07 February 2018Alexander Kostin, an associate at Khrenov & Partners has prepared an article on “Arbitration of domestic disputes in Russia (Review of the key amendments introduced by the Federal Law N 382-FZ)". The article focuses on the key amendments introduced by the Federal Law N 382-FZ “On arbitration in Russian Federation”. In particular, it covers: (1) difference in operation of arbitration institutions and ad hoc arbitrations in Russia; (2) state court assistance with regard to arbitration; (3) interrelation between arbitration and mediation procedures.
Traditionally, the Russian legislator has established different legal regimes for arbitration tribunals dealing with disputes which are related to foreign jurisdictions (international arbitration) and purely domestic disputes (domestic arbitration).
International arbitration, which encompasses the resolution of those disputes wherein the place of business of the parties is located in different states, or a substantial part of the obligations of the commercial relationship is to be performed abroad, was and remains regulated by Law N 5338-1 ‘On international commercial arbitration’ 1993, which is based on the UNCITRAL Model Law 1986.
Unlike international arbitration, the sphere of domestic arbitration, until recently, remained significantly underregulated. One of the most significant problems posed before the Russian government was the formation of arbitration institutions mimicking official state courts, for example they used a name which was almost identical to state courts and used other official insignia which caused the general public to believe that they had authority to dispense justice on behalf of the state. In order to tackle this problem, as well as to make arbitration more appealing for Russian business entities and entrepreneurs, Federal Law N 382-FZ ‘On arbitration’ was enacted, replacing the former Federal Law N 102-FZ ‘On arbitration tribunals’, which was no longer effective from 1 September 2016 onward.
Institutional arbitration vs. ad hoc arbitration
Under Federal Law N 382-FZ ‘On arbitration’, domestic disputes may be referred to both institutional arbitration or to ad hoc arbitration. However, it should be noted that certain types of corporate disputes, including those relating to setting aside the company’s transactions and the recovery of damages from the company’s directors, may be referred only to institutional arbitration. Furthermore, only parties to institutional arbitration may waive their right for setting aside the award.
Institutional arbitration can be administered only by non-profit organisations holding a special permit from the government, except for the International Commercial Arbitration Court (MKAS) and the Maritime Arbitration Commission (MAC) at the Chamber of Commerce and Industry of the Russian Federation, which were specifically exempt from this requirement by Federal Law N 382-FZ. At present, the following organisations may validly administer institutional arbitration under Federal Law N 382-FZ: (i) the International Commercial Arbitration Court (MKAS); (ii) the Maritime Arbitration Commission (MAC), dealing exclusively with the marine disputes; (iii) the Arbitration Centre at the Autonomous Non-Profit Organisation Institute of Modern Arbitration; and (iv) the Arbitration Centre at the Russian Industrialists and Entrepreneurs Union (RSPP).
In order obtain a special permit from the government to administer institutional arbitration, a non-profit organisation should seek approval from the council for development of arbitration in Russia. Such approval may be granted upon review of the documents, the full list of which is set out in Article 44 (8) of Federal Law N 382-FZ. Another condition imposed by Federal Law N 382-FZ is that non-profit organisations enjoy a good reputation so that they are able to ensure high quality dispute resolution. Foreign non-profit organisations can also obtain a permit from the government to administer ‘domestic Russian’ disputes, provided the organisation enjoys a widely-recognised reputation.
Resolution of ‘purely Russian’ disputes by foreign institutional arbitrations
As noted, the principal purpose of arbitration reform in Russia has been to ensure a high quality of arbitration so that institutional arbitration may be administered by non-profit organisations holding special permits from the government.
However, there arose an issue regarding whether a purely Russian dispute – a dispute which lacks any foreign element – may be submitted to a foreign arbitration institution which does not hold a special permit from the government. This issue was dealt with by the Moscow Arbitrazh [Commercial] Court in matter А40-219464/16. In this case, LLC Common Legal Property (Russia) applied to the Moscow Arbitrazh [Commercial] Court to obtain exequatur for the award rendered by the Russian-Singapore Arbitration Court for the recovery of debt from LCC Technoart (Russia) under the legal services agreement. The court of first instance ruled that the dispute had no legal relation to the foreign legal order, thus its submission to the foreign arbitration institution violates the public order. However, the Cassation Arbitrazh [Commercial] Court of the Moscow region overturned the judgment on the grounds that there is no express prohibition in Russian law to submit a domestic dispute to a foreign arbitration institution and, thus, remanded the case for a new trial.
In the new trial, the Moscow Arbitrazh [Commercial] Court found that the hearing was conducted and the award was rendered in Moscow, despite the fact that the arbitration was administered by the Russian-Singapore Arbitration Court and the arbitration clause stated that the place of arbitration shall be Singapore. Therefore, the Court ruled that it was rendered with an aim to bypass the procedure for setting aside arbitration awards rendered in Russia provided by the Arbitrazh [Commercial] Procedure Code of the Russian Federation and, thus, its enforcement was against the public order. This view was confirmed by the Ruling of the judge of the Supreme Court of the Russian Federation dated 13 November 2017.
Thus, on the basis of matter N А40-219464/16, it is safe to assume that domestic disputes between two Russian parties may not be submitted to arbitration in a seat located abroad.
Court assistance with regard to obtaining evidence
Federal Law N 382-FZ provides that an arbitration tribunal, if administered by an institution holding a permit from the government, may seek assistance from the state court to obtain relevant evidence. The manner of the execution of such requests by the state court is set out in Article 74.1 of the Arbitrazh [Commercial] Procedure Code for disputes pending before companies and entrepreneurs, and in Article 63.1 of the Civil Procedure Code for all other types of disputes.
Arbitration vs. mediation
Under Article 49 of Federal Law N 382-FZ, the parties are free to proceed to mediation at any stage of the arbitration. In this event, arbitration of the dispute is suspended for the time period set out by the relevant ruling of the arbitration tribunal.
Federal Law N 382-FZ ‘On arbitration’ introduced several significant changes regarding arbitration of domestic disputes in Russia, for example disputes which are not related to a foreign jurisdiction.
Among other things, it provides that institutional arbitration may be administered only by NGOs in possession of a special permit from the government. The ad hoc arbitration option remains open, however certain types of corporate disputes may not be resolved by this type of arbitration. Furthermore, ad hoc tribunals may not seek assistance from state courts to obtain evidence as per Article 30 of Federal Law N 382-FZ ‘On arbitration’.
Recent court practice suggests that foreign arbitration institutions may not administer domestic disputes – for example, disputes which are not related to foreign jurisdictions. Such an award, should it be rendered by a foreign arbitration institution, is likely to be denied exequatur by the Russian court.
The article is also available here