Russian justice goes beyond all limits

The Supreme Court of the Russian Federation (SC) considered the issue of jurisdiction in disputes between Russian business and a foreign company in the absence of an agreement on the choice of court. An example was the case of Transformer Group against the Chinese Sunshine Property and Casualty Insurance. The Arbitration Court of the Krasnodar Territory decided that the dispute was beyond its jurisdiction. The Supreme Court explained that the case can be considered in a domestic court if there is a “close connection with the Russian Federation.” For example, if the place of execution of the contract is a Russian city, and a foreign company has representatives in the Russian Federation, even unofficial ones. The Supreme Court is expanding the jurisdiction of Russian courts, lawyers say, warning of possible difficulties with the enforcement of decisions in China.

The Supreme Court clarified the scope of competence of Russian courts in disputes between local businesses and foreign partners. In March 2021, Krasnodar LLC Transformer Group (buyer) entered into an agreement with the Chinese Changzhou Randa International Trade Co. (seller) agreement for the supply of chrome plated sheets to the Russian Federation through Novorossiysk. The seller insured the cargo in favor of an LLC in the Chinese Sunshine Property and Casualty Insurance Co., the cost of the goods was set at $164.87 thousand, the liability limit exceeded it by 10%.

During unloading in Novorossiysk, a violation of the integrity of the packaging and damage to the goods was discovered. Transformer Group asked the insurer to pay compensation, but did not receive a response and appealed to the arbitration court of the Krasnodar region – it considered that it did not have the competence to resolve the dispute. The appeal and cassation agreed with this. The judicial acts explain that the agreement does not specify jurisdiction, the defendant is a foreign company, does not have property in the Russian Federation and does not conduct activities here, that is, there is no “close connection of the dispute with the territory of the Russian Federation.” In addition, the insurance policy does not indicate the place of performance of the contract, and in its absence, disputes about payment are considered at the location of the insurer.

Transformer Group appealed these decisions to the Supreme Court, claiming a close connection with Russia, where “a significant part of the obligations” must be fulfilled. The case was referred to the economic board, which overturned all decisions. The Supreme Court explained that the absence of a jurisdiction clause does not deprive a party of the opportunity to appeal to the Russian state court if “signs of a close connection of the disputed legal relationship” with the Russian Federation are established. The plaintiff emphasized that according to the contract and policy, Novorossiysk was named as the place of fulfillment of obligations, and damage to the cargo was recorded after its arrival at the Russian port.

Moreover, since the insurer entered into an agreement and determined such a place of fulfillment of obligations, it “actually agreed with the competence of the arbitration courts of the Russian Federation” regarding disputes from the agreement, the panel of the Supreme Court decided. The beneficiary is a Russian company, and the insurer, according to the plaintiff, has a representative office in the Russian Federation, although without formal registration. To determine the international competence of state courts under insurance contracts, the Supreme Court noted, “alternative criteria are traditionally used,” namely the location of the insurer and its representative office, the location of the insured person or beneficiary of the insurance policy. These circumstances were ignored by the lower authorities, so the dispute was sent for a new consideration.

“In the current situation,” Russian businesses regularly seek protection in domestic courts, where disputes involving foreign entities have become noticeably more numerous, notes Delcredere lawyer Yan Goncharov. According to the Supreme Court, in the first half of the year the number of disputes in arbitration courts involving foreigners increased by 60%, to 10.6 thousand (see Kommersant, October 6).

In general, the latest practice of the Supreme Court indicates a desire to expand the jurisdiction of Russian state courts in disputes with foreigners under contracts that do not contain a jurisdiction clause, notes Evgeniy Perkunov, adviser in the dispute resolution and investigations practice of Level Legal Services. Ingvarr partner Igor Kokin agrees that the decision continues “the concept of legal protectionism and develops tools” for the possibility of considering disputes between Russian companies and foreigners in domestic courts.

This is the first case in the Supreme Court on the jurisdiction of disputes with a Chinese company, which “is very important given the turn of Russian business to the East,” adds Evgeny Perkunov. So far, Russian courts “do not have extensive practice” in cases involving organizations from the People’s Republic of China, clarifies Alexey Yadykin, partner in the dispute resolution practice at Stonebridge Legal.

The position of the Supreme Court will contribute to the “standardization of practice in applying the concept of close connection,” believes Igor Kokin. Based on the decision of the board, adds Yan Goncharov, the presence of representatives in the Russian Federation in the absence of an officially registered branch can also confirm a “close connection”. In this case, the plaintiff insured the cargo in Novorossiysk through an agent of the insurance company, which can be interpreted as a representative office in Russia, he explains.

But the consideration of a dispute in the Russian Federation in itself does not guarantee receipt of payment. Partner at the Regionservice bar association, Maria Lyubimova, clarifies that in order to enforce a Russian decision in China, it will need to be recognized in a Chinese state court. Russia and China have a legal assistance agreement dated 1992, which provides for mutual recognition of judicial acts in civil and criminal cases. But this does not mean unhindered execution of decisions, warns Rustam Kurmaev and Partners partner Dmitry Kletochkin. Maria Lyubimova clarifies that the Chinese court may refuse to enforce the decision if it decides that the case falls within its exclusive competence. “The system for recognizing foreign decisions in China is lengthy, labor-intensive and very complex,” the lawyer emphasizes.

Taking into account the position of the Supreme Court on the new consideration, most likely, the arbitration court of the Krasnodar Territory will recognize its competence, lawyers believe. According to Evgeny Perkunov, “the ability to litigate at home” is important for business. “But this does not mean that all disputes involving Chinese insurance companies will automatically be considered in Russian courts,” clarifies Alexey Yadykin. The decision of the board is applicable only if there is no clause in the contract on the jurisdiction of disputes and if there is a close connection with the Russian Federation, emphasizes Dmitry Kletochkin. Most often, large foreign insurers provide a clause to resolve the dispute in arbitration, explains Yan Goncharov. According to Alexey Yadykin, parties to Russian-Chinese transactions choose, for example, the Hong Kong Arbitration Center or arbitration institutions in the Russian Federation and mainland China.

Anna Zanina, Ekaterina Volkova