THE AUTHOR:
Shelal Lodhi Rajput, Associate at Trilegal
In the labyrinth of legal mythos, where Minos once wielded his laws to bind gods, the Russian Supreme Court’s 28 November 2024 ruling emerges as a modern-day Daedalus, crafting walls of jurisdictional exclusivity to entrap Russian entities within a maze of domestic courts, heedless of the Ariadne’s thread guiding global arbitration. Like the Titanomachy, where Olympians clashed with elder gods, this ruling under the Lugovoy Law, defies international arbitration norms, prioritizing state hegemony over international law. Amidst geopolitical tremors, it warns of a world where the once-sacrosanct autonomy of contracts fractures under the sovereign ambitions of nations. Will the global order preserve arbitration’s core, or succumb to a new era where justice is confined to national
Introduction
The Russian Supreme Court (“RSC”) marks another step in Russia’s increasing scepticism towards international arbitration. In its recent ruling in NS Bank v. Lukoil, Case No. 305-ES24-13398, RSC effectively grants Russian commercial courts exclusive jurisdiction over disputes involving Russian-domiciled companies, even where arbitration agreements explicitly provide for foreign-seated arbitration governed by English law. This judicial shift, rooted in the Lugovoy Law (Articles 248.1 and 248.2 of the Russian Arbitrazh Procedure Code), reflects an entrenched state policy of shielding Russian entities from the perceived risks of hostile jurisdictions.
It raises profound questions about the enforceability of arbitration agreements and Russia’s adherence to international commercial norms. This decision, emerging amid geopolitical tensions and economic recalibration, signals a deliberate prioritization of state control over private contractual autonomy.
Background and Facts of the Case
The dispute arose between JSC NS Bank (“Claimant”) and PJSC LUKOIL (“Respondent”) over the payment of RUB 1,283,357.38 in coupon income on bonds issued by LUKOIL Securities B.V., a subsidiary of Respondent, which acted as guarantor. The coupon payment was made to a Russian depository account with Euroclear Bank SA/NV. However, due to the European Union and United Kingdom sanctions against Russian entities, the funds were blocked, preventing Claimant from accessing the payment.
The claimant filed a claim in the lower courts for repayment of the coupon from the Respondent as guarantor. The respondent opposed the claim by citing an arbitration clause in the bond prospectus, which requires disputes to be governed by English law and resolved before the London Court of International Arbitration (“LCIA”), with London as the seat of arbitration. The Arbitration Court of Moscow, the Ninth Arbitration Court of Appeal, and the Arbitration Court of the Moscow District upheld the arbitration clause and dismissed the Claimant’s claim.
The claimant filed an appeal before the RSC, which overturned the decision of the lower courts by highlighting the impact of foreign sanctions on Russian entities and reaffirming Russian courts’ jurisdiction over disputes involving such entities, as per the Lugovoy Law.
Decision and Rationale: Analytical Perspective
The RSC’s ruling rests on three primary legal facets, each of which raises significant concerns from an international arbitration law perspective.
The Expansion of the ‘Foreign Element’ Concept
The Court adopted a broader and more expansive interpretation of a foreign element, traditionally limited to disputes involving foreign parties or assets located abroad. It held that restrictive measures imposed by foreign states on Russian entities could, in themselves, constitute a foreign element justifying the application of Russian exclusive jurisdiction. This interpretation departs from established jurisdictional principles under international arbitration law, where jurisdiction is determined based on the parties’ agreements rather than external factors (geopolitics etc). By allowing domestic economic conditions to dictate jurisdiction, the ruling undermines the party autonomy principles under arbitration agreements.
The Application of the Lugovoy Law Beyond Its Intended Scope
The RSC referred to Lugovoy Law, which grants Russian courts exclusive jurisdiction over disputes involving Russian entities when foreign sanctions create obstacles to accessing foreign courts or arbitration. It was originally designed to protect Russian entities under direct sanctions; this Law has been increasingly interpreted to encompass disputes involving any Russian party, regardless of whether they are personally sanctioned. The RSC herein reinforced this expansion by holding that the arbitration agreement was effectively unenforceable due to the financial and procedural hurdles faced by the Claimant in initiating proceedings in London.
This reasoning disregards fundamental principles enshrined in the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (“New York Convention”), which stipulates that arbitration agreements be recognized and enforced unless they are inherently invalid or illegal. The RSC’s ruling effectively negates arbitration clauses based on speculative or potential difficulties, creating a broad and subjective standard for disregarding arbitration agreements. The Court observed that the sanctions imposed by the EU and the UK against Russian entities made it impossible for the Claimant to pursue arbitration in London.
The Presumption of Foreign Arbitrators’ Partiality
The RSC observed that arbitration in “unfriendly countries”, such as the UK, creates an inherent risk of bias, given the geopolitical context. This presumption challenges the principle of arbitral neutrality. Arbitration institutions such as the LCIA operate independently of state influence, and allegations of systemic bias lack empirical support. By conflating a forum’s national policies with its arbitration institution’s impartiality, the ruling sets a dangerous precedent that could justify any state’s rejection of foreign-seated arbitration on similar grounds. This approach risks creating a fragmented global arbitration regime where national courts unilaterally determine the legitimacy of foreign arbitration tribunals.
Implications for International Arbitration
Through this ruling, the RSC has effectively overridden arbitration agreements that designate foreign forums as the seat for arbitration. This move could deter international parties from engaging in arbitration with Russian entities, given the increased risk that Russian courts will assert jurisdiction regardless of existing agreements. Moreover, the decision may lead to a decline in the enforceability of foreign arbitral awards in Russia, as parties may now prefer to litigate disputes within the Russian legal system to avoid potential jurisdictional challenges.
Uncertainty for Contracting Parties
The enforceability of arbitration clauses, a staple of international contracts, is now at risk of being undermined. The key issue lies in the unpredictability of how Russian courts might approach arbitration agreements, as they could assert jurisdiction in cases that would otherwise fall under an arbitration clause. This undermines the foundational principle of commercial certainty, particularly for foreign companies that enter into agreements with Russian counterparts under the expectation of neutral and enforceable arbitration processes.
Party Autonomy and Kompetenz-Kompetenz
RSC’s ruling severely undermines the doctrine of kompetenz-kompetenz, which dictates that an arbitral tribunal has the authority to rule on its own jurisdiction. By permitting Russian courts to disregard arbitration clauses and retain jurisdiction over disputes, the RSC’s ruling herein creates a precedent that undermines party autonomy and erodes trust in arbitration agreements.
This reflects the fundamental principle of party autonomy recognized in international arbitration law — that parties must be free to select their method of dispute resolution — and that interference by national courts, especially after a valid arbitration agreement, risks undermining the efficacy of international arbitration. This principle was strongly affirmed by the Permanent Court of International Justice in the Mavrommatis Palestine Concessions case (1924) and more recently by the UK House of Lords in Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40, where it was emphasized that arbitration agreements must be upheld unless there are compelling reasons otherwise. The current Russian stance could erode the confidence of international businesses in the principle of party autonomy, particularly when contracting with Russian entities.
Potential Retaliation by Foreign Courts
In response to such a unilateral judicial stance by Russian courts, foreign courts may decline to recognize or enforce judgments that override valid arbitration agreements. This could result in a complex and potentially chaotic legal gridlock. For example, countries that are signatories to the New York Convention may refuse to enforce Russian court decisions that contravene the parties’ explicit choice of arbitration. Illustratively, in M/S Arif Azim Co. Ltd v M/s Micromax Informatics FZE (2024), the Indian Supreme Court ruled in favour of honouring the arbitration agreement between parties as the arbitration agreement confers jurisdiction to a foreign court. Similarly, the correct approach by the RSC in this instance would be to refer the matter to the LCIA, as a valid arbitration agreement exists between the parties. However, it held otherwise and contrary to that.
Fragmentation of International Arbitration Law
One of the most concerning implications of this ruling is the potential fragmentation of international arbitration law. By disregarding fundamental arbitration principles, such as party autonomy and the competence of arbitral tribunals, Russia contributes to the deepening divide between states that respect arbitration agreements and those that prioritize national judicial sovereignty. This growing fragmentation threatens the role of international arbitration as a neutral and harmonized dispute resolution mechanism. Russia’s increasing preference for national jurisdiction in resolving international disputes poses a threat to the harmonized enforcement regime that underpins international arbitration. If other nations emulate this approach, the foundational pillars of arbitration—neutrality, party autonomy, and cross-border enforceability—risk erosion, potentially fragmenting the global legal landscape and undermining arbitration’s role as a reliable mechanism for dispute resolution.
Concluding Remarks
The RSC’s ruling marks a significant shift from established arbitration norms, asserting the primacy of Russian courts in commercial disputes involving domestic parties. This move complicates international arbitration by casting doubt on the neutrality of foreign arbitral institutions and emphasizing national jurisdiction in sanction-related matters. While the decision aims to shield Russian entities from foreign legal constraints, it risks isolating Russia from the global arbitration framework and undermining confidence in the enforceability of cross-border contracts. As the landscape evolves, businesses must adapt their legal strategies to safeguard their arbitration rights and contractual obligations in an increasingly fragmented international legal order.
From a contrarian perspective, it can be argued that the Russian courts’ actions are symptomatic of broader global shifts where national interests are increasingly taking precedence over international norms. This could reflect the growing disillusionment with international arbitration’s ability to provide enforceable and neutral resolutions, especially when geopolitical considerations come into play. However, this argument overlooks the fundamental nature of arbitration as a self-regulating and international system designed to avoid the pitfalls of national legal systems, such as inconsistency and perceived bias.
The RSC’s ruling exemplifies a paradigm shift toward jurisdictional nationalism, challenging the universality of arbitration. Ultimately, if left unchecked, this trend could erode the very foundations of international arbitration, making the resolution of cross-border disputes increasingly uncertain. The coming years will determine whether Russia’s judiciary continues down this path or whether international arbitration will reaffirm its primacy as the preferred dispute resolution mechanism for global commerce.
ABOUT THE AUTHOR
Shelal L. Rajput is an Associate with the Dispute Resolution team at Trilegal, New Delhi. A 2024 graduate of Symbiosis Law School, Pune, he holds a B.B.A. LL.B. (Hons.) degree. Shelal is passionate about legal research, writing and exploring the evolving contours of dispute resolution. His academic and professional interests span constitutional law, human rights, corporate and commercial law, and public law. He also writes extensively on matters of international relations, particularly where law intersects with pressing social and political developments.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
