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Dmitriy Magonya comments on landmark case concerning Vympelcom exchange rate differences

29 march 2016

Source: RBK

Judgment Reversed

RAPSI reported that on March 28 the Ninth Arbitration Court of Appeal reversed the judgment made by the Arbitration Court of Moscow to set a reduced dollar-to-ruble exchange rate to calculate rental charges under a suit brought by VympelCom against PAO Tizpribor (affiliated with Eastern Property Holdings, EPH), the owner of the Hermitage Plaza business center. At the end of last year, on December 29, 2015, the Arbitration Court of Moscow partially upheld the suit brought by VympelCom to revise the terms and conditions of the Lease Agreement of 2009 denominated in foreign currency. The court partially upheld the suit by including a paragraph in the Lease Agreement whereby, if the ruble-to-dollar rate is less than 30 rubles per U.S. dollar as of the payment date, the payment shall be made at the rate of 30 rubles per dollar, and if the ruble rate is more than 42 rubles per dollar, the payment shall be made at the rate of 42 rubles per dollar.

VympelCom said that the suit was caused by a material change in circumstances in the form of devaluation and the measures taken by the Central Bank in November 2014 which resulted in the rejection of the mechanisms which were used to regulate currency rates and in the dollar rate growing. To confirm that what they said was true, the representatives of VympelCom relied on Article 451 of the Russian Civil Code whereby a material change in circumstances may constitute grounds for amendment or termination of a contract entered into. In its judgment, the court specified that, according to Clause 1 of Article 2 of the Civil Code, entrepreneurial activities are undertaken at one's own risk; therefore, the risk of any changes in circumstances shall be borne by the party seeking to amend a disputed contract, i.e. VympelCom. At the same time, the arbitration court deemed it possible to amend the contract such that the interests of the parties can be balanced. On February 26, 2016, Tizpribor filed an appeal against that judgment.

On Monday, the decision of the court of appeals was not published yet. The court representative declined to comment to RBK on the gist of the court judgment before its publication in the register of arbitration cases and specified that the reasons for the judgment would be published within five days.

Tizpribor's representative clarified to RBK that, in the company's opinion, VympelCom deliberately took on a risk by concluding the contract in foreign currency: “We believe the judgment to be equitable: the court made the business community confident again that the freedom of contract principle is inviolable. Nevertheless, despite the fact that the court judgment is in our favor, we are, as we stated earlier, open for a constructive dialog with VympelCom and ready to discuss contractual terms and conditions acceptable to both parties,” says Aleksander Nikolayev, a member of the Investment Committee of Eastern Property Holdings, as quoted in Tizpribor's reply.

Rosneft Making No Payments in Dollars

In October 2015, Nordstar Tower, the operator of the 42-storied Nordstar Tower business center, filed two lawsuits against OJSC Rosneft Oil Company with the Moscow Arbitration Court. The claimed amounts totaled 552.4 million rubles under the first lawsuit and 68.3 million rubles under the second lawsuit. The lessor sought to recover Rosneft's debt related to rental charges, payment for operation services, and parking charges under a lease agreement for non-residential premises.

The parties signed the lease agreement for a period of 15 years. The representative of an international consulting company who took part in the signature of that agreement told RBK in October that the lease rate totaled about $550 per 1 square meter per annum with an additional $100 per square meter per annum as the operation fee. At that point in time, one of Rosneft's former top managers and the RBK source in the commercial real estate market said that Nordstar Tower's lawsuits were associated with the lessee wishing to revise the terms and conditions of the agreement following the ruble devaluation.

Subsequently, Nordstar Tower renounced its claims against Rosneft, and the court stopped the proceedings for both cases in January 2016. The court determination contains no reasons for the abandonment of the claims.

“The existing agreement with the building owner, PAO Tizpribor, actually makes us hostage to the lessor: we are unable to rescind the agreement or change the office, nor do we have any prospects for reaching agreement with its owner on a fair lease rate because the latter spares no effort to avoid any negotiation process,” says the representative of VympelCom's press service in the reply to RBK's inquiry. Because of the ruble devaluation, the company has to incur far greater costs, points out VympelCom's representative: “Now the annual lease payment for us is 2.5 billion rubles versus the original sum of 0.9 billion rubles which is by times more than both the existing market rates for that kind of real estate and even the common sense. PAO VympelCom is a Russian company collecting its proceeds in rubles, and the aggressively non-constructive position of the owner of our building creates a material and totally unreasonable burden for us. The hard-currency lease rates have already virtually killed the Russian small and medium business. Now the beneficiaries of such contracts are also making a strike at the large business”. In addition, according to the company's representative, the company intends to wait till it receives the reasons for the court judgment, and after that it will “look into the possibility of defending its interests to the end by using any and all methods available to it under the law”.

An Important Precedent

In December 2015, when the court upheld VympelCom's lawsuit, the lawyers qualified the court judgment as a precedent which will make it possible to revise all civil law contracts entered into in hard currency. “This court judgment gives grounds for terminating virtually all civil law contracts entered into in hard currency which, in turn, may result in an economic collapse,” TASS quoted Yiliy Tai, a Managing Partner of the Bartolius law firm, as saying. According to the consulting firm JLL, from 50% to 70% of lease agreements in the Moscow office real estate market were entered into in hard currency, based on the data provided by TASS in late January 2015.

Before that, there had been no such precedents in legal practice, clarifies Dmitriy Magonya, the Managing Partner of the ART DE LEX law firm, to RBK. “Normally, such situations are settled out of court between the lessee and the lessor which would hate to lose a customer”, he says. “In case of failure, they would go to court and try to find grounds for revising contractual terms and conditions. Such lawsuits would always spring up in a crisis, with many of them registered in 2008 and 2009. However, a change in the currency rate has never been recognized as a material circumstance in legal practice”.

Indeed, there is an established court practice which does not qualify a change in currency rates as a circumstance which the parties could not predict at the time of the entry into a contract, consents Pavel Gerasimov, a Partner of the Padva and Epshtein law firm. At the same time, he admits that there are no mechanisms now to protect the lessee from currency volatility: only the lessee itself can protect itself by entering into contracts in rubles or establishing currency corridors. The next step by VympelCom could be going to the cassation instance and the Supreme Court, he adds.