Russia recently enacted an important packet of laws that substantially alters the landscape for commercial arbitration in and involving Russia (both wholly domestic and international) and addresses in detail the current hottest issue in this area—the arbitrability of so-called “corporate disputes”.
This LawFlash will focus most closely on the new rules as they apply to arbitration of corporate disputes, including the potential practical impact of the rules on existing arbitration agreements—those being negotiated now, and those that will be negotiated after the reform package takes effect on September 1 (and we’ll discuss a key February 1, 2017 trigger date that enters the picture as well). We’ll also explore the choice of institutional versus ad hoc arbitration, and what should or may be included into a contract clause for arbitrations to be seated in Russia, which issues are also affected by the new reform. Finally, we touch on the extent to which a foreign-seated arbitral tribunal is likely to respect and apply these new Russian rules—a sensitive subject in itself.
Our aim here is not to give a complete report on the entire scope of the reform and its background and context. That would not be practical in brief form; this area is quite complex, having a long and dense history.
WHAT'S BEEN ENACTED?
The reform comprises a new Arbitration Law and an Associated Law. The new Arbitration Law regulates domestic arbitration and, to some extent, international arbitration seated in Russia. The Associated Law amends Russia’s Arbitrazh (State Commercial Courts) Procedure Code (APC), the International Commercial Arbitration Law (ICAL), and some others. The package is designed to work together as an integrated whole (but is somewhat difficult to master, given the diffusion and necessary interaction of provisions among the various individual new and amended laws, as well as the complex “transitional provisions” summarized below).
A bit of further context here: The ICAL was initially enacted in 1993 on the basis of the UNCITRAL Model Law on Arbitration, and reflecting New York Convention norms on recognition and enforcement of foreign arbitral awards. The “international arbitration” governed by it encompasses disputes having a foreign element—most commonly involving at least one non-Russian party, a Russian company with some foreign ownership, or cross-border trade. A new ICAL amendment potentially broadens this scope somewhat in various ways, including express reference to “investment disputes”. The new Arbitration Law and amended ICAL both state that the former applies to international arbitrations, to the specific extent provided.
The new arbitration packet does the following:
- Clearly establishes the arbitrability of corporate disputes, but with several restrictions.
- Sharpens the distinction between permanent arbitral institutions and ad hoc tribunals, in favor of the former, in Russian law and practice (and guides contract parties as to certain related content of arbitration clauses).
- Mandates “accreditation” by the Russian government of Russian permanent arbitral institutions (but gives special, more liberal treatment to Russia’s two longstanding institutions at the RF Chamber of Commerce and Industry—the International Commercial Arbitration Court (ICAC) and the Maritime Arbitration Commission (MAC)). A related obligation is imposed on foreign institutions that may administer arbitrations seated in Russia, in the absence of which accreditation an arbitration conducted under such auspices will be deemed as ad hoc with the attendant disadvantages (see below).
- Sets some further requirements to accredited arbitration institutions and to arbitrators serving in Russia.
CORPORATE DISPUTES—WHAT CAN BE ARBITRATED, AND WHERE?
In general, the reform packet now expressly codifies/allows arbitration of corporate disputes. This is a major advance for Russia, given the murky situation in the area to date. But there are some important exceptions and restrictions.
Dispute types and the rules for each
In general, the regime of arbitrability of a corporate dispute will depend on its type, based on the rules set out in amended APC Article 2251. “Corporate disputes” are defined broadly as disputes concerning establishment and management of and participation in a Russian legal entity (i.e., these rules are not applicable to foreign-incorporated legal entities that have a Russian party). A number of types of corporate disputes are set out in the law, but the list is stated to be non-exhaustive.
The basic new overarching rules and restrictions can be summarized as follows (and detailed in the linked Chart 1 below, and also keeping in mind the transitional provisions as summarized further below):
- Certain types of corporate disputes are non-arbitrable and must be heard in a Russian state court only.
- Corporate disputes that are arbitrable must be referred only to a permanent arbitration institution—and not to an ad hoc tribunal.
- Most such disputes must be referred to a permanent arbitral institution with seat in Russia and administered under that institution’s specific rules for arbitration of corporate disputes. Also for most such disputes, all the shareholders of a company and the company itself must be party to the relevant arbitration agreement, and there are detailed rules on notice to the company and shareholders regarding actual disputes. (But these requirements will not apply for disputes arising purely out of a share purchase agreement—i.e., in an M&A rather than a joint venture context—or arising over basic encumbrances on shares or out of actions of a registrar with respect to shares.)
- It is further provided that an arbitration clause for corporate disputes can be inserted into the charter of such a JV company, as long as it is adopted unanimously by the shareholders. (Some questions may remain as to the sufficiency and effect of such a charter provision.)
We refer you to the linked Chart 1, which we believe is a useful "pocket guide" depiction of the various newly defined types of corporate disputes and the rules on their arbitrability. Again, we caution that not all of this is crystal clear on the basis of the new statutory wording alone. Actual practice and authoritative interpretation over some years may be needed for full clarity.
Navigating the transitional provisions
As mentioned above, the new rules come into effect on September 1, 2016. Not surprisingly, given the universe of already-existing contract arbitration clauses (and disputes already arisen or about to arise under such contracts), there are some quite complex transitional provisions. Two basic ones are as follows:
- Agreements referring disputes to international commercial arbitration that were executed prior to September 1, 2016 and were in accord with the applicable laws as of the date of agreement execution will generally remain in force. The validity of such agreements, and the arbitrability of disputes thereunder, are to be considered based on the applicable laws as of the date of the agreement.
- With regard to an international commercial arbitration commenced but not completed prior to September 1, 2016, the ICAL in the version in effect prior to September 1 will continue to apply (with the exception on certain rules on setting aside, and a few others). With regard to arbitration commenced after September 1, 2016, the ICAL as newly amended will apply.
These rules (and some other related transitional provisions) seem straightforward enough at first glance. But there will be some real uncertainties regarding treatment of pre-September 1, 2016 arbitration agreements—and disputes arising under them—in light of the quite unclear and indeed controversial pre-reform Russian legal position on arbitrability of corporate disputes. We will not detour into that difficult history here.
In any event, the most delicate and potentially troublesome transitional provision states that “arbitration agreements to refer to arbitration disputes contemplated by Art. 2251 of the [APC] in its [newly amended] wording [i.e., corporate disputes] … may be entered into not earlier than February 1, 2017. Such arbitration agreements entered into earlier than February 1, 2017 shall be deemed incapable of being performed.”
The conservative take on this rule (which one might even say is the consensus view among leading commentators and practitioners to date) is that corporate disputes should be referred only to the state courts, and not to commercial arbitration at all, before February 1, 2017—at least from the Russian-law point of view (see below on the possible view from abroad). And a particularly confounding point here is that this transitional rule might logically be interpreted to apply only to the five-month period between September 1 of this year and February 1 of next year given that the whole reform package, including its transitional provisions, comes into effect only as of this September 1. Thus, there are inevitable further uncertainties as to the status of existing arbitration agreements and those to be entered into before September 1, and corporate disputes arising under them at various points in time. (There is also a related delicate issue as to the proper treatment of such disputes arising post-February 1, 2017 but based on an arbitration agreement signed between this September 1 and February 1.)
In this context, one possible approach could be that all arbitration agreements (clauses) entered into before February 1, 2017 that could give rise to corporate disputes as defined above (in particular, under shareholders agreements governing Russian-registered JV-type companies) should be amended soon after that date to include a reform-package-compliant arbitration clause. Of course, parties to many sophisticated and intensely negotiated existing contracts governing Russian JV companies will be very hesitant to “open a Pandora’s box” of renegotiation of any provisions of such contracts. But it is something to be duly considered under the new arbitration reform package “facts on the ground”—which, like it or not, are with us now.
A few other possible options (though not risk-free) with regard to arbitration clauses for such new contracts to be entered into before February 1, 2017: (i) a "hybrid" disputes clause providing that any pre-February 1 claim is to be heard in state court and any post-February 1 claim in the chosen institutional arbitration forum; or (ii) expressly providing that the arbitration clause comes into effect only as of next February 1.
Please see the linked Chart 2, which may further aid our readers in thinking through how to deal with these issues.
INTERNATIONAL OR AD HOC?
Some arbitration consumers in the international business world tend to favor ad hoc arbitration (e.g., under the widely used UNCITRAL Rules) rather than institutional (e.g., ICC, LCIA in London, SCC Arbitration Institute in Stockholm, ICAC in Moscow, AAA in the United States) to economize on overhead administration costs or other reasons. But it’s now time to think again, for arbitrations to be seated in Russia.
We have already noted one big new “negative” for ad hoc: No corporate disputes (as now defined) can be heard by such tribunals in Russia. And here are some more negatives introduced by the reform package for ad hoc tribunals:
- Such tribunals can’t request (or authorize a party to request) assistance from a state court in obtaining evidence.
- The parties can’t validly agree on waiver/removal of the state court’s right to appoint arbitrators (for the event the parties have failed to make the appointments), or to hear appeals of a challenge to an arbitrator, or, most importantly, on waiver/elimination of the losing party’s right to apply to state court to set aside the award (i.e., there can be no binding provision in the arbitration agreement for finality of the award).
WHAT CAN/SHOULD GO INTO ARBITRATION CLAUSES?
There are, of course, many important aspects in drafting an effective arbitration clause—and this is not the place to lay them all out. We flag here only some key points for consideration that flow directly or indirectly from the new reform, where the parties intend to designate arbitration seated in Russia:
- Assuming it is to be institutional arbitration, by express agreement, the parties may exclude recourse to state court (i) to appoint an arbitrator if the parties’ designated appointment procedure fails, or to decide on a challenge to an arbitrator, or on termination of an arbitrator’s powers, (ii) to challenge the arbitral tribunal’s decision that it has jurisdiction to hear a claim, and (iii) to set aside an arbitration award. (This has to be done expressly.)
- If it is to be institutional arbitration in Russia (e.g., for most corporate disputes per the above), the clause should state expressly that Russia is to be the “seat” of the arbitration.
- Since such disputes will have to be administered under an approved institution’s specific new rules for arbitration of corporate disputes, the clause should expressly reference those rules of the chosen institution.
And now that parties to Russian-company shareholders’ and related JV-deal agreements (which may give rise to “corporate disputes”) may well be more inclined than before to choose a local institutional arbitration forum (e.g., ICAC-Moscow) given the new constraints on other options as presented above, also consider the following:
- An express provision that the third arbitrator (Chair) of the tribunal is to be agreed/designated by the two party-appointed arbitrators (assuming there is to be a panel of three), and that the ICAC Presidium is to appoint the Chair only if the parties fail to within a specified time. (Otherwise, under ICAC’s rules, the Presidium automatically appoints the Chair.)
- Also (from a foreign party’s perspective), an express provision that the Chair shall not be of the same nationality/citizenship as either of the parties, for maximum assurance of “neutrality”. (Otherwise, the Presidium most likely will choose a Russian national—given that most of the people on the official approved list, and the best known among these, are Russians.)
THE VIEW FROM ABROAD
Having spotlighted Russia’s new rules and restrictions on arbitrating corporate disputes (between participants in a Russian JV-type company), we should note at the same time that arbitral tribunals seated outside Russia per agreement of the parties (e.g., a contract arbitration clause calling for LCIA arbitration in London or ICC arbitration in Paris) may well choose not to respect/abide by these restrictions and rather rule that the arbitration is validly convened under the governing local law of the seat (England, France, etc.) and may proceed to hearing and award on the merits.
This gets into a quite complex international conflicts-of-laws issue as to whether these Russia arbitrability rules are just an extension of the Russian laws governing “legal competence to sign” documents on behalf of Russian companies (in Latin, lex societatis), which should be respected in a dispute being heard outside Russia—or are something more/different, which need not be respected, in favor of upholding party autonomy under the laws and doctrines of the chosen arbitration seat (lex loci arbitri), as seems more likely here.
Of course, in light of all the above, there will be risks attached to proceeding with such a corporate-dispute arbitration outside of Russia (either after or before September 1, 2016 or February 1, 2017). The decision on whether to bear that risk may well largely depend on whether the arbitration claimant would anticipate a need to attempt enforcement of an award against the Russian respondent in Russia (in which case it seems almost certain that such enforcement will fail on so-called “public policy” or similar grounds in a subsequent Russian court enforcement proceeding) or rather has a realistic possibility of enforcing against assets of the respondent located outside Russia (in which case the new Russian-law restrictions may never become a winning argument for the Russian respondent in such a dispute).