Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Dispute Resolution volume discussing topics including Brexit’s impact on choice of law and jurisdiction, market competition and the popularity of ADR within key jurisdictions worldwide.
1 What are the most popular dispute resolution methods for clients in your jurisdiction? Is there a clear preference for a particular method in commercial disputes? What is the balance between litigation and arbitration? What are the advantages and disadvantages of the most popular dispute resolution methods?
Russian parties largely prefer litigation before Russian courts, although for cross-border projects they usually select arbitration to ensure they get an award, which is enforceable abroad. There are two branches within the Russian court system: courts of general jurisdiction (the latter deals with disputes involving individuals) and state commercial courts for commercial disputes. Litigation before Russian courts is quick and comparatively cheap, which explains clients’ preference for litigation.
At the same time, arbitration is also relatively popular. Domestic arbitration in Russia does not enjoy the same reputation and respect as international arbitration. However, after the recent arbitration law reform we can see the first signs of improvement in the situation and domestic arbitration is becoming more trustworthy.
Other ADR mechanisms are not that popular in Russia, because clients want the resolution of their dispute to result in a binding and enforceable decision against the other party, rather than yet another settlement agreement that may eventually be breached.
It appears that the Russian judicial system has, in principle, recovered from the impact of the covid-19 pandemic and its related measures, which no longer affect proceedings or the court ability to hear cases. At the same time, the court system in Russia (as well as Russian arbitration institutions) have received some positive ‘vaccinations’ during 2020 – hearings via videoconferencing and other technological developments allowing remote access to the proceedings have reached a new level of quality and availability.
2 Are there any recent trends in the formulation of applicable law clauses and dispute resolution clauses in your jurisdiction? What is contributing to those trends? How is the legal profession in your jurisdiction keeping up with these trends and clients’ preferences? What effect has Brexit had on choice of law and jurisdiction clauses?
Over the past decade, the choice of foreign law (primarily English law), as well as foreign-seated arbitration for cross-border transactions, has become common practice for large and medium-sized businesses in Russia. English law has been considered more convenient for the structuring of M&A and related deals with Russian participants.
Following the imposition of sanctions against Russia by the European Union and the United States, many Russian companies, especially those with state participation, started choosing Singapore law (instead of English law) and the Singapore International Arbitration Centre (SIAC), as well as the Hong Kong International Arbitration Centre (HKIAC), instead of the usual European arbitral centres.
In parallel to this, the Russian Civil Code has been reformed to recognise concepts common in business transactions (eg, rules on representations and warranties). Russian law documents often form part of the transaction documentation in large-scale deals, but it is still not common to have the entirety of a significant transaction governed by Russian law.
However, for certain disputes (eg, shareholders’ disputes between participants of a Russian entity), it is now mandatory to litigate or arbitrate them in Russia rather than abroad. For these types of disputes many clients agree to Russian litigation or Russia-seated arbitration administered by Russian institutions. Sometimes, parties adopt ‘waterfall dispute resolution clauses’, which provide for various means of dispute resolution (such as arbitration abroad, arbitration in Russia and litigation in Russia) to apply depending on the circumstances. The attitude of the Russian courts regarding such complex clauses remains unclear. However, its recent Plenum Resolution of December 2019, the Supreme Court established a position on the invalidity of disproportional asymmetrical arbitration agreements.
Many Russian judges are unfamiliar with foreign law governed disputes and, therefore, usually welcome assistance from the parties’ counsel in establishing the meaning of the applicable law. Russian offices of international law firms are often best equipped to deal with this, as they benefit from a large network of their own specialists located in many relevant jurisdictions. Russian law firms would require a co-counsel from relevant jurisdictions, which may result in a compromise over quality or an increase in costs.
From our perspective, Brexit has not had any substantial impact on Russian parties’ choice of law and jurisdiction. The possible uncertainties as to the post-Brexit position do not seem to be relevant for Russian parties, except perhaps the possibility that the post-Brexit United Kingdom may be more likely to adopt their own sanctions regime against Russia, which may be more severe than the one adopted by the European Union. Otherwise, if parties have adopted English law in the past, this had nothing to do with the EU but was rather driven by the principles of English contract law, which are likely to remain the same irrespective of the UK’s status within the European Union. Furthermore, in many cases when selecting the United Kingdom as a forum for their disputes, Russian parties were opting primarily for arbitration. In that context it would not matter whether the United Kingdom remains part of the Brussels regime.
3 How competitive is the legal market in commercial contentious matters in your jurisdiction? Have there been recent changes affecting disputes lawyers in your jurisdiction? How is the trend towards ‘niche’ or specialist litigation firms reflected in your jurisdiction?
The dispute resolution market in Russia has become very competitive, particularly following the economic downturn, which, on the one hand, has increased the amount of work, but, on the other, has made clients more cost-conscious. Both of these trends are likely to increase due to the covid-19 pandemic and its economic effects. The main competition at the moment is between larger Russian law firms and international offices of international law firms. There is also growing competition from specialised dispute resolution boutiques established recently by some of the leading litigators in the market. Such ‘niche’ litigation firms could, undoubtedly, play an important role in the Russian dispute resolution market, but are likely to focus more on local litigation work, rather than on cross-border disputes and large international arbitration cases.
At the same time, competition between Moscow and Saint Petersburg-based firms and regional firms is largely non-existent, for they usually work in different market sectors. While Moscow and Saint Petersburg firms usually work on more complex projects, often involving cross-border elements, where the increased cost would be justified, local firms have a clear advantage of being able to charge significantly lower fees, but would, in many cases, be challenged to deliver to a Western-style standard and may have significant difficulties in communicating with clients in English. There are, however, new services that may reduce costs even where larger international firms are involved. For example, certain firms will offer to study case files at the client’s request and provide the copies of the same to the lawyers based in Moscow. This is useful particularly when the relevant court is located far from Moscow (eg, in the Russian Far East).
In 2017, the Ministry of Justice published a paper on the development of the legal profession in Russia. It envisages that the legal profession must become fully regulated by 2023. Representation of clients before the Russian courts would be open only for Russian-qualified advocates and in-house lawyers, and it is expected that this will ultimately enhance the quality of legal representation in the Russian courts. However, the concrete details of this reform are yet to be seen and its separate elements are still subject to discussion.
4 What have been the most significant recent court cases and litigation topics in your jurisdiction?
As in recent years, the primary Russian litigation trend connected to bankruptcy proceedings and management liability still holds its leading status. The largest number of cases resolved by the Supreme Court of Russia are in the areas of bankruptcy and secondary liability issues.
Among the most significant cases is the largest ever claim to recover losses from Rost Bank’s former managers and other controlling persons in the amount of 306 billion roubles was filed with the Moscow Commercial Court in November 2020. The claimant, National Bank TRUST, is challenging transactions to increase the share capital of Rost Bank’s subsidiaries and is suing for resulting losses.
Also notable is a set of cases concerning the secondary liability of underage heirs in terms of bankruptcy procedures. The Supreme Court, having considered the Alliance LLC and Amursky Product LLC cases, has formed a practice according to which children may acquire the monetary liabilities of their deceased parents. In reaching such a conclusion, the Supreme Court’s position is that persons subject to subsidiary liability could harm creditors not only by driving a debtor company into bankruptcy, but also by preventing creditors from receiving their funds via bankruptcy proceedings (eg, when property is transferred to close relatives within the framework of a gratuitous transaction). The assets concerned will remain in the family’s control, but a nominal change of ownership will have occurred.
5 What are clients’ attitudes towards litigation in your national courts? How do clients perceive the cost, duration and the certainty of the legal process? How does this compare with attitudes to arbitral proceedings in your jurisdiction?
Litigation before Russian courts is relatively inexpensive and quick. The maximum filing fee is capped at around US$2,700 where the value of the claim is above US$27,000. Many companies handle litigation through their in-house teams. Even where external counsel are retained, their fees are likely to be lower than in many other jurisdictions, as Russian litigation usually involves fewer time-consuming and costly tasks, such as document production or lengthy hearings intended for cross-examination of witnesses. In terms of speed, a case before the commercial court may be considered by three instances (first, appellate and cassation) within eight to 12 months on average, although some cases may continue their journey through the courts for some years.
Russian clients are accustomed to low costs and speed. For this reason, they may sometimes be reluctant to agree on arbitration. In addition, the negative costs implications, even when a claim is unmeritorious, are very limited, as the courts are reluctant to order reimbursement of legal expenses in full. As a result, Russian clients will usually litigate for tactical reasons or out of principle, even where foreign clients might have negotiated a settlement.
However, the speed of litigation and a very significant caseload may mean that Russian judges do not always examine complex factual backgrounds or innovative legal arguments to a great extent.
One additional disadvantage of litigation before the Russian courts is the limited enforceability of the resulting judgment outside of Russia. In this respect, international arbitration is a more popular choice for cross-border transactions, though Russian clients may sometimes be surprised by the costs involved in arbitral proceeding and their duration. At the same time, arbitration even before Russian-based arbitral institutions usually presents better opportunities to argue the case, particularly if it is fact intensive or governed by foreign law.
6 Discuss any notable recent or upcoming reforms or initiatives affecting court proceedings in your jurisdiction.
Due to covid-19 pandemic, on 8 April 2020, the Presidium of the Supreme Court of the Russian Federation together with the Presidium of the Council of Judges of the Russian Federation adopted the joint Resolution No. 821 (1), prescribing a temporary suspension of personal reception as well as recommending the submission of documents electronically.
Subsequently, the resolution was supplemented with a recommendation to conduct court hearings by using a videoconferencing system and a web conference system. As opposed to the videoconferencing system already known by the procedural laws, the additional web option has emerged as a new procedural tool referred to as an online court hearing. To participate in an online court hearing, it is sufficient to have any device allowing to enter into widely available videoconferencing platforms such as Zoom.
To participate in an online court hearing, participants in the proceedings submit a special application to the court in electronic form and attach electronic images of their identity documents and confirming powers. Once such an application is accepted by court, the possibility of an online court hearing opens in the electronic case card on the corresponding internet portal.
This online format presumes an ability to participate in court hearing from other regions or even abroad, reducing the monetary and time cost associated with court attendance. At the same time, experience demonstrates that this format is unsuitable for complex disputes when it is essential to debate and defend one’s position by presenting evidence in-person.
The use of virtual court hearing formats has yet to be widely adopted for commercial disputes in Russia. Many courts still do not support online court hearings and, despite the fact that covid-19 health risks have not gone away, the number of online court hearings appears to be decreasing. It is worth mentioning that there is also a systemic problem with regard to the online format, given it is not directly provided for by Russian procedural legislation. The introduction of online court hearings by the Supreme Court, which is not a legislative body, is insufficient to overcome this particular regulatory vacuum with respect to proceedings.
Nevertheless, the online court hearings initiative, as a real and functioning procedural instrument, represents the next step toward digitalisation and the improvement of proceedings in Russia.
Elsewhere, as of 1 July 2021, a pre-trial appeal of decisions of supervisory authorities will become compulsory for 19 agencies. Within the framework of the current experiment on pre-trial appeals, a complaint may be filed against a supervisory authority via the State Service portal. The progress of the appeal may also be tracked on the portal. Complaints are to be answered within 20 business days.
A pre-trial complaint may be filed against:
- an act or decision based on the results of an inspection;
- an order on the detection of violations;
- an order to carry out measures to prevent harm;
- a decision on the appointment of an inspection; or
- actions of an official within the inspection.
The procedure for compulsory pre-trial appeal is imposed within the framework of the Federal law ‘On State Control (Supervision) and Municipal Control’. Effective from 1 January 2023, the compulsory pre-trial procedure should cover all types of state control that are regulated by the named federal law.
7 What have been the most significant recent trends in arbitral proceedings in your jurisdiction?
We continue to see clients becoming more sophisticated when it comes to drafting dispute resolution provisions. For example, we have started seeing more tiered dispute resolution clauses. Clients also take more care in selecting a forum or an arbitral institution. We are seeing more clauses selecting the HKIAC and the SIAC, particularly when it comes to state-owned companies. This is mainly due to the sanctions imposed by the European Union and the United States, but also because major Russian companies are more active in the Asian market than previously. Private companies, however, are still happy to use London Court of International Arbitration, International Chamber of Commerce (ICC) or Stockholm Chamber of Commerce clauses in their agreements.
Furthermore, Russian clients may be becoming less litigious than before. As a minimum, they are generally happy for lawyers to conduct a preliminary assessment on the merits of the case and will usually weigh the chances of success against potential cost implications. They also welcome settlement attempts through negotiation.
The trend for using Moscow-based counsel is on the rise, even though the most lucrative cases will often still be handled elsewhere. Clients will usually use the Russian offices of major international law firms, but also, sometimes, leading Russian firms and dispute resolution boutiques, many of which have lawyers with relevant experience in cross-border disputes and international arbitration. We are already seeing more international cases handled by Russian teams since 2020.
The number of investment treaty cases involving Russia is increasing, with some awards already being rendered against Russia in Crimea-related cases. At the same time, Russian investors are also becoming more active in bringing claims against host states.
8 What are the most significant recent developments in arbitration in your jurisdiction?
Following the 2016 arbitration reform, only five Russian arbitral institutions are allowed to administer arbitrations in Russia:
- the International Commercial Arbitration Court;
- the Maritime Arbitration Commission at the Russian Chamber of Commerce and Industry;
- the Arbitration Centre at the Russian Union of Industrialists and Entrepreneurs;
- the Russian Arbitration Centre at the Russian Institute of Modern Arbitration; and
- the National Center of Sport Arbitration at the Sport Arbitration Chamber.
In April 2019, the HKIAC became the first international arbitral institution to obtain a permit and the status of a permanent arbitral institution under Russian arbitration legislation. Shortly after, in July 2019, the Vienna International Arbitration Centre was also added to the list. Very recently, in May 2021, the ICC and SIAC also obtained permits to administer Russia-seated arbitrations. This is indeed a very positive development for the Russian arbitration landscape.
However, in mid-2020, the Russian state commercial courts obtained exclusive jurisdiction over commercial disputes with the participation of the Russian entities under foreign restrictive measures (ie, foreign sanctions) under ‘Lugovoy Law’ (Federal Law No. 171).
The main categories of disputes that are consequently subject to Russian courts’ jurisdiction are the following:
- disputes involving Russian persons in respect of which foreign states or organizations imposed restrictive measures;
- disputes involving foreign legal entities in respect of which the Russian counter restrictive measures were introduced; and
- disputes between parties, regardless of their place of incorporation, arising out of sanctions against Russian entities.
Exclusive jurisdiction of Russian courts can be now exercised even in cases where arbitration or prorogation agreements were concluded, provided that such agreements cannot be enforced due to foreign restrictive measures.
Violation of the exclusive competence of the Russian courts is now likely to become a valid legal ground for refusal to enforce decisions of foreign courts or arbitral awards in Russia. Another judicial instrument for securing the parties’ compliance with Russian courts’ jurisdiction is the anti-suit injunction, which can now be imposed by Russian courts on forms of restriction to initiate or continue foreign dispute resolution proceedings. Violation of said anti-suit injunction may lead to a unique procedural sanction – the suffering sanctioned party is able to file a claim against the violating party for compensation of up to a full amount of the latter party’s claim heard by the foreign arbitral tribunal or foreign court.
Thus, the essence of the newly brought amendments to the Arbitral Procedural Code provides that Russian entities under foreign sanctions are practically entitled to transfer (submit) their claims or disputes to the Russian courts in order to exercise proper access to justice.
This mechanism represents a national protective measure against the legal effect of foreign sanctions for the benefit of sanctioned Russian entities and their subsidiaries. At the same time, this sophisticated legislative initiative is expected to affect the international commercial arbitration environment in Russia as well as the related state court practice.
9 How popular is ADR as an alternative to litigation and arbitration in your jurisdiction? What are the current ADR trends? Do particular commercial sectors prefer or avoid ADR? Why?
ADR mechanisms other than arbitration are still not very popular with Russian parties, who generally prefer to have a clear procedure and enforceable award against the opposing party. While Russia adopted the Law on Mediation in 2010, in practice parties to commercial disputes rarely use mediation. It is likely, however, that the popularity of mediation may increase over time, as Russian procedural legislation continues to support this aim. This might be linked to the fact that Russian clients are increasingly unwilling to spend time and money when there is room for amicable settlement.
Contracts sometimes provide for multi-tier dispute resolution provisions, but, in most cases, these are limited to a requirement that parties attempt to resolve the dispute by negotiation and are still at risk of not being enforced in many jurisdictions. Expert determination and dispute resolution boards are frequently used in construction contracts (eg, dispute adjudication boards or similar instruments), particularly those modelled after the International Federation of Consulting Engineers. Expert determination is also used in cross-border commodity trading, particularly with respect to determining the sales price in long-term contracts.
10 What is the position in relation to litigation funding in your jurisdiction? Is funding available? Have there been any significant developments in this area in your jurisdiction?
In terms of regulation, the Russian jurisdiction remains, in principle, silent on litigation funding and on third-party funding in general. Therefore, there still are no formal restrictions or regulations applicable to such practice. At the same time, we have yet to see a litigation funding and third-party funding sector to emerge. Therefore, while applying for funding of the proceedings, which does not happen often in Russia, parties mainly use ad hoc financing options instead of institutional financial services. Litigation costs remain relatively low in Russia and therefore demand for such services has yet to emerge.
There remains the possibility that this situation may change in future, in which case a relevant regulatory framework would be required. Nevertheless, the leading litigation funds have so far adopted a cautious approach to finding Russian disputes given the elevated level of uncertainty associated with litigation before the Russian courts.
The Inside Track
What is the most interesting dispute you have worked on recently and why?
We are representing a Russian ore mining and processing plant located in the Russian Far East within the context of an engineering, procurement and construction dispute against a Chinese contractor in complex ICC arbitration proceedings. The complexity of the case is caused by a two-level dispute resolution mechanism that involves both arbitration and dispute adjudication board proceedings.
What do you consider to have been the most significant legal development or change in your jurisdiction of the past 10 years?
The elimination of the Supreme Arbitrazh Court of 2014 redirected the vector of interpretation and application of Russian civil law and procedure. Although many approaches and trends taken by the Supreme Arbitrazh Court have been preserved through the practice of the Supreme Court, there is no doubt that this did affect the practice and development of the arbitrazh courts system in Russia.
The Russian Arbitration Reform, started in 2016, saw more strict and efficient regulation of Russian arbitration institutions, as well as the moving of Russian disputes to a more arbitration-friendly environment. Although the existing results of the reform implied many practical challenges and contrasting evaluations by the practitioners, we hope that its strategic effect is yet to be discovered and would continue to evolve.
What key changes do you foresee in relation to dispute resolution in the near future arising out of technological changes?
The increased use of blockchain and decentralised technologies globally, and particularly within Eastern European jurisdictions, will inevitably be accompanied by an increase in associated disputes. The active use of cryptocurrencies and increased application of smart-contracts technologies will almost inevitably bring with it a disputes element.
Having taken the first steps in defining and regulating the civil law dimension of digital rights, the Russian legislature is expected to implement procedural measures to allow for the Russian judicial system to account for technological developments in the global economy, and more specifically the ability to resolve disputes arising out of complex digital agreements and algorithms (eg, smart-contracts).