By 13 August, 2014 Read More →

Unreliable Warranty as a Basis for Invalidity of a Transaction

Foreign and Russian legal practitioners quite often note the absence of legal enforceability of “warranties” as a shortcoming of the Russian legal system.

Meanwhile, the situation is changing as, on 10 July 2014, the Ninth Commercial Appellate Court confirmed the judgment of the Moscow Commercial Court acknowledging the legal force of “contractual warranties” and the duty of parties to ensure their reliability.

The courts concluded that a seller of shares had made unreliable warranties regarding the financial condition of a sold company and therefore a share purchase agreement was invalid.

International contracts involving Russian parties frequently contain warranty provisions. Hence the recent ruling on this issue is important for Russia-related dispute resolution.

Facts of the Case

In 2007 OJSC Novolipetsk Steel (“NLMK”) and N.V. Maksimov concluded an agreement for the purchase of shares of Maksi-Group OJSC to NLMK. According to the agreement 50%+1 of Maksi-Group’s shares was transferred to NLMK and the purchaser paid the first tranche of the price in the amount 7 billion roubles to Maksimov.

NLMK in 2011 filed a claim to the Moscow Commercial Court for invalidation of the share purchase agreement.

The claimant based its position on article 179 of the Russian Civil Code “Invalidity of a Transaction Made under the Influence of Fraud, Duress, Threat, of a Bad-Faith Agreement of the Representative of One Party With Another Party or the Confluence of Harsh Circumstances”.

NLMK stated that the agreement had been concluded under the influence of fraud by Maksimov that had given unreliable warranties. According to the claimant the actions created an untrue impression relating to prospects of the transaction.

The defendant responded that Maksimov had never signed the appendices to the share purchase agreement containing warranties.

Judgment of the Moscow Commercial Court

The court satisfied the claims of NLMK referring to Article 179 of the Russian Civil Code. According to the article a transaction made under the influence of fraud may be declared invalid by a court on the suit of the victim.

The court quoted the Information Letter of the Supreme Commercial Court No. 162 dated 10 December 2013 with an overview of case law on the application of Articles 178 and 179 of the Russian Civil Code. According to the Letter fraudulent actions can consist of intentional non-disclosure of relevant information by a party to a contract.

Rejecting the argument of the defendant that he had not signed the warranties, the court also referred to the Resolution of the Supreme Commercial Court dated 6 September 2011 No. 4905/11. In the Resolution the Supreme Court had stated that in case of absence of agreement signed by parties mutual obligations of the parties could be confirmed by tacit actions; such tacit actions created obligations of the parties.

In this connection the court noted that the share purchase agreement contained references to the appendices containing warranties. On that basis the court concluded that by signing the share purchase agreement Maksimov undertook to ensure the reliability of warranties.

The court agreed with the arguments of the claimant that, in concluding the disputed transaction, Maksimov had known about the real financial condition of Maksi-Group OJSC, including of the risks of initiation of bankruptcy proceedings against Maksi-Group OJSC, though he had not informed the buyer about the circumstances.  Therefore, the court concluded that the claimant had been misled by the defendant.

The Moscow Commercial Court declared the share purchase agreement invalid and recovered 7 billion roubles from Maksimov.

Decree of the Ninth Commercial Appellate Court

Maksimov appealed the judgment of the Moscow Commercial Court to the Ninth Commercial Appellate Court. The appellant argued that the share purchase agreement had been falsified. The appeal court resuméd that the appellant had failed to prove the argument and confirmed the lower court’s decision.

Significance of the Case

The case underlines the importance of including “warranties” in the text of contracts. It is not for the first time that Russian courts have demonstrated such an approach.

Earlier, the Supreme Court of Russia in a Ruling dated 19 July 2011 had confirmed the judgments of lower courts based on “warranties”.

As noted above foreign and Russian lawyers frequently mention the absence of “contractual warranties” in Russia arguing that Russian law protects the interests of bona fide parties less than English law.

Meanwhile, the judgments referred to show that Russian courts also can base their decisions on “contractual warranties”.

About the Author:

Andrey Kalimanov is an intern with CIS Arbitration Forum. He is an associate at law firm Muranov, Chernyakov & Partners, Moscow, Russia. His practice focuses on international arbitration, domestic litigation, enforcement of arbitral awards and foreign court judgments, advising clients on different Russian law aspects in foreign litigations and arbitrations. Andrey is a co-founder and member of the Russian Arbitration Association (RAA). Andrey graduated with honours from the Law Faculty of the State University of Management (GUU).

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