Extension of exclusive jurisdiction of Russian courts over the disputes with Russian sanctioned entities: potential unenforceability of prorogation agreements and anti-suit injunctions

On 19 June 2020, Federal Law No. 171-FZ dated 08 June 2020 (“Law”) introducing some critical amendments aimed at protection of the Russian sanctioned entities will enter into force. The amendments were made to the Russian Arbitrazh Procedure Code, which governs litigation in state commercial courts. These might be extremely important for conducting business with Russian entities placed under foreign sanctions.

Please see a brief outline of the recent changes below:

1. Key changes

1.1 Default exclusive jurisdiction of Russian arbitrazh courts

In accordance with this novel legislation, as a default rule, Russian courts now have exclusive jurisdiction over the following disputes:

• Disputes involving entities under the sanctions of foreign states, state association and institutions (not only the USA or EU sanctions, but sanctions of any country);

• Disputes between Russian entities, between Russian and foreign entities, or between foreign entities, the grounds of which are the sanctions against Russian citizens or organizations.

This default rule does not apply if there is (1) an international treaty or (2) prorogation agreement in favour of foreign court or arbitration agreement with seat of arbitration outside the territory of the Russian Federation between the parties.

Taking into account the underlying purpose of this new piece of legislation, it appears that in fact this reservation is aimed to serve as a legitimate cover for the actual transfer of the resolution of all disputes involving Russian sanctioned entities to Russian courts.

1.2 New grounds for unenforceability of prorogation and arbitration agreements

The Law stipulates that if a prorogation or an arbitration agreement is “unenforceable” due to the impact of the anti-Russian sanctions barring a Russian sanctioned person from access to justice, Russian courts will have jurisdiction over the dispute.

The Law does not define “barriers to access to justice”, but due to the recent public deliberations of the Law by its authors one can assume that Russian courts may consider as such barriers any difficulties for Russian persons in paying arbitration charges or state fees, in hiring a lawyer or any other administrative or factual difficulties related to participation in proceedings.

Moreover, we cannot exclude that some Russian courts will consider the mere application of sanctions provisions that prohibit granting a Russian entity’s claim by a foreign court or arbitral tribunal (so-called non-claim and non-liability clauses) as barriers to access to justice for Russian sanctioned persons.

For example, recently, even before the adoption of the Law in the Instar Logistic v Nabors Drilling Innovation case (No. A40-149566/2019) Russian courts have found their jurisdiction due to the conclusion that the sole fact of sanctions imposition constitutes barriers for the Russian sanctioned company’s access to justice “since under the current US sanctions regime the Russian sanctioned company’s ability to protect its rights and economic interests is significantly limited.”

Moreover, in this case Russian courts have changed the choice-of-law agreement between the parties, so that now Russian law governs the dispute instead of English law. One should also bear in mind that according to the well-known Russian Constitutional Court position compliance by Russian and foreign entities with the anti-Russian sanctions can be considered as bad faith conduct violating the public policy of the Russian Federation¹. This might be the other ground for Russian courts not to apply the anti-Russian sanctions provisions, which may limit or exclude a foreign counterparty’s liability, in order to protect Russian sanctioned persons.

1.3 Anti-suit injunctions for Russian sanctioned persons

The Law also introduces a brand new injunction for Russian law, namely a Russian analogy of anti-suit injunctions prohibiting commencement or continuation of foreign court or arbitration proceedings, if Russian courts have jurisdiction over the dispute.

Violation of these injunctions will be punished by a penalty in favor of the other party up to the amount of the claim.

Additionally, the Law also stipulates a kind of estoppel for the parties, who did not object to a foreign court’s or arbitral tribunal’s jurisdiction, providing that in such a case the mentioned party will not be able to object on this basis to the recognition and enforcement of a foreign court decision or an arbitral award in the territory of the Russian Federation.

2. Legal consequences

Thus, commercial relations with Russian sanctioned persons can now be affected by the new Law in the following way:

• Unenforceability in the territory of the Russian Federation of a foreign court order or an arbitral award issued in contradiction with Russian court’s view on its jurisdiction over the dispute;

• High likelihood of declaring prorogation or arbitration agreements with Russian sanctioned persons unenforceable by Russian courts due to the mere existence of the sanctions;

• Non-application by Russian courts of the anti-Russian sanctions provisions via public policy exception or via change of choice-of-law agreement that can automatically lead to a foreign party loss of the case;

• Foreclosure of assets in the territory of the Russian Federation in case of enforcement of Russian court decision or violation of anti-suit injunctions imposed by Russian courts.

3. Problematic issues

The Law definitely provokes many complicated legal issues.

First of all, the Law does not provide for any provisions regarding its operation in time. Therefore, the question of whether it will apply to prorogation or arbitration agreements concluded before or after its effective date remains open and potentially very controversial.

The absence of provisions regarding (1) the possibility of transferring a dispute to the Russian domestic arbitration, (2) the procedure for the recovery of a penalty for violation of the Russian anti-suit injunctions also constitutes a legal gap that will require a thorough legal analysis of these issues.

4. Possible solutions

Despite the unlikeliness of such Russian judicial acts’ recognition and enforcement abroad and, therefore security of assets outside Russia, it is advisable to take additional measures to proactively protect business interests in commercial relationships with Russian entities that are or can be included in any sanctions lists, including:

• Drafting of sanction clauses with mechanisms to settle potential disputes without the need to apply to any forum.

• Selection of a seat of arbitration in the territory of neutral countries that have not imposed the anti-Russian sanctions. This can help avoiding the administrative restrictions that EU or US arbitration institutes shall comply with. This could potentially lower the risks of triggering Russian courts to recognize an arbitration agreement as unenforceable due to such minor administrative barriers.

• Application of enhanced methods of obligations securing, which could help to enforce obligation without applying to the jurisdictional bodies or to enforce a potential non-Russian court order or arbitral award (e.g. using escrow accounts with banks outside the Russian Federation, or other collateral outside Russia, etc.).

¹ See Decision of the Constitutional Court of the Russian Federation N 8-P dated February 13, 2018.

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Practice: Dispute Resolution

Note: Please be aware that all information provided in this letter was taken from open sources. Neither ALRUD Law Firm, nor the author of this letter bear any liability for consequences of any decisions made in reliance upon this information.