International companies dealing with Russian projects tend to prefer to submit their disputes to fora outside the country, typically to arbitration at the world’s leading arbitration centres. However, local counterparties may insist on referral to arbitration in Russia or to Russian courts. Foreign parties may also be dragged into a Russian commercial or regulatory litigation, or they may have to intervene in insolvency proceedings involving the Russian counterparty. It is, therefore, important to understand the main features of Russian dispute resolution when dealing with Russian projects and negotiating dispute resolution clauses in contracts.
Litigation in Russia
Court litigation is by far the predominant method of dispute resolution in Russia. Litigation is fast (with trial court proceedings often conducted within just three to six months) and relatively cheap. Court fees and dues are capped at less than USD 3,000, irrespective of the magnitude of the claim, and the parties have access to many inexpensive local counsel. Furthermore, the party that loses the dispute is typically ordered to pay just a fraction of the actual legal costs of the other side, so litigation risks for claimants are quite limited. This explains why Russia is experiencing a boom in litigation, with millions of active cases going through the commercial (arbitrazh) court system.
In Russian courts, the parties are expected to present their case quickly and concisely, with limited room for extensive advocacy. Still, it is both necessary and, in our experience, entirely possible to ensure a high standard of representation and the best outcome for clients. Those cases have several important points in common, which may be relevant to international companies. For example, in many cases our foreign clients acting as respondents are not properly served and one of the first strategic decision points is whether to appear in the hearing (thereby waiving service) to avoid the risk of a default judgment. These cases may also involve difficult jurisdictional issues and may require the application of foreign law in Russian courts.
Importantly, you may be dragged into Russian litigation even if you have no desire to land before a Russian court. For example, you may have to enforce an arbitral award against a local counterparty through Russian courts, or participate in the counterparty’s insolvency proceedings. You may be involved in a non-arbitrable ‘corporate dispute’ in relation to a Russian target company (see more details on this below), or be targeted by tort (delict) claims from parties that have no arbitration agreement with the client, or by regulatory claims. Finally, even if the parties have an arbitration agreement that refers disputes to a non-Russian forum, since 2020, Russian law allows the local counterparty to submit the dispute to a Russian court, and/or obtain a Russian anti-suit order against the foreign party, where the court is satisfied that the arbitration agreement is effectively paralysed by foreign sanctions. Russian courts have found that the designation of a Russian party as an SDN under the US sanctions regime creates exactly such a situation, thereby enabling the Russian party to bypass its arbitration agreement and go directly to Russian courts.
Finally, and perhaps counter-intuitively, litigation in Russia may actually be a good choice for foreign companies and their local subsidiaries where they have to litigate ordinary-course and relatively low-value commercial disputes with local parties. In those circumstances, choosing Russian courts may actually save client time and money.
Arbitration in Russia
The most sensitive and high-value commercial disputes related to Russia are often referred to foreign arbitration institutions. This is generally the preference of international companies and many Russian parties, including Russia’s largest private, and even state-owned, corporations. Russian parties are quite familiar with arbitration in foreign arbitration centres. The LCIA, SCC and ICC are traditionally popular with the Russian corporates, followed recently by the SIAC and the HKIAC. However, we are increasingly seeing high stakes disputes referred to arbitration in Russia, including in projects with state/public participation, where the state party can insist on arbitration in the country.
In 2016, Russia reformed its arbitration legislation and introduced a licensing requirement for arbitral institutions, thereby banning a multitude of pre-existing domestic arbitral institutions. As of early 2021, there are only three arbitral institutions eligible to administer commercial arbitration in Russia, plus specialised arbitration centres for maritime and sports arbitration. The eligible commercial arbitration centres are the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (the ICAC, also known by its Russian abbreviation MKAS), established in 1930s, as well as two new arbitration centres established in 2016: the Russian Arbitration Centre (RAC) and the Arbitration Centre at the Russian Union of Industrialists and Entrepreneurs. Where parties refer disputes to arbitration in Russia, they predominantly choose the ICAC, but the RAC is also becoming increasingly popular, though largely untested. In our experience, it is entirely possible to ensure high quality arbitration in Russia but there are important nuances to be aware of, such as the default procedures for a chairman’s appointment under Russian arbitral institutions’ rules. It is often advisable to modify the standard arbitration clauses of the Russian arbitral institutions to ensure optimal protection of party interests.
Proceedings before Russian arbitral institutions are, in some respects, different from those used in the leading global arbitration centres, with much more emphasis on documentary evidence, usually no room for document production and limited use of witness evidence. These proceedings require specialist representation and extensive local experience.
Foreign arbitral institutions do not have to apply for a Russian governmental licence, and their awards remain enforceable in Russia under the New York Convention, irrespective of whether the foreign institution has been licensed. The enforcement proceedings have to be handled efficiently and it is important to know the risks, including the potentially broad use of the public policy exception by Russian courts. There is also an important distinction: if the dispute relates to the management of a Russian company or to shares therein, it qualifies as a ‘corporate dispute’, which may only be referred to licensed institutions. An arbitration award issued in respect of a ‘corporate dispute’ by a non-licensed foreign institution may be unenforceable in Russia. This is the reason why some foreign institutions have applied for the Russian licence. Licences have so far been issued to the VIAC and the HKIAC.
It is important to understand that ‘corporate disputes’ as defined in Russian law include many types of commercial disputes arising out of common M&A contracts such as SPAs, SHAs and JVAs, to the extent those contracts relate to Russian companies or shares therein. Since the arbitration reform of 2016, Russia has very complex rules and restrictions in relation to ‘corporate disputes’ which need to be considered in drafting arbitration provisions in M&A contracts. For example, in addition to the use of licensed arbitral institutions, some types of ‘corporate disputes’ may only be arbitrated in Russia and/or under specialised arbitration rules compliant with Russian arbitration legislation. Moreover, should the target Russian company qualify as a ‘strategic entity’ under the country’s strategic foreign investment legislation, ‘corporate disputes’ relating to it would mostly be non-arbitrable.
We have advised and represented clients extensively in Russian proceedings and would be delighted to help you navigate any Russia dispute resolution issues that may arise, from negotiating dispute resolution clauses to handling arbitrations and litigations.