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18 09 / 17

AT THE JUNCTION OF TWO WORLDS

It is becoming more and more common for the Russian business companies to resolve commercial disputes under the British jurisdiction. This approach has certain advantages, however, it bears a significant risk, including for example, loss of profits or damages that can be incurred.

In the beginning of August there was an informal meeting of top managers and business owners organized by the legal firm PARADIGMA together with Jaguar Land Rover that took place in the restaurant Vodniy Royal Yacht club. During the meeting PARADGIMA lawyers told about conflicts that arise in the field of a cross-border law and effective remedies that can be used for the client’s benefit in this type of proceedings.

You can find most memorable parts of the presentation made in a style of «traveler’s tales», based on the real cases of PARADIGMA practice, in the latest issue of SPEAR’S magazine or in pdf format, following the link.

At the junction of two worlds

Bringing legal action in the English courts with an aim to solve commercial disputes is becoming a common practice for Russian business entities. However, even though this way of solving disputes has its benefits, it could also lead to substantial risks such as damages and loss of expected profit.

An unofficial meeting was held in the beginning of August with upper management and business owners alike in a restaurant in Moscow. The meeting was organised by Paradigma law firm and Jaguar Land Rover. During the meeting lawyers talked about the conflicts of law, which arise in the realm of cross-border law and discussed effective remedies that might be used to the benefit of clients in such cases.

You can find most memorable parts of the presentation made in a style of «traveler’s tales», based on the real cases of PARADIGMA practice, recorded and presented by Vladimir Volkov. 

KLIMENT RUSAKOMSKIY

Managing Partner of PARADIGMA

It is a common knowledge that nowadays the majority of complex contracts and business transactions between Russian companies that work in the national and international jurisdictions are concluded under the rules of common law. Therefore, it is now essential to apply Russian and English law avoiding the conflict of these two legal systems. At this point Russian business entities often make mistakes that become evident only at the stage of trial proceedings.

The fundamental problem for the Russian clients when dealing with the English law is either that people drafting legal documents for transaction are either fellow citizens who have studied in London for a few months and obtained some kind of certificate of law or they are in fact specialists of the English law but have no idea about legal industry in Russia.

As a result, the client is faced with incorrect contracts and absurd situations. For instance, in my practice there were several cases when Russian lawyers and even major companies drafted preliminary contracts and they were broadly used. However, under the English law parties cannot rely on a preliminary contract unless the main contract is signed with all essential terms agreed.  In order to avoid such situations knowledge of the aspects of both jurisdictions and an ability to work at the junction of different legal systems are required.  However, specialists who have such knowledge and experience are rare in Russia.

At this point, we would like to present you cases based on our legal practice. We won in these legal actions not because of a legal position or initial rightness of the client but due to the knowledge of technical aspects and remedies used in both English and Russian jurisdictions. Also in these cases, we were supported by our London office.

ANDREY TORYANNIKOV

Attorney at law, the head of judicial practice of PARADIGMA

In English law there is a variety of remedies that are used to protect clients’ interests but these remedies, however, are not common in Russia. One of them is security for costs. The British have used this legal concept since the thirteen century.  By contrast, in Russia compensation of legal counsel fees and payment of advance on costs are almost never used. There are several cases in PARADIGMA’s practice where use of ‘security for costs’ allowed us to force the plaintiff to conclude a settlement agreement even when we were on a losing side.

In one of such cases, our law firm defended interests of a company (the defendant) that presented a large network of supermarkets. The company delayed the multimillion payments, which it was obliged to make under the contract, and as a result, it was bound to pay significant penalty sums. Although the client believed that he was defrauded, according to the legal documents we had the law was on the plaintiff’s side.

 EXECUTION OF A JUDICIAL DECISION AND REAL SATISFACTION OF CLAIMS IS AN URGENT THEME IN THE RUSIAN PRACTICE. CASES OF POSITIVE SANCTIONS IN RUSSIA ARE QUITE RARE

Execution of a judicial decision and real satisfaction of claims is an urgent theme in the Russian practice. Cases of positive sanctions in Russia are quite rare. Often the situation is such that the defendant’s company is trying to go into bankruptcy instead of paying off the debt or is trying to “water down” the assets in order to avoid fulfillment of their obligations.

The case was brought to the London Court of International Arbitration (LCIA). Our task was to bring the plaintiff to a settlement agreement before receiving a judgment against our client. The plaintiff was a special legal entity (SPV), registered in the British Virgin Islands (BVI), a company with small capital, which gave us a clue. We demanded from the court to oblige SPV to secure the costs for proceedings that our client could have encountered - current expenses, compensation for potential losses, the amount of possible counterclaim, etc.

Thus, with the claim to our client of about $ 4 million, we requested to secure the costs in the amount of about $ 8 million. The court in this matter stood by our side, issuing more and more orders making the plaintiff to advance the deposit for security of costs. At some point, they simply did not have enough money. After that, they came out with us to negotiate, and we concluded a settlement agreement.

Similar to the mechanisms of British law that are rarely used in Russian practice are the anti-suit injunction. Unlike in Russia, the percentage of unfounded claims abroad, in England or the US, is very small. This is explained by the fact that in British law there are good procedural mechanisms that allow either to block the filing of unfounded lawsuits, or oblige to reimburse the expenses incurred by the other party in opposing the claim recognized as unfounded. As our practice shows, such a tool effectively operates under Russian conditions. In one of the large cases, the amount of claims raised against our client who did not fulfill the terms of the option contract exceeded $ 150 million. The application was filed with the LCIA. In fact, we were in a losing situation: yes, the client had to pay, redeem shares by option, but he had no money. Moreover, in order to increase the pressure on our client, the plaintiff began filing numerous claims in various jurisdictions - in Cyprus, in BVI and others - although the main contract implied consideration of all disputes only in the LCIA. It was a mistake that we took advantage of. We appealed to the LCIA and showed the groundlessness of such claims, their absolute contradiction to the law.

Lawyers of PARADIGMA asked the London arbitration court to issue an order to prohibit the plaintiff from filing such unreasonable claims. The demand was satisfied. In fact, we blocked the filing of lawsuits around the world, reducing them to the LCIA, where the dispute promised to continue for the next 6-7 years. As a result, we signed a settlement agreement.

 KLIMENT RUSAKOMSKIY

Another legal tool of the same kind is the interim measures imposed by court. Today it is widely used in foreign jurisdictions - Cyprus, Malta, BVI. Their courts consider themselves competent to impose interim measures, even if according to the contract the British courts, for example LCIA, is fixed as a place of litigation. This is a significant point, which is often overlooked by Russian entrepreneurs holding British assets or a holding company registered in the local jurisdiction. Often they are not in a hurry to comply with the order of a foreign court, believing that in Russia the British court will not be able to reach them. However, numerous examples of specific Russian businessmen show that when crossing the border one can receive imprisonment sentence for contempt of court and for failure to comply with the imposed measures. In turn, this can be a important tool that can be used against an opponent in a legal dispute.

Let's say a litigant company - its property, bank accounts or any other assets - is in Cyprus. By submitting a relevant application to the local court, you can get a court order blocking company’s bank accounts and possibility of conducting transactions. Such a decision is made within three days, without a formal submission of the claim, leading to an actual freezing of the company's activities. This will significant and painful for your opponent.

However, using this remedy in the interests of the client and knowing the peculiarities of English law and its application in countries "copying" English law (i.e. Cyprus), we can resist such actions. Suppose, measures that completely have frozen the activities of our client are already imposed. Transactions are prohibited, accounts and property are blocked. In one of the real proceedings in Cyprus we appealed the decision of the LCIA (imposing the said measures) to the High Court in London to appeal.

What most Russian lawyers do not know, quite often it is possible to appeal the measures imposed by independent arbitration courts in the state courts. And that was what we did in that case. High Court - and this is an interesting feature of the English justice - formally not having the right to oblige the LCIA to make a decision, recommended that the arbitration court change or cancel the measures taken against our client. The LCIA complied with the recommendations of the High Court.

DEFENCE AND ATTACK

ANDREY TORYANNIKOV

As the practice of the legal firm PARADIGMA shows, the staff lawyers of the client are good at "peaceful" time. However, during the "war", in the midst of judicial battles, they very often lose. This, in particular, is illustrated by the example of the proceedings in the case of another of our clients - a large oil company, which had to defend its position in a lawsuit with contractors. The company refused to pay for those works, citing their inadequate quality. The tactics proposed by the company's line lawyer turned out to be passive and losing: he offered to prove in court a low level of quality of work on the part of contractors. After the case came to us, we proposed and developed a set of offensive measures related to the presentation of counterclaims to contractors for recovery of losses incurred by our client. We filed counter claims, three times the amount of the initial claim to the company. During the consideration of the case, a decision was obtained in which the contractors were denied satisfaction of their initial claims, and our people were satisfied.

Taking into account the legal firm PARADIGMA’s experience, in-house lawyers are good at "peaceful" times. However, when it comes to the judicial “wars” they very often lose. There is an example of the clients’ case - a large oil company, which had to defend its position in a lawsuit with contractors. The company refused to pay for those works, citing their inadequate quality.

Tactics proposed by the in house lawyer proved to be passive and losing: he offered to prove a low-level quality of work of contractors in the court. After the case came to us, we proposed and developed a set of offensive measures related to filing the counter claims to contractors for recovery of losses incurred by the client. We filed counter-claims for recovery of the monetary sums exceeding the amount of the initial claim to the company by three times. As a result we obtained a court decision under which the contractors claims were refused while our claim was satisfied.

 ELENA GORBATOVSKAYA

Associate of PARADIGMA

 Execution of a judicial decision and real satisfaction of claims is an urgent theme in the Russian practice. Cases of positive sanctions in Russia are quite rare. Often the situation is such that the defendant’s company is trying to go into bankruptcy instead of paying off the debt or is trying to “water down” the assets in order to avoid fulfillment of their obligations.

In one of these cases we were approached by a major manufacturer of power machinery. This company supplied the unique equipment for one of the Moscow plants for a few million dollars. However, the company’s customer began to evade the payment under various pretexts. Moreover, at some point, attempts were made to withdraw completely from its obligations, initiating a withdrawal of assets and going into bankruptcy. Our response was to file a claim to the company-debtor. The claims were aimed not at the result of the proceedings – the recovery of the debt that did not seem possible at this stage, but at gaining the access to internal information of the debtor. Also we tried to obtain information on the actions of the customer taken in order to withdraw the assets and once we got it it allowed us to collect essential evidence of unlawfulness of his actions. In the end the debtor decided to negotiate with us and fully complied with the claim of our client.

In another case, we defended the interests of a bank that held a right of claim for more than a billion rubles to a major graduation enterprise, the pulp and paper mill, against which the bankruptcy procedure was launched. The main creditors of the pulp and paper mill were two large banks. They kept the register, while our client's right of claim was not taken into account. We actively interacted with the interim receiver who were making internal transactions with the debtor's assets, including selling them in the interests of a certain legal entity. Our tactics were to challnege each of these deals. In fact, we hampered the new business of the debtor, who in fact was transferring the assets to its ‘secondary’ enterprises. In the end he decided to settle the debt to our client.

SERGEY SMIRNOV

Attorney at law, head of the criminal legal practice of PARADIGMA

It is very important that a lawyers not only be defending and attacking. It is essential that the “mechanisms of a defence and attack” are effective and bring positive results too. It so happened that the most complex concept in the economic disputes is criminal proceedings. Work with the client in a criminal case would depend on how far the case has gone. For instance it is already quite bad and a client has sought a solicitor’s advice when he already has a writ of summons before him, an office search took place or even he was arrested. At this stage of the proceedings a lot of opportunities to save the case are missed out. However even then it possible and necessary to look for other options to find solutions to the problem and get out of an unpleasant situation with minimal losses.

There are much more positive perspectives when a client comes to us in advance to identify and eliminate potential problems. Prevention of violations of criminal law can significantly reduce the likelihood of negative consequences in the case. Legal audit of the client's business processes that can identify and eliminate the most vulnerable points that can lead to accusations of economic crimes is very effective in this regard. A timely criminal legal audit will eliminate mistakes, reduce existing risks and minimize the financial and reputational costs of the business and its owners.