Boris Berezovsky v Roman Abramovich; Michael Cherney v Oleg Deripaska – these were the two headlining title bouts that for a brief and glorious moment took the often prosaic world of shareholder disputes out of the business sections and on to the front page of almost every national newspaper.
They involved a cast of colourful litigants with a seemingly bottomless pit of money and grudges, whose lawyers, particularly the barristers, were turned into media stars, if only for a while. The costs were huge and the outcomes of both cases well documented.
On 31 August 2012, Mrs Justice Gloster threw out Boris Berezovsky’s claim, famously dismissing him as ‘an unimpressive, and inherently unreliable, witness, who regarded truth as a transitory, flexible concept, which could be moulded to suit his current purposes’. It seemed a fitting summation for a case that hinged on oral agreements made between its two famous counterparties, Berezovsky and Chelsea Football Club owner, Roman Abramovich, regarding the ownership of shares in the Russian oil company, Sibneft, and the aluminium company, Rusal.
Less than a month later, on 27 September, Michael Cherney and Oleg Deripaska settled their similar shareholder dispute (also involving Rusal) a week before the trial was due to start. They might have avoided the sort of grilling that Berezovsky received on the witness stand at the hands of Jonathan Sumption QC (now Supreme Court judge Lord Sumption), but their claims and counterclaims were still there to be raked over by journalists and lawyers alike. As part of his defence, Rusal chief executive Deripaska alleged that Cherney was ‘a representative of organised crime’, while the UK courts accepted jurisdiction of the case on the basis that Cherney faced the possibility of criminal sanctions if he pursued his claim in Russia. In July 2009, the Court of Appeal ruled in favour of Cherney’s bid for UK jurisdiction, with Mr Justice Clarke stating: ‘The available evidence indicates Mr Cherney will not obtain a just and expeditious hearing in the arbitrazh courts and that there is a strong likelihood that he will be arrested on false allegations.’ It was a compelling narrative that rarely reflected well on Russia and the CIS.
For the law firms and barristers involved, the disputes – and the connected cases, such as Berezovsky’s tandem claim against the estate of the Georgian businessman Arkady Patarkatsishvili – seemed to herald a new era of Russia and CIS-related litigation on a scale that arguably has no precedent in the English courts. The fact that the UK courts were willing to accept jurisdiction on cases such as Cherney v Deripaska was both seen as a sign of London’s position as a key dispute hub and the UK’s tradition of supporting the rule of law. Conversely, the spectre of ultra-rich Russian litigants commandeering London’s civil courts was criticised by some as evidence that access to justice was increasingly denied to domestic parties in favour of rich foreign interests.
And then there were the fees. Addleshaw Goddard, which represented Berezovsky on a part CFA arrangement, and continues to act for the Berezovsky estate following his suicide in March 2013, has billed over £50m since first getting the instruction in December 2008. Skadden, Arps, Slate, Meagher & Flom, which represented Abramovich, presented a legal bill of £40m, which included £8m of disbursements to Sumption QC. Berezovsky ultimately paid £35m of these costs, as well as a further £3.75m billed by Freshfields Bruckhaus Deringer for its representation of Abramovich’s co-defendant, Vasily Anisimov. In addition, One Essex Court’s Laurence Rabinowitz QC’s initial brief fee for representing Berezovsky was £1.7m. Other cases such as the epic Fiona Trust litigation and BTA Bank v Ablyazov, a $5bn fraud claim brought by the Kazakhstan bank against its former chairman Mukhtar Ablyazov, might not have involved such familiar names, but their scale and complex nature ensured gainful employment for a large chunk of London’s litigators. The BTA Bank case eventually concluded in November 2012, with the UK court ordering Ablyazov to pay over £1bn. The Fiona Trust case ended in March 2013 with the Court of Appeal upholding the High Court’s dismissal of fraud claims brought against Dmitry Skarga and Tagir Izmaylov by their former employer, the Russian state-owned shipping company Sovcomflot.
End of an era
With the conclusion of such high-profile and long-running cases, many feel that the purple patch of Russia and CIS-related litigation, which roughly ran between 2006 and early 2013, has finally come to an end. More recently, in the case of VTB Capital plc v Nutritek International Corp & ors, the Supreme Court’s decision to uphold the lower courts’ ruling that VTB Capital could not lift the corporate veil on Russagroprom, a company to which it lent $225m, meant that the Russian state-owned bank could not bring its claim in the English courts. The sober judgment illustrated that the UK courts were not going to welcome every Russia-related claim with open arms.
‘The English courts have had a comparatively flexible approach to jurisdiction, but have always looked very carefully at a case before deciding whether to hear it,’ says Philip Carrington, a disputes partner at Herbert Smith Freehills (HSF), who represented VTB Capital. ‘The fact is that litigants who have wanted to bring claims in London have not always been successful. If you’re simply seeking to argue that Russian courts are unreliable, that isn’t going to impress the English court. You have to look at the facts of each individual case in detail.’
Even those who have successfully played upon the perceived unreliability of the Russian courts in the past, concede that the UK courts were never going to play fast and loose with jurisdiction.
‘We were successful in Cherney in establishing on the particular facts of that case that the interests of both parties and the ends of justice required that Cherney’s claims against Deripaska should proceed in England,’ says Dechert partner Andrew Hearn, who represented Michael Cherney in his claim against Deripaska. ‘But the way in which jurisdictional challenges of this sort are decided means that each case has to be considered carefully on its own facts. It isn’t always the case that the English courts will accept jurisdiction over Russian related disputes.’
Coupled with this is the simple fact that the blockbuster oligarch disputes were themselves a result of a particular moment in Russia’s development that is fast fading into history. The fall of Communist Russia happened over 20 years ago, so there is a natural time limit to the disputes that typically emerged from that era. In his opening submissions on day two of the Abramovich v Berezovsky trial, Sumption vividly described the world in which the two oligarchs made their fortunes and the rare environment in which a multibillion-pound dispute of this type could germinate. According to Sumption, post-Communist Russia in the 1990s was ‘Europe’s “Wild East”’, where ‘criminal violence had become simply business by other means’ and where ‘there was no rule of law’. Russia had ‘experienced, in less than a decade, a transition to capitalism which had taken other European countries more than a century to achieve’. It was the sort of place in which a businessman like Abramovich needed Berezovsky’s ‘services as a political godfather’ and where their resultant business agreements were ‘never recorded in writing’.
While few would argue that modern day Russia’s legal, business and political infrastructure is in any way perfect, it has still come a long way since those first chaotic, post-Soviet years. Oligarchs and high-net-worth individuals (HNWIs) remain, but the Russian business community is becoming more mature and institutionalised. Business agreements are increasingly documented and heavily lawyered (and largely governed by English law), and the domestic courts are undergoing rapid reform, which has fostered greater transparency and reduced corruption. This certainly does not mean that the London-based disputes will disappear – far from it – but they won’t generate the sort of media scrum that the respective Berezovsky and Cherney claims created.
‘What we’re going to find over the next five or so years is a difference in the types of cases that get litigated,’ adds Hearn. ‘If you look at Cherney or Berezovsky, these are cases that came out of a particular period of Russian history. Disputes abounded as to who owned what in the aftermath of the break-up of the former Soviet Union. I anticipate fewer of those types of disputes going forward. What will not be on the decline are ordinary commercial disputes that arise between Russian businesses and businessmen. English law is generally the system of choice in Russian business and access to the English commercial courts is also favoured by many for a variety of entirely understandable reasons.’
Enforcement
In reality, the majority of these disputes are being resolved in international arbitration, with the London Court of International Arbitration (LCIA) being by far the most popular forum. The increased maturity of the Russian business and legal market, and the prevalence of arbitration clauses in corporate contracts, has ensured this. According to the LCIA, 16.5% of its cases in 2012 involved parties from Russia and the CIS, which is a significant step up from 2004 when the figure stood at 7.04%, although it is some way off the 2009 peak of 27% of all cases. The LCIA adds, however, that the real figure for 2012 could be ‘in excess of 30%’ when one factors in cases where parties are based in offshore jurisdictions such as the British Virgin Islands (BVI) and Cyprus, where the main shareholders are often from Russia or the CIS.
‘Russian clients realise that one gets a high and impartial standard of judicial scrutiny in the High Court, but that this comes at the cost of a very public examination of all parties’ positions,’ says Alex Gerbi, one of the Quinn Emanuel Urquhart & Sullivan partners who represented Deripaska. ‘This exposure might discourage people from pursuing the High Court route where they have the alternative of a confidential arbitration process.’
On a more practical level, there is also the fact that arbitral awards are more likely to be recognised in Russia and the CIS.
‘With Russian clients there is a perception that it’s easier to enforce an arbitral award than to enforce an English court judgment,’ says Justin Williams, a disputes partner at Akin Gump Strauss Hauer & Feld. ‘Usually that perception is correct, unless there are assets available for enforcement within the EU. You have issues such as confidentiality, but the main driver is enforceability.’
Since so many of the assets of Russian companies and HNWIs are based abroad, typically through structures held in offshore jurisdictions, enforceability is paramount. While the Russian courts are generally viewed as improving, the ease with which their judgments can be enforced in other jurisdictions is sketchy at best.
‘We have a situation representing a Russian bank where it is trying to enforce a substantial loan where the borrower has assets in different jurisdictions including France,’ says Peter Sharp, litigation partner at Morgan, Lewis & Bockius and co-managing partner of its London office. ‘The clear advice from French lawyers was that we’d face difficulty in a French court enforcing a Russian judgment.’
Since the most popular offshore jurisdictions, including Cyprus, BVI and the Channel Islands, are common law, and the fact that their respective lawyers are familiar with contracts governed by English law – which most Russian contracts are – the legal infrastructure that gives English-qualified lawyers such a large competitive advantage in Russia and CIS-related disputes is unlikely to change in the foreseeable future.
Other advantages that UK disputes lawyers have is the admissibility of civil fraud claims in the UK courts. Bringing a claim of fraud in a Russian court without a criminal finding is fraught with difficulties. The resultant freezing injunction that a successful claim in the UK court can bring is also a formidable weapon in any potential dispute. This is something that aggressive Russian litigants will never lose sight of, and one of the reasons why they are still willing to submit themselves to the rigour and public exposure of the English courts.
‘The confidentiality aspect is an important one that for many provides an incentive towards arbitration. Just as in England, some Russians would value that quite highly,’ says Hearn. ‘Against that there are occasions where you wouldn’t necessarily want to give the other side the benefit of confidentiality. There is also the question of speed and expense; while I would not seek to suggest that litigating disputes in the commercial court in London is inexpensive, the costs inherent in bringing a claim in front of a commercial court judge represent good value for money and, generally speaking, matters can be brought forward in the commercial court quite quickly.’
Culturally speaking, lawyers also note that the results-oriented attitude of their Russian clients also makes them inevitably gravitate towards litigation.
‘It may reflect the cultural approach to disputes,’ says Williams. ‘If you have done any Russian work, you know that the approach that Russians take to resolving disagreements is different to others. Russians are more comfortable in submitting themselves to a legal process to produce the “right” outcome rather than compromising.’
The recent High Court claim that the Ukrainian billionaire Victor Pinchuk has pursued against his business partners Gennadiy Bogolyubov and Igor Kolomoisky for alleged breach of contract and trust, illustrates that the region’s appetite for London-based litigation remains high. The Pinchuk claim – which refers to a disputed oral agreement over a controlling stake in Krivoy Rog Iron Ore Industrial Complex (KZhRK) that the defendants allegedly held in trust for Pinchuk through an offshore vehicle – also suggests that the nature of the disputes won’t change overnight.
‘You still see the joint ventures that are done on the back of a cigarette packet,’ says Phillip Kite, global head of litigation and insolvency at the offshore practice Harneys. ‘Russia is a reasonably mature jurisdiction and there might be more of a move towards proper joint ventures, but for me that’s still not the norm. If things are properly done they might not litigate so I don’t see them. Russians tend to sit down and do quick deals on people’s yachts.’
Preferred strategy
Regardless of the dispute’s content, when it comes to tapping into this work and gaining market share, most international firms leverage off the connections they have built, either through their pre-existing corporate relationships, or their offices in Moscow – Skadden’s ongoing relationship with Roman Abramovich and Sibneft being the most high-profile example. Nevertheless, there are outlier firms that have built successful niches without going down such a well-trodden path. The fact that it doesn’t have a transactional practice has been a major boon for the international disputes specialist Quinn Emanuel, which opened its Moscow office in 2011 through its recruitment of partners Ivan Marisin and Vasily Kuznetsov from Dechert. The firm claims that much of its success in attracting new work boils down to the fact that other international firms, including Magic Circle ones, are willing to refer disputes to them in the knowledge that they won’t steal their transactional work. This works both ways, because Quinn Emanuel can also send corporate referrals in the opposite direction. The fact that they can take on the banks is another attraction to investors and borrowers from Russia and the CIS.
‘When we were litigation lawyers at Clifford Chance (CC), we couldn’t even think about suing a big bank,’ says Marisin, who was also Moscow head of litigation at CC before joining Quinn Emanuel (via Dechert). ‘Conflict issues here are not the same as the conflict issues at other international law firms. That gives us a different scope of opportunity. Russian clients in particular appreciate that. Russians generally are rather litigious and they would expect their litigation lawyers to fight for their interests without any limitations.’
While not having a Moscow office could be perceived by some as a weakness, Addleshaw used this to its own advantage, particularly when it came to snaring the most litigious Russian client of them all, Boris Berezovsky.
‘One of the very reasons we were selected was because we were a firm of a certain size and expertise that didn’t have a Moscow office,’ says Addleshaw litigation partner Mark Hastings with regard to Berezovsky’s initial instruction back in 2008. ‘The client recognised that, since he was someone on the wrong side of the Russian state, a firm that had an office in Moscow might have been put in a difficult situation.’
Even though the main bulk of the Berezovsky case has finished, Russia and CIS-related work still accounts for around 50% of Hastings’ workload. There are of course the outstanding matters of Berezovsky’s estate to sort out – including ongoing disputes with Aeroflot, as well as the late oligarch’s former mistress, Elena Gorbunova, who continues to lay claim to a large portion of his assets – but the increased profile that Addleshaw received as a result of Berezovsky has also led to new instructions.
Hastings remains bullish about the future market for Russian and CIS disputes: ‘The appetite of Russian and CIS clients is as large as ever. If you look at the daily list, you will see hearings of CIS-related matters virtually every day. Where CIS clients feel that they have been wronged, they often do not hesitate to bring a claim. Experience has shown that they continue to arrange their affairs through tax-advantageous and politically expedient offshore structures, make high-risk investments and are aggressive in protecting those investments. This is all a recipe for litigation.’
‘Obviously a lot has been said about costs, which can be very significant in these cases,’ says Carrington at HSF. ‘Also, as Berezovsky discovered, a failed claim can be a very uncomfortable and humiliating experience, but you have to look at why these clients have been attracted to the English courts and to arbitration in London in the first place. I can’t see how those factors have really changed. The courts in London are seen as reliable, the judges as impartial and independent and a wide range of remedies are available here.’
This is ultimately the nub of the issue. International advisers can take all sorts of different strategies in attracting Russia and CIS-related work, be it through their Moscow offices or their corporate practices, or none of the above. However, there are two ultimately crucial constants that all of these firms have in common: English-qualified disputes lawyers and a robust contentious offering in London. Regardless of future fluctuations and trends, when it comes to cross-border Russia and CIS disputes, credibility in the Square Mile is non-negotiable. LB
anthony.notaras@legalease.co.uk
Photographs: (clockwise) REX/Sipa Press; REX; REX; REX/David Crump/Daily Mail
Background photograph: Shutterstock
Cyprus: Follow the money
The European Union (EU) bailout of March 2013 was crippling for Cyprus’s local population and economy. Some of the hardest hit, however, were Russian depositors who had left billions of euros in the country’s largest local banks: Bank of Cyprus and Laiki Bank. The bailout deal, which saw bank depositors lose 47.5% of their savings over the €100,000 insurance limit, meant that Russian depositors were among the biggest losers. Since Russians have never been afraid to litigate, it is perhaps unsurprising that the lawyers were called in with almost immediate effect.
‘I have more than 60 claims from Russians,’ says Stavros Pavlou, senior and managing partner at Patrikios Pavlou & Associates. ‘About 25 of them are already filing cases in the district courts.’
Given the systemic nature of the problem, the claims involve a whole host of defendants. The expectation is that the disputes will ultimately end up at EU level. And the work isn’t purely limited to domestic law firms.
‘We’re involved in two litigations in Cyprus,’ says Alexei Panich of Herbert Smith Freehills (HSF) in Moscow. ‘When we spoke to the Cyprus lawyers back in spring, generally they recommend filing a claim against all possible defendants including auditors, officials of the Central Bank, the minister of finance, all the government bodies, against the respective banks. We filed a claim against more than a dozen defendants following that recommendation. Many litigated with the view that if they lost they could take a claim to the European Court of Human Rights.’
‘My firm is representing the administrator of Laiki Bank, which has been closed down,’ adds Elias Neocleous at Andreas Neocleous & Co. ‘One of the first things we did was to issue proceedings against the ex-CEO and management of the bank. Then there will be actions against professional advisers who didn’t advise the banks to be careful. There might be action against the government of Cyprus, the Central Bank, the Troika, the European Central Bank. All these issues will be resolved, but will take time.’
While these actions will keep the litigators busy, a more immediate concern is what effect the bailout will have on transactional work, particularly since so many Russian corporate vehicles are structured in Cyprus. Even though most Russian-owned companies based in Cyprus were largely unaffected by the bailout, the reputational fallout has already prompted a drop in new instructions.
‘The problem is attracting new clients,’ says George Pamboridis at Pamboridis law firm. ‘That is a problem because even though the elements that used to attract people to Cyprus are still present, the bruising of the image of the country during the months of March and April 2013 were so big that any professional who puts the name of Cyprus on the table needs to do a lot of explaning to the client. If you need to explain, it isn’t easy to sell.’
Greater competition from jurisdictions like Luxembourg and the Netherlands is also increasing pressure. ‘The Benelux has always enjoyed longstanding trade relations with Russia and the CIS,’ says NautaDutilh partner Gerard Meijer. ‘Since the Cyprus bailout, some evidence has already indicated that Russian and CIS investors started turning to the Benelux even more than before. It is reported that, in Luxembourg alone, Russian investments grew by €5bn.’
In reality, it is unlikely that investors from Russia and the CIS are going to cut ties with Cyprus completely, despite any short-term misgivings. Their existing structures are already too embedded and the familiarity that the Russian authorities have with Cypriot structures gives the country a strong advantage, as does the fact that it is a common law jurisdiction, and almost all international Russia and CIS-based deals are governed by English law. Nevertheless, Cypriot lawyers are far from complacent and the battle to retain Russia’s corporate hearts and minds is well underway.