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“). 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.
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.
In A v OOO “Insurance Company Chubb” and other companies  EWHC 2729 (Comm), the English Commercial Court (the Court) refused, for various reasons, to consider an application for interim relief. The application sought an order requiring a party to withdraw a claim in the Russian courts and seek a stay of those proceedings. The application was made on an urgent ex parte (but on notice) basis. The Court found that the matter, although capable of quick disposal, was not yet in a position to proceed any further because it was insufficiently prepared to enable there to be a fair hearing.
As we previously reported, the events of 2014 in Crimea have, aside from their geopolitical impact, also resulted in numerous investment arbitration claims being brought against Russia by Ukrainian companies in relation to their assets and investments in Crimea. While these cases are ongoing, and while there are limited details in the public domain, the awards to date in each case have upheld the jurisdiction of the tribunal to hear the claims and seemingly held that the territorial scope of the Russia-Ukraine bilateral investment treaty extends to protect investments in Crimea as a territory now under the effective control of the Russian Federation.
More claims against Russia appear to be in prospect, although the arbitral fall-out is not all one way. Indeed, actions taken by governmental and other bodies in Ukraine against Russian companies since 2014 have resulted in a number of investment arbitration claims being brought against Ukraine. Whether these are strictly to be considered as “Crimea cases” is a moot point, but they may perhaps be understood as part of the wider tensions between Russia and Ukraine.
This post looks at the recent developments in the active cases and possible future developments.
London-based partner Nicholas Peacock has authored an article for Law360, together with former Herbert Smith Freehills intern Paula Daniela Cala, covering Ukrainian arbitration claims against Russia arising out of events in Crimea in 2014.
On 18 June 2019, the Vienna International Arbitral Centre (“VIAC“) received a recommendation to be recognised as a “permanent arbitration institution” (“PAI“) in Russia. Coming only a few months after the Hong Kong International Arbitration Centre (“HKIAC“) became the first foreign institution to receive PAI status, this development is yet another milestone in the rapidly evolving Russian arbitration landscape.
As explained in our previous blog post, after formally obtaining “permanent” status the VIAC will be able to lawfully administer a variety of Russian corporate disputes. Until recently, the few arbitration institutions that had received PAI status were all Russia-based, which meant that commercial parties had very limited choice when selecting a method to resolve their disputes through arbitration.
In late November 2018, the Russian Arbitration Association (“RAA”) published a detailed study on the application of the New York Convention in Russia between 2008 and 2017. The Working Group of the RAA analysed 10 consecutive years of case law on the recognition and enforcement of foreign arbitral awards in the Russian courts. The study provides valuable statistical data on the success rates of Russian enforcement proceedings under the New York Convention and uncovers interesting trends for those looking to enforce in the jurisdiction.
As discussed in our recent blog post, the Moscow Arbitrazh Court and appeal courts recently found that a reference to the arbitration rules of an arbitral institution was not sufficiently clear evidence that the parties had agreed on that specific institution to administer the resolution of their disputes. The case related to the ICC standard arbitration clause and the ICC has applied to the Russian Supreme Court for clarity on its approach.
However, in the meantime, the ICC has issued an additional modified standard arbitration clause “to take account of the requirements of national laws and any other special requirements that the parties may have“. The ICC then proceeds to state that it is “prudent” for parties wishing to have an ICC Arbitration in Mainland China or in Russia “to include in their arbitration clause an explicit reference to the ICC International Court of Arbitration“.
The modified clause proposed by the ICC is as follows:
“All disputes arising out of or in connection with the present contract shall be submitted to the International Court of Arbitration of the International Chamber of Commerce and shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”
For further information, please contact Alexei Panich, partner, Nick Peacock, partner, Alexander Khretinin, senior associate, or your usual Herbert Smith Freehills contact.
The English Court (the “Court“) has dismissed an application by Ukraine to set aside a court order permitting Russian investor, PAO Tatneft, to enforce an arbitral award against Ukraine. Ukraine argued that it was immune from the Court’s jurisdiction by virtue of the State Immunity Act 1978. The Court found that Ukraine had not waived its right to rely on state immunity arguments, despite not having raising them in the arbitration. However, it found that Ukraine had agreed to submit the disputes in question to arbitration under the Russia-Ukraine Bilateral Investment Treaty (the “BIT“) and was therefore not immune from proceedings in connection with the arbitration by virtue of s9(1) of the State Immunity Act 1978 (“SIA“).
On 6 March 2018, the Hong Kong International Arbitration Centre (HKIAC) and the Institute of Modern Arbitration of the Russian Federation (IMA) signed a Cooperation Agreement that aims to support and promote the development of international arbitration and other dispute resolution options in Russia and Hong Kong.
This is a further development in HKIAC’s on-going efforts to meet growing demand in the Russian market for disputes to administered by established Asian arbitration institutions, such as HKIAC and the Singapore International Arbitration Centre (SIAC), which has signed a similar cooperation agreement with IMA.
In recent years, HKIAC has built up a panel of 30 Russian-speaking arbitrators, translated the HKIAC rules into Russian, and hosted and participated in a number of events in Russia. HKIAC has also announced that it is developing a new set of Administered Arbitration Rules, with innovative features “that will bring a new level of arbitration experience to users in Russia and other parts of the world”.
According to a recent survey by the Russian Arbitration Association, Russian users have indicated that Asian centres including SIAC, HKIAC and CIETAC are viable alternatives to the more traditionally-used European arbitral institutions such as ICC, SCC, LCIA and the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (ICAC). In addition, the survey indicates that Singapore and Hong Kong are increasingly popular seats, and the laws of these jurisdictions are respectively the sixth and seventh most popular choices among the survey respondents.