A Russian game changer? New law gives Russian courts exclusive jurisdiction over disputes involving sanctioned parties

Russia, UK

On 19 June 2020, a new Russian law came into force (Federal Law No.171-FZ) that will have a significant impact on certain disputes involving sanctioned Russian entities and individuals, as well as foreign entities controlled by them. The new law effectively grants the Russian arbitrazh (commercial) courts exclusive jurisdiction over all such disputes, regardless of the parties’ choice of jurisdiction in their underlying contract or in the provisions of a relevant international treaty.

A number of Russian entities have found themselves subject to foreign sanctions in recent years (including by the EU and the US), which prohibit their participation in certain activities and prohibit others from certain dealings with them. Where a sanctioned individual or entity is party to litigation or arbitration proceedings, their sanctioned status can pose various practical and legal issues, not only for the parties, but also their lawyers, any arbitrators and for arbitral institutions. For example, an otherwise simple matter such as paying tribunal fees can be complicated by the party’s sanctioned status, which may prohibit them from transferring funds. This issue has recently received increasing attention, with the new law being foreshadowed by the decision of the Russian Arbitrazh Court of Appeal last year (case А40-149566/2019), where the court held that an ICC arbitration clause was unenforceable due to the imposition of US sanctions on the Russian claimant (although this case has since been appealed and judgment is expected this month).

The purpose of the new law is to protect, and ensure access to justice for, Russian entities subject to sanctions. However, its provisions are controversial – they significantly intervene in party autonomy and are far-reaching, potentially even extending to proceedings that are already underway in the parties’ chosen forum. It is also unclear how certain provisions are to be interpreted, creating a risk of uncertainty for all parties concerned, as well as lengthy and costly satellite litigation.

On its face, it therefore appears that the new law will have material implications for sanctioned Russian entities and individuals, as well as non-Russian entities and individuals involved in, or contemplating, a dispute with sanctioned Russian parties. Those non-Russian parties may find themselves compelled to litigate their dispute before the Russian arbitrazh courts or risk a potentially hefty financial penalty. We set out the key features of the law, followed by our analysis and some practical takeaways.

Key features of the new law

The key features of the new law, which has the effect of amending the Arbitrazh Procedure Code of the Russian Federation, are as follows:

  • Where a sanctioned Russian party and a foreign party have not explicitly agreed to the jurisdiction of a foreign (i.e. non-Russian) court or foreign-seated arbitral tribunal over a dispute between the parties (and there is no applicable international treaty), the Russian commercial courts will have exclusive jurisdiction over the dispute. The courts will also have jurisdiction over any disputes between two or more Russian parties or between two or more foreign parties, provided that the dispute is a result of sanctions being imposed against a Russian individual or entity.
  • Where the parties have already explicitly agreed that the jurisdiction for their dispute is a foreign (i.e. non-Russian) court or arbitral tribunal seated outside Russia, the sanctioned Russian party can essentially disregard that provision and instead have its dispute referred to the Russian courts. This is not an automatic right; they must first apply to the first-instance Russian commercial court if they consider that the jurisdiction clause is not capable of enforcement as a result of the sanctions, and would therefore limit their access to justice.
  • The sanctioned Russian party can only make such an application if a foreign court or arbitral tribunal seated outside Russia is not already considering a similar dispute between the parties. However, as discussed below, the scope of this carve-out is unclear.
  • If the Russian commercial court determines that the relevant dispute resolution provision is unenforceable, the sanctioned Russian party will be entitled to apply to the arbitrazh court for an anti-suit injunction to prevent the foreign party from commencing or continuing proceedings in a different forum (and the Russian party must prove that proceedings have either been initiated or are about to be initiated). Non-compliance with this injunction by the foreign party will be subject to the payment of compensation to the Russian party up to the amount of the total claim being considered by the foreign court, plus the legal expenses incurred – a potentially very significant fine.
  • It will still be possible for a foreign court judgment or foreign-seated tribunal award to be recognised and enforced in Russia against a sanctioned Russian party in accordance with the relevant recognition and enforcement rules applicable in Russia (e.g., the New York Convention), so long as the Russian party concerned initiated the claim itself or did not object to it, e.g. by filing an anti-suit injunction.

Comment

The stated purpose of the new law is to protect sanctioned Russian parties who may not, as a result of those sanctions, have adequate access to justice in foreign proceedings. However, in seeking to protect those parties, the law arguably erodes other important legal principles such as party autonomy and legal certainty, potentially tipping the balance too far the other way in terms of the impact on the rights of foreign parties.

Foreign parties involved in disputes with sanctioned Russian parties are likely to be concerned at the possibility that their counterparty will be entitled unilaterally to disregard a dispute resolution provision that was freely entered into. This is likely to be a particular concern where there are already proceedings on foot, as a referral to the Russian court at that stage (essentially a jurisdiction challenge in the middle of proceedings) is likely to be significantly disruptive, with the associated additional time and cost. Although the law provides that referrals may only be made to the Russian court where there is not a similar dispute already underway between the same parties before a foreign court or trial, it is unclear whether this exception would apply if the Russian party simply claimed that those parallel proceedings were not adequately protecting its rights. The law also does not specify whether it only applies to new disputes, or pending claims as well. There is also scope for Russian parties essentially to transplant their disputes from one jurisdiction to the other, under the guise of ensuring access to justice, in the hopes of a more favourable view of the merits of their dispute by a Russian court.

The new law is also extremely broad in its scope; it appears that any sanction or restriction imposed by a foreign state on a Russian entity or individual (or a foreign entity controlled by them) will be sufficient to underpin an application to the Russian courts. It is also unclear what factors will render an existing jurisdiction agreement unenforceable in the eyes of the Russian courts, or what would amount to a restriction on a Russian party’s access to justice. The lack of guidance in this regard potentially gives the Russian courts a broad discretion to claim jurisdiction over a dispute even, as noted above, where that dispute is already being heard by a foreign court or tribunal. This may put the principle of comity under considerable strain.

Whether an existing case is “transplanted” to the Russian courts, or a new one is commenced there, there is also the issue of what governing law would apply. If the parties’ original choice of (non-Russian) law is respected, this would likely require parties to submit expert evidence on the relevant law to the Russian courts, again adding to the complexity, duration and cost of proceedings.

However, many of these concerns will be tempered for certain foreign parties by the fact that Russian law is not extra-territorial in scope. If an anti-suit injunction were issued by a Russian court in respect of parallel foreign proceedings brought by the foreign party, a foreign court is perhaps unlikely to enforce that injunction, particularly where the parallel proceedings have been brought in accordance with the parties’ original jurisdiction agreement (or the relevant international treaty). Similarly, where a foreign court or foreign-seated tribunal issues a final judgment or award, it will continue to be enforceable outside Russia (assuming it would have been anyway under the applicable law) against any assets of the sanctioned party located outside Russia. Where the Russian court issues a judgment, there may also be arguments as to the enforceability of that judgment outside Russia. Therefore, arguably this law will only have a significant impact on foreign parties if they seek to enforce their judgments and awards against assets located in Russia.

Practical takeaways

There are a number of steps that non-Russian businesses and individuals can be taking now in order to mitigate the potential disruption and complexity resulting from a sanctioned Russian counterparty having recourse to this new law.

It would be advisable to review contracts and other business arrangements to identify any that have been entered into with a Russian entity or individual, or a foreign entity controlled by a Russian entity or individual, and check whether those entities or individuals are subject to sanctions. To the extent certain business arrangements do not have express jurisdiction agreements, depending on the circumstances, it may be prudent now to seek to agree them, which would prevent the automatic application of the exclusive jurisdiction of the Russian courts in the event of a dispute (although this is unlikely to prevent a sanctioned party subsequently from making a referral to those courts). Early engagement with identified sanctioned parties as to the issue of jurisdiction (and governing law) might also reduce wasted time and costs down the line.

Similarly, promptly commencing and progressing proceedings in a non-Russian court might reduce a Russian counterparty’s appetite to seek to uproot the dispute. Seeking legal advice at the earliest opportunity will be crucial in order to navigate the features of this new law, which present both procedural and substantive, strategic challenges.

The authors would like to thank Imtiyaz Chowdhury, Trainee Solicitor, for his assistance with this article.