It isn’t a secret that over the past 10 – 15 years, the LCIA and other major arbitral institutions in Europe including ICC, SCC and Swiss Chamber of Commerce have been hearing and continue to hear an increasing number of disputes originating in Russia and other CIS countries. Now over a year passed since the US and the European sanctions hit the Russian economy. In this article we are going to consider an impact which the sanctions are having already and are likely to have in the future on the resolution of international disputes involving the Russian parties. We are going to try and take into account as many factors as possible, including some of the recent changes in Russian law.
Some of the economic sanctions imposed on Russia by the EU and the United States apply to listed individuals, while the others concern certain sectors of the economy. The scope of the sanctions is quite wide. The sector sanctions cover arms and military equipment, energy and finance, putting a pressure on the Russian corporate entities operating in these sectors in different ways. For example, some of the biggest Russian companies, such as Gazprombank, Gazpromneft, Rosneft and many others don’t have access to the European and the US capital markets, cannot arrange for loans, etc. Sanctions concerning individuals are aimed at restricting their ability to travel and at freezing their assets. The sanctions are being under a constant review with new measures being added and more individuals being included into the sanctions lists.
The sanctions are obviously having an impact on the individuals and the corporate entities which they were aimed at targeting. However they are also having some less obvious effects on other individuals and companies, including those in the legal services. The law firms based in Europe and in the US need to make sure that in rendering legal support in contentious and non-contentious matters they are not facilitating any transactions prohibited by the sanctions. Many law firms in Europe and in the US have now developed internal control systems in relation to the sanctions. These systems are used whenever it comes to instructions from the Russian clients. It is not uncommon these days for an English or a US law firm to refuse representing a Russian client in a potential dispute or in connection with a non-contentious matter. There is a concern that the arbitrators may be refusing to act in a similar way. Even if this will not be the case it is believed there is a danger that the arbitrators’ impartiality and independence might get affected. Apart from this there are other issues arising out of sanctions in the context of international arbitration and the use of the European arbitral institutions:
- if a party to the proceedings is one of the listed individuals or entities, then before proceeding with filing a request for arbitration, such party would have to apply for a permission to transfer funds to the relevant arbitration institution;
- it might be difficult for the witnesses involved to travel to the venue, i.e. the place of a hearing; the witnesses may also experience difficulties in meeting their legal advisers in their office based in Europe;
- it might be difficult to enforce an award in Russia because it might be seen as contravening the public policy. Generally it is not very uncommon for the Russian courts to refuse enforcement based on the public policy argument. For example, in the case of Oil & Natural Gas Corporation v OJSC Amur (case no. A73-1288/2009) the Supreme Commercial Court held that the damages exceeding 60% of the contract price were disproportionately high and as the result the award was refused enforcement. It might be the case that with sanctions related arbitral awards the public policy ground will be invoked more often, making it impossible to enforce the awards.
- It might also be difficult to enforce it in other jurisdictions covered by the sanctions, as the enforcement itself might trigger one of the restrictions imposed by sanctions.
The above listed issues are just some examples of possible difficulties which are being experienced or considered by the Russian and international legal community involved in resolution of the Russia related disputes.
As the result, a number of commentators both in Russia and in Europe suggested that it might be a shift towards arbitral institutions based outside of Europe for resolution of the disputes involving the Russian parties. These alternative institutions may include Singapore International Arbitration Centre (SIAC) and Hong Kong International Arbitration Centre (HKIAC).
Whilst the alternatives are out there, it is unlikely that the Russian disputes will all move from the LCIA and other European institutions to SIAC, HIAC or other Asian institutions. Over the past twenty years or so, the Russian parties have been heavily relying on English law in quite a lot of transactions, including M&A, finance, general commercial agreements for sale of goods and services, distribution agreements, etc. As for the dispute resolution methods, international arbitration under the Rules of major European arbitral institutions was a popular choice. The disputes arising out of the contracts which had already been entered into in the past will obviously continue to be heard as per a relevant arbitration agreement between the parties.
As for the current transactions, it would probably be fair to say that the Russian in-house lawyers do think twice before inserting the LCIA, the ICC, the SCC arbitration clauses or the arbitration clauses of other arbitral institutions based in Europe. However the substantive law often stays English. Therefore even if the chosen seat is in Hong Kong or in Singapore and even if the chosen arbitral rules are those of SIAC or the HKIAC, the legal representatives will still have to include the English lawyers as well. Also for a client based in Moscow or in St Petersburgh or in other cities within the European part of Russia having to travel to Hong Kong or Singapore might not be convenient and cost effective. Last but not least there is simply a custom. A lot of lawyers in Russia have long established relationships with the partners of the law firms in London and other European cities. They had been working together for decades now. Whether all these factors will actually outweigh the difficulties associated with the sanctions remains to be seen.
Apart from the arbitral institutions in Asia, one should not forget about the Russian arbitration institutions. The oldest and probably the best-known one is the International Commercial Arbitration Court for Russian Chamber of Commerce, however it is not the only one. In April 2013 members of the Russian and international legal community dealing with the Russian related disputes founded a Russian Arbitration Association (the “RAA”). The association acts as an appointing authority and/or administers the disputes under the UNCTIRAL Rules 2010. The association’s members include some of the World’s top legal professionals in the area of international arbitration. Although the association is very young, it is very active and is becoming more and more popular quite quickly. There is a common understanding that in part, a success of the Russian arbitration institutions, including the RAA will depend on how often Russian law is used in international transactions.
Recently several attempts have been undertaken to make Russian law more attractive in international context. In particular, the Federal Law No. 42-FZ dated 8 March 2015 (‘Law No. 42-FZ’) introduced a number of important changes into Russian corporate law, which became effective as of 1 June 2015. Most importantly for the M&A transactions, where English law is often used, the new provisions were introduced in connection with warranties and indemnities. New section 431.2 of the Civil Code now provides a basis for claiming damages for misrepresentations. Before the claimant was most likely to rely on section 179 of the Civil Code, which allowed to claim damages for misrepresentation but only in conjunction with a claim to declare the whole transaction void. For obvious reasons, the claimant is not necessarily interested in setting the transaction aside. Instead, the claimant may wish to simply recover the losses sustained as the result of a misrepresentation. Before 1 June 2015 this could be very difficult or even impossible to achieve under the Russian. Now it is possible. It would be fair to say that the change introduced by section 431.2 is quite a significant development.
New section 406.1 of the Civil Code, which also became effective as of 1 June 2015, is very similar to what is understood as “indemnity” under the English law. Such term was not recognized before under the Russian law, the closest concept was that of an “insurance” which is very different. This change may also be regarded as a significant improvement in the context of Russian M&A law.
Needless to say, these are the new provisions and there are arguments amongst the Russian practitioners about possible interpretation of some aspects of these provisions. For example, some concerns have been expressed in connection with a wording of a new s. 406.1, which seems to suggest that parties may need to include at least a maximum amount of the indemnity into their agreement, which might be a difficult thing to do in reality. In time the courts’ practice in connection with these new provisions will develop giving the business parties concerned more certainty and more confidence.
The new sections in the Civil Code are just some examples of changes in the Russian Civil Code, which have been reformed significantly. The changes were made also in the areas concerning Russian insolvency law, general contract law and guarantees. Apart from this, other changes are being considered in the Russian judicial system including in relation to international arbitration. It is too early to say how successful the implemented and the anticipated changes are going to be. However it is clear that that while the English law will continue to be used the Russian legislators and the Russian business community do feel under more pressure now to continue developing a national law so that it is easier to use in international context. The more successful the changes are the more significant will be the shift to Russian law and the Russian arbitral institutions. Right at this moment, the Asian institutions are definitely a good alternative but with its own practical limitations in place.
 – For further information on European sanctions please see Counsel Regulations 833/2014, 960/2014, 208/2014, 269/2014, 692/2014, 825/2014. For further information on the US Sanctions please see Executive Order 13662.