On 29 March 2019, a series of amendments to Federal Law No. 382-FZ “On Arbitration (Arbitration Proceedings) in the Russian Federation” came into force. The amendments, which were predominantly introduced by Federal Law No. 531-FZ of 27 December 2018 (the “Amending Law“), are an attempt to address various issues that have arisen from the implementation of the 2016 Russian Arbitration Reform over the past three years.
The Amending Law focuses primarily on the Permanent Arbitration Institutions regime (the “PAI Regime“) and the arbitrability of corporate disputes. It imposes even tighter restrictions on arbitration institutions operating in Russia without “permanent arbitration institution” (“PAI“) status. In relation to a narrow category of Russia-related transactions, careful thought should be given before choosing a non-PAI institution, in particular where disputes are likely to need to be enforced inside Russia.
The PAI Regime – technical amendments and options for foreign arbitration institutions
As discussed previously on our blog, the PAI Regime was introduced in 2016 as part of the Russian Arbitration Reform (the “2016 Reform“) to combat so-called “pocket” arbitration institutions, which were typically incorporated by large corporations/banks to hear disputes with their counterparties. A PAI is a recognised institution which is accredited to administer arbitrations on a permanent (as opposed to ad hoc) basis.
For both Russian and foreign institutions, however, the process of obtaining PAI status is complex and heavily bureaucratic. In accordance with the Amending Law, institutions seeking to obtain PAI status must submit an application to the Council for the Development of Arbitral Proceedings (the “Council“), which then issues a recommendation as to whether the institution qualifies for formal approval as a PAI. At the time when the Amending Law came into force on 29 March 2019, there were only four institutions operating under PAI status in Russia. Two of them – the Russian International Commercial Arbitration Court and the Maritime Arbitration Commission – had been automatically exempted from the requirement to obtain formal PAI approval, and no foreign arbitration institution had yet been successful in securing PAI status. (As noted below, the HKIAC has since achieved that status.)
The Amending Law introduced a number of changes to the PAI application process. In particular, the law now sets out an exhaustive list of supporting documents to be provided as part of a PAI application. Moreover, the procedure for the approval of PAIs on the recommendation of the Council is now overseen by the Ministry of Justice rather than by the Russian Government. The Amending Law also clarifies that in order to obtain PAI status, a foreign arbitration institution must convince the Council that it benefits from a “widely recognised international reputation” in accordance with the criteria enacted by the Ministry of Justice on 20 March 2019. Provided that this basic requirement is satisfied, the foreign arbitration institution will be able to administer:
- international disputes seated in Russia (save for certain types of corporate disputes which are subject to special rules);
- certain procurement disputes seated in Russia; and
- a restricted range of corporate disputes (as detailed below).
If, in addition to the above, the foreign arbitration institution wishes to administer a wider range of corporate disputes, including for example disputes relating to the creation of Russian legal entities or disputes brought by shareholders to recover damages caused to a legal entity, it must deposit special rules for the arbitration of corporate disputes at the time of its application.
If the foreign arbitration institution wishes to administer domestic disputes in Russia, it must also establish a branch or representative office in Russia.
All awards issued by foreign institutions without PAI status in connection with the above disputes are automatically treated as ad hoc awards. Institutions operating without PAI status are prohibited from appointing and terminating arbitrator mandates and banned from advertising their services or carrying out functions related to the administration of arbitral proceedings, such as the receipt of arbitration fees and the allocation of premises for oral hearings on a regular basis. Where an arbitral tribunal seeks the assistance of an arbitration institution in breach of one or more of these provisions, its award will be treated as having been rendered in violation of Russian arbitration procedure and will therefore be subject to challenge. On a literal reading of the law as amended, therefore, arbitration in Russia now appears virtually impossible without the support of an accredited PAI.
Arbitrability of corporate disputes
As discussed above, the Amending Law provides that a foreign arbitration institution which has been approved as a PAI can at the very least administer a restricted range of corporate disputes, which includes disputes arising out of:
- the ownership of shares in a Russian legal entity, including the creation of encumbrances over shares and the exercise of rights attached to shares (e.g. under a share purchase agreement);
- the activities of share registrars; and
- the management of a legal entity (e.g. under a shareholder agreement), provided that the parties to the agreement have signed an arbitration agreement.
If the foreign arbitration institution has chosen to deposit special rules for the arbitration of corporate disputes, it will also be accredited to hear:
- disputes brought by shareholders to recover damages caused to a legal entity and to invalidate transactions made by a legal entity; and
- disputes arising out of the incorporation, reorganization and liquidation of legal entities,
provided that the arbitration is seated in Russia and all parties involved have signed an arbitration agreement.
Despite coming into force through the Amending Law, these changes are not currently reflected in Art. 225.1 of the Russian Arbitrazh Procedure Code (“APC“), which, for example, continues to require special rules for disputes arising out of shareholder agreements. Although the general rules of interpretation dictate that the provisions of the Amending Law should override the older provisions of the APC (under the lex posterior derogat priori principle), this direct conflict of norms creates a layer of uncertainty as to the application of the Amending Law by the Russian courts.
To a certain extent, the Amending Law successfully clarifies the restrictions introduced by the 2016 Reform on arbitration institutions operating in Russia and the types of disputes that they can lawfully administer. As discussed in our recent blog post, it is promising that on 4 April 2019 – less than a week after the Amending Law came into force – the Hong Kong International Arbitration Centre (“HKIAC“) received formal PAI approval and thus became the first foreign arbitration institution operating in Russia with PAI status. However, it remains to be seen whether the recent amendments will be sufficient to promote the adoption of the PAI Regime on a wider scale and achieve the 2016 Reform’s underlying aim of promoting arbitration in Russia.
For more information, please contact Nicholas Peacock, Partner, Alexander Khretinin, Senior Associate, Olga Dementyeva, Associate, or your usual Herbert Smith Freehills contact.