholders join the arbitral proceedings. Apparently, they would still be bound by the award and would not be able to arbitrate the same matter anew. This res judicata effect on a non-participating signatory of an arbitration agreement would is at odds with the traditional limits of the arbitrators’ authority.

The new arbitration reform is probably an example of judicialisation of arbitration at its extreme, where the legislator simply seeks to replicate the procedural features that are customary in state court litigation by relying, at the same time, on the contractual nature of arbitration. The question is whether this should be done at all, or whether we should simply accept that arbitration has its natural limits and reject the idea of pursuing arbitration where these natural limits would be overstepped.

Norton Rose Fulbright Andrey Panov

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