More scrutiny recommended: New arbitration law in Russia and its consequences for corporate disputes

By Tanja Galander

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Introduction

The enforcement of a foreign court decision in Russia presupposes that the decision has  been recognized and declared enforceable by a Russian court. Currently, Russian law allows for the recognition and enforcement of court decisions and arbitral awards only if this is stipulated by a treaty of the Russian Federation, Article 409 section 1 Civil Procedure Code RF (Гражданский процессуальный кодекс Российской Федерации от 14 ноября 2002 г. N 138-ФЗ), Article 241 section 1, Commercial Procedure Code RF (Арбитражный процессуальный кодекс Российской Федерации от 24 июля 2002 г. N 95-ФЗ). On the other hand, neither the Civil Procedure Code RF nor the Commercial Procedure Code RF stipulate that the absence of a mutual treaty with another state leads to a refusal to accept a foreign title. On the contrary, under certain conditions, a foreign court decision may be declared enforceable provided that according to the principle of reciprocity, the enforcement of the decisions of Russian courts is ensured in the country of origin of the decision to be recognized.

Between Russia and Germany, there is currently no treaty in place regulating the mutual recognition and enforcement of state or ordinary court decisions.

Therefore, in the case of cross-border contracts between German and Russian parties, arbitration agreements should be considered in order to avoid the risk of nonenforceability. The Russian Federation is a member of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958, and the European Agreement on International Trade Jurisdiction of April 21, 1961. As a result, arbitral awards of Russian arbitration courts are enforceable abroad and arbitral awards of foreign arbitration courts are enforceable in Russia.

In the Russian Federation, a legal civil dispute can be withdrawn from the decision-making authority of the national state courts based on a special arbitration agreement between the disputing parties and transferred to private arbitration courts. The arbitration courts do not belong to the judicial system of the Russian Federation but are an expression of the constitutionally recognized privilege of the parties involved to transfer the dispute to private jurisdiction. The transfer of dispute resolution to arbitration has a long tradition in Russia. The most well-known and reputable arbitration institution in Russia is the International Commercial Arbitration Court of the Russian Federation (ICAC or MKAS, www.mkas.tpprf.ru/en).

New arbitration law

On September 1, 2016, the new Federal Law of December 29, 2015, N 382-FZ On Arbitration (Arbitral Proceedings) in the Russian Federation (Федеральный закон от 29 декабря 2015 г. N 382-ФЗ “Об арбитраже (третейском разбирательстве в Российской Федерации”), hereinafter referred to as Arbitration Act RF, entered into force. The new Arbitration Act RF is intended to improve the quality of arbitration in order to boost confidence in arbitration and remove existing legal contradictions.

The new Arbitration Act RF increases the requirements for establishing permanent (institutionalized) arbitration courts. These may now be established by noncommercial legal entities that are only required to exercise arbitration by special permission (authorization) granted by the Russian government. This helps to reinforce state control over the arbitration courts. Article 44 section 1 of the Arbitration Act RF also explicitly states that the International Commercial Arbitration Court of the Russian Federation and the Maritime Arbitration Commission at the Chamber of Commerce and Industry of the Russian Federation do not require such permission.

The law prohibits the establishment of permanent arbitration courts by federal bodies or bodies of the subjects of the Federation, municipalities, state or municipal institutions, state bodies, state enterprises, political parties and religious communities as well as by lawyers and notary organizations.

The previous practice of countless and not necessarily independent arbitration courts, which in the past were established in part by different institutions who then negotiated the disputes, will now cease to exist and is a welcome change.

International arbitration institutions

International arbitration is still regulated by a separate law, On International Commercial Arbitration Jurisdiction of July 7, 1993, N-5338-I (Закон РФ от 7 июля 1993 г. N 5338-I “О международном коммерческом арбитраже”).

The Arbitration Act RF refers to arbitration proceedings without an international treaty or element even if its applicability on international arbitration is, in principle, possible and, in some cases, specifically stipulated by the Arbitration Act RF. For example, in accordance with Article 44 section 3 of the Arbitration Act RF, foreign arbitration institutions are recognized as institutionalized arbitration tribunals if the Russian government has granted them the right to exercise the functions of such tribunals under the rules of the Arbitration Act RF. As per Article 44 section 12 of the Arbitration Act RF, foreign arbitration institutions may obtain such a right if they have an international reputation.

Corporate disputes

According to Article 225.1 section 2 of the Commercial Procedure Code RF, certain corporate disputes may not be settled by arbitration. These include

  • disputes concerning the convocation of shareholders’ meetings of a legal entity;
  • disputes arising from the activities of notaries to certify transactions involving shares in the authorized capital of limited liability companies;
  • disputes related to the contesting of nonnormative legal acts, decisions and actions (or inaction) of state bodies, local self-governing bodies, other bodies, organizations endowed with federal or other state powers or other officials;
  • shareholder disputes if at the time of the initiation of the case in an arbitration court or the commencement of arbitration in an arbitration court by a legal entity in respect of which such disputes arose, an economic entity is essential for ensuring the defense of the country and the security of the state in accordance with Federal Law No. 29 of April 29, 2008, 57-FZ, On the Procedure for Foreign Investment in Business Entities of Strategic Importance for Ensuring the Country’s Defense and State Security (Федеральный закон от 29 апреля 2008 г. N 57-ФЗ “О порядке осуществления иностранных инвестиций в хозяйственные общества, имеющие стратегическое значение для обеспечения обороны страны и безопасности государства”);
  • certain equity disputes regarding the purchase of own individual shares by a Russian joint stock corporation (JSC) or the acquisition of more than 30% of the shares in a public JSC; or
  • shareholder disputes concerning the exclusion of a shareholder.

Certain disputes may be settled by arbitration only if all parties concerned have concluded a corresponding arbitration agreement. In addition, the dispute may only be settled by a permanent arbitration tribunal with special rules for corporate disputes filed with the relevant state authority and published on its website. Furthermore, the place of arbitration must be in Russia. Such disputes include, among other things, disputes relating to the establishment, reorganization and liquidation of a legal entity, claims by shareholders for compensation for damages incurred by the company, or claims challenging legal transactions concluded by the company, as well as claims for the appointment and dismissal of members of the bodies of legal entities (Article 225.1, section 3 of the Commercial Procedure Code RF). This also includes claims by shareholders and the company if such a right or a corresponding arbitration agreement expressly permits the admissibility of an arbitration procedure (Article 225.1, section 4 of the Civil Procedure Code RF). This means that the articles of association of a legal entity could now also explicitly contain an arbitration agreement.

Overall, however, corporate disputes according to article 225.1 of the Commercial Procedure Code RF may only be settled by permanent (institutionalized) arbitration courts (Article 225.1, section 5 of the Commercial Procedure Code RF). Ad hoc arbitration is therefore ruled out.

A foreign arbitration tribunal without the aforementioned authorization in Russia will be considered an ad hoc arbitration court and since ad hoc arbitration may not settle corporate disputes between parties, the corresponding arbitration decision in Russia would not be recognizable and executable. Currently, there is no official public record available showing which international arbitration institutions have already applied for and received authorization in Russia.

The new rules on arbitration agreements regarding corporate disputes only became effective on February 1, 2017 (whereas the Arbitration Act RF entered into force on September 1, 2016). Arbitration agreements on corporate disputes concluded before February 1, 2017, did not become effective and are not valid as per Article 13 section 7 of the amending law of December 29, 2015, N 409-FZ. It is recommended that arbitration agreements concluded before February 1, 2017, be reviewed and the conclusion of new agreements considered.

tanja.galander@de.pwc.com