The Swedish Supreme Court confirms Swedish courts' jurisdiction to hear Russian Federation's request for a declaratory judgment in Yukos arbitration

Practical Law UK Legal Update Case Report 8-504-1015 (Approx. 6 pages)

The Swedish Supreme Court confirms Swedish courts' jurisdiction to hear Russian Federation's request for a declaratory judgment in Yukos arbitration

by Practical Law

Background

Section 2 (1) of the Swedish Arbitration Act (SAA) provides that "[t]he arbitrators may rule on their own jurisdiction to decide the dispute. The aforesaid shall not prevent a court from determining such a question at the request of a party. The arbitrators may continue the arbitral proceedings pending the determination by the court."

Section 46 of the SAA provides that the "[Arbitration] Act shall apply to arbitral proceedings which take place in Sweden notwithstanding that the dispute has an international connection."

Section 48 of the SAA provides that "[w]here an arbitration agreement has an international connection, the agreement shall be governed by the law agreed upon by the parties. Where the parties have not reached such an agreement, the arbitration agreement shall be governed by the law of the country in which, by virtue of the agreement, the proceedings have taken place or shall take place."

Chapter 13, section 2 of the Swedish Procedural Code provides that a declaratory claim whether a certain legal relationship exists or not may be entertained if there is uncertainty about a legal relationship and this uncertainly is to the claimant's detriment.

Article 1.2 (d) of the Brussels Regulation provides that the Regulation does not apply to arbitration.

Facts

Following the issue of an award on jurisdiction in an arbitration between RosInvestCo UK Ltd (RosInvest) and the Russian Federation concerning certain alleged expropriatory measures against RosInvest, the Russian Federation brought an action for a declaratory judgment to the Stockholm District Court and requested the court to declare that the arbitral tribunal did not have jurisdiction.

RosInvest argued that the Russian Federation's request should be dismissed because:

The Swedish courts did not have jurisdiction to hear the case under the Brussels Regulation.
There was no Swedish jurisdictional interest to rule on the Russian Federation's request.
The request for a declaratory judgment was not permitted under the Swedish Procedural Code as the final arbitration award was expected before the final court decision.

The Stockholm District Court and the Appeal Court dismissed RosInvest's arguments. RosInvest appealed to the Supreme Court on the issues of whether:

The Brussels Regulation applies to negative declaratory requests relating to the validity or scope of an arbitration agreement.
The Swedish courts have jurisdiction in respect of declaratory requests relating to the validity or scope of an arbitration agreement when foreign parties, without connection to Sweden, agree to arbitrate in Sweden.
A negative declaratory request relating to interpretation and application of an international treaty between two foreign states can be tried by the Swedish courts.
A negative declaratory request meets the requirements under the Swedish Procedural Code given that an award may be rendered prior to the declaratory issue being resolved by the court.

Leave to appeal was granted in respect of the second and fourth issue and the proceedings were stayed in respect of the first and third issue.

Decision

Jurisdiction of Swedish courts

The Supreme Court confirmed that there was Swedish jurisdictional interest and that the Swedish court could rule on the arbitrators' jurisdiction.

The Supreme Court noted that according to the principle of party autonomy the parties can agree on a legal regime applicable to the arbitration (lex arbitri), which normally takes place by determining the seat of arbitration. Further, unless otherwise agreed by the parties, the tribunal can hold meetings elsewhere, whether in Sweden or abroad.

According to section 46, the SAA applies to arbitrations which take place in Sweden, notwithstanding that a dispute has an international connection. Even in cases where arbitration proceedings have an international connection, the courts can assist with the appointment of arbitrators, hearing of witnesses under oath, reviewing the arbitrators' remuneration and ruling on challenges to or invalidity of arbitration awards. Pursuant to section 48 of the SAA, the law applicable to the arbitration agreement is the law agreed on by the parties. In the absence of such agreement, the arbitration agreement shall be governed by the law of the country in which, by virtue of the agreement, the proceedings have taken or shall take place.

Therefore, where the parties have agreed that the arbitration shall take place in Sweden, it is irrelevant that:

The parties or the arbitrators hold meetings elsewhere.
The arbitrators are not from Sweden.
The arbitrators' work is done in a different country.
The dispute concerns a contract otherwise not having any connection to Sweden.

According to Section 2 (1) of the SAA, the arbitrators may rule on their own jurisdiction to decide the dispute. However, this shall not prevent a court from determining, during the course of the arbitration and on a request of a party, whether the arbitrators have jurisdiction. A judgment of a court resolves the issue of jurisdiction with legal force and is binding on the arbitrators. The arbitrators' decision that they have jurisdiction to resolve a dispute is not binding, and the jurisdictional issue can become subject to review in connection with the challenge of the award.

Thus, taking into account that RosInvest and the Russian Federation agreed that the arbitration would take place in Sweden, the SAA is applicable. It follows that a Swedish court can rule on the arbitrators' jurisdiction and that there is Swedish jurisdictional interest.

Prerequisites applicable to declaratory claims

The Russian Federation's request complied with the requirements regarding declaratory claims under the Swedish Procedural Code.

The Supreme Court noted that according to Section 2(1) of the SAA a party may turn to a court in order to have the jurisdiction of the arbitral tribunal tried during an ongoing arbitration. Section 2 of the SAA does not provide for any limitations in this regard. However, general provisions regarding the requirements applicable to declaratory claims according to Chapter 13, section 2 of the Procedural Code may be considered applicable - even with regard to an action pursuant to section 2 of the SAA. Accordingly, in order for a declaratory claim to be tried an uncertainty must exist with regard to a legal relationship (in the present case, whether the arbitrators have jurisdiction), and that this uncertainty must be to the disadvantage of the claimant.

The Supreme Court noted that the uncertainty generally already exists when the parties have different opinions on the jurisdiction of the arbitrators. If the jurisdictional issue is not tried until the entire arbitration is concluded, thereby incurring costs, there may be a disadvantage to the claimant. Whereas a claim concerning lack of jurisdiction pursuant to section 2 of the SAA is brought to a district court and can be appealed to an appeal court and the Supreme Court under the ordinary rules, a challenge action against an arbitration award shall be brought to an appeal court as the court of first instance and entails special limitations on the right to appeal.

It was therefore questionable whether a claim concerning a lack of jurisdiction pursuant to section 2 of the SAA was appropriate and permissible where the claim could not be expected to be finally resolved within such a timeframe so as to save considerable costs of the arbitration.. However, with reference to the legislative history of section 2 of the SAA, the Supreme Court concluded that an action concerning a lack of jurisdiction can be pursued even if the arbitration continues, and the award is issued prior to the resolution of the jurisdictional issue by the court. Therefore, a party should be able to bring an action concerning lack of jurisdiction before an arbitration award has been issued, at least when it can be assumed on good grounds that the award is not imminent.

In the present case, the arbitrators had determined their own jurisdiction in an "award on jurisdiction", which is a decision on jurisdiction during the pendency of the arbitration and which cannot be challenged pursuant to section 34 of the SAA. The Russian Federation brought an action for a negative declaratory judgment shortly after the arbitrators' decision and therefore, long before a final award could be expected. Therefore, with regard to the Russian Federation's declaratory claim, not only does an uncertainty exist on the issue of the arbitrators' jurisdiction but also the requirement that the uncertainty shall be to the disadvantage of a party is met.

As regards leave to appeal on the remaining issues, the Supreme Court stated that Article 1.2 (d) of the Brussels Regulation does not apply to arbitration and that it is obvious that this exception applies also to the action for a negative declaratory judgment in the present case. RosInvest's request that the Supreme Court should submit the issue to the EU Court of Justice was denied. The Supreme Court also concluded that there are no reasons for granting leave to appeal on the issues in respect of which the proceedings had been stayed.

Comment

This decision of the Supreme Court concerns the possibility of indirect court control of arbitrators' affirmative decisions on jurisdiction in the light of the principle of kompetenz-kompetenz.

It is generally acknowledged that although arbitrators may rule on objections to their own jurisdiction such decisions are not final and binding and that the last word on the issue of jurisdiction belongs to the national courts. In Sweden, unlike in the Model Law countries, affirmative decisions of an arbitral tribunal on jurisdiction, which take the form of a procedural decision, are not subject to immediate court control. Recourse against such decisions is generally possible only in connection with a challenge of the final award on basis of the grounds enumerated in section 34 of the SAA. However, court control of the arbitrators' jurisdiction may be achieved indirectly by requesting a court to rule on jurisdiction of the tribunal by means of a negative declaratory claim that the arbitrators do not have jurisdiction pursuant to section 2 of the SAA. In such cases, the tribunal is not precluded in any way from continuing the proceedings pending the determination by the court.

For international arbitrations which take place in Sweden it is considered that the Stockholm District Court is a subsidiary forum in matters concerning arbitral jurisdiction which are not based on the rules for invalidity or setting aside of arbitration awards. However, in cases where none of the parties are domiciled in Sweden, and where the parties' agreement has no connection with Sweden, it could be argued that the Swedish courts lack jurisdictional interest and, thus, jurisdiction to entertain an action for a declaratory relief.

In this case, the Supreme Court has confirmed that by agreeing on the arbitration venue, parties also determine the legal regime applicable to the arbitration. Therefore, the SAA will apply to international arbitrations with a Swedish seat which establishes the jurisdiction of Swedish courts to entertain a party's action for a declaratory relief, even in cases when the dispute otherwise has no connection with Sweden. In the author's opinion, this clarification by the Supreme Court shall be viewed as a confirmation of an important guarantee for parties in being able to obtain the support of local courts in matters of international arbitration.

The case also highlights the issue of the procedural limitations applicable to claims for a declaratory relief under section 2 of the SAA. The Supreme Court confirmed that the requirements established in Chapter 13 of the Procedural Code also apply to declaratory claims under section 2 of the SAA and has made an important conclusion that a party shall be deemed entitled to bring an action for a declaratory relief in court before an arbitration award has been rendered, at least when it can reasonably be assumed that the rendering of the award is not imminent.

Issues as to when a declaratory claim on jurisdiction could be brought and whether after the delivery of the award it should be tried in the initial court proceedings for a declaratory judgment or in challenge proceedings have not been altogether clear. The RosInvest decision may limit a party's right to seek a declaratory judgment in court at the later stages of arbitration proceedings, which would mean that parties would have to have the jurisdictional issue tried in the appeal court in challenge proceedings.

On the other hand, the decision gives good reasons to conclude that a party will be entitled to have the issue resolved in the initial court proceedings, even after the delivery of the arbitral award, opening up the possibility to have the issue reviewed by three court instances (claims pursuant to section 2 are heard by a district court and can be appealed to an appeal court and the Supreme Court), and that the appeal court should, in such cases, stay commenced challenge proceedings pending the resolution of the jurisdictional issue.

Case

RosInvestCo UK Ltd v Russian Federation, Ö2301-09, Decision of the Swedish Supreme Court, 12 November 2010

The Swedish Supreme Court confirms Swedish courts' jurisdiction to hear Russian Federation's request for a declaratory judgment in Yukos arbitration | Practical Law