On 25 April 2019, the Hong Kong International Arbitration Centre (HKIAC) became the first foreign arbitral institution to receive a Russian governmental permit to administer arbitrations under Russia’s Federal Law on Arbitration.
This is a significant step for the arbitration of Russia-related disputes involving foreign parties, and opens up new opportunities for users of arbitration in Russia and Asia. The HKIAC’s popularity among the users of arbitration in Russia has grown significantly in recent years. The grant of the Russian government permit is therefore timely and will no doubt result in increased use of the HKIAC’s services by parties involved in Russia-related international disputes.
Unlicensed Institutions and Enforceability Risk
Russia’s Arbitration Law (in effect since 1 September 2016) requires all arbitral institutions to obtain a Russian governmental permit. Without one, any arbitration administered by an institution would not be considered an “institutional arbitration”. Russian law requires that “institutional arbitrations” are conducted for a range of different types of dispute classified under Russian law as ‘corporate disputes’. These include post-M&A disputes in respect of Russian companies, including those arising from share purchase agreements, share pledge agreements and shareholders’ agreements. While it has been argued that foreign arbitral institutions are not bound by the Arbitration Law and may administer arbitrations involving “corporate disputes” seated outside Russia even without a permit, the issue remains untested in the courts. Foreign arbitration in this type of case is therefore not without risk.
To date, only two Russian arbitral institutions have received the required permit, so the move to grant one to HKIAC is a significant step that opens the door for parties to submit certain kinds of “corporate disputes” to a highly trusted international arbitration centre with reduced enforcement risk in Russia.
Opportunities for Hong Kong
If the HKIAC becomes the leading foreign arbitral institution for handling Russia-related international arbitrations, this will sharpen the city’s competitive edge as a legal services hub. As well as disputes classed as ‘corporate diputes’ (discussed above), the HKIAC will also be eligible under Russian law to administer arbitrations seated in Russia arising from non-corporate commercial disputes.
There are, however, various other disputes which the HKIAC is ineligible under Russian law from administering. First, the HKIAC is not eligible to administer purely domestic Russian disputes, whether corporate or not. Second, there are still some categories of dispute that are non-arbitrable under Russian law. Third, for disputes arising from other kinds of corporate transactions (eg shareholders’ agreements), the following additional requirements must be satisfied:
1. the seat of arbitration must be Russia;
2. the arbitration agreement must be signed by all parties to the dispute, the Russian target company and all its shareholders (even if such shareholders are not parties to the shareholders’ agreement); and
3. specialised corporate arbitration rules must be adopted and applied by the eligible arbitral institution administering the dispute.
Requirements (1) and (2) can be satisfied through contractual arrangements between the parties and should not prevent HKIAC from administering such cases. HKIAC does not meet requirement (3), however, as it has not yet adopted the specialised corporate arbitration rules required by the legislation. Notwithstanding some encouraging moves by Russia to relax the requirements, HKIAC’s ability to administer arbitrations in this category of disputes remains restricted for now.
Since the Arbitration Law was adopted, users of arbitration in Russia have speculated that one or more foreign arbitral institutions may succeed in obtaining the necessary permit. This, combined with certain arbitration users’ strong preference for arbitrations to be administered outside Russia, has led to the widespread use of so-called ‘waterfall’ arbitration clauses in Russia-related cross-border M&A and financial transactions. A typical waterfall arbitration clause lists a number of foreign arbitral institutions in descending order of preference. If a dispute arises, the arbitration goes to the highest-ranked institution on the list that holds a Russian governmental permit. The HKIAC has already been included in many such clauses, so – unless other foreign arbitral institutions obtain the necessary government permit – there is a good chance that disputes arising from many existing transactions will find their way to the HKIAC.
Editorial Note: this is a summary of the article “HKIAC Becomes the First Foreign Arbitral Institution Licensed Under Russia’s Arbitration Legislation” which was circulated via Hong Kong Lawyer eNewsletter and posted on Hong Kong Lawyer website in May 2019.