Stand, arbitration is on. The Government initiates the private arbitration reform

The Government has decided on the plan of the reform of the private arbitration courts (PAC). As a result, the PACs will become, in the lawyers’ opinion, “almost public authorities”: their creation and operation will be controlled by way of issuing approvals to the NGO’s that establish them. But the selection criteria are rather vague, and the refusal cannot be applied against. As a result, the number of the permanent PACs may drop sharply, leaving only large institutions, while the smaller ones will prefer to become ad hoc courts in order to avoid interference from the Government.

After a year and a half of development, the Government draft law “On arbitration (private proceedings)” was submitted to the State Duma on May 8. The explanation note says its adoption “will allow a decrease of the state court workload and stimulate the improvement of investment attractiveness of the Russian Federation and de-offshorization of the Russian economy”. The reform includes state control over the creation and operation of permanent PACs, which will be called “arbitration institutions”. These will only be allowed to be created by NGOs and upon permission of the Government. Ad hoc PACs (for considering isolated cases) will remain, but will not be able to consider corporate disputes, and the state courts will not assist them in obtaining proof.

Lawyers point out that the reform creates a completely different basis for the functioning of the PACs. Andrey Mikonin, Partner of the S&K Vertical advocates’ bureau, says: “This is a new legal institutions of permanent establishments – administrators of arbitration courts on the basis of a state regulator”. Alexander Bolomatov, Partner of the Law Firm "YUST", states: “The PACs used to keep to the outskirts, nobody actually believed in them. According to the draft law, they become nearly public institutions, a branch of state courts – this is the reform’s strongest and also weakest point”.

In order to receive the permission, a PAC must provide the lists of arbitrators (at least 30) and true information on the NGO that establishes the court, its founders and members. The NGO must have a “reputation” and a “significant scope and character of activity”, and all arbitrators on the list must have a ”high professional authority”. A.Bolomatov states: “Such requirements are 100% discretionary. The state will give permissions only to those, whom it wants”. He adds that it will be almost impossible to appeal against refusals. The subject area is also limited: the PACs will be unable to consider the cases of contesting non-normative acts of public authorities, the disputes involving strategic ventures, on purchase and buy-out of JSC shares, as well as public law disputes (labor, inheritance, procurement and privatization). At the same time, active participation of state courts in the PAC activity is stipulated – if there are doubts regarding the competence of the PAC or if there are controversies concerning the choice of arbitrators.

After the Parliament approves the draft law, the law is supposed to enter into force as early as on September 1^st. The Government is planning to approve the procedure of obtaining permissions by the NGOs by December, and from that moment the permanent PACs will have one year to remake their documents. Only the International Court of Commercial Arbitration and the Maritime Arbitration Commission under the Chamber of Commerce and Industry are the exceptions – they will need no permissions.

According to Alexander Bolomatov, due to the impossibility to apply the criminal mechanism, the Ministry of Justice attempts to resolve the problem of dishonest PACs by “civilistic methods, suggesting a simple but not the most efficient way of resolution of the most obvious difficulties – bringing the State to govern the private arbitration”. It will be possible to dissolve the new PACs upon the decision by the founder (the NGO) as well as in the case of discovery of severe or repeated breaches of the law. Andrey Mikonin also pays attention to a very strict state regulation of arbitration and believes that “the regulator’s superpowers may be compensated by making the regulator itself liable to the parties to the dispute” – similar to how the budget is liable for illegal actions of the bailiffs.

At the end of the day, according to Mr. Bolomatov, the reform will enable “a stable and weak development of the PACs, but will eliminate the most cynical offences in the sphere”. Andrey Mikonin adds: “The creation of what used to be called a permanent court of private arbitration is extremely complicated. Only two ways remain for PACs: to join an “approved” arbitration institution or to imitate ad hoc courts, which, at first glance, might become widely used”. Mr. Bolomatov believes that 10-15 permanent PACs will remain in the entire country, which will “take their work much more seriously” and become ever more popular with large companies.