On December 29 2015 the president signed two bills effecting the reform of arbitration law in Russia,(1) which had been in the works for more than two years.(2) The laws will enter into force on September 1 2016, with some provisions to become effective at later dates. This update outlines the main changes introduced by the reform.
The reform introduces changes in relation to the rules governing arbitration agreements. The changes are based to a significant extent on the 2006 version of the United Nations Commission on International Trade Law Model Law on International Commercial Arbitration (Article 7, Option I). The written form requirement remains, but certain clarifications are given as to when such requirements are deemed to be met. Generally speaking, the written form requirement is satisfied when the agreement is concluded in a form which allows for the recording of information contained in it or for access to such information for subsequent use. This may include:
- electronic communications signed with digital signatures;
- exchange of statements of claim and defence by the parties; and
- incorporation by clear and unequivocal reference.
The arbitration agreement can also be included in the house rules of exchange and, in some cases, the charter of a Russian legal entity.
The amended article also provides that in case of assignment, both new and old creditors (or debtors, as the case may be) will be bound by an arbitration agreement.
Finally, the amended article introduces a number of interpretation presumptions. Most importantly, it provides that all questions relating to interpretation of the arbitration agreement should be construed in favour of its validity and enforceability. Thus far, the Russian courts have largely interpreted even minor mistakes as invalidating the arbitration clause. It remains to be seen whether this interpretative presumption will be capable of bringing about a change in this attitude.
While the drafts of the laws at one point included express permission to enter into optional arbitration clauses – both symmetrical and asymmetrical – the enacted legislative texts contain no rule in this regard. Therefore, Russian law on this point remains rather unsettled.
Russian legislation initially provided that all commercial and private disputes could be referred to arbitration, unless otherwise provided for under federal law. Only bankruptcy legislation contained a clear prohibition against referring bankruptcy cases to arbitration. However, court practice has significantly broadened the scope on non-arbitrable disputes. For example, the courts have considered real estate disputes,(3) corporate disputes and disputes involving a public element(4) to be non-arbitrable, among others. The recent reform was intended to limit the scope of judicial creativity. Now, only disputes specifically excluded under federal law are prohibited from being referred to arbitration. The list of non-arbitrable disputes is not confined to the procedural legislation,(5) but can be extended by further legislation. Non-arbitrable disputes include (but are not limited to):
- bankruptcy disputes;
- privatisation disputes;
- disputes relating to public procurement; and
- employment, family and personal injury cases.
One of the most widely cited innovations introduced by the reform relates to the arbitrability of corporate disputes. The laws distinguish three categories of corporate dispute:
- corporate disputes involving a public element (eg, disputes on state registration of corporations), which cannot be referred to arbitration;
- disputes involving contracting parties only (eg, disputes arising from share purchase agreements), which are arbitrable; and
- disputes involving a large number of parties (eg, disputes relating to the challenge of corporate resolutions and disputes arising from shareholders' agreements with respect to Russian entities), which may be arbitrable under certain circumstances. In particular, these disputes can be referred only to arbitral institutions which have adopted specific rules for corporate arbitrations.
With respect to this latter category of dispute, the special arbitration rules must provide that the arbitral institution will inform the relevant entity of the corporate dispute (and the entity must inform its shareholders) and post the relevant information on its website. Further, the shareholders of the entity in question must be able to join to the proceedings at any stage (in which case, the arbitral institution will notify them of developments in the case). No arbitral institution in Russia has adopted the corporate arbitration rules to date, but the Russian Arbitration Association and the International Commercial Arbitration Court at the Russian Chamber of Commerce and Industry are said to have started drafting them. Thus, it is likely that the rules will be adopted by the end of 2016.
It remains to be seen whether there will be significant demand for these services, as it is cheaper to litigate in the state courts. However, the arbitration option may prove popular for special-purpose entities created to implement joint ventures between Russian and foreign partners.
Corporate disputes can be arbitrated only in Russian and must be administered by an arbitral institution. It remains uncertain whether this requirement extends to disputes arising from share purchase agreements, as the legislative provisions on this are not quite clear. Importantly, the transitional provisions provide that arbitration agreements with respect to corporate disputes can be concluded only after February 1 2017; such agreements concluded before this date are considered incapable of being performed (the provisions in this regard thus remain unchanged).
Court proceedings to set aside or enforce arbitral awards in Russia are generally quick. At present, the first-instance court must decide on the matter within three months of the filing date of the relevant application. However, the reform will reduce this timeframe to only one month; this change will become effective on January 1 2017. The reduced timeframe to enforce or set aside the award is intended to promote efficiency, but also comes with downsides. First, the respondents to the applications will need to be prepared to act promptly and most likely monitor any application to ensure that defence submissions can be made within a short period. Second, this change will put additional pressure on first-instance judges, who are known to make many mistakes in arbitration-related cases. On top of being unfamiliar with arbitration and having many other cases before them simultaneously, they will now have insufficient time to study and develop a full understanding of the parties' submissions. Therefore, it is quite possible that judges will have to take decisions intuitively and their subconscious biases will likely have to be rectified at the appellate level.
The reform will allow the parties to Russia-seated and administered arbitrations (both domestic and international) to agree on the finality of the award and thereby to prohibit setting-aside proceedings. This development essentially reflects recent court practice, which has extended the analogous provision in the law on domestic arbitration to international arbitration cases. However, while court practice has considered the reference to the finality of the award in the arbitration rules to be sufficient to trigger the prohibition of setting-aside proceedings, after the reform becomes effective, such an agreement will need to be expressly stated in the arbitration clause.
The reform will also allow non-parties to arbitration to challenge arbitral awards which concern their rights or duties. Most likely, such challenges cannot be excluded, irrespective of any express agreement of the parties to the contrary; but in practice, situations in which arbitrators render an award that directly affects non-parties will be exceptional.
Further, the reform provides for a mechanism to stay the setting aside of proceedings in order to allow the arbitral tribunal to rectify defects. Upon a party's application, the court can stay the proceedings and remit the case to the arbitral tribunal if:
- the grounds for application to set aside are based on a lack of proper notice or an inability to present one's case;
- the award was rendered on matters not falling within the scope of the arbitration agreement; or
- the arbitral tribunal's composition or procedure did not comply with the agreement of the parties.
The stay can be granted for up to three months, within which the arbitral tribunal must rectify the procedural defects. At present, this is allowed under Article 34(4) of the Law on International Commercial Arbitration; but this provision has lain dormant, since the procedural legislation did not provide for a specific mechanism to implement it.
The reform will introduce a new provision on the recognition of foreign declaratory judgments and arbitral awards.(6) If the relevant international treaty provides for the recognition of such judgments and awards, they will be recognised in Russia without further enforcement proceedings. Therefore, such declaratory judgments and awards may be directly applicable in Russia and may be relied on in Russian court and arbitration proceedings. However, it is unclear whether there needs to be a specific international treaty to this effect or if the treaties providing for recognition and enforcement (eg, the New York Convention) would suffice.
Notably, the burden to oppose recognition of the award would be on the respondent. The application to oppose recognition must be filed in the Russian court within one month of the date that the applicant learned of the judgment or award. The grounds for refusal of recognition are essentially the same as those for refusal of enforcement. Thus, the burden of proving that a declaratory judgment or award should not be recognised rests with the losing party and, unless that burden is promptly discharged, the relevant judgment or award can be used in proceedings in Russia without further formalities. This development also puts pressure on respondents, which need to be aware of the risk of the judgment or award being used against them in Russia and be ready to file the relevant application with short notice after they have been notified of the judgment or award.
For further information on this topic please contact Andrey Panov at Norton Rose Fulbright (Central Europe) LLP by telephone (+7 499 924 5101) or email ([email protected]). The Norton Rose Fulbright website can be accessed at www.nortonrosefulbright.com.
(1) An unofficial translation of the amended Law on International Commercial Arbitration was prepared by the Russian Arbitration Association and is available at http://arbitrations.ru/upload/medialibrary/d94/international-arbitration-act-russia-in-english.pdf. However, various provisions relevant to international arbitration are contained in other pieces of legislation, including the law on domestic arbitrations and procedural codes.
(2) For further details please see "Impact of proposed reform on international arbitration" and "Arbitration law reform in Russia: a U-turn?".
(3) This practice was later overturned by the Constitutional Court.
(4) For further details please see "Court affirms non-arbitrability of disputes involving public element".
(5) Article 33 of the Arbitrazh Procedural Code and Article 22.1 of the Civil Procedural Code.
(6) Article 245.1 of the Arbitrazh Procedural Code.
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