The Russian arbitration reform

Alexey Yadykin, Martin C. Mekat† and Noah Rubins‡

ABSTRACT

Russia adopted new federal laws largely reforming its arbitration industry. This reform is intended to address a number of recurring issues and to modernize the Russian arbitration rules. As one of its main facets, the new Russian arbitration law expressly provides for arbitrability of corporate disputes, subject to a number of caveats and conditions. Moreover, the reform legislation provides for quality controls on arbitration institutions, including mandatory permits and other ongoing requirements. Finally, the new Russian arbitration law also addresses a number of other topics, including changes in arbitration-related litigation as well as a number of procedural changes. The reform is expected to have a significant impact on the Russian arbitration landscape.

On 29 December 2015, the Russian President signed into law two bills (federal laws) reforming Russia’s arbitration regime. The reform legislation is based on draft bills developed by the Russian Ministry of Justice with a view to addressing a number of recurring problems in the Russian arbitration sector and to modernizing existing legislation—a process that lasted over two years.

The reform legislation comes into force on 1 September 2016, although a number of important provisions will take effect at specified later dates. It brings about important institutional changes in Russia’s arbitration sector, as well as significant procedural changes.

1. STRUCTURE AND SCOPE OF THE REFORM LAWS

The reform laws completely replace Russia’s existing law on domestic arbitration (2002) and significantly amend the existing law on international commercial arbitration (1993) as well as a number of other Russian laws (including the procedural laws codified in the Arbitrazh Procedural Code and the Civil Procedural Code).

The scope of the reform legislation is very wide. It addresses, among other topics:

• the arbitrability of various types of disputes (including corporate disputes);

• requirements for arbitration agreements and the approach taken to their interpretation;

• various procedural aspects of arbitration and related state court proceedings;

• assistance from state courts, including the capacity of assistance and supervision authorities within the meaning of the United Nations Commission on International Trade Law (UNCITRAL) Model Law (eg to resolve nomination and challenge deadlocks);

• regulation of arbitral institutions and their rules;

• personal requirements for arbitrators; and

• liability of arbitrators and arbitral institutions.

2. MODEL LAW BASIS

The reform harmonizes Russia’s domestic and international arbitration regimes to a significant extent, largely on the basis of the UNCITRAL Model Law on International Commercial Arbitration (the Model Law). For example, the critically important provisions relating to the recognition, enforcement and annulment of awards and a number of other central provisions of the revised domestic and international arbitration statutes are based on the Model Law. However, some provisions of the reformed arbitration statutes differ from the Model Law, in part due to the adoption in the international arbitration statute of rules previously found only in the domestic arbitration statute,and in part due to the introduction of novel rules that address a number of issues beyond the scope of the Model Law (such as civil liability of arbitrators and institutions toward the parties).There also remain differences between the two statutes, with the international commercial arbitration statute remaining overall better aligned to the Model Law

Despite proposals to implement the 2006 amendments to the Model Law, the reform legislation for the most part draws upon the pre-2006 version. In particular, the extensive provisions on interim measures and preliminary orders contained in the 2006 Model Law have not been adopted, although the tribunal’s power to grant interim measures will no longer be limited to measures in respect of the subject-matter of the dispute, as the 1985 Model Law suggested. Importantly, the existing position that foreign arbitral interim orders are not enforceable in Russia will not be changed.

3. ARBITRABILITY IN CORPORATE AND OTHER DISPUTES

One of the major aspects of the reform is the clear determination of the arbitrability of various categories of disputes. Under the pre-reform legislation, arbitrability of various categories of disputes remained unclear or caused controversy, most importantly in respect of corporate disputes, which have been deemed non-arbitrable by Russian courts (eg in the well-known Maksimov v NLMK ruling).

By default, all civil law disputes capable of being referred to court will be deemed arbitrable, subject to the exceptions stated in the legislation. For example, the reform legislation expressly provides for the non-arbitrability of insolvency disputes and a number of other types of disputes that are predominantly public or administrative in nature, such as those connected to privatization.State procurement is also designated as a non-arbitrable subject. At the same time, the reform legislation provides that state procurement disputes may be arbitrated after a special federal law has been adopted to determine arbitral institutions that will be eligible to administer such arbitrations.

The reform legislation expressly renders corporate disputes arbitrable. There are a few exceptions to this rule, such as disputes regarding the convocation of the general shareholders meetings of Russian companies, certain disputes in respect of ‘strategic’ companies, and disputes arising out of share redemption and mandatory tender offer procedures in joint stock companies.A wide range of corporate disputes (including corporate management, share ownership, derivative claims against directors and even challenges of the corporation’s transactions with third parties) is therefore now clearly arbitrable under the reformed system.

An important reservation is that corporate disputes may not be referred to arbitration before 1 February 2017, and arbitration agreements relating to such disputes made prior to that date will be ineffective (ie incapable of being performed).Furthermore, corporate disputes can only be referred to institutional arbitration (and not to an ad hoc tribunal), and the seat of arbitration must be in the Russian Federation. Thus, the parties are not permitted to refer their Russian corporate disputes (eg those arising under a shareholders’ agreement in a Russian company) to foreign-seated arbitration, eg to the International Chamber of Commerce (ICC) with seat in Paris or Geneva.

An additional requirement is that, under the reform legislation, most corporate disputes must be arbitrated under specialized corporate arbitration rules to be adopted by eligible arbitral institutions—in other words, cannot be arbitrated under the general/default set of arbitral rules of the institution. The reform legislation stipulates a number of requirements for the corporate arbitration rules. In particular, it contemplates complex rules for multi-party corporate arbitration, including information sharing, joinder/accession mechanisms and several other matters (even the possibility of ‘class action’ arbitration).These procedures have been influenced strongly by the German Institution of Arbitration (DeutscheInstitution fu¨r Schiedsgerichtsbarkeit e.V. - DIS) Supplementary Rules for Corporate Disputes.

4. APPROACH TO ARBITRATION AGREEMENTS

The approach to arbitration agreements under the reform legislation follows the Model Law. Arbitration agreements have to be made in writing. However, this requirement is satisfied where the agreement was made by means of electronic communication or by the exchange of statements of claim and defence. In addition, arbitration agreements can be included in stock exchange and clearing rules and even in the charters (articles of association) of Russian companies (except public joint stock companies and companies with 1000 or more shareholders).

The reform legislation also addresses a number of issues that have caused controversy, such as unclear or defective arbitration clauses and survival of arbitration clauses in the event of assignment of a contract. It introduces the principle that in case of uncertainties in an arbitration agreement, the agreement should be construed in favour of its validity and enforceability. The reform legislation also expressly provides for the survival of arbitration agreements in the event of an assignment, and sets default rules as to the coverage of disputes by an arbitration clause in a contract. For example, it provides that by default (ie absent any agreement by the parties to the contrary), an arbitration clause in an agreement shall cover not only the disputes relating to its performance but also disputes relating to its entry into force, invalidation, and termination.

5. INSTITUTIONAL REFORM

Under the reform legislation, Russian arbitral institutions must file for a permit (‘the right to perform the functions of a permanent arbitral institution’) to start or continue to administer arbitrations. The International Commercial Arbitration Court (ICAC) and the Maritime Arbitration Commission (MAC), both institutions under the auspices of the Chamber of Commerce and Industry of the Russian Federation, are not required to obtain a permit, but they would still have to adopt and submit to the relevant state authority new arbitration rules compliant with the reform legislation before 1 February 2017. As for the remaining institutions, the permit must be issued by the government upon the recommendation of a special non-governmental body—the Council for the Improvement of Arbitration. The Council, which has not yet been established, is envisaged to consist of up to one-third-state officials, with the rest of the delegates representing the arbitration community, legal scholars, and other stakeholders.

The procedure and precise rules for the issuance of the permits are to be developed by the Russian government following the adoption of the reform legislation. However, the legislation already includes the criteria to be assessed by the Council. The Council will have power to refuse permits to institutions that it considers to be of dubious reliability (on the ground of non-compliance with the reputational and other criteria envisaged by the reform legislation).

Several requirements are being imposed upon arbitration institutions, most importantly:

• institutions must be formed as units of non-profit entities;

• institutions must adopt a list of at least 30 recommended arbitrators (with some further related requirements if they are to administer international arbitrations). One-third of the listed arbitrators must have a Russian academic degree, and at least half of the listed arbitrators must have previous experience sitting as arbitrator or judge;

• institutions must develop and deposit with the Russian regulatory authorities arbitration rules that meet the standards prescribed by the reform legislation (standards that are influenced by leading arbitration rules);

• institutions must maintain committees to deal collectively with arbitrator nominations and challenges; and

• substantial or systematic non-compliance with the prescribed rules that results in serious damage to the users of arbitration or other parties may lead to a ban on the offending institution’s activity. Shutting down an institution in this manner would require a court decision.

The issue of ‘institutional conflicts’ (mostly relevant to so-called ‘pocket arbitration courts’) is also addressed in the reform legislation. For instance, arbitral institutions will generally not be allowed to administer arbitrations in disputes between the entity that founded them, its participants and third parties (subject to certain exceptions).

These institutional requirements (including both the basic requirement to obtain a permit and further ongoing requirements) are designed primarily to apply to Russian institutions. In respect of foreign arbitral institutions administering arbitrations in Russia, the reform legislation does not directly require any registration and/ or permit to be obtained. In respect of foreign arbitral institutions administering arbitrations or acting as the appointing authorities in arbitrations seated outside Russia, the reform legislation does not apply. However, arbitrations administered by foreign institutions will only be recognized as institutional if they obtain the permit. This may be relevant to the parties since the reform legislation provides a number of benefits to institutional arbitration over ad hoc arbitration, and—as discussed above—only allows institutional arbitration of ‘corporate disputes’. Arguably, the treatment of a foreign-administered arbitration with a Russian seat as ad hoc would also trigger art 44 para 20 of the New DA Law, which only allows arbitral institutions in possession of the Russian government permit to act as an appointing authority in Russia-seated arbitrations. This limitation will become effective one year after adoption of the procedure for issuance of the aforementioned permits by the government. If foreign institutions apply for a permit the only applicable criterion is whether they enjoy a ‘widely recognized international reputation’, a test which the leading arbitral institutions should be able to pass. Once a permit is issued, foreign institutions would not be subject to the same intrusive ongoing requirements as their Russian counterparts. It remains to be seen, however, whether any of the foreign institutions will be willing to apply for a Russian permit, given in particular that such an action could be seen as limiting the institutions’ independence in a way that does not exist in other countries.

6. PERSONAL REQUIREMENTS FOR ARBITRATORS

The reform legislation expands pre-existing personal requirements for arbitrators under the domestic arbitration statute. More importantly, these requirements will also apply in the context of an international arbitration with its seat in Russia. For instance, the default rule (which may be varied to a certain extent in institutional arbitration) is that the sole arbitrator/presiding arbitrator must have a legal education. Certain requirements will also be applicable to all arbitrators. For example, all arbitrators will need to fulfil general requirements, such as the minimum age of 25 years, as well as full legal capacity.

7. PROCEDURAL CHANGES

A number of changes were adopted in respect of the arbitral procedure. One of the most important features is that under the reform legislation, Russian state courts will serve as the supervisory authority in matters of arbitrator challenges and appointments. This change will apply to both domestic and international arbitrations. This follows the example of a number of leading arbitration jurisdictions.However, it remains to be seen how the system will operate in practice, eg how courts are going to perform the nomination functions, which is entirely new to them.

As should by now be clear, the reform exhibits a strong preference for institutional arbitration, according it a number of procedural benefits. For example, in institutional arbitration, parties will be allowed to ‘opt out’ and waive their right to apply to the supervisory authorities. Parties to an institutional arbitration are also allowed to agree on the finality of the award and to accept a waiver of the right to apply to vacate an award. State courts’ assistance in evidence-gathering is also guaranteed only in the context of administered arbitration, and not in ad hoc proceedings.

8. CIVIL LIABILITY

Although unusual under Russian law and the laws of leading international arbitration jurisdictions, the bill expressly addresses the civil liability of arbitral institutions and arbitrators. Institutions will be liable for wilful misconduct or gross negligence. Arbitrators will be immune from civil liability toward the parties.However, institutional arbitration rules may provide for a reduction of arbitrator’s fees for failure to perform their duties properly.

9. CHANGES IN ARBITRATION-RELATED LITIGATION

In addition to the changes in the arbitral procedures, the reform legislation introduces a number of changes to Russian civil litigation rules (sections of the Arbitrazh Procedural Code and the Civil Procedural Code dealing with various types of arbitration-related proceedings, such as recognition and enforcement and settingaside cases). The changes include new rules and institutions (eg detailed provisions on judicial support in evidence-gathering and support of arbitration as well as new sections on judicial assistance and supervision in respect of arbitrator nominations and challenges). In addition, the reform legislation introduces changes to the existing rules, eg relating to territorial jurisdiction and the timing of arbitration-related proceedings. One important change worth mentioning is the new (reduced) one-month statutory time limit for the court to resolve set-aside requests and requests for recognition and enforcement. One-month periods are also set for the court to perform requests for assistance and supervision (eg in respect of deadlocked nominations and challenges) and for judicial assistance in evidence-gathering. Overall, the new procedural regime is aimed at ensuring swift and timely assistance from courts in arbitration-related cases, although the reduced time limits will put significant pressure on the judiciary and the parties.

The reform legislation also codifies a number of features, which were not previously addressed in statutory law, eg the opportunity for third parties whose interests are affected by an award to apply to set it aside. It also codifies the recognition in Russia of foreign declaratory awards that do not require enforcement, a peculiar procedure where the normal roles of the parties (eg the creditor applying to a local state court for recognition and enforcement, and the debtor opposing such action) are reversed. The default rule is that such foreign declaratory awards are recognized without the need for Russian court proceedings. However, the debtor may file an opposition (request for non-recognition) with the court within one month of learning of the award, in which case the recognition will be decided in court, and will not be automatic.

10. CONCLUSION

The reform legislation is an ambitious attempt to modernize the arbitration industry in Russia, one with far-reaching and, in some cases, not entirely predictable consequences (although serious efforts were made to foresee and address a number of possible contingencies).

The institutional part of the reform has provoked particularly intense discussion in the Russian legal community. It has been received unfavourably by some of the institutions that it seeks to reform and/or remove from the scene, and has been heavily criticized, especially for its administrative and permit requirements. However, as the reform will subject arbitration in Russia to stricter legal standards and ensure improved regulation and certainty on a number of important issues, the general effect is likely to be positive.

The reform could also impact the users of arbitration in the way their existing arbitration clauses will operate, but will also provide new opportunities, most importantly in respect of arbitrating corporate dispute

It remains to be seen how effective the new legislation will be in achieving the reform’s goals, such as sanitizing the Russian arbitration market and making Russia a more attractive arbitration jurisdiction. In the meantime, it is important for users of arbitration to familiarize themselves with the new legislation and be prepared to operate under the new arbitration regime after it enters into force.