Why Russian disputes are resolved outside Russia?

Why Russian disputes are
resolved outside Russia?
Published in the Russian Investment Review, the official magazine
of the Russian Economic Forum - September 2007
David Goldberg & Julia Zagonek
SJ Berwin LLP, London
[email protected] & [email protected]
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Why Russian disputes are resolved
outside Russia?
David Goldberg,
Chartered Arbitrator,
Solicitor and CoHead of International
Arbitration Group,
SJ Berwin LLP,
and Julia Zagonek,
Solicitor, International
Arbitration Group,
SJ Berwin LLP
T
The statistics from the leading international arbitral institutions show that
the number of disputes, in which at
least one of the parties is from the Russian Federation, has been gradually
increasing. While most arbitral institutions registered a decline in the number
of cases with Russian parties in 2000
to 2002, 2003 has been the year when
the number of such disputes has gone
up. According to the statistics of the
Arbitration Institute of the Stockholm
Chamber of Commerce (‘SCC’) there
were 9 cases with Russian parties in
2002 and this figure more than doubled
in 2003 with 19 cases submitted. The
London Court of International Arbitration (‘LCIA’) did not provide statistics
on a country by country basis for the
years before 2003. It has, however, reported in 2003 a general increase in the
number of cases with parties from Eastern Europe.
On the other hand, in 2004 the LCIA
has reported a decrease in the number
of cases with parties from the CIS countries from 6% in 2003 to 4% in 2004.
SCC reported only 4 cases with Russian
parties in the same year.
These statistics are somewhat misleading in that, in reality, the number
of ‘Russian’ cases administered by
these institutions is significantly higher.
42 • Russian Investment Review •
In fact, these figures only show the
number of cases, where one of the
parties is domiciled in the Russian
Federation. There are many cases in
which no parties are registered in the
Russian Federation and yet the subject
matter of the dispute is at the very least
connected to Russia or the entities or
individuals controlling one or more of
the parties to the dispute are Russian.
These cases are not shown in the statistics as cases with Russian parties. One
of the reasons is that Russian businesses
often operate via foreign registered
companies or choose to structure their
corporate deals and asset holdings with
the use of companies registered outside
Russia. Needless to say that when disputes relating to these assets arise they
are typically resolved either in accordance with the dispute resolution clauses
contained in the contractual documentation or at the place of registration of
the companies involved.
There are many examples of such cases, but perhaps two of the best known
that have been in the public domain
recently are the ‘Megafon’ case and the
Roust case. These multi-party multijurisdictional disputes concerned a
number of companies registered around
the globe involved in proceedings in
various jurisdictions, entailing both liti-
gation and multiple sets of arbitration
under different rules. In the statistics of
the arbitral institutions involved and
the courts of different countries dealing
with the disputes and ancillary matters,
these cases do not register as cases with
a Russian party, but the reality is that
these disputes were between Russian
principals and related to their interests
in Russian businesses (such as mobile
telecoms company in the ‘Megafon’
case and a Russian bank in the Roust
case).
One of the popular jurisdictions for
registration of companies has been
the British Virgin Islands. The large
numbers of Russia-related disputes
there have made the court and the legal
profession of the small offshore enclave
overwhelmed with work.
The Russian economy is currently
booming and getting increasingly
stronger. With the development of infrastructure and the increasing business
activity the number of disputes is also
constantly growing. The Russian Courts
that deal with commercial disputes
have become increasingly busy. Russia is one of a handful of countries that
have a specialised commercial court
system throughout the country; these
are known as the Arbitrazh Courts. The
number of disputes submitted to the
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Arbitrazh Courts in 2003 has reached
a record number of 951,778 cases – a
11.4% increase compared to the previous
year. Incredibly, in 2004, this figure increased by over 40% to 1,340,699 cases.
With further development of the
economy and increasing foreign investment in the country, the number of commercial disputes is only likely to go up.
Whether the state courts are equipped
to deal with all these cases is doubtful.
While an ambitious reform of the court
system has been ongoing during the
last three years and considerable results
in improving the court system have
been achieved, the system is still far
from satisfactory in the view of many
Russian businesses and the legal community. Within the reform a number
of new laws have been introduced, including the new Arbitrazh Procedural
Code and some changes to the Law ‘On
Arbitrazh Courts in the Russian Federation’ designed to bring the legislation
in line with internationally acceptable
standards. However, there appears to be
a strong view within the business community in Russia as well as within the
legal profession and even amongst some
government officials and politicians,
that the reforms have fallen short of the
radical changes necessary to achieve
the desired result. Despite the reforms
both the Western and the Russian press
continue to make allegations from time
to time in relation to the corruption
and unreliability of the Russian courts
system.
With this background more and more
businesses in Russia incorporate arbitration clauses into their agreements with
a view to ensuring that their disputes
do not go to Russian courts. Arbitration
is not a new concept in Russia and had
been widely used during the Soviet Union time for international agreements.
The International Commercial Arbitration Court in Moscow (ICAC) is a longestablished international arbitration institution. While it is well known around
the world, many Russian parties have
expressed their mistrust and are hesitant
to submit their disputes to ICAC for a
number of reasons. One of the reasons
appears to be lack of understanding of
the process of arbitration and insufficient experience of some legal advisors
in dealing with arbitration cases. What
is seen internationally as an advantage
of arbitration, i.e. the finality of the
award, is viewed by some Russian lawyers as a disadvantage.
There has been previously some concern that in highly specialised technical
cases some arbitrators produce poor
awards and that notwithstanding the
errors in fundamental questions of law,
the awards cannot be reviewed on the
merits. This is, of course, viewed as a
disadvantage. Training of arbitrators
from various sectors of commerce and
industry seems to be partly the answer
to the problem of the decreasing use
of domestic arbitration in Russia. Better general awareness of arbitration
and mediation may be necessary to attract Russian disputes to stay in Russia
without overburdening the increasingly
busy state court system. Continuous
review of the existing Rules and legislation will also help to promote the Russian Federation as the forum for dispute
resolution.
The ICAC Rules are currently undergoing a substantial review, which is
likely to have a considerable impact on
the procedural conduct of international
commercial arbitration under the ICAC
Rules within the Russian Federation.
The proposed new ICAC Rules were
adopted by the general meeting of the
listed Arbitrators of ICAC on 19 October
2005.
The key changes introduced by the
new Rules include the following:
1. Increased overall power of the
ICAC in relation to the regulation of
arbitral proceedings. For example,
the Rules propose to (i) broaden
the arbitrator’s liability to include
omissions as well as actions by
the arbitrator in connection with
arbitral proceedings and (ii) to extend the duty of confidentiality to
experts, employees of the ICAC and
employees of the Chamber of Commerce. The new Rules also propose
to bring arbitration proceedings
into the 21st Century by including emails and various means of
registered delivery into the modes
of communication recognised for
the purpose of arbitral proceedings.
Another material change is that the
new Rules propose a measure enabling the Presidium of the ICAC to
remove any arbitrator without the
requirement to specify reasons for
such a removal.
2. With a view to increasing the transparency and accountability standards applicable to arbitral proceedings, the new Rules seek to increase
the requirements imposed on ICAC
arbitrators, requiring them to sign
a specific form indicating their consent to comply with the ICAC Rules
in their capacity as arbitrators. In
addition, the new Rules require
that each arbitrator provide short
biographical details including reference to their education and previous professional experience. Failure
to comply with these requirements
within 15 days from receipt of appointment notification from ICAC
will lead to the arbitrator being
deemed to have declined the appointment.
3. The proposed Rules further suggest
measures designed to increase the
flexibility of arbitral proceedings
with a view to obtaining a suitable
result, by allowing the parties to
an arbitration the freedom to agree
not to resort to interim measures
against one another during arbitral
proceedings and providing the option for the provision of ‘partial
awards’ to be adopted on discrete
issues arising during the arbitral
proceedings or with regard to part
of the original claim.
The new Rules reflect the tendency
in Russia to move closer towards
meeting the requirements of international trade and the country’s
commitment to adhere both to the
Council of Europe and the Organization for Security and Cooperation in Europe (OSCE) founding
documents. These Rules will be in
force from 1 March 2006 and will
apply to all arbitrations commenced
after this date. How these changes
will affect the current trend for
arbitrating Russia-related disputes
outside Russia remains to be seen,
however, the dramatic increase in
cases submitted to the Arbitrazh
Courts suggests that those behind
the proposed reforms may be on
the right path. However, it is likely
that major Russian disputes will
continue to be resolved abroad for
quite some time. rir
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