Author: Roman Zykov

On 8 June 2020, Russia adopted a new law (the “Law”), which extended the exclusive jurisdiction of Russian state courts over certain types of disputes and the parties affected by restrictive measures imposed by other states. The Law titled "The law amending the Arbitrazh Procedure Code for the purposes of protecting private and legal persons from restrictive measures enacted by a state, union of several states, or a public body of a state or a union of several states". The Law was enacted as the new Articles 248.1 and 248.2 of the Commercial (Arbitrazh) Procedure Code.

The Law appears to be a reaction to the anti-Russia sanctions, which have been introduced against Russian legal and private persons by several states since 2014. As for today, around 690 Russian companies and individuals have been designated by the US and 120 by the EU. The number of persons has been continuously growing and the sanctions affect the most important fields of Russian economy.

The Law provides that Russian (and in some cases foreign) persons may refer their disputes to the Russian state commercial courts (Arbitrazh court) at their domicile. For example, if a party is located in Moscow, then the Arbitrazh (Commercial) Court of Moscow City would have exclusive jurisdiction over the matter. Read more about the Law.

The application of Articles 248.1 and 248.2 of the Commercial (Arbitrazh) Procedure Code was recently considered by Russian courts in the declaratory action brought by Uralvagonzavod.

In 2014, JSC NPK Uralvagonzavod (“UralvagonZavod”) was designated by the U.S. as SDN under the U.S. Executive Order 13661.
OJSC Uraltransmash (“Uraltransmash”) is a leading machinery manufacturer in Russia, owned by Uralvagonzavod (99,23%). Uraltransmash came into contract with PESA Bydgoszcz SA from Poland (“PESA”) for the supply of tram carriages for the Moscow transport network. The contract contained an arbitration clause pursuant to which “all disputes arising out of the performance of the present contract shall be resolved in the Arbitration Institute of the Stockholm Chamber of Commerce” (“SCC”).
In 2018, Uralvagonzavod filed a derivative claim on behalf of its subsidiary Uraltransmash, requesting the court to declare the arbitration agreement between Uraltransmash and PESA invalid and unenforceable.

PESA initiated arbitration proceedings under the Arbitration Rules of the Stockholm Chamber of Commerce pursuant to the arbitration agreement between the parties. Allegedly, due to the U.S. sanctions against its majority shareholder (Uralvagonzavod), Uraltransmash was unable to lodge its share of the arbitration fees to the SCC. It was argued that the EU Council Decision No. 2014/512/CFSP dated 31.07.2014 and EU Regulation No. 833/2014 dated 31.07.2014 prohibited EU banks to accept payments from certain Russian banks.

Furthermore, it was argued that it was impossible to instruct a legal counsel because most of the law firms refused to take instructions due to the SDN status of Uralvagonzavod.

Both, the Court of first instance and the Court of Appeal rejected Uralvagonzavod’s claim. However, the court of cassation issued a ruling in favor of Uralvagonzavod and held that the lower courts failed to fully analyze the arguments of enforceability of the arbitration agreement. As a result, the Court of Cassation quashed the judgments of the lower courts and transferred the case back to the Court of first instance for a new trial.

Most importantly, the Court of Cassation held that the Court of first instance shall take into consideration Articles 248.1 and 248.2 of the Arbitrazh Procedure Code of the Russian Federation (“APC RF”), according to which Russian state courts have exclusive jurisdiction to resolve disputes which involve sanctioned entities. The court also noted that Russian courts also may issue anti-suit injunctions prohibiting initiating or continue arbitration proceedings. In the process of reconsideration of the case by the Court of first instance, Uralvagonzavod insisted that the arbitration clause is unenforceable because Uralvagonzavod was prevented from paying its share of the arbitration fees to the Stockholm Chamber of Commerce ('SCC'), and was unable to instruct a local legal counsel. The claimant also pleaded that a prospective arbitral award may be unjust due to the possible partiality of the arbitrators based on the designation of Uralvagonzavod.

PESA disagreed and indicated that the provisions of Articles 248.1 and 248.2 of the APC RF did not prevent the parties from arbitrating under the SCC Arbitration Rules.
PESA also pleaded that the arbitration clause is enforceable since Uralvagonzavod is successfully exercising its rights in the pending process before the SCC. Furthermore, the imposition of sanctions on Uralvagonzavod does not prejudice its rights to a fair trial in the SCC.

The Court of first instance stated that for the application of Article 248.1 of the APC RF, a party must prove the circumstances preventing consideration of the dispute in arbitration.

In relation to Uralvagonzavod’s references to the EU Council Decision No. 2014/512/CFSP and EU Regulation 31.07.2014 No. 833/2014, the Court of first instance indicated that the contract between the parties concerns supply of the trams and does not belong to the categories of transactions prohibited by these documents.

The court also rejected Uralvagonzavod’s argument on the impossibility of obtaining qualified legal assistance, because Uralvagonzavod has a Russian legal representative and Polish legal experts. As for the obstacles in arranging payments to the Polish legal representatives, Uraltransmash unsuccessfully tried to make the transfer through Raiffeisen Bank in Vienna. Uraltransmash could use other banks to make the transfer, but it did not try.

Regarding Uralvagonzavod’s arguments on the impossibility of paying the SCC arbitration fee due to the sanctions, the court concluded that Uralvagonzavod made numerous payments to a PESA’s bank account in a Polish bank within the past 5 years while being under the sanctions.

The court found that the U.S. and EU sanctions laws did not prohibit the SCC from accepting payments from Uraltransmash. According to the clarifications received from the Secretary-General of the SCC in August 2020, the SCC was of the opinion that laws did not contain any instructions which oblige Uraltransmash to apply to Swedish state authorities for obtaining permission to make payments in connection with the arbitration proceedings. The SCC also indicated that in the current circumstances there are no obstacles for Uralvagonzavod to take part in this arbitration.

The court also rejected Uralvagonzavod’s argument that the U.S. restrictive measures were effective throughout the EU due to their "extraterritoriality", because Uralvagonzavod did not provide any evidence that the laws and orders of the U.S. President were binding on Sweden or the EU.

Uralvagonzavod’s allegations of possible impartiality of the arbitrators have not been accepted by the court either.Consequently, the Court of first instance ruled in favor of PESA and specifically said that Uralvagonzavod did not present evidence confirming the existence of circumstances impeding the consideration of the dispute in the SCC.
Although the Court of first instance refused to accept jurisdiction under the Law, the court has formulated the test for admitting cases for trial – there should be compelling evidence that a Designated Party was unable to pursue its case in arbitration.