CIS Legal Update - September 2013: Review of Russian Commercial Court Practice in Proceedings Involving Foreign Entities

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The Presidium of the Supreme Arbitrazh (Commercial) Court of the Russian Federation (the “Presidium”) published Information Letter No. 158 on 9 July 2013 containing a review of judicial practice in cases involving foreign parties (the “Information Letter”). The Information Letter was adopted to ensure the courts correctly apply procedural and substantive law and to streamline approaches to resolving cases of this kind. Information letters released by the Presidium are not binding on arbitrazh courts, though in practice courts seek to abide by them.

This review is a consolidation of commercial court practice. However, certain clarifications relate to contentious issues that previously allowed for a variety of approaches to their resolution. Set out below is our brief commentary on the most interesting examples.

Estoppel doctrine applied

The Presidium recommends that, if applicable, a defendant should dispute the jurisdiction of a Russian arbitrazh court prior to making any submissions on the merits and not raise jurisdiction objections at a later stage in the proceedings, a common dilatory tactic. If a defendant does not do so, the court will be free to proceed on the basis that the defendant has submitted to the court's jurisdiction (the estoppel doctrine).

While the aim of this clarification is encouraging, certain gaps and risks remain, for example, any attempt by a foreign defendant to participate in proceedings solely to challenge the jurisdiction of the Russian courts may in itself result in the defendant being deemed to have submitted to jurisdiction and being forced to participate in the merits stage. This is because under Russian law there is no doctrine, such as “special appearance” under US law, which permits this. (Where a Russian commercial court refuses a jurisdictional challenge it may proceed immediately to the merits stage. A defendant may only appeal a decision on jurisdiction together with a judgment on the merits – it may not appeal the court's ruling on jurisdiction independently).

Also, where a defendant takes no active part in proceedings at all, (and instead begins proceedings abroad) the Russian courts may assume jurisdiction and issue a judgment on the merits. Where this occurs, it may then be impossible to enforce any judgment of a foreign court in Russia (even if enforcement were in theory possible by virtue of an international treaty or the reciprocity principle). In this regard, it should be noted that default judgment is not available in the commercial courts of Russia.

Establishing jurisdiction on the basis of a branch or representative office in Russia

The Information Letter explains that the ground for establishing a Russian arbitrazh court’s jurisdiction under paragraph 2 of Part 1 of Art. 247 of the Arbitrazh Procedure Code of the Russian Federation is the existence of a close connection between the legal relationship in dispute and the activities of the branch or representative office of a foreign entity in Russia, rather than the mere presence of such branch or representative office in Russia.

The above clarification is particularly important where the parties’ agreement is silent as to dispute resolution. In such cases, often Russian companies either wishing to save on the high cost of a dispute abroad (in the jurisdiction where the defendant is located) or to have their dispute resolved on home turf, seek to establish the jurisdiction of the Russian courts by arguing that the defendant has a presence in Russia, despite the fact that the branch (or representative office) is not involved in the dispute. Foreign parties should welcome this clarification which means they will not be drawn into proceedings in Russia, (where they have failed to agree dispute resolution provisions) on the sole ground that they have a branch or representative office in Russia.

Place of business

In relation to the connection between a dispute and the activities of the branch (or representative office) of a foreign entity in Russia, the Information Letter recommends that the permanent place of business through which a foreign entity carries on its business activities in Russia should be treated as that entity's branch (or representative office), regardless of whether it is registered or not.

The Presidium does not, however, specify the qualifying attributes of foreign entity’s “place of business”. It is believed that such attributes may include: 

(i) the availability of office space and staff in the Russia;

(ii) information on an official website describing the entity’s activities and projects in Russia; and

(iii) whether the entity promotes goods, works or services in the Russian media, etc.

The effect of assignment on jurisdiction clauses

The Presidium has clarified that the terms and conditions of a jurisdiction clause remain in force for both the debtor and the new creditor (assignee) (unless otherwise specified in a separate agreement between the parties). This was already confirmed to be the case in respect of arbitration clauses.

Previously, opposing views were expressed as to whether a jurisdiction clause retains its full force and effect in respect of the assignee. Parties have been known to exploit this lack of clarity to justify the transfer of a dispute from an “undesirable” to a “friendly” forum. The Presidium’s clarification now eliminates that possibility by removing any doubt that the lower courts have had on this issue and aligning approaches to the effect of assignment on both jurisdiction and arbitration agreements.

Interim measures in support of foreign proceedings

Perhaps, the most important development is that the Presidium confirmed that Russian arbitrazh courts do have the ability to order interim measures in support of foreign court proceedings. This is not expressly stated in the Arbitrazh Procedure Code (as opposed to interim measures in support of arbitral proceedings which are provided for) and therefore was, until recently, highly questionable. The Presidium’s clarification appears to represent a major step forward in protecting the rights and interests of companies litigating abroad who must ultimately enforce against assets held in Russia.

Previously, an indirect reference to the possibility of obtaining interim measures from a Russian court in support of foreign proceedings was contained in Information Letter No. 78 dated 7 July 2004 Review of the practice of the application of interim measures by arbitrazh courts. However, there have only been isolated instances when this right was utilized effectively. In most cases, Russian based assets belonging to defendants in foreign court proceedings have remained virtually inaccessible to claimants.

The Presidium clarified that in order to grant such measures a Russian court must have the jurisdiction to enable such interim measures to be enforced effectively. Effective jurisdiction may be established based on:

(i) the location of the applicant; or

(ii) the location of cash or other property in respect of which the interim measures are sought; or

(iii) the location where the applicant's rights have been violated.

However, the Presidium requires that courts verify, when ordering any interim measures, that the foreign court has jurisdiction to hear the case on the merits, and that the exclusive jurisdiction of Russian arbitrazh courts has not been violated.

Pitfalls may thus arise for parties where a Russian court refuses to grant interim measures on the basis that the foreign court lacks jurisdiction as this will subsequently lead to hurdles in enforcing any foreign judgment in Russia. Parties seeking such measures should bear this in mind when dealing with unscrupulous counterparties.

It should be noted that this clarification does not apply to enforcement of foreign court interim orders. Such orders remain unenforceable in Russia. The Information Letter deals only with interim measures issued by Russian courts in support of foreign court proceedings. When a Russian court is seized with such an application it will apply Russian procedural law in establishing: (i) whether there are grounds for application of interim measures; and (ii) the type and limit of the interim measures. For example, since Russian procedural law does not allow for the ability to obtain asset disclosure orders, such orders will not be available from a Russian court even if this interim measure is sought in aid of foreign court proceedings.

In any event, this is a significant step forward in the internationalization of Russian court proceedings and it remains to be seen how it will be applied in practice.