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Yaroslav Klimov, partner and head of the Russia and CIS dispute resolution practice, specialises exclusively in dispute resolution, and has significant experience in international arbitration, cross-border disputes and domestic litigation. A member of the Moscow Bar Association since 1997, Yaroslav is an arbitrator at the Singapore International Arbitration Centre, the Pacific International Arbitration Centre, the Russian Arbitration Association, the London Court of International Arbitration and the arbitration court of the Moscow International Chamber of Commerce. He has also acted as arbitrator under ICC Rules.

Andrey Panov is a dispute resolution lawyer based in Moscow. A senior associate at Norton Rose Fulbright, he focuses on representing clients in international arbitrations under the rules of various institutions, including the ICC, LCIA, SCC, SIAC and ICAC (Moscow), as well as in ad hoc arbitrations. Andrey also successfully appears before all levels of Russian courts in arbitration-related matters, including the enforcement of arbitral awards. He is a councillor at the LCIA European User’s Council and the co-chair of the LCIA YIAG.

Sergey Avakyan is a dispute resolution lawyer based in Moscow. An associate at Norton Rose Fulbright, he exclusively specialises in dispute resolution. Sergey represents Russian and foreign clients in general commercial, construction, insurance and administrative disputes. Sergey is a member of a number of arbitration groups, including the ICC YAF and the LCIA YIAG.

Natalia Klimova qualified as a lawyer in Russia and is based in Moscow, where she is an associate at Norton Rose Fulbright. She specialises exclusively in dispute resolution with a focus on local litigation. Natalia represents clients before the Russian state arbitrazh (commercial) courts and courts of general jurisdiction and is experienced in domestic and cross-border corporate disputes.

GTDT: What are the most popular dispute resolution methods for clients in your jurisdiction? Is there a clear preference for a particular method in commercial disputes? To what extent are treaty claims increasing?

Yaroslav Klimov and Sergey Avakyan: Russian parties clearly prefer litigation before Russian courts, even though for cross-border projects they usually select arbitration to make sure they get an award enforceable abroad. There are two branches within the Russian court system – courts of general jurisdiction (dealing with the disputes involving individuals) and arbitrazh (state commercial) courts for commercial disputes.

Litigation before Russian courts is quick and comparatively cheap, which explains clients’ preference for litigation.

At the same time, arbitration is also relatively popular. Domestic arbitration in Russia does not enjoy the same reputation and respect as the international one owing to various abuses by the parties and local arbitral institutions and use of domestic arbitration for fraudulent purposes. However, recent arbitration law reform will hopefully improve the situation and make domestic arbitration more trustworthy.

Other ADR mechanisms are not that popular in Russia because clients want the resolution of their dispute to result in a binding and enforceable decision against the other party, rather than yet another (settlement) agreement that may eventually be breached.

The investment treaty claims involving Russia are increasing, primarily owing to the cases commenced against Russia in connection with the situation around Crimea. There are also potential matters that may be brought by Russian investors (including against Ukraine), but so far Russian investors have not been as willing to take their matters to arbitration.

GTDT: Are there any recent trends in the formulation of applicable law clauses and dispute resolution clauses in your jurisdiction? What is contributing to those trends? How is the legal profession in your jurisdiction keeping up with these trends and clients’ preferences? Has Brexit affected choice of law and jurisdiction?

YK & SA: Over the past decade choosing the foreign law (primarily English law) as well as the foreign-seated arbitration for cross-border transactions became the common practice for large and medium-sized businesses in Russia. English law has been considered more comfortable for structuring of M&A and related deals with Russian participants.

As in the previous year, following imposition of sanctions against Russia by the EU and the United States, many Russian companies, especially with state participation, started choosing Singapore law (instead of English law), and SIAC and sometimes HKIAC (instead of the usual European arbitral centres).

In parallel to this, Russian Civil Code has been reformed to provide for tools needed in business transactions (for example, rules on representations and warranties). However, this has not brought about a significant switch to Russian law so far. Furthermore, for certain disputes (eg, shareholders’ disputes between the participants of a Russian entity) it is now mandatory to litigate or arbitrate them in Russia, rather than abroad. Therefore, for those types of disputes many clients agree on Russian litigation or Russia-seated arbitration administered by Russian institutions.

When drafting dispute resolution clauses, it is worth remembering that the approach of Russian courts to interpretation and enforcement of the ‘hybrid’ clauses (ie, clauses that entitle one of the parties to choose between several fora) remains largely unsettled. Thus in 2012, the Russian Supreme Arbitrazh Court found that an asymmetrical clause granting the right to choose between litigation and arbitration to only one party to a contract (eg, the buyer) violates the rights of the other party, and therefore the asymmetrical part of the clause is invalid. On the other hand, in May 2015, the Supreme Court of Russia upheld a clause that granted a choice of forum to the claimant, rather than by one specified party. Thus, symmetrical hybrid clauses seem to be more reliable than asymmetrical ones.

Many Russian judges in reality struggle with foreign law-governed disputes, and therefore they usually welcome assistance from the parties’ counsel in establishing the content of the applicable law. Russian offices of international law firms seem to be better equipped to cope with this task, as they could benefit from a large network of their own specialists located in many relevant jurisdictions. Russian law firms would have to hire a co-counsel from relevant jurisdictions, which could result in compromise over quality or increase of costs. 

From our perspective, Brexit is unlikely to have any impact on Russian parties’ choice of law and jurisdiction. While there are many uncertainties as to the post-Brexit state of relationships between the UK and the EU, none of them seems to be relevant for Russian parties. If they were choosing English law before, it had nothing to do with the EU, but rather was driven by the principles of English contract law in the first place. Those are likely to remain the same irrespective of the UK status within the EU. Furthermore, in many cases when selecting England as forum for their disputes, Russian parties were opting primarily for arbitration. Therefore, it would not matter that much to what extent the UK remains part of the Brussels regime.

GTDT: How competitive is the legal market in commercial contentious matters in your jurisdiction? Have there been recent changes affecting disputes lawyers in your jurisdiction?

YK and Natalia Klimova: The dispute resolution market in Russia has become very competitive, particularly following the economic downturn, which, on the one hand, has increased the amount of work, but on the other hand made clients more cost-conscious. The main competition at the moment is between larger Russian law firms and international offices of international law firms. There is also growing competition from specialised dispute resolution boutiques established recently by some of the leading litigators in the market.

At the same time, the competition between Moscow and St Petersburg-based firms and regional firms is largely non-existent, for they usually work in different markets. Thus, Moscow and St Petersburg firms usually work on more complex projects, often involving cross-border elements (ie, disputes where the increased cost would be justified). In contrast, local firms have the undoubted advantage of charging much lower fees, but would in many cases struggle to deliver the same Western-style quality and may have significant difficulties in communicating with clients in English. There are, however, new services that may decrease costs even where larger international firms are involved. For example, certain firms offer a service of studying case files at the client’s request and providing the copies of the same to the lawyers based in Moscow. This is certainly beneficial, particularly when the relevant court is located far away from Moscow, for instance, in the Far East.

Last year, the Ministry of Justice published a paper on development of legal profession in Russia, and it envisages the legal profession to become fully regulated by 2023. Representation of the clients before the Russian courts would only be only for Russian qualified advocates and in-house lawyers, which may eventually enhance the quality of legal representation in Russian courts. However, the concrete details of the reform are yet to be seen.

GTDT: What have been the most significant recent court cases and litigation topics in your jurisdiction?

NK: The most significant court case by value was the dispute between two Russian giants: the leader of petroleum industry Rosneft and a large private investor, Sistema. The proceedings went in leaps and bounds – they commenced in May and finished in December 2017. Oil company claimed an unprecedented amount of 170.6 billion roubles of losses as a consequence of the reorganisation of the oil company Bashneft during the period when it was owned by Sistema. The case was heard in the arbitrazh court of the Republic of Bashkortostan (a region of the Russian Federation). The decision was rendered in favour of the claimant and, according to it Sistema, was obliged to pay Rosneft 136 billion roubles. Nevertheless, the dispute ended up with a settlement agreement between the parties that stipulated that Sistema should pay 80 billion roubles by itself and further 20 billion roubles through its subsidiary, which meant that Rosneft shall receive 100 billion roubles in total.

One of the main litigation topics of the past year (continuing also today) was the controlling persons’ liability in case of the company’s bankruptcy. The detailed mechanism of holding a person who has been controlling a legal entity before it went bankrupt liable was introduced in 13 new articles in the Federal Law on Bankruptcy which came into force on 1 July 2017. Also, a special Resolution of the Plenum of Russia’s Supreme Court explaining various aspects of this type of claim was published in December 2017. With the introduction of the above mechanism it has become much easier to sue the controlling shareholders, beneficiaries and management for debts of a bankrupt company. Moreover, the courts enjoy wide discretion to determine the persons who have had control over the companies’ actions owing to fairly vague criteria introduced in the law. As of 2017, we have been representing two clients (major international financial institutions) in high-profile litigation cases where they were sued by bankruptcy managers on the basis of alleged control over the entities that went bankrupt.

GTDT: What are clients’ attitudes towards litigation in your national courts? How do clients perceive the cost, duration and the certainty of the legal process? How does this compare with attitudes to arbitral proceedings in your jurisdiction?

YK, Andrey Panov & NK: Litigation before Russian courts is relatively inexpensive and quick. The maximum filing fee is capped at around US$3,500, where the value of the claim is above US$35,000. Many companies handle litigation through their in-house teams. Even when external counsel are retained their fees are likely to be lower than in many other jurisdictions, as Russian litigation usually implies fewer time-consuming and costly tasks, such as document production or lengthy hearings intended for cross-examination of the witnesses. In terms of speed, a case before the arbitrazh court may be considered by three instances (first, appellate and cassation) within eight to 12 months on average, even though some cases may continue their journey through the court instances for years.

Low costs and high speed are what Russian clients have become used to. For this reason, they may sometimes be reluctant to agree on arbitration. Also, the negative costs implications even when a claim is unmeritorious are very limited, as the courts are reluctant to order the reimbursement of legal expenses in full. Thus, Russian clients would usually litigate for tactical reasons or out of principle, even where foreign clients would have negotiated a settlement.

However, the speed comes sometimes at the expense of quality. Owing to a very significant case load, Russian judges are not very keen on examining complex factual backgrounds or innovative legal arguments with the required attention.

One additional disadvantage of litigation before Russian courts is limited enforceability of the resulting judgement outside of Russia. In this respect, international arbitration is a more popular choice for cross-border transactions; however, Russian clients may be sometimes surprised by the costs involved in arbitral proceedings and their duration. At the same time, arbitration even before Russian-based arbitral institutions usually presents better opportunities to argue your case, particularly if it is fact-intensive or foreign-law governed.

“The amendments proposed by the Supreme Court, which have recently been adopted in the first reading by the Russian parliament, envisage radical changes.”

GTDT: Discuss any notable recent or upcoming reforms or initiatives affecting court proceedings in your jurisdiction.

NK & SA: The complex reform of Russian procedural legislation (civil, arbitrazh and administrative) was actively discussed throughout 2017 and was supported by the President of Russia.

The amendments proposed by the Supreme Court, which have recently been adopted in the first reading by the Russian parliament, envisage radical changes, in particular with respect to the system of courts of general jurisdiction. Thus, it is expected that the system of appeals and cassation courts will be reshuffled, with five court of appeals and nine courts of cassation being created. This should balance the judges’ workload as well as improve their impartiality. The amendments are proposed to take effect from 1 July 2018; however, the date when the new courts are to commence their activity shall be established by the Supreme Court.

Another aspect of the reforms, also the most heavily criticised one, is that the judges will not be required to provide reasoning for their decisions, unless specifically required by the parties. While the main idea of the amendment is to improve judges’ time efficiency in simple cases, majority of practitioners believes that this move may negatively affect both quality and impartiality of the courts.

The Supreme Court is also willing to impose the requirement that parties’ representatives in civil cases shall have higher legal education. This rule has already been enacted within the Code of administrative procedure and obviously represents a new step in the way of forming the concept of professional representation.

Other notable amendments refer to the grounds for reviewing cases on the basis of new circumstances and bringing certain changes to the simplified proceedings in both the Civil Procedural Code and Arbitrazh Procedural Code (the threshold for simplified procedure is planned to rise to  500,000 roubles in civil proceedings and 1 million roubles in arbitrazh proceedings).

GTDT: What have been the most significant recent trends in arbitral proceedings in your jurisdiction?

AP: We continue to see clients becoming more sophisticated when it comes to drafting dispute resolution provisions. For example, we have started seeing more tiered dispute resolution clauses. Also, the clients are more careful and thoughtful when selecting a forum or an arbitral institution than they used to be. We are seeing more clauses in favour of SIAC (less so HKIAC), particularly when it comes to state-owned companies. This is mainly owing to the sanctions imposed by the EU and the US, but also because major Russian companies are more active on the Asian market than before. At the same time, private companies are still happy putting their usual LCIA, ICC or SCC clauses in their agreements.

Furthermore, Russian clients may be becoming less litigious than before. At least nowadays they are happy for lawyers to conduct preliminary assessment of the merits of the case and would usually weight chances of success against potential cost implications. They also welcome settlement attempts through negotiations or mediation.

The trend for using Moscow-based counsel is on the rise, even though most lucrative cases on many occasions would still be handled from elsewhere. The client would usually use Russian offices of major international law firms, but also sometimes leading Russian firms and dispute resolution boutiques, many of which have lawyers with relevant experience in cross-border disputes and international arbitration. We will probably see more international cases handled by Russian teams in the coming years.

GTDT: What are the most significant recent developments in arbitration in your jurisdiction?

AP & SA: Under the reform arbitration legislation (which came into force on 1 September 2016), there were a number of important milestones planned for 2017. On 1 January 2017, the updated procedural legislation came into force – from then onwards, the courts of the first instance should render a decision on applications to set aside the award on jurisdiction or the final award as well as applications for enforcement of awards shall be rendered within one monthof the date of its filing (previously three months). This means that the respondents may need to react to such applications much quicker than before and ideally monitor any applications that may have been filed in the Russian courts in relation to their existing or completed arbitral proceedings. This is only relevant if the seat of arbitration is in Russia (for set-aside and enforcement) or if the enforcement might be sought in Russia.

As of 1 February, the parties can enter into arbitration agreements in relation to corporate disputes in the Russian companies. The reform legislation allowed for arbitration of certain corporate disputes (ie, the disputes relating to shareholders’ rights and corporate governance within a Russian-registered company), whereas previously the prevailing view was that such disputes were non-arbitrable (even though there were cases where the courts adopted the opposite view). The reform law stated that all arbitration agreements in relation to corporate disputes concluded before 1 February 2017 were deemed unenforceable.

The reform legislation also required that the Russian arbitral institutions wishing to administer arbitrations seated in Russia should obtain governmental permit to do so. In order to obtain such, they were to satisfy the specially created committee that their structure, arbitration rules and the list of arbitrators are compliant with the requirement of the reform legislation. Foreign arbitral institutions were not required to obtain permits, but could do so. In the absence of such permits, the disputes they administer in Russia would be considered ad hoc (rather than institutional), which imposes certain limitations (eg, they cannot administer corporate disputes).

The ICAC and the Maritime Arbitration Commission at the Russian Chamber of Commerce and Industry were exempted from the requirement to obtain permits.

Out of (reportedly) thousands of arbitral institutions in Russia, only two have bene able to obtain permits to date (the Arbitration Centre at the Institute of Modern Arbitration; and the Arbitration Centre at the Russian Union of Industrialists and Entrepreneurs). These are the only four options for administered arbitration in Russia at the moment. No foreign institutions have obtained the permit to date.

All four Russian institutions are based in Moscow (even though some of them now opened branches in some regions) and they are all more expensive than litigation before the state courts. For this reason, smaller businesses, particularly those based in the regions, may have to go to the state courts to limit their costs.

GTDT: How popular is ADR as an alternative to litigation and arbitration in your jurisdiction? What are the current ADR trends? Do particular commercial sectors prefer or avoid ADR? Why?

AP & SA: ADR is still not really popular with Russian parties, because they usually prefer having an enforceable award against the opposing party. Whilst Russia has adopted the Law on Mediation in 2010, in practice parties to commercial disputes rarely use mediation. It is likely, however, that the popularity of mediation may grow over time, because Russian clients are increasingly less willing to waste time and money when there is still a room for amicable settlement.

Sometimes the contracts provide for multi-tier dispute resolution, but in most cases it would be limited to the requirement of attempting to resolve the dispute by negotiation. Expert determination and dispute resolution boards are frequently used in construction contracts, particularly those modelled on FIDIC. Expert determination is also used in cross-border commodity trading, particularly with respect to determining the sales price in long-term contracts.

The Inside Track

What is the most interesting dispute you have worked on recently and why?

Yaroslav Klimov: We have represented a major financial institution as a respondent in court proceedings in Russia initiated by a bankruptcy manager of a Russian company. The bankruptcy manager alleged that our client should be held liable for divesting funds from the company. The legal and financial community followed this case very closely owing to its significance to the nature of the relationship between financial institutions and their clients that went bankrupt under the Russian bankruptcy law. Because of the sensitivity of the matter, we are not able to provide more detailed information.

If you could reform one element of the dispute resolution process in your jurisdiction, what would it be?

YK: While it is technically possible, usually the courts would cut the winning party’s legal costs substantially. The measures have to be taken so that the courts order adequate recovery of the winning party’s legal fees. This will likely make the proceedings more professional and the parties less willing to litigate hopeless or frivolous cases.
What piece of practical advice would you give to a potential claimant or defendant when a dispute is pending?

YK: Russian judges still remain overloaded by the number of cases they have to consider. According to market statistics, a Russian judge considers approximately at least 50 cases each month, so the parties should not be surprised if the court allocates 15 minutes for considering their complex case. In these circumstances the parties’ representatives should prepare their oral pleadings in a very structured, clear and short format in order to be able to explain their positions to the judge very quickly. The quality of such preparation should not be underestimated even though the written submission should be quite detailed.

Yaroslav Klimov, Andrey Panov, Sergey Avakyan and Natalia Klimova
Norton Rose Fulbright
Moscow
www.nortonrosefulbright.com


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