On 1 November 2017, the transition period for the reform of Russian permanent arbitral institutions (PDAU) provided under the new Russian arbitration legislation17 for the reform of Russian arbitral institutions expires. Starting from that date, permanent arbitral institutions which failed to obtain a Russian Government permit envisaged under the new legislation would no longer be permitted to operate. In this briefing, we will consider the options now available to the parties wishing to arbitrate their dispute and the first results of the practical application of the new legislation, which is in force from 1 September 2016.
The reform of arbitral institutions and its interim results as at October 2017
On 1 November 2016, the Russian Government introduced the rules for issuance of specialised permits to arbitral institutions as required under the new arbitral legislation18, thereby triggering the start of the one-year period for arbitral institutions to receive the permits. The ICAC and the MAC at the Chamber of Commerce and Industry of the Russian Federation were exempted from the permit requirement but were nevertheless required to reform their arbitration rules19 . According to public information, a large number of institutions applied for the permits, however, as at October 2017, only two permanent arbitral institutions have obtained such permits, i.e., the Arbitration Centre at the Institute of Modern Arbitration and the Arbitration Centre at the Russian Union of Industrialists and Entrepreneurs. Therefore, the choice of arbitral institutions available in Russia has effectively been reduced to three institutions20. 1 November 2017 is not a cut-of date, i.e., new permits may be issued afterwards (including to institutions whose applications have previously been refused)21. However, it is reasonable to assume that the extremely conservative approach to issuing new permits will continue and that the number of permanent arbitral institutions in Russia will remain low.
The new legislation does not require that permits be obtained by foreign arbitral institutions, however, it does stipulate that, until and unless they get the permit22, they will not be considered “permanent arbitral institutions” for Russian arbitration law purposes and the arbitration administered by them would effectively be deemed ad hoc arbitration under Russian law. Given that the new legislation only allows institutional arbitration of corporate disputes23, under Russian law, the lack of a permit would disqualify a foreign institution from administering Russian corporate disputes. In practice, many parties will continue submitting Russian corporate disputes to “non-permitted” foreign institutions; however, they need to be mindful of the legal risks, including, first and foremost, the risk of non-enforcement of the arbitral award in Russia. According to public information, some foreign institutions intend to obtain the Russian permit; however, at the time of writing, none have obtained a permit and it remains unclear which foreign institutions will actually apply.
We also note that the new arbitral legislation does not prohibit ad hoc arbitrations (except in relation to corporate disputes), however, if the parties intend to appoint a body or institution to assist in ad hoc arbitration (e.g., to resolve deadlocked appointments and challenges), such body or institution must hold a permit24 .
The reform of arbitration rules and adoption of specialised “corporate” arbitration rules
The new arbitral legislation compelled the ICAC and the MAC at the Chamber of Commerce and Industry of the Russian Federation, as well as other Russian arbitral institutions, to reform their arbitration rules. In addition to being brought into compliance with mandatory requirements of the new legislation, the arbitration rules have undergone significant modernisation25 .
One of the pillars of the arbitral reform is the new regulation for arbitration of corporate disputes, i.e., disputes connected with the incorporation and management of, and participation in, Russian companies26. The new legislation sets out minimum statutory requirements for specific types of disputes (such as disputes concerning title to shares and participation interests in Russian companies) and allows such disputes to be arbitrated under regular, non-specialised arbitration rules. However, for the vast majority of corporate disputes, arbitration is only permitted under specialised “corporate dispute arbitration rules” (CDAR), which set out the methods for informing the target Russian entity and its shareholders of the dispute, joinder of additional participants and coordination of the latter's procedural steps. At the time of writing, the CDAR have already been adopted by the ICAC, the Arbitration Centre at the Institute of Modern Arbitration and the Arbitration Centre at the Russian Union of Industrialists and Entrepreneurs27. Therefore, the necessary legal infrastructure for consideration of all types of corporate dispute28 has been set up not only at the statutory level but also in arbitration rules. However, this, in itself, may be insufficient. For most types of corporate disputes, in addition to the requirement to apply CDAR, other requirements exist, ( such as accession of the target company and all its participants to the arbitration agreement29. In some situations (e.g., for joint stock companies with a large number of shareholders) these requirements may be very difficult to comply with, which limits the scope of specialised “corporate” arbitration in Russia.
Complex and “cascade” arbitration clauses
Apart from the arbitration rules, the Russian arbitral institutions also reformed their model arbitration clauses. In addition, the new legislation gives the parties wide discretion for fine tuning of their arbitration clauses, in particular by including “specific agreements” to waive recourse to state courts on such matters as resolution of deadlocked appointments and challenges, setting aside of the award, and more. Given this and also taking into account the fact that the arbitration rules often allow the parties to opt out of default provisions, we can expect to see quite complicated arbitration clauses. Furthermore, in the context of corporate and financial transactions with a foreign element one can see an increasingly wide use of “cascade” arbitration clauses in respect of corporate disputes, whereby the parties agree in advance the list of preferred arbitral institutions (including non-Russian) and agree that the future dispute shall be submitted to the highest ranked institution on the list of preferred arbitral institutions (including non-Russian) and agree that any future dispute shall be submitted to the highest ranked institution on the list provided that it shall have obtained the Russian permit before commencement of the arbitration proceedings30 .
Outstanding issues relating to interpretation of the new legislation
A uniform approach to interpretation of the new legislation, especially with regard to corporate disputes, is yet to be formed. In particular, there remains a difference in views on whether any and all disputes arising under share and participation interest purchase agreements in Russian companies, or only disputes relating to title to shares and interests, are deemed corporate. There also exist different interpretations of other issues, such as the delimitation of “simple” corporate disputes and those requiring CDAR, as well as delimitation of “corporate” and “non-corporate” disputes arising in complex crossborder transactions. Many of these issues will remain open until a uniform approach is adopted in doctrine and court practice31. An important step in this direction was the publication, in August 2017, of a comprehensive commentary on the new arbitral legislation under the aegis of the RAA, in which Freshfields lawyers actively participated32 .
What to expect in the near future
Following the adoption of the new arbitration legislation, the necessary regulations were passed, the system for issuance of permits was launched and reformed arbitration rules were passed by Russian arbitral institutions, thereby completing the legal infrastructure necessary for implementing the new legislation. We expect development, in due course, of court practice in relation to the new arbitration legislation and the new arbitral rules (including CDAR) based on such legislation. We also expect a gradual increase in the number of arbitral institutions holding the Russian permit. Arguably, the most significant developments would be the issuance of such permits to the RAA and reputable foreign arbitral institutions.
We shall closely monitor the situation and update you on the most important developments.