A question of confidence – Russians strive to keep high stakes disputes at home

Given that domestic litigators in Russia and the CIS regularly see their clients’ largest commercial disputes go abroad, usually to be resolved under English law, they treat the outflow of work with unexpectedly good grace. This is mostly based on the realisation that this exodus of high-value litigation not only reflects what clients want, but also what they need. But what’s best for clients isn’t always best for advisers’ bottom lines.

‘The tendency for cases to go to the UK High Court will remain for the next two or three years,’ says Markian Malskyy, head of alternative dispute resolution (ADR) at Ukrainian law firm Arzinger. ‘Normally the bigger Ukrainian law firms would try to exclude the domestic courts from any potential disputes. One party will usually hope that the UK courts will accept jurisdiction. This looks like a good platform for objective justice – still hard to find in the CIS.’

‘In the Kazakh courts there are obviously issues of transparency and so on,’ says Joel Benjamin, managing partner of Kinstellar’s Almaty office. ‘It depends on what you are dealing with. They are signatories of the UN convention and people feel more comfortable with an international forum. In theory, the awards are enforceable in Kazakhstan, but in practice it isn’t always that easy.’

But local firms, particularly in Russia, can take some comfort from the fact that the authorities are making considerable efforts to improve legal infrastructure. When Anton Ivanov, chairman of Russia’s Supreme Court of Arbitration, the country’s highest commercial court, was appointed in 2005, his remit was to improve a system that was blighted by accusations of corruption and political interference. It was clear that if Russia was to attract further foreign investment, one thing that had to be improved was the rule of law. The problems faced by oil company Yukos and the imprisonment of its high-profile chairman, Mikhail Khodorkovsky, in 2003, has never been far from investors’ minds, nor have the problems faced by BP, which saw its current chief executive Bob Dudley effectively run out of Russia while running the troubled TNK-BP joint venture. Other high-profile controversies include the death in 2009 of Russian lawyer Sergei Magnitsky while he was in custody for allegedly assisting his client, investment fund Hermitage Capital Management, with tax evasion. That Magnitsky had himself supposedly unveiled a cover up relating to attempts by Russian state officials to embezzle funds from the Russian treasury, only cast doubt on what was widely seen to be a highly politicised and corrupt judicial process. Added into the mix were unflattering revelations made during the recent London-based litigations between the quartet of oligarchs: Boris Berezovsky, Roman Abramovich, Oleg Deripaska and Michael Cherney.

Russia’s Commercial Arbitration Courts’ Caseload

	2007	2008	2009	2010	2011	2012
Total cases heard	905,211	970,152	1,409,503	1,197,103	1,078,383	1,409,545
Cases involving foreign parties	1,338	1,639	1,723	1,792	1,675	2,537

The cumulative effect of all of this bad publicity has been an overwhelming desire – not just among international clients, but many domestic ones as well – to take their disputes outside of Russia wherever possible. Such forum shopping is something that Ivanov has railed against in public and, while he might struggle to force litigants to keep their disputes within Russia, his rhetoric has at least been backed up by moves to make the domestic system more attractive.

Embracing change

The main thrust of Russia’s court reforms have been towards greater transparency. All commercial court decisions are online (www.arbitr.ru) and audio recordings are also available.

‘This is one of the most transparent court systems in Europe,’ says Evgeny Raschevsky, head of international litigation at Egorov Puginsky Afanasiev & Partners. ‘That is one of the reasons Russian law is so accessible to English lawyers. They can simply click the button and get the full understanding of the current state of Russian civil law.’

These relatively straightforward measures have gone some way towards making the judges more accountable. Coupled with this has been a new system of case allocation, whereby senior judges can no longer influence where cases are sent. It is now done automatically, which will, it is hoped, decrease the likelihood of bribery.

‘There have been some changes in terms of greater transparency in the state commercial/arbitrazh courts,’ says Ivan Marisin, a Moscow litigation partner at Quinn Emanuel Urquhart & Sullivan. ‘There are audio records from the hearings that you can check, which is very helpful, otherwise you could get a ruling that is very surprising. Now with these records, the judges aren’t that free to state in the ruling that certain things weren’t said in the hearing.’

Most experienced practitioners feel that such changes have made a real difference, although there is a huge distance to go before local courts can attract the level of international confidence enjoyed by the major dispute hubs in western Europe.

Veteran litigators argue there can be tactical advantage in resolving disputes locally. ‘I think those foreigners who live in Moscow, and have experience already in dealing with the Russian courts, are quite prepared to use them,’ says Vassily Rudomino, senior partner of Russian firm Alrud. ‘The state commercial courts in Russia are a very big institution, there are more than 1.3 million cases considered every year. We’ve been very successful in winning cases, even if the other side is well connected. If you are professional, you can fight those challenges where judges aren’t independent. Four levels of appeal give you very good opportunity to fight those surprising decisions. Elements of precedent law, some of which we recently incorporated into the legal system, increase certainty and predictability in litigation. It reduces the risk of “strange” decisions if the case is well prepared by lawyers.’

The high caseload at the commercial courts is one of the reasons why the situation remains far from perfect. The judges might be becoming more reliable, especially now that a system of precedent has been introduced for helping decide on cases, but their workload makes it far from easy to produce satisfactory judgments.

‘The transparency adds to the quality but that is not sufficient – you need to make the judgments more predictable,’ says Edward Bekeschenko, a Moscow-based disputes partner at Baker & McKenzie. ‘The judgments are much shorter than English court judgments. That is simply down to the volume of cases. That affects the quality of writing.’

For many, the barrier to entry is simply not high enough. In 2012, the courts considered 1,409,545 cases. The fact that fees only cost $4,000 per case means that spurious claimants are rarely put off by cost. In addition, costs awards are currently only limited to fees from the court hearings, not the preparatory work that comes beforehand. The potential downside of losing is therefore nowhere near as damaging as it would be in other jurisdictions. There has been no real effort to raise this barrier, since it is believed that a few spurious cases are a small price to pay for greater access to justice. Instead, Ivanov has been trying to ease pressure on the court system by encouraging people to use domestic arbitration. Unfortunately, the same concerns regarding independence and the rule of law have dogged the growth of ADR as much as local courts.

‘In domestic arbitration there are very few courts and some are pocket courts of big groups,’ says Rudomino. ‘There is a lot to do to make domestic arbitration attractive.’

With the exception of the International Commercial Arbitration Court, few of the local arbitration forums are seen as being particularly reliable. Again, reforms have been put in place to try to address this, since the state now has powers to disqualify and even bring criminal charges against corrupt arbitrators. Unfortunately, in the eyes of some, this is viewed as another example of state interference. Reconciling the inherent tension between anti-corruption measures with the need for greater judicial independence is a feat Russia is a long way from achieving.

Foreign competition

In spite of these hurdles, there are indications that foreign clients are slowly warming to the Russian commercial court system, particularly when the cases are fairly straightforward and where expediency is required. In 2012, there were 2,537 cases in the commercial courts involving foreign parties, up from 1,675 in 2011, and almost double the figure in 2007. (See ‘Russia’s Commercial Arbitration Courts’ Caseload’, below).

‘If the clients expect the matter is serious and they need protection, they invariably choose London,’ says Yuri Monastyrsky, a founding partner at Monastyrsky, Zyuba, Stepanov & Partners. ‘There is a trend however that parties and companies prefer to go to the state courts in Russia just for the purpose of sparing costs. There is a visible advantage of the Russian system, which is the speed of making a decision. It is relatively short. In this respect, the Russian courts and arbitrations have a competitive advantage.’

Growing acceptance of the Russian courts has been something of a double-edged sword for domestic firms. While it suggests there will be more high-profile court work to target, it has also opened them up to greater competition from international advisers, who previously showed little interest in the national disputes market.

‘International law firms are more involved in domestic disputes,’ says Alexei Panich, a Moscow-based disputes partner at Herbert Smith Freehills (HSF). ‘It used to be a general understanding that international firms were involved in litigation and arbitration with a foreign element, however we can see that more Russian companies are starting to involve international firms in disputes with no foreign element. This is because many disputes involve high-profile issues. Big Russian companies have to substantiate why this law firm is representing them. It is much easier for GCs to say it is a Magic Circle-calibre law firm and this law firm has a huge insurance coverage.’

The growing importance of the domestic litigator has been reflected by the lengths to which law firms will go to ensure their Moscow offering is up to scratch. This was certainly the approach taken by feted US litigation leader Quinn Emanuel when it unveiled its Moscow launch in 2011. It recruited Ivan Marisin and Vasily Kuznetsov from Dechert (where they had joined from Clifford Chance (CC) the year before). Marisin, who headed CC’s Moscow disputes practice, has long been established as one of the most experienced litigators. Their arrival at Quinn Emanuel sparked a merry-go-round of lateral hires, with Dechert plugging the hole that Marisin left through the recruitment of HSF’s head of European litigation, Dmitry Kurochkin, in June 2012. In September of the same year, HSF replaced Kurochkin with Alexei Panich, former Moscow head of Dentons’ legacy firm, Salans.

‘It is interesting that the main international firms are developing their capabilities,’ says Rudomino. ‘A couple of years ago they were just ignoring this part of Russian legal business. It’s their response to the fact that more and more international clients are facing the need to litigate in Russia. There is a clear demand there.’

Domestic firms are certainly noticing the impact, be it through a diminishing number of domestic referrals, or simply because there is greater competition. This is especially the case when it comes to the larger disputes.

‘In the upper layer of the market, domestic law firms are under extreme pressure, which has increased drastically over the past few years,’ says Monastyrsky. ‘This is because of the active position of international law firms and their willingness to go in any direction where profit can be generated. Big disputes are limited in number from year to year. Because of the structure of offices bearing the names of international firms, Russian law firms don’t have competitive advantage.’

The same has also been seen in jurisdictions like Ukraine: ‘Previously we were more involved in cases from A to Z,’ says Malskyy at Arzinger. ‘Now UK firms are keeping this work to themselves. Our part of the work has decreased.’

Competitive advantage

Since the overall volume of litigation in Russia is increasing, domestic firms still have plenty to work on, albeit at a lower end of the market for some. They can compete well in more specialised areas, such as tax and intellectual property disputes. Where they struggle to compete is in shareholder disputes, which are almost always governed by English law.

‘In Russia our conception of shareholders’ agreements is new. We didn’t use to have this in our law,’ says Irina Onikienko, head of dispute resolution in the St Petersburg office of Capital Legal Services. ‘Shareholders didn’t have any possibility to go to court in Russia, which is why they went to another jurisdiction just to have any opportunity to be protected. Traditionally our courts are not involved in these kinds of disputes because some contracts already exist in London.’

Since the majority of foreign investments, and even domestic business deals, in Russia are built through English-governed shareholder and joint venture agreements, this automatically cuts out a good portion of the work on offer. This also has a bearing on the initial corporate mandates.

Most domestic firms take this on the chin and concede that international counsel simply have an unassailable competitive advantage when it comes to litigating English law contracts.

One firm, however, has made a push in the opposite direction in an attempt to compete equally with the international firms on its own turf: Egorov, Puginsky. Its November 2012 recruitment of Robin Wittering, a highly rated corporate partner from HSF with strong disputes expertise, was a major signal to the market that it wants to retain a lead role on deals and disputes.

It seems unlikely that many other domestic firms will follow in the footsteps of Egorov Puginsky, which has additional resources as one of Russia’s most profitable law firms.

And even with the increased competition, most profess confidence that as the legal infrastructure improves there will at least be more work to go around, both on the transactional and contentious front. A lot still needs to be done, but Russia has come a fair distance in a short time. LB

anthony.notaras@legalease.co.uk

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