09.08.2019 — State Duma Will Consider Bill on Mandatory Jurisdiction of Russian Courts in Cases Involving Persons Affected by Foreign Economic Sanctions

The State Duma adopted in the first reading the bill granting all Russian persons affected by foreign sanctions the right to unilaterally transfer their dispute resolution forum to Russian state courts for any disputes in which they are involved. The bill proposes to enable the sanctioned persons to unilaterally terminate existing dispute resolution clauses, under which they previously agreed to submit disputes to foreign arbitration institutions or foreign state courts, and to demand penalty in the amount of their claims in a Russian court if the case is nonetheless decided abroad.

According to the authors of the bill, currently, persons affected by foreign sanctions are not properly protected in foreign courts. Thus, the legislative amendment proposes that they should be granted the right not only to unilaterally amend their existing dispute resolution agreements with foreign parties, but also to demand penalty equal to the claimed amount if the case is considered by a foreign court.

Furthermore, it is proposed in the bill that the sanctioned persons should have the right to request Russian courts to grant an anti-suit injunction ordering the other party to terminate its pending case before a foreign court or an international organization. In case this anti-suit injunction is not complied with, the Russian court may also impose penalties equal to the amounts claimed in the foreign jurisdiction.

However, the State Duma Committee in charge of this bill already expressed concerns that the proposed amendments would contradict the generally recognized principles of international law and could lead to Russia’s breach of its international obligations, particularly under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). Further consideration of the bill is now scheduled for September, 2019.

08.08.2019 — Customer’s Decision to Extend Construction Deadlines Does Not by Itself Imply Waiver of Penalty for Delay

The State Commercial (Arbitrazh) Court of the Moscow District decided that the mere fact that the parties concluded an addendum to extend construction deadlines does not deprive the customer of the right to claim penalty for delay that occurred before the extension. If the parties wish to avoid this penalty, they should clearly state so in the contractual addendum.  This position has also been previously expressed by the Supreme Court.

In case No. А40-184030/2018 the customer claimed the contractual penalty for delayed construction works from the contractor. The contractor objected to the claim, and argued that the parties had already extended the construction deadlines beyond the period of delay in the additional agreement to the construction contract.

The lower courts agreed with the contractor’s reasoning and rejected the customer’s penalty claim. The State Commercial (Arbitrazh) Court of the Moscow District, however, disagreed with this approach. According to the Court, the extension of deadlines through a contractual addendum does not automatically eliminate the liability for delay that occurred prior to the extension. Consequently, since the parties did not specify in the contractual addendum that the customer waived the right to claim penalty for the previous delay, the customer is still eligible to demand it.

Previously, the same legal position was expressed by the Supreme Court (see Decision of the Supreme Court of the Russian Federation No. 305- ЭС17-6839 dated 31.08.2017 on case No. А40-14774/2016).

07.08.2019 — Estoppel in Tax Law: Tax Authorities May Not Refer to Unlawful Application of Tax Regime if They Previously Confirmed Its Application

The Supreme Court noted that tax authorities may not refer to formal violations in a taxpayer’s choice of the applicable tax regime in case the tax authorities previously confirmed the lawfulness of its application, and accepted tax records and payments without objections. The Supreme Court highlighted that the consistency of the tax authorities’ behavior and the timeliness of their actions against the taxpayer should be considered when imposing tax penalties.

During a 2017 tax inspection covering three years of the taxpayer’s operations, the tax authorities found formal violations in the taxpayer’s application of the simplified tax regime (USN). In particular, the tax authorities found that the taxpayer had lost the right to apply this tax regime back in 2007 and failed to notify the tax inspectorate about its application. Therefore, the tax authorities increased the tax amount to be paid and imposed a fine on the taxpayer.

However, the Supreme Court did not endorse this approach and found that the behavior of the tax authorities, proportionality and timeliness of their actions should also be taken into account when evaluating the lawfulness of taxpayers’ conduct. Since the tax authorities previously accepted tax declarations and payments during the tax period of inspection without objections, they thereby confirmed the lawfulness of the taxpayer’s application of the simplified tax regime. Accordingly, the tax authorities could no longer refer to its misapplication (Decision of the Supreme Court of the Russian Federation No. 310-ЭС19-1705 dated 02.07.2019 on case No. А62-5153/2017).

06.08.2019 — Russian Courts May Refuse Enforcement of Arbitral Awards Under Publicly Funded Contracts as Contrary to Public Policy

In a recent case, the Supreme Court upheld the position that the use of public funds in the performance of a contract may form ground for the non-enforcement of an arbitral award rendered under such a contract, since the principles of arbitration proceedings are not compatible with the public interest and do not ensure openness and transparency of budgetary spending. However, the Supreme Court noted that a mere reference to the public interest behind a contract is insufficient; for enforcement to be refused, the person concerned has to prove the actual spending of public funds under the contract.

In case No. А40-111339/2018 a company initiated enforcement proceedings in Russia to enforce an arbitral award rendered in its favor. The adverse party (general contractor of a Russian state university), however, argued that such enforcement would contradict the Russian public policy,  since the contract was concluded pursuant to an investment program designed to further public needs (as the final beneficiary of the project is a Russian state funded university). Due to the public interest behind this contract, the respondent argued that it was impossible for the parties to submit their disputes to arbitration, because confidentiality of the proceedings and the finality of the arbitral awards are inconsistent with the goals of public procurement.

The lower courts agreed with this reasoning and refused to enforce the arbitral award, which caused the company to appeal these decisions to the Supreme Court. The Judicial Panel on Economic Disputes of the Supreme Court generally upheld the position that Russian courts may refuse the enforcement of arbitral awards under contracts involving public funds. However, the Supreme Court explained that for enforcement to be refused, the respondent has to prove the actual spending of the public funds under the contract, rather than merely refer to the alleged “public interest” in its performance. As applied to the case at hand, the Supreme Court found that the mere fact that the contract was concluded pursuant to a public investment program does not prove that the contract was actually funded by public money. Accordingly, the Supreme Court reversed the decisions of lower courts, and remanded the case for reconsideration (Decision of the Supreme Court of the Russian Federation No. 305-ЭС19-1212 dated 10.06.2019 on case No. А40-111339/2018).

05.08.2019 — Supreme Court Adopted Clarifications on Private International Law

On 9 July 2009 the Supreme Court adopted Plenary Ruling No. 24 on the application of private international law. Among essential clarifications, the Supreme Court emphasized that the notion of “foreign element” for choice-of-law issues has to be understood broadly, and that foreign law may be selected by the parties, although to a limited extent, even without a foreign element in a given relationship. Moreover, the Supreme Court established the criteria for the closest connection test, and for the selection of rules and principles of Russian law that have to be applied regardless of the parties’ choice of law, and made a number of other significant clarifications.

First of all, the Supreme Court indicated that the legally prescribed list of foreign elements, which allow the parties to freely choose foreign governing law, is not meant to be exhaustive and various other circumstances can be regarded as foreign element. In particular, the fact that a transaction or a dispositive event took place abroad may be qualified as sufficient foreign element for parties to freely choose foreign governing law (see Plenary Ruling of the Supreme Court No. 24 dated 09.07.2019).

Moreover, it is permitted to select foreign law, albeit to a limited extent, even if there is no foreign element in a given transaction and all of its aspects are linked to one jurisdiction. However, in this case the parties’ choice of law does not exclude the application of all mandatory (non-derogable) rules of the relevant jurisdiction. Thus, within purely domestic relationships the parties can replace only derogable (default) rules with foreign legal rules, that significantly reduces the potential of applying foreign law to exclusively domestic affairs.

Furthermore, the Supreme Court reiterated that certain rules (the so-called supervening mandatory rules) should be applied by the courts regardless of foreign law chosen by the parties. As applied to Russian law, such supervening mandatory rules include, for instance, restrictions on the acquisition of certain property by foreigners (agricultural land plots, borderline land plots, shares and participatory interests in companies of strategic significance, etc.).

In addition, the Supreme Court established the criteria for the “closest connection test” to determine the applicable law in the absence of the parties’ agreement on governing law. In particular, the Supreme Court emphasized that, apart from obvious criteria (such as the parties’ place of business and the place of contract performance), the courts may also consider whether the selection of a given law would allow to apply universally recognized legal principles, such as the validation principle (selecting the national law that would ensure the validity of the parties’ agreement) and the prohibition of abuse of rights.