Background
Bill
Reception
Comment


On October 7 2013 the president introduced a bill outlining amendments to the Constitution which may result in the abolishment of the most progressive of Russian judicial systems – the arbitrazh courts.(1) This would significantly affect commercial cases involving Russian parties.

Background

The arbitrazh court system dates back to the Soviet era. As early as 1922, the young Soviet state established arbitration organs to settle disputes between entities. The system of state arbitration organs – in effect, quasi-judicial institutions – existed from 1931 to 1991. In 1991 the new system of arbitrazh courts was established for commercial disputes, inheriting its Soviet predecessor's somewhat confusing name.

The 1993 Constitution provides for two judicial systems – the courts of ordinary jurisdiction, headed by the Supreme Court, and the arbitrazh courts, headed by the Supreme Arbitrazh Court. The Constitution also provides for separate sets of procedural legislation for each judicial system. Roughly speaking, the courts of general jurisdiction deal with disputes involving individuals (including criminal cases), while arbitrazh courts deal with commercial cases.

Over time, the arbitrazh court system developed into a more progressive, user-friendly judicial branch. It developed systems for e-filing and audio recording of hearings, videoconferencing and an online database of all judicial acts and information on all pending cases (probably one of the most developed of such systems worldwide). The arbitrazh procedural legislation also developed to make proceedings more efficient and professional, warranting the use of professional representation. On the contrary, the general jurisdiction court system remained much less transparent and user friendly, focusing on individuals who in many cases represent themselves.

Arbitrazh courts are generally perceived to be more independent thanks to their organisational structure. Thus, the appellate and cassation courts are extraterritorial (ie, they hear cases from different regions), whereas the structure of the general jurisdiction courts is based on the regional structure of Russia (eg, the cassation courts are the courts of the relevant region). Therefore, the links between the arbitrazh courts and local governments are more limited. Furthermore, the arbitrazh courts are considered less corrupt. For example, to fight frivolous corporate raids (which were usually the result of interim measures obtained from remote courts of general jurisdiction in order to paralyse a competitor), the legislature assigned jurisdiction over all corporate disputes to the arbitrazh court of the place of the company's registration.

The procedure in the arbitrazh courts is also considered more adversarial and fairer. Statistics show a success rate of nearly 50% in arbitrazh court cases against the tax authorities, whereas in the courts of general jurisdiction the success rate in such disputes is around 4%. It is not unusual for parties to international contracts to agree on the jurisdiction of Russian arbitrazh courts, which demonstrates the considerable level of trust in this court system.

Finally, a few years ago the Supreme Arbitrazh Court introduced to some extent the doctrine of precedent into Russian law. The court has also regularly issued clarifications and guidelines that have further developed – and in some instances even supplemented – legislation. This has led to criticisms that the Supreme Arbitrazh Court has exceeded its powers, but in reality such moves have contributed greatly to the predictability of judicial practice.

Bill

Talks about the merger of the Supreme Court and Supreme Arbitrazh Court commenced in early 2013. On October 7 2013 the president introduced the bill containing amendments to the Constitution. The bill generally comprises two parts – the first deals with the amendments to the text of the Constitution while the second outlines the merger of the two highest courts in the country.

It appears that all mention of the arbitrazh court system and arbitrazh procedural legislation will be deleted from the Constitution. This means that the bill goes beyond a mere merger of the highest instance courts of the two systems; rather, it envisages the abolishment of the arbitrazh court system altogether.

Regarding the merger process, the bill provides that the Supreme Arbitrazh Court will be abolished within six months of the entry into force of the constitutional amendments and its judicial functions will be handed over to the Supreme Court. Furthermore, the bill envisages the establishment of a special qualification commission to form the judicial body of the new Supreme Court, which will comprise 170 judges. This commission appears to differ from the existing judicial qualification commissions in that it will include representatives of the president as well as of regional judicial communities. Therefore, it is unclear whether the present judges would automatically become members of the Supreme Arbitrazh Court or would rather have to sit additional examinations.

Reception

The general reaction to the bill can best be described as one of shock and frustration. Such sentiment is particularly strong among those who have litigated in both the arbitrazh courts and the courts of general jurisdiction, as the difference between the systems in terms of professionalism is striking. The common perception is that the quality of dispute resolution in Russia will decrease dramatically. At the same time, the rationale behind the bill remains unclear.

The lack of understanding as to how the reform will progress adds to the confusion. The bill amends the Constitution and provides some hints as to the characteristics of the future Supreme Arbitrazh Court, but provides few details on how the merger of the court systems will be effected. It is also unclear what will happen with the latest developments introduced by the arbitrazh court system, including electronic services and the recently established specialised IP court. Many judges and former judges have commented that it would have been better to divide the entire package of amendments into various legislative acts prepared before amending the Constitution.

The lack of sufficient information has already compelled seven Supreme Arbitrazh Court judges to resign, although it is rumoured that nearly half of the present Supreme Arbitrazh Court justices (26 to 29) may follow them. Furthermore, it seems that a wave of resignations of the lower arbitrazh court judges has commenced.

Comment

The future of the arbitrazh court system remains uncertain. Given recent legislative history, there is little doubt that the presidential bill will be adopted by Parliament and proceed through regional ratification, unless the president pulls back for some reason. While the rationale behind the reform is unclear, the implementation mechanism of the reform is even less clearly articulated.

Moreover, since 2002 the arbitrazh courts have been entrusted with arbitration-related cases. The arbitrazh courts have developed considerable judicial practice in these cases, including a number of important guidelines, some of which were adopted in early 2013.(2) Generally speaking, Russia seemed to be becoming more arbitration friendly. In addition, the Supreme Arbitrazh Court adopted a number of guidelines and set a number of important precedents directly relevant to arbitration and resolution of trans-border disputes in general. Obvious examples include recent guidelines on public policy defence in enforcement cases,(3) as well as precedents on availability of interim measures in support of foreign arbitration or state court proceedings, recognition and enforcement of foreign judgments on the basis of reciprocity and international comity principles. The fate of these guidelines and precedents is unclear. Equally unclear is whether the trend towards a friendlier attitude to arbitration and foreign court proceedings will continue.

The judicial reform is likely to result in the reconsideration of risk profiles of any Russia-related dealings. Parties anticipating agreements with Russian parties should bear the pending reform in mind when deciding on the dispute resolution mechanism for their transactions.

Given the uncertain future of the arbitrazh court system in Russia, it is advisable to avoid agreeing to dispute resolution clauses in favour of arbitrazh courts. Furthermore, parties should be cautious about agreeing to submit disputes to the jurisdiction of the state courts, as it is unclear whether the enforcement of foreign court judgments in Russia on the basis of the principles of reciprocity and comity (ie, without a special international treaty) will be available after the reform has been implemented.

Therefore, foreign parties would be better off insisting on arbitration with Russian parties, at least until the details of the reform are made available. It should also be borne in mind that the awards of tribunals sitting in Russia may be subject to setting aside proceedings in Russian courts.

For further information on this topic please contact Andrey Panov at Norton Rose Fulbright (Central Europe) LLP by telephone (+7 499 924 5101), fax (+7 499 924 5102) or email ([email protected]). The Norton Rose Fulbright website can be accessed at www.nortonrosefulbright.com.

Endnotes

(1) The text of the bill (in Russian) is available at http://asozd2c.duma.gov.ru/addwork/scans.nsf/ID/87719AA68713572943257BFD00533AD2/$FILE/352924-6.PDF?OpenElement.

(2) See, for example, "Arbitration implications of recent Supreme Arbitrazh Court practice review".

(3) See Andrey Panov, "Russian Supreme Arbitrazh Court clarifies the public policy exception in the enforcement of foreign arbitral awards", IBA Arbitration News September 2013, pp 49-51; the text of the guidelines is available (in Russian) at http://arbitr.ru/as/pract/vas_info_letter/82122.html.