Russian parties and sanctions-related arbitrations

В публикации рассматриваются средства возможной защиты российских компаний в арбитраже, связанном с санкциями, введенными в результате украинского кризиса, а также подход российского суда к вопросам, относящимся к подобным делам. Хотя судебная практика пока что отсутствует изложенные в настоящей публикации соображения могут представлять не только теоретический, но и практический интерес.

Alexei Panich, partner at Herbert Smith Freehills in Moscow, considers potential remedies for Russian parties in arbitrations involving sanctions arising from the Ukraine crisis, and the Russian courts’ approach to such issues.

Euromaidan protesters in Kiev, 2013

Euromaidan protesters in Kiev, 2013 (Credit: Mstyslav Chernov)

The sanctions against Russia related to the situation in Ukraine were first introduced in March 2014 and have subsequently been escalated in terms of their content and territorial scope. This has increased concern among Russian companies and individuals about the growing impact of the sanctions on the Russian business community and the persons subject to the sanctions. This concern has manifested itself in a growing number of challenges to the EU sanctions regime before the European Court of Justice. However, challenging the lawfulness of the sanctions is just the tip of the iceberg; various disputes have arisen in connection with the introduction of sanctions. It is against this background that possible strategies to be adopted by Russian parties in resolving contractual disputes connected to sanctions have gained increasing focus.

At the outset, it should be noted that the EU, US and a number of other countries have applied various sanctions laws over an extended period, and thus the practice of applying such laws, including court precedents, is relatively well developed. The key point arising from such practice is that Russian contracting parties are not entitled to compensation in circumstances where contractual performance is suspended or otherwise terminated by the contractual counterparty as a result of the applicable sanctions regime. For example, the expanded EU sanctions against Russia expressly provide that no claims in connection with any contract or transaction that has been affected, directly or indirectly, in whole or in part, by the sanctions shall be satisfied, if they were made by Russian persons or their representatives (EU Regulation No. 833, EU Council Decision 2014/512/CSFP). Moreover, it is worth noting that the EU regulation contains provisions on the burden of proof, which require the sanctioned party to demonstrate that the transaction does not fall within the applicable sanctions regime.

Despite the widespread adoption of such restrictions by many countries in connection with previous sanctions regimes (for example, the EU sanctions against Iran contain the same wording), it is obviously of concern for Russian parties that such restrictions appear to be discriminatory in nature.

Accordingly, to avoid such restrictions, Russian parties are likely to seek to avoid submitting commercial disputes to:

  • the law of a country where sanctions have been implemented;
  • the courts or arbitral institutions in jurisdictions where the sanctions regime has effect; and
  • arbitrators who are citizens or residents of such a jurisdiction.

The question then, is how this can be achieved in practice?

The situation appears to be relatively straightforward in the pre-contract stage, where Russian and foreign counterparties are still negotiating terms and can therefore attempt to agree a mutually acceptable governing law clause and an arbitration or jurisdiction clause. This has been borne out in practice over the past few months: Russian companies have, in light of the similarities with English law, frequently initiated discussions about agreeing to a Hong Kong (or less often Singaporean) law governing clause. There has also been a move away from arbitrations seated in London under the LCIA Rules, to the Hong Kong and Singapore International Arbitration Centres.

Moreover, greater attention has been given to the constitution of arbitral tribunals, particularly in terms of the arbitrators’ nationality. Indeed, Russian entities are increasingly concerned (not without reason) that citizens or residents of countries where sanctions have been implemented are more likely to take sanctions into account, even in circumstances where a dispute is considered under the law of a neutral third country or where the seat of the arbitration is located in such a country. Even if Russian entities select arbitrators from countries where sanctions are applied, there is always the risk that the arbitrators might decline to act in sanctions-related disputes or disputes involving designated Russian parties, thereby complicating the dispute resolution process. To avoid these issues, Russian entities might seek to agree that the parties should appoint arbitrators from neutral countries only.

Some of the more aggressive Russian companies are now seeking to have disputes heard under Russian law, using Russian arbitral institutions. However, foreign parties are often reluctant to agree to Russian law and Russian arbitral institutions, not least because of uncertainties associated with the application of foreign sanctions regimes by Russian courts.

One of the main problems concerning the application of Russian law to agreements with a foreign element is the lack of regulation relating to sanctions. Notwithstanding that the USSR was subject to similar measures, this is the first time in its recent history that Russia is grappling with sanctions imposed against Russian individuals and entities. Resolutions issued by the Russian courts at the end of 2014 in sanctions-related disputes have not provided any clarity as to the approach to be adopted in respect of anti-Russian sanctions. However, in light of comments made by a number of Russian officials, we can infer that sanctions would be deemed illegal, with their restrictive nature to be disregarded by the Russian courts. In the meantime, pending clarity on these issues, Russian judges and arbitrators may either disregard sanctions in their entirety, or adopt a more nuanced approach, not applying sanctions where doing so would be prejudicial to the rights of Russian entities, but applying said sanctions when it would be beneficial to do so.

However, it is worth bearing in mind that, even with a favourable award from a Russian arbitral institution, there is a risk that a foreign counterparty would not be able to see it enforced in Russia. Such an award may be set aside by a Russian court (for example, on the basis that it breaches fundamental principles of Russian law, in particular the principle of non-discrimination and the right to a remedy) or be refused enforcement by reference to sanctions.

The decision of the Moscow justice of the peace dated 18 August 2014 in the administrative case of MasterCard confirmed that it is possible to resolve disputes in Russia without taking into account sanctions laws. Despite the arguments advanced by MasterCard in support of the impossibility of servicing credit cards in violation of US sanctions laws, the Russian court held that MasterCard was guilty of an administrative offence – namely, failure to comply with a directive issued by the Central Bank of Russia to service credit cards. While the decision was not appealed, there is no reason why the court’s refusal to consider the US sanctions regime cannot apply more generally in sanctions-related disputes. There is, however, conflicting case law in this area. In a separate dispute involving MasterCard, the Meschansky District Court for the City of Moscow took the US sanctions regime into account in finding that it was not possible for Mastercard to service credit cards (this decision was upheld on appeal). The approach of the Russian courts therefore remains uncertain and unpredictable.

In addition, Russian courts have yet to formulate a position on a number of special issues related to sanctions, in particular issues relating to force majeure and frustration (as a result of the impossibility of performance or material changes in circumstances). Despite the fact that Russian judicial practice in these areas is developing rapidly, it is unlikely that a consistent body of case law will be available in the near future.

Russian entities will also need to consider how best to mitigate sanctions-related risks in contracts that predate the applicable sanctions regime, or which were executed without regard to the same. In this context, it is unlikely that Russian parties can expect their foreign counterparties to agree to amend the governing law and the arbitration or jurisdiction clauses in existing agreements. Accordingly, if disputes arise, Russian companies might consider opting for aggressive strategies that would enable them to avoid unfavourable jurisdictions. Such strategies might involve attempting to move the venue for the dispute to Russia where, notwithstanding current judicial uncertainty in relation to sanctions-related matters, Russian companies would have good reason to expect a favourable attitude from the Russian courts.

For example, in recent years the Russian state courts have rendered various, at times questionable, resolutions in relation to the arbitrability of certain types of disputes (real estate, corporate, etc). The common theme in such resolutions was the steadfast aspiration of the Russian courts to determine their exclusive jurisdiction over various categories of disputes. It is therefore not difficult to foresee a scenario whereby the Russian courts might find that they have exclusive jurisdiction in connection with certain sanctions-related disputes.

Potential strategies for Russian counterparties might include initiating legal proceedings in Russia with reference to: the unenforceability of the arbitration clause, with the result that the matter should be heard by a Russian state court; the need to terminate an agreed arbitration clause; or the invalidation of the contract, whether fully or partially. While the third approach is unlikely to find favour with the Russian courts, the first two strategies may well prove successful.

In fact, based on established judicial practice, a Russian court would be free to consider the enforceability of an arbitration clause on the basis that sanctions violated a Russian entity’s right to a non-discriminatory remedy and accordingly rendered the clause unenforceable.

Similarly, a Russian court may consider terminating a contractual arbitration clause on the basis that the Supreme Commercial Court of Russia has repeatedly stated that arbitration clauses must be considered as ordinary civil law contracts. Such a clause may accordingly be terminated, for example, due to any material change in circumstances – such as the restrictions imposed on a Russian person as to satisfaction of a sanctions-related claim. This would require a Russian party to demonstrate that it would not have agreed to the existing arbitration clause if it could have foreseen the sanctions restrictions. A Russian person may also demand termination of a governing law clause on the same grounds.

Despite the current absence of court precedents supporting these strategies in the context of sanctions disputes of a contractual nature, there is a chance that they may develop if the sanctions regimes are not relaxed.

Норайр Бабаджанян
+7 910 496 2784


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