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Exclusive jurisdiction of Russian state courts in disputes involving sanctioned entities

A law amending the Russian Arbitration Procedure Code passed on June 8, 2020 (“APC Amendments”) has granted local commercial courts exclusive jurisdiction over disputes involving Russian individuals and entities subject to international sanctions. The new law applies to two categories of situations.

First category:

The parties have not agreed on forum and Russia has no international treaty that addresses this.

In such a scenario under the new rules, persons affected by sanctions against Russia may, by passing the normal rules of international jurisdiction, commence proceedings in a Russian court at their location.

For example, if a Russian company has a claim against its European partner, but finds itself on the sanctions list, it will not have to spend money on European justice and it would suffice that it files a lawsuit in a Russian court, which is incidentally less expensive.

If, on the contrary, an opponent has begun a dispute abroad against a sanctioned entity, then such an entity may apply to a Russian court with a request for an injunction to prohibit the initiation or continuation of proceedings based on the APC Amendments.

Such an application may also be filed if the dispute abroad has not yet begun, but there are already suspicions that it will begin soon (for example, after receipt of a pre-trial complaint).

If the Russian court agrees with the applicant, and the foreign partner disobeys and continues the proceedings abroad, the Russian court may impose a fine on the foreign partner for the full amount of the claims plus the legal expenses of the sanctioned entity (the decision is usually unenforceable abroad unless the foreign partner has assets in Russia).

In addition, if the sanctioned entity objects the jurisdiction of the foreign forum based on the new law, but the proceedings nevertheless continue, the judgment/award subsequently rendered will be impossible to enforce in Russia.

Second category:

If the parties have stipulated in a contract the procedure for dispute resolution, the new rules of exclusive jurisdiction of Russian state courts over such disputes established by the APC Amendments will still apply, but only if sanctions prevent enforcement of the said contract.

A sanctioned person may then exclude the chosen forum’s jurisdiction by demonstrating that the contract cannot be enforced because of the sanctions. Since the APC Amendments can create significant risk for a foreign party contracting with a sanctioned entity in case of a dispute, it would be advisable that companies in the process of negotiating agreements with sanctioned entities provide for contractual prohibitions for the sanctioned party from exercising such a right; and with respect to existing contracts, it may be useful for counter-partners of the sanctioned entity to execute them anew by confirmation of the binding nature of the dispute resolution provisions in the light of the APC amendments.

The APC Amendments however do not block recognition and enforcement of foreign court orders or arbitral awards where the sanctioned party did not object to the foreign court or arbitration procedure and did not apply for an injunction to prohibit foreign proceedings.

As an illustration thereof, the ruling of May 14, 2021 by the Russian Supreme Court in the case between Russian railcar maker UralTransMash (UTM) and Polish Pojazdy Szynowe PESA Bydgoszcz SA, in which the Supreme Court refused to grant an injunction to halt the SCC arbitration on the basis that UTM had fully exercised its rights in the arbitration and there was then no obstacle for it to have a fair trial, provides for certain comfort for foreign companies which have arbitration clauses with Russian sanctioned entities.

The author Paulina Touroude is the head of Enforcement Risk and a senior member of our Legal Analysis team. 


If you have any questions, please do not hesitate to get in touch with Paulina via email on ptouroude@profileinvestment.com

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