Choice of applicable law and arbitration: what has changed for business

Mar, 15 2023

Until 2022, the parties to the agreement provided for an arbitration clause, in which they most often chose English law to resolve disputes. In the current situation, for similar purposes, Russian companies most often choose Russian law, and do not so actively apply to Western arbitration institutions, such as the London Court of International Arbitration, the International Chamber of Commerce and others. Asian and Middle Eastern institutions (Hong Kong International Arbitration Centre, Singapore International Arbitration Center and Dubai Arbitration Center) are now more popular for arbitration proceedings.

Usually, to resolve disputes, the parties to the contract choose the law that is better known to them, previously English law was such a law. In addition, English law allowed between the provisions of the contract and the provisions of the law to give priority to the contract, and this possibility was very attractive to both parties. In this regard, Russian legislation is inferior to English, since the practice of considering civil disputes by courts speaks of the priority of legislation over the provisions of the contract. Therefore, Russian law needs to be improved in terms of law enforcement in order to be of interest to contracting parties and inclusion in agreements.

Despite these advantages, the work of English lawyers has its own characteristics, which are important when choosing the right to resolve disputes. In particular, obligations to disclose information about clients and, in some cases, rules for accepting clients. In the current situation, English specialists are not always happy with Russian clients and often refuse to work with Russian clients, and sometimes the English side delays the decision whether to take on work with Russian counterparties or not, in view of the fact that for this it is necessary to carry out a special procedure through a collegial solutions. Also, to work in any legislation, it is necessary to have a constant practice of working in it, therefore, even if the company previously had experience in litigation in the English law system, now there are difficulties in obtaining the necessary advice from a practicing lawyer. Given all of the above, for Russian companies, dispute resolution in English law raises more problems and questions than certainty, since there is no understanding of how a particular transaction will be considered from the point of view of English lawyers, English courts, and the practice of applying English law. Therefore, priority in arbitration proceedings is now given to Russian law, in which Russian lawyers have much more competence and experience.

Currently, there are several types of organizations that you can turn to to resolve disputes – state courts, mediation and arbitration. When determining the place of dispute resolution, the parties tend to stay within their own jurisdiction for several reasons: conducting legal proceedings in another language in a foreign jurisdiction entails the need to search for foreign experts who can competently convey the position of the party, as well as the fear that a foreign court is likely to stand up to protect “their” side. Therefore, the parties tried to avoid resolving disputes in foreign jurisdictions, and in light of this, arbitration became a more attractive option. However, in 2022, financial obstacles began to arise in cooperation with international arbitration organizations (the inability to accept funds from the Russian party to the dispute), and, accordingly, the inability to initiate the procedure and the attendant inconveniences. In addition, since 2014, the practice of arbitration proceedings has called into question the independence of international arbitration institutions. So, in one of the disputes, which, according to established practice, seemed very simple, an ambiguous decision was made. In 2014, due to circumstances, the Ukrainian company was unable to supply products to Russia and did not return the advance payment, and in arbitration it was decided that since Russia is an aggressor country, the Ukrainian side is not obliged to supply anything to the Russian company and is not obliged to return advance payment, despite the fact that, according to established practice, the customer under the supply agreement, having applied to arbitration, most often received the advance payment back, unless it was a matter of force majeure. Thus, Russian companies can no longer trust arbitration as an independent way to resolve disputes.

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Choice of applicable law and arbitration: what has changed for business
Valentina Khlavich
Managing Partner
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