Russian Supreme Court says sanctioned persons may ignore arbitration clauses
15 December 2021
On 9 December 2021, Russian Supreme Court published its decision on the appeal in the case of Uraltransmash vs PESA, which was of great interest for every party doing business with Russian companies.
The case concerns the scope of Russian legislation on exclusive jurisdiction to Russian courts in the matters involving sanctioned persons. The Supreme Court essentially confirmed that the sanctioned persons are free to choose between litigating (or arbitrating) abroad and litigating in Russia under the new provisions on exclusive jurisdiction.
We have briefly summarised below the case and the key takeaways, which we consider to be of most importance for our clients' business.
Russian court's exclusive jurisdiction over matters involving sanctioned persons
Since 2014, sanctions remain a hot topic not only for Russian companies and individuals, but also for those doing business with Russians. There are of course different types of sanctions – some prohibit only certain business activities with the sanctioned persons (so called sectoral sanctions), while others impose the overall freeze on the assets of a person (e.g. Specially Designated Nationals And Blocked Persons List or asset freeze sanctions).
In 2020, Russian legislator amended the Arbitrazh (Commercial) Procedural Code (the APC) to introduce exclusive jurisdiction of Russian arbitrazh courts in cases involving persons subject to restrictive measures. Under new Article 248.1 of the APC, the Russian courts would have exclusive jurisdiction over the disputes involving sanctions persons, unless there is a treaty or an agreement between the parties that provides otherwise. If there is an arbitration or choice of court clause, the exclusive jurisdiction of the Russian courts only arises under article 248.1(4) if:
- the clause provides for resolution of the dispute in a foreign court or arbitration, and
- the clause becomes inoperative due to the sanctions against a party to the proceedings, which create obstacles to access to justice for such a party.
If the proceedings in a foreign court or arbitration are pending or about to begin, the sanctioned person can request the Russian court to issue an anti-suit injunction against the opposing party under Article 248.2 of the APC.
Court practice (to date)
So far, there have been only a few cases, which may provide some guidance as to how articles 248.1 and 248.2 of the APC should operate where the parties have a contract with an arbitration or forum selection clause.
In the majority of cases resolved by the Russian courts under the new provisions, the sanctioned persons were included Specially Designated Nationals (SDN) list of OFAC or were subject to the asset freeze sanctions imposed by the EU (or both).
When dealing with these types of sanction, the threshold for obstacles to access to justice is relatively low. The courts usually note that it is very difficult, if at all possible, for persons subject to assets freezes to make bank transfers to pay for the proceedings and their lawyers. For this reason, the courts conclude that the persons subject to such sanctions cannot obtain justice in a foreign forum and assume exclusive jurisdiction over such matters relatively easily. Russian courts have already done so in at least five difference cases.
The situation with respect to the persons subject to sectoral sanctions is somewhat different. Many of Russian state owned companies are subject to sectoral sanctions of some sort, but they remain active in cross-border business. Also, their cross-border contracts would often provide for arbitration outside of Russia.
Sectoral sanctions in practice usually do not affect the sanctioned person’s ability to bring claims in foreign jurisdictions, hire lawyers and other professional there, and pay arbitration and other fees. Therefore, sectoral sanctions generally do not create obstacles to access to justice when it comes to litigating or arbitrating cases outside of Russia.
Uraltransmash vs PESA – lower courts decisions
In a recent case, Russian courts did have to consider whether sectoral sanctions create grounds for exclusive jurisdiction of Russian courts under article 248.1 of the APC.
The case of Ural Transport Machinery Construction Company JSC (Uraltransmash) vs Pojazdy Szynowe PESA Bydgoszcz Spolka Akcyjna (PESA) (Case No. А60-36897/2020) concerned a contract for supply of tram vehicles by PESA, and provided for arbitration under the rules of the Arbitration Institution at the Stockholm Chamber of Commerce (the SCC). The contract in question was concluded in 2013. Since September 2014, Uraltransmash was subject to the EU sanctions pursuant to the Article 5(2)(c) of the Council Regulation (EU) No 833/2014 of 31 July 2014 (as amended). These sanctions, however, did not concern the contract with PESA.
In 2019, PESA commenced arbitration at the SCC for unpaid price and contractual and statutory interest and penalties (over EUR 55 million in total). However, Uraltransmash commenced the proceedings in Russian courts under articles 248.1 and 248.2 of the APC seeking an anti-suit injunction against PESA.
The lower courts were not convinced that the sanctions made the arbitration agreement inoperative or created any obstacles for Uraltransmash’s participation in arbitration proceedings at the SCC. The courts found that the sanctions did not concern the contract in question. Moreover, the courts noted that Uraltansmash was actually making payments in Euros to PESA under the contract after the sanctions were imposed. Furthermore, the courts pointed out that Uraltransmash did in fact participate in the arbitration proceedings at the SCC, paid its share of the advance on costs, appointed an arbitrator, hired legal counsel and made submissions throughout the proceedings.
On this basis, the lower courts concluded that exclusive jurisdiction under Article 248.1(4) of the APC was not established, and dismissed the application for the anti-suit injunction.
Uraltransmash vs PESA – The Supreme court decision
Uraltransmash was initially unsuccessful in its appeal to the Supreme Court, but filed a complaint with the Vice-President of the Supreme Court, who then referred the case to the panel of the three Supreme Court judges.
The panel considered the appeal on 11 November and 2 December, and rendered its decision on 9 December 2021.
The Supreme Court found that Article 248.1 of the APC did not require the sanctioned person to prove the existence of obstacles to the access to justice. Instead, the very fact of introduction of sanctions against a Russian person is sufficient to conclude that there are obstacles to access to justice for such a person in a foreign state that introduced such sanctions. The panel reasoned that the sanctions are always personal and are issued by the public authorities. Therefore, they necessarily affect the sanctioned persons’ rights, or at least reputation. For this reason they put the sanctioned person on an unequal footing with other parties. On this basis, the Supreme Court concluded, there are justified doubts that the sanctioned person’s due process right would be observed and that it would be able to obtain justice on the territory of the state that introduced sanctions. Accordingly, article 248.1 of the APC only requires a unilateral declaration from a sanctioned person who can choose whether to pursue the case in a foreign court or arbitration, or to opt for exclusive jurisdiction of the Russian courts.
On this basis, the Supreme Court quashed the lower courts’ judgements. However, it also dismissed the application for an anti-suit injunction, because the SCC proceedings against Uraltransmash have already been completed, and the final award was rendered in May 2021.
The Supreme Court’s decision does not create a binding precedent for the courts below. While it is possible that article 248.1 of the APC would be interpreted differently in other cases, it is likely that the courts would be persuaded by the Supreme Court’s reading of this provision.
The Supreme Court’s interpretation leaves no room to distinguish between asset freezes and sectoral sanctions. Also, the Supreme Court apparently did not see any difference between litigation in foreign state courts and private arbitration.
If the Supreme Court’s reading of article 248.1 were followed in subsequent cases, it would put at risk any arbitration and forum selection clause in a contract with a sanctioned Russian person.
With regard to the arbitration agreements, this judgement potentially affects those, which provide for arbitration administered by an institution registered in the UK, EU or the USA and/or provide for seat of arbitration in one of the jurisdiction that introduced sanctions against Russian companies. It is not clear, however, if the treatment would be different in cases where the seat of arbitration is in Russia. There may be an argument to say that this is not a “foreign arbitration” for the purposes of Article 248.1 of the APC, even if administered by a foreign institution.
The Supreme Court’s reasoning does not seems to affect the enforceability of arbitration clauses providing for one of the Russian arbitral institution. Equally unaffected may be arbitrations under the rules of HKIAC or SIAC, particularly when they are not seated in the UK, EU or the USA. Hong Kong and Singapore did not introduce sanctions against Russian persons so far, and since 2014 were promoted to Russian users as “sanctions-free arbitration jurisdictions”. Finally, one additional option to consider may be the Swiss Arbitration Centre (formerly, Swiss Chambers’ Arbitration Institution) and Switzerland as a seat of arbitration, for Swiss sanctions against Russian persons are rather limited as compared to those introduced by the EU.