In Russia, recovery of damages is a universal remedy available for a wronged party.
The universal nature means that, as a general rule, a wronged party may recover damages regardless of whether there are other remedies available to the party or whether the party's right to recover damages is specifically mentioned in law or in an applicable agreement.
Historically, claims for recovery of damages before the Russian courts have been very difficult to prove because of the high threshold of evidence required. For many years, the courts acted on the basis that both the amount of damages and causal link between the breach and the harm must be proved with 'absolute certainty'.
The trend for lowering the high evidential burden for recovery of damages began with the Supreme Arbitrazh (Commercial) Court of the Russian Federation2 in 2011 when the court applied a lower standard of evidence to secure the interests of the party who suffered loss and render a fair judgment.
Substantial amendments to the Civil Code of the Russian Federation (the Civil Code) in effect from 1 June 2015 and additional clarifications of the provisions in the Civil Code dealing with recovery of damages that have been recently issued by the Supreme Court of the Russian Federation (the Supreme Court) have continued this trend of lowering the evidential standard and simplifying the procedure for evidencing damages claims.
The most important changes were introduced (1) to reduce the threshold of evidence required to prove the amount of damages and the causal link between the breach and the damage; (2) to introduce 'concrete' and 'abstract' methods as a universal method for calculating damages arising out of the breach of contracts; and (3) to extend the possibility for wronged parties to recover damages resulting from bad faith negotiations.
i Amount of damages and causal link between the breach and the damage
According to the amended Civil Code, the amount of damages must be proved to 'a reasonable degree of reliability'. This test is significantly lower than the previous standard of 'absolute certainty'.
Furthermore, if a claimant fails to prove the amount of damages to a 'reasonable degree of reliability', it does not constitute a ground for dismissal of the claim. The court must still determine the amount of damages by taking into account all the circumstances of the case, based on principles of fairness and proportionality of liability stemming from the breach.
In addition, in relation to lost profit, the Supreme Court in its recent clarifications ruled that the calculation of the amount of lost profit need not be precise and may be based on approximation. For example, the amount of loss of profit may be calculated using the actual profit of the creditor for a similar period prior to the breach committed by the debtor.
According to the new rules, the causal link between the damage suffered and the breach will be established if such damage is deemed a normal consequence of the breach committed by the defendant. This is a new principle for the courts. Previously, the court required that the causal link is also proved with 'absolute certainty'.
Though the above amendments were introduced in relation to contractual damages, they should also apply in the context of tortuous liability.
ii 'Concrete' and 'abstract' methods for calculating damages
Recent amendments to the Civil Code further simplify the process for proving damages by introducing the 'concrete' and 'abstract' methods of calculating damages. These methods were introduced into the Civil Code with effect from 1 June 2015 as a universal method that may be used when calculating damages in relation to all types of contracts. Previously, the Civil Code provided for these methods only in relation to supply agreements and there was no unified approach in court practice as to whether such methods were applicable to the calculation of damages in other types of contracts.
The 'concrete method' of calculation applies where a claimant has mitigated a loss by entering into a replacement transaction to replace an original transaction that has been terminated owing to non-performance or improper performance by a defendant. The calculation is based on the price difference between the original transaction and the replacement transaction.
The 'abstract method' applies if a claimant has not mitigated its loss by entering into a replacement transaction, but where an actual price for similar goods or services can be established. The difference between the price in the original agreement and the actual price is used to calculate the amount of abstract damages.
iii Damages resulting from bad faith negotiations
The recent amendments to the Civil Code further extend possibilities for the wronged party to restore the rights violated during negotiations by introducing the notion of bad faith negotiations and requiring a party who negotiated in bad faith to compensate the other party for damages suffered. In particular, the party who negotiated in good faith will be compensated for expenses relating to the negotiations and the lost opportunity to enter into an agreement with a third party.
II Quantification of financial loss
The Civil Code provides for two types of damages: actual loss and lost profits.
Actual loss encompasses loss or damage to the property or assets of a party as well as subsequent costs the party has or will have to incur to restore that party to its original position.
Lost profits refers to income not obtained by the party, which would have been obtained under normal conditions, if there was no breach on the part of the defendant.
Unless otherwise provided by law or by contract, damages must be compensated in full. The intention is to place the party in the position that it would have been in if a breach had not occurred.
A claimant seeking to recover damages must prove: (1) that there is a breach on the part of the defendant; (2) the amount of harm suffered; and (3) a causal link between the breach and the harm suffered.
As a general rule, the Civil Code also recognises that there must be fault on the part of the defendant. However, the fault is presumed and, therefore, the burden lies with the defendant to satisfy the court that they are not at fault. Moreover, in instances provided by the Civil Code, a party that causes the damage is held liable regardless of whether such party is found to be at fault for the breach or not. For example, where damage arises from the breach of a commercial contract, the party may only be released from liability in case of force majeure.
There is no specific type of evidence required in Russia to prove damage. Depending on the complexity of the circumstances of the dispute, the claimant may need to provide expert reports and additional types of evidence to prove the amount of damage. In complex disputes, the courts tend to rely on expert evidence.
iii Date of assessment
As a general rule, unless otherwise provided by law or by contract, there are two main approaches to assessing the date on which damages are calculated, along with a third, less commonly used approach.
Day of voluntary performance
The first approach applies when the party who caused damage voluntarily agrees to compensate the other party. Here damages are calculated based on the price of goods or services on the day of voluntary performance.
Day the claim was submitted
The second option applies when the court finds the defendant liable for damages suffered by the claimant. Here damages are calculated based on the price of goods and services on the day the claim was submitted to the court.
Date of the judgment
There is a third approach the court may apply at its own discretion. The court has discretion to calculate damages by taking into account the price of goods and services on the date of the judgment. This discretion allows the court the flexibility to render a fair judgment in cases where, for example, prices have fluctuated significantly by the date of judgment.
iv Financial projections
Russian law does not directly mention financial projections in relation to the calculation of damages. However, the Civil Code does allow a claimant to factor into its damages calculation the costs that it projects it will be forced to incur to recover from the breach (the non-concrete part of real damage) and any profits not made (as lost profit). Therefore, the Civil Code allows a consideration of financial projections to some extent when calculating damages.
Following amendments to the Civil Code (which came into effect from 1 June 2015) and further clarifications of the Civil Code by the Supreme Court, the threshold required to prove the amount of damages has reduced from 'absolute certainty' to 'a reasonable degree of reliability'. This, in turn, has increased the scope for using financial projections in the calculation of damages.
However, despite the reduced threshold required to prove the amount of damages and the increased scope for the use of financial projections, the courts have tended towards more conservative approaches when calculating damages. Where the circumstances would allow for use of financial projections, the courts have favoured approaches that have less reliance on expert speculations. For example, in one recent case where the claim was for recovery of lost profit, the court adopted an approach that had a stronger correlation with the factual evidence, leaving smaller scope for interpretation by an expert.
A claimant seeking to recover damages may rely on the following presumptions.
As a general rule, the fault of the defendant is presumed, unless proved otherwise. The burden lies with the defendant to satisfy the court that they are not at fault.
Amount of damages
To prove the amount of damages suffered, the claimant is required to present evidence sufficient for the court to determine the amount of damages to the standard of 'a reasonable degree of reliability'.
Amount of lost profit
Where the defendant has profited from a breach, there is a presumption that the claimant can recover at least the amount of the defendant's profit that flows from the breach.
The causal link between the damage suffered by the claimant and the breach is presumed to be proved if the damage suffered is a normal consequence of the breach.
In addition, there are certain presumptions applicable to specific situations.
- Abstract and concrete damages: when calculating concrete damages (explained in the overview above), it is presumed that a claimant entered into the replacement transaction in good faith and reasonably.
- Bad faith negotiations: as a general rule, it is presumed that negotiating parties act in good faith. By itself the refusal to continue negotiations without specifying reasons does not mean that a party is acting in bad faith.
However, in the following situations, the above presumption is reversed and a party is presumed to have entered into negotiations in bad faith:
- if a party provides the other party with incomplete or misleading information, including non-disclosure of material conditions that, taking into account the nature of the transaction, should be communicated to the other party; or
- if a party abruptly and unreasonably terminates negotiations where the other party could not reasonably expect such termination.
The defendant has the right to challenge any of the above assumptions.
vi Discount rates
Russian law does not take into account discount rates. A defendant does not have the right to apply to the court to request the awarded amount of damages be discounted based on the claimant's opportunity to invest the awarded amount.
vii Currency conversion
As a general rule, all payments in Russia must be made in roubles.
Regardless of whether the amount agreed by the parties is in a foreign currency or non-conventional monetary units ('special drawing rights', etc.) payment is still required by law to be made in roubles.
By law, the payment amount in roubles is determined according to the official exchange rate as of the day of payment. However, a different exchange rate or an exchange rate from a different date can be used where agreed by the parties.
Payments can be made in a foreign currency where permitted by the Federal Law on Currency Regulation and Currency Control No. 173-FZ dated 10 December 2003.
viii Interest on damages
As a general rule, if there is a delay in payment of damages required by a judgment or agreement, the creditor is entitled to require payment of interest on the outstanding amounts. Such interest is defined in the Civil Code as interest for 'unlawful usage of another person's money'.
Unless another interest rate is agreed by the parties or is provided for by law, the amount of interest due is calculated based on the key rate (or base rate) of the Bank of Russia, existing during the delay period. For example, from 17 June 2019, the key rate of the Bank of Russia is fixed at 7.5 per cent per annum.3
If the interest rate agreed by the parties is higher than the key rate established by the Bank of Russia, the defendant can make an application to the court, which has discretion to reduce the amount of interest set by the parties if the court considers that the amount of interest is clearly inadequate considering the consequences of the breach, but not lower than the key rate of the Bank of Russia.
If damages are deemed recoverable by the court, interest on the damages will accrue from the date the judgment becomes effective.
If a party that caused damage and a party that suffered damage entered into a subsequent agreement pertaining to compensation for the damages, then interest will accrue in accordance with the terms of that agreement.
As a general rule, the interest will accrue until full payment of the amount due to the creditor is made.
If the delay in payment causes damage to the creditor and the amount of such damage is not fully covered by the amount of interest accrued for the delay period, then the creditor has the right to require the defendant to pay damages in excess of the amount of interest.
As a general rule, the unsuccessful party in a dispute must pay the successful party's costs. If the claim is only partially successful, costs will be allocated proportionately.
The successful party has the right to recover any costs deriving from the dispute – for example, any state fees relating to the dispute, amounts paid to the party's representatives, experts, specialists, witnesses, translators and others. The successful party may also recover costs incurred in relation to the collection of evidence, legalisation of documents received in another country, and issuance of a power of attorney. The list of costs that may be recovered by the successful party is not exhaustive.
Following the court's judgment on the merits of the case, the court will consider which party is liable for costs and to what extent, and the reasonableness of such costs. Costs are considered reasonable if they correspond to normal pricing.
The party required to pay costs can apply to the court to reduce the amount of costs, if the costs are proven to be unreasonable. For example, it is common practice in Russia for the court to significantly reduce the recoverable amount of fees paid to representatives. As a result, fees recovered may be several times lower than fees paid.
Though contingency fees are not prohibited by law, according to current court practice contingency fees are not recoverable.
Payment of taxes is regulated by the Tax Code of the Russian Federation (the Tax Code).
Pursuant to the provisions of the Tax Code, damages received by a claimant (on the basis of a court decision or as a result of voluntary payment by the defendant), penalties and other sanctions are subject to 20 per cent corporate income tax in Russia, unless there is a double tax treaty between Russia and the country of residency of the creditor, which provides for a lower tax rate on received income.
It is important to note that the taxable amount of damages received by the claimant could be reduced based on what the claimant states as their expenses pursuant to the Tax Code.
The amount of damages, penalties and other sanctions received by the claimant are not subject to VAT. For many years there was no unified approach as to whether VAT may be included by the claimant in the amounts of damages due to them. In 2013, the Supreme Arbitrazh Court ruled that VAT should not be included in the amount of damages due to the claimant, provided that the claimant has the right to VAT deduction. Generally, the courts follow this position.
III Expert evidence
The court has the right to involve an expert where it considers that specific professional knowledge is needed to resolve a dispute. This includes experts who are employees of state-owned or private expert organisations, or who have their own private practice.
There are no legal restrictions as to the qualifications of persons who may act as experts in court. The only exception is experts who are employees of state-owned organisations. According to the Federal Law on State Court and Expert Activities No. 75-FZ dated 31 May 2011 (the Law on State Court and Expert Activities), they must possess a higher education degree, additional professional education in a specific and relevant expertise area, and be qualified to conduct independent court examination. The level of expertise of state experts must be reconfirmed every five years.
The court also has the right to involve a 'specialist' to assist in resolving the dispute. The difference between a specialist and an expert is that the expert is involved by the court to conduct research and prepare an expert report reflecting their findings, while the specialist gives advice in a court hearing without conducting an examination and preparing a report. Specialists are rarely involved by Russian courts.
Also, in Russia it is common practice for a party to a dispute to hire its own expert, whom it believes is best qualified to conduct the examination. A party to the dispute will then formalise questions, and provide materials and documents to allow the expert to carry out the requested examination. Once ready, the party's expert report is submitted to the court. Though such reports cannot be considered expert reports as referred to in the APC and CPC, courts accept such reports and treat them as equal to other evidence.
ii The role of expert evidence in the calculation of damages
When calculating damages, Russian procedural rules do not give any preference to expert evidence over other sources of evidence available in a particular dispute.
When making a decision, the court will evaluate relevance, admissibility and reliability of each set of evidence separately and collectively.
This means that when rendering its judgment, the court may rely on the expert evidence as long as such evidence is not contradicted by other evidence presented to the court.
In practice, however, it is more common that contradictions arise between expert evidence provided by court-appointed experts and expert evidence presented by the parties. Based on analysis of available court practice and our own experience, in such instances, judges tend to prefer the opinions of court-appointed experts to the reports of party-appointed experts.
However, the Supreme Court has repeatedly stated that expert reports presented by the parties cannot be rejected simply on the basis that the experts who prepared such reports were not appointed by the court. In a recent case where the lower courts (i.e., first instance, appeal and cassation) accepted the findings of the court's expert report and rejected the expert report obtained by a party to the dispute, the Supreme Court, referring to the unresolved contradictions between the report of the expert retained by the claimant and the report of the expert appointed by the court sent the case for reconsideration to the first instance court. The Supreme Court ruled that contradictions between the court-appointed expert and the party's expert must be resolved when rendering the judgment.
iii The court's role excluding and managing expert evidence
In Russia, the court itself appoints the experts.
As a general rule, the court appoints the expert examination upon a motion of either party to the dispute. The court will consider that motion and if the motion is convincing then the court will initiate an expert examination. In the arbitrazh courts, the court may also proceed without an initial motion from either party and suggest the appointment of an expert. If either of the parties agrees, the expert examination will be appointed by the court.
The parties to the dispute have the right to present to the court their own expert candidates. The court is free to select experts from a proposed pool of candidates or to select its own candidates. In practice, the court generally selects experts from the candidates proposed by the parties.
The court will provide questions for the experts. The parties have a right to ask the court to add questions.
A request for expert examination must be filed with the court of first instance (i.e., the trial court). An expert examination may only be ordered by the court of appeal (the second level court) in a limited number of instances; for example, if the lower court refused to grant the party's motion to carry out the expert examination. Courts of higher instances (cassation courts and the supervisory court) cannot order an expert examination.
Parties have no right to challenge a court's rejection of a request for expert examination or the court's ruling on the appointment of an expert to conduct an examination (e.g., because of the court's choice of experts or questions for the experts). The only avenue to challenge these rulings is to present the party's arguments when appealing the court's judgment rendered on the merits of the case before the higher courts.
iv Independence of experts
Russian procedural rules require experts to act independently when conducting the expert examination initiated by the courts.
The following rights and obligations guarantee the independence of experts in court.
Disqualification and self-disqualification of experts
The CPC and the APC provide the grounds for disqualification of experts, which are similar to the standards for the judiciary.
The expert will be subject to disqualification if: (1) he or she is a relative of a party involved in the dispute or of a representative of such party; (2) he or she is personally, directly or indirectly, interested in the outcome of the dispute, or there are other grounds that could raise doubts about his or her impartiality; (3) he or she is, or was, under employment or another position of subordination to a party involved in the dispute, or the representative of such party. This is not an exhaustive list.
The court may disqualify the expert on its own initiative. The parties to the dispute also have a right to request the disqualification of an expert. If there are grounds for disqualification, the expert can also self-disqualify.
Disqualification or self-disqualification must be done prior to commencement of consideration of the dispute on merits. After that, the disqualification or self-disqualification can only be requested if the grounds for disqualification became known to the requesting party after consideration of the dispute on merits commenced.
Experts receive their fees from the court upon completion of their examination. Prior to initiation of the examination at the request of the court, the parties to the dispute are required to transfer to the court's bank account the amounts due to the experts.
Provision of experts with materials for analysis
Experts are not allowed to contact the parties to the dispute directly. Materials necessary for the experts to conduct the examination are provided to them by the court. Experts can receive explanations from parties in a court hearing with a court's consent.
Expert independence in choosing the analysis method
The expert has the right to choose a method of analysis that provides validity, credibility and can be verified by using generally accepted scientific and practical data.
Criminal liability of the expert for giving a knowingly false opinion
An expert is criminally liable for knowingly giving a false opinion.
Criminal liability for influence on the expert or his or her relatives
Both the court and the parties to the dispute are prohibited from influencing the conclusions of the expert examination. Any party deemed to have influenced the expert will be subject to criminal liability under the Russian Criminal Code of the Russian Federation.
v Challenging expert credentials
Prior to initiation of the expert examination
Expert candidates proposed by the parties will be considered at a court hearing.
The parties have a right to present arguments as to why the expert candidates proposed by the opposing party should not carry out the required expert examination. In practice, the most common argument is the absence of the necessary education and experience in relation to the matter.
After completion of the expert examination
Questioning of expert
Any of the parties to a dispute can request that an appointed expert appears before the court for questioning. However, it is ultimately at the discretion of the court whether it considers that questioning is necessary to clarify aspects of a written expert report. The court is, therefore, entitled to refuse such a request.
Additional and repeated expert examination
If an expert report lacks certain necessary findings, either party to the dispute or the court may request that the court appoint another expert examination. In such circumstances a party may request an additional expert examination into the outstanding issues by the same or a new expert, or make a request to have the expert examination repeated in its entirety by a new expert.
After consideration of the dispute on merits
After the first instance court has handed down its judgment on the merits of the claim, the parties will also have an opportunity to raise disagreements with the expert opinion when challenging the first instance judgment in the higher courts (i.e., court of appeal, cassation or supervisory court).
vi Novel methods and science
The Civil Code establishes only a general framework for damages calculation. In particular, the Civil Code: (1) defines that damages should be calculated with a 'reasonable degree of reliability'; (2) establishes that the calculation of loss of profit may be based on approximation; and (3) allows experts calculating the amount of damages the right to use methods of calculation of concrete and abstract damages (as explained in more detail above).
Furthermore, the Law on State Court and Expert Activities contains the general rule that an expert must carry out his or her examination objectively, thoroughly and fully, based on scientific and practical standards within the limits of his or her specialisation. The expert's opinion must be based on assumptions that are verifiable and relevant, and must draw reliable conclusions derived from the scientific and practical data.
In addition, there are subordinate legislative acts that define the methodology for calculating damages in specific cases. For example, there is a specific methodology for the calculation of damages arising from the illegal dissemination of insider information.6
vii Oral and written submissions
Experts are required to issue their reports in writing.
IV Recent case law
In general, precedents are not binding in Russia. However, lower courts tend to follow the positions of the higher courts, though without relying on them directly (except for certain positions of the highest courts in Russia – the Supreme Court and the Constitutional Court).
i Recovery of real damages
The facts of the case
We would like to elaborate on two claims for recovery of real damages. These claims have similar grounds, but different outcomes with regard to the amount of proven damages (i.e., which evidence could be deemed sufficient for proof of damages).
In both cases, claimants asked to recover from defendants incurred real damages, being the claimants' expenses for preparation of technical documentation.
In the first case for recovery of damages, a customer claimed that it had to restore the technical documentation, which was required to operate a sewage system, because the contractor did not transfer such documentation originally.
In the second case, a contractor asked for termination of the contract with a customer because of the customer's default of payment obligations and for the recovery of damages for preparation of documentation under the contract. Pursuant to the concluded contract, the contractor had to develop technical terms for electrical grid connection and carry out the connection itself.
In the first case, the customer's claim was satisfied in court. As evidence of the amount of damages, the first instance court accepted the expert report for market value of the documentation, which had to be alternatively prepared. The defendant's arguments that the market value did not reflect the claimant's factual expenses to restore the documentation were rejected by the court. Courts of higher instances upheld the above judgment.
In the second case, the court dismissed the claim on recovery of damages on the grounds that the claimant failed to prove the amount of damages. As evidence of the amount of damages the claimant referred to calculations based on the methodology on determination of the cost of connecting to the electrical grid as approved by the Russian Federal Tariffs Service. The methodology provided for the calculations to determine costs for development of the documentation. The court pointed out that the methodology provides for calculations on the basis of average expenses for connecting to the power supply system and, therefore, did not reflect factual expenses incurred by the claimant.
The significance of the decisions
In these cases, the courts applied recently introduced provisions of the Civil Code providing for a lower standard of evidence when proving the amount of damages under which the amount of damages must be determined with a reasonable degree of reliability rather than with absolute certainty. A failure to do so does not constitute grounds for dismissal of a claim but requires the court to determine the amount of damages, taking into account all circumstances of the case, based on the principles of fairness and proportionality.
Despite the fact that in both cases the courts were provided with calculations that were not based on factual expenses incurred by the claimants, in the first case the court decided that such evidence was sufficient to determine the amount of damages with a reasonable degree of reliability, while in the other case the court decided that the provided evidence was not sufficient.
This shows that the position of the courts regarding what evidence may prove the incurred damages with a reasonable degree of reliability is still being developed. Claimants shall thoroughly evaluate that available evidence, which they plan to present to the court as proof of incurred damages.
ii Recovery of lost profits
The facts of the case
A lessee entered into a lease agreement with a lessor, a local municipality, for a boiler facility and boiler equipment. During the lease term, the lessor issued a municipal ruling to unilaterally terminate the lease agreement. After the lease termination, the local municipality leased the boiler facility and equipment to another lessee.
The lessee applied to the court to declare the municipality ruling on termination of the agreement void. The court ruled in favour of the lessee.
Then, the lessee initiated a case against the local municipality with a claim for lost profits (i.e., proceeds that the lessee would have received from providing heat supply services during the lease period if the lessor had not unlawfully terminated the lease agreement).
The first instance court dismissed the claim on the grounds that the lessee's calculations of the lost profit were based solely on its assumptions and therefore were insufficient to determine the amount of lost profit. In addition, the court stated that the lessee failed to present initial supporting documents evidencing what expenses the lessee would have incurred from provision of services under the heat supply agreement, as such expenses should have been deducted from the amount of lost profit claimed.
The appeal court set aside the first instance court judgment. The appeal court stated that the conclusion of the first instance court that the lessee's calculations were insufficient to determine the amount of lost profits could not be grounds for dismissal of the claim. Instead, the court had to require the parties to present additional evidence. Moreover, as the lessee did not provide heat supply services because the lease agreement had been terminated, its expenses for providing such services may be calculated solely on the basis of assumptions rather than initial documents.
The appeal court further appointed an expert examination to evaluate the amount of lost profit that would have been received by the lessee and requested that the lessor present information on factual expenses associated with providing heat supply services during the period in question.
Taking into account the expert examination and information presented by the lessee, the appeal court reduced the amount of lost profit initially claimed by the lessee and partially satisfied the claim.
The higher courts upheld the appeal court decision.
The significance of the decision
Until recently, the courts required that the amount of lost profit had to be proven with absolute certainty. However, lost profit (i.e., the proceeds from something that did not take place) is extremely difficult to prove with certainty, as there is always some level of probability and approximation. Therefore, in a majority of cases the courts used to dismiss the claims on recovery of lost profit on the grounds that the claimant had failed to prove the amount of lost profit with certainty.
This case is a positive example of how, in practice, the Russian courts now apply the recently introduced amendments to the Civil Code together with the recent clarifications of the Supreme Court, allowing for calculations of lost profit to be based on approximation.
This makes recovery of lost profit a more effective method of restoring the rights of a wronged party.
iii Recovery of 'concrete' damages
The facts of the case
The lessee and the lessor entered into a real estate lease agreement (the Original Agreement).
As the lessee repeatedly failed to make lease payments on time, the lessor unilaterally terminated the Original Agreement.
The lessor entered into an alternative lease agreement with another lessor (the Replacement Agreement).
As the lease payments under the Replacement Agreement were lower than in the Original Agreement, the lessor claimed that the difference in price constituted its damages and applied to the court to recover these damages from the lessee under the Original Agreement.
First, the appeal and the cassation courts dismissed the claim on the grounds that:
- the Civil Code allows the recovery of damages only if the price under the Replacement Agreement would have been higher than that under the Original Agreement;
- the existence of different lease terms in the Original Agreement and in the Replacement Agreement prevent qualification of the Replacement Agreement as that which replaced the Original Agreement;
- the lessor entered into the Replacement Agreement with a lower price at its own will and, therefore, the lessee shall not bear the negative consequences, in this respect.
The lessor filed an appeal to the Chamber for Commercial Disputes of the Supreme Court, which set aside the lower courts' rulings and transferred the case for reconsideration to the first instance court on the following grounds.
- The law aims at restoring creditors' rights as if the Original Agreement would have been performed properly. However, the lower courts' approach released the defendant from its obligations to compensate the claimant from negative consequences resulting from termination of the Original Agreement due to improper performance by the defendant of its obligations. If the price under the Replacement Agreement would have been higher than in the Original Agreement, the lessor would not have grounds to claim damages.
- The existence of different lease terms in the Original Agreement and the Replacement Agreement does not constitute grounds for dismissal of the claim.
- When entering into the Replacement Agreement with a lower price, the claimant tried to minimise the negative consequences of termination of the Original Agreement. To justify the lower price, the lessor presented evidence showing the rent price decrease in the real estate market as at the time of the Replacement Agreement's signing and that such evidence was not countered by the defendant.
When reconsidering the case, the first instance court made a judgment in favour of the claimant, the lessor under the Original Agreement. The lessor did not appeal the judgment with the higher courts.
The significance of the decision
This case is important because it illustrates the application by the Russian courts of the recently introduced 'concrete' method of damages calculation. When considering a case, the Supreme Court reiterated its approach on a number of important issues related to the application of concrete damages.
First, the concrete method works not only in situations where the price in the Replacement Agreement is higher than in the original one, but also vice versa to place the wronged party in the position it would have been in had the obligations been properly performed.
Second, to recover concrete damages, the original and the replacement transactions do not need to be identical.
Third, the good faith of the wronged party entering into the replacement agreement shall be presumed, unless proven otherwise by the defendant.
iv Recovery of damages for bad faith negotiations
The facts of the case
A claimant (potential lessor) and the defendant (potential lessee) had been negotiating the terms of a warehouse lease agreement for more than six months.
The defendant initiated such negotiations by sending to the claimant a letter of intent to enter into the warehouse lease agreement.
During the negotiations, the claimant specifically terminated the existing lease agreements with its former lessors in anticipation of the new warehouse lease agreement with the defendant and to prepare the warehouse for the new lease.
Once the claimant and the defendant agreed on all material provisions of the warehouse lease agreement, the defendant sent the execution version of the warehouse lease agreement to the claimant for signing. Upon receipt of the signed warehouse lease agreement from the claimant, the defendant stopped all communication with the claimant.
The claimant applied to the court and claimed the lost profit (i.e., lease payments that the claimant would have received from its former lessees for the six months – the period from the termination of the lease agreements with the former lessees to the date when the claimant entered into an alternative warehouse lease agreement with another party).
The first instance court satisfied the claim in full and pointed out that the defendant's actions made the claimant believe that the defendant had a strong intention to enter into the warehouse lease agreement with the claimant. In particular, during negotiations the defendant had supervised preparatory works of the warehouse, reviewed draft documents provided by the claimant, requested additional documents, approved commercial and technical terms of the warehouse lease agreement, and repeatedly extended the date of the warehouse lease agreement's signing.
Based on the above, the court ruled that the defendant had acted in bad faith as it had abruptly and unreasonably terminated negotiations in circumstances where the claimant could not reasonably expect such termination.
The higher courts, including the Supreme Court, upheld this ruling.
The significance of the decision
This case is one of the first on recovery of damages for bad faith negotiations. Therefore, it helps shed light on what could be considered as bad faith negotiations in terms of recovery of damages.
Also, while considering this case the courts formulated their approach towards damages resulting from bad faith negotiations, according to which the right of the wronged party is not limited by recovery of damages explicitly set out in the relevant provisions of the Civil Code (i.e., expenses relating to the negotiations and damages relating to the lost opportunity to enter into an agreement with a third party).
The courts have stated that the purpose of recovering damages is to place the wronged party in the position it would have been in had it not entered into negotiations, and therefore the claimant has the right to recover all other damages. For example, in this case the court ruled to recover from the defendant an amount of damages equal to the lease payments from the former lessors not received by the claimant during the six-month negotiation period.
1 Yaroslav Klimov is a partner and Ekaterina Merkulova is a senior associate at Norton Rose Fulbright (Central Europe) LLP.
2 There are two branches of civil courts in Russia: state arbitrazh (commercial) courts, primarily dealing with commercial disputes between legal entities, corporate and bankruptcy disputes, and courts of general jurisdiction, primarily dealing with non-commercial disputes between individuals. The Supreme Arbitrazh (Commercial) Court was the highest court for state arbitrazh (commercial) courts in Russia until it became defunct on 6 August 2014 with its functions transferred to the Supreme Court of the Russian Federation, which has since been the highest court for both state arbitrazh (commercial) courts and courts of general jurisdiction.
3 The Bank of Russia's Press Service information letter dated 14 June 2019.
4 The Civil Procedural Code of the Russian Federation establishes procedural rules for courts of general jurisdiction.
5 The Arbitrazh Procedural Code of the Russian Federation establishes procedural rules for state arbitrazh (commercial) courts.
6 Adopted by the Decree of the Federal Financial Markets Service of the Russian Federation dated 28 June 2012, No. 12-49/pz-n.