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Alexander Muranov and Dmitry Davydenko: Court upholds right to arbitrate real estate disputes

15 June 2011, Categories: Media Profile

On 26 May the Constitutional Court issued Decree No. 10-П evaluating the constitutionality of several provisions of Russian law relating to the competence of arbitral tribunals. Although the court has previously issued brief procedural rulings on international and domestic arbitration, this is the first time it has issued a decree on the subject - and at 40 pages it is uncommonly long.

The presidium of Russia's Supreme Arbitrazh Court (SAC) asked the Constitutional Court to evaluate whether Russia's international commercial arbitration law and the federal law on arbitral tribunals in Russia agree with the Constitution. The SAC had argued that these laws do not contain an exhaustive list of arbitrable or non-arbitrable disputes and hence there was uncertainty on this point. The SAC also challenged provisions in two other laws relating to the arbitrability of disputes on real property rights, as well as article 11.1 of the Russian Civil Code, which provides that "protection of violated or disputed civil-law rights shall be conducted [...] by a court, commercial court, or arbitration tribunal (hereinafter – court)". The SAC argued that this provision equated arbitral tribunals with state courts and thus included them in the Russian state court system, making it possible to conceive a "fallacy" that some disputes with a public element can be arbitrable.

The SAC's purpose in submitting the request was to have the Constitutional Court narrow the scope of competence of arbitral tribunals - in particular, to confirm that arbitrators may not hear disputes relating to immoveable property rights. The SAC reasoned as follows: if arbitral tribunals are not part of the Russian judicial system, then their awards may not have the same public effect as judgments of state courts, they may not hear disputes of public importance (in particular, those relating to immovable property) and an arbitral award is not a ground for the state authorities to register the transfer of rights to immovable property in the public registry.
The Constitutional Court did not find that any of the challenged provisions contravenes the Constitution. It refused to evaluate the constitutionality of Russia's international commercial arbitration law because it did not apply in the case being heard by the SAC. However, the Constitutional Court made a number of vital findings for arbitration, set out below.

Although arbitral tribunals indeed do not form part of the Russian judicial system, they are institutions of civil society that are endowed with functions of public importance. Arbitration is an alternative form of resolution of civil-law disputes and expresses tendency towards consolidation of democratic principles of justice and as such does not contradict the Constitution.

Russian law does not create an uncertainty as to which categories of disputes are arbitrable. Any dispute arising out of civil-law relations is arbitrable unless otherwise specifically provided by federal law.

The federal legislative body may further specify and modify the categories of arbitrable and non-arbitrable disputes depending on their social importance, specific conditions of development of civil relations and social and economic system in the whole, considering the legal principles of the market economy, legal culture and other issues. However, any legislative modifications as to the arbitrability of disputes may not randomly reduce the current level of guarantees of rights to arbitration to civil law parties. Any such modifications must consider the current legal regulation aiming at ensuring the stability and dynamism of civil relations and the opportunity for participants to foresee the use of procedural remedies.

Arbitral awards are not only binding on the parties to arbitration, but also form a ground for other persons to make legally significant acts. Thus, if an award establishes a person's title to immoveable property, the competent state body must register such rights in the public registry. The legal requirement of state registration of transfer of rights to immoveable property by no means excludes the civil law nature of disputes relating to such rights. Therefore they are arbitrable. The court condemned the previous practice of state commercial courts that found that an arbitral award may not constitute ground for a state body to register transfer of rights to immoveable property.

The court confirmed that arbitral tribunals may award the levy of execution on mortgaged property.

If an arbitral award infringes the rights of a non-party to the arbitration, then that party may challenge the award in state court. Consequently the provisions of the law challenged by the SAC do not contravene the rights of non-parties to an arbitration.
Therefore, the SAC did not achieve its aim of narrowing the scope of competence of arbitral tribunals. On the contrary, the legal status in Russia of arbitration, arbitral tribunals and arbitral awards has been strengthened.

This subject was also discussed by Dmitry Davydenko in Russian Law Online: