Why are Russian Cases Litigated and/or Arbitrated in England and Wales?

Many high profile complex cases which involve a Russian element are both being litigated and arbitrated outside the Russian Federation and very often in England and the offshore jurisdictions.  Generally, these cases involve allegations of fraud, multiple jurisdictions and numerous parties.

English law is frequently chosen by Russian litigants to govern their commercial contracts and to resolve these complex disputes. The parties will usually stipulate arbitration (sometimes in London, often in Switzerland or Sweden) rather than litigation, principally because an arbitral award is more widely enforceable around the world, under the New York Convention, than an English Court judgment. However, usually there is a need for ancillary proceedings in the English Court in order to try related fraud issues or to obtain ancillary relief e.g. a freezing order. Russian parties and their lawyers frequently choose English law because:

1. English law is predictable and has developed to the very high standard as regards business/commercial law. English Courts are empowered with an active case management role and will often take a pragmatic approach.
2. English law has many more flexible causes of action due to the creative approach of the common law system and the Courts of Equity. They will even assist in the resolution of parallel proceedings by granting search and freezing orders.
3. The English legal system is highly regarded; it is seen as being free from corruption and political influence.
4. In England trials take place before one judge (there are no juries in civil cases, except for defamation), so the results are better and more predictable than in the USA where civil/commercial disputes are often tried before a jury.
5. English Courts take a pro arbitration approach and can be seized to enforce an arbitration agreement, to establish an arbitral tribunal, to obtain measures to secure attendance of witnesses, preservation of evidence, and security for costs.
6. Their decisions are directly recognised within the EU and are easily enforced outside the EU within countries of common law jurisdictions (Jersey, Guernsey, BVI, Isle of Man).

Although there are specialised commercial courts in Russia (the Arbitrazh Courts), the Russian Court system is still perceived by both foreign and Russian investors as being subject to political interference from the Kremlin and other Governmental authorities.  The judiciary is also still reported to be corruptible and therefore justice can appear to be (even more) unpredictable for those who do not have political influence or are not prepared to pay bribes.

As a result of this, many Russian litigants chose to have their dispute resolved outside Russia, as shown in the examples given below.

The dispute over Novokuznetsk Aluminum Plant (NKAZ) involved a sham bankruptcy perpetrated under the instructions of RUSAL company (Russian Aluminum) with a view to controlling the aluminium smelting capacity of NKAZ.  RUSAL with the complicity of a sham receiver inflated a debt it had acquired in NKAZ and managed to oust the owners of NKAZ who lost an asset worth hundreds of millions of US Dollars as a result of the fabrication of the insolvency of NKAZ.  Litigation proceedings followed in New York and the BVI and arbitration proceedings took place in Stockholm, Zurich and Cyprus until this matter was finally resolved by means of a settlement agreement in March 2005.

In Intermet v. Ansol, Steptoe & Johnson acted for Intermet who had been the victim of a fraudulent misrepresentation.  Intermet had been funding the trading operations of Ansol, an aluminium trader and had loaned the sum of over US$100m over 2 years.  Ansol was unable to pay its debt and sought to defer repayment for a period of 9 months by entering into a Settlement Agreement with Intermet which provided for a transfer of the shares in Gradex, a company incorporated in England (which allegedly owned the rights to a large commercial development project in Moscow), to act as the security for the loan.  After 9 months, when the debt extension period fell due, Ansol failed to repay its debt, Intermet discovered that there were in fact two Gradex companies, one registered in Gibraltar which owned the rights in the Moscow project but that the Gradex incorporated in England (which it owned) did not have any rights in the project at all.  Arbitration proceedings in Switzerland were commenced and were followed by fraud and freezing proceedings in England, Guernsey and Gibraltar.  The matter was subsequently settled successfully.

The well reported case of “Megafon” (IPOC v. LV Finance) is another good example of a complex Russian fraud case being litigated and arbitrated outside Russia in various jurisdictions (Switzerland, Russia, England, Sweden, Bermuda and BVI).

More recently, the case of Tadaz v. Ansol Ltd & Others relating to the alleged corruption of a plant manager is still being heard before the Commercial Court of London. This is a $500m dispute and is one of the largest disputes (measured by length of trial and fees) in the UK.

The dispute between Michael Cherney v. Oleg Derispaska which relates to a 20% stake in the share capital of RUSAL is currently being heard before the Court of Appeal in London.

Further, the case of Beregovskiy v. Roman Abramovich involving allegations that Mr Abramovich acted on the instructions from the Kremlin and forced Mr Beregovskiy to sell his shares in a number of blue chip companies in Russia is also being heard before the High Court in London.

To ensure that English Courts have jurisdiction and that English law applies to resolve the parties’ dispute, an effective “Governing law and jurisdiction Clause” can be incorporated in a contract.  Here is an example:

“Governing Law/Jurisdiction clause

1. This Agreement and any dispute arising out of or in connection with it shall be governed by and construed in accordance with the laws of England and Wales.
2. The parties irrevocably agree that the courts of England and Wales shall have exclusive jurisdiction to settle any dispute or claim that arises out of or in connection with this agreement.”