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What can be done when deals go bad?

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Conference co-chair Veniamin Yakovlev, Chief Justice and President of Supreme Arbital Court, Russia

Emmanuel Maurice, EBRD General Counsel

When investments turn sour in the former soviet bloc, it often can prove difficult to enforce the agreements on which they’re based. Contract enforcement is improving, said law experts at a recent EBRD conference, but greater reliability is crucial to encourage foreign investment.

A foreign bank invests in a Russian car repair firm which diverts the funds into an illegal vodka distillery. A central Asian court protects a local business by refusing to hear a court case lodged against the firm by disaffected western partners. And after its deal with the Russian government falls apart, a Swiss firm seeking compensation asks a French court to seize Russian military jets at a Paris air show.

Contract enforcement is the bane of businesses around the world. It can be particularly challenging in the former soviet bloc, according to experts on contract law in central and eastern Europe and the Commonwealth of Independent States. They were speaking at a conference held recently at the EBRD’s London headquarters.

“When two parties strike a bargain, there must be some mechanism to ensure that each party will stick to the terms of the agreement,” said Emmanuel Maurice, EBRD General Counsel.

Unfortunately, those mechanisms – commercial courts, arbitration services, bailiffs, liens, mortgages, etc. – are immature or uneven in their effectiveness in many of these emerging economies. Corruption and lack of experience among officials worsen the problem.

The enforcement of contracts

Mr Maurice said many foreign investors shy away from the region because they “remain to be convinced that their contractual arrangements will be upheld if they need to seek legal remedies to enforce their rights or recover their claim”.

The enforcement of contracts is a basic component of the rule of law, said Roberto Dañino, Senior Vice-President and General Counsel of the World Bank, addressing the conference by video. “I personally find it frustrating that 13 years after the Berlin wall came down so little progress has been made in the enforcement of contracts in these countries.”

But the difficulties in developing commercial legal structures in these countries should not be discounted, said Paul Kearney, EBRD Senior Counsel. “Our countries of operation have had to make a 180 degree turn. They’ve had to adopt procedures and methodologies to give enforcement to contractual rights, to very concepts which would have been illegal 15 years ago in those countries: the concepts of private property and  rights of individuals.”

Nor should contract enforcement be viewed as an issue only in these emerging markets, said François Veit of the Prague law firm Gide Loyrette Nouel. “We have more and more Czech clients requesting our help to sue French, English and German clients in France, in Germany or abroad, which shows that we are more and more playing the same game on both sides, and it seems to me a good sign.”

Conference speakers agreed that contract enforcement would improve were judges in the region offered better training and perhaps secondments to countries with highly developed commercial courts. Higher salaries for officials in the legal system would reduce corruption and encourage autonomy. Commented Mr Veit: “In the Czech Republic the magistrates are the most highly paid among civil servants, which obviously gives them an element of independence.”

Commercial courts in Russia

Commercial courts and related services are evolving rapidly in Russia, according to Veniamin Yakovlev, Chief Justice and President of Supreme Arbitral Court of the Russian Federation. The national budget for commercial courts went up by 60 per cent in 2002 and another 40 per cent in 2003, with another jump of 37 per cent scheduled for 2004. “In other words, a sound basis is being established for a radical improvement in the situation of the courts,” said Mr Yakovlev.

“There is a colossal volume of work in the commercial courts,” he said. About one million cases are addressed by 3000 judges per year. “Most of these cases are settled not in years but in months.”

In fact the efficiency of courts in some parts of the region is better than in western Europe, said Mr Veit. “In France it takes something like eight years to finish a complete procedure before the Conseil d’Etat.”

Still, widespread lack of faith in the region’s courts means “arbitration is regarded by the majority of businesses as the only acceptable method of settling disputes,” said Jernej Sekolec, Secretary-General of the UN Commission on International Trade Law.

 He said Russia and Ukraine are two countries with well-functioning arbitration systems.

The problem with court decisions and arbitration is that awards approved by either must then be enforced. “At the end of the 1980s and the early 1990s we did not have the means of enforcing court decisions,” said Mr Yakovlev.

 “At that time a sort of underground structure for enforcement of our own court decisions emerged. For example, an individual would go to the defendant and say, ‘You have lost the case. You know that there is a court decision against you. How come you are not carrying it out? You have a deadline of three days. If you do not carry out the court decision, you have only yourself to blame.”

To ensure that awards, whether from courts or mediation/arbitration services, are respected, Mr Yakovlev said the number of bailiffs in Russia has grown from 23,000 in 2002 to 33,000 this year. “Several million enforcement procedures have been carried out by these officials. All this takes place under court supervision.”  Of 15,000 appeals against bailiffs’ actions, about one-third have been successful.

The conference was organised by the Bank and the British Institute of International and Comparative Law and co-funded by the UK Department for International Development.

Contact: Office of the General Counsel

6 January 2004