21 January 2016

1 Authors

Partner Alexander Khrenov specialises in litigation and dispute resolution, corporate law, energy and civil law. He is a member of both the International Bar Association (IBA) and the Russian Association of Lawyers, and has contributed to numerous publications on the subject of litigation and arbitration

Counsel Marianna Rybynok specialises in international arbitration and litigation. She is a member of the English Law Society and has practised in both England and Russia. She is a member of the Russian Arbitration Association.
Khrenov & Partners is a leading national law firm headquartered in Moscow offering domestic and international clients a comprehensive range of legal services, together with value added knowledge of local business and regulatory issues. Established in 2003, the firm has almost 50 lawyers with international qualifications and exceptional experience. 2014 saw the latest addition to the firm’s nationwide network of offices with the opening of an office in St. Petersburg. Khrenov & Partners is on the panel of preferred law firms to act as advisors on corporate and commercial legal matters to a number of Russian government-owned banks and corporations. A reputable advisor on dispute resolution matters, Khrenov & Partners provides litigation, arbitration and mediation legal services to the highest standard across key industries and business sectors. The firm brings together trial lawyers to represent clients in shareholder litigation, derivate suits and insolvency matters. Khrenov & Partners’ litigation team is particularly known for representing clients in energy and electricity regulation, real estate and construction, restructuring and bankruptcy matters. The firm also has an active practice advising international and domestic businesses on mergers and acquisitions and general legal support for business projects and establishing joint ventures.

2 General

2.1 Prevalence of Arbitration

The number of international arbitration disputes involving Russian parties has increased dramatically over the past ten years or so. More and more in-house practitioners are now choosing to incorporate arbitration clauses into their contracts in various industries, including oil and gas, banking and finance, IT and telecoms, retail and pharmaceuticals. In April 2013, arbitration practitioners with experience in Commonwealth of Independent States (CIS)-related disputes set up a Russian Arbitration Association. The aim of this organisation is to promote international arbitration in Russia in general and to make Russia a more popular choice as a place of arbitration. The Russian Arbitration Association has developed its own Rules for administering the disputes and has created its own list of arbitrators. These Rules became enforceable as of 1 July 2014. International arbitration is becoming an increasingly popular method of resolving the international disputes in Russia.

2.2 Trends

In August 2014 the Russian Civil Courts of General Jurisdiction and the Supreme Arbitrazh Court were merged into one: the Supreme Court of the Russian Federation. This court now deals with all administrative, commercial and criminal cases. The aim of this merger was to increase the efficiency of the courts system in Russia. However, the reform received a controversial reaction from the Russian legal and business community, as the judges of the Supreme Arbitrazh Court are generally considered to be better qualified and to have more experience in dealing with complex issues. There is a view that this reform will result in more disputes being referred to arbitration rather than to the state court, primarily because in international arbitration there is an opportunity to agree upon an arbitrator (or panel of arbitrators) who will have the right experience and any specialised knowledge which might be required for a specific dispute.
Given the current political situation, in particular the sanctions against Russia imposed by the EU and the USA, some in-house lawyers may choose arbitration institutions outside Europe, for example in Singapore or Hong Kong.

In April 2014, the Russian Ministry of Justice presented an updated bill on international arbitration. The key changes are aimed at addressing some of the issues in both domestic and international arbitration in Russia. More details on the bill are given in section 2.2 below. It is unclear at the moment when the bill is going to be implemented.

2.3 Key Industries

Usually the companies involved in international business will have international arbitration clauses inserted into their agreements. There is a good chance that in 2015 a number of arbitrations will be commenced by the Russian companies affected by the sanctions in connection with ongoing contractual arrangements with the existing international counterparties. Sanctions concern primarily oil & gas, the financial sector and the defence industry in Russia. These are the industries which are likely to be experiencing significant arbitration activity in 2015.
2.4 Arbitral Institutions

It would be fair to say that the International Chamber of Commerce ('ICC') is still the most frequently used for international arbitration in Russia, although quite a lot of disputes, where one of the parties is Russian, also go to the London Court of International Arbitration ('LCIA') and the Swiss Chamber of Commerce 'SCC'.

3 Governing Law

3.1 International Legislation

In Russia, international commercial arbitration is governed by the Federal Law on International Commercial Arbitration, 1993 (the 'ICAA'). It closely follows the UNCITRAL Model Law with only minor differences.

3.2 Changes to National Law

In April 2014, the Russian Ministry of Justice updated the bill on international arbitration. The key issues which the bill is intended to address are: (i) the existence of the so-called 'pocket' arbitration institutions, which are arbitration institutions existing within an organisation and resolving the disputes arising in connection with activities of that organisation; (ii) the absence of any uniform rules in relation to the qualification of the arbitrators; (iii) the absence of a single organisation which will support and control the conduct of international and domestic arbitrations; (iv) the absence of accountability mechanisms in arbitration; (v) the existence of certain gaps in the legislation which relate to the conduct of international and domestic arbitration in Russia; and (vi) uncertainties with respect to the arbitrability of the disputes. This bill has been under development for the past two years. The latest version of the bill has instigated a great deal of discussion, as some of the proposed changes were seen as controversial. For example, there is a requirement for an arbitration institution to receive a 'licence', a permission to operate, from the Russian Ministry of Justice. Many practitioners in the Russian legal community argued that this new provision, if accepted, will discourage such institutions as the ICC or the LCIA from establishing their presence in Russia, which will not be conducive to the idea of promoting Russia as a centre for international arbitration.
The new Russian law will still be based on the UNCITRAL Model; however, at the moment it is difficult to predict exactly what changes it will bring, and when this will happen.

4 The Arbitration Agreement

4.1 Enforceability

Article 7 (2) of the ICCA provides that an agreement to arbitrate must be made in writing. It should be clear that parties have given consent to arbitration. It is worth noting that Russian courts may adopt quite a formal approach to the interpretation of an arbitration clause and may decide that the clause is void, simply on the basis that the arbitration institution which is supposed to hear the dispute was not defined with sufficient clarity by the parties. In one case an arbitration clause contained a reference to the 'Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation'. Strictly speaking, such an arbitration institution does not exist, however it was quite clear that the correct name was 'International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation'; notwithstanding, the arbitration clause was held to be invalid on the basis that it was not sufficiently clear (Decree No KG — A40/7725–03 — Federal Arbitrazh Court of the Moscow District of 6 November 2003).

4.2 Approach of National Courts

In general, the Russian courts respect the parties’ choice to arbitrate and will enforce an agreement to arbitrate. However, the approach of the Russian courts may be quite formalistic; the courts may refuse to enforce an agreement to arbitrate on the basis that the name of the arbitration institution is wrong and that it is not entirely clear which arbitration institution has been chosen by the parties (please see para 3.1 for more details).

4.3 Validity of Arbitral Clause

A concept of separability does exist in Russian law; therefore, even if the main contact is invalid the arbitration clause will still survive. The only exception would be the situation where the main contract is not signed. In such a case, it could be argued that the parties did not give a proper consent to arbitration.

5 The Arbitral Tribunal

5.1 Selecting an Arbitrator

One limit on the parties’ autonomy to arbitrate is that, generally, the arbitrators cannot be state court judges. Also if the panel consists of three members, then at least one of them should be a lawyer. However, this relates to domestic arbitrations only.

5.2 Challenging or Removing an Arbitrator

A court cannot intervene in the selection of arbitrators in Russia. However, if the arbitral award is challenged, the Court may annul it on the basis that the appointment of arbitrators was not in line with the parties’ agreement, or the arbitrator(s) did not declare a conflict of interest or were affiliated with one of the parties to arbitration.

5.3 Independence, Impartiality and Conflicts of Interest
There is a requirement under Russian law that the arbitrators should be independent and impartial. In particular, Article 12(2) of the ICAA provides that a party can challenge an arbitrator if it has sufficient grounds to believe that the arbitrator is not neutral and/or impartial.
Two principal arbitration institutions in Russia are the International Commercial Arbitration Court ('ICAC') and the Maritime Arbitration Commission ('MAC'). They both operate under the realm of the Chamber of Commerce and Industry of the Russian Federation. Both the ICAC and the MAC have developed their own arbitration Rules and both sets of Rules have references to arbitrators’ independence and impartiality, as well as to the disclosure of potential conflicts.

ICAC

Rule 3(1) provides that arbitrators should be impartial. Rule 3(2) provides that the arbitrators should submit all the information which may give rise to a breach of impartiality and neutrality. This is a continuous obligation; in other words, should such information become available to an arbitrator at a later stage, after the proceedings were commenced, the arbitrator should still report this information as soon as possible.
MAC

Rule 7 provides for a mechanism by which either party can make an application to remove a particular arbitrator if that party believes that an arbitrator is not neutral and impartial.

6 Jurisdiction

6.1 Matters Excluded from Arbitration

There are a few matters which are not arbitrable under Russian law. The key types of disputes which are not arbitrable are listed in Article 248 of the Russian Commercial Procedure Code: (1) disputes in relation to the title to real estate located in Russia (please note, however, that this type of dispute may be arbitrated in domestic arbitration); (2) registration of intellectual property rights; and (3) public law disputes.
Recently, the Russian courts confirmed that disputes arising from government-related contracts are not arbitrable (Major Repairs and Construction Agency at the Health Department of Moscow v ArbatStroy). In that case, the contract was between a Russian state agency and a private entity — ArbatStroy. The contract was for services which were meant to be rendered by ArbatStroy in several state hospitals. The Russian court held that this case was not arbitrable, primarily because it contained public law elements.
Another non-arbitrable subject matter relates to insolvency. Federal Law on Insolvency (Bankruptcy) provides that, once bankruptcy procedures have been commenced, a creditor cannot bring a claim against an insolvent entity in arbitration.

Finally, corporate matters are arguably not arbitrable in Russia. A few years ago, in an unpopular case (Novolipetsky Metallurgicheskiy Kombinat v Nikolay Maksimov) the Russian courts (the Constitutional Court and the Supreme Arbitrazh Court) decided that the corporate disputes were not arbitrable because they related to public law issues and were outside the domain of civil law. The decision did not make very clear what was meant by a 'corporate' dispute. It is not entirely clear whether all the disputes arising out of shareholders' agreements are arbitrable or not. Conflicting views are still being expressed on this point.

6.2 Challenges to Jurisidiction

Under Russian law, an arbitral tribunal can decide on its own jurisdiction (the competence-competence principle) (Article 16.1 of the ICCA). Article 16.2 of the ICCA provides that a decision of the arbitral tribunal on jurisdiction can be appealed to a relevant court within 30 days from the receipt of an award on jurisdiction. Otherwise the court will not intervene in the arbitral process in relation to jurisdictional issues.

6.3 Timing of Challenge

Under Article 16.3, the parties can go to court to challenge the jurisdiction of the arbitral tribunal once the award is rendered. This includes the situation when the award is an interim award on jurisdiction. A party can challenge the interim award on jurisdiction, and the arbitration on the merits of the dispute will continue in the meantime.

6.4 Standard of Judicial Review for Jurisdiction/Admissibility

Under Article 16 of the ICAA, the arbitration tribunal has total discretion to determine its jurisdiction over the dispute (the competence-competence principle). According to this principle, the arbitration tribunal may, but is not obliged to, render the award on jurisdiction, which can be challenged at the state court. If the court sets aside the award on jurisdiction then the arbitral proceedings are terminated. However, in a case where no award on jurisdiction was rendered and the party believes that the tribunal assumed the jurisdiction wrongly, the final award may be challenged under Article 34.1 and/or Article 36.1 of the ICCA (these Articles address the grounds for an annulment of the arbitration award — for further details please section 11.1 below).

6.5 Breach of Arbitration Agreement

Under Article 148 of the Arbitrazh Procedure Code, a party may commence the court proceedings despite the existence of an arbitration agreement. The court will accept jurisdiction to hear the case unless the opposing party applies to the court to stay the proceedings due to the existence of an arbitration agreement. Such an application should be filed before the parties have exchanged their pleadings.

6.6 Right of Tribunal to Assume Jurisdiction

The right to join of third parties is not expressly provided for in the ICCA. However, under Article 28 of the ICAC, a third party may be joined into arbitral proceedings, provided that the two following conditions are satisfied: (a) both parties agree with such an intervention; (b) the intervening party expresses consent for such a joinder in writing before the reply to the request for arbitration is submitted.

7 Preliminary and Interim Relief

7.1 Types of Relief

Generally, an arbitral tribunal is permitted to award a preliminary or interim award. This may be a protective measure as the tribunal sees fit, and in addition a security order may be applied for (see section 17 of the ICCA). Specific provisions for interim relief are also made in the ICAC (Article 36) and the MAC (Article 12). It should be noted that there is no definite list of measures based on which a tribunal will issue an order. An ICAC tribunal may quite often issue a restraining order preventing a claimant from doing something, or a property attachment order.

7.2 Role of Courts

It is possible to make an application to a state court in Russia for interim relief. In general, Article 27 of the ICCA provides that the courts in Russia can assist in taking evidence. Such assistance should be in accordance with the usual procedure for taking evidence in the court in question. However, in practice, this Article cannot really be relied upon, because no corresponding provisions are made in the Arbitrazh Procedure
Code.

Article 90 of the Arbitrazh Procedure Code specifically states that provisional measures may be ordered in support of arbitration proceedings. In practice, however, the Russian courts will grant interim measures under this Article only in quite limited circumstances, usually when it can be shown that, in the absence of the requested relief, the enforcement will be extremely difficult or even impossible to achieve. Article 256 of the same Code provides that the Russian courts can enforce a tribunal’s request in relation to taking the evidence.
In practice, it should be borne in mind that interim measures granted by a tribunal in international arbitration, whether seated in Moscow or not, will not be enforced by the Russian state courts, as they are not considered final for the purposes of the New York Convention (Article V).

7.3 Security for Costs

Theoretically, a party may apply for a security for costs order to the tribunal relying on section 17 of the ICCA. However, it should be remembered that, strictly speaking, section 17 deals with interim measures in connection with a subject matter of the dispute only, therefore it may be argued that section 17 does not cover a security for costs order.
National courts have the power to order security for costs but in practice may often refuse to grant such an order.

8 Procedure

8.1 Governing Rules

The rules governing the procedure of arbitration in Russia are to be found in the ICCA.

8.2 Procedural Steps

Article 19 of the ICCA provides that parties are free to agree on the procedures which will have to be followed by the arbitral tribunal. Failing such an agreement between the parties, the arbitral tribunal has the power to conduct the proceedings as it deems appropriate, subject to the relevant provisions of the ICCA.
Article 18 states that 'the parties must be treated equally and each party must be given a full opportunity to present its case…'
Parties are free to choose the language and the place of arbitration, however, failing such an agreement the arbitral tribunal will make a decision (Articles 22 and 20 of the ICCA). Article 24 of the ICCA provides that unless the parties have agreed otherwise, the tribunal will hear the oral submission. Generally, oral submissions are quite unusual in Russia and even if they take place, the extent will be quite limited. Article 29 of the ICCA states that in cases when there is more than one member in the tribunal, the decisions should be taken by a majority of the members of the tribunal. It is evident that there are very few provisions regulating the procedure of arbitration in Russia.

8.3 Legal Representatives

There are no specific requirements for the legal representatives appearing in Russia, apart from a requirement for the foreign lawyers. They need to be registered with a specific Russian registry to provide legal assistance in Russia (Advocacy Law).

9 Evidence

9.1 Collection and Submission of Evidence

Methods for the gathering and submission of evidence are set out in the ICAA and applicable arbitration rules. Under Article 23 of the ICAA, relevant documentary evidence is to be included in the pleadings unless the party indicates that the documents will be provided at a later stage. Failure to provide the relevant documentary evidence does not preclude the tribunal from rendering the award (Article 25 Law of the ICAA). The tribunal may hear witnesses of fact as well as the expert witnesses. Nothing specific is stated with respect to the documents' disclosure, either in the ICAA or in the rules of the ICAC and the MAC.

9.2 Rules of Evidence

Under Article 19 of the ICAA, the arbitral tribunal is empowered to conduct the proceedings in the manner it considers appropriate and such power includes the right to rule on admissibility, relevancy and sufficiency of evidence. No other mandatory rules concerning relevancy and admissibility of evidence apply to arbitration proceedings seated in Russia.

9.3 Powers of Compulsion

A party to arbitration or to an arbitral tribunal may apply to the state court to get an order for the production of documents. If that application to the state court is made by a party, it must be made with the permission of the arbitral tribunal. However, the Arbitrazh Procedure Code does not include the relevant corresponding provisions allowing the state court to grant such applications in support of arbitration proceedings. For this reason, applications to the state courts for an order to produce evidence in support are often unsuccessful (see the Decree of the Ninth Court of Appeals docket number N А40-47047/11-68-399 dated 30 June 2011).
There are no specific provisions regulating the witness testimony. In fact, although such testimonies are permitted in arbitral proceedings in Russia, it is quite unusual for them to take place.

10 Confidentiality

There are no provisions on confidentiality in Russian law on arbitration. Even so, Article 25 of the ICAC does say that the arbitrators as well as the staff of the institution concerned should keep all the information received in the course of arbitration confidential. No provisions are made in relation to the parties to arbitration. In other words, the parties are not under any obligation to keep the matter confidential, and if this is a concern then the relevant wording should be added to an arbitration clause, or the relevant agreement on non-disclosure should be made between the parties.

11 The Award

11.1 Legal Requirements

Article 31 of the ICAC sets out the requirements for the contents of an award. The award should specify the grounds upon which the decision was reached by the tribunal. The award should also state what the costs were and distribute them between the parties. Finally, the award should say where and when it was rendered. Each party will receive a copy of the award, signed by the arbitrator(s).

11.2 Types of Remedies

Russian arbitration does not expressly impose any limits on the types of remedies that an arbitral tribunal may award in Russia. Nevertheless, it should be borne in mind that certain types of remedies are not available in civil law in principle and as a result those same remedies will not be available in arbitration (for example, criminal or public law remedies will not be available in arbitration).
Punitive damages may be awarded by the tribunal in Russia; however, such damages should be proportionate to the value of the claim, and they should not amount to an unjustified enrichment (Federal Grid Company JSC v FNK Engineering LLC).

11.3 Recovering Interest and Legal Costs

Article 395 of the Russian Civil Code provides that the arbitrators may award interest at an average rate offered by the banks at the creditor’s location. That interest will continue to accrue up until the moment when the payment is made.
The legal costs are usually born by the losing party. The arbitrator’s fees, the fees of an arbitration institution as well as the reasonable costs of a winning party, are usually recoverable. Often the legal costs are lower in Russia than, for example, in England, which is why it might be difficult for the successful party to recover its legal costs in full.

12 Review of an Award

12.1 Grounds for Appeal

An arbitration award cannot be appealed in Russia. However, it can be set aside on the grounds set out in Article 34 of the ICCA. They largely replicate the grounds listed in Article V of the New York Convention, namely, if:
One of the parties to an arbitration agreement was under some incapacity, or the arbitration agreement is invalid for other reasons;
A party was not properly notified of the commencement of the arbitral proceedings or did not have an opportunity to present its case fully;
The award was in relation to a dispute outside the scope of an arbitration agreement. If the award covers both the issues covered by an arbitration agreement and the issues outside the agreement, then the part of the award dealing with issues within the scope of an arbitration agreement will still be valid; or
The arbitral tribunal or the procedure did not correspond with the parties’ agreement.
The award may also be set aside, if the court decides that:
A subject of the dispute cannot be the subject of arbitral proceedings in Russia; or
An award would be in violation of public policy in Russia.

12.2 Excluding/Expanding the Scope of Appeal

The parties cannot agree to expand the scope of appeal or challenge the award under the national law.

12.3 Standard of Judicial Review

As stated in paragraph 5.2 above, it is possible to challenge an interim award on jurisdiction. However, the final award cannot be challenged or appealed. As stated in paragraph 11.1 above, it is possible to seek an annulment of the award, provided that one of the grounds set out in Article 34 of the ICCA is satisfied.

13 Enforcement of an Award

13.1 New York Convention

The New York Convention was signed by the USSR on 28 December 1959 and it became effective for the USSR on 22 November 1960. At the accession to the Convention, the USSR made a reservation that arbitral awards rendered in a country which is non-signatory to the New York Convention shall be enforced on the grounds of reciprocity (ie the court may refuse enforcement of the foreign award if the foreign country does not enforce the awards of the country where the enforcement is sought on similar grounds). Due to the fact that Russia is a successor of the USSR, it remains a party to the New York Convention and the reciprocity reservation remains effective.
Russia is also a signatory to the European Convention on International Commercial Arbitration (Geneva, 21 April 1961) which amongst other things provides for a mechanism for remedying 'pathological arbitration clauses' (by application to the Secretary of the Permanent Court).

13.2 Enforcement Procedure

Under Article 242 of Arbitrazh Procedure Code (Article 416 of the Civil Procedure Code), a party is to make an application to the competent court for enforcement of the award, to which it must attach a duly authenticated copy of the award, and other documents as provided by the relevant Code. The application is to be heard within three months and a failure of the parties to attend the hearing will not prevent the court from enforcing the award. The grounds for declining recognition and enforcement of the award coincide with the New York Convention of 1958. There are no specific national grounds for declining recognition and enforcement of the award.

13.3 Approach of the Courts

In the past, the Russian courts had a tendency to refuse the enforcement of arbitral awards. The public policy was interpreted widely and sometimes used unreasonably as a ground for refusal of enforcement. However, the situation is steadily improving due to the efforts of the Russian legal community as well as the members of the Russian legal academic community.