September 2012: Russia Litigation Update

by Quinn Emanuel Urquhart & Sullivan, LLP

Overview: Dispute resolution through international arbitration is rapidly developing in Russia, although not quite at the pace set by the leading international arbitration centers of Europe, such as London, Paris, and Stockholm. All the basic pieces are in place: the Russian Federation is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the 1961 European Convention on International Commercial Arbitration, and even the seldom used 1972 Moscow Convention on the Settlement by Arbitration of Civil Law Disputes Arising from Relations of Economic, Scientific and Technical Cooperation. In July of 1993, Russia adopted its own law “On International Commercial Arbitration” (“ICA”), which essentially mirrors the UNCITRAL model law.

These are certainly positive developments, but hurdles must still be cleared on the path to Russia’s full acceptance of international arbitration as a global dispute resolution mechanism. Court, decisions, and even statements of high-ranking Russian officials, reflect a cautious—and in some cases an internally controversial—attitude towards arbitration of which practitioners and clients should be aware.

Arbitrability: Significant developments have occurred on the subject of which disputes are arbitrable in the first instance. Generally, Russian law recognizes that all commercial and other civil law disputes (with limited exceptions) may be arbitrated; however, public law cases, such as bankruptcy and tax matters, remain within the exclusive province of the courts. However, recent court decisions have sent a disturbing message on arbitrability. In 2011, the Constitutional Court in ZAO Kalinka Stockmann v. Smolensky Pasazh, issued a decree clarifying that only domestic arbitral tribunals could resolve real estate disputes. And earlier this year, a three-judge panel of the Supreme Arbitrazh Court in the Maximov v. NLMK confirmed that the lower courts had correctly set aside an award of the International Commercial Arbitration Court at the RF Chamber of Commerce and Industry (“ICAC”) on the basis that a dispute arising out of non-payment under a sale-purchase agreement of shares in a Russian company, as well as other corporate disputes, could not be resolved by arbitration; worse, the decision includes a pronouncement that corporate disputes in general are not arbitrable in Russia. Both cases are disturbing from an international arbitration perspective: although the real estate decision would generally be applicable to real property in Russia, it certainly is possible that a foreign party could be involved in such a dispute (for example, in a real estate development deal with international investors). The same is obviously true regarding disputes between corporations—indeed, the vast majority of international arbitration disputes today are between corporations, partnerships, or similar legal entities.

Public Policy: Russian courts also seem to have adopted unique grounds for vacating awards on the grounds of public policy. The New York Convention of course recognizes a violation of “public policy” as grounds for refusing to enforce an international arbitration award. But case law around the world has interpreted this clause very narrowly, limiting it to behavior that offends fundamental principles of morality (see e.g., Parsons & Whittemore Overseas Co. v. Societe Generale de L’Industrie du Papier (“RAKTA”), 508 F.2d 969, 973 (2d Cir. 1974). As such, vacatur petitions on grounds of “public policy” under the Convention are seldom made and even more rarely granted.

Russia is falling into line with this reasoning, but the road has not been easy, as demonstrated in the remarkable case of Stena RoRo v. Baltiisky Zavod, —decided September 13, 2010—by the Supreme Arbitrazh Court. In Stena RoRo, the Court annulled the lower courts’ decisions that refused recognition and enforcement of an international arbitration award issued under the arbitration rules of the Swedish Chamber of Commerce based on a “public policy” rationale that was defined not in terms of morally reprehensible conduct but as an award that would lead to bankruptcy of Baltiisky Zavod (a strategic Russian enterprise), thereby jeopardizing the interests of Russia in violation of public policy. However, in righting the Russian “public policy” ship, the Supreme Court did somewhat more than it had to, holding that the question of the validity of the contracts had been considered by the arbitral tribunal and could not be reconsidered at the enforcement stage by the state court. Obviously, this holding raises its own controversy—i.e., whether Russia will allow courts to entertain any vacatur petition, either under the New York Convention or Russian law, which seeks to reexamine the validity of contract decided by the arbitral tribunal, even if the facts fit under one or more of the recognized grounds for vacatur.

Interim Measures: In line with virtually all sets of international arbitration rules, Russian law provides for the possibility of granting interim measures in support of a pending arbitration in situations where the court believes that a failure to do so could render the enforcement of the award impossible, substantially complicate enforcement, or cause the applicant to incur substantial damage. Happily, recent court decisions on this issue are much more mainstream, granting interim measures in support of international arbitration and, in one case, an attachment of assets. See Edimax Limited v. Shalva Chigirinsky (2010) (Russian Arbitrazh court granted interim measures to support Enka v. KMKI Dobrininskiy (2011) (court issued pre-award attachment of land lease rights over a state-owned land plot in support of a pending ICC construction arbitration).

Impartiality of Arbitrators: In 2010, the RF Chamber of Commerce and Industry adopted Rules on Impartiality and Independence of Arbitrators (“Rules”) based on, inter alia, the IBA Guidelines on Conflicts of Interest in International Arbitration. While the court practice on application of the Rules has yet to be established, the Rules have already become a ground for setting aside an ICAC award (Ruling of Supreme Arbitrazh Court of 30 January 2012 in Maximov v. NLMK). However, the Court once again seems to have overshot the mark. Specifically, the Court found that the failure by the arbitrators to disclose that they were employees of the same education and scientific institutions as experts who provided legal opinions to the tribunal cast doubt on the impartiality of the arbitrators sufficient to vacate the award, which is as aggressive a position on arbitrator bias as that taken by any court.

Mediation: In addition to arbitration, another positive signal of the overall development of alternative dispute resolution mechanisms in Russia is the January 1, 2011 adoption of the set of rules aimed at regulating mediation. It includes the Federal Law “On Alternative Procedure of Dispute Settlement with Participation of Mediator (Mediation Procedure)” and a separate set of amendments to the Russian procedural laws designed to incorporate mediation into the already existing procedures. It is promising that the law covers a broad range of disputes—civil, labor (except for collective employment disputes), and family law, except when such disputes affect public interests or the rights and legitimate interests of third parties that are not participants in the mediation.

All told, the Russian Federation is getting there. Movement toward fully embracing international arbitration appears to clearly be on the horizon—perhaps the fairly immediate horizon—but parties may not be able to take full comfort from an arm’s length negotiated international arbitration clause until court decisions on arbitration issues become more predictable.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Quinn Emanuel Urquhart & Sullivan, LLP

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