Russian court rules on foreign currency use in real estate transactions

On 18 July 2016 the Commercial Court of Moscow region refused to confirm the settlement agreement between PAO Vimpel-Communications and PAO Tizpribor in the year-long dispute between the two companies.

The outcome of this case may have significant consequences both for Russian real estate, says The Property Sourcing Company, in particular for the use of foreign currency in tenancy agreements, as well as litigation law and practice in Russia.

Facts

In 2009 PAO Vimpel-Communications (“VimpelCom“) signed a 10-year long tenancy agreement with PAO Tizpribor (“Tizpribor“). The parties agreed that the price to be paid in rouble equivalent was $700 per square metre per year. The contract also stated that the rouble equivalent will be calculated based on the official rate of the Russian Central Bank on the date of payment.

However, due to currency fluctuations and the plunge of the rouble in relation to the US dollar in 2014-2015, the rouble price of the contract rose from ₽900 million to ₽2.5 billion roubles.

The dispute

After the initial attempts to renegotiate the contract failed, VimpelCom filed claims for termination and modification of the tenancy agreement (later consolidated in one proceedings) against Tizpribor.

In February 2016, the commercial court of the first instance decided that the increased profits of Tizpribor constitute unjust enrichment and amended the contract to include currency rate limits from 30 to 42 roubles to the US dollar. The court considered that Tizpribor had not acted in good faith by refusing to renegotiate the currency rates and demanding payment under the contractual rate, which, after the currency rate changes, significantly exceeded the market price for similar premises.

In March, however, the Ninth Commercial Appeal court revoked this decision. The appellate court decided that the first instance court had incorrectly interpreted the facts and the relevant law. The appeal court found no bad faith in the landlord’s refusal to renegotiate parts of the contract and/or unjust enrichment in the fact that the price was significantly higher than the market price.

A significant change of circumstances?

Interestingly enough, both courts agreed that the change of currency exchange rates did not constitute a significant change of circumstance which could not have been predicted by the parties at the moment the contract was concluded (which could also allow the court to amend the contract).

The appeal court gave an extensive explanation of this point, stating that neither the refusal of the Russian Central bank to regulate the currency rates, nor the economic sanctions on Russia per se changed the course of the Russian currency. It was also influenced by various other factors (including changes in oil prices, capital movements, economical stagnation, slowing of GDP growth etc) and was ultimately determined by the currency market.

The parties should have anticipated possible economic changes in the country and risks connected with accepting the price in foreign currency during the time of the contract. Therefore, the change of currency rates did not allow the courts to amend the contract.

Settlement

After the revocation of the decision of the first instance court, Vimpelcom made a further appeal to the Appeal Court of the Moscow Region. There, on 13 July 2016, the parties announced that they had reached a settlement agreement.

The agreement did not change the currency exchange clause, but rather made several additional conditions: the tenant, Vimpelcom, was allowed to sub-lease the premises and to terminate the agreement in relation to a part of the building.

The judges, however, criticised the agreement for various reasons. First of all, they said that they cannot issue an execution writ on it, and that the settlement agreement must be clear and precise.

More importantly, among the reasons for the refusal to uphold the decision, the judges also mentioned the fact that the agreement must be about the subject of the dispute (ie the currency rates).

The parties’ representatives argued that the main subject of the dispute is not the currency rates per se, but the payment for the tenancy and the fact that the parties had managed to introduce new categories for payment helped them to settle the dispute. Furthermore, they argued that the court should uphold the principle of freedom of contract and support the parties and their settlement agreement.

The court, however, quoted the classical Russian XIX century dictum “one cannot embrace the unembraceable” and refused to confirm the agreement and said that this agreement was not a settlement agreement, but an additional agreement to the dispute and advised the parties to make a new document about the subject of the dispute. Further hearings were postponed until 24 August 2016.

Outcomes of the case

The outcome of this case may have significant consequences both for Russian real estate and litigation law and practice.

For real estate like beachfront homes delray, it could pave the way out of the currency trap in which many businesses found themselves after 2014. Historically many of the large commercial tenancy agreements in Moscow were made in rouble equivalent of foreign currency because many of the landlords have their own loans in foreign currency. The rouble equivalent to the US dollar is used to overcome Russian law limitations for the use of foreign currency for actual payments between Russian companies.

The initial decision of the first instance court could potentially lead to a flood of claims for the revision of currency rates in tenancy agreements by the tenants, more frequent use of the rouble as a currency for such agreements and huge instability on the market. The fact the court of appeal has revoked it has brought more stability to the tenancy market.

For litigation it may mean that parties will have to be more careful in drafting settlement agreements. They will need to avoid problems similar to the ones encountered in this case, ensuring that such agreements not only resolve the dispute between the parties, but also specifically cover their subject matter.