Fried Frank International Arbitration Newsletter, December 2012

Unilateral Jurisdiction Clauses Undermined in Russia, France

A unilateral jurisdiction clause is a dispute resolution clause that gives one party a jurisdictional option that the other party does not have. For example, a clause could provide for disputes to be resolved by international arbitration but, in addition, give only one of the parties a unilateral option to refer disputes to a competent national court instead of resorting to arbitration. Or, a clause could provide for disputes to be resolved in the courts of a certain jurisdiction, but give one of the parties an option to resort to a court of another jurisdiction. Such unilateral clauses are commonly used in international financing agreements, where the lenders wish to have flexibility to resort to litigation or arbitration, or choose a venue for litigation to recover amounts due. However, recent decisions by the Supreme Arbitration Court of the Russian Federation and the French Cour de Cassation undermine the validity of such clauses and put parties on notice to rethink dispute resolution clauses in current, as well as future, financing agreements, especially if the parties or the assets are in Russia or France.

Russia

The relevant dispute arose between CJSC Russian Telephone Company ("RTC") and Sony Ericsson Mobil Communications Rus LLC ("Sony Ericsson") under a distribution agreement for the sale of mobile phones. The contract gave Sony Ericsson a right to commence arbitration or litigation to resolve disputes between the parties, while RTC only had a right to arbitrate. When a dispute arose over alleged defects in mobile phones, RTC filed a claim against Sony Ericsson in a local Arbitrazh Court of the City of Moscow. Relying on the jurisdiction clause, the court refused to entertain RTC's claim. The decision was affirmed by two appellate courts. But, on further appeal to the Supreme Arbitration Court, the highest court disagreed, reversing the judgment and remanding the case to the Arbitrazh Court of Moscow. On 19 June 2011, the Presidium of the Supreme Arbitration Court decided that RTC should have equal access to justice and be allowed to resort to litigation. The court found that the provision giving Sony Ericsson a unilateral right to commence litigation contravened the principle of procedural equality of rights between the parties and violated Russian law. This decision is contrary to previous decisions by Russian courts to respect party autonomy in upholding similar unilateral clauses. While the long-term ramifications of the decision are not yet clear, the decision suggests that inequality created by unilateral jurisdiction clauses would be disregarded by the courts in Russia, and instead, the clause will be interpreted as bilateral, giving the same rights to both parties.

France

On 26 September 2012, the French Cour de Cassation ruled on the validity of a unilateral jurisdiction clause in an agreement between a Luxembourg bank, Banque Private Edmond de Rothschild, and its client. The clause provided for disputes to be submitted to the exclusive jurisdiction of the Luxembourg courts, but the bank had a right to sue the client in the courts of its domicile or any other competent court. The client brought proceedings in France. The Cour de Cassation upheld the Court of Appeal's decision to reject the bank's jurisdictional challenge. The Cour de Cassation concluded that the clause was "potestative" in favor of the bank, as it placed no obligations on the bank, and therefore was void under French law, as well as Article 23 of the Brussels Regulation. The court's reliance on potestativité is intriguing because potestativité is not a concept usually linked to jurisdiction. Rather, under French legislation, a term is potestative when its performance is dependent on an event that is in control of only one party. The court's reliance on the Brussels Regulation is also interesting, because Article 23 had previously been understood to permit such clauses. The ruling is a move away from previous decisions by the French courts enforcing contract clauses that benefitted only one party.

One point of concern with unilateral jurisdiction clauses is that any arbitration award rendered on the basis of such a dispute resolution clause may face enforcement challenges in Russian or French courts. Parties may wish to revisit existing unilateral jurisdictional clauses to consider whether they should be revised and in all events think very hard about their inclusion in future agreements.

The Potential Effects of Chinese State Secrecy Laws on Disclosure in Arbitration

Recent cases have renewed concerns among practitioners of international arbitration and litigation about the breadth of Chinese state secrecy laws and the effect these laws may have on disputes involving Chinese companies.

SEC Moves Against Accounting Firms

In the first week of December 2012, proceedings were issued against the Chinese subsidiaries of five large accounting firms, Deloitte Touche Tohmatsu ("Deloitte"), Ernst & Young ("E&Y"), KPMG, PricewaterhouseCoopers and BDO China Dahua, charged with breaking US securities laws by the US Securities and Exchange Commission ("SEC") for refusing to disclose documents related to accounting fraud investigations at nine Chinese companies. The SEC said that the companies refused to cooperate and impeded the government's investigations notwithstanding the companies' reliance on Chinese state secrecy laws. In response, the companies noted the difficulties of navigating the conflicting disclosure laws of the United States and China, and expressed hope that US and Chinese regulators will sort out these conflicts.

Cases Against E&Y and Deloitte

In August, Hong Kong's securities regulator, the Securities and Futures Commission, took E&Y to court, seeking records related to the failed listing application of Standard Water, a Chinese company and former E&Y client, on the Stock Exchange of Hong Kong. Under the Hong Kong Securities and Futures Ordinance, E&Y has an obligation to provide the records unless it can demonstrate a "reasonable excuse" for not doing so. E&Y refused to provide the records, citing Chinese state secrecy laws. In September, the Hong Kong Court of First Instance ordered E&Y to explain its basis for relying on Chinese state secrecy laws in refusing to turn over the requested accounting records. The court has not yet ruled on whether E&Y has demonstrated a "reasonable excuse."

The case in Hong Kong parallels a case in the United States that began approximately one year earlier. In September 2011, the SEC asked a federal court to order Deloitte to turn over work papers from an audit performed on Longtop...