The Vienna International Arbitral Centre (VIAC) has been approved by Russia’s Ministry of Justice on 7 July as a non-Russian permanent arbitration institution. This allows VIAC to be designated by parties to hear arbitrations of certain types of Russian “corporate disputes”. VIAC is the first such Russian-accredited European arbitration institution.

This comes three months after the April 2019 approval of the Hong Kong International Arbitration Centre (HKIAC) as Russia’s first such non-Russian permanent arbitration institution. (The Singapore International Arbitration Centre is said to be now holding discussions with the Ministry of Justice about such possible accreditation as well.)

Context

Russia reformed its laws on commercial arbitration in late 2015 (in force as of September 2016). The goal of the reform was to stop the by-then widespread practice of so-called “pocket arbitration courts”, which had led to many abuses of parties’ rights. As one of the consequences of the reform, commercial arbitration in Russia may now only be conducted either ad hoc or by accredited arbitration institutions – and certain categories of disputes, including corporate disputes, may be heard only by the latter.

On the one hand, by these amendments Russian law for the first time expressly recognizes the arbitrability of these disputes. But at the same time, the amendments limit the choice of arbitration forum for such disputes to institutions that are formally "accredited" in Russia. Until this year, no foreign institutions (and only a few Russian institutions) were so accredited. By some recent changes effective March 2019, in addition to three accredited Russian institutions[1], parties can now also choose HKIAC or VIAC for corporate disputes (albeit with some apparent restrictions on what the two foreign institutions can hear).

For a more detailed discussion of this whole reform, see our April 2016 LawFlash. See also our linked chart, which depicts the various types of corporate disputes and their arbitrability as defined by Russian law – also reflecting the new additions of HKIAC and VIAC, some other recent adjustments in the law, and some related consensus interpretations. This is quite a complex area, with various uncertainties still.

Arbitrability; Accredited Institutions

Broadly speaking, as relevant here, a corporate dispute is one concerning establishment or management of or participation in a Russian-incorporated company. In other words, this is a dispute on any corporate governance matter or in connection with any corporate transaction – including acquisition, divestiture, merger, joint venture, or shareholders’ agreement. (Foreign-incorporated companies involving Russian parties are outside the reform’s scope.)

The reform mandated "accreditation" by the Russian government (this function now being carried out by the Ministry of Justice) of any arbitration institution if it wants to administer disputes in Russia as “institutional” (the significance of this is summarized just below). Once accredited, it is known as a permanent arbitration institution (PAI).

Any Russian-seated arbitration may now either be administered by a PAI or be a non-administered ad hoc arbitration. In the latter case, the parties are not permitted to agree on a finality of the award (thus, such award may be challenged in a state court), or to exclude the possibility of referring to a state court for assistance on certain issues (such as on formation of the tribunal, challenge of an arbitrator, or of a tribunal’s ruling on lack of jurisdiction).

A closely related consequence of the reform is that, as of 1 November 2017, arbitration agreements (e.g., clauses in commercial contracts) referring corporate disputes to unaccredited institutions became unenforceable in Russia. Further, such unaccredited institutions (Russian as well as foreign) were barred from administering arbitrations in Russia. Any arbitration award by a non-Russian institution (that has not become an accredited PAI) on a corporate dispute will therefore be unenforceable in Russia.

This has given rise to some difficult issues for parties to cross-border corporate transactions in Russia, sparking heated debate in the legal community. But actual market practice on choice of dispute forum for major M&A/joint venture deals has been slow to change: many foreign investors in such Russian projects have continued to prefer designating non-Russian arbitration for the shareholders’ agreement (SHA). In doing so, they are accepting the reality that enforcement of a foreign arbitral award in such context would be practically impossible in Russia, with enforcement outside of Russia being the only realistic hope – assuming the Russian counterpart has attachable assets outside Russia.[2]

The traditionally popular institutions for Russia-related arbitration—the London Court of International Arbitration (LCIA), the International Chamber of Commerce (ICC), and the Stockholm Chamber of Commerce (SCC)— have decided thus far not to apply for the accreditation. (Their generally expressed explanation is to maintain distance from any government authority, and thus their impartiality.) But some other institutions have shown interest in applying – among them HKIAC (already accredited) and VIAC (about to be); and more will surely follow.

Eased Rules for Some Corporate Disputes

Some further recent amendments (of December 2018, effective as of end March 2019) among other things have somewhat eased the rules on arbitrability of certain corporate disputes in general and for foreign PAIs in particular. Namely:

  • Additions (to para. 7.1 of art. 7 of the Law on Arbitration) have made it possible for just the shareholders who are parties to a specific SHA-based dispute to arbitrate that corporate dispute – without the need to include the company (and/or, as the case may be, other shareholders). This fixes an aspect of the initial 2015-16 reform that had created substantial complexities and hurdles to arbitration of corporate disputes.
  • Further additions (to para. 6.2(4) of art. 44, and para. 7.1 of art. 45 of this Law) have made it possible to consider this category of corporate disputes (i.e., involving only certain shareholders of a company) under the chosen accredited institution’s general arbitration rules – without requiring application of special “corporate disputes rules”. (These special rules, which have been adopted by the Russian PAIs per legal requirement, are in practice quite complex and burdensome to apply. So far, neither HKIAC nor VIAC has indicated an intent to adopt such special rules.)
  • The general requirement of a foreign accredited PAI having a Russian branch or representative office applies only if it intends to hear domestic corporate disputes in Russia –i.e., disputes involving only Russian legal entities. (There is an exception, per which a foreign PAI may hear such disputes if they arise from one of Russia’s “special administrative regions”.)

HKIAC and VIAC – Impact for Russian M&A / Joint Venture Disputes

HKIAC and VIAC, as the first and currently the only PAIs based outside Russia, are eligible to consider corporate disputes in relation to shares or participatory interests in Russian companies concerning ownership of, encumbrances on, or exercise of rights arising out of such shares/interests. In other words, these are most disputes in the M&A context.

And now, per the most recent amendments as noted above, another category of corporate disputes may also be resolved by a PAI seated in Russia – without the need of having special corporate dispute rules. This evidently allows the newly accredited HKIAC and VIAC to consider these – namely disputes arising from agreements between the shareholders of a legal entity concerning the management of that entity, including disputes arising from corporate agreements (thus covering the key issues within a shareholders’ or analogous agreement context), as long as such disputes do not involve the company as a party (and all the disputing shareholders are parties).[3]

Thus, HKIAC or VIAC may currently hear such a corporate dispute as long as they involve a foreign party or have other cognizable “foreign element”— so that the dispute can be classified as “international”— in contrast with a “domestic” dispute which involves only Russian parties.