The so-called “Lugovoy Act” came into force on 19 June 2020. Introducing amendments to the Code of Commercial (Arbitrazh) Proceedings, this legislation has a goal of providing sanctioned entities from Russia with an opportunity to transfer their litigation and arbitration proceedings home from overseas. To make this work, the law introduces a mechanism under which, upon request of a sanctioned party, the court may issue an injunction order forcing the other party to the proceedings to transfer the dispute to Russia, enforced by a monetary penalty of up to the claim value and litigation costs.
This new legislation sends a special signal to the international business community. On top of the new wave of complex and enhanced sanctions due diligence procedures for Russia-related counterparties, an international business may demand from its counterparties in a dispute certain guarantees that no other matters under Russian jurisdiction are taking place in the enterprise.`
The courts are yet to tailor their position on how they will implement the “Lugovoy Act,” but, in time, it will become clear how efficiently these measures will be applied and enforced.
Here are some of the features of this legislation:
1. Russian courts have exclusive jurisdiction over disputes with the uncertain or undefined place of dispute resolution.
Under the Act’s provisions, the Russian court will have jurisdiction over a case involving sanctioned parties when there is no international treaty to which Russia is a party that establishes jurisdiction, and when the parties did not explicitly indicate where a dispute would be settled. This applies to foreign and Russian entities, as well as individuals.
2. An opportunity to transfer a dispute to Russia even if parties did agree on proceedings abroad
Under Article 248.1(4), the parties may transfer their proceedings to Russia even if they agreed to settle a dispute overseas, but due to sanctions enforcement of an arbitral clause by a party under sanctions, the rights of a party would be diminished or enhanced thereby, denying access to justice to that party. (This would be a scenario in which a party cannot participate in a dispute due to sanctions).
3. Anti-suit injunction in Russia
If a party to the proceedings should become a sanctioned person, that party is entitled to file an injunction request to the Russian court calling for a total ban on the initiation or continuation of the ongoing proceedings abroad. Should the other party to the proceedings refuse to comply with an injunction or similar order, the sanctioned party may be entitled to compensation in the amount of the claim value and litigation costs. (Article 248.2(10)
4. The parties may continue their dispute overseas if they want to
The Act underlines an opportunity for parties to resolve a dispute overseas, as well as an opportunity to enforce the ruling in Russia, despite the sanctions. If a sanctioned party did not claim that it cannot continue the dispute resolution process overseas and did not file a request for the injunction, the ruling or decision can be enforced in Russia on common grounds. (Article 248.1(5))
Artificial elimination of any link with a Russian jurisdiction
In response to the new massive wave of enhanced sanctions due diligence procedures and checks, the international business may demand additional guarantees from its counterparties that no other business matters are covered by the Russian jurisdiction. This can be very important, as some companies might abuse opportunities provided by the Act. For instance, they might artificially enter under sanctions and then attempt to switch jurisdiction to Russia in order to have proceedings in a place that they believe would be more favorable to meeting their unlawful goals.
- There is an increasing tendency towards the exclusive jurisdiction of Russian courts in disputes with a sanctioned element.
- Sanctioned persons are entitled to request an injunction that would bar the initiation or continuation of dispute resolution proceedings overseas, whether in courts or arbitral tribunals.
- A party that fails to comply with such a court order can be subject to a monetary penalty of up to the claim value and litigation costs.