6 July 2003
Russian approach to immunity and enforcement against Russian public entities

Russian approach to immunity of the state agencies has not been crystallized yet. There are two aspects to this problem: (i) immunity of Russian public entities in foreign courts and status of their extraterritorial assets and (ii) standing of foreign public entities and international organizations in Russian courts.

Although the Russian Federation did not ratify 1972 European Convention on State Immunity, there are voices to acknowledge that this document codifies generally accepted international principles, and thus form part of the national law of the Russian Federation.
Position of foreign public entities in domestic proceedings is now characterized by departure from absolute immunity concept and the trend is to acknowledge the functional immunity. Art. 251 of 2002 Arbitrazh Procedure Code, provides immunity from jurisdiction only in respect of public acts, the jure imperii and not the jure gestionis. Notably, according to Art. 401 of 2002 Civil Procedure Code (governing proceedings in courts of general jurisdiction), immunity of the state is still abosolute. Thus the outcome of a case depends pretty much upon the chain of the courts in which the plaintiff ends up.

Case law demonstrates that even the immunity can be waived in respect of disputes arising from both public and private acts of the state. For example, the Supreme Arbitrazh Court has vacated the judgement entered by the lower court in favor of a construction company involved in reconstruction of the building occupied by the embassy. The court has noted that the embassy undertook the construction to perform the public and representative and not commercial activity of the foreign state in the Russian Federation and the judicial acts and submitted the case for re-hearing, proposing to establish the immunity of the agency of the foreign state (embassy) which made a turnkey contract and also the possibility of waiving the judicial immunity by a foreign state represented by its embassy in the Russian Federation and ”a turnkey contract with the Russian building company did not provide for a waiver of the judicial immunity of the foreign state.” (1) The consent to jurisdiction of a national court of the Russian Federation shall be signed by persons duly authorized by the legislation of a foreign state or by-laws of international organization to waive judicial immunity. (2) Implied waiver of immunity is recognized as well. For instance, international organization or foreign public authority that files a claim with a Russian national court is considered to have waived immunity from counterclaim. (3)

Privileges of international organizations are controlled by constituent documents of these organizations and may be differ from general rules applicable to immunity. For instance, in many cases European Bank for Reconstruction and Development has successfully pleaded immunity from jurisdiction of Russian commercial courts in proceedings relating to EBRD loans.(4)

As regards Russian property, the Law on State Immunity of Public Property Located in Foreign Countries is debated in the Parliament. This statute will have a limited effect, being only an argument to consider in foreign proceedings, in which the outcome is primarily controlled by home rules. In domestic proceedings, the state formations (Russian Federation, subunits of the federation and municipal formations) are generally treated equally with both national and foreign persons (which enjoy the national treatment in this respect). However, even though these entities cannot plead immunity from jurisdiction of a domestic court, prosecution and enforcement of claims against the state is quite intricate because of legal and practical issues described below.

General pitfalls facing potential claimants have already been illuminated by case law. These issues should be addressed in pro-rogatory agreements and notably in the course of arbitration involving Russian public entities.

State agencies are hesitant to submit for jurisdiction of foreign courts, but are ready to negotiate an arbitration clause. Normally, a Russian agency would prefer an arbitration on a home turf, i.e. submission to jurisdiction of a domestic arbitral tribunal, such as ICAC in Moscow. However, as a result of negotiation almost universally, institutional arbitration in third countries is elected.

Such clause serves as a waiver from immunity in respect of jurisdiction of an arbitration tribunal. However, the defense of foreign immunity could also be raised in proceedings ancillary to arbitration, namely, interim measures, enforcement and execution against state property. Well-drafted dispute resolution clause should provide for a waiver of immunity in respect of these issues.

Investment disputes are generally within jurisdiction of Russian domestic courts.(5) Russia has signed, but did not ratify the 1965 Convention On The Settlement Of Investment Disputes Between States And Nationals Of Other States. However, a road to submission of investment disputes to arbitration is cleared by multiple Bilateral Investment Treaties (BITs) of the Russian Federation, which typically provide for an ad hoc or ICSID arbitration. First cases relying on these provisions have already been tried.

The purpose of this presentation is to illuminate the pivotal issues to be considered when dealing with Russian public entities.

1. Who are you dealing with?

The first rule is to carefully identify the opposing party and its capacity to contract and than to verify the powers of representation during arbitration proceedings.

The system of state entities in Russia bears a legacy of the Soviet system. Public entities – the Russian Federation itself, its constituent units – regions, cities of Moscow and St.Petersburg, and municipalities have the power to contract in their own name. In some cases these contracts are signed by the executive of the corresponding unit – for instance, by the Government of the Russian Federation. In other cases the private transactions on behalf of the state are concluded by the state agencies acting on the basis of their general or special mandate. This is a first pitfall – most of the state agencies, such as ministries and departments – are treated as legal entities and thus are capable to contract in their name as well as in the name of the government. Such “personal” contracts concluded by state agencies on their own behalf are not immediately binding for the state as a public entity. Thus, the first rule is to identify, at a time of contract and/or submission of a dispute to arbitration, the opposing party – the public entity or a state agency.

The second step is to carefully check the proper mandate of the state agency and authority of the person executing the contract. For instance, in most cases sovereign guarantees require prior approval by legislature on an ad hoc basis or as part of a limit provided in the budget.(6) There is also a third category of state organizations – government enterprizes(businesses) and institutions. Unlike government agencies, their primary purpose is not public administration, but ancillary services. For example, some universities and other educational institutions, some utilities companies are government-owned, but independent legal entities. As a rule, these organizations cannot bind the state and bound and liable by the contracts with their own assets only. Still, in certain cases the government may be called as a supplementary respondent in case the assets of an institution are not sufficient to satisfy the claim.
Similar issues arise during arbitration. A proper defendant shall be identified from the outset and its mandate (as well as capacity of its counsel participating in proceedings) carefully examined to avoid surprise arguments that a sovereign party did not participate in proceedings once the award is submitted for enforcement.(7) Determination of a right defendant to be summoned among intricate system of Russian government is not a trivial task even in domestic proceedings. Supreme Arbitrazh Court has even advised judges to take initiative in helping the claimants in finding the right respondent.(8) To be on the safe side, counsel to private parties in domestic proceedings often summon every possible government agency, so that a proper respondent (as may determined in the course of litigation) would certainly be involved.

2. What to be aware of

With the adoption of 2002 Arbitrazh Procedure Code, proceedings relating to enforcement of commercial arbitration awards, including foreign awards, were transferred under the jurisdiction of commercial courts. This move was well received by business operators, since arbitarzh courts are well-versed in dealing with commercial matters. According to statistics 41 proceedings were filed in arbitrazh courts for issue of writs of exequature in respect of foreign arbitration awards already in 2002. Not all cases were resolved in favor of an applicant. Although the grounds for denying execution are limited to those found in international conventions, a decision to deny enforcement has been upheld in some cases by the highest judicial bodies.

This practice demonstrates that an arbitration clause and even an arbitration award does not warrant recovery. Once a dispute has arisen it is a common practice for Russian entities, to rely on national courts to steer the matter to the favorable outcome. Russian courts are generally not immune to such practices. For instance, the circuit court for the Moscow and Moscow region has acknowledged that it has a jurisdiction to review a claim for annulment of an arbitration clause.(9) Naturally, an arbitration award, which is based on the arbitration clause which is declared to be invalid, has no chance to stand for an enforcement.

Another technique to “torpedo” the arbitration award is third party suits before Russian courts.

In disputes involving validity of private transaction Russian courts treat the facts quite formally and are inclined to grant motions to avoid a contract if substantive grounds are present. Arbitration tribunals are much more careful and tend to give effect to parties’ intent. Should the arbitrators find that a claim of the party to annul the contract is abusive, they attempt to secure the fair solution, even if such fair outcome involves quite creative interpretation the law. After all, a domestic court at the execution stage is generally not able to go into the merits of the transaction to find out that the arbitrators erred in applying law regarding invalidity of transactions. Moreover, in most cases, invalidity would only affect the material provisions of the contract, but not an arbitration clause and thus a mandate of arbitrators. Therefore, it is quite common to see that a defense of invalidity fails in arbitration, while it would have better prospective to survive in a domestic court.

At the same time, enforcement of such award is problematic, particularly if the contract in question was already found void by a national court. Existing case law shows that execution of an arbitration award based on contract, which was avoided by national courts, may be denied . (10)

In response to this situation, Russian parties (including government agencies) that face unfavorable arbitration award often institute preventive proceedings in domestic courts that may ultimately hinder the enforcement – “torpedo” lawsuits. Of course, parties to a contract themselves are barred from contesting its validity before national courts by virtue of an arbitration clause. Such claims are normally filed by third parties: shareholders of a commercial entity and even the prosecutor, if the government agency is involved(11).

Other defensive techniques (used primarily by private entities) are bankruptcy proceedings or general commercial claims by third parties leading to dissipation of assets prior to completion of an arbitration. Once the award has been rendered, a Russian defendant may also attempt to invalidate it in domestic proceedings. A novel provision of the new APC - Art. 230(5) – provides for a jurisdiction of national arbitrazh courts to conduct proceedings to set aside a foreign arbitration award “based on the legislation of the Russian Federation”(12).

3. How to get funds

Upon successful completion of exequature proceedings there is one more step to accomplish – namely, to recover money or property due. Currently this is the most intricate step.

According to contemporary Russian Civil Law, public entities (the Russian Federation, as well as subunits of the federation and municipalities) engage in private relationships act on equal footing with independent parties (Art. 124 of the Civil Code of 1994(13) ). This provision has an effect a general rule of the law.

Similar provisions apply to status of foreign persons (natural and legal) in private relationships. Item 3 of Art. 2 of the RF Civil Code says:

... The rules established by the civil legislation shall apply to the relationships involving the foreign citizens, natural persons without citizenship and foreign legal entities unless otherwise provided by the federal law.

Art. 127 of the Civil Code of 1994 is called Particularities of the Liability of the Russian Federation and of the Subjects of the Russian Federation in the Relationships Governed by the Civil Legislation and Involving Foreign Legal Entities, Citizens and States. It stipulates as follows:

The particularities of the liability to be borne by the Russian Federation and by the subjects of the Russian Federation in the relationships governed by the civil legislation and involving the foreign legal entities, citizens and states are involved, shall be established by the Law on the Immunity of the State and of Its Property.

The very language of the heading of the article and its text suggests that general rules apply to responsibility of the Russian state in the relationships that involve foreign persons. The Law on the Immunity of the State and of Its Property would only set specific, peculiar features unique to the responsibility of the state before the foreign persons. But such Law on the Immunity of the State and of Its Property is not adopted yet in Russia. Absent the special rule, a general rules shall apply to the relationship.

Therefore, the responsibility of the Russian state entities in the relationships involving private parties would be governed by very same rules as the responsibility of the state before domestic persons.

The principle of equal standing dictates that when the state engages in the private relationships and undertakes an obligation, such obligation should be enforcable. This concept is implemented by Art. 126 of the RF Civil Code:

Article 126. Liability for the Obligations of the Russian Federation, of the Subject of the Russian Federation and of the Municipal Formation

1. The Russian Federation, the subject of the Russian Federation and the municipal formation shall be answerable by their obligations with the property they possess by the right of ownership, with the exception of the property that has been assigned on the right of economic domain or the right of operative management to the legal entities, created by the state or municipal formations, and also of the property that shall be owned exclusively by the state or municipalities.

Levy of execution upon the state land and other natural resources owned by the state or municipal formations shall be allowed in cases specifically provided in the law.

Notably, in the context of liability, the state and municipal property is bifurcated. Substantial share of public assets is assigned to the state organizations under the right of economic domain and/or the right operational control. These two legal regimes - the right of economic domain and the right operational control - provided by Russian law can be described as “split ownership”, i.e. the economic rights to these assets are shared by the organization and the state. State property assigned to legal entities under one of these regimes is shielded from attachment and sale to satisfy judgments rendered against public entities (and, in certain cases, even for obligations of the respective institution itself – Art. 120 of the Civil Code).

The remaining part of state assets constitutes the Treasure (казна) of the corresponding public entity(state formation). The Treasure in its turn is divided into (1) budget funds of the corresponding state formation and (2) other state property. Generally the claims against the state are recovered against the Treasure.

However not all the assets of Treasure can be claimed by the creditors. Execution cannot be levied upon the property that under the Russian Law cannot be a owned by anybody else but the state. This category includes, inter alia, certain subsoil natural resources, continental shelf, state border, certain hazardous substances.

Budget funds are intuitively the most convenient target for recovery. It is easier to recover monetary assets and thus then to engage in the attachment and judicial sale of the property. Having realized that, the Government took steps to protect its financial system. The Budget Code (adopted after the Civil Code) provides that public funds enjoy immunity from execution (Art. 239) (14). The writ of execution (ispolnitelnyj list) is condemned to be stalled with a treasury until such time as the corresponding allocation is provided in the budget(15). The only exception are the claims under tort. Constitutionality of these provisions is questionable, but is not tested yet.

In view of these complications, foreign claimants often endeavor to get their awards executed in foreign countries. However, they face problems caused by domestic immunity concepts of respective countries. Foreign courts have also demonstrated their willingness to accept the concept of bifurcation of the state assets by denying levy of execution on assets of a state-owned organization in consideration of an award granted the public entity itself.

These issues have been highlighted in a line of cases involving a Swiss trading company Noga that has obtained two arbitration awards (rendered on February 1 and May 25, 1997) against the Russian Federation and, after unsuccessful setting aside proceedings initiated by the Russian Government, Noga proceeded to enforce the award. Paris Tribunal de Grande Instance granted enforcement in France in Spring 2000 and an intermediate appellate court affirmed that ruling in 2001. The next step was to execute the order. This turned out to be the problem. Bank accounts of Russian diplomatic missions were the first target. On 18 May 2000, the bank assets of the Russian Embassy and several other missions in Paris were seized at Noga's request. Appeal followed and an injunction was vacated by the Paris Court of Appeal (by decision dated Aug. 10, 2000) on the basis of 1961 Vienna Convention on Diplomatic Relations. The court has found that immunities of diplomatic missions are distinct from immunity for execution granted to state, and thus the general waiver of immunity from execution found in the state contract is not sufficient to waive diplomatic immunity.

The other target was the world's largest sailing ship, the Sedov, that was impounded at the Brest boating festival in July 2000. The Russian side has successfully pleaded that the sailing ship is assigned under operational control of a Murmansk State Technical University, which is an autonomous state body with its own budget, that is not accountable for any debts incurred by Russia and thus is shielded from execution of an award rendered against the government as such(16). Finally, in summer 2003 the court in Bobigny ruled that an attempt to seize Sukhoi and MiG fighter planes that participated in air show in Le Bourget was illegal on the grounds that fighter planes, although they are stripped of the weapons and exhibited for commercial purposes, cannot be arrested and sold by national authorities pursuant to 1982 UN Convention of the Law of the Sea.

In parallel proceedings for recognition and enforcement of the awards initiated before the Southern District of New York, Noga attempted to obtain an execution against Russian bank accounts. A New York court has held that the Government of the Russian Federation is distinct from the Russian Federation and thus an award rendered against “the Russian Government” cannot be immediately enforced against public assets(17) . These cases illuminate the need to give careful attention to internal structure of the Russian public sector both at a time of contracting and during arbitration or litigation proceedings.
* * *
It can be summarized that under the Russian law the state is responsible for its obligations with part of its property, particularly with the funds of the corresponding budget. It is a regular practice in Russia that the courts issue judgments and enforcement orders granting award of money against the public entities. These judgments can than be submitted to the banks to obtain money due. However, the claimants may have to wait a long time before corresponding amount is allocated for their claims. This barrier to execution (which is also effective for domestic claimants seeking to enforce their claims against the state) is questionable and may soon be challenged before Constitutional court or even the European court of Human Rights.

  1. Information Letter of the Presidium of Supreme Arbitrazh Court of the RF No. 58 of January 18, 2001. item 5. // Vestnik Vysshego Arbitrazhnogo Suda Rossiiskoi Federatsii. No. 3. 2001.
  2. Decision of the Plenum of Supreme Arbitrazh Court of the RF No. 8 of June 11, 1999. “On Operation of International Agreements in the Russian Federation Governing the Issues of Arbitration Procedure.” // Vestnik Vysshego Arbitrazhnogo Suda Rossiiskoi Federatsii. No. 8. 1999.
  3. Information Letter of Presidium of Supreme Arbitrazh Court of the RF No. 58 of January 18, 2001. Item 6. // Vestnik Vysshego Arbitrazhnogo Suda Rossiiskoi Federatsii. No. 3. 2001
  4. See e.g a Resoulution of Federal Arbitrazh Court for West Siberia. 8 Feburary 2000. Case № F04/311-16/А67-2000
  5. Art. 10 of the Federal Law “On Foreign Investment In The Russian Federation”. 39 I.L.M. 894
  6. See e.g. the Budget Code of the Russian Federation; the Law of St.Petersburg of July 2, 1997 “On the Procedure for Entering into Contracts of St.Petersburg” (as amended by laws of St.Petersburg of 05.05.98 N 62-12, 18.05.98 N 93-16, 29.12.2000 N 693-79, 01.06.2001 N 385-51).
  7. Decision of the Government of the Russian Federation No. 950 Of August 12, 1994 “On The Appointment Of Representatives of the Interests of The Government Of The Russian Federation In Courts Of Law”
  8. Ruling of the Supreme Arbitrazh Court and Supreme Court No. 6/8 of July 1, 1996 “On Certain Questions Related To The Application Of Part One Of The Civil Code Of The Russian Federation” // Vestnik Vysshego Arbitrazhnogo Suda Rossiiskoi Federatsii No. 9, 1996; in Bulleten Verkhovnogo Suda Rossiiskoi Federatsii No. 9, 1996.
  9. Item 3, “Digest of judicial practice of the Federal Arbitrazh court of Moscow Region Обзора regarding litigation involving foreign entities” of May 26, 2000 № 12 (unpublished)
  10. enforcement of an award may be denied for public policy reasons because the award was granting claim arising under the contract, which was previously found void in a separate proceeding before Russian national court. V.V. Yarkov. Commentary to Chapter 30 of RF APC 2002 // Treteijskij sud. No. 3. 2003 page 32
  11. Recent case law demonstrates that courts are now willing to disregard abusive third parties’ claims. See, for instance, Resolution of the Circuit Arbitrazh Court for Far East Region of November 5, 2002 in case F03-A51/02-2/2333 (enforcement granted in spite of a pending third party claim to annul the contract) // Treteijskij sud. No. 3. 2003
    page 75.
  12. for more details see I.Nikiforov. New Regime for Commercial Arbitration in Russia // Stockholm Arbitration Reporter. Vol. 1. 2003
  13. Part One of the Civil Code of the Russian Federation. Law No. 51-FZ of November 30, 1994 /// Sobranie Zakonodatelstva Rossiiskoi Federatsii No. 32, 1994, art. 3301.
  14. Budget Code of the Russian Federation No. 145-FZ of July 31, 1998 // Sobranie Zakonodatelstva Rossiskoy Federatsii No. 31 of August 3, 1998, item 3823
  15. See Decision of the Government of the Russian Federation No. 143 of February 22, 2001 “On the Approval of Rules for Collection of Funds on the Basis of Writs Execution issued by Judicial Bodies to Enforce Monetary Obligations of Recipients of the Federal Budget Resources” // Sobraniye Zakonodatelstva Rossiyskoy Federatsii No. 10 of March 5, 2001, item 959.
  16. For more information see: “Decision of the Brest County Court and the Paris Court of Appeals Rendered in 2000: the Noga case and the Seizure of Sedov.” Observations by Emmanuel Gaillard. // 2000 Stockholm Arbitration Report 119
  17. Compagnie Noga d'Importation et d'Exportation S.A. v. The Russian Federation decision of September 19, 2002 // Mealey's International Arbitration Report, Vol. 17, #10, 10/02, page C-1. For a discussion of this case see Emmanuel Gaillard, “International Arbitration Law Enforcement of Arbitral Awards - The Next 'Noga' Episode” // 229 New York Law Journal