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. Last Updated: 07/27/2016

Court Speaks, but Who Obeys?

The good news for companies with Russia-related business disputes is that arbitration courts have been handing down judgments that have been hailed as well-considered and independent.

Now for the bad news: A growing number of parties that have won judgements in Russian or international arbitration courts haven't been able to collect their awards here.

In an effort to rectify that, the Russian government last July passed Federal Law No. 118, which calls for the creation of a "court officer" corps, which can be used by all of Russia's court systems to police the enforcement of decisions. Legal experts said that although the law has come into force, no officer corps has been created and they are waiting to see whether the laws will have any effect.

So for now, there is no sure bet that the party on the losing end of a judgment will carry out the court's will.

A recent judgment in favor of the Vandy Corporation illustrates the difficulties: The California-based tea trading company won a judgment against Alfa Eco trading company in Moscow's International Commercial Arbitration Court. The court ruled a division of Alfa Eco owed Vandy roughly $194,000, plus legal fees, for tea shipments.

But after six months, Vandy still had not been paid. To collect what the court determined was owed, the company must go back to a common court to apply to enforce the award. That means more legal fees, and so far the company has been loath to start the process over.

Similarly, outside shareholders in the Novolipetsk Metallurgy Combine successfully sued in the Lipetsk region's arbitration court, winning several decisions against the company directors for failing to give the outsiders board seats.

"The Russian courts are starting to understand shareholder rights and they're even willing, when they're under pressure in the local jurisdiction of company management, to rule for out-of-town shareholders," said Brian Zimbler, managing partner in the Moscow office of Leboeuf Lamb Greene & McRae.

The metal company, however, has continued to defy the court's order.

For the shareholder group, which includes top names such as Cambridge Capital Management, Renaissance Capital's Sputnik Fund and Uneximbank's MFK investment arm, little more can be done to enforce the court order unless local prosecutors file criminal charges.

"The only way is if [first deputy prime ministers] Boris Nemtsov, Anatoly Chubais, or Prime Minister Viktor Chernomyrdin get together and give some enforcement powers to these awards," a source from the group said. "The shareholders have done what they can do in court."

Russia's common court system currently has only a limited and overworked staff of bailiffs, individuals empowered to collect on physical awards in person. Enforcements from other court systems -- such as arbitration -- often end up with the common court bailiffs.

But law No. 118 and an accompanying law on the procedural side for enforcing government decisions should help rectify this problem, attorneys said.

"This is just the beginning of the process, since the courts themselves have to use these new resources," said Zimbler.

Until the court officer corps are created, it will fall to bailiffs to collect payments. Often, though, there is no money for them to collect.

"The main reason that the award is never paid is that debtor doesn't have enough money or cleans its account by the time the decision should be executed," said Olga Anissimova, an associate with the Coudert Brothers law firm in Moscow.

Under a 1988 Supreme Soviet decree that is still in effect, the creditor, or the party who wins the award, obtains a regional supreme court order and sends it to the debtor's bank; the bank should then automatically withdraw the money. If there is no money, then the court order should be submitted to a bailiff, who has the power to seize assets.

But the bailiffs are often underqualified for this task.

Anissimova, who once worked as a bailiff in the ordinary judicial court system, said bailiffs are generally underpaid and uneducated about arbitration law.

In the end, lawyers may end up advising their clients to settle out of court, rather than try to force payment through the courts, said another attorney who asked not to be identified.

"After all the delays, the money ends up being less and less," he said.