Significant changes are on the way for the resolution of disputes by way of arbitration in Russia and with respect to Russian companies.
The reform was implemented by two legislative acts (together, the Reform Legislation) adopted at the end of December 2015. The bulk of the Reform Legislation will enter into force on 1 September 2016, while a number of other provisions will take effect on 1 February 2017.
The far-reaching changes include a statutory redefinition of corporate disputes and their arbitrability, an overhaul of Russian arbitration institutions, and important modifications of the legal regimes for domestic and international arbitration.
One step forward, one step back?
In an attempt to make Russia a more arbitration-friendly jurisdiction, the reform addresses some of the issues that have caused problems for arbitration users in the past. For example, the proliferation of domestic arbitral institutions (often of questionable independence and quality) has led to the adoption of rules to impose order and consistency in the domestic arbitration market. Another progressive development is aimed at harmonising the rules governing purely domestic arbitration with the rules governing international arbitration. Various procedural reforms have been introduced with this goal in mind.
However, the Reform Legislation also imposes tighter regulation in the sphere of corporate disputes involving Russian companies. As explained below, such disputes will be subject to new rules which the parties may not have contemplated when concluding their arbitration agreement.
How is it relevant for you?
The Reform Legislation means that, from 1 September 2016 (and, in respect of corporate disputes, from 1 February 2017), parties have a number of new issues to consider when drafting arbitration clauses in transactions with a Russian element, as well as in the corporate charters of Russian companies.
Arbitral proceedings under existing arbitration clauses may be affected in unexpected ways. Dispute resolution clauses may need to be checked and may require adjustment to ensure that they remain fit for purpose.
Arbitrability of corporate disputes
Generally speaking, all civil disputes can be referred to arbitration by agreement, instead of referral to national courts. The Reform Legislation introduces a list of dispute categories that are not subject to arbitration. These include:
- insolvency disputes;
- disputes relating to privatisation;
- state procurement disputes (at least for the time being); and
- certain IP disputes.
But the most significant exclusion from arbitrability is in relation to corporate disputes. There was previously no express statutory prohibition on referring corporate disputes to arbitration, but court decisions such as the 2011 Maksimov case suggested that corporate disputes were non-arbitrable. This case law did not prevent parties from referring corporate disputes to arbitration abroad, but enforcement of resulting awards in Russia has been problematic.
The Reform Legislation establishes a clearer regime: Russian corporate disputes (as defined, including disputes arising out of SPAs, shareholder agreements and joint venture contracts) can be submitted to arbitration. This default rule is subject to an exhaustive list of specific dispute categories that can only be heard in courts. Most importantly disputes are nonarbitrable if they:
- relate to the general meetings of Russian companies;
- relate to the notarisation of stake (participation interest) transfers in limited liability companies;
- involve challenges to the conduct of public officials;
- relate to a company designated as a ‘strategic entity’ under Russian law (although disputes relating only to ownership of shares in such companies may be arbitrated, with some exceptions);
- arise out of share redemption and mandatory offers; or
- relate to the expulsion of shareholders from a Russian company.
This new framework will only apply to arbitration clauses concluded from 1 February 2017. Arbitration agreements relating to corporate disputes and signed earlier are to be considered invalid in relation to Russian corporate disputes.
If a corporate dispute arises under an existing SPA or SHA arbitration clause, a party could take a range of actions to avoid arbitration. This could take the form of civil actions in Russian courts, opposing jurisdiction in the arbitration, seeking annulment or blocking enforcement of an eventual award.
With respect to future contracts that will subject to the Reform Legislation, the situation should be clearer, and avoidance tactics more difficult. But there will be ample room for disruption, if the parties have not taken care in their shareholders’ agreement to observe new limitations imposed on the arbitration agreement:
- institutional arbitration must be selected; ad hoc proceedings are prohibited;
- most corporate disputes have to be adjudicated under specialised rules for that purpose, which the institution has adopted and deposited with the authorities; and
- the seat of arbitration must be in Russia.
In light of the changes introduced by the Reform Legislation, users of arbitration will need to review their existing arbitration clauses and carefully consider their operation under the Reform Legislation and the optimal choice of arbitration institutions and rules going forward.