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Media Coverage

Russian Backlash – Will Russian parties be forced home to resolve their legal disputes?

25 September 2012
Solicitors Journal

In 2008 and 2009, the number of Russian cases being litigated or arbitrated in London tripled. A very significant proportion of current cases in London's Commercial and Chancery courts involve Russian or other East European parties.

These include the high profile and high value oligarch disputes which have firmly thrust the English courts into the limelight. Media attention peaked late last year during the trial between former Kremlin power-broker, Boris Berezovsky, and Chelsea football club owner, Roman Abramovich. The reported £3.5 billion claim centred on Berezovsky's allegations that he was coerced into selling his shares in the Russian oil firm, Sibneft, for far below their market value.

Since then there has been no let up. This month, the long anticipated trial of Cherney v. Deripaska began. Michael Cherney, a Ukrainian-born businessman, is suing one of the richest and best connected oligarchs, Oleg Deripaska, for a reported £730 million stake in Rusal, the world's biggest producer of aluminium. Cherney claims that he was Deripaska's business partner and was cheated out of his 13 per cent share in Rusal. Deripaska denies any such partnership and alleges that, in fact, he was a victim of a protection racket, known in Russian as a "krysha". The reputation of both men is key to the dispute: there are allegations on both sides that the other party is engaged in the Russian gangster culture. Cherney will give evidence by video-link from his home in Israel because he is the subject of an international arrest warrant in relation to a Spanish money-laundering investigation. Deripaska has been questioned in relation to the same investigation.

More is to come. In October, Berezovsky will return to the London Court to pursue his claim against Russian metal magnate Vasily Anisimov, the estate of Arkady “Badri” Patarkatsishvili, formerly Georgia’s richest man, and investment company Salford Capital Partners for a share in assets valued between a reported US$2 and US$3 billion. November will see trial begin in Kazakhstan’s BTA Bank’s claim against its former Chairman Mukhtar Ablyazov. Ablyazov is accused of embezzling the bank's assets to the tune of a reported £3.2 billion.

Why are oligarchs and others choosing the English courts?
There are very good reasons why oligarchs and other CIS parties are selecting the English courts as their preferred forum to resolve their legal disputes. English courts are very high calibre. There is a stable legal system in place which guarantees impartiality and fairness, free from corruption. The common law is sufficiently robust and flexible to deal with any commercial dispute. Parties correctly perceive that the playing field is level and justice will be done in the public arena. English judges, barristers and lawyers are highly sophisticated and widely regarded as the best in the business.

Similarly, the London Court of International Arbitration is very popular with Russian and other foreign (as well as English) parties. London is seen as a neutral forum. There is great confidence in arbitrations being governed by English procedural rules and English law with its strong legal history and its settled legal principles. In both litigation and arbitration, a key advantage of London proceedings is the ability to enforce judgments and awards against foreign parties in their home courts.

Russia's reaction
It seems that the Russian authorities may want to stem the tide of foreign litigation and arbitrations on Russian matters.

In May, at the St Petersburg International Legal Forum, Anton Ivanov, the Chairman of Russia's Supreme Commercial Court, openly criticised such foreign proceedings. He referred to the "abuse" of forum shopping in legal actions and advocated that Russia should "guarantee its citizens and entities protection from the unfair competition of legal systems of other states by way of adopting a special law". He said that local judges should have powers to decide whether a foreign court or arbitration tribunal had "exceeded its jurisdiction" by accepting cases against Russian parties. Russian judges should be given the right to annul foreign judgments or arbitration awards, if they feel that Russian parties are unfairly prejudiced. Ivanov proposed punitive measures against those who interfere with Russian interests overseas. In extreme cases, this would include denying entry into Russia and freezing assets in Russia. He also suggested that the Russian Government should provide special insurance to Russians who invest abroad. This would give the Russian Government, as provider of the insurance, a political platform to take on states which "wrongfully" seize Russian assets.

At the same Legal Forum, Russian Prime Minister Medvedev affirmed these sentiments. He also condemned the "prejudiced competition of foreign legal systems" and described Ivanov's plan as a "civilised means of resolving issues".

Shortly after these comments, in June, in a dispute between Sony Ericsson Communication Rus v. Russian Telephone Company, Russia's Supreme Commercial Court Panel held that the parties did not have the right to refer a matter to arbitration in London. Instead, the Panel gave the Moscow Commercial Court jurisdiction to try the case. The Panel concluded that the optional arbitration clause in the distribution agreement was not valid since it gave Sony Ericsson (but not Russian Telephone) the right to submit the dispute either to arbitration or to a court of law. This, the Panel said, was unfair and breached Article 6 (the right to a fair trial) of the European Convention on Human Rights. In previous cases, the Russian courts have not questioned the validity of optional arbitration clauses.

The Panel's decision in Sony Ericsson may indicate that the Russian courts, spurred on by Ivanov's and Prime Minister Medvedev's recent rhetoric, have decided to assert their authority to require disputes involving Russian parties and Russian assets to be heard in Russia.

Implications of Russia's reaction
So what does this mean for current and future Russian cases in London's High Court?

First, given the ready enforceability of English court judgments (and arbitration awards) in other EU Member States and worldwide, it seems likely that parties will continue to claim in England against Russian assets outside Russia. Even where both parties are Russian, they can agree that their contract is governed by English law and is subject to English court jurisdiction. There will be little scope for Russian courts to assert that a party has been unfairly prejudiced or that Russian assets have been wrongly seized if the consent of the Russian party is evident from the underlying contract.

Second, it could potentially take longer to enforce a foreign judgment or arbitration award against a Russian party. An example can be seen in the case of Yukos v. Rosneft. Yukos succeeded in enforcing arbitration awards of US$425 million against Rosneft in Holland, although the awards had been annulled by the Russian courts. The Dutch court found that the Russian court's decision to annul the awards was not impartial. The arbitral awards date from September 2006 but it took until August 2010 for Rosneft to meet that liability. Yukos is now proceeding against Rosneft in England for an award of interest in excess of US$160 million, and the validity of the Russian court's annulment decision will be re-heard in those proceedings.

Third, arbitration may become a preferred means of resolving disputes involving Russian parties, if they are prepared to agree to arbitration as the dispute resolution mechanism. Russia is party to the New York Convention requiring it to recognise and give effect to arbitration agreements and awards. There is no equivalent treaty with Russia for English court judgments. Despite the Sony Ericsson decision, the Russian courts may be more likely to disregard English court judgments than violate the New York Convention by rejecting a compliant agreement or award.

If there is a question mark as to whether a foreign judgment or award will be enforceable in Russia, what impact will there be on London's litigation market? London's litigation market has benefited greatly from the staggering number of often complex and high value cases involving Russian and other East European parties. In the Berezovsky v. Abramovich claim alone, legal fees are reputed to have been in excess of £100 million. It seems likely that, for now, London's High Court will continue to take centre stage for these cases. This can only be a good thing for the English legal system, cementing its reputation as the best place to resolve legal disputes.

Reducing the risk of a foreign judgment or award not being enforced
Parties can take the following steps to reduce the risk that a foreign judgment or award will not be enforced in Russia:

  1. Ensure clarity of drafting of dispute resolution clauses so there is no room for debate as to the intention of the parties entering into the contract.
  2. If parties choose arbitration, following the Sony Ericsson case, they should agree to exclusive (and not optional) arbitration clauses since it was perceived unfairness in a one-sided option which lay behind the Sony Ericsson decision.
  3. Ensure dispute management strategy incorporates consideration of likely difficulties on enforcement and how these might be overcome.
  4. Parties seeking to enforce foreign judgments or awards in Russia should make certain that their contracts do not violate Russian public policy and that they adhere to procedural formalities when entering into agreements and engaging in proceedings.

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