Market Technology : Where To Go To Litigate


Construction community is conservative. In case of conflicts both major developer holdings and smaller contractors prefer to seek justice not in courts of referees but in arbitration courts.

“First the parties try to negotiate; if it was no successfully  - then to go to the court, said Alexander Konevsky, Head of Land Law, Real Estate and Construction practice of "Pepelyaev group."  According to him construction itself  is a conflict area but the essence of disputes has not changed much even in a crisis: "Payments, quality and timing of construction are the traditional reasons for filing claims. Since the time the pyramid of Cheops had been built  no object was built in time and in compliance with the budget". With the beginning  of the crisis there were a lot of problems with non-payments, now there "has become easier," says Konevsky.

One of the lawyers from  development company described the current practice as follows: "Daily there is a clash of interests of companies involved in the same project . Customers are trying to compel the  contractors to build an object for a minimum fee. Contractors deal with subcontractors in the same way, increasing the delay of payment by using "guarantee deductions," fines and penalties. If the contractor's main task is to get done work and get the agreed  money, the main task of the customer is to identify gaps and avoid of paying. Or try not to pay the guarantee amounts, or to find a reason for terminating oа the contract". As a rule at the conclusion of the contract the parties are completely  charmed    by each other and the prospects of cooperation. All lawsuits arise when the building comes to an end and it's time to perform calculations.

Anatoly Lyskov, the chairman of committee on legal and judicial questions of the Council of the Federation, considers that the low culture of manufacture and low level of professional relations are guilty.

According to Andrey Pushkin, managing partner of Tenzor Consulting Group and the chairman of the Interbranch court of referees, approximately 70 % of disputes dare in arbitration courts, 30 % — in courts of referees or commercial arbitration. The reason is banal mistrust to the commercial organizations as to legal institute.

The international contracts are in a different way. Kamil Karibov, the partner of the legal bureau Beiten Burkhardt  which is serving foreign participants of the market working in Russia, fixes other parity: approximately 80 % of affairs are considered in the court of referees – it is International commercial arbitration court (ICAC) at Industry&Commerce Chamber (ICC) of the Russian Federation –  and only 20 % — in state courts. «We recommend to go to state court only when the contract is simple also its sum isn't too great — up to $50 000. If it’s a question about the serious sums our clients go to commercial court. There is more trust to it. But if the state company is the party, as a rule, it intends to have legal proceedings in the system of state arbitration», — explains Karibov.

Companies solve in advance where to search justice — in state court or in court of referees (or commercial arbitration). The choice is occurred at the stage of the conclusion of the contract by entering of the so-called arbitration reservation.

An alternative to the state court procedure  appeared in Russia  about 10 years ago (the federal law № 102-FZ of 24.07.2002). Lawyers appreciate this fact as very positive. Formally the  courts of referees existed in times of USSR but there was no need for them in a situation where there were no independent market participants as a class.

The most humane,  not the fastest

Judgment proceeding in state arbitration courts and courts of general jurisdiction may take several months or even years, Andrei Pushkin says. Loss of time (and of money) is often a blow to the financial interests of the business.

For example  since July 2009 the Arbitration Court of Moscow city is still considering and has not made solutions for lawsuits of contractors and suppliers to the group company "Mirax": "Euro-American glazing Engineering," SPC "Reconstruction", "Center for Land Management and Cadastre " etc.

The term of the proceedings at first instance  set by the Arbitration Procedure Code - three months, but this term does not include the periods for which the judge may postpone the hearing of cases (for different reasons), and the timing of the suspension. In fact at first instance the case may be considered depending on the busy schedule of judges to 6-8 months.

If the case is referred for review to another instance the decision may be awaited for years to come. One expert commented anonymously: "The main problem of state courts – their extreme overload. In many cases a judge with good intentions is unable to resolve the dispute to pay as much attention as it is objectively necessary to gain insight not only into the essence of the dispute but also in the details. And just the details can be crucial. Often overloaded courts are glad to find a reason to delay consideration of the case. "

In many countries civil society in the face of the court of referees takes the resolution of occurring conflicts. But dynamic of trial is not the only plus of the referees arbitration. There is a choice of arbitrator also. 

ICC of the Russian Federation, which has four courts (two of them have narrow profile - Marine and Sports as well as the ICAC and the Court of Arbitration for the settlement of economic disputes) explains: choosing  the parties are guided by the fact that judges must understand the essence of the dispute, to be experts. The House has recommended lists of arbitrators. These include both legal scholars with extensive practical experience and practice. For example a civil engineer which is able to assess the actual circumstances of the conflict correctly. 

According Konevsky in the same way it is  the minus of trial in commercial arbitration: "The arbitrator may not even be a lawyer." In the State Arbitration court judges are guided by the laws and practices, which can be viewed and our chances can be appreciated in advance. In addition  the commercial court as well as court of referees have only one instance, whereas  appeal to the state court suggests that losing the case it is possible to object to a higher court.

There is another way to resolve conflicts - mediation. The technology is simple: the parties choose a specialist, which has unquestioned authority as well as professionalism and trust him to solve the dispute. Anatoly Lyskov believes that mediation is the future: "If the court is still a power  solution of question, then the mediation is to develop of the ways to exit the conflict Lyskov sure: "In economic disputes you can always find a common language (of course unless do not aim to remove the partner from the market).

However firms still have difficulties to assess such advantages, their experience is very limited. "We were offered services of a mediator, but I'm against it, - says Irina Mogilatova, CEO of the Tweed agency . - Who knows what this  mediator is guided by. It is much like practice of bandit 1990th -  "to agree on concepts,"  referring to the "beholder."

"We had the trial with  the company MIAN in arbitration court on question about  non-payment of agency commission and we won this trial. The process itself was fairly trouble-free. The problems began after the trial - MIAN announced bankruptcy, and the company-successor was insolvent, so that we didn’t manage get the money - says Mogilatova. - A similar story happened  with a natural person - we also won a case in an arbitration court. But bankruptcy  history repeated, the creditors were many, and we were not even in the first ten of those. 

This is a fairly common story. But the court has nothing to do with it. It works quite quickly normally; if the other party is an adequate company then everything is solved calmly.

Rates and mysteries

The cost of the proceedings in different courts are different. The claimant charges to State Arbitration Court state duty of up to 200,000 rubles. In commercial courts cost of trial may be formed as a percentage of state duty or of the price of the claim. For example in the Arbitration Court of the  Moscow construction companies the claimant pays the 75% state duty. Arbitrators of this court considered the case where the disputed amount was of 540 million rubles, it became a record for this organization. The reason of dispute was a refusal of the organization, which funding was undertaken with the budget, to pay for done work – the built and put into maintenance building in downtown of Moscow city. The trial was costed for the developer of 150 000 rubles., it is the maximum possible amount of cost in this arbitration court.

In the Court of Arbitration at the ICC of the Russian Federation, that deals with domestic disputes between market participants, the rate is comparable to state duty at the first instance of State Arbitration court. In the international courts at ICC rates are higher because they are targeted for participation of foreign arbitrators in the processes. But still significantly lower than in Western European arbitration: in London and a number of arbitration courts of Great Britain and the USA set hourly rate (the longer preparation of the decision is more expensive).

Concerning the commercial courts there is strong opinion in the companies that all the proceedings there are  a priori more expensive than in the state courts. In the Storm Properties expressed this same opinion: state services are almost always cheaper than the commercial ones, especially if the first ones have no additional fees. However in this as usually acts  the principle: you have to pay for quality, considers Eugene Koltsov, a senior lawyer of company.

Michael Savransky, deputy director of the Center for Arbitration and Mediation at Russian ICC, the arbitrator of ICAC, points out a further plus of the arbitration for business - its confidentiality. Arbitration cases are considered in closed session, and if the decisions are published then without specifying the contending parties and other specific information to help identify them. The requirement to disclose information is presented to the arbitrators and the staff of the ICC of the Russian Federation. This approach stems from the fact that the disputing parties do not wish to be disclosed specifics of their business, any trade secrets as well as their dispute became known to other partners, competitors, shareholders and others. Commercial secret of the court decision often assessed more than all the tangible assets of the business.

On the other hand to check the qualification and integrity of the arbitrators is not possible, not to mention the made decisions.

A conservative approach

Practise shows that companies dealing with real estate and construction refer to arbitration (referees) justice a little and inactive, statesSergey Gorbylev, a lawyer of "Yukov, Khrenov and Partners": in 2009 the ICC of the Russian Federation has received 250 claims from companies . During the same period in the Moscow Arbitration Court were considered 94 052 cases. But not all courts of arbitration (and they are now, according to ICC, about 500) provides statistics on the number of solved cases. The Arbitration Court of has received 211 complaints in 2010,  186 complaints - in 2009.

According to Julia Verbitskaya, the chairman of the Arbitration Court of Moscow construction companies, in the first half of 2011 50 cases were tried,  in the same period of last year - 42. Curiously enough the crisis served to popularization of the court: in such times a quick decision was important for companies. "The crisis of the organization often lack the money, there are underpayments - explains Verbitskaya. – If the company managed to get the court's decision so it managed to get into a queue of applicants for money - from the bank, the bankrupt partner, and so on. Or vice versa: when the bankruptcy proceeding is not initiated you can manage to collect some debts and pay off your debts. Sometimes we got 40 claims from the same organization at once. We quickly examined the cases, fixed the debt amount, exacted", she says.

Challenge the decision of the arbitration court can be only in arbitration, and other instances do not exist. Verbitskaya accentuates: the Arbitration Court of construction companies received complaints of 25% of cases examined by the court, in connection with that the cases were transferred to the Moscow Arbitration Court. So far, none of the decisions made by the arbitration court was cancelled by arbitration court, none of the cases have finished by the opposite decision.

A sign of immaturity

The low popularity of arbitration courts some lawyers believe a reflection of the immaturity of civil society: if the professional community is not able to solve their own problems, it is willing to delegate this right to the state. Or create such institutions which can only distort the idea of arbitration. Not for help was the spread of the arbitration courts in individual self-regulatory organizations (SROs).They have considered engaged in fact of origin.

Russian legislation provides the right to create a SRO arbitration courts "in itself" as well as enter into contracts with professional pre-existing courts. Apparently the process will develop in the second path. According to Marianna Samsonova,  the deputy head of the department of architecture, construction and urban development policy of the Ministry of Regional Development of the Russian Federation, arbitration proceedings is an interesting trend in the development of the judicial system in the country.

Under the committee on insurance to financial risks "Nostroy" was created the subcommittee on arbitration courts. The purpose of this innovation - the optimization of the judiciary under the SRO. "The idea of non-state dispute resolution consistent with the principles of self-regulation - when the responsibility for the regulation of relations in the area passed to the most professional community.  SROs become an alternative to state regulation as well as arbitration courts are to become full-fledged judicial institution along with the traditional public "- says Samsonova.

On the terms 

Julia Verbitskaya, the Chairman of the Arbitration Court of Moscow construction companies:

The arbitration courts in Russia had a dramatic transformation. Even at the level of terminology: the term "arbitration" usurped the state court. While in a foreign practice the term "court of referees" and "arbitration" - are synonymous. During the period of transition to market the concept of "commercial" has been so discredited that even in the minds of lawyers entrenched view: commercial justice can not be true, but  the state - completely. 

Natalia Krol

Source: Vedomosty Newspaper

25 October 2011