Arbitrability of corporate disputes: dispute in relation to "Delovye Linii"

The Arbitrazh Court of St Petersburg and the Leningrad Region (AC) in its Ruling dated 21 October 2021 in case No. А56-25416/2021 declined recognition and enforcement of the foreign arbitral award (Ruling) and in doing so the AC (1) broadly interpreted the concept of corporate disputes, and (2) applied restrictions on the arbitrability of corporate disputes.

According to the AC, the dispute resolved by arbitration under the LCIA Rules in relation to an option agreement with respect to shares in a Cypriot company was actually a dispute related to establishing, managing or participating in a Russian legal entity, ie a corporate dispute subject to the restrictions provided for by Russian law.

The AC held that the arbitration clause providing for an arbitration under the LCIA Rules was unenforceable and the dispute should have been heard in a Russian arbitrazh court.

1. Background

1.1 The Ruling refused to recognise and enforce the Corrected LCIA Award (as defined below) in the dispute in relation to  “Delovye Linii”:

1.1.1 Under the Option Agreement, Doglemor Trade Limited and A.A. Bogatikov undertook to transfer shares in DL Management Limited in favour of Caledor Consulting Limited and M.V. Khabarov. DL Management Limited was to become the sole owner of the “Delovye Linii” Russian group of companies.

1.1.2 The tribunal under the LCIA rules granted the claim of Caledor Consulting Limited and M.V. Khabarov against Doglemor Trade Limited, DL Management Limited and A.A. Bogatikov, recognised the unilateral termination of the call option agreement with respect to shares in DL Management Limited as lawful and awarded damages jointly with the respondents in the amount of USD 58 million.

1.1.3 On 25 November 2020, the AC refused to recognise and enforce the LCIA award. The court justified the refusal by a calculation error on the part of the arbitrators (the arbitrators had not deducted but had added the amount of “tax risks” to the enterprise value).

1.1.4 On 23 February 2021, the tribunal under the LCIA Rules issued a corrected award, which reduced the amount of the awarded damages to USD 49 million (“Corrected LCIA Award”). Caledor Consulting Limited sought recognition and enforcement of the Corrected LCIA Award before the AC.

2. The AC's Position

2.1 The AC, while accepting that the arbitrators had corrected the previous error, nevertheless refused to recognise and enforce the Corrected LCIA Award, stating the following.

In recalculating the enterprise value, the arbitrators changed, on their own, the EBITDA estimate (for which there had been no previous error) without obtaining additional expert evidence. The AC held that such an arbitrary estimate contradicted the mandatory provisions of Russian law (because, according to the AC, “the losses were awarded in an arbitrary amount”), therefore the Corrected LCIA Award violates Russian public policy.

2.2 Important: According to the AC, the dispute considered in the LCIA arbitration (under an option agreement with respect to shares in a Cypriot company) was actually a dispute related to establishing, managing or participating in a Russian legal entity, ie a corporate dispute subject to the restrictions provided for by Russian law: “The use of a foreign holding structure for the actual management of Russian companies was of a formal legal and technical nature. Therefore, based on the actual intention of the parties to the Option Agreement to regulate corporate relations in Russian corporations, their relationship arose and was aimed at participating in and managing Russian entities.”

The arbitration clause providing for the LCIA arbitration was deemed unenforceable and the dispute, according to the AC, should have been heard in a Russian arbitrazh court. The AC declined to recognise and enforce the Corrected LCIA Award.

3. Conclusions

3.1 It is hard to say at this stage whether the Ruling will set a new conservative trend in Russian court practice regarding the arbitrability of corporate disputes, whether the Ruling will be set aside subsequently, or whether it will remain a sole example of such an approach.

3.2 However, the Ruling demonstrates additional risks and uncertainties in the event that disputes arising out of “offshore transactions” (e.g. in relation to shares in Cypriot or other foreign holding companies) are referred to arbitration institutions that do not have the status of “permanent arbitration institutions” in Russia (for example, the LCIA) and there is need to recognise and enforce such arbitration awards in Russia.

3.3 We will monitor whether the parties will appeal the Ruling in the Arbitrazh Court of the North-Western District and the Supreme Court of the Russian Federation.

We advise you to consult your legal counsel to understand how the abovementioned news may work in your situation.