Global menu

Our global pages

Close

Russia Grants Exclusive Jurisdiction Over Disputes with Sanctioned Persons to its Commercial Courts

  • United Kingdom
  • Sanctions

15-07-2020

Background

Russia is currently subject EU, UK, and US sectoral sanctions, which include measures that:

  • prohibit transactions with certain Russian entities and individuals, or those owned or controlled by them; and
  • prohibit or restrict certain types of transactions in targeted sectors of the economy.

The financial and trade sanctions against Russia have created both legal and practical difficulties for persons targeted by the sanctions, including where they are involved in legal proceedings in a jurisdiction which imposes such sanctions.

On 8 June 2020, in an attempt to address those difficulties, the Arbitrazh Procedure Code of the Russian Federation was amended by Federal Law No. 171-FZ.

This amendment grants exclusive jurisdiction to the Russian state commercial courts (arbitrazh courts)[1] over disputes involving a Russian party subject to such sanctions, irrespective of the parties’ choice of jurisdiction in the underlying contract. This will have a significant impact on disputes involving sanctioned Russian persons, as well as foreign entities controlled by them, as the choice of law specifically agreed during commercial negotiations may be rendered ineffective.

The amendment entered into force on 19 June 2020.

Particulars of Federal Law No. 171-FZ

The purpose of Federal Law No. 171-FZ is to protect and ensure access to justice for individuals and entities subject to sanctions against Russia. The amendment is applicable to the following persons (“Sanctioned Persons”):

  • Russian individuals and entities that have been subject to foreign sanctions; and
  • foreign legal entities that have been subject to foreign sanctions, which are in turn based on sanctions adopted against Russian individuals or legal entities.

Federal Law No. 171-FZ expands the list of disputes that fall within exclusive jurisdiction of Russian courts. This list now includes, inter alia, the following disputes (“Sanctions-Related Disputes”):

  • disputes where one of the parties is subject to foreign sanctions against Russia; and
  • disputes between a Russian and a foreign party, if the claim arises from the foreign sanctions imposed on Russian individuals and entities.

For Sanctions-Related Disputes, the amendment provides that:

  • in instances where the forum for dispute resolution has not been explicitly agreed (or is not expressly regulated in an international treaty that Russia has ratified), Russian arbitrazh courts will have exclusive jurisdiction over the dispute. Further, in such instances, Russian arbitrazh courts will also have exclusive jurisdiction over disputes arising as a result of sanctions being imposed against a Sanctioned Person; and
  • in instances where parties have explicitly agreed to the jurisdiction of a non-Russian court or seat of arbitration, Russian courts may still have jurisdiction, if the forum selection clause cannot be applied due to one of the parties being subject to foreign sanctions, where these hinder the party’s access to justice. In order to issue proceedings in Russian courts, the Sanctioned Person must apply to an arbitrazh court, which will rule on whether the forum selection clause is unenforceable on the basis that the sanctions limit the Sanctioned Person’s access to justice.

Sanctioned Persons may:

  • file a petition to a Russian arbitrazh court for the resolution of a Sanctions-Related Dispute, provided that the dispute is not already being litigated or arbitrated by a foreign body; and/or
  • file a petition with a Russian arbitrazh court for an injunction ordering the defendant to halt pending or threatened proceedings in a foreign court or international arbitral institution.

Comment 

Federal Law No. 171-FZ appears to allow Sanctioned Persons to unilaterally disregard the dispute resolution mechanism agreed in commercial negotiations between parties. This threatens to undermine the key pillar of legal certainty of contract. Going forward, for entities that contract with Sanctioned Persons, it would be prudent to ensure that all contracts have both governing law and governing jurisdiction clauses.

The Arbitrazh Procedure Code of the Russian Federation generally provides that no judgement (or award) issued by a foreign court (or international arbitral institution) will be recognised and enforced in Russia, if the judgement or award was granted in violation of the rules on exclusive jurisdiction of Russian courts. However, Federal Law No. 171-FZ clarifies that failure to respect the exclusive jurisdiction of Russian courts does not prevent the recognition and enforcement of a foreign judgement (or award) in a Sanctions-Related Dispute if: (a) the Sanctioned Person was the claimant; or (b) the Sanctioned Person did not object to the proceedings in the foreign court or international arbitral institution. In particular, the Sanctioned Person is deemed to have failed to object within the meaning of point (b) if they have not filed a petition with a Russian arbitrazh court for an injunction ordering the defendant to halt proceedings in the foreign court or international arbitral institution.

Where a Russian arbitrazh court has determined that a jurisdiction clause is unenforceable, the Sanctioned Person is entitled to apply for an injunction against the foreign entity wishing to initiate proceedings elsewhere. This injunction prevents the foreign entity from commencing proceedings in a different jurisdiction, including the one contractually agreed by the parties. Any contravention of the injunction by the foreign entity is punishable by a fine in the form of compensation payable to the Sanctioned Person, up to the value of the total claim being considered by the foreign court (or international arbitral institution), plus legal expenses.

However, how effective this amendment will be in practice is unclear. While the jurisdiction clause of a contract may be rendered ineffective in contracts with Sanctioned Persons, the amendment does not have any effect on the governing law clause of such contracts. This means that, even though a dispute may be forced into the Russian commercial court, the contractual terms will still be interpreted in accordance with the relevant governing law. This is likely to increase the costs and complexities of any court case.


[1] Please note that Russian arbitrazh courts are not arbitral institutions; their name does not mean that these courts deal with arbitration matters. Arbitrazh Courts are Russian state courts that consider commercial disputes.