Sony Ericsson Case to Be Heard in Russia Despite LCIA Arbitration Clause

Over recent years, the London Court of International Arbitration (LCIA) has proved to be a preferred place of arbitration for Russian entities. It is common in Russian business practice for the parties to opt for arbitration instead of litigation when it comes to dispute resolution. Alongside an arbitration clause, the agreement may also provide for an optional jurisdiction, when either both parties have the possibility to apply to the state court, or only one party has the right to select arbitration or state court at its own discretion. Such unilateral clauses are often used in Russia, although they cause controversy and jurisdictional conflicts. In June 2012, the Supreme Arbitration Court of Russia considered this issue in Sony Ericsson Mobile Communication RUS v Russian Telephone Company.

The dispute arose from an arbitration clause in the agreement between Sony Ericsson Mobile Communication RUS (Sony Ericsson) and Russian Telephone Company. It provided for the possibility of both parties to refer all disputes arising to the LCIA. In addition, Sony Ericsson had the right to apply to a "court of the competent jurisdiction." Russian Telephone Company, which was under an obligation to sell phones of Sony Ericsson, filed a suit in the Arbitration Court of Moscow against Sony Ericsson in May 2011, requesting the defendant to replace defective goods. The court rejected the suit and directed the parties to arbitration in the LCIA in accordance with an arbitration clause. That judgment was upheld by appeal courts as well. The Supreme Arbitration Court of Russia, however, overturned all previous courts' decisions and sent the case for re-consideration to the Moscow Arbitration Court.

In the view of the Supreme Arbitration Court of Russia, a contractual arbitration clause may not entitle only one party to go to a state court, while depriving the other party of the same right. Such one-sided clauses are invalid and, therefore, the presence of such provisions will not prevent any party from filing a suit with a competent court.

Although Russia is not a precedent law country, this decision is likely to be given significant weight by other courts. Following the Sony Ericsson judgment, parties have to take care with arbitration provisions and allow both parties to arbitrate and litigate in order to reduce the risk of a procedural invalidation. For the avoidance of a jurisdictional conflict it would be advisable for the counterparts to agree on exclusive arbitration provisions. There is also a possibility that the Russian courts will declare similar unilateral clauses in previously executed agreements invalid in the case of a claim.

We will continue monitoring developments in this area and will be happy to advise you on the jurisdictional and dispute resolution risks as well as the possible ways of protecting your rights.