A new Russian statute has changed the rules relevant to arbitration and choice-of-court agreements for disputes involving Russian parties targeted by foreign sanctions. These agreements may now be unenforceable.
On 8 June 2020, Russia’s parliament adopted Federal Law No.171-FZ ('the amendment'), which has changed the rules on the jurisdiction of Russian courts over disputes involving parties targeted by foreign sanctions ('targeted persons'). The amendment came into force on 19 June 2020.
Although arbitration and choice-of-court agreements concluded by targeted persons will remain valid and enforceable, the amendment means that those agreements may be bypassed where a Russian court finds that they have become 'incapable of being performed' due to foreign sanctions. The amendment also provides Russian courts with the power to issue anti-suit injunctions on the application of the party affected by the foreign sanctions.
In this blog, we analyse the new risks and suggest several ways to mitigate them.
Note that the amendment contains ambiguous language and Russian courts may interpret the wording in unexpected ways. An unofficial translation is attached to this update for information purposes only.
What does the amendment do?
The amendment provides that disputes involving targeted persons or arising from anti-Russian sanctions are within the exclusive jurisdiction of the Russian commercial (arbitrazh) courts. As a result, Russian courts will have jurisdiction to decide on the merits of the disputes involving targeted persons. Conversely, awards and judgments rendered by foreign arbitral tribunals and courts in these disputes will not be enforceable in Russia.
Existing and new arbitration and choice-of-court agreements involving targeted persons remain enforceable unless a Russian court finds that they are 'incapable of being performed', ie that arbitration or litigation outside Russia is no longer possible due to sanctions.
It is hard to predict how Russian courts will analyse whether sanctions render dispute resolution clauses incapable of being performed. On the one hand, the sanctions that have been in place since 2014 have not seriously hindered international proceedings to date, even in the event of specially designated national (SDN) designations. On the other hand, there is a risk that Russian courts may find an arbitration or choice-of-court agreement unenforceable even where sanctions do not render such an agreement objectively unenforceable but do make it more difficult for targeted persons to pay arbitration fees, or create other practical problems.
There is a risk, therefore, that arbitration and choice-of-court agreements concluded with Russian parties targeted by foreign sanctions may be open to challenge before Russian courts on the basis that they are incapable of being performed. This risk applies not only to currently sanctioned entities but also to other major Russian companies that may be affected by sanctions in the future.
Furthermore, the amendment introduces the possibility for targeted persons to apply for an anti-suit injunction from the Russian courts in order to block foreign proceedings. It appears that such an injunction will only be available if there is no arbitration or choice-of-court agreement submitting a targeted person’s dispute to a foreign forum or if the relevant agreement is 'incapable of being performed' due to sanctions.
Such orders are backed by the Russian courts’ new power to order any party that does not comply with an anti-suit injunction (if granted) to pay the targeted person the sums that the non-compliant party claimed before a foreign court or tribunal, as well as the costs incurred by the targeted person to defend itself.
Scope of the new rules
The amendment changes the rules on jurisdiction under the Arbitrazh (Commercial) Procedure Code, Russia’s procedural law for commercial litigation. Arbitrazh courts are now given exclusive jurisdiction in disputes that either:
- involve targeted persons; or
- arise from sanctions adopted against targeted persons.
Targeted persons include:
- Russian citizens and legal entities targeted by foreign sanctions; and
- foreign legal entities affected by anti-Russian sanctions, which may include both foreign subsidiaries of Russian-sanctioned entities and third parties affected through secondary sanctions triggered by a violation of the primary sanctions regime.
The amendment does not specify the type of sanctions that trigger the new regulation. While the amendment could be interpreted as applying only to SDNs, Russian courts may adopt a broader interpretation that would include any persons affected by all foreign sanctions, including sectoral sanctions.
- applies to all disputes involving targeted persons, even if the dispute in question is not affected by sanctions; and
- does not carve out disputes that are deemed to be within the exclusive jurisdiction of foreign courts.
Therefore, the new Russian rules may result in a jurisdictional conflict where the same dispute is within Russian courts’ exclusive jurisdiction under the Russian rules and within foreign courts’ jurisdiction under their rules.
Mitigating the risk
While the appropriate steps to take to mitigate the risks arising from the amendment will depend on the particular arbitration or choice-of-court agreement, parties may wish to consider the following:
- Whether arbitration or choice-of-court agreements with targeted persons (or Russian parties at risk of being affected by foreign sanctions) providing for a foreign dispute resolution mechanism should be renegotiated. Generally, the sanctions exposures are lower with HKIAC and SIAC arbitration agreements, as Hong Kong and Singapore have not introduced any anti-Russian sanctions.
- Whether an arbitration agreement providing for arbitration in Russia might provide a suitable compromise (for example, ad hoc arbitration seated in Russia or Russian-seated arbitration administered by one of the Russian institutions, eg the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (the ICAC)).
- The use of a multitiered (waterfall) arbitration clause whereby the parties agree to use their preferred foreign forum but also provide for arbitration in Russia as a fallback option.
- Expressly providing for the steps the parties should take if one or more of the parties is targeted by foreign sanctions.