Developments in Judicial Interpretation of the Recent Law Expanding Russian Courts’ Exclusive Jurisdiction to Disputes Related to Sanctions Against Russians

Six years after the introduction of sanctions against Russia by the United States and the European Union, the new sanctions-related amendments to the Russian Arbitrazh Procedure Code (“APC”) were introduced by  Federal Law No. 171-FZ  (“Law”) which came in effect on June 19, 2020. The law allows a sanctioned person to both claim that a foreign arbitration agreement in unenforceable, and also to seek an injunction in the Russian court to prohibit such foreign proceedings. This law can significantly affect US companies conducting business in Russia and can create uncertainty for any party contracting with a sanctioned person. The Law accordingly expands exclusive jurisdiction of Russian courts to adjudicate:

• disputes involving Russian entities/persons under foreign sanctions;
• disputes arising from foreign sanctions against Russian entities/persons.

The Law also allows Russian arbitrazh courts to issue anti-suit injunctions against proceedings in a court or international commercial arbitration seated outside Russia, in cases where disputes are subject to exclusive jurisdiction of Russian courts. An anti-suit injunction against a foreign proceeding is a novelty in Russian law.

The exclusive jurisdiction default rule can be modified by (a) the parties’ agreement to refer disputes to a court or arbitration seated outside Russia or (b) an international treaty to which Russia is a party.  However, a dispute may still be heard by a Russian state arbitrazh court if the parties’ forum selection clause or arbitration agreement becomes unenforceable due to the foreign sanctions (restrictive measures) placed on a party which create “obstacles” to the party’s access to justice.

The Law does not specify how a party’s access to justice can be hampered in order for the party to succeed in setting an arbitration agreement aside.  Because of the novelty of the Law, Russian courts have yet to decide the standard for whether an obstacle hinders a party’s access to justice sufficient for the Russian court to enjoin the dispute. Based on discussions within the Russian legal community, mere difficulties associated with following administrative rules of a foreign tribunal, paying state or arbitration fees, engaging counsel, or receiving OFAC permission to process payments related to arbitration should not be viewed as sufficient barriers for a party to access justice.

Examples of court practice described below demonstrate how Russian courts have already been inconsistent in their interpretation of the Law. In the  recent case, Instar Logistic v Nabors Drilling Innovation, before Moscow Arbitrazh Court (case № А40-196570/19-29-1738) October 19, 2020, the court relied on its own reasoning in a prior decision involving the same parties, issued before the Law  was adopted (case № А40-149566/19-29-1334).

In the first Instrar case the court found the ICC arbitration clause unenforceable, because due to the imposition of US sanctions on Plaintiff, Plaintiff would not be able to recover a debt from the defendant, a Russian branch of a US company, by resorting to the arbitration clause in their contract. The Court viewed the sanctions as a fundamental change of circumstances. The Court also changed the choice-of-law agreement between the parties from English to Russia law. The decision in the first Instar litigation was upheld in both appeal and cassation instances.

In Uralvagonzavod v PESA before Arbirzh Court of Sverdlovsk Region (case № А60–62910/2018 (decided after the Law went in effect), Plaintiffs tried to set aside an arbitration agreement arguing that sanctions hampered Plaintiffs’ access to justice, including their ability to hire qualified representatives and use payment blocks. The Court rejected Plaintiffs’ arguments, observing that they actively participated in the foreign arbitration, were represented by a well-known law firm and provided no evidence of any payment block.  The court concluded that the Plaintiffs had not proved  restriction of their access to justice such that the arbitration agreement would be  unenforceable, and accordingly dismissed their claims.  In a recent anti –suit litigation before the same court involving the same parties (case А60-36897/2020) the court dismissed the claims on the same basis as the court of first instance, in the case Uralvagonzavod v PESA (case № А60–62910/2018).

Recommendations: When assessing the risks of unexpected transfer of litigation to a Russian court it is important to consider whether the dispute falls within the category of sanctions disputes to which the Law applies. In addition, it is important to re-evaluate the existing dispute resolution clause and determine if it contains an enforceable provision. In order to reduce the risk of adverse court findings regarding the unenforceability of arbitration agreements, it may be useful to revisit existing agreements and re-execute them to confirm their binding nature in the light of the Law.

Maria Grechishkina is a senior attorney in the Philadelphia office of Marks & Sokolov LLC. With over 20 years of professional experience, Ms. Grechishkina has represented Western, Russian and Ukrainian clients in complex commercial disputes, corporate and transactional matters and has provided legal opinions on Russian law to US Courts.0.