International transactions: a Russian and English law comparison

Practical Law UK Practice Note Overview 1-504-0104 (Approx. 6 pages)

International transactions: a Russian and English law comparison

by Ian Ivory and Anton Rogoza, Goltsblat BLP, Moscow

Why is English law used in Russian transactions?

English law is widely used in international transactions (often in conjunction with local laws) across a variety of jurisdictions, especially where deals involve the Middle East, Africa, Singapore, Hong Kong, China, India, Russia and the Commonwealth of Independent States (CIS). Despite developments in Russian corporate legislation, the mergers and acquisitions (M&A) and international finance markets still heavily rely on English law for Russian deals (in some cases for historical reasons, in others for practical reasons, or sometimes both). There are several reasons why English law is used in Russian transactions:

Many Russian deals involve Cypriot holding companies. English law fits well with Cypriot corporate law, which is based on earlier versions of the English Companies Acts.
Historically and currently, a number of major banks and financial institutions are head-quartered in London and so have logically insisted on English law when issuing financing documents.
Financing documentation under English law is well developed and the interpretation and practice relating to this area of law is clear and well established.
The English language is generally recognised as the main language of international business and is the main language of the internet.
English law has fully developed jurisprudence and a universally well-respected judicial system.
The English legal system has a dependable, high-calibre and trustworthy judiciary.
The English judicial system is reasonably efficient and comparatively cheap (at least in terms of the costs of court proceedings themselves).

Key merits of English law

English law is not set out in a single civil code. It is a common law system, based on a combination of legislation and precedent. This has enabled English law to be flexible, adaptable and practical when dealing with the developing needs of commerce as technology, evolving markets and new techniques revolutionise the way companies do business.

The principles of English law are clear and well established. Within broad parameters, businesses and their advisers have the legal freedom and flexibility to agree to whatever terms they want on their transactions.

English courts will interpret what the parties have written in the contract. English law is less prescriptive than some legal systems in governing relationships between parties. This makes it relatively easy for businesses to transact and to clearly understand their rights and obligations under the contract. Parties simply need to read the contract to understand their obligations and rights. This is particularly helpful where one or more of the parties do not have English as their first language.

In the event of a dispute, English courts and arbitration tribunals have a strong reputation for reaching fair, balanced and unbiased judgments and rulings and clear and predictable outcomes (on the whole).

The Russian Civil Code

The Russian Civil Code is the main source of civil and corporate law in Russia. There are also a number of special federal laws dedicated to the incorporation and existence of legal entities and certain business affairs. Russian commercial and corporate law has developed rapidly over the past 20 years, following the end of the Soviet regime.

The main difference between the Russian law system and common law jurisdictions is that, historically, Russian law has not recognised precedent when interpreting provisions of the Civil Code and other Federal Laws. However, the role of the higher courts and especially the Supreme Arbitrazh Court, has increased within the last few years, so (in practice) its decisions are being treated as binding for other Russian courts dealing with similar disputes.

The Civil Code was originally developed with consumer transactions and business-to-business trading of goods and services in mind. Although a number of the legal principles can be applied equally well to corporate and finance transactions, this was not the primary purpose of the legislation. As a result this approach is not always compatible with the terms customarily agreed in international corporate and finance transactions.

The current Russian legal system still in its infancy. For over 70 years Russia had:

A regulated economy.
State controlled commerce.
No private ownership.

Consequently, there was no established market practice or court precedent from that earlier period to refer back to.

Russian law is used where there is no foreign element

Russian law is also used in some M&A and financing deals, usually where the deal is between Russian parties only and does not involve any foreign element. Many legal practitioners in Russia regard the use of Russian law as obligatory in these circumstances. Most Russian state institutions and government organisations will insist on using Russian law where possible.

There appears a definite move away from the past market practice of artificially introducing a non-Russian party to a deal (for example, to act as a guarantor) simply to avoid using Russian law. Russian courts do not approve of these artificial steps and, in these circumstances, may disregard them and apply Russian law to the contract anyway. This can lead to difficulties for one or more of the parties where Russian law is incompatible with the particular terms of the contract.

However, international organisations are still often reluctant to rely on Russian law for their transactions. Russian law is not yet widely recognised on an international level as a viable alternative to English law and concerns remain about:

Using Russian courts and arbitration systems.
The predictability of the courts' rulings.
The effectiveness of the courts' enforcement actions.

Russian corporate law continues to improve and develop. For example, the legal changes introduced in 2009 regarding shareholders' agreements were well publicised in the Russian legal market. However, Russian law is still not fully developed in some important areas vital to international M&A and finance deals.

The future for Russian law

It is our view that the use of Russian law will continue to develop steadily over time. Parties will become more familiar with and confident in the Russian system and the courts themselves will gain further experience and create precedents.

Although, historically, precedent has not been recognised when interpreting provisions of the Civil Code, it is likely the Russian system will start to do so in the future. There is already an increase in the use of decisions of the Supreme Arbitrazh Court as guiding precedents for other Russian courts. This will help develop the Russian legal position on the provisions commonly found in international agreements.

The common practice of Russian-only parties using Russian law and the insistence of state organisations on using Russian law where possible, will give the changes momentum and help build confidence in the Russian system. Over time this will lessen the need for offshore structures on many Russian deals. International businesses will take longer to become completely comfortable only using Russian law in these circumstances and the pace of development is likely to be slower.

Why is US law not widely used on Russian deals?

US law is, of course, also used for international transactions. However, the number of Russian and CIS deals using US law is low compared with the number using English law. The reasons for this are a matter of speculation, but include:

The fear of the US litigation process (with its potentially huge scale and costs).
Concerns of becoming involved with US regulators (particularly after the introduction of Sarbanes-Oxley).
The different style of US legal drafting compared with English law drafting. US legal drafting style is generally more traditional and sometimes arcane, with longer sentences and much less punctuation than English drafting. This can make it more difficult for the parties to understand their rights and obligations, particularly if English is not their first language.

Comparing English and Russian law on common provisions found in international agreements

For a summary of the main similarities and differences between English and Russian law on many commonly found provisions in international agreements, see Checklist, Comparing Russian and English law on common provisions in international agreements. The checklist, which is in a table format, contains links to the following notes:

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