Just over 4 months after its previous landmark ruling of 26 July 2024, the Russian Supreme Court continues its crusade against “hostile” or “unfriendly” arbitration forums under the so-called Lugovoy Law (Articles 248.1 and 248.2 of the Russian Arbitrazh (commercial) procedure code). On 28 November 2024, the Supreme Court issued a new ruling in which it held that Russian arbitrazh (commercial) courts can have exclusive jurisdiction over disputes between two companies domiciled in Russia, overriding any arbitration agreement between them (the “Ruling”).
Background
1. The Case at Hand
JSC NS Bank (“NS Bank”) holds bonds issued by LUKOIL Securities B.V. The bond prospectus included an arbitration clause stipulating that all disputes, including non-contractual ones, would be governed by English law and resolved under the auspices of the London Court of International Arbitration (“LCIA”), and the seat of arbitration would be London.
On 6 May 2022, LUKOIL Securities B.V. paid a coupon rate of USD 19,375 intended for NS Bank under the bonds. This amount was credited to the Russian depository—JSC National Settlement Depository (“NSD”), which was later sanctioned by the EU in June 2022, preventing NS Bank from receiving the funds.
NS Bank filed a claim with the Moscow City Arbitrazh Court against PJSC Lukoil (“Lukoil”), as guarantor of the bonds, for repayment of the coupon. NS Bank argued that the arbitration clause should be disregarded in favour of the exclusive jurisdiction of the Russian courts because the “hostile” countries had imposed sanctions on Russia and its nationals.
Lukoil filed a motion to dismiss NS Bank’s claim, citing the arbitration clause. The lower courts, from first instance to cassation, sided with Lukoil (see 1, 2, and 3), and dismissed the claim because, inter alia:
- The bond prospectus contained a valid arbitration agreement;
- Russian arbitrazh courts did not have exclusive jurisdiction over the dispute, as the parties to the dispute were Russian entities not subject to sanctions.
Both the legal basis for transferring the case to the Supreme Court and the Court’s ruling align with the development of the Lugovoy Law practice. This notorious law allows Russian courts to assert exclusive jurisdiction over cases involving sanctioned entities and grant injunctions against foreign arbitration or litigation. The Uraltransmash v. Pesa case, previously discussed here, set a precedent: the presence of personal sanctions imposed over a plaintiff alone triggers the application of the Lugovoy Law with a rebuttable presumption that those sanctions impeded the plaintiff’s access to justice abroad.
Despite the courts’ stance in Uraltransmash v. Pesa, Russian courts have since broadly interpreted the Lugovoy Law, with plaintiffs often claiming it without personal sanctions imposed over them. To tie sanctions to the forum, judges frequently cite the location of an arbitral institution or court and the arbitration seat in the “unfriendly” states as a key factor. This trend is concerning and widespread.
The Court’s Conclusions
First, the Court emphasised that when a legal relationship involves a foreign element, Russian arbitrazh court should determine in each case if there are legal grounds for its exclusive jurisdiction, to effectively ensure the claimant’s constitutional right to judicial protection. This consideration is not new and aligns with the Plenum of the Russian Supreme Court’s position of 27 June 2017 No. 23 (see, e.g., paras. 1, 3 & 4).
With reference to this Plenum’s position, the Court also clarified that a case involving a foreign element includes not only cases involving foreign persons but also disputes concerning rights in rem and over properties located abroad, as well as disputes related to legal facts occurring abroad, particularly those related to tort.
Second, the Court noted that the Lugovoy Law’s purpose is to ensure Russian parties’ constitutional right to judicial protection when the restoration of rights, that had been infringed abroad, becomes impossible or significantly difficult.
The Court ruled that a dispute falls under exclusive competence of Russian courts in particular if:
- the restrictive measures imposed on Russian persons are “the direct cause of the dispute,” or
- the arbitration agreement became unenforceable in accordance with intent that the parties had had when entering into the agreement “due to the emergence of obvious obstacles to access to justice” for one of the parties.
Lastly, Russian courts may presume obstacles to access to justice when a party experiences hurdles in resolving a dispute abroad in accordance with the terms that the parties initially agreed on. The Court held there should be a substantial and unforeseeable change of circumstances as compared to the time the parties agreed on the dispute resolution clause.
Implications of the Ruling
This Ruling advances a worrying trend of Russian courts rejecting foreign arbitral proceedings in case there is a connection to sanctions. This case is notable because it involves two Russian entities that are not under personal sanctions and validates the trends of applying the Lugovoy Law beyond its express wording.
Following this approach, any unforeseeable difficulties or costs in arranging international arbitration can invalidate dispute resolution clauses. The Court declared that international arbitration under LCIA rules would not be independent and impartial due to sanctions (this is likely to apply to proceedings under other rules as well). In doing so, the Court implied its stance from a previous ruling that foreign (“unfriendly”) arbitrators and institutions are presumptively non-independent and non-impartial, without clarifying how to rebut this presumption. In these conclusions, the Court did not differentiate between the foreign courts and foreign-seated arbitrations, regardless of tribunal composition.
Importantly, the Court reasoned its approach by mentioning, inter alia, that the Russian parties seeking satisfaction from guarantors can be considered by arbitrators of a sanctioning state as a circumvention of EU sanctions. Relatedly, the Court of Justice of the EU was recently requested by the Swedish court to provide its interpretation of the Article 11 of the EU Regulation 833/2014. Its ruling will cast a light on whether the Russian Supreme Court, on a whim, was right in its conclusions, at least when it comes to an EU-seated arbitration with sanctioned parties from Russia.
Conclusion
This Russian Supreme Court’s ruling reflects a growing scepticism towards foreign arbitral institutions, particularly those in “unfriendly” states. The Court has signalled a further move towards the primacy of national jurisdiction amid international sanctions, complicating relations between foreign companies and Russian counterparties and potentially discouraging new connections. It also poses new challenges for dispute resolution lawyers.
Historically, international arbitration has served as a neutral tool for resolving disputes despite political tensions and armed conflicts. The Supreme Court’s Ruling—as another response to or trigger of Russia-unfriendly states—further reduces a chance of widespread peaceful dispute resolution proceedings involving Russian entities. This stance discourages foreign companies, even from Russia-friendly states, from engaging with Russian counterparties, signalling a red flag in due diligence and increasing transactional costs for all Russian companies, including entirely private and not sanctioned ones.
Read more in the article on the site Kluwer Arbitration Blog.