FW: In recent years, have you seen an increase in disputes involving Russian and CIS companies? What are some of the common causes of such disputes?
Malskyy: Given the significant increase in international commercial trade between CIS/Russian companies and companies from Western jurisdictions, it is unsurprising that we have observed an increase in disputes involving Russian and CIS companies in comparison to previous years. The global financial crisis, which dramatically affected Russian and CIS companies in 2008, has also made it more difficult for large companies to meet all their contractual obligations to foreign partners. The most common causes of such disputes are breach of obligations under commercial contracts such as supply, purchase, loan, shareholder and real estate agreements. Also, some disputes have arisen due to an inability of some companies to meet their financial obligations to banks, and the subsequent bankruptcy of such companies. Even though some economists are forecasting another global financial crisis, at this stage the situation in Russia and the CIS is generally stable. However, a future economic downturn may cause another wave of such disputes.
FW: To what extent do the complexities of doing business in Russia and the CIS, the country's judicial system, and the binding rules which govern commercial relationships, increase the risk of encountering a commercial dispute?
Malskyy: Presently, one of the main problems in Ukraine is the unreliable judicial system and unpredictable legislation. Although legislation provides scope for protecting the rights of foreign companies and investors, there remains a problem with the enforcement of such rights in national courts. Foreign companies hesitate to conclude long term contracts with companies from such jurisdictions as the political climate influences legislation activity and makes it unstable. To avoid the risks and complexities of resolving such disputes, it is important to identity these risks when concluding contractual relationships and to choose international commercial arbitration institutions as the place of dispute resolution. It is also important to draft all contracts and agreements between the parties, from the outset of any cooperation, with the assistance of qualified legal counsel located within the respective jurisdictions. Another good idea is to evaluate your contracting party before concluding any binding agreements. This could be done by obtaining an excerpt from the official trade register of companies (which allows you to get to know the limitations of powers of managers, the names of current managers, the size of the share capital, information on liquidation or reorganization, and so on), reviewing the register of court decisions (which may reveal whether the party is involved in any litigation, whether it has been declared bankrupt, and so on). Also, simple approaches such as enquiring about a company's reputation in previous transactions may also prove effective.
FW: How would you describe existing dispute resolution facilities and processes in Russia and the CIS?
Malskyy: Similar to most jurisdictions, resolving disputes in Russia and the CIS usually includes three key stages, namely – negotiation and pre-court dispute resolution; in-court dispute resolution; and enforcement of the final decision. There are further options relating to in-court dispute resolution, being traditional dispute resolution in national courts, and alternative dispute resolution in international arbitration institutions and domestic arbitration institutions. Dispute resolution in national courts usually includes consideration of the case in all three instances. In Ukraine it is also possible that the case may be returned to the court of first instance for reconsideration. International commercial arbitration is quite well developed in Ukraine and Russia, and both MKASs (international commercial arbitration courts) have a long tradition of resolving multiple disputes. Enforcement is a separate stage of dispute resolution and is often problematic as many debtors refuse to voluntarily carry out actions in accordance with the decisions. Guerrilla tactics often take place, including procedural delays and transfer of assets to third parties. For those reasons, parties should apply for interim measures where such risk exists.
FW: Could you outline some of the main problems relating to pre-court and in-court dispute resolution in the region?
Malskyy: When talking about negotiation and pre-court dispute resolution, it should be noted that, unlike western jurisdictions where it is an effective means of resolving disputes and usually results in mutually acceptable agreements, in the CIS region this process is rarely effective and a rather formal procedure. Traditional dispute resolution in national courts is a lengthy proceeding; it usually takes about 12 to 18 months for a commercial courts to consider the case in three instances (rarely do the cases go to the fourth instance, which is the Supreme Court of Ukraine). The procedural legislation contains some gaps allowing debtors to use dilatory techniques and guerrilla tactics against a creditor, in which case the proceedings – from filling the claim until actual payment – may last a few years. Therefore, we recommend using international commercial arbitration as an alternative means of dispute resolution. Further, such factors as insufficient financing of the state courts, the large number of cases and a lack of experience in international commercial disputes, make international arbitration a much better choice.
FW: Do court proceedings and the enforcement of final court decisions present challenges for disputing parties?
Malskyy: The biggest challenges are the formal approach of national courts, corruption in the courts, lengthy proceedings, dilatory and guerrilla tactics used by responding parties, and problematic and ineffective enforcement of final court decisions. In any case, the success of court proceedings is often heavily dependent on an effective strategy initiated well in advance.
FW: In cases where asset tracing is required for debt collection, why is it important for the process to be performed before court proceedings are initiated?
Malskyy: We recommend performing asset tracing at the beginning of a dispute to determine whether there are any debt collection issues, and initiating court or arbitration proceedings. Asset tracing reports are also useful for securing future enforcement. Debtors originating from CIS countries often 'hide' (alienate) their assets in the course of pre-court and in-court dispute resolution to preclude actual payment. Therefore, if any assets are discovered, the creditor should apply for interim measures to secure enforcement. Providing such information to the State Enforcement Service, which is in charge of enforcing court rulings, will accelerate enforcement proceedings.
FW: Could you outline the main problems faced by foreign shareholders in the field of corporate governance? What steps can be taken to prevent violation of corporate rights and to protect corporate rights in the courts?
Malskyy: One of the key problems faced by foreign shareholders in the field of corporate governance is the cultural difference in the approach to business and partner relationships between western investors and local managers at all levels. There are a many clear examples of local managers abusing their positions and using company assets to further their own financial interests. In fact, even removing such managers often takes great effort, and the damage stemming from such 'managing activity' sometimes even leads to the insolvency of previously successful businesses. In such cases we recommend appointing a trusted manager from abroad to a key position within the company, or at least regularly performing legal and financial due diligence on the company. There is no such thing as having too much control in our part of the world.
FW: Could you explain the term 'raider attacks'? What options are available to counteract this issue?
Malskyy: The issue of counteracting raider attacks has become important in Ukraine and CIS countries. In common understanding, a raider attack means obtaining control over certain target shares or assets, in particular by a minority shareholder, counteragent or even third party. Often this is performed through obtaining a court decision regarding a non-existing or minor debt, vindication of property, invalidation of agreements, etc., under which the court issues a decision which transfers either the property rights or makes it impossible for the business to function. To enforce such decisions, enforcement service representatives with a large number of private security staff enter a company's premises and, for example, alienate its stamps together with the constituent documents. The next step is usually to assume management of the company or at least to conclude numerous contracts to create new debts for the company. To counteract raider attacks, we recommend disposing of the company assets in strict compliance with the law and to fix efficient mechanisms of controlling all company transactions. In addition, structuring an investment through other jurisdictions may provide protection via investment treaties. In our experience, companies are less likely to come under attack if they are highly indebted or their property is leased or pledged. As mentioned, performing regular legal and financial due diligence is very important.
FW: To what extent should companies consider international commercial arbitration as an alternative means of disputes resolution? In doing so, what issues should be considered when including an arbitral clause in a commercial contract?
Malskyy: At this stage in the development of local judicial systems, international arbitration is the most effective means of dispute resolution. Parties choosing international arbitration should consider the follow issues: the most appropriate seat of arbitration for both parties (with due regard to possible challenges of awards, the law governing arbitration, and so on), the governing law of the contract, the cost of arbitration proceedings at a particular institution, the language of arbitration and the quantity of arbitrators, and the respective rules of arbitration of the chosen institution. When concluding a commercial contract it is most important to correctly draft the arbitration clause – avoiding, for example, misspelling the names of institutions or creating ambiguity somewhere in the clause. In this respect we recommend using model arbitration clauses, which, as proven by practice, are effective and enforceable in almost any case – otherwise there is a risk that the arbitral tribunal or the court to which an application for enforcement has been filed may consider the arbitration clause defective and even refuse to recognise and enforce an award.
FW: Overall, what general advice would you give to parties that find themselves in dispute with a Russian or CIS entity?
Malskyy: The general advice is to pay attention to the local nuances of doing business and to double or triple check all actions that influence the business. In such cases experts, close colleagues or business associations from respective jurisdictions will assist the investor to avoid fraud perpetrated by contractors, managers or third parties. It is also true that a business will not function well if there is an insufficient level of control over it, or if a partner is chosen simply out of the blue. Shareholders must visit the company regularly, avoid hiring interconnected managers, regularly double check procedures such as tenders within the company, have the power to block bank accounts or to deny certain payments, be sure to check the title over the main assets regularly, ensure that no 'side' business develops within the company, and have all constituent legal documents well drafted and updated as the company develops. If a dispute does arise, we suggest pursuing an amicable settlement – but if this is not possible, act immediately with prompt applications for interim measures and ensure they are duly enforced. Applications that include statements of potential criminal activity may also be quite effective, although it is necessary to assist investigators by continually supplying information. It is possible to conduct business successfully in Ukraine; however, it is an emerging market with certain higher-than-average legal risks.
Originally published in Lehmann Communications, 3 October 2012
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.