This overview highlights recent developments in the approach to international commercial arbitration in Russia and provides a basic summary of the underlying legal rules. During the past year, the courts have analysed various different aspects of international commercial arbitration, focusing on the issues associated with the public policy clause.
Legal framework and major arbitration institutions
The Russian Federation is a party to the New York Convention 1958; the European Convention on International Commercial Arbitration (21 April 1961); and the Moscow Convention on the Settlement by Arbitration of Civil Law Disputes Arising from Relations of Economic, Scientific and Technical Cooperation (26 May 1972). The latter convention was intended for COMECOM countries and rarely applies, but has been used in some cases.
As regards investor–state arbitration, the Russian Federation signed the Washington (ICSID) Convention on 16 June 1992, but has not yet ratified it. The Russian Federation is also a party to more than 50 BITs.
On the national level, the international commercial arbitration rules are set out by the Law of the Russian Federation No. 5338-1 (7 July 1993), ‘On the International Commercial Arbitration’ (the ICA Law), which is based on the UNCITRAL Model Law. Domestic arbitration is governed by the Federal Law of the Russian Federation No. 102-FZ (24 July 2002), ‘On the Arbitration Tribunals in the Russian Federation’.
The major Russia-based international arbitration institutions include the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (ICAC), and the Maritime Arbitration Commission at the Chamber of Commerce and Industry of the Russian Federation (MAC). ICAC and MAC act on the basis of regulations annexed to the ICA Law and the rules adopted by the Chamber of Commerce and Industry.
Agreement to arbitrate
The basic legal requirements for an arbitration agreement are set out in article 7 of the ICA Law. Article 7(1) of the Law reproduces the definition of the arbitration agreement from article 7(1) of the UNCITRAL Model Law. Article 7(2) of the Law (as well as article 7(2) of the UNCITRAL Model Law) requires that an arbitration agreement must be in writing.
It is also important that the arbitration institution is named correctly by the arbitration agreement. The Russian courts have frequently refused enforcement of the arbitration clauses on the ground that they have not referred to the correct official name of an arbitration institution.
Involvement of the courts of the Russian Federation
The Russian state courts of both branches – the courts of general jurisdiction and the arbitrazh (ie, commercial) courts – have jurisdiction to deal with arbitration by means of, for example, granting interim reliefs in support of arbitral proceedings, recognising and enforcing arbitral awards, and setting them aside. However, the courts of general jurisdiction will have jurisdiction over the issues related to an arbitration only where the arbitration dispute did not arise out of economic activities in a broad sense. Therefore, the overwhelming majority of arbitration-related cases are dealt with by the arbitrazh courts.
The arbitrazh courts have four levels: a first instance court; an appellate instance court; a cassation instance court; and a higher instance court, the Supreme Court of the Russian Federation. In this hierarchy, the appellate instance court does not consider disputes as to the annulment or recognition and enforcement of arbitral awards, and a complaint against the decision of the first instance court should be filed directly to the cassation instance court.
Recent developments in the court system
Until 6 August 2014, the arbitrazh courts were headed by the Supreme Arbitrazh Court of the Russian Federation (the SAC). It was then merged into the Supreme Court, which is now on top of both arbitrazh courts and courts of general jurisdiction. The system of inferior arbitrazh courts did not suffer any apparent changes, but the legal community remains concerned about the future of commercial judicial system in Russia.
Recent developments in case law
Entry into a bankruptcy register of claims on the basis of an arbitral award
Hong Kong company Gartic Limited (Gartic) applied for enforcement of a foreign arbitral award on recovery of royalty and damages from OJSC Murmansk Multiservice Networks (MMN). The Moscow Region court enforced the award. Several days before that, an application was filed for MMN’s bankruptcy.
Gartic’s claim was then included into the bankruptcy register of claims against MMN. This was challenged by one of the bankruptcy creditors. The creditor argued that Gartic and MMN used the arbitration to document a non-existing claim for bankruptcy purposes and that the award was backdated. The cassation court dismissed the challenge and the creditor applied to the SAC.
The SAC reversed the cassation court ruling and remanded the matter for reconsideration.1 The SAC noted, inter alia, that:
- it had already confirmed that courts should consider whether acceptance of a claim based on an arbitral award may lead to unfair settlement of the claim and prejudice other bankruptcy creditors;
- a bankruptcy creditor can challenge claims of other creditors confirmed by an arbitral award, but it has limited ability to prove its case (as non-party to the arbitration); and
- a high standard of proof is therefore unfair, and it is sufficient for such a creditor to present prima facie evidence of reasonable doubts in existence of the debt.
The SAC also stated that a person seeking inclusion into the bankruptcy register based on an arbitral award should have no difficulties presenting evidence of the debt to rebut such doubts.
An arbitral award can be enforced in the Russian courts even if it was reconsidered by the tribunal without providing notice to the parties and holding a hearing
On 31 May 2013, the Maritime Arbitration Commission issued an award ordering a Russian insurance company to pay a certain sum of money to a foreign claimant. However, the defendant then realised that the Commission had failed to deduct the unconditional franchise from the amount awarded. It applied to the tribunal to rectify the error and the tribunal issued an additional award stating the correct amount of money to be paid in favour of the claimant.
The additional award was set aside by the Federal Arbitrazh Court of the Moscow District due to violations of the arbitration procedure: the additional award reconsidered the initial award and was rendered without proper notice to the parties and a hearing in their presence.
Following that, the claimant applied to the Moscow Arbitrazh Court to enforce the initial award. However, based on the fact that the initial award contained obvious calculation errors that were recognised by the tribunal itself, the first instance court refused the enforcement as such enforcement would lead to violation of the basic principle of legality. The cassation court reversed that decision as reassessing the facts of the arbitration case.
The Commercial Division of the Supreme Court reviewed the case as the second cassation instance and partly upheld the first instance court’s judgment. The Supreme Court agreed that enforcement of the initial award (with no account to the additional award) would violate the principle of legality due to calculation errors in it, and the fact that the initial award was not final as it was eventually corrected.
At the same time, refusal to enforce both the initial award and the additional award would violate the claimant’s right for judicial protection. Therefore, the Commercial Division enforced the initial award as corrected by the additional award. This ruling was upheld by the Supreme Court on 3 July 2015.2
The status of the ‘pocket’ domestic arbitral institutions
In the past, the SAC has issued a number of decisions that either set aside or refused recognition and enforcement of the awards rendered by ‘pocket’ arbitral institutions (tribunals) (ie, domestic arbitral institutions founded at Russian companies that resolve disputes related to such companies). In these decisions, the SAC held that the principles of objective impartiality were violated and thus such awards were in conflict with the public policy of the Russian Federation (the basic principles of Russian law). The concept behind these decisions was that no one can be a judge in his own case.
These issues have recently been considered by the Constitutional Court of the Russian Federation and the Supreme Court.
The Resolution of the Constitutional Court on the ‘pocket’ domestic arbitral institutions
On 26 June 2012, the arbitral institution at the non-profit Centre for Arbitral Proceedings sustained a claim of one of the major Russian banks Sberbank against its borrower SOFID LLC and the guarantor Mr Sheet for the recovery of debts under the credit line agreement.
Sberbank applied for recognition and enforcement of this award to the Arbitrazh Court of the City of Saint-Petersburg and the Leningrad Region. The court granted the application,3 which was upheld by the cassation instance court.4 However, on 16 July 2013 the Presidium of the SAC reversed these decisions of the lower courts.5 The Presidium found that Sberbank was one of the founders of the Centre for Arbitral Proceedings. Since Sberbank was a party to the arbitration proceedings, the Presidium further held that resolving such a dispute would violate the requirements for impartiality of the arbitral tribunal.
However, Sberbank applied to the Constitutional Court of the Russian Federation claiming that the legal rules on which the conclusions of the Presidium of the SAC were based contradict the Constitution of the Russian Federation.
On 18 November 2014, the Constitutional Court ruled that parties are free to refer their disputes to arbitration and that the laws contain guarantees for the independence and impartiality of members of an arbitral tribunal. The Constitutional Court held that if a party to the arbitral proceedings was also a founder of an entity at which the domestic arbitral institution exists, this fact in itself shall not lead to the refusal to recognise and enforce an award issued by such domestic arbitral institution in favour of such party; however, compliance with the impartiality principle shall be verified in relation to a particular tribunal and the ‘organizational and legal relationships’ with the parties can be taken into account for these purposes.6
The ruling of the Supreme Court on ‘pocket’ domestic arbitral institutions
Geotrest LLC sought to recognise and enforce an award issued on 28 February 2014 by the Domestic Arbitration Institution at Gazprom LLC against Gazprom’s subsidiary. The first and the cassation instance courts refused recognition and enforcement of the award7 on the basis that an impartiality principle was violated because the dispute was resolved under the rules of an arbitral institution affiliated to one of the parties. The Judge of the SC further refused to refer the case to the Judicial Board for Economic Disputes of the SC for its consideration.8 However, the deputy head of the Supreme Court disagreed and referred the case to the Judicial Board for Economic Disputes.9
The deputy head of the Supreme Court, referencing the Resolution of the Constitutional Court of 18 November 2014, held that a relationship between the domestic arbitral institution and one of the parties to the dispute does not in itself prevent the dispute from being resolved by such a domestic arbitral institution. However, the impartiality of an arbitral tribunal shall be examined separately. The Judicial Board for Economic Disputes of the SC sustained an application of Geotrest LLC and granted recognition and enforcement of the award.10
In 2013, the Russian Ministry of Justice introduced draft bills to implement a reform of arbitration in Russia. In July 2014, the draft bills were to be considered by the government; however, due to criticism from the presidential administration they were recalled. In October 2014, the draft bills were amended with assistance of the Supreme Court. The bills were approved by the government in April 2015. The new draft bills, inter alia, propose to:
- define the range of arbitrable disputes on the basis of the principle ‘everything which is not forbidden is allowed’, in particular including corporate disputes;
- eliminate distinctions between domestic and international arbitration, and unify arbitration legislation;
- create arbitration courts only upon consent of the government of the Russian Federation and in specified corporate form (save for permanent courts at the chambers of commerce);
- publish certain information about activities of arbitration courts (including filed cases) on their websites;
- prohibit arbitration courts from running disputes with their affiliates (to avoid conflict of interest and fight ‘pocket’ arbitration courts); and
- include certain provisions in the arbitration courts’ rules.
Although this initiative received mixed views from scholars, practitioners and the business community, the draft bills were approved by the State Duma in their first reading on 1 July 2015.
The author would like to thank Yan Kalish, an associate at Quinn Emanuel Urquhart & Sullivan, who assisted in the preparation of this article.
- Resolution of the Presidium of the Supreme Arbitrazh Court No. 1446/14 dated 13 May 2014.
- Decree of the Supreme Court No. 241-PEK15 dated 3 July 2015.
- Ruling of the Arbitrazh Court of the City of Saint-Petersburg and the Leningrad Region dated 31 October 2012, case No. А56-48511/2012.
- Resolution of the Federal Arbitrazh Court of the North-Western Circuit dated 10 December 2012, case No. A56-48511/2012.
- Resolution of the Presidium of SAC dated 16 July 2013 No. 1567/13.
- Resolution of the Constitutional Court of the Russian Federation dated 18 November 2014 No. 30-P.
- Ruling of the Arbitrazh Court of the Tomsk Region dated 7 May 2014, case No. A67-1587/2014; Resolution of the Federal Arbitrazh Court of the Western Siberia Circuit dated 10 July 2014, case No. A67-1587/2014.
- Resolution of the SC dated 14 August 2014 No. 304-ES14-495.
- Ruling of the SC dated 30 December 2014 No. 304-ES14-495.
- Ruling of the SC dated 24 February 2015 No. 304-ES14-495. As at the date of preparation of this publication, the full text of this Ruling of the SC has not been published. This Ruling can be further appealed to the Presidium of SC.
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