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#27 - JRL 2009-42 - JRL Home
Subject: RE: 2009-#41-Johnson's Russia List - On Backer/ contracts
Date: Fri, 27 Feb 2009
From: "Andrei Liakhov" <Andrei.Liakhov@withersworldwide.com>

Paul obviously is talking only about contracts which contain a standard anglo-american style damages clause. These contracts constitute, most probably, not more than 2%-3% of all contracts being entered into in Russia. Russian law contracts habitually contain a penalties clause which typically would impose a daily penalty for a delay in payment for goods delivered. This could be as little as 0.3% DAILY from the amounts due but unpaid (e.g. Gazprom-Naftogaz contract) to as high as 10% (on, say, car finance agreements).

I would also strongly contest his statement that "CIS and Ukrainian courts routinely fail to award meaningful damages for contractual breach". Firstly on damages court practice is very very different in various CIS states. You cannot compare, say Tadjik court practice to Ukrainian or Belorussian. Secondly on Paul's example of delaying court ruling by 12 months on a US$1,000,000 supply contract governed by Russian law the daily penalties to which the supplier of goods will be entitled will accrue to a hefty sum of US$1,095,000 (doubling the original contract price) and any lawyers who chose to play a delaying games are actually doing their client a huge disservice. Thus I would never agree with Paul's assertion that "Payment obligations are not being met by companies to each other and cannot be compelled in less than 12 to 18 months through the judicial system" - if that would have been the case why would anyone bother to pay anyone else in Russian at all???

Thirdly, the courts (particularly Kazakh and Russian) have a very effective way of enforcing such judgements by issuing orders for "bezakceptnoye spisanie" (orders to debit an account without the consent of the account holder)to banks where the debtor holds its accounts. I have never seen any bank ignoring such an order.

On a separate note majority of supply contracts we advise on come with the three parties agreement (with the bank being the third party) pursuant to which the debtor agrees to the bank performing the creditor's instructions to debit the monies owed from the debtor's account without his authority in a situation when it defaults on payment of the monies due.

Crisis or no crisis this system works perfectly for the majority of Russian companies.

We, unlike fat expat (primarily super arrogant US) lawyers always advise our supplier clients to have their contracts with Russian/CIS buyers be governed by Russian/relevant CIS law which the courts understand and are more likely to uphold and enforce.

Claims in obscure places are typically used as a tool in a corporate raid or as an attempt to make a large company do something with/for, typically a Western lead (Browder comes to mind) minority shareholders group. These are by now virtually defunct (as the principal cause of their existence is gone) with one minority shareholder claim against Rosneft working its way through the appeals court system. Such claims, although always amusing to expat lawyers and creating a lot of publicity have nothing to do with the reasons of the crisis and definitely are not used to collect monies due...

The existence of a transaction could only be challenged when in the court's view there is no contract in writing between the parties. Again, in the ultimate expat arrogance anglo-american lawyers whose approaches dominate in Moscow offices of the majority of international law firms (again it is more evident in US law firms) often insist that a contract must be goverened by US/English law and will go to the end of their tether to persuade an often ignorant client that it is the right thing to do. In reality very few Russian (let alone Kazakh or Ukrainian) courts are likely to view such documents as evidence of what the parties intended to do, rather than as binding contracts. This approach usually is based on two things: (i) the court does not know English/New York law which it is asked to apply and will be reluctant to tell the parties to hire a specialist who would explain it to the court; and (ii) contrary to the very popular expat lawyers' views Russian courts take the requirement that the contract must have some connection to the jurisdiction the law of which is chosen to govern it seriously. As an example we have just managed to successfully contest existence of a written contract between a Siberian based supplier and a Ukrainian purchaser which was goverened by English law. US lawyers who drafted the original documentation failed to exlpain how supply of goods from Irkutsk based firm to a Kiev based client was connected to England (for lawyer members of DJLR - payments were made from Sberbank in Kiev to Sberbank in Krasnoyarsk). I would challenge Paul (or anyone else) to do the same. If you do, I will tell you the name of the US law firm which has a huge egg on its face at the moment - probably they will hire you to fight decent Russian folk like us.

As to IPOs - best Russian companies are still able to raise finance - Peter Hambro Mining PLC just raised 89 million for its Amur region projects. Although the times are really tough we know several Russian companies which are actively preparing for their IPOs either in Q3 '09 or Q1 '10. One has to bear in mind that the first round of Russian IPOs was completed by the end of 2007 and the market, having absorbed a number of mega floats, by far and large was taking a break until Russian regionals would be ready to come to the market. The crisis only stimulated this work as it made the prospective issuers streamline much faster.

As in any other country litigation in Russia cost money. Particularly civil litigation where the claimant has to make a payment into court at the time the claim is filed the quantum of which is calculated by reference to the value of the claim. This deterrs a lot of frivolous claims but is also a bar to litigation to people who lost a lot of money. Coupled with [US] lawyers exorbitant advances requested from clients even before a paralegal does a list of docs received from the client this makes civil litigation available to a "selected few". Even those who can still afford to splash a million or two on lawyers are becoming more and more aware of the uncertainties of the litigation and use claim forms only as a weapon of last resort. I cannot thus agree that "every conflict gets litigated out". Most of business people are going out of the wits to resolve differences with each other peacefully and amicably.