The pros and cons

Author: | Published: 24 Jun 2010
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As a result of global economic downturn, the amount of litigation procedures involving both domestic and foreign parties increased during the past year in Russia. Statistics show that the amount of court proceedings initiated in 2009 in the arbitrazh courts increased 36% on 2008. Russia's economy is facing a considerable increase in the amount of default disputes in trade, construction, real estate and insurance.

Foreign companies doing business in Russia have several main options of dispute resolution: (i) international commercial arbitration; (ii) alternative dispute resolution; (iii) the domestic court of the foreign party; or (iv) the Russian national court. When litigating a case in the Russian national court a foreign investor should keep in mind that justice in the Russian Federation is conducted solely by courts, which means that no other authority has the power to render an obligatory decision to the parties of the trial.

Judicial power is exercised by means of constitutional, civil and criminal proceedings. The peculiarity of civil proceedings in Russia is its system based on the soviet tradition of division between two systems of courts: general jurisdiction courts and arbitrazh courts. The general jurisdiction courts resolve disputes that involve individuals – divorces, employment, consumer rights; whereas arbitrazh courts are vested with the authority to resolve commercial and economic disputes and to conduct other business proceedings (bankruptcy, corporate and enforcement of foreign arbitral decisions). The majority of business cases that involve foreign companies are heard in the arbitrazh courts.

The Russian system of arbitrazh courts is divided into four tiers. The first tier consists of the Federal arbitrazh courts that operate in each region of Russia. The second tier is formed of the 20 Federal arbitrazh courts of appellate instance that revise decisions of the first tier courts. The third level is the Federal arbitrazh district courts that function as courts of cassation instance (second appeal). The third tier is formed by 10 district courts: Volgo-Vyatsky, east Siberian, far east, west Siberian, Moscow, Volga region, north-west, north-Caucasian, Ural and central district. The fourth and highest tier is the Higher Arbitrazh Court, which serves as a supreme arbitrazh judicial body for settling economic disputes and revises decisions in the supervision order. Despite the fact that Russia is a civil law country where court precedents are not recognised as the source of law, the most important function of the Higher Arbitrazh Court is issuing guidelines and unifications of the arbitrazh court practice for lower arbitrazh courts.

Corruption

When deciding on whether to litigate a case in the Russian court, what first comes to the mind of a foreign investor is a high level of corruption and an illogical number of formalities that cause bribery and corruption opportunities. Foreign management assumes that there are major risks that a fair and impartial hearing will not be afforded and that the judges' opinion can be influenced by his or her corrupted interests, or that the Russian government would seek to interfere in the proceeding.

Worried that an impartial and just decision will not be awarded, a foreign investor recalls the prominent Yukos case and decides not to choose the Russian national court as a place to settle its dispute. However, while certain sectors of Russian society severely suffer from corruption, it is not a particular problem in the arbitrazh courts system. Like the judicial systems of other countries, the arbitrazh courts have ethical rules, procedures to enforce such rules and sufficient liability for breaching the norms. Judges that do not comply with the judicial standards and anti-corruption laws bear disciplinary and criminal liability.

It is true that Russian government authorities will strongly pursue a case in which the state is an interested party, but its position in this regard is not different from that of any other litigant before the court. The Federal Agency on Management of State Property recently initiated a court proceeding against a private company named East Line, which is the sole owner of Domodedovo airport, a massive infrastructure facility and one of the principal air gates to Moscow.

The Federal Agency challenged the privatisation of the airport's assets that took place in the late nineties, based on the lack of proper government approvals from the state and local authorities. The plaintiff's claim was to cancel the privatisation and return the assets to the government. The dispute was long running and court decisions were rendered in favour of each party back and forth. In the end, the Higher Arbitrazh Court in its decision on June 14 2007 6576/06 denied the Agency's claims. This case proves that although the government had a major interest in the outcome of the dispute, the judiciary system did not simply act in accordance with directions of the authorities.

Timing

Once a foreign investor decides to choose the Russian national court as the place to settle a dispute, in the ordinary course of business, it takes one calendar year from initial filing to final rendering of judgment in the court of the last instance. The general timelines for court proceedings include one month for acceptance of a claim in the lowest court and preparation for the court proceeding. Consideration of a case solely by the judge, court proceeding and rendering a decision in the court of the first instance will take from three to four months. Almost every decision rendered by the court of the first instance is appealed in the court of appeal. A party has one month to file an appeal to the appellate court after the decision of the first instance court was rendered. If an appeal was not filed within a month, an interested party is entitled to receive an order of enforcement of the judgment.

The court of appeal revises the case, and if it finds any reasonable cause, sets aside prior judgment and delivers a new decision. Subsequent examination of the case in the court of appeal cannot take more than two months.

After a decision of the appellate court is rendered and entered into legal force, a party during the next two months can file an appeal on the decision to the cassation court. Examination of the case in the cassation court cannot take more than two months. The cassation court examines the compliance of the procedure (though it does not reconsider the case on its merits) and, if it finds reasonable grounds, sets aside prior decision and submits it for reconsideration or delivers its own judgment.

Within three months from the date when the final act was rendered, the judgment can be appealed in the Higher Arbitazh Court. The Higher Court examines whether the rendered judgment violates consistency of the legislation and court practice. Less than one percent of the total amount of claims are examined in the Higher court instance every year and it is considered to be a great success if a case was taken for consideration by the Higher Arbitrazh Court.

Therefore, an initial judgment can be rendered in three months from the moment of initial filing to the court, however challenging the judgment in the higher appellate courts can exceed examination of the case by up to one year.

Enforcement

The Russian enforcement system is sometimes ineffective, slow and does not meet the needs of litigants. Judges' involvement in the process of enforcement ends when their decisions are rendered. If a party chooses to deny the court's decision, it is highly unlikely that further decisions from court or law enforcement authorities will make any difference. A full explanation of the reasons why it is so is beyond the subject of this article; however, lack of respect for the courts' power is no doubt partially responsible.

Nevertheless, sometimes qualitative legal services, constant close interaction, control and negotiations with law enforcement officials can increase the effectiveness of judgment enforcement by using legal means to supervise law enforcement officials in their operations.

One of the main advantages of litigating a case in the Russian court is that judgments are subject to direct execution by the Federal Service of Court Enforcement Officers. In order to enforce a decision of a foreign court or international arbitration commercial court it is necessary to first initiate the proceeding in the Russian court on recognition of the foreign judgment. Recognition of a foreign decision may take up to three months. Moreover, in order to recognise a foreign court judgment the presence of a relevant international treaty is required. Russia lacks such treaties with most global economies including the US, England, Germany and France.

Despite some recent cases where Russian courts recognized the decision of foreign courts based on international law (such as Rentpool, December 7 2009), recognition of a foreign arbitral award is much easier because Russia is a part of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958. If conditions defined in the Convention are met, then a foreign award can be recognised by Russian courts and enforced against the debtor. Russian legislation does not provide any additional rules regarding this subject. The provisions of the New York Convention are incorporated in the Arbitrazh Procedure Code and in the Statute on International Commercial Arbitration (which was heavily rewritten from the Model Uncitral law).

Still, court practice is important. It happens that Russian judges have formed a very conservative and almost protectionist approach to recognising and enforcing foreign arbitral awards. Following this approach on December 22 2005 the Higher Arbitrazh Court issued Information Letter 96 An Overview of the Court Practice on Recognition and Enforcement of Foreign Judgments. Much of the Information Letter concerns award dismissal on public policy grounds, which are of a prime consideration in the process of recognition and enforcement of arbitral decisions in Russia.

Russian legislation does not contain a definition of public policy; however, the Higher Arbitrazh Court lists several examples of the latter in its Information Letter. Whereas Russian statutory legislation does not contain a precise definition of conditions that can qualify as public policy, the Higher Arbitrazh Court in the Information Letter gives at least three examples when public policy concern has been raised:

  • When consequences of enforcing the judgment will be in contradiction with the general principles of equity of the parties, good faith, and adequacy of the liability to the consequences of the contract breach;
  • When award can be dismissed, or the claim for its enforcement rejected if it is based on counterfeit documents; and
  • If a sum awarded is evaluated in a foreign currency that itself does not constitute a ground for denial in its enforcement, because that does not contravene Russian public policy.

The first provision, which implies that the court will re-examine the award on its merits, increases the possibility to employ the public policy objection as compared with internationally recognised arbitration practice. Another important provision is that a number of disputes regarding corporate conflicts in Russian companies (cases on incorporation, reorganisation, property on shares or securities) and real estate in Russia can be resolved only by the domestic national court. Recognition proceedings required for foreign judgments and arbitral awards in Russia area disadvantage as compared with national court justice, not only in terms of losing time for enforcement, but also because of the possibility that the case will be re-examined and lost.

Costs and legal fees

The sizes of state duties in the Russian courts are stipulated in the Tax Code. The amount is defined as a certain percentage of the total amount of claim For example:

  • If the total claim is from R100,001 to R200,000 (approximately €2,500 and €5,000), the state duty of R4,000 is applied plus 3% of the claim above R100,000.
  • If the amount of dispute is between R200,001 to R1 million, the size of state duty is R7,000 plus 2% of the claim above R100,000.
  • If the amount of dispute is between R1,000,001 and R2 million, the size of state duty is R23,000 plus 1% of the claim above R1 million.
  • When the claim exceeds R2 millon, the state duty is R33,000 plus 0.5% of the amount of that exceeds R2 million but not more than R200,000.

Most lawyers in Russia work under one of two strategies of legal fees. The first is charging the client according to hourly rates, the second, which is popular among trial practitioners, is compensating a lawyer with a certain percentage of the awarded amount (a contingency fee). Most of the private advocates condition their fees by successful award of the court or by successful recovery of the debt. However, in January 2007 this way of conditioning legal fees was recognised by the Constitutional Court of Russia as contradictory to statutory regulations and not valid. In its resolution, which has been widely discussed in the legal press, the Constitutional Court of Russia ruled that the payment of a fee under service contract cannot be conditioned by rendering of a certain decision by independent judicial authority. Therefore, the Constitutional Court ruled that agreements on contingency fees are not valid and shall not be protected in courts. However, lawyers continue to include contingency fees provisions into legal services agreements, though whether the client would pay the sum or not is now more than ever dependent on client-attorney relationship.

Generally, legal fees of Russian local advisers are lower than those of international law firms. However, it is hard to define and compare the fees of local legal advisers due to the broad range of rates and limited availability of any official or unofficial domestic rankings. Yet it is evident that costs of legal services of local counsel in Russia are lower than those in many other countries.

Foreign investors and international lawyers are also reluctant to recover damages and lawyers fees as one of the main disadvantages of resolving disputes in Russian courts. The courts do not tend to award large amounts of moral damages or lost profits. Even lawyers' fees that are requested for recovery are always double checked and often decreased at the court's own discretion. However, if recovery of damages under a contract is requested, the will court most likely recover all reasonable and documentary evidenced harm to the counterparty, as well as penalties provided in the contract if such penalties are reasonable ("not over the top").

Litigating a case in Russian national court is an acceptable method of dispute resolution, though a foreign investor should think carefully and analyse all advantages and disadvantages before initiating a procedure. Obtaining a judgment in Russian state courts may seem to be faster and cheaper than in foreign courts or international arbitration tribunals, but it may turn out to be longer due to many appellation instances and unpredictable due to diversified court practice.

A decision issued by the Russian national court would be easier to enforce in Russia because there is no necessity to recognise such decision as there is for foreign court and arbitral decisions. But enforcing a decision of the court may be a major problem. Law enforcement in Russia is poorly organized, leaving loopholes for manipulation by unfair litigants. However, the main disadvantages of resolving disputes in Russian state courts – corruption, poor enforcement and reluctance in recovering damages – can be overcome by qualitative legal support.

About the author

Andrey Zelenin has been a partner at Lidings since 2006. Andrey specialises in providing services to foreign clients operating in the Russian Federation or intending to enter the Russian market.

Involved in day-to-day legal support of foreign businesses in Russia, Zelenin has developed a strong knowledge of practical legal solutions, which help Lidings' clients to successfully operate in Russia and develop and expand their business efficiently.

His areas of expertise include foreign Investment, corporate law, litigation and arbitration, and banking and finance. His experience includes acting as a representative in numerous litigation and arbitration cases, carrying out and supervising due diligence processes and participating in legal teams of major investment cross-border transactions, and advising on corporate matters as well as drafting various agreements.

Zelenin is the co-chair of the Enterprise Development Committee at the American Chamber of Commerce in Moscow. That allows him to receive up-to-date information concerning issues that are essential for foreign business in Russia. He is also a frequent speaker at various legal and business events organised by the leading Russian media organisations and Lidings itself.

Contact information

Andrey Zelenin
Lidings

Moscow, 115114, Russia 11V, Derbenevskaya emb., office V601 Business Center «Pollars»

Tel: +7 495 989 44 10
Fax: +7 495 989 44 20
Email:moscow@lidings.com
Web:www.lidings.com

About the author

Dmitry Pavlov has been an associate at Lidings since 2009. He specialises in providing legal services to foreign clients of the firm operating in the Russian Federation. Throughout his legal career, Pavlov has developed a strong interest and expertise in the following practices: corporate law and M&A; international business transactions; and, banking and finance.

His experience includes acting as counsel of a Korean bank in a multinational bank loan, representing a major Czech bank during the assignment of receivables from a large Russian coal company and advising a major European water supply company on an investment project in Russia.

Pavlov writes articles for Russian and international legal newspapers and magazines. He frequently speaks on business presentations and attends conferences devoted to different legal issues.

Contact information

Dmitry Pavlov
Lidings

Moscow, 115114, Russia 11V, Derbenevskaya emb., office V601 Business Center «Pollars»

Tel: +7 495 989 44 10
Fax: +7 495 989 44 20
Email:moscow@lidings.com
Web:www.lidings.com