Review of Russian Commercial Cases Involving Foreign Persons

Validity of choice-of-court agreements, possibility of piercing the corporate veil and falling under jurisdiction of Russian court have always been important concerns for international companies doing business in Russia or with Russian legal entities.

The Russian Supreme Commercial (Arbitrazh) Court (“SCC”) will soon clarify these issues in an Informational letter with a Review of Certain Issues Related to Hearing Cases Involving Foreign Persons (“Review”).

Cases involving foreign persons imply a number of legal issues such as establishing a competent court, service of foreign parties and applicable law. Last time the SCC made an official review of such cases in 1998 and the relevant Russian law significantly changed since then.

The most ‘tricky’ topic is perhaps the interaction of principle of ‘close connection’ of the legal relation with the Russian territory with the competence of Russian commercial courts to hear corporate disputes involving foreign persons (i.e. their international jurisdiction).

Main Issues

The SCC  published the Statement regarding the draft Review at its website in Russian for a public discussion before finalizing and adopting it. The draft Review addresses a number of controversial issues.

Firstly, it interprets the meaning of close link between the disputed legal relation and the Russian territory as a ground to establish jurisdiction of the Russian commercial courts (Article 247(1)(10) of the Russian Commercial Procedural Code (“CPC”)).

Secondly, the Review provides certain criteria for determining the competence of Russian commercial courts to hear corporate disputes involving foreign persons.

Thirdly, the Review deals with the validity and enforcement of prorogation agreements which provide for disputes resolution by the “court of plaintiff” or “court of defendant”, and validity of similar agreements on governing law. According to the Statement prepared for the meeting of the SCC Advisory Board International Law Section (“Statement”) such agreements should be valid;

In addition, the Review explains the legal consequences of the so-called “unequal” (asymmetrical) agreements on dispute resolution, i.e. where one party shall file any claims exclusively to a specified arbitration tribunal whereas the other party, additionally, has a discretion to bring the claim in state courts if it chooses so.

Finally, the Review clarifies legal consequences of prorogation agreements with the choice of a foreign court.

Close Connection Principle

According to the Statement, the Review would presumably clarify positive and negative aspects (sides) of the application of the close connection principle:

• specify the criteria of a close connection in a particular case (positive side);
• identify the cases with no close connection to Russia. Accordingly, the Russian commercial courts should refrain from hearing such cases (negative side).

Close Connection & International Jurisdiction of Russian Courts

Article 225.1 of the CPC establishes a list of corporate disputes falling under competence of Russian commercial courts (Russian corporate disputes). Thus, disputes on the establishment, liquidation or registration of legal entities and individual entrepreneurs in Russian territory, as well as the challenge of their corporate bodies’ decisions are exclusively subject to Russian jurisdiction.

The list of corporate disputes involving foreign persons exclusively falling under the Russian jurisdiction (Article 248(1)(5) of the CPC) is narrower than the list of the Russian corporate disputes.

Consequently if a corporate dispute involving foreign persons does not fall into the said list of Russian corporate disputes, then should the competence of the Russian commercial courts be established under the rules on cross-border corporate disputes or under the rules on Russian corporate disputes?

Arguably, the CPC provisions on the disputes involving foreign persons should apply as lex specialis compared to the general rules of Russian corporate disputes on jurisdiction of Russian commercial courts over corporate disputes.

Therefore the principle of the close connection should apply to establish the competence of a Russian state commercial court to hear corporate disputes involving foreign persons.

Thus if a corporate dispute falls out of the list of corporate disputes exclusively referred to the Russian state commercial courts (Article 248(1)(5) of the CPC), then such cases do not fall under the exclusive jurisdiction of Russian state commercial courts. Hence, arbitral tribunals or a foreign state court under a prorogation agreement may resolve such cases.

In case NLMK v. N. Maximov on recovery of a debt under a share purchase agreement the SCC underlined that only Russian state commercial courts have competence to hear corporate disputes (Ruling of the SCC No. VAS-15384/11 as of January 30, 2012, in the case No. А40-35844/2011-69-311).

Moreover, as the CIS Arbitration Forum previously noted, the Constitutional Court of the Russian Federation did not clarify directly whether the corporate disputes were arbitrable in Russia or not. Therefore generally corporate disputes are now not arbitrable in Russia.

Jurisdiction of Russian courts to Pierce the Foreign Corporate Veil

Expectedly, to identify the applicability of the forum non conveniens doctrine, the Review follows the rationale in the case of LLC Olimpiya v. Latvian banks Parex banka, Citadele banka (Resolution of the SCC Presidium No. 16404/11 as of April 24, 2012, in the case No. А40-21127/11-98-184). The claimant brought its claim in Russia because it believed that Parex banka and Citadele banka (Latvian banks) operated in Russia through the Russian representative offices of Latvian companies affiliated with the Latvian banks. The SCC refused to pierce the corporate veil and denied the jurisdiction of Russian courts because the conclusion and performance of the disputed transactions took place outside Russia, deposits were kept in Latvian banks.

Therefore, presumably, Russian state commercial courts would be competent to hear a dispute involving a foreign party where the dispute is closely connected with an affiliate or representative office of the foreign company in Russia, e.g. where Russia is the place of the conclusion and performance of the disputed transaction.

Summing up, the rules governing international jurisdiction of Russian courts, prorogation agreements as well as arbitrability of corporate disputes will soon become clearer. This will strengthen the desired predictability of the legal framework for dispute resolution with Russian parties.

Dmitry Davydenko, senior associate at Muranov, Chernyakov & Partners,

Alexandra Khizunova, associate at Muranov, Chernyakov & Partners