In February 2020, the Hong Kong International Arbitration Centre (the “HKIAC”) and the Vienna International Arbitration Centre (the “VIAC”) jointly applied to the Russian Ministry of Justice (the “MOJ”) and the Council for the Development of Arbitration at the MOJ (the “Council”) for clarification of certain “grey areas” of Russian Arbitration legislation (the “Joint Request“). Both arbitration institutions have recently published the response issued by the Working Group No. 2 on Foreign Arbitral Institutions of the Council (the “Working Group”) on the questions posed in the Joint Request (the “Response“)[1]. Although the position in the Response was declared to be non-binding on the Russian courts, the Working Group’s views might impact Russian court practice on the reformed arbitration legislation.

Background

The Russian arbitration reform of 2016 and 2019 (discussed in our previous blogs here and here) introduced significant changes to the landscape of arbitration in Russia. A major outcome of the reform was that disputes seated in Russia and disputes related to the “creation, management or participation in” legal entities incorporated in Russia (the “Corporate Disputes“) could only be administered by arbitration institutions which obtained the status of a Permanent Arbitration Institution (“PAI“). Since then, only two foreign arbitration institutions, the HKIAC and the VIAC, have obtained PAI status (as discussed in our previous blog posts here and here).

On 10 February 2020, both the HKIAC and the VIAC submitted the Joint Request (available on the web-pages of HKIAC and VIAC) covering a number of issues, in particular those relating to Corporate Disputes, procurement disputes, Russian domestic disputes, the differences between arbitrations administered by a PAI and ad hoc proceedings, and the consequences that could follow if a PAI administers an arbitration that it is not authorised to administer.

On 27 May 2020, the Working Group issued the Response (recently published on the web-pages of HKIAC and VIAC). Below we provide an overview of the key points raised in the Response in relation to Corporate Disputes and Russian domestic disputes.

As the Working Group notes in the Response, its “position …shall not prevent any different construction of the rules of law by courts and other government bodies considering particular disputes.” Accordingly, although the Response may influence the Russian courts’ position on the relevant issues in future, the courts are not under a duty to follow it.

Disputes arising out of shareholder agreements (the “SHAs”)

As discussed in our blog, due to the discrepancy between the provisions of the Arbitrazh Procedure Code (the “APC”) and the Arbitration Law[2], it was unclear whether Corporate Disputes arising out of SHAs could be considered by PAIs which had not adopted special corporate dispute resolution rules (the “SCDRs“), HKIAC and VIAC being among those institutions. In the Response, the Working Group confirmed that the provisions of the Arbitration Law had priority over the earlier rules of the APC. Accordingly, HKIAC and VIAC are eligible to consider Corporate Disputes out of SHAs, notwithstanding the absence of SCDRs.

At the same time, the Working Group clarified that Corporate Disputes relating to the appointment, election, termination, suspension and liability of a Russian company’s management could only be resolved by a PAI which adopted SCDRs. Given that such management-related issues can be closely connected with other disputes arising under SHAs (and which are arguably available for reference to the HKIAC and the VIAC), it is not clear how the Working Group’s position regarding SHAs may be implemented in practice.

In addition, there was some ambiguity as to whether, in order to be valid, arbitration clauses covering Corporate Disputes out of SHAs have to be entered into by the company itself and all its shareholders in addition to the parties to the SHA. The Working Group helpfully clarified that such arbitration clauses had to be signed only by the parties to the SHA.

The Working Group specifically noted that, in its view, the above rules relating to disputes out of SHAs would apply only to arbitration proceedings commenced after 29 March 2019 (the date when the amendments to the Arbitration Law entered into force), notwithstanding the date of the arbitration clause.

Disputes arising out of share purchase agreements (the “SPAs”)

The Working Group noted that, in its opinion, disputes which did not concern issues of ownership over shares or participatory interests in the charter capital of a Russian company could not be considered Corporate Disputes and therefore were not subject to restrictions introduced by the Arbitration Reform (i.e. they may be considered by non-PAIs).

The Working Group provided the following examples of such disputes:

  • disputes on recovery of the purchase price of shares or participatory interests;
  • disputes on reduction of the purchase price of shares or participatory interests; and
  • disputes on recovery of penalties or damages caused by breaches of representations or warranties.

There is already some court practice supporting the above clarification which makes the Working Group’s position with respect to the SPAs sufficiently solid.

Disputes raising claims subject to different requirements

The Working Group has also noted that if the dispute raises claims which are subject to different requirements under Russian arbitration legislation, then the stricter requirements will apply. For example, if a dispute contains both corporate and non-corporate claims, the rules relating to Corporate Disputes will apply to the whole dispute. The same rule applies to disputes where one part of the claims may be considered by a PAI with SCDRs and the other by a PAI without SCDRs. Thus, only a PAI with SCDRs would be able to administer this dispute.

Corporate disputes relating to companies of strategic importance

Corporate Disputes relating to companies which have acquired the status of strategic importance[3] are generally non-arbitrable under the APC. According to the Working Group, the non-arbitrability rule applies only if a company has the status of strategic entity at the date of commencement of the arbitration proceedings. However, if a company acquired such status after commencement of the arbitration, this fact should not impact the arbitration proceedings, and therefore the dispute remains arbitrable.

Domestic disputes

In the opinion of the Working Group, which is rather debatable among the scholars, domestic disputes of Russian entities can only be administered by Russian domestic institutions with PAI status, or a foreign institution with PAI status and a branch in Russia[4] save, in the latter case, for disputes between parties from any special administrative region as defined by Russian law[5] and disputes arising from agreements to carry out activities in any such special administrative region. The HKIAC and the VIAC do not have a branch in Russia and therefore cannot administer domestic disputes subject to the exception defined above.

Comment

The Working Group’s clarifications in the Response help to further develop and promote commercial arbitration in Russia. However, as mentioned, the clarifications are not legally binding, which means that the Russian courts may adopt different approaches to the issues raised in the Response. Accordingly, it remains to be seen what direction Russian court practice will take and whether the Russian courts will take into account the conclusions in the Response in practice.

For further information, please contact Nick Peacock, Partner, Alexei Panich, Partner, Maria Dolotova, Of Counsel, Alexander Gridasov, Associate, Olga Dementyeva, Associate, or your usual Herbert Smith Freehills contact.

Nicholas Peacock
Nicholas Peacock
Partner
+44 20 7466 2803
Alexei Panich
Alexei Panich
Partner
+7 495 36 36515
Maria Dolotova
Maria Dolotova
+7 495 36 36839

Alexander Gridasov
Alexander Gridasov
Associate
+7 495 36 36536
Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 7644

[1]       Further to the Response, a new federal law has been enacted, which may significantly change the dispute resolution landscape involving Russian sanctioned individuals and entities. Please see our article first published on GAR and later republished on our blog for details.

[2]       Federal Law No. 382-FZ dated 29 December 2015 “On Arbitration (Arbitration Proceedings) in Russia” (as amended).

[3]       Under Federal Law No. 57-FZ “On Procedures for Foreign Investments in the Business Entities of Strategic Importance for Russian National Defence and State Security” dated 29 April 2008.

[4]       In the opinion of the Working Group foreign institutions without PAI status and a branch in Russia cannot perform separate functions relating to administration of ad hoc arbitration of domestic disputes either.

[5]       Federal Law No. 291-FZ “On Special Administrative Regions in the Territories of Kaliningrad Region and Primorsky Krai” dated 3 August 2018.