18.12.2023 — Countersanctions: Trends in Their Application and Liability for Non-Compliance
Since Russian countersanctions were first introduced, certain directions in their application have been crystallized. In particular, the Government Commission has clarified its expectations as to the terms and conditions of selling Russian assets by foreign parties in order to obtain the Government Commission’s approval when required under the Russian countersanctions. Apart from that, new case law has emerged on this topic which says that contracts that breach the Russian countersanctions will be invalidated by Russian courts. As a significant number of restrictive measures were prolonged for 2024 – 2025 and the Russian Parliament is considering bills to further penalize failure to comply with Russian countersanctions, the topic remains highly relevant for both for foreign businesses and local entities.
The Russian countersanctions were introduced by several Presidential Decrees in the spring of 2022. They impose certain restrictions on contracts and other transactions with foreign parties associated with the so-called “unfriendly” jurisdictions that have imposed sanctions on Russia. In particular, countersanctions require deals with certain types of Russian assets (such as real estate or shares in Russian entities) to be pre-approved by the Government Commission or the Russian Central Bank.
Since then, state authorities have issued important clarifications to explain their expectations on the terms and conditions of the asset sale transactions involving such foreign parties in order to maximize the chances for their approval. In particular, the Government Commission has explained that it normally expects that the sale price comes with a discount of at least 50% compared to market value. Apart from that, the Government Commission expects sellers to make a voluntary contribution to the federal budget of up to 10% of the market value of the assets sold.
If a given contract or transaction does not comply with the countersanctions, Russian courts are prepared to invalidate the sale. The relevant lawsuit may, for instance, be brought by the Russian entity’s management. A number of prominent court judgments to this effect are already published in Russia (e.g., the case of Bauer Technologiya LLC No. А41-101031/2022).
In addition, the Russian countersanctions have recently been renewed and will remain in place in the foreseeable future. For example, foreign shareholders of designated Russian companies will remain limited in their right to vote on corporate affairs until 2024. Apart from that, the prohibition to sell or otherwise dispose of shares in Russian entities operating in the financial, fuel and energy sectors has been extended until the end of 2025.
The Russian Parliament (the State Duma) is considering a number of legislative bills which would allow the Russian authorities to charge a public fine based on the price of a given transaction in case the Russian countersanctions are breached. The State Duma is also considering a bill that could impose criminal liability for compliance with foreign sanctions against Russia.
04.12.2023 — International Disputes: New Ways for Russian Courts to Assume Jurisdiction by Reference to Sanctions
In a recent digest of case law, the Supreme Court found that Russian courts should assume jurisdiction over disputes under contracts, that would otherwise be decided by a foreign court, where Russian parties are unable to enter the relevant foreign country because of foreign sanctions or restrictive measures and the contract has a “close connection” to Russian territory.
According to the Supreme Court, the imposition of sanctions by foreign states against Russian persons negatively impacts their rights, at least reputationally, and thus knowingly puts them in a position unequal to that of foreign parties.
In the case considered in the Supreme Court’s digest of case law, Lithuania was said to have banned the entry of Russian nationals to its territory, which the Supreme Court found to be a matter of public knowledge that does not require positive proof. As this travel ban restricts the ability of a Russian party to participate in a court hearing in Lithuania, the Supreme Court found that Russian courts should not defer to the jurisdiction of Lithuanian courts.
Instead, as the relevant contract was executed as part of the Lithuanian−Russian Cross-Border Cooperation Program for 2014−2020, the Supreme Court found that the contract has a “close connection” with the Russian territory. As a result, Russian courts should assume jurisdiction over the relevant dispute and prevent its adjudication abroad (paragraph 31 of the Case Law Digest of the Supreme Court of the Russian Federation No. 3 (2023)).
01.12.2023 — Russian Supreme Court Is Increasing Control Over Construction Contracts for Public Needs
A contractor may be not allowed to claim payment for works – even if the acceptance certificates have been signed – where the contractor is unable to prove that it in fact completed the work by reference to as-built documentation and other direct evidence. It may also be even more difficult to claim payment for additional works as not all unforeseen costs of the contractor trigger the client’s duty to provide additional payment.
The Supreme Court is guiding lower courts to increase control over the recovery of payment for works under construction contracts. This trend is particularly evident in cases involving government customers and the use of budget financing.
In one case, the Supreme Court completely rejected all of the evidence of the performance of works presented by the contractor, ranging from acceptance certificates signed by the client to correspondence between the parties and the client’s formal acknowledgement of debt. At the same time, since the contractor was unable to present primary and as-built documentation for the works performed, the court could not order the expert study in order to determine the scope and cost of the works.
As for disputes relating to additional works, the Supreme Court has clarified that courts should always examine the reasons why the contractor exceeded the agreed contract price. Even where a court-appointed expert confirms that the contractor has performed works that were not envisaged in the original project, the court should determine whether such works can be legally classified as “additional works” and what caused the need for their performance. For example, if the additional works were caused by the contractor’s delay in construction, the contractor is not entitled to demand payment for such works. The contractor is also not entitled to argue that ordinary auxiliary works such as the provision of temporary electricity and site fencing are additional works and require separate payments, unless the contract expressly provides otherwise.