by the Arbitration Association

Their life, their rules

Сентябрь 26, 2019

Russian State Duma (the lower chamber of the Parliament) has accepted in the first reading the law according to which Russian entities under sanctions can unilaterally change the arbitration agreement with foreign parties.

Recently the Russian establishment has passed unpopular laws on higher retirement age and VAT increase. A new law is in the line.

The law is called “On amending certain legislative acts of the Russian Federation in order to protect the rights of certain categories of individuals and legal entities in connection against the unfriendly actions of the United States of America and other foreign states.”1

Unilateral changes in arbitration agreement

The suggested law amends Russian arbitration (commercial) procedural code, Russian civil procedural code and the law on Russian counter-sanctions against the US and other foreign states.

Currently there are 520 Russian companies and individuals in the US Office of foreign assets control (OFAC) sanctions list, Mansors law firm2 reports. 

Those entities are in fact deprived of the right to a fair trial in the courts of foreign states or international organizations and in international arbitration tribunals, declares the bill. 

“In order to protect the rights of these persons to a fair trial, the bill provides that a lawsuit is brought against them in an arbitration [commerical] court or court of general jurisdiction at their location in the Russian Federation or at the location of their property on the territory of the Russian Federation. Such persons shall have the right to unilaterally introduce into existing agreements, <…> conditions providing for a dispute to be brought before a court of the Russian Federation in accordance with its competence and the law of the Russian Federation or the dispute to be brought before an arbitral tribunal with the place of arbitration on the territory of the Russian Federation”, says the bill.

In the absence of the above agreements, citizens of the Russian Federation and Russian legal entities facing claims in foreign courts or tribunals have the right to appeal to the court of the Russian Federation with a claim to terminate the trial in such courts and organizations, says the explanatory note to the document.

If the bill is approved (by the Duma, the upper chamber of the Parliament (Federation Council) and ultimately President Vladimir Putin), the law shall also have back effect on contracts concluded before its publication.

The law-to-be does not speak of any form of consent, neither ways of notification of the other party about changing the jurisdiction.

Contradictions with international and national legislation

If adopted, this law will stand at odds with the international treaties Russia has already ratified and create even more exclusions in the national body of law.

Russia is a legal successor to the USSR, which has ratified the New York Convention on 22 November 1960. The Convention introduced a universal mechanism for the recognition and enforcement of foreign arbitral awards, which shall apply uniformly in all Contracting States. 3 By being a Contracting state, Russia has bound itself to recognize foreign arbitral awards under provision of Article III: Each Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon.

The exhaustive list of grounds, which the national courts may apply for rejecting the recognition and enforcement of foreign arbitral awards, is set out in Article V of the Convention and does not mention international sanctions. 

Later on, on 27 June 1962, Russia ratified the 2nd European Convention on International Commercial Arbitration (the Geneva convention). The proposed provision of the bill to unilaterally change the applicable law to Russian legislation is at odds with Article VII of the international agreement, which provides that the parties can by agreement choose the law to be applied to the substance of the dispute, or, in absence of such agreement, the law is chosen by the arbitrators.

The acceptance of the bill would mean breach of “Pacta sunt servanda” principle of international law in respect of the New York and Geneva Conventions mentioned above. Namely, these principles are documented in the Vienna Convention on the Law of Treaties from 1969 in Articles 26 and 27 stating that “Every treaty in force is binding upon the parties to it and must be performed by them in good faith” and “A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty.”

Finally, on the national level, the current Russian legislation is restrictive about unilateral changes to the terms of the contract. 

Article 310 of the Russian Civil Code “Inadmissibility of a unilateral refusal to fulfil an obligation” provides that a unilateral refusal to fulfil the obligation and the unilateral amendment of its terms shall not be admitted, with the exception of the law-stipulated cases. 

Article 450 of the named Code “The Grounds for the Amendment and the Cancellation of the Contract” in p. 1 provides that “The amendment and the cancellation of the contract shall be possible only by an agreement between the parties, unless otherwise stipulated by the present Code, by the other legal acts or by the contract”. 

The law has already received criticism in Russian legal circles. According to news agency Interfax, Konstantin Dobrynin, state secretary of the Federal Chamber of Attorneys, said that the bill on the right of Russians under sanctions to transfer their proceedings to domestic courts from foreign and international is an example of legislative spam. 

According to him, these amendments cross out the foundations of international law and the general principles of law: "It is impossible to impose on the counterparty a change in the jurisdiction of a future dispute unilaterally, albeit at the level of a law".4

Meanwhile, the Head of Legal Department of State Duma Committee on state and legislation E.V. Gorbacheva wrote that “There are no conceptual comments on the bill.”5 The bill has passed the first reading in the Duma on 24th of July.

“International law does not exist”

The bill was brought in by ex-FSB officer and now Duma member Andrey Lugovoi. He became notorious in connection with the so-called "polonium scandal" in 2006 when another FSB agent Alexander Litvinenko died in London from poisoning with a radioactive element of polonium-210. The Royal Prosecutor's Office of Great Britain accused Andrei Lugovoi of the murder of Litvinenko and sent a request for his extradition to Russia. The Prosecutor General’s Office denied this request, and soon Lugovoi gained the Duma mandate and got parliamentary immunity.

Lugovoi has very straightforward views on international law. “Forget about international law. In relations between states, only the right of the strong exists. The United States detain citizens of any country in any other country under the U.S. own law, and then send them to prison for decades. Russia must ensure its citizens and our business have the right to a fair trial, and no “international law” will prevent us from doing this”, he wrote in his blog post called “International law does not exist”6.

Lugovoi is himself on the US Sanctions list7 in connection under the Magnitsky Act.

One of the co-authors of the bill is Victor Pinsky, who like Lugovoi graduated from one of the soviet military academies, but with a degree in law.

If this law is adopted, outside of Russia it will not be implemented, and it will not entail legal consequences.

A practical scenario is that any reputable tribunal or national court will not agree to deny it’s own competence over a dispute to comply with the new Russian law for three reasons.

  1. Breach of pacta sunt servanda principle;

  2. In case of a Russian and a non-Russian party to a dispute, the new bill creates asymmetrically favourable conditions providing home forum for one side; 

  3. Due to the negative perception of Russian entities under sanctions.

However, if the law is adopted, it may force Russian entities with a dispute against Russian entities under sanctions to transfer their cases to domestic arbitration. It would also mean that Russian legislator changes the rule of the game on the go and the sanctioned companies and individuals will become even less attractive to conclude contracts with.

Finally, an adoption of the Lugovoi law would mean that the U.S. sanctions really have their bite on those lobbying their interests in the Russian Parliament.  

Dmitry Artyukhov, 

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