The Global Damages Review: Russia

Overview

Under Russian law, recovery of damages is a universal remedy available for a wronged party.

This universal nature of the remedy means that generally, a wronged party may recover damages regardless of the availability of other remedies to the party or whether the party's right to recover damages arises out of specific mention in law or in an otherwise applicable agreement.

Claims for recovery of damages before the Russian courts have been very difficult to prove, historically, because of the high threshold of evidence required. The courts have for years acted on the basis that both the amount of damages and causal link between the breach and the harm were to be proven with 'absolute certainty'. A lowering of the high evidential burden for recovery of damages began with the Supreme Arbitrazh (Commercial) Court of the Russian Federation2 in 2011. The court applied a lower standard of evidence to secure the interests of the party who suffered loss and render a fair judgment, and in doing so began a trend.

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 more 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.

Of particular note were changes 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

The amended Civil Code states that damages must be proven to 'a reasonable degree of reliability'. This test is substantially lower than the previous standard of 'absolute certainty'.

Should a claimant fail to prove the amount of damages with a 'reasonable degree of reliability', this in itself will not constitute grounds for dismissal of the claim. The court is still required to determine the amount of damages by taking into account all the circumstances of the case, applying the 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 amount calculated for determination of lost profit need not be precise, and may rely on an approximation. For example, the calculation of a lost profit amount may be performed 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 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 courts required that the causal link is be proved with 'absolute certainty'.

Though the above amendments were introduced in relation to contractual damages, they should also apply in the context of tortious liability.

ii 'Concrete' and 'abstract' methods for calculating damages

Recently, amendments have been made to the Civil Code which 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 no unified approach was seen 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 is applicable 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 differential between the subsequent transaction and the one which it replaces.

The 'abstract method' is applicable 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 to the basis for calculation of the abstract damages amount.

iii Damages resulting from bad faith negotiations

The Civil Code's recent amendments 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 that negotiated in bad faith to compensate the other party for damages suffered. In particular, the party whose negotiations rested on good faith is to be compensated for expenses relating to the negotiations and the lost opportunity to enter into an agreement with a third party.

Quantification of financial loss

i Introduction

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 any subsequent costs that have been incurred by the party, or will have to be incurred, in order to restore that party to its original position.

Lost profits refers to income not obtained by the party, but which would have been obtained under normal conditions, were there no breach on the defendant's part.

Unless provided for otherwise by law or by contract, damages are to be compensated in full. The intention is to place the party in that same position it would have been in, had a breach 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, this fault is presumed and the burden therefore lies with the defendant to satisfy the courts that they are not at fault. Instances provided for by the Civil Code moreover hold that a party that causes the damage is held liable regardless of whether or not such party is found to be at fault for the breach. Where damage arises from the breach of a commercial contract, for example the party may only be released from liability in the event of force majeure.

ii Evidence

No specific type of evidence is required in Russia to prove damage. Depending on the complexity of the dispute, the claimant may need to provide expert reports and additional such evidence to prove the damages amount. In complex disputes, the courts tend to rely more on expert evidence.

iii Date of assessment

In general and unless otherwise provided for by law or by contract, there are two primary approaches to assessing the date on which damages are calculated, along with a third, less commonly used approach.

Date of voluntary performance

The first approach applies when the party causing the damage voluntarily agrees to compensate the other party. In this case damages are calculated based on the price of goods or services on the date of voluntary performance.

Date of claim submission

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 date the claim was submitted to the court.

Date of judgment

The third and less common approach which may be taken by the courts at their own discretion is as follows: the court may apply its own discretion to calculate damages by taking into account the cost of the goods and services on the date of the judgment. Such discretionary power allows the court greater flexibility to render a fair judgment in cases where, for example, prices have fluctuated significantly between when the initial events took place and when the final judgment is arrived at.

iv Financial projections

Russian law does not directly mention financial projections in relation to the calculation of damages. The Civil Code does, however, allow a claimant to factor into its damages calculation the additional costs that it projects it will be forced to incur in order to recover from the breach (the non-concrete element of real damage), and consequently any lost profits. The Civil Code therefore allows for consideration to a certain extent of financial projections when calculating damages.

Following certain amendments to the Civil Code which came into effect on 1 June 2015 and further clarifications of the Civil Code by the Supreme Court, the threshold required to prove the amount of damages has been 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.

Despite the reduced threshold requirement for proving the amount of damages and the increased scope for use of financial projections, the courts have tended towards a more conservative approach to calculation of damages. Where circumstances allow for the use of financial projections, the courts have favoured approaches that rely less on expert testimony. This was illustrated in a recent case where the claim was for recovery of lost profit, and the court adopted an approach that had a stronger correlation with the factual evidence, leaving reduced scope for expert interpretation.

v Assumptions

A claimant seeking to recover damages may rely on the following presumptions:

Fault

In general, the fault of the defendant is presumed, unless otherwise proven. The burden therefore lies with the defendant to satisfy the court that they are not at fault.

Amount of damages and causal link

The link between the breach and the damage and the resulting damages awarded are presumed proven if the court decides that presented evidence is sufficient for the court to determine the amount of damages to the standard of 'a reasonable degree of reliability' and that the damage suffered is a normal consequence of the breach.

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.

Additionally, certain presumptions are applicable to specific situations, namely:

  1. abstract and concrete damages: the calculation of concrete damages (explained in the overview above) presumes that a claimant entered into the replacement transaction in good faith and reasonably; and
  2. bad faith negotiations: it is generally presumed that negotiating parties act in good faith. The refusal, in itself, to continue negotiations without specifying reasons does not mean that a party acts in bad faith.

Nevertheless, in the following situations, the above presumption is reversed and a party is presumed to have entered into negotiations in bad faith:

  1. when 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 have been communicated to the other party; or
  2. if a party abruptly and unreasonably terminates negotiations where the other party could not reasonably have expected 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

In general, all payments in Russia must be made in roubles.

Regardless of whether the amount agreed by the parties is in foreign currency or non-conventional monetary units ('special drawing rights', etc.) payment in roubles is still mandated by law.

By law, the rouble payment amount is determined according to the official exchange rate as of the day of payment. A different exchange rate or an exchange rate from a different date may, however, 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

In general, a delay in payment of damages required by a judgment or agreement constitutes unlawful usage of another person's money and the creditor is entitled to require payment of interest on the outstanding amounts.

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 15 June 2021, the key rate of the Bank of Russia is fixed at 5.5 per cent per annum.3

Should the parties agree on an interest rate which 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 interest rate set by the parties if the court considers that the amount of interest is clearly inappropriate 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 on which the judgment takes effect.

Should a party that caused damage and a party that suffered damage entered into a subsequent agreement pertaining to compensation for the damage, interest will accrue in accordance with the terms of that agreement.

In general, interest will accrue until full payment of the amount due to the creditor has been completed.

Should a delay in payment cause damage to the creditor and the amount of such damage is not fully covered by the amount of interest accrued for the delay period, the creditor then has the right to require the defendant to pay damages in excess of the amount of interest.

ix Costs

In general, 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.

A successful party has the right to recover any costs deriving from the dispute, such as 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 courts will consider the extent to which a party is liable for costs and the reasonableness of such costs. Costs that correspond to normal pricing are considered reasonable.

The party required to pay costs can apply to the courts to reduce the amount of costs, if such costs can be proven unreasonable. In Russia it is common practice for the court to significantly reduce the recoverable amount of fees paid to representatives. Consequently, the recovered fees may be several times lower than fees paid.

Though contingency fees are not prohibited by law, according to current court practice these are not recoverable.

x Tax

The Tax Code of the Russian Federation (the Tax Code) regulates the payment of taxes.

Pursuant to Tax Code provisions, 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 a double tax treaty between Russia and the country of residency of the creditor 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 could 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 have followed this position.

Expert evidence

i Introduction

Procedural rules for the involvement of experts are set forth by the Civil Procedural Code of the Russian Federation4 (CPC) and by the Arbitrazh Procedural Code5 (APC).

Courts have the right to involve an expert where it considers that specific professional knowledge is necessary to resolve a dispute. This includes experts who are state or private sector employees, or those in private practice.

In general, there are no legal restrictions as to the qualifications of persons who may act as experts in court. However, experts who are employees of state-owned organisations and experts who are involved in valuation of assets under dispute must comply with certain educational and qualification requirements relevant to a specific and relevant expertise area. Irrespective, in practice in each case the courts will consider how the qualifications of the proposed expert matches with the expert opinion.

Courts have 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, whereas the specialist provides advice in a court hearing without conducting an examination and preparing a report. The involvement of specialists by Russian courts is rare, however.

In Russia it is also 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 enable the expert to carry out the requested examination. Once ready, the party's expert report is submitted to the court. Though such party's reports cannot be considered expert reports as referred to in the APC and CPC, the courts accept such reports and are required to treat them as equal to other evidence. The Supreme Court has repeatedly stated that expert's 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 and that any contradictions between the conclusions of the court-appointed expert and those of the party's expert must be resolved by court in the judgment. Nevertheless, judges still tend to prefer the opinions of court-appointed experts to the reports of party-appointed experts.

ii The role of expert evidence in 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.

In coming to a decision, the courts are required to evaluate the relevance, admissibility and reliability of each set of evidence separately and collectively. This means that when rendering judgments, the courts may rely on expert evidence so long as such evidence is not contradicted by other evidence presented.

In practice it is however more common, particularly in complex disputes, for the courts to appoint a court expert examination and substantiate a judgment with conclusions provided by court-appointed experts.

iii The court's role excluding and managing expert evidence

In Russia, courts appoint experts.

In general, courts appoint an expert examination upon the motion of either party to the dispute. The courts will consider that motion and if the motion is convincing, an expert examination will be initiated by the court. Arbitrazh courts may suggest the appointment of an expert and proceed without an initial motion from either party. With the agreement of either of the parties, the expert examination is appointed by the court.

The parties to the dispute have the right to present to the court their own expert candidates. The courts are free to select experts from a proposed pool of candidates or to select their own candidates. In practice, the courts generally select experts from among candidates proposed by the parties.

The courts will provide questions for the experts. Parties have the 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). As for the higher courts, an expert examination may be ordered only by the court of appeal (the second level court) in a limited number of instances; for example, if the first instance 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 expert examinations.

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 such 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. These 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 the 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 the merits commenced.

Expert fees

Experts receive their fees from the court upon completion of their examination. Prior to initiation of the examination at the court's request, 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 permitted 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 the court's consent.

Expert independence in selecting the method of analysis

The expert has the right to select a method of analysis that provides validity and credibility, and which is verifiable by means of generally accepted scientific and practical data.

Criminal liability of the expert for knowingly giving a 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 Criminal Code of the Russian Federation.

v Challenging experts' credentials

Prior to initiation of the expert examination

Expert candidates proposed by the parties will be considered at a court hearing.

The parties have the right to challenge, by means of presented arguments, the appointment of expert candidates proposed by the opposing party. In practice, the most common argument is the absence of the requisite education and experience pertaining to the matter in question.

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 court's discretion whether it considers such questioning necessary to clarify aspects of a written expert report. The court is, therefore, entitled to refuse such a request.

Additional and repeated expert examination

Should an expert report lack certain necessary findings, either party to the dispute or the court may request the court to 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 the merits

After the court of first instance 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 science and methods

The Civil Code only establishes 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 Federal Law on State Court and Expert Activities No. 75-FZ dated 31 May 2011 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 appraisal of various assets in dispute and calculation of damages arising from the illegal dissemination of insider information.

vii Oral and written submissions

Experts are required to issue their reports and present them to the court in writing. In addition, experts may be questioned in court, and if this happens, they will have to give oral explanations.

Recent case law

Precedents are generally not binding in Russia. However, the lower courts tend to follow the positions of the higher courts established upon review of respective cases, especially the positions of the highest courts – namely the Supreme Court and the Constitutional Court.

i Recovery of real damages

The facts of the cases

At this point we would like to elaborate on two claims for recovery of real damages. Both claims rest on similar grounds, but lead to different outcomes when it comes 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.

The decisions

In the first case, the customer's claim was satisfied in court. As evidence of the amount of damages, the court of first instance 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 demonstrates that the position of the courts regarding what evidence may prove the incurred damages with a reasonable degree of reliability is still under development. Claimants are to 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 termination of the lease, 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.

The lessee then 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 decision

The court of first instance dismissed the claim on grounds that the lessee's calculations of lost profit were based solely on its assumptions and as such these were insufficient to determine the amount of lost profit. Additionally, 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 court of first instance judgment. The appeal court stated that the conclusion of the court of first instance 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 heating supply services because the lease agreement had been terminated, its expenses for providing such services could 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 decision of the appeal court.

The significance of the decision

Until recently, the courts had required that the amount of lost profit 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 involved. 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 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.

The decision

First, the appeal and the cassation courts dismissed the claim on the grounds that:

  1. 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;
  2. 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; and
  3. 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. Had the price under the Replacement Agreement 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 did 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.

In reconsidering the case, the court of first instance issued a judgment in favour of the claimant, the lessor under the Original Agreement. The lessor did not appeal.

The significance of the decision

The importance of this case is in its illustration of the application by 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 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 had 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 for 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 decision

The court of first instance satisfied the claim in full, pointing out that the defendant's actions had led the claimant to believe that the defendant had a strong intention to enter into the warehouse lease agreement with the claimant. Of particular note, during the 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 delayed the date of the warehouse lease agreement's signing.

Based on the above circumstances, the court had ruled that the defendant acted in bad faith in abruptly and unreasonably terminating negotiations in circumstances where the claimant could not have reasonably expected such termination.

The higher courts, including the Supreme Court, upheld this ruling.

The significance of the decision

This case is one of the first concerning recovery of damages for bad faith negotiations. It therefore helps shed light on what could constitute bad faith negotiations for the purposes of recovery of damages.

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, which 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. 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.

Footnotes

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 11 June 2021.

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.

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