Russian Arbitration Reform: Key Changes

On 1 September 2016, the following federal laws came into force in Russia: the Federal Law On Arbitration (Arbitration Proceedings) in the Russian Federation and the Federal Law on Amendments to Certain Legislative Acts which introduced a number of changes, in particular, to the Arbitrazh Procedure Code, the Civil Procedure Code and the Law on International Commercial Arbitration (collectively, the "Laws"). Russian arbitration regulation has materially changed as a result of these Laws.

The reforms were initiated in 2013 on the instruction of the President given to the Federal Assembly with a view to developing Russian arbitration legislation. Two of the main goals of the reforms were to:

• Provide clearer and more detailed regulation of the arbitration process in order to encourage businesses to use arbitration as a dispute resolution mechanism more actively, decreasing the workload of the state courts;
• Fight with so called "pocket" arbitration institutions (i.e. those which are incorporated by large corporations / banks to hear disputes with their counterparties).

The Laws have made many significant amendments, most of which can be placed under the following two categories: (1) the administering of arbitration proceedings; and (2) the arbitration process. This update deals with the most significant amendments.

Administering of arbitration proceedings

The Laws have introduced a new term of "permanent arbitration institution" (an institution which administers arbitrations on a permanent basis, as opposed to ad hoc arbitrations). According to the Laws, arbitral tribunals constituted under permanent arbitration instructions will enjoy a number of benefits as compared to ad hoc arbitral tribunals. In particular, (i) corporate disputes may only be submitted to arbitration administered by permanent arbitration instructions;  and (2) the parties to ad hoc arbitration agreements will not be able to agree on the final nature of the award (with the effect that it could not be subject to challenge in the state courts).

In order to be able to administer arbitrations, permanent arbitration institutions must:

1. be established exclusively by non-commercial organizations; and
2. obtain approval from the RF Government. Such approval is to be issued in accordance with the recommendations of the Council for Development of Arbitral Proceedings. That Council would consist of individuals from state authorities, business and law. To obtain approval, the permanent arbitration institution must comply with a number of requirements, including  having a reputation that will ensure a high standard of arbitration, submitting rules of arbitration submitting a list of recommended arbitrators etc. The only institutions that are exempted under the Laws from the requirement to obtain government approval are the ICAC and the MAC (the most reputable Russian arbitration institutions).

Foreign arbitration institutions are also required to obtain the RF Government approval if they wish to administer disputes seated in Russia or corporate disputes with respect to Russian companies (irrespective of whether or not the seat is in Russia). For this purpose, they are only required to be internationally recognised. No other requirements are otherwise applicable.

Arbitration process

Arbitration agreement

The Laws attempt to unify the rules relating to local and international arbitration agreements in a number of ways. They also introduce a number of significant changes to the form and substance of arbitration agreement.

1. As for corporate disputes, the Laws allow for inclusion of an arbitration clause in the  charter of a legal entity. Such inclusion must be approved by all of a legal entity's shareholders. The arbitration clause may not, however, be included in the charter of a public joint company or a joint stock company with 1,000 voting shareholders or more.
2. Parties to an arbitration agreement that provides for arbitration to be administered by a permanent arbitration institution are free to exclude some of the powers of local courts in relation to assisting / supervising the arbitration, e.g.: the appointment arbitrators, challenges to arbitrators, challenges to partial awards on jurisdiction, challenges to final awards. These options are not available to the parties to ad hoc arbitration agreements.
3. The Laws now formally confirm (further to existing court practice) that an arbitration agreement continues to be in effect in the event of assignment of the principal contract to a new creditor / debtor.
4. The Laws also formalised an important principle that while construing an arbitration agreement, all doubts shall be interpreted in favour of its validity.

Disputes which are subject to arbitration

As to domestic disputes, the Laws do not alter the definition of an arbitrable domestic dispute: any domestic civil law dispute is arbitrable, unless otherwise provided by law.

In the meantime, as to cross-border disputes, the Laws change the scope of disputes that may be subject to international commercial arbitration. It may be any civil law dispute arising from foreign trade that has at least one of the following characteristics:

5. the commercial enterprise of at least one of the parties is located aboard;
6. the subject matter of the dispute is closely connected with a foreign jurisdiction (a new element);
7. a substantial part of the relevant obligation is to be performed abroad (a new element); and
8. disputes arising out of foreign investment into Russia or Russian investment abroad. The wording of this element was amended, arguably resulting in some  disputes falling outside the scope of those that may be subject to arbitration. In particular, it cannot be excluded that it may be interpreted in a way that means it would not be sufficient for a Russian company to have international investments in order for it to be able to resort under the Laws to international commercial arbitration.

Non-arbitrable and corporate disputes

Before the Laws came into force, there were no unified rules as to the arbitrability / non-arbitrability of certain types of disputes. This led to doubts in a number of cases as to whether or not a particular dispute was subject to arbitration. The Laws now eliminate such ambiguity:

1. As a rule, all disputes are arbitral, unless otherwise envisaged by law.
2. The Laws set out a (non-exhaustive) list of disputes that are non-arbitrable, including:

1. bankruptcy cases;
2. administrative disputes;
3. labour disputes;
4. class actions; and
5. disputes relating to public procurement (until such time a specific law governing arbitral procedure in relation to such type of disputes is introduced).

3. In relation to the arbitrability of corporate disputes, before the amendments came into force, the Russian courts had mainly treated corporate disputes as non-arbitrable on the basis that they fall within exclusive jurisdiction of the Russian arbitrazh courts.

Now the Laws clearly provide a general rule that corporate disputes are arbitrable, subject to certain exceptions and requirements. In short, corporate disputes can be divided into three groups:

Non-arbitrable disputes, which include disputes relating to:

• the convening of general shareholders meetings;
• public notaries' activities in connection with the certification of transactions relating to interests in LLCs;
• strategic enterprises (with the exception of disputes regarding ownership of shares / interests in such companies if their sale does not require prior approval in accordance with the Federal Law on Strategic Enterprises);
• the expulsion of the participants of a legal entity; and
• voluntary / mandatory tender offers.

Arbitrable corporate disputes, which can, in turn, be divided into two sub-groups:

First, disputes that (1) must be considered by permanent arbitration institutions; (2) have a seat in Russia ; (3) can be heard in accordance with special corporate rules of procedure to be adopted by such institutions; and (4) are subject to an arbitration agreement between the legal entity itself, all shareholders / participants and other parties who are to be claimants / defendants. Such disputes include those arising out of:

• the incorporation, reorganisation and liquidation of legal entities;
• claims by shareholders to recover damages caused to a legal entity and for the invalidation of transactions made by a legal entity; and
• agreements relating to the management of a legal entity, such as SHA's.

Second sub-group, the only requirement for which is to be considered by a permanent arbitration institution:

• Disputes regarding ownership over shares / interests in legal entities, the creation of encumbrances over such shares / interests or the exercise of rights arising therefrom (e.g. SPAs);
• Disputes in connection with the activities of share registrars.

It is notable that an arbitration agreement with respect to an arbitrable corporate dispute may be validly concluded only after 1 February 2017. Those concluded before this date are treated under the Laws as inoperable.

It is unclear whether this provision applies to arbitration agreements entered into before the Laws came into force (1 September 2016). In any event, this provision increases the risk that Russian state courts would treat any award in a corporate dispute rendered in accordance with such clause as unenforceable.

State court assistance / supervision

The Laws vest the Russian state courts with powers to assist / supervise arbitration. In particular, a competent state court (i.e. a court local to the seat of arbitration) is now empowered to assist / supervise the arbitral process under certain conditions in the following ways:

1. appoint arbitrators;
2. consider challenges to arbitrators;
3. consider challenges to the jurisdiction of the tribunal; and
4. provide assistance with obtaining evidence.

As to points 1-3 above, parties to arbitration proceedings administered by a permanent arbitration institution may exclude those powers by direct agreement (such option is not available to parties to ad hoc arbitration agreements). It will not, however, be sufficient for such direct agreement to be simply included in the rules of the relevant permanent arbitration institution. Instead, it must be in the arbitration clause / agreement itself.

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