Russian sanctions: arbitration agreements and the Russian "home advantage"
28 May 2024
Background
Sanctions imposed on Russian persons and entities as a result of Russia's invasion of Ukraine in 2022 continue to have a significant impact on commercial relationships.
In a previous article, we looked at some key questions arising in the context of international arbitration of Russia-related disputes and we touched on the difficulties which may arise when one of the parties to an arbitration is subject to, or impacted by, sanctions.
In this article we consider in further detail the impact Russian sanctions may have on an arbitration agreement: while the parties may have contractually agreed to resolve their disputes by way of arbitration, those disputes instead may end up before the Russian courts in direct contravention of the parties' agreement. We consider this in the context of Unicredit Bank GmbH v RusChemAlliance LLC, which reached the UK Supreme Court (the Supreme Court) and is one of many cases in recent months to address the conflict between the parties' agreement to resolve their disputes by way of arbitration and Russian legislation which grants exclusive jurisdiction to the Russian courts to hear disputes between Russian and foreign persons arising from foreign sanctions.
Unicredit: the Supreme Court upholds anti-suit injunction
In the Unicredit case, RusChemAlliance LLC (RCA) contracted with German companies Linde GmbH and Renaissance Heavy Industries LLC (together, the Contractor) in relation to the construction of natural gas facilities in Russia (the EPC Contracts). The Contractor guaranteed the performance of its obligations under the EPC Contracts by way of on-demand bonds. Some of those bonds were provided by UniCredit Bank GmbH (Unicredit) (the Bonds), with further bonds being provided by other European banks (the subject of separate proceedings).
The dispute arose from RCA's attempt to call on the Bonds as a result of the Contractor halting its performance of the EPC Contracts, citing EU sanctions on Russia as its reason for doing so (while RCA was not itself the subject of EU sanctions, the German Federal Office for Economic Affairs and Export Control instructed the Contractor that it could not continue to perform the EPC Contracts). RCA then terminated, or purported to terminate, the EPC Contracts on grounds of material breach and subsequently made demands for payment under the Bonds. Unicredit refused to pay on the grounds that such payment was prohibited by EU sanctions.
The Bonds were governed by English law and provided for the resolution of disputes by way of ICC arbitration seated in Paris (without specifying the governing law of the arbitration agreement).
Rather than commencing ICC arbitration, RCA filed proceedings against Unicredit in the Arbitrazh Court of St Petersburg and the Leningrad Region (the Arbitrazh Court) seeking payment of the Bonds, plus interest. The Arbitrazh Court accepted jurisdiction over the proceedings in light of a Russian law that came into force in June 2020, which grants exclusive jurisdiction to the Russian court to hear disputes between Russian and foreign persons arising from foreign sanctions, and which effectively rendered the arbitration agreement in the Bonds unenforceable (see further below). In response, Unicredit applied to the English court for an anti-suit injunction in order to restrain the Russian proceedings.
At first instance, Sir Nigel Teare refused to grant a final anti-suit injunction, however in February 2024 the Court of Appeal found in favour of Unicredit and granted an anti-suit injunction ordering RCA to terminate the Russian proceedings.1 In doing so it applied the principles laid down in the Supreme Court's decision in Enka v Chubb and considered French law evidence. On 23 April 2024, the Supreme Court dismissed RCA's jurisdictional appeal and upheld the anti-suit injunction granted by the Court of Appeal.2 The Supreme Court's reasoning will be further clarified in its written judgment to be issued in due course.
Both the Court of Appeal (in its judgment) and the Supreme Court (in its decision summary) expressed gratitude to the judge overseeing the parallel proceedings in the Arbitrazh Court for suspending those proceedings to allow the respective appeals to be considered. However, shortly after the Supreme Court released its decision summary, the Arbitrazh Court reportedly continued the parallel proceedings and upheld RCA's requests for interim relief by freezing millions of euros' worth of Russian assets held by Unicredit (as well as other European banks, the subject of separate proceedings).
It remains to be seen how Unicredit will respond. While the Supreme Court's decision may assist Unicredit (and parties in a similar position) in resisting enforcement of any Russian judgment against them outside Russia, it may be of little assistance in respect of Unicredit's Russian assets.
Exclusive jurisdiction of the Russian courts
In mid-2020, new provisions (Article 248.1 and 248.2) of the Arbitration Procedural Code of the Russian Federation (the Russian Arbitration Code) came into force, the effect of which is, among other things, to confer exclusive jurisdiction on the Russian courts over disputes arising from foreign sanctions or involving sanctioned persons and to treat an arbitration agreement providing for arbitration outside of Russia as inoperable.3 Moreover, Russian persons affected by foreign sanctions are able to apply to the Russian courts for an anti-suit injunction against foreign court or arbitration proceedings and the Russian courts have the power to sanction a breach of any such anti-suit injunction.4
Unicredit is just one example of a number of recent and ongoing cases where Russian persons or entities are using the Russian Arbitration Code as a tool to circumvent the arbitration agreement in their contractual arrangements with foreign parties and as a gateway to their disputes being resolved by the Russian domestic courts. In doing so, they are arguing that the arbitration agreement in question is "unenforceable and inoperable".5
What does this mean in practice?
Recent trends dictate that where a contractual party is, or is controlled by, a Russian entity or person, and it is (directly or indirectly) affected by foreign sanctions on Russia, there is a high probability that, in the event of a dispute, it will seek to utilise Article 248 of the Russian Arbitration Code to circumvent the arbitration agreement (or other dispute resolution provision) in pursuit of a "home advantage" in the Russian courts. Moreover, there is a significant risk that the Russian courts will not only assume jurisdiction in direct contravention of the arbitration agreement but will also disregard foreign court decisions upholding that agreement. In doing so, the Russian courts may grant interim relief by way of freezing Russian assets (as with the Unicredit case), issuing anti-suit injunctions, or otherwise. At the very least, this will cause disruption and delay to any arbitration proceedings commenced in accordance with the arbitration agreement.
Impacted parties will need to consider carefully how best to uphold their agreement to arbitrate, apply for appropriate anti-suit relief without delay and manage any parallel proceedings in Russia (including any restrictions or sanctions imposed upon them by the Russian courts).
