The Google case in the Moscow Arbitration Court: Why the dispute over sanctions may become a precedent

Almost a year has passed since Article 248.1 was introduced to the Arbitration Procedure Code. It establishes that a dispute containing a foreign element falls within the exclusive competence of a Russian arbitration court if there are two qualifying attributes. The first of them is the participation in the case of a person on whom sanctions have been imposed. The second one is that such restrictive measures are themselves the basis of the proceedings. However, the first case, which is really relevant to the merits of such a norm, has come up only now. Artur Zurabyan, head of the Dispute Resolution and International Arbitration practice of ART DE LEX, talks about it in his column.

When can this norm be applied?

Part 1 of Article 248.1 of the APC establishes the following: a Russian arbitration court does not have exclusive jurisdiction, if there is an agreement between the parties on dispute resolution or if the dispute is referred by an international agreement to the jurisdiction of foreign courts and international arbitrations.

The regulation of this article looks rather linear: if there is no dispute resolution agreement or international treaty and the qualifying characteristics of the dispute are present (sanctions as the basis of the dispute or as a «characteristic» of the person involved in the dispute), then a Russian arbitration court will be competent to consider a dispute with a foreign element.

However, part 4 of the same article establishes an exception to the general rule: a Russian arbitration court will also have exclusive jurisdiction over a “sanctioned” dispute in cases where an agreement to resolve a dispute between the parties is unenforceable due to obstacles to access to justice by a sanctioned person involved in the dispute.

Thus, based on the literal content of article 248.1 of the APC, the exclusive competence of Russian arbitration courts includes disputes involving persons in respect of whom restrictive measures are applied, if the parties' agreement (or an international treaty) does not assign the consideration of such disputes to the competence of foreign courts or international commercial arbitrations. Unless an agreement on an arbitration clause is unenforceable due to the application of restrictive measures (sanctions) to one of the persons.

The difficulties the courts will face in applying this article are evident. The following issues have proved particularly difficult:

1. Who is included in the group of «persons subject to restrictive measures»?

2. What can be considered as obstacles to access to justice for the purpose of applying Art. 248.1(4) of the APC?

The application of Article 248.1 of the APC RF in disputes involving persons who are actually on the sanctions lists (specially designated nationals and blocked persons list, SDN) does not raise questions. Up-to-date lists of individuals subject to restrictive measures are published on the official websites of foreign government agencies in charge of monitoring compliance with sanctions laws. However, in a recent court decision dated April 20, 2021 in case No. A40-155367/2020 (Tsargrad v. Google), the Moscow Arbitration Court applied an expanded approach to the definition of sanctioned persons, known abroad as the «50% Rule».

The essence of the rule is as follows: if an SDN owns directly or indirectly more than 50% of the share capital of a legal entity, such company is also considered an SDN, with all the negative consequences of the status. In other words, even if a person is not directly listed as an SDN, it will be considered a sanctioned entity if it is closely related to an SDN corporately.

Thus, the circle of sanctioned persons in clause 1 of part 2 of article 248.1 of the APC is actually wider than the literal text says.

The approach of different courts to the problem

Regarding obstacles to access to justice abroad. The issue is interesting both in terms of procedural merits and in terms of the distribution of the burden of proof.

Historically, impediments to access to justice have been viewed primarily in terms of the actual ability to get physically into the courthouse and bring a lawsuit. However, there is reason to believe that the legislators proceeded from a broader approach related to the fact that sanctioned persons have objective difficulties in protecting their interests related to the need to obtain licenses from sanctions regulators by legal representatives, special permits to pay fees, restrictions on physical appearance in court, etc. In addition, and perhaps most importantly, if the actions of the opponent, which are the basis of the lawsuit, are caused by the application of sanctions, then with a very high probability the plaintiff cannot claim that the court of the state that applied the sanctions will make a decision contrary to the sanctions order. That is, from the point of view of the Russian legal order, such a decision would be a priori unjust.

Thus, we can say that the mere application of sanctions against a person involved in a dispute, provided that the dispute involves the application of a sanctions regulation, creates a rebuttable presumption of obstruction of access to justice. The contrary must be proved by the defendant (the other party to the dispute).

Thus, in the case of Tsargrad v. Google, the Moscow Arbitration Court indicated that, by virtue of paragraph 4 of Art. 248.1 of the APC, to apply the exclusive jurisdiction of arbitration courts of the Russian Federation it is sufficient that restrictive measures are applied to one of the persons involved in the dispute, creating obstacles to access to justice. Accordingly, even the application of sanctions restrictions with account of the actual circumstances of the dispute is sufficient for the exclusive competence of the arbitration courts of Russia. At the same time, in a separate ruling dated December 18, 2020 in the same case, the court took note of the circumstances stated by the plaintiff that prevented him from access to justice.

In fact, a similar approach is contained in the judgment of the Arbitration Court of the Ural District on March 10, 2021 in case No. A60-36897/2020. The difference is, according to the applicants, as follows: when submitting the original draft of the Federal Law, which introduced article 248.1 of the APC into Russian legislation, the legislators proceeded from the fact that restrictive measures in respect of a Russian person already indicate the impossibility of exercising the rights to judicial protection abroad. And the opposite cannot be established regardless of the evidence presented. However, the court did not agree with this interpretation of the article and came to the conclusion: if there is evidence of the absence of obstacles (presence of representatives on the initiated dispute, the absence of difficulties with payments, etc.) for the purpose of applying Article 248.1 of the APC, then the party must, in referring the relevant claim to the state court, prove the circumstances which, in its opinion, prevent the consideration of the dispute in the arbitration court. In short, the circumstances, which do not allow the parties to the legal relations to exercise the right to dispute resolution in the form agreed by them in the arbitration clause.

The question is what balance will be formed in practice and where will be that reasonable amount of evidence of the absence of obstacles, which will place the burden of proving the existence of such obstacles to access to justice on the sanctioned person. In this situation, it should be taken into account that, as a general rule, the opponent of a sanctioned person has certain advantages in proving the fact that the sanctioned person actually has access to justice, because such a counterpart is generally better aware of his sanction right.

It should be borne in mind that the existence of obstacles to access to justice, despite their apparent «legal impeccability», places an excessive burden of proof on the party, which is in fact a negative one (lack of access to justice).

Another important conclusion from the decision of the Moscow Arbitration Court

It is also interesting that in the Tsargrad v. Google case, the court for the first time assessed the financial sanctions of the United States and the European Union for their compliance with the public policy of the Russian Federation in a situation where their application as a ground for non-performance of the contract was invoked not by a Russian entity, as in the famous turbines case, but by a foreign legal entity. Thus, the court ruling notes that these restrictive measures are norms of public law of the United States and the EU, that is, they are prescriptions of foreign authorities to impose a number of public-law restrictions on the rights and obligations of individuals. Since public law is not extraterritorial, the U.S. and EU sanctions laws cannot create rights and impose obligations on entities outside the U.S. and EU jurisdiction, which is consistent with the fundamental principles of non-interference in the internal affairs of states and the sovereignty of states.

The court found that the foreign sanctions were contrary to Russian public policy and hence concluded that the defendants' conduct in reneging on the service agreement was unlawful. In other words, since the sanctions could not serve as a legitimate basis for withdrawal from the contract, and no other grounds for withdrawal have been asserted or proven by the defendants, the defendants' actions are unlawful.

In addition, the court came to another significant conclusion in its decision: in principle, Google had no reason to withdraw from the contract, because its performance is not aimed at the transfer of property benefits from the plaintiff to the defendant and vice versa, which prohibition is the purpose of the financial sanctions.

Time will show how case No. А40-155367/2020 will develop, but undoubtedly, its conclusions will be a precedent for the Russian legal practice.

Link to the article: https://pravo.ru/opinion/231291/