Russia tables proposals for reforms to its arbitration system

Reforms to the Russian system and procedure for arbitration have been tabled by the Ministry of Justice of the Russian Federation (MoJRF), in the form of a package of three draft Bills that are to be the subject of a 45 day consultation. The consultation concludes on 3 March 2014, following which any revisions proposed to the draft Bills shall be considered by the MoJRF and the revised Bills submitted to the Duma (Parliament) for the vote.

The reforms proposed in the draft Bills address a range of important issues: clarifying the position on arbitrability; introducing quality control for arbitral institutions; streamlining the processes for challenge and enforcement of awards; providing for (optional) assistance by the state courts; defining the remit of arbitrators liability; and implementing changes that favour the validity of arbitration agreements.

Broadly, these are all arbitration-friendly changes to the system, although some provisions do expose procedure to state control. Notwithstanding any concern regarding the latter, however, the practitioners' responses will reveal whether, in reality, such measures will assist or deter the bringing and proper resolution of arbitral claims in Russia-related disputes.

Background

The draft Bills amend, amongst others, two core pieces of legislation: the Code of Commercial Procedure and the Law on International Arbitration, which between them contain the main provisions governing the arbitral process.

The arbitration system in Russia has been subject to discussions for several years in anticipation of amendments and reforms, with input from various groups. The legal and business communities will now review the changes as encapsulated by the draft Bills in their penultimate form, with the Ministries to take the practitioners' comments into account when producing the final drafts for Parliament.

Summary of changes

The various changes tabled in the draft Bills are summarised below.

Arbitrability

Clarification is finally given on the arbitrability of various types of dispute. The default position will be that all matters which fall within the jurisdiction of the State Commercial Courts are arbitrable, save for those explicitly carved out by the legislation. There are two categories of exception:

• A list of  "non-arbitrable" matters: these include matters relating to insolvency; incorporation issues; intellectual property; public law; obligations to call a shareholders meeting; notarisation of transactions with shares; buy-out of shares by the company; mandatory offers; privatisation; and disputes involving companies that have "strategic significance for securing the defence capacity of the state and the security of the government". 
• A list of "conditionally arbitrable" matters: this includes almost all corporate disputes (not listed as non-arbitrable). The conditions to be satisfied for such disputes to be arbitrable are (i) an agreement to arbitrate by all the parties, and (ii) arbitration to be submitted to such arbitral institutions which have adopted the special set of rules published for the arbitration of corporate issues.

Neither of the lists above are exhaustive, and may grow.

Status of Arbitral Institutions

A list of quality control requirements will be introduced for arbitral institutions. These will include requirements for at least 1/3 of the recommended list of arbitrators to be foreign law qualified, and for arbitrators to meet specified criteria (including being 25 years of age and not holding any criminal or malpractice record). Case files will need to be stored for 10 years, and there will be an obligation for institutions to annually publish their case statistics data. The arbitration rules will need to comply in content with the baseline rules, as published by the MoJRF.

Further, it will only be possible to incorporate arbitral institutions in the form of non-commercial entities. Founders will also need to be non-commercial entities, or otherwise well-known foreign arbitral institutions, and will need to obtain the MoJRF's permission. The MoJRF will be able to apply to the courts to liquidate any institution suspected of violating this requirement.

Challenge and Enforcement

Both recognition and enforcement, and the challenge of arbitral awards will now be heard in the Federal Commercial Courts instead of in Constituent Commercial Courts. This means the first instance courts for these matters will be courts of the third (cassation) level as opposed to courts of the first level.

This will streamline the process, meaning that such cases are dealt with by higher level courts with more time and smaller caseloads. Other consequences include that cases will be judged by collective consideration (as opposed to one judge). Challenges and applications for writs of execution will be considered in one as opposed to three months (recognition and enforcement of awards will retain its 3 month consideration period).

Importantly, with respect to the challenge of awards, case files will now be released at the request of only one party, rather than requiring the request of both.  Parties may also agree that the award should be final, which means it would not be open to challenge on any grounds other than non-arbitrability or the case being contrary to public order.

Assistance by State Courts

Assistance by the level one Constituent Commercial Courts will be available to all arbitral institutions in respect of two matters:

• Assistance with collecting evidence: any arbitral tribunal will be able to apply for help to the state courts to compel the production of evidence, by submitting a request. This request will be complied with within 30 days, subject to certain exceptions (such as for state secrets, commercial secrets, etc). The specific procedure for submitting a request is set out, referencing the Code of Commercial Procedure. These amendments clarify the current ambiguity surrounding the powers and process of the state courts to assist with evidence. Both foreign and domestically seated arbitrations will be able to benefit from this assistance. 
• Assistance with arbitration procedure: state courts will be able to act as the authorised body to (1) resolve challenges to arbitrators, (2) resolve failures to nominate arbitrators by appointing an arbitrator, and (3) make final decisions regarding the competence of arbitrators, with the ability to terminate their powers. This will be solely at the request of a party, and parties will be able to specifically exclude such a right to apply for the assistance of the courts in the arbitration agreement. However, only arbitral tribunals presiding over Russia-seated arbitrations will be able to apply for such assistance.

Whilst involving the state courts is not compulsory, it does place an additional burden on the parties to specifically exclude their involvement from the arbitration if they so wish.

Civil Liability

Liability in connection with the arbitration will only be available in two cases:

• Arbitrator liability: arbitrators are to be exempt from any civil liability resulting from their acts as an arbitrator, other than that which attaches to criminal cases (civil suits further to criminal liability for bribery, malpractice, etc). However, the arbitration rules may provide for a reduction in the arbitrators' fee in cases of the arbitrator's failure to perform his functions as an arbitrator. 
• Arbitral institution liability: arbitral institutions may be liable in damages for failure to perform their functions in cases of wilful intent or gross negligence, but not for the acts or omissions of an arbitrator.

This should encourage lawyers to take part in the arbitral process whilst offering the parties appropriate protection in more severe circumstances.

Arbitration Agreements

The changes favour the validity of arbitration agreements. There will now be a presumption of validity of the arbitration agreement in cases of unclear wording. The wide formulation of the scope of agreements to arbitrate means that agreements concluded in order to perform, amend or terminate the underlying agreement will also now be arbitrable. Powers of attorney to conclude agreements will now automatically imply the power to conclude an arbitration agreement, and the assignment of agreements containing arbitration clauses will also now assign the arbitration clauses by default. Parties will be able to contract out of these wider provisions if they wish.

Commentary

Broadly, the changes tabled in the draft Bills are positive. The assistance of the state courts is voluntary and on request, the clarification on arbitrability helpful, the provisions with respect to arbitration agreements arbitration-friendly, and the higher level of courts used to consider challenge and enforcement advantageous. The prohibition of commercial arbitral institutions is intended to break-up the "pocket arbitral institutions" (entities set up by companies whose disputes are being arbitrated) that currently abuse the market, and to reduce corruption, and help inject transparency and impartiality into the system. The less positive side of the regulation proposed is that the MoJRF will acquire substantial influence over who enters the field at all.

Further, the prescription of content of arbitral rules is constricting, reducing the flexibility that is the hallmark of arbitration. Ad hoc tribunals will not be able to request assistance from the courts, and corporate disputes remain non-arbitrable by them. The draft Bills mark several steps in the right direction. It remains to be seen if outstanding issues will be resolved.

For further information, please contact Vladimir Melnikov, Partner, Alexander Khretinin, Associate, or your usual Herbert Smith Freehills contact.