Arbitrability of corporate disputes in Russia: current and future regulation

Corporate disputes, currently non-arbitrable in Russia, will become open to arbitration in 2017.

Russian regulation of arbitration has undergone significant changes with the adoption at the end of 2015 of two new laws, the Federal Law “On Arbitration in the Russian Federation” and the Federal Law “On Changes to Certain Laws of the Russian Federation”.

While the first one mainly concerns domestic arbitration, the second one touches upon international arbitration, civil procedure and other relevant legislation. Among numerous changes brought about by the new legislation, the contentious issue of arbitrability of corporate disputes occupies an important place.

Current state of affairs

Until now corporate disputes (including disputes concerning title to shares and participation interests in companies incorporated in Russia) remain non-arbitrable, although no explicit prohibition in the applicable legislation exists. The courts adopted such a strict approach in the famous case of NLMK v. Nikolay Maksimov (case No. А40-35844/11).

In particular, they found that corporate matters (including disputes over the title of shares, corporate governance and others) fell under the exclusive jurisdiction of Russian state commercial courts. In recent clarifications the Supreme Court of the Russian Federation further confirmed that all disputes between parties to corporate agreements shall belong to the jurisdiction of state commercial courts (Resolution of the Plenum of the Supreme Court of the Russian Federation of 23 June 2015 No. 25)

Arbitrability of corporate disputes in the future

The rigidity of the current approach to arbitrability of corporate disputes attracted criticism from experts. The ongoing arbitration reform sought to increase the credibility of alternative dispute resolution in Russia and eliminate gaps in the existing legislation. Corporate disputes in this regard were at the forefront of legislative efforts. According to the above laws, corporate disputes will become arbitrable in the future.

Which corporate disputes will become arbitrable?

In light of the new legislation, I have divided all types of corporate disputes into arbitrable and non-arbitrable (see attached file).

When will corporate disputes become arbitrable?

The Federal Law “On changes to certain laws of the Russian Federation” stipulates that agreements providing for arbitration of corporate disputes can be concluded not earlier than 1 February 2017. If concluded before this date, they shall be regarded unenforceable. This effectively means that until 1 February 2017 arbitration of corporate disputes remains unavailable.

Which arbitral institutions will be allowed to consider corporate disputes?

One of the primary aims of the current arbitration reform in Russia consists in revising arbitral institutions in order to raise their prestige and combat recurring abuses. Most Russian arbitral institutions (except for the International Commercial Arbitration Court (MKAS) and Maritime Arbitration Commission (MAC) at the Russian Chamber of Commerce and Industry) will have to go through mandatory licensing provided by the Russian Government. Foreign arbitral institutions would also have to receive such a license, otherwise state courts will treat their Russia-seated awards and proceedings as ad hoc ones.

According to the new legislation, most corporate disputes listed above cannot be resolved by ad hoc arbitration, i.e. they can only be referred for administration to licenced arbitral institutions that have submitted their arbitration rules for corporate disputes (that is, special arbitration rules) with the respective state body and posted them on their websites on the Internet.

Moreover, the arbitration seat for such disputes shall always lie in Russia, regardless of the parties’ domicile. Thus, foreign arbitral institutions will qualify for administering Russian corporate disputes only after they have gone through the process of certification. The Government of Russia will reveal details of such a process in the future.

Controversial issues

Both of the abovementioned laws provide that parties can include arbitration clauses for corporate disputes into a company’s charter, provided that the number of shareholders does not exceed 1,000 and the company is not a public joint stock company. The above laws keep silent on whether parties may include arbitration agreements in other documents, e.g. corporate agreements.

Apparently, corporate agreements appear more preferable in terms of flexibility and confidentiality. Besides, unlike a company’s charter they can bind some, but not necessarily all shareholders. It remains to be seen whether Russian courts will interpret such omission as a gap or an outright ban.

Yet another problematic issue is of a procedural nature. The Federal Law “On Arbitration in the Russian Federation” lays down detailed rules for arbitration of corporate disputes, including an obligation of an arbitration institution to publish information about the submitted claim on the Internet and send a copy of the claim to the respective company, an obligation of such a company to notify all the shareholders and provide them with a copy of the claim, the right of every shareholder in the company to join arbitration proceedings, etc.

These rules equally apply to both domestic arbitration and arbitration administered by foreign arbitral institutions. In some instances, such “collective” nature of arbitration of corporate disputes is well deserved, particularly in cases affecting rights and obligations of all or the majority of shareholders. In others, however, it makes arbitration less effective, increases costs and time for dispute resolution, let alone deprives (even if not totally) arbitration of its confidential character. Importantly, non-application of such strict rules may lead to setting aside of an arbitral award or a refusal of its enforcement.

Non-arbitrability of corporate disputes in Russia partly stems from the general lack of trust among judges in arbitration as an alternative to state litigation. In this regard new laws making such disputes arbitrable in the future coupled with other important changes could signify a new era for arbitration in Russia. However, due to a variety of uncertainties and over-regulation, arbitration of corporate disputes will remain a minefield, at least until Russian courts form their approaches.

Ilya Kokorin

Partner, Buzko Kokorin Law Firm