In 2012, the Presidium of the Russian Supreme Commercial (‘Arbitration’) Court adopted a number of newsworthy resolutions relating to recognising and enforcing foreign courts’ decisions and awards, and concerning disputes involving foreign parties. The approaches formulated in these case decisions should be taken into account not only by those involve international proceedings but also parties to cross-border transactions when developing procedures for resolving eventual conflicts.
Resolution No. 1831 / 12 of the Presidium of the Supreme Arbitration Court dated 19 June 2012 featuring case No. А40-49223/11-112-401 “Russian Telephone Company CJSC v. Sony Ericsson Mobile Communications Rus”.
The Presidium of the Supreme Arbitration Court has resolved that the parties’ interests are violated if the choice of clause (the clause selecting a forum to resolve disputes) gives the right to file a claim with a state court in Russia only to one party to the contract: this contradicts the principle of granting equal procedural opportunities to all parties to defend their rights and legitimate interests. Under such circumstances a party whose rights were infringed by this discriminatory provision may not be denied the right to file a claim with a state court, and this party’s claim must be considered, even if there is any effective arbitration clause.
Russian Telephone Company Closed Joint Stock Company (“RTC”) and Sony Ericsson Mobile Communications Rus Limited Liability Company (“Sony Ericsson”) entered into a contract containing an arbitration clause which was agreed on by both parties. That arbitration clause stated that there would be no restriction on “.... the right of Sony Ericsson to file a claim with a court of the competent jurisdiction seeking recovery of amounts due for Products delivered”.
RTC filed a claim with the Moscow Arbitration Court in relation to the above contract, demanding that Sony Ericsson fulfil its obligation to replace a number of cell phones with similar cell phones of the requisite quality. However, Sony Ericsson made an application to the court of first instance that the claim be dismissed, as the contract contained a clause that any dispute that arose should be considered by an arbitration tribunal; the parties named the arbitration tribunal which was to have jurisdiction to arbitrate disputes between them; the International Court of Arbitration at the International Chamber of Commerce is a body that remains in existence; a Russian state court may not resolve which procedural rules and regulations an arbitration tribunal may apply in initiating and settling a dispute; the parties did not rule out the possibility that regulations other than the Rules of Conciliation and Arbitration of the International Chamber of Commerce, which are no longer in force, may be applied to resolve a dispute. In view of the above, the court of first instance held the arbitration clause to be enforceable.
As a result, the Moscow Arbitration Court ruled on 8 July 2011 that the claim be dismissed under article 148(1)(5) of the Russian Arbitration Procedural Code. By its resolution dated 14 September 2011, the Ninth Arbitration Appeal Court upheld the ruling of the court of first instance. While the appeal court agreed with the conclusions of the court of first instance, it also pointed out that there are no grounds to consider the arbitration clause in the contract to be invalid, unenforceable, or no longer in force since the parties, when entering into the contract, had observed the freedom-of-contract principle. This principle stipulates that the terms and conditions of a contract, including the provisions concerning dispute resolution and the procedure for referring certain disputes to the arbitration tribunal, should be set at the parties’ discretion. The Federal Arbitration Court for the Moscow Region on 5 December 2011 upheld the ruling of the court of first instance and the resolution of the appeal instance.
It should also be noted that the Moscow Arbitration Court has already considered whether the above arbitration clause was valid and enforceable in the context of case No. А40-36609/11-56-324. In its ruling dated 25 April 2011, the same court determined that the above arbitration clause was indeed valid and enforceable.
However, the Presidium of the Supreme Arbitration Court did not agree with the conclusions of the lower courts and issued on 19 June 2012 Resolution No. 1831/12 in the case in question. where it revoked their decisions and returned the case file to the court of first instance for re-examination. In the opinion of the Supreme Arbitration Court, the courts did not take into account that the agreement (the clause) about settlement of disputes generally implies that, apart from elements of an arbitration clause, there are also elements of a prorogation agreement, since it sets out that disputes may be referred to international commercial courts and state courts.
Such prorogation agreement, as stipulated in the Resolution, formalises the right of only one party to the contract, i.e., Sony Ericsson (the seller), to refer disputes to a state court. Together with the provision concerning the resolution of disputes that relate to the arbitration clause, such prorogation agreement gives priority to Sony Ericsson as compared with RTC, because only the former is given the right to choose the judicial means (either a state court or non-state arbitration) to resolve disputes, accordingly, the agreement creates an imbalance between the parties’ rights.
The Presidium stressed that those who are involved in such a relationship being equal before the law is one of the basic principles of civil law. In addition, the standards of ensuring a fair trial of civil disputes, which are intrinsic to state justice, also apply to alternative ways of resolving disputes, for instance, to non-state arbitration proceedings. To guarantee judicial protection and a fair trial, the parties should be given, on an equal footing, a genuine opportunity to communicate to the court their position regarding all aspects of the case, since fair, full and effective judicial protection is possible only if this condition is met. The adversarial principle and the principle of equality before the law presuppose that parties involved in judicial proceedings will be granted equal procedural opportunities in respect of their rights and lawful interests. The Presidium also underlined that, according to the opinion of the European Court of Human Rights, the parties to civil proceedings should have equal procedural rights and that the European Convention for the Protection of Human Rights and Fundamental Freedoms (1950) guarantees the right of one party to be in an equal position in relation to the other party.
Therefore, based on the general principles for protecting civil rights, the Presidium of the Supreme Arbitration Court concluded that the dispute resolution agreement may not authorise only one party to the contract (the seller) to apply to the relevant state court and at the same time deprive the other party (the buyer) of this right. If such agreement is concluded, it the balance of the parties’ interests is not preserved and the agreement is consequently void, and “any party whose right has been infringed by this dispute resolution agreement is also entitled to address the relevant state court and exercise a guaranteed right to be protected before court on conditions equal to those of its counterparty”.
The stance of the Supreme Arbitration Court in this matter will obviously affect the practice of concluding and performing arbitration and prorogation agreements, most notably among the parties to international distribution agreements. It should be noted that this resolution of the Supreme Arbitration Court is more than just a landmark – it is revolutionary for the legal relationship between a supplier and a distributor. Similar non-equal prorogation clauses were previously included in contracts virtually by all foreign suppliers who intended to have the opportunity to collect amounts payable, or, more rarely, to demand in court at the Russian distributor’s location that the goods be returned. In this situation the Russian party only could only have recourse to international arbitration with a view to safeguarding its rights. Now Russian courts will invalidate any such unilateral jurisdiction agreements. Moreover, any judicial decisions of state commercial (‘arbitration’) courts that are in force may, if there is no other barrier to doing so, be reconsidered by virtue of article 311(3)(5) of the Arbitration Procedure Code. This is provided that such decisions were taken in relation to cases with similar facts and circumstances and the state courts took them interpreting a rule of law in a manner inconsistent with the interpretation set out in the resolution referred to above.
It is obvious that in the context of the recent changes in the judicial practice, the parties to international contracts should, wherever possible, review the existing agreements in terms of the procedure for dispute resolution. It is also necessary to pay attention to the fact that the stance of the Supreme Arbitration Court concerning this case was based on common principles of civil justice, such as the parties being treated equally and having equal access to justice. Taking this approach into account, we may suppose that the highest court will also apply a similar approach to other unequal procedural agreements of the parties.
Resolution of the Presidium of the Supreme Arbitration Court No. 7805 / 12 concerning case No. А56-49603/2011 “FRINGILLA CO. LTD v. ООО Rybprominvest, ООО Produktovye Terminaly, ООО Morskoy Rybny Port and ООО Konmark” dated 23 October 2012
The Presidium of the Supreme Arbitration Court resolved that a foreign court applying any national public legislation to a transaction between Russian legal entities involving a participation interest in a Russian limited liability company (for which the Russian acronym is “OOO”) may cause a detriment to Russia’s sovereignty; no award of a foreign court delivered in relation to rights and obligations of a third person who did not participate in the proceedings and is not party to a prorogation agreement may be recognised and enforced in Russia to the corresponding degree; if a foreign court violates the exclusive competence of Russian commercial (‘arbitration’) courts, this will be a ground for refusing to recognise and enforce the award of the foreign court.
In line with the agreement dated 20 October 2006 (the “agreement”, or the “loan agreement”), EIMSKIP HOLDINGS LTD (the lender), later renamed FRINGILLA CO. LTD (“FRINGILLA”), undertook to grant a term loan in the amount of USD 44,000,000 to Rybprominvest Limited Liability Company (“Rybprominvest”) (the borrower) to refinance the purchase of membership interest in Morskoy Rybny Port Limited Liability Company (“Morskoy Rybny Port”), Produktovye Terminaly LLC (“Produktovye Terminaly”) and Romiss LLC. The parties made their loan agreement subject to English law.
The agreement included a provision according to which the borrower, provided that it complied with all laws and directions that may apply to it, may not enter into (and ensures that its subsidiaries refrain from entering into) one or more transactions (whether these are related parties transactions or not, and whether they are voluntary or not) aimed at selling, leasing, transferring or other disposing of any of its assets without the lender’s prior written consent.
Apart from the general procedure for considering disputes in accordance with the Arbitration Rules of the London Court of International Arbitration and, in particular cases, the procedure applicable in the English courts, the loan agreement also envisaged that the lender had a unilateral right to initiate proceedings in relation to the dispute in any other courts having the necessary jurisdiction. In particular, insofar as this is allowed by law, the lender was entitled to initiate concurrent proceedings in any number of jurisdictions.
Further to the action filed by FRINGILLA, the District Court of Limassol (Cyprus) delivered an award dated 11 November 2010 concerning case No. 4019/2010, by which it ordered Rybprominvest to pay the lender USD 16,473,642.17 (or EUR 13,011,650.46) which arose under the loan agreement, plus interest of 15% per annum on the above sum.
In the meantime, during the proceedings involving case No. 4019/2010 which took course in the District Court of Limassol, FRINGILLA became aware that Rybprominvest and Produktovye Terminaly, acting by virtue of notarised sale and purchase agreements for a membership interest in a limited liability company dated 14 October 2010 and 18 November 2010, disposed of 58.5 percent and 23.46 percent of their respective ownership in the issued capital of Morskoy Rybny Port to Konmark Limited Liability Company (“Konmark”).
Invoking the violation of the agreement, FRINGILLA filed with the District Court of Limassol a claim seeking to invalidate the transaction entered into between Rybprominvest and Konmark, which aimed to dispose of a membership interest in the issued capital of Morskoy Rybny Port at a nominal value of RUB 1,466,250, and seeking to invalidate the license issued by Rybprominvest to its subsidiary, Produktovye Terminaly, authorising the disposal to Konmark of the membership interest in the issued capital of Morskoy Rybny Port at a nominal value of RUB 3,656,250. On 7 July 2011, the District Court of Limassol upheld the claim with regard to case No. 4019/2010 in full.
FRINGILLA filed a motion with the Arbitration Court for Saint Petersburg and the Leningrad Region requesting that this award be recognised and enforced in Russia; however, the Arbitration Court for Saint Petersburg and the Leningrad Region ruled on 9 December 2011 that the motion be dismissed. In its resolution dated 6 March 2012 the Federal Arbitration Court for the Northwest Federal District upheld the ruling of the first instance court. The court relied on the fact that the above award of the Cyprus court contravenes Russian public policy and violates the exclusive competence of Russian courts. FRINGILLA requested that these decisions be overturned by filing the relevant motion of supervisory review with the Supreme Arbitration Court. In their statements of defence, Rybprominvest and Konmark requested that the decisions being challenged be left unchanged.
When it examined the validity of the parties’ arguments, the Presidium of the Supreme Arbitration Court concluded the following. Article 241(1) of the Russian Arbitration Procedure Code stipulates that awards and decisions of foreign state courts delivered in the context of disputes and other lawsuits arising from entrepreneurial and other business activities (foreign courts) are recognised and enforced in Russia by state commercial (‘arbitration’) courts if such recognition and enforcement are provided for by any international treaty to which Russia is a party, and by federal law. According to article 23 of the Treaty of Legal Assistance in Civil and Criminal Cases between the Union of Soviet Socialist Republics and the Republic of Cyprus dated 19 January 1984 (the “Legal Assistance Treaty”, or the “Treaty”), the parties agreed mutually to recognise and enforce decisions delivered in civil lawsuits. By virtue of article 12 of the Treaty, legal assistance, which also includes, according to article 3, recognising and enforcing decisions delivered in civil lawsuits, may be denied if such legal assistance is capable of impairing sovereignty or public security, or contravenes the basic legislative principles of the addressed contracting party (public policy).
Based on the case file, the courts established that the District Court of Limassol had invalidated the transaction concluded by Russian companies and aimed at selling a membership interest in a Russian company, relying on the fact that this transaction contravenes the Law of the Republic of Cyprus regarding property being fraudulently transferred. Accordingly, the Supreme Arbitration Court resolved that “if a foreign court extraterritorially applies the public law of its country to a transaction which was entered into by Russian legal entities in Russia and had as its subject matter a membership interest in the issued capital of a Russian limited liability company, this may impair the sovereignty of the Russian Federation and prevents, by virtue of article 12 of the Legal Assistance Treaty, the award of the District Court of Limassol dated 7 July 2011 regarding case No. 4019/2010 from being recognised and enforced to the above extent”.
It should be emphasised that the Supreme Arbitration Court obviously did not invent any new legal ground for refusing to recognise and enforce a foreign judicial decision, but directly applied the provision of an international treaty which covers these legal relationships and prevails by virtue of article 15(4) of the Russian Constitution.
In addition, the Supreme Arbitration Court concluded that this award of the District Court of Limassol affects the rights and obligations of Konmark (which was buying a membership interest under the transaction challenged in Cyprus) as a third party which did not participate in any contractual relations with FRINGILLA, did not have any representative office in Cyprus and did not pursue any business activities there; finally, this third party did not consent to the Cyprus court to be involved in and have jurisdiction over this lawsuit by concluding a prorogation agreement. The Court refused to recognise and enforce the award of the Cyprus court owing to a violation of public policy of the Russian Federation, part and parcel of which is the right of judicial recourse.
Finally, the Supreme Arbitration Court of Russia resolved that the award delivered by the District Court of Limassol was not recognisable or enforceable by virtue of article 24(2) of the Legal Assistance Treaty. This applied to the extent that to the extent that District Court of Limassol’s decision invalidated the permission given by Rybprominvest to its subsidiary, Produktovye Terminaly, authorising the latter to sell, for the benefit of Konmark, a membership interest in the issued capital of Morskoy Rybny Port, as formalised in the resolution of the extraordinary general meeting of Produktovye Terminaly. The reasoning behind the Russian court’s stance was that this issue falls within the exclusive competence of Russian courts. If any foreign court violates the exclusive competence of Russian commercial (‘arbitration’) courts, this is, on its own, a ground for refusing to recognise and enforce a foreign judicial decision, as provided for by article 24 of the Legal Assistance Treaty and article 244(1)(3) of the Arbitration Procedure Code.
Therefore, the Supreme Arbitration Court left the judicial decisions challenged by FRINGILLA unchanged. However, it is necessary to pay attention to the logic of the reasoning which the Presidium of the Supreme Arbitration Court applied in this particular case, to the detriment the claimant; however, the same logic could have far-reaching legal implications for recognising and enforcing foreign judicial decisions. The author has described at some length the actual circumstances of the case simply because it is necessary to assess carefully, when referring to this test case, how similar the circumstances are.
The Supreme Arbitration Court, when considering the case, refused to recognise that a foreign court has the power to invalidate, based on its national legislation, transactions which involve only Russian parties. If in another situation the Cyprus court applies Russian legislation to Russian-only legal relationships, will the Russian supreme instance continue to insist that such recognition and enforcement of a foreign judicial decision is detrimental to Russian sovereignty? What if the concerned party challenges only the transaction without touching on the procedure of the corporate decisions being challenged (insofar as in Russian legislation this procedure is aimed at protecting the member’s interests and is unavailable to third parties)? Formally, the conditions for these tasks are different, and in this situation the Supreme Arbitration Court would probably come to a different conclusion…
However, what general conclusions can we draw from the resolution in question? Firstly, the Russian courts do object to intrusions into their jurisdiction. Secondly, although the opinions of the Supreme Arbitration Court concerning a lot of issues relating to cooperation with foreign courts are just starting to take shape and the arguments of Russian courts are sometimes controversial, it is safe to conclude that the Russian legal system will not readily pull back from its positions. For this reason any lawsuits being exported abroad may be justified only if the case under consideration involves an undeniable foreign element. It is obvious that the Russian legal system at its current stage will not encourage forum fishing, especially if it favours one of the parties.
Resolution No. 16404/11 of the Presidium of the Supreme Commercial (‘Arbitration’) Court dated 24 April 2012 regarding case No. А40-21127/2011 “Olympia LLC v. AS Parex Banka and AS Citadele Banka”.
The Presidium of the Supreme Arbitration Court has implemented the “lifting of the corporate veil” doctrine and resolved that the representative offices of companies which are the respondents’ affiliates and were created to bypass Russian bank control law, had actually been acting in Russia as representative offices of banks providing the services of such companies in Russia. The purchasers of such services had the opportunity to close transactions at the representative offices’ location without contacting with the banks’ head offices in Riga. Theoretically, a lawsuit may be filed in respect of such companies at the location of their representative offices in Russia. However, in this case the Supreme Arbitration Court also implemented the closest connection principle, based on which it concluded that this case had no connection with the Russian Federation and, accordingly, that Russian courts have no jurisdiction in relation to the dispute.
Olympia Limited Liability Company (“Olympia”) filed with the Moscow Arbitration Court a lawsuit against AS Parex banka (the Latvian Republic) (“Parex Banka”) and AS Citadele banka (the Latvian Republic) (“Citadele banka”) regarding the termination of contracts for acceptance and maintenance of fixed-term deposits dated 26 September 2007, 17 September 2008 and 29 September 2008. These had been concluded between Valeriy Kargin, a Latvian citizen (the “Depositor”), and Parex Banka. The lawsuit also provides for deposits to the amount of LVL 11,200,291.2 to be jointly collected from Parex Banka and Citadele Banka as well as interest on these deposits accrued from 24 February 2011 to the date when the deposits were actually repaid. Accounts receivable in relation to such deposits were assigned by the depositor to the plaintiff on 20 January 2011 by virtue of assignment agreement No. 1/2011.
To substantiate the claims, Olympia referred to Parex Banka having violated the conditions of undertaking operations in good faith when it allocated, as a result of reorganisation, liquid assets to the newly-incorporated Citadele Banka and left its accounts receivable (including in relation to deposits) and low-liquid assets to Parex Banka.
By virtue of the ruling of the Moscow Arbitration Court dated 24 May 2011, the matter was dismissed. By virtue of the resolution of the Ninth Arbitration Court of Appeal dated 25 July 2011, the ruling of the first instance court was upheld.
The courts of the first and appeal instances, based on the Russian Arbitration Procedure Code and the Treaty of Legal Assistance and Legal Relations in Civil, Matrimonial and Criminal Cases between the Russian Federation and the Latvian Republic dated 3 February 1993 (the “Legal Assistance Treaty”), concluded that, since there are no representative offices or branches of the above banks in Russia, their property in Russia is not the subject of the dispute and does not fall within the scope of article 248 of the Arbitration Procedure Code, the claims are de jure (at the location where the challenged transactions are closed and performed) not connected with the Russian Federation, and, accordingly, the claim cannot be considered by a Russian commercial (‘arbitration’) court.
The Federal Arbitration Court for the Moscow Region resolved on 24 October 2011 to set aside the ruling of the first instance court and the resolution of the court of appeal, and referred the case back to the first instance court to consider it on the merits. By setting aside the decisions of lower courts, the court of cassation pointed out that the lawsuits do not infringe the exclusive competence of Russian commercial (‘arbitration’) courts. These actions had been brought under article 247(1) of the Russian Arbitration Procedure Code, which commits Russian commercial (‘arbitration’) courts to consider business disputes and other cases involving foreign entities or citizens, if the defendant is in Russia or its property is in Russia. The Plaintiff proved that the defendant’s property is in Russia.
The Presidium of the Supreme Arbitration Court of Russia considered the applications filed by Parex Banka and Citadele Banka that the resolution of the Federal Commercial Court for the Moscow Region should be reviewed by supervisory authorities. It concluded that the resolution of the court of cassation should be revoked, whereas the above judicial decisions of the first instance and appeal courts should be left unchanged on the following grounds.
Commercial (‘arbitration’) courts in Russia consider business disputes and other cases featuring business and other economic activities, involving foreign and international entities, foreign citizens and stateless individuals pursuing business and other economic activities, in cases envisaged by section V “Proceedings for cases involving foreign persons” of the Russian Arbitration Procedure Code. However, if any international treaty to which Russia is a party provides for judicial procedures other than those envisaged by Russian legislation regarding arbitration proceedings, then the rules of the international treaty will apply. 
In accordance with article 21(1) “Court jurisdiction” of the Legal Assistance Treaty, the courts of each of the Contracting Parties are competent to consider civil and matrimonial lawsuits filed against legal entities if there is a management body, representative office or a branch of this legal entity in the territory of this Party. By virtue of article 254(3) of the Arbitration Procedure Code, it is necessary to determine the legal status of the legal entity involved in the case.
The courts of the first and appeal instances established that it cannot be confirmed formally, i.e. in accordance with law, that branches and representative offices of Parex Banka and Citadele Banka were actually created in Russia. However, the Supreme Arbitration Court, based on the case file, concluded that in fact Parex Banka and, subsequently, Citadele Banka did pursue banking operations in Russia and provided banking services via organised representative offices operating on their behalf.
It is noteworthy that the courts of the first and appeal instances rejected this evidence that Citadele Banka was pursuing banking operations in Russia via representative offices as the courts found that formally, these representative offices were representative offices of third parties (i.e. of the investment management companies Citadele Asset Management, Latvia, and Pares Asset Management, Latvia), and were duly accredited and registered with tax authorities in Russia.
However, according to the Supreme Arbitration Court the facts suggest that no other but the defendants pursued business activities in Russia using affiliated parties (the doctrine of “piercing the corporate veil”) because: (i) these representative offices in question in fact acted as representative offices of the banks (at present, Citadele Banka) which were selling their services in Russia; (ii) the purchasers of the services were able to close transactions at the location of the representative offices without having direct contact with the banks’ head offices in Riga; and (iii) Citadele Asset Management and Parex Asset Management were entities created so as to circumvent Russian banking control legislation.
In order to substantiate its position, the Supreme Arbitration Court invoked the judicial decisions of the Court of Justice of the European Union (the “ECJ”) and came to the conclusion that Citadele Banka existing in Russia at present is a proved fact, as is the possibility for its services to be provided in Russia. Thus, the Supreme Arbitration Court directly recognised that it is theoretically possible to file a lawsuit against the defendant at the location of its actual representative office, which is an absolutely new development in modern Russian procedural legislation. It is obvious that this signal, coming from the highest court responsible for economic disputes, should make clear to those involved in international business activity that the Russian judicial system is ready to consider the substance, rather than the form, of legal relationships between foreign parties.
Nevertheless, in this specific case the Supreme Arbitration Court concluded that it is not within the jurisdiction of Russian courts to consider the substance of the dispute as the challenged bank deposit contracts were not signed with the banks’ representative offices in Russia but the bank’s head office in Riga. This means that the place where the contracts are signed and performed is the Latvian Republic, and the funds are also in Latvia. If a branch (representative office) is not involved in signing, executing and performing the transaction, the criterion for implementing international jurisdiction where the branch (representative office) is located, as set out in clause 23 of the Legal Assistance Treaty, does not apply. The Supreme Arbitration Court did not establish any other grounds to justify the Russian courts having jurisdiction (such as the Russian courts having exclusive competence, there being any effective prorogation agreement, or there being any close legal relationship with Russia).
Essentially, in this case the Supreme Arbitration Court used the forum non conviniens doctrine, which is well-known in the common law system and stipulates that a court may refuse to consider the case if it establishes that the parties may seek justice in a more suitable court. The relevant decision of the Supreme Arbitration Court demonstrates that although Russian courts object to disputes that have a close connection with Russia being “exported”, they are equally unprepared to justify their own jurisdiction in relation to disputes which in reality do not concern Russia.
Resolution of the Presidium of the Supreme Arbitration Court of Russia No. 76 /12 dated 5 June 2012 featuring case No. А27-4626/2009 Sibkonkord Financial and Industrial Union LLC v. Sibirsky Tsement Holding Company OJSC, Ciments Français, İstanbul Çimento Yatırımları Anonim Şirketi.
The Presidium of the Supreme Arbitration Court of Russia issued a resolution stating that if a business entity fails to accomplish a major transaction, or accomplishes such transaction improperly, and this has an adverse effect on the entity (e.g. an advance payment is lost), the transaction in question cannot be classed as detrimental to shareholders, unless it is established that the entity entered into the transaction with the initial intention to fail to accomplish or accomplish it improperly and cause losses to the shareholders. Any losses arising from the transaction in the context of the shareholder’s rights being violated should be assessed taking into account the aggregate mutual obligations of the parties and the terms and conditions of the contract when it was signed, rather than based on specific obligations being performed when the transaction being accomplished by the entity is challenged.
Ciments Français (France), acting as the seller, Sibirsky Tsement Holding Company Open Joint Stock Company (“Sibirsky Tsement”), acting as the buyer, and İstanbul Çimento Yatırımları Anonim Şirketi (Turkey) entered on 26 March 2008 into a share purchase agreement (the “agreement”)for a certain number of shares in Set Group Holding A.Ş., Afyon Çimento Sanayi T.A.Ş. and Set Beton Madencilik Sanyi ve Ticaret A.Ş. The latter three companies were all incorporated in the Republic of Turkey. Under the agreement, the total value of the shares purchased by the buyer was EUR 577,300,000, out of which EUR 377,300,000 was paid in cash, including an initial instalment of EUR 50,000,000 to be paid within four business days from signing the agreement. The balance was to be paid within seven business days before the agreement expired, with EUR 200,000,000 to be paid by shares of Sibirsky Tsement. By virtue of transfer order No. 6 dated 31 March 2008 Sibirsky Tsement transferred to the account of Ciments Français EUR 50,000,000. The extraordinary general meeting of Sibirsky Tsement shareholders resolved on 24 May 2008 to approve the agreement as a major transaction.
Owing to Sibirsky Tsement’s failure to perform under the agreement and to pay the balance of the purchase price and transfer its shares in return for the purchased shares, to submit copies of documents and take other actions, Ciments Français repudiated the agreement. In accordance with the agreement, Ciments Français withheld the initial instalment because the other party had failed to perform. In its interim award dated 7 December 2010 the ICC’s International Court of Arbitration found, among other things, that the share purchase agreement was valid and that Ciments Français had acted lawfully when repudiating the agreement and withholding EUR 50,000,000 received from Sibirsky Tsement. The Court also dismissed Sibirsky Tsement’s counter-claim for the share purchase agreement to be invalidated and the EUR 50,000,000 refunded.
In the meantime, the Arbitration Court for the Kemerovo Region entered on 4 February 2009 a judgment regarding case No. А27-16841/2008-3, in which it invalidated the resolution of the extraordinary general shareholders’ meeting dated 24 May 2008 regarding the lawsuit of Sibkonkord against Sibirsky Tsement, including in terms of approving the challenged share purchase agreement, because there had been an unauthorised representative of Sibkonkord present at the meeting. As a result, Sibkonkord, in its capacity as a shareholder of Sibirsky Tsement and owner of 14,265,675 of the ordinary issued shares (47 percent of the issued capital of Sibirsky Tsement), believed that the share purchase agreement was a major transaction for Sibirsky Tsement, entered into without the requisite approval in violation of articles 42, 78 and 79 of Federal Law No. 208-FZ “On joint-stock companies” dated 26 December 1995 (the “Joint-Stock Companies Law”). Accordingly, Sibkonkord filed with the Arbitration Court for the Kemerovo Region a lawsuit against Sibirsky Tsement, Ciments Français and İstanbul Çimento Yatırımları Anonim Şirketi seeking to have the share purchase agreement invalidated and to have the initial instalment of EUR 50,000,000 repaid by Ciments Français to Sibirsky Tsement as a consequence of the invalidation.
Taking into account the above decision of the Arbitration Court for the Kemerovo Region dated 4 February 2009 in relation to case No. А27-16841/2008-3, and pursuant to articles 78 “A major transaction” and 79 “Approving major transactions” of the Joint-Stock Companies Law (as in force during the challenged legal relationships), the Arbitration Court for the Kemerovo Region invalidated the above transaction on 13 August 2010 and, by virtue of article 167 of the Russian Civil Code, obliged Ciments Français to repay EUR 50,000,000 to Sibirsky Tsement. On 26 September 2011 the Seventh Arbitration Appeal Court upheld the decision of the first instance court. In its resolution dated 6 December 2011 the Federal Arbitration Court for the Northwest Federal District upheld these decisions as well.
Ciments Français filed an application with the Russian Supreme Arbitration Court demanding that the decisions of the first instance court and the resolutions of appeal and cassation courts be reviewed by a supervisory authority and that the above judicial decisions be overturned. Having considered the case, the Presidium of the Supreme Arbitration Court set aside the decisions of the lower courts and ordered the case to be reconsidered. The logic of the Supreme Arbitration Court was the following.
The shareholders’ lawsuits seeking to invalidate the transactions entered into by joint-stock companies may be satisfied if evidence is provided which proves that the rights and lawful interests of a shareholder were violated . Such evidence may encompass evidence that the shareholder has incurred losses which arose out of the joint-stock company accomplishing the challenged transaction. However, any actual losses from the transaction, in the context of a shareholder’s rights being violated, should be assessed taking into account the aggregate mutual obligations of the parties and the terms and conditions of the contract when it was signed, rather than based on specific obligations performed when the transaction accomplished by the entity is challenged.
If a major transaction has been accomplished in violation of the law, it may be invalidated if it is obviously detrimental to the joint-stock company. In relation to purchase transactions this may take the form of disposing of the property of the joint-stock company at a price which is substantially lower than the market price, or in purchasing the property for the joint-stock company at a substantially overstated price.
In addition, for the agreement to be invalidated there must be grounds for it to be invalidated either before it is signed or when it is signed but in no circumstance after it is signed. Actions aimed at performing the agreement cannot serve as grounds for it to be invalidated insofar as they do not derogate from the agreement itself. If a business entity fails to accomplish a major transaction, or accomplishes such a transaction improperly, and this has an adverse impact on the entity (e.g. it forfeits an advance payment), the transaction in question cannot be classed as detrimental to the shareholders, unless it is established that the entity entered into the transaction with the initial intention to fail to accomplish or accomplish it improperly and cause losses to the shareholders. For this reason it does not follow that the whole transaction is detrimental, with the rights of Sibkonkord being violated, from the mere fact that Sibirsky Tsement transferred to Ciments Français EUR 50,000,000 without receiving consideration before the extraordinary general shareholders’ meeting of Sibirsky Tsement had approved the share purchase agreement as a major transaction. Consequently, the conclusion of the lower courts that the challenged transaction violated the rights and lawful interests of Sibkonkord as a shareholder of Sibirsky Tsement is groundless, and there are no grounds for invalidating the share purchase agreement.
This resolution , though made in relation to a corporate issue, is in practice of great importance for developing the right strategy of international investigation and risk assessment. Essentially, the Supreme Arbitration Court formulated a position which does not encourage “friendly” corporate lawsuits if such lawsuits have one objective: to prevent the decisions and awards of foreign courts and arbitration courts from being recognised and enforced. Thus, the Supreme Arbitration Court demonstrated to the international community that the Russian legal system will not protect a Russian party if its position is founded on domestic legal remedies being used in bad faith.