Housekeeping in Russia since November 2017: registration of permanent arbitral institutions

Background Picture

On 1 September 2016, Russia’s Federal Law on Arbitration (Arbitration Proceedings) and related legislation came into effect. The changes were driven by a desire to overhaul the existing arbitration regime, in favour of greater efficiency, independence and regulation of the arbitral process.

One notable reform – and the subject of this article – involves combatting the presence of so-called “pocket” arbitral institutions, which have been incorporated by large organisations to settle disputes with their counterparties. Unsurprisingly, the perceived one-sided nature of these arrangements has called into question the independence and objectivity of certain of these institutions.

In fact, the Supreme Arbitrazh Court has issued a number of decisions that either set aside or refused to enforce awards rendered by certain “pocket” institutions, on the basis that they violated the principles of objective impartiality and were, therefore, in conflict with Russian public policy. The vast number of institutions (of which there were rumoured to be more than 500 across Moscow and St Petersburg alone) has also given rise to concerns over their potential use as vehicles for money laundering and other illegal purposes.

A measure addressing this state of affairs is therefore welcome but do the reforms go far enough?

Registration as a Permanent Arbitration Institution

Under the new regime, arbitral institutions are required to obtain a licence from the Russian Government to operate as a Permanent Arbitration Institution (“PAI“). Although the requirements for domestic institutions are fairly extensive, those applicable to foreign institutions are considerably less onerous.
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In short, they will be granted a licence if they can demonstrate that they have a “widely recognised international reputation”.

To date, only two institutions have obtained PAI status: The Arbitration Center at the Institute of Modern Arbitration (“IMA“) and the Arbitration Center at the Russian Union of Industrialists and Entrepreneurs (“RSPP“). Notably, the International Commercial Arbitration Court (“ICAC“) and the Maritime Arbitration Commission at the Chamber of Commerce and Industry of the Russian Federation (“MAC“) are exempt from the PAI requirement to obtain such permission. The question that remains, then, is why no foreign institutions have been registered, given that the main deadline for registration was 1 November 2017.

This may be explained in part by the fact that a number of foreign institutions simply did not apply. It is well known, for example, that neither the Stockholm Chamber of Commerce (“SCC“) nor the International Chamber of Commerce (“ICC“) applied for registration. This reportedly stemmed from concerns that registration might undermine the principle of neutrality in international arbitration and lead to uncertainty for the institutions. Anecdotally, it is understood that the London Court of International Arbitration (“LCIA“) took a similar line, although this has never been confirmed.

However, not all institutions adopted the same approach.
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Both the Vienna International Arbitration Centre (“VIAC“) and the Kuala Lumpur Regional Arbitration Centre (“KLRCA“) previously indicated that they had applied for PAI status. This is not surprising given that the VIAC experienced a significant rise in cases involving CIS parties in 2016, whilst the KLRCA has an existing relationship with the Russian Arbitration Association (in the form of the 2015 Cooperation Agreement). It was reported that the Hong Kong International Arbitration Centre (“HKIAC“) and Singapore International Arbitration Centre (“SIAC“) were also considering registration.

Implications of non-registration as a PAI

Given that none of the foreign institutions have achieved PAI status, what are the practical implications of the legislation?

The most significant consequence is undoubtedly that proceedings administered by a non-registered foreign institution “in the territory of the Russian Federation” will be treated as ad hoc proceedings. This carries important implications for such arbitrations seated in Russia:

First, any award rendered by an arbitral tribunal in such circumstances will be deemed an ad hoc award.

Second, parties to ad hoc proceedings are prohibited from waiving the right to challenge an arbitral award before the Russian state courts.

Third, only authorised PAIs are permitted to administer arbitrations for certain types of corporate disputes involving Russian companies (eg those concerning the establishment, reorganisation and liquidation of Russian legal entities). Notably, this restriction applies even if the proceedings are seated outside of Russia.

Fourth, and finally, only those parties whose proceedings are administrated by a PAI may apply to the Russian courts for judicial assistance on certain procedural issues, including the appointment, challenge and termination of the mandate of arbitrators, and the obtaining of evidence in Russia.

Commentary on the legislative reforms

In many respects, the Russian legislative reforms are a positive development. There is a clear mandate in favour of resolving more disputes within Russia and a move towards strengthening and regulating the Russian arbitration framework to achieve this objective. At the same time, however, there remain serious concerns over the treatment of foreign institutional proceedings as ad hoc, which carries significant consequences for parties.

First, the inability to waive the right to challenge an arbitral award before the Russian courts presents a serious disadvantage to parties who want to exclude the right to seek leave to appeal to the Russian courts on points of law (an appeal on the merits is, of course, already precluded under Russian law). Such “exclusion agreements” are an important feature of international arbitration and are critical to giving parties additional comfort regarding the finality of awards.

Second, since the courts of the seat have supervisory jurisdiction over the proceedings, the inability to seek certain types of redress from the Russian courts can give rise to practical hurdles (eg where assistance is required to obtain evidence located in Russia). It also forces parties to potentially seek recourse from the courts of another jurisdiction (eg the country with the closest nexus to the subject matter of the dispute), which can have undesirable consequences such as additional cost and delay.

In practice, it is unusual to find parties referring arbitration to a seat in Russia whilst opting to have those proceedings administered by a foreign institution. To this end, some may argue that the legislative reforms have little practical effect. The more important point, however, is that there has been a concerted effort on the part of certain institutions to strengthen their ties with Russia – take the Memorandum of Understanding between SIAC and IMA, which is aimed at “support[ing] and promot[ing] the development of Singapore and Russia’s arbitration regimes” – but the registration requirement impedes such efforts.

Parties arbitrating Russia-related disputes therefore have one of two options: either they choose to have their dispute seated in Russia and administered by one of the four PAIs or they select a foreign seat and foreign institution to administer those proceedings. In forcing parties to make this choice, there is a real risk that this might discourage the resolution of Russia-related disputes in Russia, which is the very opposite of what the reforms aimed to achieve. Indeed, given the existing concerns about possible interference from the Russian courts in arbitral proceedings, and their perceived lack of experience in resolving high value, complex disputes, a foreign seat is often viewed as preferable.

London, for example, has traditionally been one of the preferred forums for Russian parties, and its institutions have a long-standing track record of dealing with Russia-related disputes (eg approximately one third of the LCIA’s cases in 2015 involved either a Russian and/or CIS-related party and/or a party ultimately controlled by a Russian/CIS entity). Given the impact of EU sanctions and increasing anti-West sentiment, other arbitral hubs that offer reliable alternatives have also become more attractive (eg HKIAC and SIAC were ranked the third and fourth most popular seats respectively in the 2015 Queen Mary International Arbitration Survey).

The above issues serve as a welcome reminder of the need to take advice when drafting arbitration clauses. It is critical to ensure, for example, that any “corporate disputes” are administered by a PAI. Failure to adhere to this requirement could result in a challenge to the Tribunal at the jurisdictional stage or a refusal to enforce an arbitral award if challenged before the Russian state courts. It is also important to advise parties of the risks of choosing a Russian seat coupled with a foreign institution, lest they find themselves faced with the limitations discussed above.

Although the eradication of pocket institutions is a welcome measure, the reforms may not have the desired effect of rendering Russia a more attractive seat of arbitration if the world’s leading arbitral institutions do not “buy in” to the new regime. It is, after all, important not to underestimate the confidence placed by international parties in such institutions, which lend significant credibility to the arbitration process.

It therefore remains to be seen whether these well-intended reforms will ultimately harm Russia by isolating it from the wider arbitral community or whether, in fact, the local institutions will rise up to the occasion in the absence of foreign and pocket institutions. As they say in Russia, “babushka (gadala, da) nadvoye skazala (— to li dozhdik, to li sneg, to li budet, to li net)”: we’ll see what we’ll see; maybe rain or maybe snow, maybe yes or maybe no. 

About the Author:

Chantal du Toit is an associate in Allen & Overy’s Global Arbitration group based in London and has experience working in Hong Kong, Moscow and Kazakhstan. She has advised on a range of disputes concerning the energy, insurance and construction sectors.

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