RUSSIAN SUPREME COURT SAYS INTERNATIONAL SANCTIONS ARE SUFFICIENT TO IGNORE DISPUTE RESOLUTION CLAUSE

Is the introduction of international sanctions against a person sufficient to justify a move of the agreed dispute resolution forum to Russia? This has been a hot topic for discussion since June 2020. In JSC Uraltransmash v PESA (case No. А60-36897/2020) the Supreme Court has put an end to this debate.

On 9 December 2021, the Supreme Court issued its judgment where it unequivocally held that if international sanctions are introduced against an entity, the Russian courts will have jurisdiction to hear disputes where such an entity is a party. That will be the case notwithstanding a dispute resolution clause providing for a different forum. It is not necessary for the sanctioned entity to provide any evidence that the agreed dispute resolution clause is unenforceable due to “obstacles to access to justice” caused by sanctions. The mere fact that sanctions have been imposed is deemed sufficient to create obstacles for a sanctioned entity to access to justice: therefore, the sanctioned entity can simply submit to the jurisdiction of the Russian courts.

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OVERVIEW OF THE LATEST COURT PRACTICE ON THE RUSSIAN SANCTIONS-RELATED AMENDMENTS—IS WINTER COMING?

This analysis was first published on Lexis®PSL on 29 October 2021 and can be found here (subscription required).

Ivan Teselkin, partner, Maria Dolotova, of counsel, Alexander Gridasov, senior associate, and Sergei Eremin, senior associate, of Herbert Smith Freehills provide an overview of Russian court decisions on the impact of recent amendments to Russian law relating to international sanctions against the Russian Federation.

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ICC AND SIAC ATTAIN “PERMANENT ARBITRATION INSTITUTION” STATUS IN RUSSIA

On 18 May 2021, the Russian Ministry of Justice granted the status of “Permanent Arbitration Institution” (“PAI”) to the ICC International Court of Arbitration (the “ICC”) and the Singapore International Arbitration Centre (“SIAC”).

This is a major development for users of international arbitration in Russia who will now have access to three of the “top-five most preferred arbitral institutions” in the world, according to the respondents of the 2021 International Arbitration Survey prepared by Queen Mary University of London. Following their successful registration in Russia, the ICC and the SIAC, have joined the Hong Kong International Arbitration Centre (HKIAC) (and the Vienna International Arbitration Centre (VIAC)), which secured similar licenses from the Russian Ministry of Justice in 2019.

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RUSSIAN MINISTRY OF JUSTICE CLARIFIES RUSSIAN ARBITRATION LEGISLATION UPON JOINT REQUEST OF HKIAC AND VIAC

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.

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RUSSIAN SUPREME COURT DECIDES PARTY CANNOT CHALLENGE AWARD DUE TO ARBITRATOR’S REMOVAL FROM LIST OF RECOMMENDED ARBITRATORS

The Russian Supreme Court (the “SC”) has seemingly put an end to the enforcement battle in Atlantic Hermes Shipping Limited v OOO Strakhovaya Kompaniya Soglasie (Limited Liability Company Insurance Company Soglasie) (Case No. A40-153265/2019). In its decision dated 27 February 2020, the SC confirmed that the removal of a party-appointed arbitrator from the list of recommended arbitrators published by an arbitral institution administering the arbitration (the “List”) did not, in itself, enable the other party to challenge the arbitral award. The SC also confirmed that parties are not prohibited from instructing, as their legal representative in the arbitration, a person who was also a recommended arbitrator on the List.

Background

Arbitration proceedings

In June 2019, an arbitral tribunal administered by the Maritime Arbitration Commission at the Russian Chamber of Commerce and Industry (the “MAC”) issued an award (the “Award”) in favour of the claimant, Atlantic Hermes Shipping Limited (“Atlantic”). The defendant in the arbitration, Limited Liability Company Insurance Company Soglasie (“Soglasie”) refused to honour the Award voluntarily.

Russian court proceedings: first instance court decision

Atlantic sought to enforce the Award in the Russian courts. Soglasie resisted enforcement and applied to set aside the Award, arguing that it violated Russia’s public policy for two reasons:

  • During the arbitration proceedings, the arbitrator appointed by Atlantic was removed from the List recommended by the MAC. However this removal was not communicated to Soglasie. As a result, Soglasie was allegedly precluded from challenging the arbitrator on this basis.
  • Atlantic’s legal representative in the arbitration was listed as a recommended arbitrator on the MAC List. Soglasie argued that this was contrary to the MAC Arbitration Rules, which provided, in the relevant section, that arbitrators had to be impartial and independent, and could not act as counsel in the same arbitration in which they sat as an arbitrator.

In September 2019, having joined the parties’ applications in the same proceedings, the first instance court sided with Soglasie, dismissing Atlantic’s enforcement application and setting aside the Award (the “Set Aside Decision”). The court held that the Award was issued in breach of Russia’s public policy, as the arbitrators blatantly violated the well-established principles of administration of justice and principles of Russian law.

Set Aside Decision overturned

Russian court proceedings: Cassation Court Decision

In November 2019, the Moscow District Court (the “MDC”) overturned the Set Aside Decision and sent the case back to the court of first instance for re-consideration (the “Cassation Court Decision”).

The MDC noted that the parties were not under an obligation to appoint arbitrators from the MAC List (there was no such requirement either under Russian law, or in accordance with the MAC Arbitration Rules, or indeed in the parties’ agreement). It was therefore open to Atlantic to appoint an arbitrator who was not listed on the MAC List. Although the removal of the arbitrator appointed by Atlantic was a matter of public knowledge, Soglasie failed to raise its objections during the arbitration, and had therefore waived its right to do so.

Further, according to the evidence provided by the parties, while the arbitration was still on-going, five months after the Atlantic-appointed arbitrator was removed from the MAC List, the parties entered into a written agreement confirming that they agreed to the composition of the tribunal and there were no grounds for challenge of the arbitrators; it was therefore not open to Soglasie to renege on its agreement in this respect. The MDC determined that Soglasie’s failure to raise the objections during the arbitration constituted a clear waiver of its right to raise the same objections during Russian court proceedings.

On Soglasie’s second argument, the MDC held that Atlantic’s legal representative acted solely in his capacity as counsel and he was not appointed to act as an arbitrator in this case. Therefore, he was not under a duty to act impartially, or to act as an independent and neutral party, in this arbitration.

Finally, the MDC reiterated that the notion of “public policy” (which we discussed in more detail in one of our previous blog posts) was to be construed as comprising only highly imperative and universal fundamental principles, which had particular social and public importance, and formed the basis of the Russian economic, political and legal system. It concluded that the factual circumstances referred to by Soglasie were not related to public policy.

Russian court proceedings: re-consideration by the first instance court

In December 2019, the first instance court followed the directions given by the MDC in the Cassation Court Decision, issuing an execution writ long-sought by Atlantic (the “Re-consideration Decision”). Soglasie attempted to challenge the Cassation Court Decision in the SC and the Re-consideration Decision in the MDC. Both appeal attempts were unsuccessful. We discuss the SC decision in more detail below.

Russian court proceedings: Supreme Court decision

The SC carried out a limited review of the case, deciding that there were no circumstances that would merit a full review. The SC agreed with the conclusions in the Cassation Court Decision. It has therefore confirmed that, as a matter of Russian law, a removal of a party-appointed arbitrator from a list of recommended arbitrators published by the administering arbitral institution does not, in itself, enable the other party to challenge the arbitral award. It has also determined that parties are not prohibited to instruct, as their legal representative, a person who is also a recommended arbitrator on such a list.

Comment

The SC decision in this case follows its previous guidelines, which attempted to narrow down the scope of “public policy” and suggested that Russian courts should refuse recognition or enforcement of an arbitral award on public policy grounds only in exceptional circumstances. Although, strictly speaking, the SC decision is not binding on the lower courts, it may also prove to be a helpful point of reference for parties seeking to enforce arbitral awards in Russia.

For more information, please contact Nicholas Peacock, Partner, Alexei Panich, Partner, Alexander Gridasov, Associate, Olga Dementyeva, Associate, or your usual Herbert Smith Freehills contact.

Nicholas Peacock
Nicholas Peacock
Partner
+44 20 7466 2803

Alexander Gridasov
Alexander Gridasov
Associate
+7 495 36 36536

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 7644

Inside Arbitration: Issue #4 of the publication from Herbert Smith Freehills’ Global Arbitration Practice

We are delighted to share with you the latest issue of the publication from Herbert Smith Freehills’ Global Arbitration Practice, Inside Arbitration.

In addition to sharing knowledge and insights about the markets and industries in which our clients operate, the publication offers personal perspectives of our international arbitration partners from across the globe.

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