Sanctioned Russian parties breaching arbitration agreements (Part III): German courts venture the next step regarding anti-suit relief

On 3 September 2024, the Berlin Higher Regional Court (the Berlin Court) granted a German subsidiary of a European industrial company declaratory anti-suit relief against a Russian sanctioned party which had breached the parties’ arbitration agreement by dragging a dispute before Russian courts. In its decision (currently still confidential), the Berlin Court upheld the parties’ agreement and found that arbitration is the sole, proper forum for the dispute between the parties. Furthermore, it reiterated that arbitration agreements are enforceable and preclude recourse to the ordinary courts of law, including the Russian courts – even where Russian entities are subject to EU and Swiss sanctions.

The facts underlying the new decision

The dispute between the parties resulted from a contract governed by Swiss law that included an arbitration agreement with the seat in Zurich. The Russian company initiated proceedings before the Arbitrazh State Court in Moscow (a commercial state court), thereby violating the arbitration agreement. To establish jurisdiction of the state courts, the Russian entity invoked Russia’s anti-arbitration law. This law allows sanctioned Russian entities to renounce their arbitration agreements. In addition, the Russian party may seek an order to restrain arbitration proceedings abroad via Russian anti-suit injunctions (which in turn may be backed by fines).

The key aspects of the new decision

The new decision of the Berlin Court of 3 September 2024 is remarkable in several respects:

(i) Enforceability of arbitration agreements against sanctioned Russian party

The new decision reinforces the position taken by the Berlin Court in an earlier ruling of June 2023 (case no 12 SchH 5/22). This previous landmark ruling was the first ever German court decision to employ the declaratory relief mechanism in Section 1032(2) of the German arbitration law to protect against sanctioned Russian parties breaching arbitration agreements (see our blog posts on the previous decision here and here for a detailed analysis).

In the new decision, the Berlin Court has now reaffirmed that “[a]s a matter of principle, the parties’ right of access to arbitration must be ensured despite sanctions”. Dismissing the Russian party’s excuse, the Berlin Court emphasised that EU and Swiss sanctions indeed allow sanctioned parties access to the (legal) services necessary to enable them to participate effectively in arbitration proceedings. Furthermore, the Berlin Court also relied on Article 177(2) of the Swiss Private International Law Act – a provision that bars state-controlled companies from invoking their own law to challenge their capacity to participate in arbitration proceedings.

(ii) Extra-territorial jurisdiction 

The decision also affirmed the unique extra-territorial reach of the declaratory relief mechanism in the German arbitration law. It reiterated that the German courts can exercise jurisdiction in aid of foreign arbitrations. In its ruling, the Berlin Court found that - despite the seat of the arbitration being in Zurich and Swiss law governing the contract - there was a sufficient connection to Germany due to the applicant being a German company. In this context, the Berlin Court noted that the German company is potentially affected by the Russian proceedings because of the enforcement risks with respect to its German assets. 

(iii)  Service via public notice

Last but not least, the latest ruling goes an important step further than the initial 2023 decision in relation to service in Russia: In its new ruling, the Berlin Court allowed service via public notice (ie publication of the application form on the court’s notices board) from the outset. The Court opted for this approach “[i]n view of the anyway lengthy processing times for a request for service [in Russia] of over a year and the specific risk of a refusal of service”. In addition, the Berlin Court took into account that the Russian counterparty had already filed an application in Russia to restrain arbitration proceedings abroad and that in similar previous cases the Russian authorities had refused to effect service. 

This new decision shows the Court’s willingness for an even more hands-on approach than its previous decision. In the 2023 ruling, the Berlin Court had only permitted service via public notice after attempts to effect service in accordance with the Hague Service Convention had been made but ultimately proved unsuccessful.

Outlook

The declaratory anti-suit relief afforded by the Berlin Court provides a new remedy against Russian sanctioned entities breaching arbitration agreements. The decision of the Berlin Court establishes that if a German company is affected by a breach of an arbitration agreement, extra-territorial anti-suit relief may be awarded in aid of arbitration despite a foreign seat and foreign governing law. Future cases are therefore likely to deal with the circumstances under which this also applies to non-German companies. 

Such declaratory relief can serve as an important defence to block enforcement of Russian judgments obtained in breach of the arbitration agreement – at least outside Russia itself. It is therefore expected to be used increasingly in the future and will be of particular interest to parties who cannot rely on common law anti-suit injunctions (e.g. due to the lack of a UK nexus). An increased interest in the new mechanism is all the more likely,  given that the Berlin Court has also provided practical protection against current obstacles to effect service on a Russian party under the Hague Service Convention.

The Freshfields team obtaining the declaratory anti-suit relief for the applicant was led by Frankfurt International Arbitration partners Boris Kasolowsky and Carsten Wendler with associates Leane Meyer and Hager Sameh.