Anti-Suit Injunctions in Sanctions Disputes in Russia: Main Issues

27/6/2020

New sanctions-related amendments to the Russian Commercial Procedure Code (CPC)[1] entered into force on 19 June 2020. The amendments are informally called the ‘Lugovoy’s Law’ after its proponent in the federal parliament. Their aim is to protect sanctioned Russian companies and their foreign subsidiaries. The amended CPC now gives Russian courts exclusive jurisdiction over all disputes arising out of sanctions involving such companies. As a result, sanctioned entities can now sue in Russian courts despite foreign forum selection clauses. Also, courts in Russia may issue anti-suit injunctions against foreign counterparties of sanctioned companies to restrain parallel proceedings abroad. A breach of this injunction will allow a Russian court to award as damages whatever sums are adjudged against a sanctioned company abroad and refuse enforcement of unfavorable foreign judgments or arbitral awards in Russia. The new amendments are clearly politically motivated, suffer from poor drafting and will undoubtedly worsen the already ailing investment climate in the country.

What does this have to do with the shipping sector?

Several Russian shipping and trading companies or their foreign subsidiaries, as well as vessels, are currently under US sanctions imposed for selling and carrying cargoes to Syria,[2] North Korea[3] and Venezuela.[4] Some trading partners of Russian oil exporters started refusing shipments for fear of being caught by American sanctions against these exporters.[5]

In addition, targeted US sanctions are in effect against vessels, companies and individuals tied to the Nord Stream 2 pipeline project. United Shipbuilding Corporation, Russia’s largest shipyard, and port operators in Crimea have also been specially designated. Meanwhile, the US government has implemented sectoral sanctions against several largest energy companies (Rosneft and NOVATEK), some state-affiliated banks and against the entire shelf oil production sector. Generally, the effect of these sanctions is to prohibit US nationals from entering into certain transactions with sanctioned Russian entities and providing banking services to them.

The European Union imposed sectoral sanctions against the Russian oil industry as well. They mainly come in the form of export prohibitions on products and technologies which may be used for oil production (e.g. drilling platforms, special supply vessels, floating cranes, etc.). Sectoral EU sanctions also forbid providing services related to the production of oil, including the provision of special supply vessels. In turn, personal EU sanctions target several Russian banks, Crimean oil and gas companies, as well as Crimean commercial ports. These sanctions bite by prohibiting European companies from providing financial services to sanctioned persons. More details about sanctions against Russia and their impact on international trade and the shipping sector can be found on P&I Clubs’ websites, e.g., here, here, and here.

What types of disputes now fall within the exclusive jurisdiction of Russian courts?

First, these are disputes to which a sanctioned Russian company is or may become party. This also includes cases involving foreign entities sanctioned due to ties with blacklisted Russian companies or individuals.[6] Second, these are disputes between any entities (foreign or Russian) if a dispute arises out of sanctions against Russia.[7]

The new law’s scope of application is overly broad and poorly defined. Unless there is a forum selection agreement between the parties (which includes choice-of-court and arbitration agreements), courts in Russia enjoy exclusive jurisdiction over all types of disputes involving sanctioned entities, whether tort or contractual. Neither does the law draw any distinction between different kinds of sanctions – any sanctions, whether personal or against entire sectors of the Russian economy, may now bring the case with the exclusive jurisdiction of a Russian court. Similarly, sanctions may be imposed by any state or regional organization (not necessarily by the US or the EU), but it appears, not by international organizations (e.g. the UN).

In addition, this newly found exclusive jurisdiction now extends to purely foreign disputes arising out of sanctions against Russia. This may lead to absurd jurisdictional consequences. For example, a Japanese company enters into prohibited transactions with a Russian entity in violation of US sanctions and now cannot wire payments through American banks to its counterparty in New Zealand under a completely unrelated contract. According to the new law, the ensuing dispute about non-payment may be considered ‘arising out of’ sanctions against Russia and may fall within the exclusive jurisdiction of its courts. This overly broad scope of application of the amended CPC may result in Russia being used as an artificial forum for parallel litigation in entirely unrelated disputes whose only purpose is to thwart legitimate proceedings abroad.

Finally, it is unclear whether the new law applies only prospectively, i.e. to contracts and dispute resolution clauses entered into after 19 June 2020, or not. Considering the overall protectionist sway of the amendments and the fact that they were made to procedural legislation (under Russian law, amendments to procedural laws enter into force immediately and apply to existing disputes), it is more likely that the new law will apply to both existing contracts/forum selection clauses and to disputes already pending.

In addition, some of the amendments appear mutually inconsistent. On the one hand, sanctioned Russian companies and their foreign subsidiaries may sue in a Russian court on the merits only if there are no parallel court or arbitration proceedings under way abroad.[8] On the other hand, a court in Russia cannot dismiss a sanctioned company’s claim –  because it has exclusive jurisdiction.[9] In theory, a Russian court might stay its proceedings pending the outcome abroad,[10] but doing so would effectively undermine the purpose of making the court’s jurisdiction exclusive in the first place. It is more likely that courts in Russia will resolve this conflict in favor of local proceedings. In any event, a sanctioned entity may always apply for an anti-suit injunction (see below), even if proceedings abroad have already started.

 

What if there is a choice-of-court or arbitration agreement between the parties?

Even if the parties agreed to resolve their disputes in a foreign court or through arbitration located outside Russia, a sanctioned company may still sue in a Russian court if it shows that the dispute resolution clause is incapable of being performed because the claimant faces ‘obstacles to access to justice’ abroad due to sanctions.[11] This particular amendment is quite complex and problematic, both in substance and in form.

First, it is unclear which arbitrations are meant here. Under the new law, an ‘arbitration located outside Russia’ may include both arbitrations with a legal seat outside Russia and those where only the physical hearings are conducted abroad. It may cover both arbitrations administered by foreign institutions not licensed in Russia and those having such licenses (e.g. HKIAC or VIAC). In other words, even choosing arbitration under the HKIAC Rules with a seat and physical hearings in Moscow does not guarantee to a foreign counterparty of a sanctioned Russian company that their arbitration agreement will be enforced.

Second, the amendments do not clarify what is meant by ‘obstacles to access to justice’. For example, an arbitral institution’s delay in accepting a claim or taking other procedural steps may arguably count as an obstacle. At the same time, obstacles may mean something more significant or permanent, e.g. a downright refusal by an arbitral institution to administer the arbitration or to accept payment of arbitration fees, or repeated refusals by arbitrators to accept appointments for fear of violating sanctions, or the practical inability to enforce a decision abroad or to pay legal fees (for example, due to prohibitions on providing banking services). It is equally unclear whether such ‘obstacles’ are purely procedural or may include situations when a sanctioned person is denied an otherwise available remedy as a matter of substantive law.

Third, similar questions arise concerning the test that Russian courts will apply to determine whether a forum selection agreement is indeed incapable of being performed. Recent case law suggests that the threshold may be very low. In one case, the 9th Court of Appeal found a standard ICC arbitration clause incapable of being performed merely because: (1) the Russian claimant was included in the US sanctions list and thus could not receive payment through US banks; (2) the defendant could not and would not pay for fear of violating US law.[12] What is more, the court found that sanctions amounted to a fundamental change of circumstances, struck out the arbitration clause along with an English choice of law provision, and replaced them with a choice of Russian law and the Moscow Commercial Court!

Fourth, it is by no means obvious what standard of proof a sanctioned claimant must satisfy to show that the agreement is incapable of being performed due to ‘obstacles to access to justice’. One option would be for the claimant to merely declare, without proof, that such ‘obstacles’ exist, or a court may find that they do on its own motion (low standard of proof). Another possible approach would be for a court to require specific documentary evidence, witness testimony and expert reports (high standard of proof). Given the suspicious attitude of Russian courts towards arbitration and their overall pro-government approach, it is quite likely that the standard for sanctioned companies will be very low.

How do Russian anti-suit injunctions work?

Apart from suing in Russian courts on the merits, a sanctioned entity may now apply for an anti-suit injunction (ASI) to restrain a foreign opponent from starting or continuing judicial or arbitral proceedings abroad.[13] In some respects, the new Russian injunctions are similar to ASIs as they are used in common law countries. It is important to understand that an ASI is addressed only to a party to a dispute and not to a foreign court or arbitral tribunal – a court in Russia cannot restrain them from considering cases. As a matter of principle, nothing in Russian legislation prevented courts from issuing ASIs even before the new law, because the list of available interim security measures in the Russian Code of Commercial Procedure is not exhaustive.[14] Nonetheless, from 2002 onwards, courts in Russia have been consistently refusing to issue such injunctions on the basis that ASIs are not related to disputes in Russia,  impermissibly interfere with arbitration and violate the constitutional right to pursue remedies through arbitral means.[15]

The new law now expressly makes ASIs available, but only to sanctioned entities. ASIs Russian-style are likely to perform two main functions in the future. First, they are punitive measures. If a sanctioned company’s opponent commences or continues parallel proceedings abroad in breach of an ASI, a court in Russia may award to that sanctioned company as damages whatever sums it is adjudged to pay abroad. The measure of such damages may not exceed the amount of the foreign judgment/award plus legal fees.[16] If the opponent has assets in Russia, the sanctioned company may enforce a damages judgment for breach of the ASI against these assets and thus get partly compensated for possible loss of it own property abroad. Second, an ASI is a blocking measure. If the foreign opponent attempts to enforce a judgment/award obtained in breach of the ASI in Russia, a Russian court will be compelled to refuse enforcement.[17]

A sanctioned company is entitled to an ASI if it shows that parallel proceedings abroad are pending or imminent and that the dispute does involve sanctions and falls within the Russian courts’ newly found exclusive jurisdiction. If there is an forum selection agreement between the parties, the sanctioned entity will need to show that it is incapable of being performed (see above).[18]

Despite harsh consequences at home, the practical effect of Russian ASIs on foreign proceedings is likely to be minimal. First, applications for ASIs are not considered ex parte and require the court to notify all parties.[19] Since many foreign defendants are located in states parties to the Hague Service Convention 1965, serving notice of process on such defendants may take very long (6 months to more than a year). By then, foreign proceedings may already come to a conclusion. Moreover, decisions granting ASIs may be appealed within 1 month directly to Circuit Commercial Courts (effectively, courts of cassation), leap-frogging Commercial Courts of Appeal.[20] Although litigation in Russia is relatively speedy and the scope of review at the circuit level is narrow, appeals may take some extra months.

Although Russian ASIs are court judgments, sanctioned entities will likely be unable to recognize them abroad (e.g.  to prevent a foreign tribunal from considering the merits of a case, to enforce a damages judgment for breach of an ASI against the opponent’s assets outside Russia, or to preserve their own foreign assets from enforcement proceedings). Russian court judgments may be recognized abroad either pursuant to a treaty, or based on comity/reciprocity. However, Russia has very few treaties allowing enforcement/recognition of interim judgments (and an ASI would be granted by an interim judgment), or of court judgments in general. Comity/reciprocity will be an unlikely option as well, since Russia itself does not recognize or enforce foreign ASIs or other interim judgments.[21]

How would the amendments affect recognition and enforcement of foreign judgments and arbitral awards in Russia?

The new law does not automatically prohibit enforcement of foreign judgments or awards against sanctioned entities in Russia. However, if a company affected by sanctions objects against the jurisdiction of a foreign tribunal or applies for an ASI in Russia, a foreign court judgment will be denied enforcement on the basis that the dispute is within the exclusive jurisdiction of Russian courts.[22] As regards arbitral awards, courts will likely refuse to enforce them on public policy grounds.

The sanctions-related to the Russian CPC analyzed above have dealt yet another blow to the already ailing investment climate in Russia. The new law significantly increases the risk of dealing with Russian businesses, which now have more tools to avoid potential liabilities. It is expected that many cross-border contracts with Russian companies will be renegotiated or, if not, terminated by foreign investors.

This material and all other materials on RUMLA’s website are intended for general information purposes only and do not constitute legal advice.

[1] Federal Law of 08.06.2020 N 171-FZ.

[2] US imposes sanctions on Russian firm, vessels for transporting jet fuel to Syria/ https://www.spglobal.com/platts/en/market-insights/latest-news/shipping/092619-us-imposes-sanctions-on-russian-firm-vessels-for-transporting-jet-fuel-to-syria.

[3] Treasury Targets Russian Shipping Companies for Violations of North Korea-related United Nations Security Council Resolutions/ https://home.treasury.gov/news/press-releases/sm463; US imposes sanctions on Russian firm, vessels for transporting jet fuel to Syria/ https://www.spglobal.com/platts/en/market-insights/latest-news/shipping/092619-us-imposes-sanctions-on-russian-firm-vessels-for-transporting-jet-fuel-to-syria.

[4] Treasury Targets Additional Russian Oil Brokerage Firm for Continued Support of Maduro Regime/ https://home.treasury.gov/news/press-releases/sm937.

[5] China refuses oil from Russian companies hit by U.S. sanctions/ https://www.worldoil.com/news/2020/3/17/china-refuses-oil-from-russian-companies-hit-by-us-sanctions.

[6] Art. 248.1(1)(1) CPC.

[7] Art. 248.1(1)(2) CPC.

[8] Art. 248.1(3)(1) CPC.

[9] Art. 252(1) CPC.

[10] Art. 114(5) CPC.

[11] Arts. 248.1(4) CPC.

[12] Judgment of the 9th Commerical Court of Appeal of 10.02.2020, case № А40-149566/2019.

[13] Art. 248.2(1) CPC.

[14] Art. 91(1) CPC.

[15] Judgment of the Commercial Court for the North-Western Circuit of 09.01.2003, case № А56-30789/02; Order of the Moscow Commercial Court of 06.05., case № А40-26424/2011; Order of the Commercial Court for the Rostov Region of 06.10.2015, case № А53-23688/2015; Judgment of the 7th Commercial Court of Appeal of 21.04.2016, case № А03-547/2016.

[16] Art. 248.2(10) CPC.

[17] Art 248.1(5) CPC; Art. 244(1)(3) CPC.

[18] Arts. 248.2(2), (4) CPC.

[19] Art. 248.2(6) CPC.

[20] Art. 248.2(9) CPC.

[21] Decree of the Plenary Session of the Russian Supreme Court №23 of 27.06.2017, Art. 52.

[22] Art.  248.1(5) CPC.