Latest arbitration development in Russia

Hong Kong International Arbitration Centre (HKIAC) is to be licensed as a permanent arbitral institution while further amendments affect arbitrability of corporate disputes arising from shareholder agreements and procurement contract disputes

Publication April 2019


Introduction

The Hong Kong International Arbitration Centre (HKIAC) is to be licensed as a permanent arbitral instruction authorized to administer proceedings seated in Russia. Furthermore, the Law on Arbitration in Russia has once again been amended, with changes that came into force on March 29, 2019. The amended version of the Law relaxes the requirements for arbitration of disputes arising out of shareholders’ agreements and confirms arbitrability of disputes arising from procurement contracts concluded by state companies. The amendments also affect foreign arbitral institutions and ad hoc arbitration.

The HKIAC to be licensed as a permanent arbitral institution in Russia

The HKIAC will become the first foreign arbitral institution to obtain a license authorizing it to administer arbitration proceedings seated in Russia.

In this paragraph we will address the practical consequences of this development. We will also provide a brief overview of the HKIAC and an outline of the distinctive features of its arbitration rules.

Practical consequences of the HKIAC obtaining the license

The license is only required to administer arbitrations seated in Russia and not, for example, Hong Kong. Notably, all HKIAC arbitrations that commenced in 2016 and 2017 were seated in Hong Kong, with a sole exception of one arbitration, which was seated in Singapore.

Furthermore, as arbitration of domestic disputes would require that the HKIAC launches a branch in Russia, the HKIAC confirmed in its application for the license that it would not administer domestic Russian arbitrations.

It may thus seem that the HKIAC sought to obtain the license primarily for marketing purposes to enhance its attempts to attract Russian users.

However, by obtaining the license, the HKIAC will obtain certain advantages in administering at least two categories of disputes.

The first category of disputes is corporate disputes, which must be referred to a licensed institution with a seat in Russia, but may be resolved under the usual arbitration rules. These are, primarily

i. Disputes regarding the ownership of shares (including disputes arising from share purchase agreements) and

ii. Disputes, arising from agreements concluded by shareholders of a legal entity regarding the management of this legal entity, including from shareholders‘ agreements

The second category of disputes are disputes arising from procurement contracts concluded by state-owned companies and other entities according to Law 223-FZ.

The HKIAC: an overview

  • The HKIAC was established in 1985 with the support of the government of Hong Kong. Nowadays, the source of HKIAC’s funding is the arbitration fees it receives from administering disputes. It declares itself as completely independent from any influence.
  • In 2017, 156 arbitrations worth US$4.7bn were commenced under the HKIAC-administered arbitration Rules.
  • On average, administered arbitration conducted under the HKIAC Rules takes 13-15 months, while the arbitration fees amount to approximately US$110,000.
  • In 2017, 87% of arbitrations initiated were held in English, 78% of disputes involved at least one party not from Hong Kong and 41% of disputes did not involve a single party from Hong Kong. However, only 5% of cases did not involve any parties from Asia.
  • Sales law disputes made up 32% of disputes initiated under the HKIAC Rules, 19% were construction and 13% were corporate disputes. The HKIAC also administers services disputes (8%), maritime disputes (8%), banking and finance disputes (6%) and other disputes.
  • Even though the HKIAC has not administered many Russia-related disputes to date (two disputes are known to have been resolved and four are pending), it has been increasingly present in Russia for marketing purposes and in particular has attempted to position itself to benefit from the political downturn in relations between Russia and the West.
  • The HKIAC list of recommended arbitrators includes several highly reputable Russian arbitration practitioners. However, the parties’ choice is not limited by this list and other Russian-speaking arbitrators may also be appointed.

Distinctive features of the HKIAC Administered Arbitration Rules

The latest HKIAC Rules were adopted in 2018 and provide detailed rules of procedure, while also remaining focused on keeping the arbitration effective in terms of time and cost.

  • Unlike most other arbitral institutions, the HKIAC offers the parties a choice between hourly rates and an ad valorem fees calculation system. In a less complex but high-stakes dispute the parties may benefit from cost savings by using hourly rates, while the ad valorem system may provide for greater certainty in a complex construction or corporate dispute.
  • Under the HKIAC rules, the parties may also agree that all documents be submitted in electronic form and upload these to either a secure data room arranged by the HKIAC or another data room of their choosing. This should in principle enable time and cost savings, particularly when multiple international locations are involved.
  • The HKIAC endeavours to ensure swift resolution of disputes. The HKIAC Rules require that the tribunal and the parties agree a time schedule for the dispute which helps minimise subsequent procedural delays. Moreover, at the end of the proceedings, the tribunal is required to inform the parties of the date on which it expects to render an award. The time period to render an award cannot exceed three months.
  • For less complex, less significant or more urgent disputes the HKIAC rules allow the parties to request that the arbitration be expedited. The default test for a dispute to qualify for expedited proceedings is that the amount at stake does not exceed HK$25m (approximately US$3m). Expedited proceedings may also be adopted in other circumstances if the parties so agree or if the dispute is urgent. If expedited procedure applies, the dispute should be resolved within six months, while the tribunal may decide to conduct the proceedings on a documents-only basis, and the award may contain less detailed motives.
  • Another mechanism introduced in the amended HKIAC rules is the right of a party to request early determination of an issue of law or fact. Such a procedure may be applicable where a particular allegation of fact or a legal argument are manifestly without merit, manifestly outside of the tribunal’s jurisdiction or on the assumption that even if assertions of a party are correct, no award could be rendered in favour of that party. The tribunal would be able to determine these issues in a separate procedure within a two-month period, while the main proceedings may be stayed or run concurrently. This procedure should be particularly helpful to determine matters of jurisdiction, objections based on expiry of the limitation period or to enforce overdue debts. A summary determination may proceed concurrently with the arbitration or the tribunal may decide to stay the proceedings pending summary determination.
  • HKIAC rules also allow the parties to seek interim measures from the arbitral tribunal or, before the tribunal is constituted, from an emergency arbitrator. An emergency arbitrator is to be appointed within a day of the moment when a request for emergency arbitrator proceedings is filed and, once appointed, should decide on the request for interim measures within 14 days.
  • The HKIAC rules also allow the parties to seek security for costs. This mechanism is primarily used by respondents where they can prove that subsequent recovery of costs may prove impossible. An example of such a case could be where the claimant is a shell company without any assets.
  • Lastly, the HKIAC rules contain a set of provisions that ensure effective conduct of multi-party and multi-contract disputes. Where disputes arising between different parties and/or from different contracts raise similar issues and fall within the scope of compatible arbitration clauses, they may be combined into a single procedure or transmitted to the same arbitral tribunal despite remaining separate cases. This mechanism is also aimed at reducing the cost and length of arbitration, and also eliminates the risk of contradictory awards being adopted by different tribunals.

Arbitrability of corporate disputes

The latest amendments relax the requirements previously applicable to arbitration of corporate disputes arising out of shareholders' agreements, as well as to arbitration of shareholders' claims for compensation of losses suffered by a legal entity and claims for invalidation of transactions concluded by a legal entity.

Requirements applicable before the amendments

The 2016 reform of Russian arbitration legislation addressed the arbitrability of corporate disputes arising from relationships between the shareholders of legal entities incorporated in Russia. The reform also introduced several preconditions which had to be satisfied in order for corporate disputes to be referred to arbitration.

In particular, any arbitrable corporate disputes could only be referred to arbitration administered by institutions licensed by the Russian government as permanent arbitral institutions. Two Russian arbitral institutions founded at the Russian Chamber of Commerce and Industry were exempt from the requirement to obtain this license, and only two other institutions were licensed. It was also announced by the Ministry of Justice that the HKIAC and another Russian institution specialising in sports arbitration will be granted the license in April 2019.

The requirement to refer disputes to licensed permanent arbitral institutions was the only restriction applicable to disputes regarding the ownership of shares (including disputes arising from share purchase agreements).

However, further restrictions were introduced and applied to most other corporate disputes, including

i. Disputes concerning incorporation, reorganization and liquidation of a legal entity

ii. Disputes concerning management of a legal entity under a shareholders' agreement or through corporate management bodies

iii. Claims by shareholders for compensation of losses suffered by a legal entity and claims for invalidation of transactions concluded by a legal entity

iv. Disputes concerning issue of securities

All these disputes could have been referred to arbitration, subject to four mandatory preconditions

i. The arbitration is administered by a permanent arbitral institution.

ii. The arbitration is seated in Russia.

iii. The arbitration is conducted under a special set of rules adopted for the arbitration of corporate disputes.

iv. All shareholders of an entity and the entity itself are parties to the relevant arbitration clause.

These requirements did not correspond to the practical reality whereby shareholders' agreements were often concluded only between some of the majority shareholders (and almost never included the target entity as a party).

Amended requirements

The latest amendments into the Law on Arbitration loosened these requirements for two categories of disputes.

In particular, the amendments affected ’disputes, arising from agreements concluded by shareholders of a legal entity regarding the management of this legal entity, including from shareholders‘ agreements’. The amended legislation now allows parties to refer these disputes to arbitration only subject to two requirements:

i. The arbitration is administered by a permanent (i.e. licensed) arbitral institution.

ii. The arbitration is seated in Russia.

The newly introduced changes now expressly provide that arbitration agreements regarding the disputes arising from shareholders agreements must only be concluded by the parties to such shareholders agreements. They need not include the entity itself or the other shareholders as parties. These amendments take into account and eliminate certain practical issues that parties to shareholders’ agreements had to face prior to the changes.

Furthermore, the requirement that such disputes be referred to arbitration administered under the special rules for arbitration of corporate disputes was revoked.

On the one hand, this should simplify the procedure of arbitration and keep it confidential (now that the rules for arbitration of corporate disputes do not need to apply, the requirement to notify the entity and all of its shareholders of a dispute is also gone).

On the other hand, this amendment also expands the scope of disputes which could be referred to foreign arbitral institutions which obtain a license to act as permanent arbitral institutions (that is, for now, the HKIAC). Without this amendment, foreign arbitral institutions would not have been able to administer disputes arising from shareholder agreements as they would not adopt the special rules for arbitration of Russian corporate disputes.

Potential issues with application of the amended provisions

The amendments introduced into the Law on Arbitration are not accompanied by transitional provisions. In particular, it is unclear whether these changes apply to arbitration agreements concluded before March 29, 2019. It is possible that the courts might approach the matter conservatively and refuse to apply the more relaxed approach to agreements concluded before the amendments came into force. Thus, it may be advisable to renew existing arbitration clauses after March 29, 2019.

Furthermore, the amended provisions in the Law on Arbitration now directly contradict the provisions of the Arbitrazh (Commercial) Procedural Code, which in Article 225.1 (that has not been amended) still lists all 4 requirements as applicable to disputes arising from shareholders‘ agreements. Arguably, the amended provisions should prevail over the Arbitrazh Procedural Code (1) as lex specialis and (2) as lex posterior. Nevertheless, the interplay between different provisions remains unclear and is to be clarified by the court practice.

Arbitrability of disputes arising from procurement contracts concluded by state-owned companies and other entities according to Law 223-FZ

Amendments introduced to the Law on Arbitration confirm arbitrability of disputes arising from procurement contracts concluded by state-owned companies and other entities according to Law 223-FZ.

Since 2014, Russian courts have adopted a restrictive approach to arbitrability of disputes arising out of contracts concluded through public procurement procedures. The arbitration legislation reform of 2016 addressed this and introduced an exhaustive list of non-arbitrable disputes. This list included procurement contracts concluded by the state bodies under Law 44-FZ, but not procurement contracts concluded by state companies and other entities in line with Law 223FZ. Nevertheless, the courts continued to apply a restrictive approach and referred to non-arbitrability of disputes involving parties which were subject to procurement requirements under Law 223FZ.

To eliminate this doubtful approach, a new provision was introduced:

"In case the arbitration is seated in the Russian Federation, disputes arising out of contracts concluded according to Law 223-FZ 'On procurement of goods, works and services by certain legal entities' or in connection with them may only be referred to arbitration administered by a permanent arbitral institution".

Although a confirmation of arbitrability of disputes connected with Law 223-FZ is a welcome step, the language adopted may cause further problems in practice.

First, the new amendment does not fully eliminate the existing problem. Recently, the courts have moved from holding disputes connected with Law 223-FZ as non-arbitrable disputes to denying enforcement of relevant awards by reference to violation of public policy. However, the Supreme Court of Russia took a more reasonable approach this time and confirmed that the mere fact of involvement of a state-owned company cannot be a violation of public policy. The only factor that (according to the Supreme Court) may qualify as violating public policy is direct funding of the relevant transaction by state budget funds. Furthermore, recent court practice confirms that the burden of proof is on the award debtor to prove that a particular contract giving rise to the dispute and the award was funded by public budget funds. Court practice on this matter is yet to be settled.

Secondly, it is currently unclear how the courts will approach the first sentence of the new provision ("in case the arbitration is seated in the Russian Federation"). Arguably, it does not in any way restrict the possibility of referring disputes connected with Law 223-FZ to international arbitration (for example, arbitration under the ICC Rules seated in Paris). However, award debtors may attempt to use this provision in their favour and interpret it as if such disputes may only be referred to arbitration administered by a permanent arbitral institution and seated in Russia.

Amendments affecting foreign arbitral institutions and ad hoc arbitration

The amendments relax the requirements for foreign arbitral institutions to be licensed as permanent arbitral institutions in Russia. They also introduce further restrictions in regard to ad hoc arbitration (arbitration not administered by an institution).

The amendments relax conditions for foreign arbitral institutions to be recognized as permanent arbitral institutions in Russia

Although initially the Law on Arbitration adopted as part of the 2016 arbitration legislation reform did not require that a foreign arbitral institution create a branch in Russia, such a requirement was announced when a foreign arbitral institution filed a request for license.

As of March 29, 2019 the law explicitly confirms that a foreign institution should create a branch in Russia only if it wishes to administer domestic Russian disputes.

The amended law also provides that foreign institutions need not adapt the rules on arbitration of corporate disputes. It also contains an exhaustive and relatively short list of documents which should accompany an application by a foreign institution.

The HKIAC had already relied on these amendments and, in early April 2019, the Council for development of arbitration recommended that the HKIAC be granted the license. On the basis of this recommendation, the Ministry of Justice of Russia will soon grant the license to the HKIAC.

New restrictions applicable to ad hoc arbitration

The amended law contains further restrictions for ad hoc arbitration, i.e. arbitration not administered by a permanent arbitral institution.

The amendments provide that persons or entities which are not licensed as permanent arbitral institutions are prohibited from administering arbitrations, including receiving and holding arbitration fees or regularly providing facilities for the hearings. Persons or entities which are not licensed as permanent arbitral institutions are also prohibited from advertising ad hoc arbitration. If arbitration is conducted in breach of these prohibitions, any award is deemed to have been rendered with a violation of the statutory requirements applicable to the procedure, and thus cannot be enforced.

These provisions are primarily aimed at countering dubious arbitral institutions which failed to obtain a license and hence attempted to adopt their own "rules of ad hoc arbitration" to mask themselves as a group of ad hoc arbitrators and circumvent the requirement to obtain the license. Nevertheless, they affect any Russian ad hoc arbitration, and thus it may be advisable for now to avoid any arbitration agreements for ad hoc arbitrations in Russia.


Recent publications

Subscribe and stay up to date with the latest legal news, information and events...