The way forward for Russia?
12 May 2014
The way forward for Russia?
Russia’s territorial future may be the burning question of the times, but what is the future of arbitration? Douglas Thomson reports on a conference in Moscow as the government considers a new arbitration law containing controversial proposals for the registration of institutions.
Russian disputes are a big market. Nearly a third of global arbitral disputes worth US$1 billion and over involve parties based in the CIS region, and, of these, over half are Russian. Whereas, in the 1990s, Russian parties were generally on the respondent side, nowadays they are just as likely to have filed the claim.
Why then are nearly three-quarters of disputes involving Russian parties heard in non-Russian seats, even though Russian law is applied in half of them?
The inaugural conference of the Russian Arbitration Association tackled this question, looking at the problems that beset arbitration in Russia, and asking whether the imminent passing of a new arbitration law will effectively deal with them.
The conference, at the Ararat Park Hyatt hotel near Red Square, is the first to be hosted by the association since it was set up last year. Chaired by Baker & McKenzie partner and ICC vice president Vladimir Khvalei, it was established by 50 local firms with the aim of promoting arbitration in Russia.
What’s the matter with arbitration in Russia?
Widely-perceived problems with Russian arbitration have led the government to propose new arbitration legislation, the first draft of which was published on 17 January.
Marina Ivanova, head of government relations at Russian steel group NLMK, told the conference that bad experiences of domestic arbitration in Russia have made businesses reluctant to turn to arbitration to resolve international disputes. She said that a survey of participants in the metallurgic industry revealed concerns over arbitral institutions’ independence, courts’ supervision of arbitrations and the ease of enforcing awards. These concerns combine to undermine trust in the process.
There is also a negative public perception of arbitration as a result of the numerous well-publicised ‘pocket arbitration courts’ that have sprung up around the country, often as fronts for semi-legal activities.
The Russian government is unsure how many such institutions exist but it has been suggested that there may be as many as 2,000 in operation. They tend only to be submitted disputes to which their founding organisations are a party – issuing predictably favourable outcomes.
Another problem, raised by panellist Andrey Korelsky, a partner at Russian law firm KIAP, is the difficulty of obtaining interim measures from the Russian courts in support of arbitration, even though they are technically available. “Out of all the requests that have been issued for interim relief in support of arbitration, only one or two have ever been granted,” Korelsky said. As a result, award debtors are often found to have disposed of their assets long before the award can be enforced.
“Arbitration clients are going into the process looking for justice,” Korelsky said. “But quite often what they encounter looks like a swamp.”
The draft legislation
Mikhail Galperin, director of the department of economic legislation at the Russian ministry of justice, told the conference that the government’s proposed legislation is informed by a recognition that arbitration is not, as it was previously thought, a purely economic feature of the commercial market, but an institution essential to civil society.
Under the proposals, the two separate sets of laws that currently regulate domestic and international arbitration would be united in a single act regulating the entire practice of arbitration in Russia. “It does not make sense for one arbitrator to be governed by two different laws, depending on whether he is acting in a domestic or an international arbitration,” Galperin said. “One of our most important proposals is to create a unified system of supervision.”
The act would define more precisely which types of dispute are arbitrable in Russia – a matter of uncertainty at present owing to unclear statutes and conflicting court decisions. It would make it clear that corporate and real estate disputes are suitable for arbitration, removing a particular area of doubt. Any institution administering corporate disputes would have to have specially adapted procedural rules.
The draft law would also remove supervision of arbitrations from first instance courts, allotting this role to higher courts instead. However, Galperin told the conference that it would not provide for interim measures to support arbitration. Although the need for such measures is recognised by the ministry of justice, they will be dealt with in separate legislation.
Arbitrators’ civil liability for improper performance of their functions would be limited under the new law. It would, however, be possible to bring a civil suit seeking damages from an arbitrator found guilty of criminal conduct. The Russian criminal code would be widened to include arbitrators who accept bribes in connection with their arbitral duties.
Galperin said that the proliferation of ‘pocket courts’ performing a dubious role is unacceptable. “It threatens the economic security of the country,” he said.
“When you think of an arbitral institution you might think of the LCIA or ICC – these institutions do not resemble them at all.”
To prevent the problem, the government proposes that any arbitral institution operating in Russia must register with the ministry of justice, having received authorisation from a commission established by the ministry.
To secure authorisation the institution would have to be run as a non-profit organisation and publish information about its founders and funders. It would also have to publish a list of arbitrators it used: all legal graduates of at least 25 years of age and “of full legal capacity” (to use the act’s words).
The institution would also have to retain the case papers of decided cases for a minimum of 10 years.
International institutions such as the LCIA, ICC or SCC would also be required to register with the ministry in order for their awards to be enforced by Russian courts, Galperin said
This proposal exercised many delegates. While Khvalei understood the government’s desire to eliminate pocket arbitration courts, he said. The arbitral process should be supervised by judges not a government-appointed commission.
Khvalei also challenged the idea of the government regulating who could sit as an arbitrator. Arbitrators invariably meet the requirements proposed, he said; such criteria as proposed in the draft legislation simply create grounds for challenging awards.
Institutions should bear the responsibility of assessing the suitability of arbitrators themselves, Khvalei argued. He also unveiled the Russian Arbitration Association’s new Code of Best Practice, encapsulating general principles drawn from a range of arbitral traditions. This would provide a basis for a viable system of self-regulation of arbitrators, he suggested.
Other attendees at the conference pointed to further disappointments in the draft proposals. Vladislav Zaytsev, partner at Genuine Arbitration Service in Moscow, told GAR, “When it comes to enforceability of either foreign or domestic arbitral awards in Russia one of the major difficulties a successful arbitration party faces lies not in the legal framework for the recognition of awards by Russian state courts, but in the absence of real assets against which the award can be enforced.”
With this in mind, Zaytsev said, a priority for practitioners in Russia is for the legislation to implement the provisions on interim measures included in the 2006 UNCITRAL Model Law. “However, it seems that the change with regard to provisional measures is not going to happen,” he said.
Zaytsev added that the reluctance of the courts and higher officials in the Russian government to provide for interim measures for arbitration stems from the distrust of arbitration by the legacy of the pocket courts in the domestic sphere.
“While "pocket arbitration" issues appear to have been very acute in the realm of domestic arbitration in Russia, these issues could arguably have influenced the drafters' view on the reform of international arbitration as well, making it, at least with regard to provisional measures, not going too far,” he said.
The view from outside
In an afternoon session of the conference, representatives of Europe’s leading arbitral institutions offered their thoughts on Russia’s proposed reforms. Warning voices suggested that some proposals – for example, that all arbitral institutions should register with Russia’s ministry of justice – would meet with a frosty reception on the global stage.
The panel included representatives of leading international arbitration providers, including the chairman of Russia’s ICAC, Alexi Kostin. Khvalei chaired the panel in his capacity as a member of the ICC Court.
Permanent Court of Arbitration counsel Eugenia Goryacheva said, “The reason arbitration is so popular as a form of dispute resolution is that it is independent and separate from the state. The [registration] requirement creates a link between the institution and the state and would undermine the view of independence and neutrality of institutions. Many foreign parties would resist having Russia as a place of arbitration.”
LCIA registrar Sarah Lancaster added that the requirement would restrict parties’ choice of arbitral institution. “If parties wanted to use a non-registered institution they would have to go for a seat outside Russia. Onerous registration requirements would force parties to choose between having Russia as a seat and the institution of their choice.”
“I would question the real purpose of registration,” said Christian Albanesi, managing counsel of the ICC International Court of Arbitration. He said that it would not limit the use of arbitration for illegal purposes such as money-laundering, since a corporation that wished to engage in this could without difficulty set up a non-profit company that would meet the criteria for registration.
“The best way of limiting abuses is to have a well-informed judiciary that is positive about arbitration and able to restrict abuses of arbitral practice,” he said.
With the exception of Kostin – who had left for another appointment – the panel members were unanimous in stating that their institutions would not seek to register with the Russian ministry of justice as recognised arbitral institutions. Khvalei said that for the ICC to do so would set a “dangerous precedent”.
While expressing astonishment that pocket institutions exist, VIAC’s general secretary Manfred Heider said the government’s proposals to control them were an overreaction, if an “understandable” one. It would be preferable to leave the problem to the market, he said: if the institutions’ awards are not recognised under the new arbitration law, there will be little motive for their founders to establish them in the first place.
ICDR senior vice president Mark Appel predicted that international arbitral institutions would not risk their integrity by registering with the government. “Arbitration is intended as an independent form of resolution; registration of institutions smacks of something else,” he said.
The panellists also discussed the proposals in the legislation for separate rules for corporate disputes. Albanesi, for the ICC, said that rules relate to the procedural aspects of a case, which do not differ fundamentally depending on the type of dispute. Lancaster, for the LCIA, said that her institution had similarly found no need for special rules for corporate disputes.
Antonida Netzer, a case manager at the German Arbitration Institute, said that institution does have different procedures for corporate disputes but only, because of a ruling from the German Federal Court. In most cases German corporate disputes are resolved by ad hoc arbitration, which is “impossible” in Russia, she added.
Appel said that the discussions within the Russian arbitration community are evidence of its potential as an arbitral seat. “Arbitration needs a community working in concert to be successful,” he said. “It is good that this is happening here.”
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