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Constitutional Court of Russia confirms arbitrability of real estate disputes
Jun 20 2011

On May 26 2011 the Constitutional Court issued a landmark decision confirming that domestic arbitral tribunals have jurisdiction over real estate claims. Ruling 10-P was issued following a request by the Supreme Arbitrazh Court in connection with a case that it was hearing in its supervisory capacity.

LLC Bulgarregionsnab provided a mortgage over loans granted by the Bank of Kazan to LLC Trade Alliance and LLC DataDot-Zakamye. The debtors failed to repay the loans when due and the bank filed a claim with a domestic arbitral tribunal, seeking repayment of the loans and enforcement of the mortgage.

The tribunal found in favour of the bank, but the mortgagor refused to comply with the award. The bank filed an application to Tatarstan Arbitrazh Court seeking enforcement of the award. The application was granted by the court of first instance and its ruling was confirmed by the Court of Cassation.

The mortgagor is in the process of challenging these rulings before the Supreme Arbitrazh Court on the basis that state arbitrazh (ie, commercial) courts have exclusive jurisdiction over real estate disputes, and that an arbitral tribunal, being a non-state judicial body, therefore lacks jurisdiction.

The Supreme Arbitrazh Court stayed the proceedings and for the first time filed a request of its own motion with the Constitutional Court to confirm the status of arbitral tribunals and their jurisdiction over real estate disputes. In particular, it asked whether certain provisions of Russia's domestic and international arbitration laws, the Civil Code and the Law on Registration of Title to Real Estate and Real Estate Transactions are unconstitutional.

The arbitrability of real estate disputes has been a matter of debate in Russia over the past decade. The core of the problem lies with Article 248 of the Arbitrazh Procedure Code, which provides (among other things) that "disputes concerning real estate" fall within the exclusive jurisdiction of the state arbitrazh courts. Rightly or wrongly, many consider Article 248 to specify matters that are not arbitrable. However, in recent years jurisprudence has attempted to distinguish real estate cases that involve state registration from those that do not. In some cases state arbitrazh courts have refused to enforce awards rendered in real estate disputes, whereas in other instances the courts have demonstrated a selective approach and granted enforcement of awards that do not involve or affect state registration of title to real estate or encumbrances.

Arguments of Supreme Arbitrazh Court
The Supreme Arbitrazh Court's primary reason for filing the request was the level of uncertainty surrounding the relevant provisions of the Civil Code, domestic and international arbitration laws and the Law on State Registration of Title to Real Estate and Real Estate Transactions. The court argued that the various provisions in these laws make it unclear whether arbitral tribunals have jurisdiction over real estate disputes, in particular those involving state registration of title or encumbrances. The court reasoned that the uncertainty regarding these statutory provisions has given rise to inconsistent court practice in breach of the constitutional principle of stable business practice and, as such, has called into question the constitutionality of certain provisions of the statutes in question.

Constitutional Court ruling
The Constitutional Court began by stating that everyone is entitled to protect his or her rights by any means permitted by law. Arbitration is a well-recognised means of dispute resolution and the public interest is protected by the use of rules that establish the procedure for arbitration proceedings.

The court held that compulsory registration of title to property by state bodies does not affect the title itself or the nature of the legal relationships between the parties, thereby reaffirming the proposition in the more persuasively reasoned of recent court decisions on this point. The compulsory nature of such registration cannot be deemed to obstruct arbitral tribunals from considering real estate disputes, since it does not affect the parties' rights to the real estate in question.

Significantly, the court observed that Article 248 of the Arbitrazh Procedure Code should not be deemed to delineate the jurisdiction of arbitral tribunals. Rather, it should be interpreted merely as stipulating the jurisdictional boundaries between Russian and foreign state courts in international disputes; its purpose is not to define the arbitrability of various matters.

The ruling criticises Information Letter 96, entitled "An overview of court practice in relation to the recognition and enforcement of foreign judgments, arbitral awards, challenging arbitral awards and the issuance of writs of enforcement for arbitral awards", which was issued by the Supreme Arbitrazh Court on December 22 2005. Paragraph 27 of the letter provides that a court must reject an application that seeks to enforce an award which orders that title to real estate be registered by the Federal Registration Service. The reasoning behind this recommendation is that state registration is considered an act with a "public element" and therefore cannot be the subject of an arbitral award. This position has been heavily criticised for tilting the subtle balance of court decisions towards a more conservative and formal approach. In the Constitutional Court's opinion, the view expressed in Letter 96 derives from an incorrect understanding of the legal concepts involved. State registration, properly considered, merely confirms title - it does not alter the civil relationship between the parties; nor does it introduce a public element to that legal relationship until registration is effected.

For these reasons the court concluded that the provisions in question do not contravene the Constitution.

The ruling is a significant step towards a greater and more secure role for international and domestic arbitration in Russia, as it ends a lengthy debate concerning the arbitrability of real estate disputes, at least for the purposes of domestic arbitration.