The Uncertain Impact of the Russian Arbitration Reform on Foreign Arbitral Institutions and International Arbitration

On 29 December 2015, existing Russian arbitral legislation[1] was modified by the Laws Nos. 382-FZ and 409-FZ, which came into force on 1 September 2016.

By introducing the aforementioned laws, the Russian legislature aimed to fight the widespread fraudulent practice of “pocket arbitration”, that is, arbitration administered by arbitral institutions created and funded by one of the parties or their subsidiaries; or ad hoc arbitrations, in which parties collude with arbitrators. Companies and banks would often impose arbitration clauses on their clients providing for arbitration before institutions created by those same companies or banks. Thus, the Russian legislator promulgated ways of fighting such fraudulent practices and circumventing Russian legislation.

The Law No. 382-FZ contains certain provisions to avoid conflicts of interests, in accordance with international standards. The laws also contain some more original provisions, providing for stricter regulation of Russian arbitral institutions. The impact of the Russian arbitration reform on international arbitration remains unclear.

Compulsory prior authorisation for arbitral institutions

The Law No. 382-FZ provides that the creation of an arbitral institution or the recognition of an existing one requires prior approval from the Government. However, two Russian institutions were exempted from this authorisation procedure: The International Commercial Arbitration Court (ICAC) and the Maritime Arbitration Commission (MAC) at the Chamber of Commerce and Industry of the Russian Federation (RCCI).

All other institutions, either Russian or foreign, in order to be fully recognised as permanent arbitral institutions have to obtain authorisation. An arbitral award rendered within the territory of the Russian Federation under the auspices of an unauthorised foreign institution shall be considered an ad hoc arbitral award.

The criteria for obtaining authorisation are far more liberal for foreign institutions, as opposed to Russian institutions, which are subject to numerous requirements (in particular, as regards composition of lists of arbitrators).

The legislators specified that authorisation can be granted to international institutions having a widely-recognised international reputation. Although such criterion is subjective, in theory it should enable recognised international institutions, like ICC or LCIA, to obtain the necessary approvals.

The resolution of the Government of 25 June 2016 No. 577 and the Decree of the Minister of Justice of 13 July 2016 No. 165 were adopted to set forth the procedure for obtaining authorisation and to establish a list of documents to be submitted in support of requests for authorisation. On 6 September 2016 the Ministry of Justice formed the Council for Improvement of Arbitration Proceeding,[2] a special body, which according to the Law No.382-FZ should examine the request and provide its recommendations. The Council has to render its decision within 3 months after the reception of a request. The decision is then communicated to the Ministry of Justice, which within 15 days prepares a draft order, which should be approved by the Government according to its procedural rules. A decision refusing authorisation may be challenged before competent national courts.

The question is whether the Russian State may use the threat of withdrawal of authorisation as a means to exert pressure on Russian and foreign arbitral institutions.

In the event of violation of Russian law, there will be no direct withdrawal of authorisation. In the event of violations, the Ministry of Justice may send an authorised arbitral institution a warning to comply with Russian law. In the case of repetitive or severe violations, the Ministry may request the institution to cease its activity and, if the latter fails to do so, liquidation of the institution may be ordered by competent Russian courts. Given the fact that the only criterion for authorisation applicable to foreign institutions is its international reputation, it would be difficult for the Russian authorities to call into question their approval or to use such threat as a means of exerting undue influence.

Arbitrability of certain disputes is conditioned on recourse to authorised arbitral institutions or choosing the seat of arbitration in Russia

Russian law precludes arbitral institutions which have not been authorised by the Government to deal with certain disputes.

One of the innovations of the arbitration reform is the  regulation of arbitration in the field of corporate law, which was previously considered inarbitrable.[3] Since the reform, depending on the subject matter, corporate disputes involving legal entities established under Russian law are either inarbitrable or arbitrable depending on the circumstances.

Inarbitrable corporate disputes include disputes concerning companies of “strategic importance” for the State, acts or omissions of State and municipal authorities as well as some other “internal” matters concerning the company and its shareholders.[4]

Conditionally arbitrable corporate disputes over Russian companies can be divided into 2 groups:

(i) Disputes, which are arbitrable under the auspices of a permanent arbitration institution having special arbitration rules for corporate disputes, provided that the seat of arbitration is in the Russian Federation. This category includes, for example, disputes over liquidation or reorganisation of a company, appointment of company’s officials etc.[5]  Parties that want to ensure that their awards regarding such disputes are enforced in Russia should chose permanent arbitral institutions seated in Russia that have been authorised, and that have special arbitration rules for corporate disputes. Besides, it seems unrealistic that international arbitration institutions like ICC or LCIA would be ready to adopt the special arbitration rules for corporate disputes, required by Russian law.

(ii) Disputes, which are arbitrable under the auspices of a permanent arbitral institution (for example, disputes related to title to shares in the share capital of a Russian company).[6] For those types of disputes, the only condition for arbitrability is resorting to a permanent arbitration institution, which has been duly authorised by the Russian Government.

Since, for the time being, highly reputed international arbitral institutions, such as, for example, ICC or LCIA have not made known their intention to obtain authorisation from the Russian Government, in order to refer arbitrable corporate disputes to arbitration, parties should opt for the two Russian institutions that have been exempted from this authorisation procedure (ICAC and MAC at the RCCI), or any other Russian institution, which may be granted authorisation upon concluding an arbitration agreement. The Law No. 409-FZ specifies that arbitration agreements in respect of corporate disputes cannot be concluded before 1 February 2017,[7] while validity of an arbitration clause shall be assessed on the date of its conclusion. Thus, for arbitrable corporate law disputes there may be a risk of referring to arbitration under the auspices of an institution, which would not receive the necessary authorisation.

An international arbitral award on the matters of corporate law concerning Russian companies, rendered in violation of Russian law, which requires resort to an authorised institution and for certain disputes mandates that the seat of arbitration be in Russia, cannot be recognised and enforced in Russia. The effect and reach of these restrictions is larger than it may appear, as it could restrict party autonomy.  For example, every time the title to shares in a Russian company is in question, the arbitration would have to be in compliance with Russian law, in order to ensure the effectiveness of the arbitral award; Consequently, all arbitrations involving the issues of corporate law discussed above, will have to be seated in Russia, and parties will not be free to choose another seat of arbitration.

Essentially, the intentions of the legislator are commendable.

From a practical standpoint, each time an award is to be executed primarily in Russia, the parties do not have any other choice but to comply with the new Russian legislation.

However, in international arbitration, parties will undoubtedly prefer to resort to arbitral proceedings which would be as neutral as possible. From a psychological point of view, the new legislation has a dissuasive effect due to the recurring doubts that arise regarding the independence and impartiality of Russian judges and institutions.

If we take into account the fact that the scope of arbitrability in Russian law has not been profoundly affected by the 2015 reform (disputes in corporate law were generally considered not to be arbitrable), parties should have no reason today to change their dispute resolution habits.

By Joseph Dalmasso and Tatiana Delvallée

[1]                Even if Russian commercial courts are referred to as “courts of arbitration”, the Laws of 2015      concern arbitration in its strict sense.

[2]              Order of the Minister of Justice No.201 dated 6 September 2017

[3]             See case “Maksimov v. NLMK”, ruling of the Moscow commercial court of 28 June 2011, case No. А40-35844/11-69-311, upheld by the ruling of the Higher Commercial Court on 30 January 2012, No. ВАС15384/11

[4]             Paragraph 2 of Article 225-1 of the Code of Commercial Procedure of the Russian Federation dated No. 95-FZ dated 24 July 2002, as amended by the Law No. 409-FZ

[5]             Article 225-1 of the Code of Commercial Procedure of the Russian Federation dated No. 95-FZ dated 24 July 2002,  as amended by the Law No. 409-FZ and paragraph 7 of Article 45 of the Law 382-FZ

[6]                Idem.

[7]                Paragraph 7 of Article 13 of the Law No. 409-FZ