KIAP contributes to case law on non-pecuniary damages to entities for bad-faith inaction by FBS

The problem of proper execution of court rulings is at the heart of the Russian judicial system. It affects the public, corporates and the state alike. For example, in one of his interviews, A.A. Ivanov, President of Supreme Arbitrazh (Commercial) Court of the Russian Federation, said that the share of executed decisions of arbitrazh and mainstream courts is within 20% and 30% respectively, with uncollected court awards totalling billions of roubles.

The situation being what it is, the problem facing a KIAP client the Russian arm of a global industrial behemoth, Denmark's Rockwool, looked fairly run of the mill for Russia; namely, having won an arbitrazh debt recovery action, the company wanted bailiffs to enforce the award. A long time passed, however, with no action taken by the bailiffs to enforce the court ruling, and the company was left totally in the dark, despite its frequent enquiries, about the progress made by the bailiffs in the enforcement proceedings.

Being aware of the ineffectiveness of the remedies available against bad-faith inaction of the bailiff service, which normally does not deliver what is sought, namely debt recovery, KIAP lawyers developed a solution in the form of legal action for non-pecuniary damages to the recoverer for unreasonable delay in court ruling enforcement and failure to notify the recoverer of the reasons for the non-enforcement.

Taken in and of itself, this legal strategy is likely to baffle most of legal practitioners because non-pecuniary damages were believed not to be available to a legal entity as it is incapable of moral or physical suffering. This reasoning, however, is now held to be outdated, as is evidenced, among other things, by the case law of the European Court of Human Rights. This was the argument we made in the statement of claim and reiterated in the courtroom.

At first, the Arbitrazh Court of the city of Moscow dismissed the case, ruling that such a claim cannot possibly be litigated in arbitrazh proceedings. The ruling was upheld by the Ninth Arbitrazh Court of Appeal; thereafter, however, the reasoning of the Moscow Okrug FCA was rejected and the case remanded for further consideration. When re-examined, the claim of our Principal was dismissed by the courts for lack of proof of wrongful omission. The second time round, however, the lower-level courts' arguments were again faulted by the Moscow Okrug FCA. The court of cassation in its judgment set aside all lower-level court rulings and found for the claimant, ordering the Russian Federation as represented by the FBS of Russia to pay non-pecuniary damages to our Principal.

The analytical part of the cassational court's judgment says that the lower-level courts failed, when denying the claim, to take into consideration the case law of the European Court of Human Rights regarding the award of damages to a legal entity for denial of intangible benefits, which is predicated on long uncertainty rather than physical and moral sufferings of the legal entity. This gave rise to the conclusion that the first instance judgment and the appeal ruling had misapplied article 15 of the RF Constitution, provisions of the Convention for the Protection of Human Rights and Fundamental Freedoms, as well as the case law of the European Court of Human Rights.

We are confident that the precedent put in place must one way or another prompt the Federal Bailiff Service to make positive changes to its operating procedures, as well as improving the enforceability of court rulings, which are currently abysmally underenforced, bringing the entire judiciary into disrepute as a result.

According to Aleksandr Kalinin, Head of Legal Department at Rockwool CIS, “this is a brilliant result delivered by KIAP lawyers, all the more so because many were sceptical of this legal strategy. I hope this precedent will help not only our company in dealing with bailiffs in later cases, but also other companies that come up against such outrageous lack of professionalism and impunity from the offices of FBS of Russia.” 

The matter was litigated by Senior Associate Mikhail Samoylov and Attorney at law Andrey Korelskiy.