Contracts with Russian and Russian-related parties

Disputes about disputes: Jon Felce, Mikhail Vishnyakov and Hazel He at Cooke, Young & Keidan LLP look at the surge in businesses being unexpectedly dragged into Russian court proceedings by former trading partners

 

When parties enter into agreements, they often agree to resolve their disputes in a particular jurisdiction, whether national courts or arbitration. Reasons include convenience, and a desire for a dispute to be heard in a preferred legal system and for the decision to be readily enforceable.

 

Another factor is certainty: parties know where any dispute will be resolved. Agreeing upon a jurisdiction before any dispute arises seeks to avoid what can be an expensive and time-consuming battle over the appropriate forum.

 

However, the world has become a far less certain place in recent times. The impact of these developments has resulted in questions as to the appropriate jurisdiction where Russian and Russian-related parties are involved, and whether steps can be taken to prevent parties breaching obligations to submit disputes to a particular forum. This has led to a flurry of decisions by both the English and the Russian courts.

 

Sanctions and disputes

Since February 2022, a wide-ranging sanctions regime has been implemented in relation to Russia. Many parties are now (sometimes incorrectly) relying upon the regime as a reason not to comply with their contractual obligations. This is increasingly giving rise to disputes which are being heard by tribunals and English courts. 

 

Notably, there have been recent English court decisions confirming that sanctioned parties can bring claims and obtain judgments and awards, and judgments and awards continue to be granted both for and against Russian and Russian-related parties, including those sanctioned.

 

Indeed, sanctions should not be a reason to delay commencing proceedings: if parties wait for sanctions to be lifted before bringing proceedings, it may be too late as the applicable mandatory deadlines may have lapsed.

 

Importantly, there are mechanisms allowing sanctioned clients to pursue disputes. English lawyers are not permitted to receive payments from sanctioned clients (or clients that are owned or controlled by sanctioned persons) without an authorisation from the English sanctions authority (OFSI). However, such authorisations are regularly granted.

 

Moreover, general licences issued by OFSI permit payments of (i) legal fees of up to £500,000 provided certain conditions are met, and (ii) various fees and expenses in connection with LCIA arbitrations. Procedural steps involving the payment of adverse costs orders and security of costs are also licensable.

 

Russian legislation

In June 2020, Russia introduced new provisions establishing the exclusive jurisdiction of Russian courts when a party is unable to litigate or arbitrate outside Russia because of restrictive measures such as sanctions (whether because the relevant party is sanctioned or the subject matter of the dispute is sanctions). This provision is intended to operate notwithstanding any contractual agreement between the parties to resolve their dispute by litigation or arbitration. 

 

According to evidence tendered in recent cases in England, this provision has been adopted broadly, such that the simple fact of being sanctioned is enough to trigger it. Further, it applies to non-Russian entities where they are affected by restrictive measures being imposed in relation to Russian entities.

 

To enforce this provision, the Russian courts have the power to grant anti-suit injunctions (ASIs) to restrain overseas proceedings or arbitration in relation to any such disputes, as well as to grant anti-anti-suit injunctions (AASIs) preventing ASIs. Breaching such orders can have potentially significant financial consequences. We now address what ASIs and AASIs are.

 

Anti-suit injunctions

Traditionally, parties use injunctions (ASIs) to seek to prevent counterparties from commencing or pursuing proceedings in a forum different to that which was agreed.

 

ASIs can be granted by national courts (including England) or arbitral tribunals (although for timing reasons it tends to be the former), on the basis that commencing or pursuing proceedings in an alternate forum is a breach of contract. ASIs are granted against the party that can or does commence the parallel proceedings (not the alternate court or tribunal).

 

That party is ordered not to commence or pursue such proceedings. Sometimes, they are also ordered not to seek an ASI (by an AASI). ASIs can be granted (on a temporary basis) without notifying the other side pending a further hearing to determine whether the ASI should become permanent.

 

In England, breaching the injunction can lead to committal of an individual to prison, fines or the confiscation of assets. The innocent party can also separately seek damages. 

 

Various factors are relevant to granting an ASI. There have been several English decisions recently in the context of Russian proceedings being commenced notwithstanding an arbitration clause (in reliance on the Russian law provision outlined above).

 

The decisions have considered whether, if England is not the seat of the arbitration (i.e. the jurisdiction selected by the parties to determine the procedural framework of the arbitration), it is the proper place to seek an ASI. The seat of arbitration was Paris, and the question was whether the French courts should ordinarily supervise the parties’ compliance with the arbitration agreement (including determining whether an ASI should be granted). Save for one occasion (which is being appealed), the applications for an ASI were granted.

 

It is understood that the Russian party subsequently agreed to stay the Russian proceedings. In a recent unrelated case, where the seat was in England and not France, the court also granted an AASI to prevent the defendant seeking an ASI in Russia.

 

Therefore, even in contracts which do not provide for English jurisdiction, an ASI may be available. The English court might be the only option, especially as some jurisdictions do not grant ASIs and an arbitral tribunal might not have been appointed. 

 

Other options

In addition to ASIs and AASIs, the English courts have other wide-ranging powers that may assist. For example, they can grant orders freezing assets if there is a real risk of those assets being dissipated. Similarly, they can order the appointment of receivers over assets to “hold the ring” whilst a dispute is ongoing. The English courts can also grant orders in support of arbitration, and the tribunals themselves may also grant relief.

 

Finally, the English courts can grant injunctions seeking to prevent enforcement of any judgments obtained in breach of an ASI. There can be serious consequences if orders of the English courts in such cases are breached. This can encourage parties to comply and cease any parallel proceedings. 

 

Keeping aware of the increased risk

Parties need to be aware of the increased risk of parallel proceedings in the current environment. Although tribunals and the courts of one jurisdiction cannot compel the courts of another to stop proceedings brought in breach of a jurisdiction or arbitration clause, they remain a powerful weapon because the breaching party may not be able to enforce abroad any judgment or award it subsequently obtains.

 

The prudent option therefore may be to protect your rights if your arbitration or jurisdiction clause has or may be breached, and to do so promptly.

 

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Authors: Jon Felce (Partner), Mikhail Vishnyakov (Partner), Hazel He (Associate) of Cooke, Young & Keidan LLP, a specialist disputes law firm based in London, England

 

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