New Russian Law on Arbitration and International Standards

The new arbitration laws which came into effect on 1 September 2016 have brought about some long-awaited changes.

The Federal Law on Arbitration in the Russian Federation (the “Law on Arbitration”) and its ancillary law address, in particular, “pocket” arbitral institutions (established and controlled by a commercial company), uncertainty in connection with the arbitrability of corporate disputes and the inconsistent position as to the grounds of enforcement of arbitral awards.

The upcoming changes to the law in Russia have already provoked much discussion. The post below examines some key changes.

Corporate Disputes

The changes concerning corporate disputes have become particularly important and controversial. In the Russian arbitration community the arbitrability of corporate disputes has attracted a lot of attention following a famous decision of the Russian Supreme Arbitrazh Court in the Metallurgical Company v Maximov case (VAS-15384/11).

In that case, which concerned the question of legal title over shares, the court found that corporate disputes were generally not arbitrable.  At the time this case came as a surprise, because arbitration practitioners generally understood that parties could refer any commercial dispute to arbitration unless expressly prohibited. The Maximov case demonstrated that this was not the case. However it remained unclear whether some types of corporate disputes still remain arbitrable.  

Share purchase agreements and joint venture agreements often contain an arbitration clause. However, enforceability of an arbitral award obtained in connection with a dispute arising out of such agreements in Russia was never certain since the Maximov case. There was always a possibility that the courts would find the dispute to be non-arbitrable in Russia.

The new legal framework contains an exhaustive list of non-arbitrable corporate disputes: disputes in relation to the procedure of the general meetings of the shareholders; disputes in relation to notarisation of certain transactions; and those arising out of the decisions and regulations of various local state entities. This also includes disputes concerning companies most significant to national security (this does not apply to the sale of shares if there was no requirement for a prior approval of such sale); disputes in connection with the expulsion of shareholders; and disputes concerning tender offers and certain types of buybacks and buyouts.

The corporate disputes will be arbitrable as of 1 February 2017. However, only a “permanent arbitration institution”, which has a separate set of rules, applicable to corporate disputes, can hear such disputes.

Permanent Arbitral Institutions – Registration Requirements

The requirement for corporate disputes to be resolved only under the rules of a permanent arbitral institution leads to the next major change brought about by the new law on arbitration.

In order to tackle the problem of so called “pocket” arbitration institutions, the new law on arbitration introduces a requirement under which a permanent arbitral institution must be established by a non-commercial organisation and must be authorised by a competent state body. In particular, it must receive a recommendation from the Council on the Development of Arbitration, yet to be established by the Russian Ministry of Justice.

The non-commercial organisation in question needs to pass a reputational test. Before getting an authorisation, the Council on the Development of Arbitration will assess several factors, including the identities of the founding members and the scale of operations of the institution.

The new law on arbitration expressly prohibits any dispute resolution activities by arbitral institutions with a conflict of interest. In other words, where either of the parties to a dispute is affiliated in any way with the founding member of the non-commercial organisation which established the arbitral institution, or the organisation itself, the conflict of interest exists.

Hopefully, these measures will prevent the arbitral institutions created by commercial organisations from being involved in resolving disputes in which these commercial organisations are involved.  It is worth noting that even before the new law came into effect, Russian courts were able to refuse an enforcement of an arbitral award created by such an arbitral institution on the basis that the procedure was unjust and unfair.

This was a conclusion reached by the Russian courts in the case of Lukoil Energoseti LLC v MK LLC (SAC No. 16541/11), in which an award was rendered by an arbitral institution set up by Lukoil, one of Russia’s largest and most powerful oil companies. As one can see even from the case title, it involved a Lukoil’s entity as a party to the dispute.

On the one hand, it seems quite clear why the law introduces in the first place a new requirement, effectively making it compulsory for all arbitral institutions operating in Russia (with a few exceptions) to obtain a license from the Russian authorities. On the other hand, it is also clear why established international arbitration institutions like the LCIA, ICC and SSC etc have not received this requirement well.  Nevertheless, such kind of institutions easily satisfy the requirement to have “widely acknowledged international reputation”.

According to the LCIA Registrar’s Report, the UK, Russian Federation and the BVI represented the three most common nationalities of parties involved in the disputes referred to LCIA. During the 20 April 2016 LCIA Conference, which took place in Moscow, the LCIA confirmed that it will take steps towards obtaining a licence to arbitrate in Russia. Not all the arbitral institutions showed the same level of commitment; the SCC, for instance, said they won’t be seeking the licence at present.

Assistance and Supervision of the Russian Courts

The changes concerning corporate disputes and the registration requirements of arbitral institutions constitute probably the most unusual ones and are unlikely to have analogues in the arbitration laws of other countries. The rest of the new regulations remain more in line with established international practices.

One of the significant changes concerns the supervisory powers of the Russian courts in connection with arbitrations seated in Russia. The Law on Arbitration introduces new provisions, which endow the Russian courts with the authority to appoint arbitrators; to hear applications on challenging arbitrators; to hear jurisdictional disputes in the context of arbitration; and to terminate arbitrators’ appointment.

The Law on Arbitration also contains provisions on interim relief by an arbitral tribunal and pre-action attachments and injunctions by an arbitral tribunal of a permanent arbitral institution. However, enforcement of interim relief orders, rendered by both domestic and international arbitral tribunals, remains a grey area with no new provisions introduced.

Last, but not least the Law on Arbitration makes amendments to both the Arbitrazh Procedure Code (further the “APC”) and the Civil Procedure Code ( further the “CPC”), making it possible to seek assistance from the courts in obtaining evidence for use in the arbitral proceedings.

Ways of Forming an Arbitration Agreement

The Law on Arbitration contains separate rules in connection with forming a binding arbitration agreement for corporate disputes. It is possible to include such agreement not only in the articles of association of a company, but also among all of the company’s shareholders or the company itself.

Conclusion

The Law on Arbitration is generally a positive move towards a wider use of international arbitration in Russia. The provisions on supervisory powers of courts are welcome and bring Russia’s arbitration law more in line with the arbitration law elsewhere.

The new provisions on the registration of permanent arbitral institutions may well prove helpful in eliminating the common practices of pocket arbitral institutions, which are unfair and harmful to the Russian business community at large. New provisions on corporate disputes shed more light on the issues of arbitrability of corporate disputes than the Maximov case previously did.

However, the overall effectiveness of this new set of rules remains to be seen. It is hard to predict the outcome of the new laws on arbitration now, because at least some of the new provisions, as discussed in this article, have no analogue in other jurisdictions.

Marianna Rybynok

Of counsel at Khrenov & Partners