10.03.2020 | Articles
Pros and Cons of Submitting Infrastructure Disputes to Arbitration

The resolution of infrastructure disputes poses two main problems: the possibility of using a private arbitration institution to resolve disputes involving a public interest and the need to resolve such disputes quickly due to possible discontinuation of operations under the relevant project.

Alexander Vaneev, a partner at BGP Litigation, tells Vedomosti about the intricacies of infrastructure disputes.

In the Russian Federation, there are two categories of entities: public and private. Plus there are a number of entities that do not fall into either of the two categories. These are state-owned corporations – non-profit organizations that essentially manage state property. Under the new rules, disputes involving private entities may be arbitrated and those with public entities may not, while state-owned corporations as in-between entities are governed by Federal Law No. 223-FZ “On the Procurement of Goods, Works, and Services by Certain Types of Legal Entities”. This summer the Supreme Court of the Russian Federation has reaffirmed the possibility of submitting disputes involving the companies listed in the said law to arbitration courts, thus giving us hope that we may see an increasing number of disputes related to infrastructure projects adjudicated by arbitration.

The obvious advantages of arbitration for disputes related to infrastructure projects are the effective protection of the investor or private company as a party to the dispute and the arbitration of the dispute by arbitrators with relevant experience appointed by the parties.

It is evident that a dispute against a state or a company in which the government has a stake tried by a state court is very likely to be adjudicated in favor of the public entity. This is not an exclusive characteristic of courts of just one jurisdiction: any state courts will defend budgetary interests. The possibility to submit disputes to arbitration courts will equalize the public and private parties to the dispute by creating the conditions necessary for the settlement of the dispute in strict accordance with the rule of law, negating any political and economic factors.

Besides, the parties will be able to choose more competent arbitrators, whereas a judge of a state court may and, most likely, for justifiable reasons, will not have the experience of resolving such disputes and the necessary technical knowledge.

At the same time, the resolution of such disputes by arbitration courts involves certain disadvantages. In particular, a dispute may often be related to the performance of several contracts under one project. If the arbitration clauses in all the contracts are not identical, the arbitration will be much more difficult as some matters will be resolved by arbitration courts and some by state courts. Also, today not all arbitration rules require that disputes arising out of several contracts be arbitrated within one arbitration process, which will most likely also complicate their arbitration. Finally, third-party interveners whose participation in this category of disputes may be of fundamental importance generally may not participate in arbitration proceedings. Nevertheless, the potential problems of resolving infrastructure disputes through arbitration do not overweigh the positive effect for the Russian economy: increasing the attractiveness of private investments (including foreign ones) in public-private partnerships and raising the trust in the state as counterparty, subject to an adequate development of a pro-arbitration approach to such disputes.

When implementing infrastructure projects, the so-called “related” disputes regarding purely technical matters (such as the use of materials of nominal quality, the thickness of structures, architectural and technical solutions) often arise. Such disputes should, on the one hand, be resolved as quickly as possible so as not to delay the implementation of infrastructure projects. On the other hand, the responsibility for such matters should be borne by technical specialists. Neither the state court nor the arbitration court can fulfill both of these tasks. To resolve the disputes of this kind, separate contractual mechanisms should be used: independent technical experts should make a decision binding on the parties and, at the same time, recognized by Russian state courts.