Agreeing an arbitration clause with a Russian party – tips to bear in mind

October 2018 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION

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Arbitration has become a preferred method for dispute resolution in Russia, particularly when it comes to contracts involving parties from countries with courts that may not necessarily have the best reputation abroad. However, to ensure that a dispute is resolved by an arbitral tribunal, rather than in the local court, one has to take special care with respect to the dispute resolution provisions in the relevant agreement.

While this might sound obvious, lawyers, arbitrators and courts often have to deal with ambiguous or pathological (defective) arbitration clauses. In addition to disputes over jurisdiction, pathological clauses can often create additional problems at the enforcement stage.

If you contract with a Russian party or Russia is a potential place of enforcement, such as when a Russian beneficiary provides a personal guarantee for its offshore vehicle, special care needs to be taken to ensure that the clause is not going to cause problems in the eyes of Russian courts.

Russian arbitration reform entered into force in September 2016. This article looks at the lessons which could be learned from court practice over the past few years.

Types of disputes

It is easy to assume that every type of contractual dispute can easily be referred to arbitration. However, it is not straightforward. One issue which could potentially cause problems relates to disputes surrounding public interests. The criteria are unclear and seem to change over time. To summarise, however, court practice seems to suggest that the involvement of state or municipal budgets or assets may render a dispute non-arbitrable.

According to current legislation, disputes over contracts for the supply of goods and services to state or municipal government cannot be referred to arbitration and are therefore non-arbitrable. However, this prohibition may be removed at some point in the future.

In addition, a number of Russian companies must follow specific public procurement procedures when buying goods and services. This concerns primarily state-owned companies and natural monopolies. While there is no direct prohibition on referring such disputes to arbitration, courts sometimes reason that concentration of public interest, including the use of budget funds, means that these disputes may also be deemed non-arbitrable. It should be noted, however, that the court practice with respect to such disputes is far from being settled.

There are also cases in which disputes concerning the sale or lease of municipality-owned goods are considered to be non-arbitrable with reference to public interest. The same reasoning was used by courts when they concluded that disputes between contractors who won their contracts through public procurement tenders and their subcontractors are non-arbitrable.

It is clear that special care should be taken when a contract involves certain public budget funding, but, ideally, specialist advice should be sought with respect to such contracts prior to the inclusion of a dispute resolution clause.

Wording

Russian courts have always been overly demanding when it comes to the wording of arbitration clauses. Therefore, parties are well-advised to take care that the standard clauses of particular institutions are used to the fullest extent possible. In such cases, it should be possible to show Russian courts that standard wording is used and, hence, parties should be understood to have agreed to arbitration in a specific institution and under specific rules.

This also means that, if the agreement is bilingual, standard wording should be used in both languages, where available. Otherwise, special care should be taken to ensure that both versions are identical. This removes any possible arguments that the Russian party failed to understand and hence agree the arbitration clause.

While any changes to the standard wording of arbitration agreements should be made with great care, there are still some examples where changes may have been helpful.

Thus, in one case Russian courts refused to enforce an International Chamber of Commerce (ICC) arbitral award despite parties having used a standard arbitration clause. The courts reasoned that the clause only referred to the ICC rules, but did not specify the administering institution. Of course, the ICC rules of arbitration do specify the administering institution. Moreover, the practice of Russian courts seemed to have already resolved this issue, but apparently problems could still arise. In any event, this problem can be addressed by including express reference to the administering institution (in this case the ICC International Court of Arbitration).

Another example is where Russian courts struggle to understand the concept of ad hoc arbitration. The clause provided for arbitration in London under the UNCITRAL Arbitration Rules (which are intended for ad hoc arbitration). Russian courts concluded that the parties failed to agree as to which of the London-based arbitral institutions would administer disputes under the UNCITRAL Arbitration Rules. While generally it is not advisable to agree on ad hoc arbitration with Russian parties, as the Russian courts may be suspicious of this form of alternative dispute resolution (ADR), parties at least need to make it clear in their clause that they agree to ad hoc, rather than administered, arbitration.

Form

Russian arbitration law reform attempted to relax formal requirements for arbitration agreements. However, Russian courts may not be too receptive to recent legislative changes. For example, in a recent case the courts refused to enforce an award rendered in London in the context of reinsurance. Apparently, as is usual in the reinsurance market, no paper version of the agreement signed by both parties was ever executed. When it came to enforcement, however, the courts refused to enforce the award because the claimant was not able to produce an agreement signed by the parties, or a certified copy thereof.

This decision seems to be at odds with the arbitration legislation, which does not require that there be a single paper document signed by parties, but also fails to take into account the customary form of communication in a particular industry. Nevertheless, a prudent party may wish to ensure that there is a hard copy of the agreement, including an arbitration clause, to avoid unnecessary disappointment when it comes to enforcement.

Andrey Panov is a senior associate at Norton Rose Fulbright (Central Europe) LLP. He can be contacted on +7 499 924 5101 or by email: andrey.panov@nortonrosefulbright.com.

Andrey Panov

Norton Rose Fulbright (Central Europe) LLP