New Russian Law Allows Sanctioned Parties to Move Contract Disputes to Russian Court

By President Putin’s signature on 8 June 2020, Russia has enacted a jarring new Law[1] by which, as written, in a significant range of circumstances Russian individuals and companies (and foreign companies) that have been sanctioned under the US, EU (and other) anti-Russia sanctions programs may now: (i) insist that a contract-based dispute involving them be heard only in Russian arbitrazh court (that is, the state commercial court system); and (ii) apply to a Russian arbitrazh court for an injunction ordering the foreign claimant to halt a pending or threatened foreign litigation or arbitration regarding such dispute (and even for substantial penalty damages to be awarded by the Russian court against a claimant that refuses to do so).

The initial draft of this Law was introduced in Russia’s State Duma last July. It faced criticism from the Russian business community and certain governmental agencies, as to likely adverse effect on the investment climate. The draft then lay dormant for some time until an amended, somewhat less aggressive version was reintroduced in late May of this year, and promptly passed through both legislative houses to presidential enactment.

The Law accomplishes its aims by a set of amendments to the Arbitrazh Procedure Code (the APC – Russia’s main civil procedural law for litigation of commercial matters), mainly adding new articles 248¹ and 248².

Essential Points, Open Questions

While the Law per its literal terms could be interpreted and applied quite broadly so as to create real chaos in commercial contract dispute resolution involving Russia-sanctioned parties, the real extent of the problem will have to await actual argument and application in practice. As we see it, here are the essential points and some key open questions:

• The Law extends not only to disputes that are based on sanctions-related matters – but also to any disputes involving sanctioned parties, whatever the matter in dispute. And while the intent (as reflected in the Duma’s official explanatory note and in certain provisions of the Law itself) seems to be to accord special protection for Russian (and other) parties that have been blacklisted (named as so-called Special Designated Nationals – SDNs – by the United States or similarly designated by the European Union, etc.) and thus may be unable to effectively defend or prosecute a dispute outside Russia, as written it might apply to so-called Sectoral Sanctions (SSI) limited-sanctioned entities as well.

• As reflected in some opening provisions, the Law is not supposed to extend to contracts for which, by agreement of the parties (i.e., a dispute resolution clause) or international treaty (to which Russia is a party), disputes are to be heard in a court or arbitral tribunal outside of Russia – and in particular if such a dispute involving the same parties, subject matter and basis has already been initiated in the chosen foreign forum. But per some other provisions, including the anti-suit injunction section, the Law could well apply in some cases where there is such a pre-chosen foreign dispute forum, and even where a dispute under it has already been commenced.

• The Law seems not intended to affect contract-designated dispute resolution in a Russia-seated commercial arbitration tribunal (although there may be some uncertainties here as well).

• As a practical matter, the Law seems to have retroactive application to contracts (and their dispute resolution clauses) entered into before the Law’s enactment, and even to those entered into before the relevant sanctions were enacted starting in 2014.

• Application of this Law seems quite likely to lead to “battles of jurisdiction” – where Russian courts will issue rulings per the Law, while contractually designated foreign courts and arbitral tribunals will choose not to respect the Law and rather go forward to decision/award on a basic freedom-of-contract principle. In such cases, as noted above, a Russian court can award damages against the foreign-case claimant in an amount up to its damages claim in the foreign tribunal – which could serve as a de facto set-off in favor of the affected sanctioned party.

The Law’s Specific Provisions

Exclusive Jurisdiction of Russian Arbitrazh Courts

Under APC new article 248¹, a Russian court now has “exclusive jurisdiction” (unless otherwise provided by applicable treaty or contract) to consider the following:

• cases involving a party that is subject to foreign sanctions aimed at Russia (the sanctioned party could be a Russian individual or legal entity, as well as a foreign legal entity if it became sanctioned in connection with foreign sanctions against Russia); and

• cases involving a Russian or foreign party in a dispute with another Russian or foreign party, if the dispute relates to application of such sanctions.

In either of the above contexts a sanctioned party is entitled to

• refer such dispute to a Russian arbitrazh court, provided that there is no ongoing dispute (likely meaning the filing of a complaint or a request for arbitration) between the same parties on the same subject matter and on the same grounds in either a foreign court or international arbitration seated outside of Russia; and

• apply to the Russian court for a declaration to prohibit the initiation or continuation of dispute proceedings in a foreign court or arbitral tribunal (as further addressed below).

The above provisions are also to apply in cases where a contract clause referring disputes to a foreign court or foreign arbitral tribunal “cannot be performed” due to the application of foreign sanctions against a party involved in the dispute. (We suppose this is aimed essentially at cases such as where a sanctioned person is not permitted to enter the country or otherwise is materially hindered in participating – for example a sanctions obstacle to money transfers to pay lawyers or the court or arbitration fee, etc. This would mostly apply to SDNs. But it remains to be seen how broadly applicants will try to invoke it and the Russian courts will apply it – e.g., whether Russian courts will take all such pleas at face value or the sanctioned-party applicant would be expected to first try to exhaust the contract-mandated dispute remedy in the foreign tribunal.

The Law also states that these new rules cannot be invoked as grounds to deny enforcement of a foreign arbitral award or a foreign court judgment if the sanctioned party (i) was the claimant or (ii) did not object to the jurisdiction of the foreign forum (including by applying to a Russian court for an injunction against such foreign proceedings – see immediately below).

Anti-Suit Injunction Procedures and Remedies

Further and strikingly, APC new article 248² allows a sanctioned party to apply to Russian court for issuance of an injunction barring the contract counterparty from initiating threatened or continuing already-initiating dispute proceedings in a foreign court or arbitral tribunal. This type of cross-border “anti-suit injunction” is a known but rather rarely used judicial tool in the Western world – given the obvious jurisdictional sensitivities and enforcement challenges; this is the first express authorization for such in Russian law.

The Law sets out detailed rules for making and supporting an application for such an injunction, and related procedural rules for the hearing of and appeal from the injunction if granted. Of note here: the applicant is to plead the circumstances confirming the Russian court’s exclusive competence to hear the dispute per the Law, including the circumstances (if any) confirming that the parties’ agreement to hear the dispute in a foreign forum cannot be performed by a party to the dispute. In other words, it appears that this Article 248² authorization for granting an anti-suit injunction may well, at least in some (and perhaps in many) pleaded circumstances, undercut the supposed article 248¹ “safe harbor” for treaty- and contract-based dispute resolution proceedings outside Russia.

Finally, the Law authorizes Russian courts that hear and grant such injunction applications to also award damages against the foreign party that has been enjoined, if that party does not obey the Russian court order to stop the foreign proceedings. The Law specifies that such sum awarded is not to exceed the amount claimed in the foreign tribunal plus the sanctioned party’s litigation costs.

We will be closely monitoring practice developments as they unfold under this new Law.