Parent company bound by Russian subsidiary’s agreement to arbitrate

Posted on: March 29th, 2016

If parties agree to refer to any disputes to arbitration, it would be reasonable to assume that only they can be parties to any ensuing arbitration. A recent decision of the English High Court concerning a lucrative redevelopment in Moscow has demonstrated that this is not always the case, and that parents of Russian companies in particular are vulnerable to being dragged into an arbitration to which they did not sign up.

In Egiazaryan and another v OJSC OEK Finance and The City of Moscow [2015] EWHC 3532 (Comm), the High Court overturned an award by a LCIA tribunal seated in London. The claimants, who were parties to a shareholders’ agreement and share purchase agreement, alleged that the respondents had orchestrated a corporate raid to illegitimately seize their interest in the project. Those agreements were governed by English law and subject to an LCIA arbitration clause with a London seat.

Notwithstanding that The City of Moscow was not a signatory to either agreement, the claimants attempted to rely upon Article 105 of the Russian Civil Code – pursuant to which a parent company can be jointly and severally liable on contracts entered into by its subsidiaries – to add The City of Moscow as a party to the arbitration and claim in tort against it under Article 1064 of the Russian Civil Code.

The Arbitral Tribunal held that it did not have jurisdiction over the tort claim against The City of Moscow. This decision was challenged in the English High Court, where the judge found that the law of incorporation of the subsidiary (Russia) determined whether or not the parent was a party to the agreements and therefore bound by the arbitration clause. It was accordingly held that, under Russian law, the parent was so bound.

Although Article 105 of the Russian Civil Code has since been replaced by Article 67.3 (which is in similar terms to Article 105), this is an important decision for arbitration disputes. Not only is it the case that non-signatories can be entitled or bound to be parties to an arbitration in cases of agency, assignment and lifting the corporate veil (for example) but now it is apparent that parents of Russian subsidiaries (and any other parties caught by similar provisions in other countries) can be unwittingly dragged into an arbitration as well.