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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THE EU AND CANADA ADOPT PROCEDURAL RULES FOR THE CETA INVESTMENT COURT SYSTEM

On 29 January 2021, the European Union (“EU”) and Canada adopted four decisions, which put in place specific rules elaborating the Investment Court System agreed in the EU-Canada Comprehensive Economic and Trade Agreement (“CETA”). The four decisions set out detailed rules and procedures regarding the structure of the Appellate Tribunal and the conduct of appeals, adjudicators’ conduct, mediation, as well as the interpretations of the CETA by the CETA Joint Committee.

We discuss the content of these four decisions in our new blog piece, published on our Public International Law blog here.

For more information, please contact Dr. Patricia Nacimiento, Partner, Olga Dementyeva, Associate or your usual Herbert Smith Freehills contact.

Patricia Nacimiento
Patricia Nacimiento
Partner
+49 69 2222 82530

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 7644

 

ENGLISH HIGH COURT STAYS COURT PROCEEDINGS IN FAVOUR OF ARBITRATION AND INTERPRETS CONFLICTING DISPUTE RESOLUTION PROVISIONS

In Helice Leasing S.A.S v PT Garuda Indonesia (Persero) TBK [2021] EWHC 99 (Comm), the English High Court interpreted seemingly conflicting dispute resolution provisions in an aircraft operating lease (the “Lease”). The Lease included an arbitration clause providing for “any dispute” to be resolved by the London Court of International Arbitration (“LCIA”) and gave the lessor an option to “proceed by appropriate court action” in case of an Event of Default, which included non-payment. When the lessor commenced court proceedings to recover rent arrears, the lessee retaliated by successfully applying to stay proceedings in favour of arbitration under s9 of the Arbitration Act 1996 (the “Act”). The High Court held that the parties had agreed to refer disputes to arbitration despite the existence of the allegedly conflicting option to proceed by court action, and set out some guidance on what constituted a “dispute” in an arbitration clause.

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ENGLISH SUPREME COURT DECIDES APPROACH TO DETERMINING GOVERNING LAW OF ARBITRATION AGREEMENT

On 9 October 2020, the English Supreme Court handed down its judgment in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38, which is likely to become the leading English law authority on the applicable principles relating to determining the proper law of an arbitration agreement and the role of the courts of the seat in granting anti-suit relief.

The Supreme Court issued the decision following an expedited appeal against a recent judgment of the Court of Appeal ([2020] EWCA Civ 574), which we discussed in our previous blog post. The Supreme Court dismissed the appeal by a majority, with Lords Burrows and Sales dissenting.

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HERBERT SMITH FREEHILLS LAUNCHES FIRST GUIDE TO DISPUTE RESOLUTION AND GOVERNING LAW IN RUSSIA

Please click here to preview this publication. To request a copy of the Guide, please email RussiaDisputeResolutionGuide@hsf.com.

Our first Guide to Dispute Resolution and Governing Law in Russia provides a concise and accessible overview of some of the practical issues involving both litigation and arbitration across the region to help our clients understand the ways in which Russian law restricts the choice of law in contracts and the types of dispute resolution mechanisms that can be used for Russia-related commercial contracts.

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ENGLISH SUPREME COURT TO DECIDE APPROACH TO DETERMINING GOVERNING LAW OF ARBITRATION AGREEMENT

On 27 and 28 July 2020, the Supreme Court heard an expedited appeal against a recent judgment of the Court of Appeal in Enka Insaat ve Sanayi AS v OOO Insurance Co Chubb [2020] EWCA Civ 574, which we discussed in one of our previous blog posts. The Supreme Court is asked to consider two issues: (i) the correct approach to determining the proper law of an arbitration agreement; and (ii) the role of the court of the seat of arbitration in determining whether foreign proceedings give rise to a breach of an agreement to arbitrate.

Background

In June 2020, the Supreme Court allowed OOO Insurance Co Chubb (“Chubb Russia”) to proceed with its appeal against the judgment in favour of Enka Insaat ve Sanayi AS (“Enka”). Chubb Russia was seeking to overturn the decision of the Court of Appeal, which precluded it from pursuing a subrogation claim in the Russian courts (the “Russian Court Claim”). The Court of Appeal had determined that the Russian Court Claim was brought in breach of the arbitration agreement (the “Arbitration Agreement”) in the main contract (the “Contract”).

The decision of the Court of Appeal

The Court of Appeal concluded that: (i) the English court as the court of the seat was necessarily an appropriate court to grant an anti-suit injunction and questions of forum conveniens did not arise; and (ii) the Arbitration Agreement in the Contract was governed by English law. In particular, on issue (ii) the Court of Appeal held that there was nothing to suggest an express choice of Russian law as the governing law of the Contract and/or the Arbitration Agreement. Accordingly, in the absence of any countervailing factors which would point to a different system of law, the parties had impliedly chosen that the Arbitration Agreement was governed by the law of the seat, i.e. English law.

The Court of Appeal emphasised that if there is no express choice of law in an arbitration agreement itself, then it is necessary to review whether the express law of the main contract also applies to the arbitration agreement. However, the law of the contract would apply to the arbitration clause only in the minority of cases. In “all other cases, the general rule should be that the…[arbitration agreement]  law is the curial law, as a matter of implied choice”, unless there are powerful factors to counter this being the implied choice of law. If there is no implied choice of law, the law of the arbitration agreement will be the system of law with which the arbitration agreement has its closest and most real connection.

Russian court proceedings

As noted in our previous blog post, Chubb Russia filed the Russian Court Claim in May 2019. The decision of the first instance court dismissing the claim was published in full in May 2020. Although the Russian Court Claim was dismissed, the court also dismissed Enka’s motion seeking dismissal without considering the merits of the case in reliance on the Arbitration Agreement, noting that the dispute did not fall within the Arbitration Agreement. Both Enka and Chubb Russia appealed, and the Russian appellate court is due to hear the appeal at the end of October 2020.

Supreme Court hearing: brief overview of the parties’ positions

Overview of submissions made by Chubb Russia

Chubb Russia argued that the Arbitration Agreement formed an integral part of the Contract, and therefore, upon the application of the rules of contractual construction, the Arbitration Agreement should be governed by the same system of law as the Contract (i.e. Russian law, being the law impliedly chosen by the parties). Chubb Russia also argued that it would be just and convenient for the English court to stay the English proceedings to allow the Russian court to determine whether it had jurisdiction to hear the Russian Court Claim.

Overview of Enka’s submissions

Enka argued that the Arbitration Agreement was a separate contract, and the starting point should accordingly be the Arbitration Agreement itself (rather than the Contract, as suggested by Chubb). By agreeing to arbitration seated in London, the parties (i) impliedly agreed that the Arbitration Agreement was governed by English law; and (ii) therefore submitted to the jurisdiction of the English courts to grant an injunction to restrain a breach of the Arbitration Agreement and to determine whether there was such breach.

Comment

This case is likely to become the leading English law authority on the applicable principles relating to the approach to determining the proper law of an arbitration agreement. It remains to be seen whether the Supreme Court agrees with the Court of Appeal in relation to the significance of the law of the seat for the purpose of determining the proper law of the arbitration agreement.

For more information, please contact Craig Tevendale, Partner, Rebecca Warder, Professional Support Lawyer, Olga Dementyeva, Associate or your usual Herbert Smith Freehills contact.

Craig Tevendale
Craig Tevendale
Partner
+44 20 7466 2445

Rebecca Warder
Rebecca Warder
Professional Support Lawyer
+44 20 7466 3418

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 7644

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 COURTS TO HAVE EXCLUSIVE JURISDICTION OVER SANCTIONED PERSONS

On 8 June 2020, the Russian President signed a new federal law (No.171-FZ), which will significantly change the dispute resolution landscape involving Russian sanctioned individuals and entities. It will come into force on 19 June 2020.

It is significant as it provides for exclusive jurisdiction of the Russian state arbitrazh (commercial) courts with respect to disputes involving Russian sanctioned individuals and entities as well as foreign entities controlled by them.

Even if the parties have agreed to the jurisdiction of a foreign court or an arbitral tribunal seated outside of Russia, sanctioned persons will be able to disregard the dispute resolution provisions if they cannot be enforced due to sanctions. A sanctioned person affected would need to assess the effect of sanctions on the contract, and, if there are grounds to believe that the applicable dispute resolution provisions cannot be enforced, it can refer the dispute for adjudication by the first-instance Russian arbitrazh courts at the place of its registration (for legal entities) or residence (for individuals). Such referral will be possible only if no similar dispute between the same parties is being considered by a foreign court or an arbitral tribunal seated outside Russia.

If the applicable dispute resolution provisions cannot be enforced, a sanctioned person will be entitled to apply to the Russian arbitrazh courts for an anti-suit injunction preventing the commencement or continuation of foreign court or international arbitration proceedings (where such proceedings are pending, this is the only way to seek protection from the Russian courts). The onus will be on a sanctioned person to demonstrate that either such proceedings have already begun or are imminently pending. At the same time, at the request of a sanctioned person, a foreign party failing to comply with the injunction imposed by a Russian court may be held liable to pay monetary compensation up to the amount claimed in the foreign court or arbitration proceedings. There is also a high risk that a decision rendered by a foreign court or arbitral tribunal as a result of such proceedings will not be enforceable in Russia.

Of course, it remains to be seen how the Russian courts will determine that the arbitration and other dispute resolution clauses involving sanctioned persons are unenforceable.

Even before the adoption of this new law, a disputable approach to enforceability of the dispute resolution clauses has already been tested by a Russian court. At least one controversial case exists (А40-149566/2019), where the Arbitrazh Court of Appeal held that an ICC arbitration clause is unenforceable due to the US sanctions and instead established the jurisdiction of the Russian courts. According to the court, the claimant, a Russian company subject to US sanctions, could not recover a debt from the defendant, a Russian branch of a US company, in reliance on the arbitration clause in the contract. The court concluded that the clause placed the defendant in a more favourable position, and an arbitral award in favour of the claimant would not be enforceable due to bank transfer restrictions as a result of sanctions. As the decision has been appealed, and the cassation court is due to hear the appeal at the end of June 2020, there will be many eagerly awaiting the judgment.

It is worth noting that the new law clarifies that a foreign court decision or an award of an arbitral tribunal seated outside Russia affecting a sanctioned person can still be recognised and enforced in Russia in accordance with general recognition and enforcement rules. Russia has been a party to the New York Convention since 1960 (replacing the former Soviet Union as a member state in 1991), and is a party to a number of international treaties that provide for enforcement of foreign court judgments and arbitral awards, and so the foreign party could rely on the relevant international instrument to ensure recognition and enforcement of the relevant decision or award in Russia.

However, according to the new law, enforcement will only be possible where either a sanctioned person filed a claim or did not make an objection to the jurisdiction of the foreign court or foreign-seated arbitral tribunal and did not make an application for an anti-suit injunction in the Russian courts.

So there are major changes in the offing.

It means that businesses dealing with Russian counterparties will need to carefully monitor whether the counterparty is a sanctioned person and whether the sanctions could affect the enforceability of the dispute resolution clauses in their contracts or provided by international treaties.

If this is the case, their disputes may be forcibly referred to the Russian arbitrazh courts, even though the parties have agreed to, or an international treaty provides for, an arbitration with a non-Russian seat; or opted for the jurisdiction of a foreign court.

In general, this law correlates with the trend determined by the draft amendments to the Russian Constitution providing for priority of Russian law and the Constitution over the international law. It will be interesting to see if these amendments are also adopted on a referendum scheduled for 1 July 2020.

Furthermore, as Russian law does not have extraterritorial effect, the relevant counterparty could nevertheless succeed in obtaining and enforcing abroad a foreign court decision or a foreign arbitral award in spite of the anti-suit injunction granted by the Russian court. However, it will still have to deal with and bear the consequences of any parallel proceedings in the Russian courts initiated in accordance with the new law and both assess whether a sanctioned person has any assets outside Russia and whether the Russian court judgment (including anti-suit injunction order) can be enforced against such party’s assets in Russia.

Enforceability of such Russian judgments abroad shall also be subject to supplemental analysis by foreign counterparties of sanctioned persons. So, in addition to monitoring sanctions legislation and its effects on the relevant contract with a sanctioned person, the foreign counterparty will need to consider whether any contractual mechanisms are available to protect its interests in the circumstances where the sanctioned person decides to rely on the new law.

It is also worth bearing in mind that the enforceability of the dispute resolution provisions could be misinterpreted by the Russian courts and confused with the possibility to enforce the decision of a foreign court or an arbitral award, as occurred in the example above. Hopefully, the cassation court will amend the approach taken by the Court of Appeal.

This law may complicate even further the already complex arbitration regime established as a result of the Russian arbitration reforms of 2016 and 2019, which were launched with the aim of eliminating the widespread practice of companies setting up their own “pocket” arbitration institutions to administer disputes. It could also lead to a deterioration of the investment climate in Russia.

This article was first published on Global Arbitration Review on 10 June 2020

For more information, please contact Alexei Panich, Partner, Olga Dementyeva, Associate, Polina Podoplelova, Associate, or your usual Herbert Smith Freehills contact.

Alexei Panich
Alexei Panich
Partner
+7 495 36 36515

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 7644

Polina Podoplelova
Polina Podoplelova
Associate
+7 495 78 37499

ENGLISH COURT OF APPEAL GRANTS ANTI-ENFORCEMENT INJUNCTION TO PROTECT THIRD PARTY DEBTS UNDER AGREEMENTS SUBJECT TO ENGLISH ARBITRATION

In SAS Institute Inc v World Programming Limited [2020] EWCA Civ 599, the English Court of Appeal granted an anti-enforcement injunction in part, preventing enforcement of a US judgment in respect of assets in England and Wales. In an interesting example of an interplay between intellectual property (“IP”) claims and arbitration, the Court of Appeal held that SAS Institute Inc (“SAS”) cannot seek orders from a US court to enforce a US judgment confirming copyright infringement. The Court of Appeal decided that enforcement orders extending to debts due from customers to World Programming Limited (“WPL”), where WPL and its customers had agreed to submit their disputes to London-seated arbitration, would be an unwarranted interference with the jurisdiction of the English court.

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