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A recent ruling by the Supreme Court of Russia (case no. A60-36897/2020) has raised the stakes with regard to the exercise of jurisdiction over disputes involving Russian parties subject to foreign sanctions, in the first case to be brought based on recent amendments to the Russian Arbitrazh (Commercial) Procedure Code (“APC”) (the “Amendments”).
Reversing previous lower court decisions, in its full ruling dated 9 December 2021, the Supreme Court provided a new interpretation of the effect of the Amendments, which will be of considerable interest to parties contracting with entities that may be impacted by financial and other sanctions (“Restrictive Measures”) imposed on Russian individuals or companies (the “Ruling”). Its effect is that, in future, the fact that Restrictive Measures have been imposed on a Russian entity by a foreign public authority will automatically lead to the Russian courts assuming that that entity will not be treated equally, fairly or impartially in court or arbitral proceedings ongoing in the state which imposed the Restrictive Measures. Consequently, the Russian courts should have exclusive jurisdiction over the dispute.
Furthermore, the Supreme Court declared that, to prevent proceedings taking place in a foreign jurisdiction, the Russian courts may issue an anti-suit injunction prohibiting a would-be or existing claimant from proceeding in that jurisdiction (unless all parties agree). Commencing or continuing foreign proceedings in contravention of that injunction could lead to serious consequences for that party, including the payment of substantial damages.
The Ruling is likely to become an obstacle for the recognition and/or enforcement in Russia of any court judgment or arbitral award issued against a party subject to Restrictive Measures, if it is issued in a jurisdiction which imposed the Restrictive Measures on the party in question. Moreover, it is likely that Restricted Parties will be able to obtain anti-suit (or anti-arbitration) injunctions in Russia solely on the ground that they are subject to Restrictive Measures, preventing disputes being determined elsewhere.
Amendments to the APC entered into force in June 2020 (the “New Law”). The wording of the New Law is largely unclear and does not provide guidance as to the exact scope and conditions of its application. However, on its face, the New Law provides for the exclusive jurisdiction of Russian state courts over:
unless otherwise provided for in an international treaty or an agreement between parties submitting disputes to either: (i) the jurisdiction of foreign courts or (ii) international commercial arbitration outside Russia.
The New Law further provides that a Restricted Party may apply to a Russian state court for a prohibition on commencement or continuation of proceedings at a foreign court or foreign arbitration (an anti-suit injunction).
If the subject of the anti-suit injunction fails to comply with it, the Restricted Party may obtain a judgment from a Russian court for the recovery from the non-complying party of compensation up to the amount of the claim brought in the foreign proceedings and for related legal costs.
Since the enactment of the New Law, there has been debate in the legal community around its impact on arbitration clauses and on foreign litigation and arbitral proceedings with Restricted Parties.
In 2013, PESA concluded a contract for the supply of trams with UralTransMash (“UTM”), a 99% subsidiary of UralVagonZavod. UTM failed to pay the full amount for the trams and, in 2018, PESA filed a claim with the Arbitration Institute of the Stockholm Chamber of Commerce (“SCC”) in accordance with the arbitration clause in the supply contract, which was governed by Polish law.
UTM responded by filing a number of civil claims against PESA in the Russian state courts. In particular, in July 2020, UTM filed an anti-suit (anti-arbitration) application under the New Law, seeking to prevent the arbitration from proceeding. In its application, UTM asked the courts to prohibit PESA from continuing the SCC arbitration and sought €56m from PESA in damages should PESA fail to comply with such an order.
UTM based its application on the assertion that, as UTM was under Restrictive Measures introduced by the EU and other foreign states, its rights to a fair trial in the SCC arbitration in Sweden were impeded. PESA disputed this assertion, arguing that the mere fact UTM was under Restrictive Measures did not necessarily mean it could not exercise its rights in a foreign arbitration in full.
The lower Russian courts agreed with PESA. They held that Article 248.1 of the APC established the exclusive jurisdiction of Russian courts over Sanctioned Disputes in two cases:
The lower Russian courts accepted PESA’s argument that there were no such obstacles and that UTM had fully exercised its rights in the SCC arbitration. In particular, the courts accepted that, as a party to the arbitration, UTM:
They therefore concluded that no anti-suit injunction should be granted. For more detail on these lower instance decisions, please see our client note from June 2021.
However, after the case had been considered by all levels of the Russian courts, in September 2021, the Chairperson of the Economic Disputes Division of the Russian Supreme Court resorted to an extraordinary measure prescribed by Russian procedural law and dismissed the lower Russian courts’ judgments, referring the case for consideration by a panel of judges in the Supreme Court.
In its Ruling, the Supreme Court refused to grant UTM’s application for an anti-suit injunction and for compensation from PESA as, by that time, the arbitration in the SCC was already completed. Nonetheless, the Supreme Court went on to consider the effect of the imposition of Restrictive Measures on a Restricted Party such as UTM. In so doing, it set out a general interpretation of the New Law which is likely to create a precedent and be applicable to any further cases to be resolved by Russian courts based on these provisions.
In summary, the Supreme Court held that if Restrictive Measures are imposed on a Restricted Party (such as UTM) by a foreign authority, it will automatically be assumed that that Restricted Party will not be treated equally and/or fairly and/or impartially in foreign proceedings taking place in the state which imposed the Restrictive Measure (in the case of the SCC, for example, Sweden, as an EU member). In such circumstances, the Russian state courts will have exclusive jurisdiction.
It is likely that the Ruling will pose an obstacle for the recognition and/or enforcement in Russia of any court judgment or arbitral award issued against a Restricted Party in a foreign state that has imposed Restrictive Measures on the Restricted Party. Moreover, it is probable that Restricted Parties will now be entitled to obtain anti-suit (or anti-arbitration) injunctions in Russia based on the mere fact that they are subject to Restrictive Measures. Parties who are concerned that entities which they contract with may be impacted by financial and other sanctions imposed on Russian individuals or companies, may well, at the same time as considering any other relevant aspects of their contractual arrangements from a sanctions compliance point of view, need to take the ramifications of this ruling into account when planning their options for resolving any disputes that may subsequently arise.
The Ruling may still be appealed to the Presidium of the Supreme Court of Russia and we will report on any such appeal, as and when it takes place.