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Russia Mediates Everything - New Law At A Glance
Apr 06 2011

The Russian Federal Law on Mediation entered into force on 1 January 2011, and the first case was quick to follow. Last Friday, the Omsk District Commercial Court approved the first mediation agreement in a corporate dispute, breaking fresh ground in the annals of the Russian dispute resolution system. Will it be good or bad for business? Let's skim over the new procedure and return a verdict.

Certain types of mediation are well-known in many countries (including Finland), but are genuinely new in Russian legislation. The Russian procedure of alternative dispute resolution resembles in certain aspects the Mediation Rules adopted by the Finnish Bar Association and involves engaging a respectable person as a mediator upon the mutual agreement of the parties. The mediator negotiates the dispute with the parties and helps them find a reciprocal solution to be formalised in writing. It should be noted that Russian law does not stipulate any forms of court-annexed mediation, which are applied in Finland. The Russian judge is able only to remind the parties unobtrusively about their right to agree to mediation.

The procedure can be applied to any civil (including business), individual employment and family disputes, unless any third party's rights and interests are or may be affected. Hence, public legal actions (e.g. bankruptcy proceedings, criminal proceedings, etc.) must be solved exclusively by state courts.

Is Mediation Mandatory?
Under the Mediation Law, the procedure is not mandatory for the parties and may start either before or during litigation and arbitration proceedings. In the latter case, the court may and the arbitration tribunal must suspend the proceedings for the duration of mediation.

Even if the parties agreed to abstain from the legal action during mediation, these obligations may be surmounted. Pursuant to art. 4 of the Mediation Law, the court should pay no attention to such agreements when one party requires legal protection in the sole opinion of that party. This wording gives grounds to assume that the judge should trust the claiming party and forbear from checking whether the reasons to nullify the mediation clauses actually exist. Furthermore, either party may withdraw the procedure at any point.

Who Will Mediate?
The parties are free to choose one or several mediators acceptable to them or ask a professional mediation organisation to recommend candidates.

A 'respectable person' can be either a professional or amateur mediator. Amateurs can be any legally competent and non-convicted persons above 18 years of age. Professionals must be specifically educated and may join self-regulated mediator organisations, which supervise and ensure the good quality of mediation services. Nevertheless, they are not obliged to be lawyers or bar members. Only professional mediators are admitted to mediate disputes during court or arbitration proceedings.

Fortunately for international businesses, the Mediation Law does not prohibit foreigners from having a go at mediation work in Russia. On the other hand, representatives, lawyers, consultants and other similar specialists dealing with one of the parties as well as public officials and any persons interested in the results of a dispute are banned from acting as mediators.

What Is the Mediation Procedure?
The mediation procedure consists of three stages:

1. Mediation Clause and Mediation Conducting Agreement. At the beginning of business relations, the parties include general mediation undertakings, i.e. a mediation clause, in their main contract. The simplest way to draft this clause is just to make reference to any existing mediation rules. The mediation conducting agreement must be entered into at the beginning of dispute and must contain information on the core of the dispute, the rules of mediation procedure, costs and mediation period.

In the event that the parties failed to include a mediation clause when drafting their agreement and decide to appeal to a mediator in the course of the dispute, they can conclude only a mediation conducting agreement.

2. Dispute Resolution Process. An ordinary mediation procedure should not exceed 60 days from the date of the mediation conducting agreement, but may be prolonged up to 180 days in certain cases, except for procedures started during the litigation.

The main task of the mediator is to cooperate with both parties jointly or separately and to help them reach a mutual understanding. The parties may agree on their own mediation rules, refer to any existing regulations or ask their mediator to think up some rules specifically for the particular case.

The Mediation Law obligates the mediator to keep confidential all information related to the dispute (unless otherwise agreed), forbids him to be a witness in legal proceedings and prohibits courts and arbitration tribunals to accept any references to information disclosed and parties' intentions expressed in the course of mediation.

3. Mediation Agreement. This is the official name of the settlement agreement produced by the procedure and containing, for example, the parties' mutual obligations (e.g. to compensate damages or pay smart-money), conditions and terms for their execution, etc. Parties who fail to solve their dispute must agree to terminate the mediation and try their luck in a court or arbitration tribunal.

Who Pays?
Mediators may work for a fee or for free, but the mediation organisations supporting the professional mediation process will request for remuneration in any case. Similar to Finnish rules, art.10 of the Mediation Law obligates both parties to pay on a 50/50 basis unless otherwise agreed. It is advisable, therefore, to check your mediation documents with care.

Is Mediation a Panacea ?
Mediation is not as simple as it may look, and at least the following substantial legal matters should be taken into account when agreeing on mediation.

1. Enforceability of the Mediation Agreement. When mediation is carried out during court or arbitration proceedings, the court or tribunal is authorised to approve the mediation agreement as an amicable agreement upon the parties' request. This makes it possible to enforce the agreement through the bailiff's office with minimal formalities. In contrast, when mediation is carried out prior to a legal action, which is probably the most common situation, the agreement can be enforced only in court or arbitration hearings bringing to naught the whole long (two to six month) mediation procedure.

2. Avoiding Arbitration. Despite the fact that the parties may agree on mediation in the course of arbitration, the dispute cannot be brought to an arbitration tribunal if the parties included a mediation clause in their agreement by virtue of the Federal Law on Arbitration in the Russian Federation. Hence, parties should not include both arbitration and mediation clauses in their agreements. If they wish to exercise both procedures, they should agree only an arbitration clause in the main agreement and sign a mediation conducting agreement only when the dispute arises, without any preliminary mediation undertakings.

3. Extension of Limitation Period. According to the Civil Code, the limitation period (three years in the most of cases) should be held up from the date of the mediation conducting agreement until the end of the mediation procedure. In this respect, a party who is not ready to bring a lawsuit within the limitation period for some reason may gain up to six months (180 days) of extra time by dragging out a mediation procedure.

4. Choosing a Mediator. Finally, in spite of all mandatory rules and prohibitions, it may be sometimes difficult to find a truly independent and fair mediator who will not act in favour of only one of the disputing parties or protect his or her own interests.In this respect, the Mediation Law surprisingly provides no specific administrative or criminal liability for unfair mediators. The only measure a defrauded party can apply is filing a civil lawsuit against the mediator.

Should We Use Mediation?
That is the most difficult question, at least until some legal experience is accumulated. No doubt, other Russian courts will follow the Omsk District Commercial Court's practice and advise the contending parties to consider mediation. At first glance, the new procedure seems to be quite liberal and handy. The main objective is, obviously, avoiding long, bureaucratic and expensive state court proceedings and less exhausting, but still expensive, arbitration hearings. Moreover, it seems possible to appoint foreigners as mediators and follow foreign mediation rules, which may be familiar to international companies.

To sum up, mediation a good prospective instrument for solving, at least, small disputes. At this early point it is better to 'test' the new dispute resolution system primary in disputes and misunderstandings between well-established business partners who clearly intend to reach and fulfill a mediation agreement of their own free will. However, the best solution remains to avoid disputes in the first place.