Russia: the end of "quick draw" style commercial litigation

Believe it or not, but Russia becomes a fun place to practice. With the new millennium and new government judicial reform has gained the new breath. New fundamental laws, which had been being prepared in a workshop since 1990-ies were finally put in place. Kremlin made it clear that it recognizes that a sound judicial system is a cornerstone of modern civil society, and reform of this system was on top of action plan of the new government. New court rules were adopted for all types of litigation. The Criminal Procedure Code (2001) was followed by in 2002 by the rules for commercial courts (known in Russia as "Arbitrazh" courts). The Civil Procedure Code (governing proceedings in courts of general jurisdiction) is also adopted and will become effective on 1 February 2003.

Simultaneously, the regulations regarding the legal profession were modified. Most important, the new 2002 Law on Advocatura has created a new framework for barristers. Until recently it was not required to have a special qualification of an advocate to appear in commercial proceedings on behalf of a client. Now the situation is reversed.

License is not mandatory for those who provide legal consulting services, however, only advocates, i.e. members of professional associations of trial lawyers are admitted to represent economic actors in the court. The exception is made for in-house counsels and executives, who may appear in the court on behalf of their employers and for representation of individuals who may appoint any person to appear in the court on their behalf.

Naturally, this monopoly was hailed by current members of the Bar and decried by everyone else. In order to become an advocate one has to demonstrate at least 2 years of professional experience and has to seat for the bar exam (next exam is in 2003).

When legislators were debating this monopoly for advocates, a winning argument was used that in order to get better litigation practices, the courthouse must be cleaned of sleazy semi-professionals, and the way to be given to skilled practitioners bound by ethical rules. But now advocates themselves will have to learn new rules of the game, which promise more sophisticated proceedings and the level playing field.

The end of "quick draw" litigation era
Over the recent years the parties appearing before the Russian courts were receiving a "swift" justice. In spite of the fact that adjournments for formal reasons were common, some western lawyers called it "quick draw" or "shotgun" proceedings. No matter how evil this term may have sounded, to lawyers it has quite innocently implied not brutal behind-the-scene conflicts among rival gang clans, but a manner in which the trial is conducted, where the "first to draw", well, not a gun, but plausible arguments supported by evidence, had good chances for winning the case. Indeed, it was customary that the parties present their arguments and evidence only in the courtroom during the hearings. It required that parties and their lawyers are sharp and quick to make a plausible instant rebuttal to something they have just heard or learned for the first time. Appeal proceedings were the only second chance to supplement the position by presenting new evidence and arguments left out at the trial court.

The entire litigation (including the trial and two appeals) was normally concluded within 8 or 10 months. Such fast-track procedures have their own advantages and were often preferred by our clients, both Russian and foreign, to other alternatives, such as arbitration or litigation in foreign court, particularly for minor claims. Litigation in Russia was regarded to be fast and relatively inexpensive, albeit dodgy route to a final and enforceable judgment.

Tight deadlines, which were imposed by the previous legislation, are somewhat relaxed by the new code. An effort is made to keep proceedings more balanced and fair by eliminating surprise tactics in a courtroom, but keep the procedure as fast as possible.

These objectives are achieved by introducing a number of novel features, which are discussed in this note. They include:
- pre-trial procedures and disclosure of evidence,
- bifurcated proceedings,
- recognition of judicial practice as controlling authority,
- fee-shifting,
- new rules relating to legal profession.

Pre-trial procedures
Hearing in the trial court used to be the first occasion on which the parties and a judge met each other face to face. Under the court rules before the changes all the procedural steps prior to hearing used to be taken by filing written motions.

Now the preparatory stage of proceedings involves a new step – pre-trial conference. At the conference, the parties are given the opportunity to explain their positions, provide and request evidence. The judge resolves the motions and makes procedural orders. If circumstances of the dispute appear to be clear and no more fact-finding is required, the judge can offer the parties to open the hearing immediately after pre-trial conference. If one of the parties objects, the hearings are scheduled for the later time.

Importantly, the new rules urge a judge to facilitate settlement of a dispute at an early stage of litigation, for instance by recommending the parties to refer a dispute to a mediator. This provision is expected to give a boost to use of various ADR techniques, such as mediation and conciliation, as a required element of a commercial litigation.

New ways to organize the trial
The new rules provide for some special types of proceedings. For instance, now the judge can order bifurcated or expedited proceedings. In this case the first hearing is only to resolve whether grounds for action exist. If a claimant prevails on this issue, the court schedules a second hearing, where amount of damages or other amounts to be awarded are quantified. In expedited proceedings, which are reserved for a limited number of straightforward cases, such as default of payment on promissory note, the special rules on fast-track litigation are introduced. The parties are notified of such proceedings.

Evidence and burden of proof
The new rules are more elaborate on the adversarial nature of commercial litigation. On one hand, a judge is now given a power to actively participate in a fact finding, and, in particular, order production of evidence on his own initiative in certain cases. On the other hand, the new rules require more active participation of the parties.

The evidence rules sign a departure from old "shotgun" tactics, where most important issues were often reserved for the courtroom, where a surprise attack could overwhelm the opponents. The new law specifically requires that all the evidence and arguments must be disclosed to opposing party prior to the hearing, so that the latter has sufficient time to react.

The judge may refuse to admit the evidence, which was not disclosed "beforehand", i.e. with a sufficient advance prior to the trial.
The judge may order production of evidence in administrative cases after his own initiative. In private disputes the judge may upon its own initiative schedule expert examination and, in some cases, summon witnesses. Production of other evidence can be ordered only upon the motion of a party.

The new code recognizes e-commerce and other realities of modern commercial practice by admitting video and audio records and "other media" as legitimate evidence. It also provides that electronic transmissions acknowledged by digital signature are treated as written documents.

Provisional measures
The system of provisional measures, i.e. arrest, attachment and other court orders has always existed in Russia, but were not effective. Such measures could be ordered by the judge without hearing the other party, but only after notice of the claim is sent to the other party and the claim is officially filed with the court. Provisional measures could be dismissed only in a hearing. Counter-security was not mandatory and rarely used in practice. In practice it meant that defendants could get notice of the proceedings and divest the assets prior to the security order. At the same time unscrupulous plaintiffs, after obtaining arrest or attachment, could engage in dilatory tactics to avoid the hearing, in the meantime using the constraints imposed by the order as leverage against defendant during settlement negotiations. Such practice was particularly common in litigation where the plaintiffs' case was not so well-founded.

A new model moves towards more balanced approach to the procedure. In what can be called a revolutionary development, it allows pre-suit provisional measures. It means that claimant can seize the assets or stop the infringement almost immediately without need to spend time for preparing and serving the claim upon the defendant. On the other hand, counter-security is mandatory for pre-suit provisional measures.

Rules regarding counter-security are improved in respect of traditional provisional measures also, albeit they include unreasonably rigid provisions. For instance, the amount of the counter-security must be at least ? of the amount claimed, but cannot exceed this amount. If the function of the counter-security is to provide for compensation of potential damages of a defendant, the nature and amount of such security shall be tied to the scope of the damages and not to the amount claimed by the plaintiff in underlying proceedings. But the defendants have to be alert in respect to the type of the counter-security requested. Recognized forms of such counter-security: a bank guarantee, personal guarantee and or money deposit with a court do not necessarily assure the recovery. The law does not instruct a judge to verify financial standing of the third party (bank or commercial company) providing a surety for the plaintiff. It was already seen in practice that a surety provided is underwritten by obscure companies, which are dormant do not have funds sufficient to pay up. At the same time, deposit of funds with a court is a burden on plaintiffs finances, particularly because no interest is due in respect of such deposit.

It is specifically stated that provisional measures can be ordered in support of arbitration. Interpretation of the language used in the statute leads to a conclusion that this facility is available not only for domestic and international arbitration proceedings with a seat in Russia, but also for foreign arbitration.

Timing is always important in these issues. Provisional measures are considered to be a urgent matter and the law requires the judge to take action on application for provisional measures not later than on the next business day after it is filed. However, if counter-security is ordered, the resolution on provisional measures is reserved until such time as the counter-security is posted.

More weight to a precedent
Russian private law is codified. It has emerged as a mix of French and German codifications. Judges have a wide discretion in interpreting the law as there is no strict precedent system. In practice, references by the parties to the precedents were not uncommon, but these precedents were not and could not be cited as grounds for decisions (with an exception of so-called "explanatory rulings" or "reviews of practice").

In a radical development, trial courts can now expressly refer to explanatory rulings of country highest judicial bodies as controlling authority in their judgments.
Moreover, the new Arbitrazh Code endowed the Supreme Arbitrazh Court with the power to overturn lower courts decisions, which are "not in line" with an established judicial practice (i.e. judgments given in earlier cases).

This provision means that not only explanatory rulings of the Supreme Arbitrazh Court, but also a line of reasoning or manner of interpretation of particular laws crystallized through series of decisions of lower courts will be binding for trial judges.
There are pros and cons of such approach. A power of civil law judge to interpret the law in the way it sees fit given the facts of a case before him was always important in Russia during the early years of reforms, when provisions of legislation were too cursory and sometimes even contradictory. Judges have used this power of interpretation to bring proceedings to a fair result notwithstanding, and sometimes even in spite of these legislative disparities. It happened more than once that same court gave different interpretation to the same statutory provision taking into account of underlying circumstances of each case, which compelled such deviation to achieve fair and just result. The new approach will make interpretation of statutory law more uniform and predictable, but will deprive judiciary of this important flexibility.
In these light publishers of computerized legal research systems announced new products featuring combined cases of all circuit courts.

Between two lights
An important achievement of 2002 Arbitrazh Procedure Code of the Russian Federation is also elimination of concurrent jurisdiction of general and commercial courts. Now all corporate disputes (including those relating to minority shareholders rights), procedures relating to commercial arbitration and administrative cases involving economic actors are within the exclusive domain of commercial courts.
This is important, because concurrent jurisdiction and differences of interpretation of laws among two branches of judicial system sometimes led to conflicting rulings of different courts in what could be two sides of basically the same dispute.

For instance, the alternative venue for claims relating to shareholders' rights was a cause of virtual anarchy in this area. An appeal against corporate resolution on merger could go to the court of general jurisdiction in cases when the claimants were private individuals and to commercial courts if shareholders were corporations. Since cross-referral between different branches of court systems was not possible, such proceedings could take radically different courses, and, sometimes led to a corporation with two struggling boards of directors and two CEO's each having its powers confirmed by a court decision.

The practice was even more controversial on some issues relating to arbitration. Courts of general jurisdiction had a view that an arbitration clause does not automatically pass upon the third person (assignee) in case the contract (or a claim arising therefore) is assigned. Thus a unilateral assignment by a foreign partner could mean that enforcement of an award against Russian party is denied by court of general jurisdiction, which at that time was a proper enforcement venue. At the same time, commercial courts established precedents that remaining party to the contract could rely on the arbitration clause to avoid jurisdiction of state courts, in spite of any assignment of the contractual rights by the other party. They would thus decline to accept jurisdiction over the claim of assignee and to refer the parties to arbitration.

Thus a beneficiary of an assignment agreement could find himself with no remedy at all. Russian commercial courts would refer the case to arbitration, but the prospective for enforcing of such an arbitration award through the courts of general jurisdiction would not be flattering at least. These two examples demonstrate how important it was to eliminate concurrent jurisdiction in order to enhance predictability of legal regulation. And this mission by and large is now accomplished. All proceedings relating to international arbitration (including ancillary proceedings, setting aside and enforcement proceedings) are now within the domain of commercial courts, which became the primary venue for resolution of disputes relating to economic activity.

Fee shifting and exclusivity
It was not unusual to see foreign attorneys appearing in Russian courts on behalf of their clients, sometimes even using an interpreter to address the court. But now foreign attorneys who face litigation in Russia will have to appoint a Russian attorney to represent their clients. Admission to the Bar is not specific to certain court or region. An advocate can practice anywhere in Russia.
The court is still bound to admit, upon application of a party, a court interpreter in order to interrogate the witnesses and/or brief foreign executives on what is going on in a courtroom. However, because representation in a court is reserved only for advocates admitted in Russia, the role of foreign attorneys in court proceedings is now limited.

Simultaneously, the rule regarding fee-shifting was reversed. Following a decision of a Constitutional Court, which recognized that legal fees are just another type of damages caused by offending party, the prevailing party is now entitled to recover "reasonable" court costs, including attorney fees. There are no guidelines in the law as to what is "reasonable". In courts of general jurisdiction, where fee shifting was allowed, remuneration of about 5% of the amount in dispute was generally used as a cap on fees that can be recovered by a party who won the case.

Even though this practice is a solid reference point, commercial courts may as well use different criteria for determining what remuneration is "reasonable". Although contingency fees in litigation cases are not banned and, in fact, very common, such claims are not enforceable in the court (information letter of Supreme Arbitrazh Court of 29/09/99 "On resolution of disputes relating to contracts for legal services"). Thus position of losing parties will be relieved because they will probably only have to pay hourly or fixed fees of the opposing counsel.

In addition, the law specifically provides that a party that has engaged in dilatory practices or obstructed litigation in other way may be ordered to pay the costs irrespective of the outcome of litigation.
This is a snapshot of new "Russian style" of commercial litigation. It brings more facilities, but also more responsibility for advocates. They hope that with consistent implementation of new features Russian commercial courts will be considered by foreign companies doing business in Russia as sound alternative to other dispute resolution forums.

Russia: the end of "quick draw" style commercial litigation