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 pursuant to Russia’s Federal Law on Arbitration (the Arbitration Law). This has profound implications for the arbitration of Russia-related disputes involving foreign parties, and opens up new opportunities for users of arbitration in Russia and Asia.
THE REQUIREMENT TO OBTAIN A PERMIT
The Arbitration Law (in effect since 1 September 2016) requires all arbitral institutions to obtain a Russian governmental permit, absent which any arbitration administered by an institution would not be considered as an “institutional arbitration”. This is highly relevant because post-M&A disputes in respect of Russian companies, including those arising under from share purchase agreements, share pledge agreements and shareholders’ agreements, are categorised as “corporate disputes” under the Arbitration Law, and the Arbitration Law requires at a minimum that such disputes are only eligible to be arbitrated as “institutional arbitrations”.
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 if they do not possess a permit, a conservative reading of the law suggests otherwise and the issue remains untested in the courts. Accordingly, there is some risk that such a foreign award may run into difficulty when enforcement is sought in Russia.
To date, only two Russian arbitral institutions (the Arbitration Center at the Russian Union of Industrialists and Entrepreneurs, and the Arbitration Center at the Russian Institute of Modern Arbitration) have received such permits.
Against this background, the grant of the Russian governmental permit to the HKIAC is highly significant. It is the first step to opening the door for parties to submit certain kinds of disputes to a highly trusted international arbitration centre with reduced enforcement risk in Russia, placing the HKIAC in the position of being the leading foreign arbitral institution for handling Russia-related arbitrations.
WHAT RUSSIA-RELATED DISPUTES CAN BE SUBMITTED TO THE HKIAC UNDER ITS PERMIT?
As a consequence of the grant of the permit, the HKIAC is now eligible under Russian law to administer:
- arbitrations arising under certain categories of Russian “corporate disputes” (including, most importantly, those arising under share purchase agreements and share pledge agreements relating to Russian companies); and
- arbitrations seated in Russia arising under non-corporate commercial disputes.
For most international commercial parties, this category of “corporate disputes” is likely to be the most relevant.
There are, however, various other disputes which the HKIAC is not eligible to administer, as a matter of Russian law.
First, the HKIAC is not eligible to administer purely domestic Russian disputes, whether corporate or not. This is because the Arbitration Law requires foreign arbitral institutions to establish local Russian branches in order to become eligible to administer domestic arbitrations, and the HKIAC has not established such a local branch.
Second, various categories of disputes remain non-arbitrable under Russian law. By way of example, these include:
- disputes concerning public law (e.g., disputes over privatisation of state properties and invalidation of administrative enactments);
- disputes arising under state procurement contracts; and
- disputes concerning a Russian company deemed strategic under the country’s foreign strategic investment legislation.
Third, for disputes arising under other kinds of corporate transactions (e.g. shareholders’ agreements), certain additional requirements apply, which are further explained below.
THE ONGOING REFORM OF ARBITRATIONS INVOLVING RUSSIAN CORPORATE DISPUTES
The Arbitration Law and the Arbitrazh Procedural Code of the Russian Federation (APK) provide that, with respect to other kinds of “corporate disputes” (including disputes arising under shareholders agreements relating to Russian companies), in addition to the requirement that the arbitration must be “institutional”, the following requirements must also be satisfied:
- the seat of arbitration must be Russia;
- the arbitration agreement must be signed by all parties to the dispute, the Russian target company and all of its shareholders (even if such shareholders are not parties to the shareholders’ agreement); and
- specialised corporate arbitration rules must be adopted and applied by the eligible arbitral institution administering the arbitration.
While requirements (i) and (ii) are matters of contractual arrangements between the parties, requirement (iii) is not met by the HKIAC, since it has not yet adopted the specialised corporate arbitration rules compliant with the legislation.
That said, the Russian government is moving to relax the requirements. On 27 December 2018, important amendments were made to the Arbitration Law to remove requirements (ii) and (iii) for disputes arising under shareholders’ agreements – however, these requirements continue to apply, as the equivalent provisions under the APK remain unchanged.
Pending further corresponding amendments to the APK, definitive guidance from Russia’s top courts, or the HKIAC’s adoption of specialised corporate arbitration rules, the HKIAC’s ability to administer arbitrations arising under this category of disputes would remain restricted.
THE TRIGGERING OF WATERFALL ARBITRATION CLAUSES
Since the Arbitration Law was adopted in late 2015, the users of arbitration in Russia have been anticipating that one or more foreign arbitral institutions may obtain the Russian governmental permit. This, combined with the generally strong preference of certain arbitration users to have arbitrations 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 such that, if a dispute arises, the arbitration goes to the highest ranked institution on the list which holds a Russian governmental permit. The HKIAC has been included in many such clauses. This means that, absent successful applications for the Russian permit by other foreign arbitral institutions, disputes arising under many existing transactions may well be referred to the HKIAC.
The HKIAC’s popularity among the users of arbitration in Russia has increased significantly over the past few years due to the growing economic ties between Russia and Asia and the HKIAC’s considerable promotional efforts in the Russian market. The grant of the Russian governmental permit to the HKIAC and the incorporation of the HKIAC into waterfall arbitration clauses reinforce this trend and will no doubt result in increased use of the HKIAC’s services by both Russian and foreign parties in the context of Russia-related international disputes. As things stand, the HKIAC represents a good choice for these disputes given its neutrality and its market-leading status. Assuming further liberalisation of the Russian rules concerning arbitration of shareholders’ disputes, the potential role for the HKIAC to assume in Russia-related “corporate disputes” can only increase further.