Posted on June 30, 2013 in Commercial Law
Standart LLC – Moscow Office
When a representative gets involved in court proceedings or out-of-court debt settlement process there are several inevitable issues to consider:
What kind of contract should be used to vest the representative (usually a law firm or a collector) with powers to take the debt owed to the client?
What are the legal grounds for termination of the contract according to which the debt had emerged, as such contract shall be performed at the account of a third party?
There are currency control issues to consider, because Russian banks and state authorities carry out currency control and control against money laundering in such operations.
There also appears the problem of business purpose of the transactions, because payment agent construction is not very well-known in Russian law.
It usually makes no sense for a law firm to have the debt assigned to it, because this means financial expenses to buy the debt from the client. As a rule an agency contract is used for such purposes.
If a foreign creditor’s debt has emerged from a foreign trade contract registered in a Russian bank, payment of such debt to the client from the account of the law firm should be made within the initial debt formatting contract referred to above. When payments are made from Russia in the amounts exceeding USD 50,000 (or its equivalent in other currency), the parties should arrange a transaction passport (similar to currency transaction report in the US) in the bank and disclose the details of the contract structure to the currency control department of the bank.
This relations structure is rather complicated, so Russian law firms usually ensure that the debtor pays to the account of the foreign creditor himself, closing its transaction passport in a Russian bank, while the creditor pays the fee to the law firm in a separate payment.
The creditor needs to issue powers of attorney to authorize the employees of the law firm to act on its behalf in negotiations and in court.
When a contract is entered into with a law firm to collect a debt in court, the client should be informed that representation fee may be recovered by court from the loser.
To prevent abuse of the right to recover legal costs including representation fees, the Presidium of the Supreme Commercial Court of the Russian Federation has pointed out some limits to make such costs reasonable (see s.20 of its Information letter as of 13.08.2004 N 82).
According to the Supreme Commercial Court and the practice of lower courts, the courts should consider the following criteria:
– nature and type of claim;
– complexity of the case in terms of volume and facts in question (number of episodes, quantity of documents etc);
– scope of work made by the representative, including the number of papers drafted to uphold the position in the case, as well as time spent to collect proofs participate in hearings, study the materials etc;
– duration of hearings in court (including in appeal and cassation courts), number of hearings attended by thee representative, degree of his involvement in the hearing;
– market fees for legal support and other work similar to that done by the representative in the region (e.g., price lists and engagement letters from law and consulting firms and attorneys at law).
The party which claims recovery of representation fees should prove the amount of such fees and the fact of payment, while the other party should prove their exorbitance (s. 111(3) of Commercial Proceeding Code of the Russian Federation, Rulings of the Constitutional Court of the Russian Federation as of 20.10.2005 N 355- and as of 21.12.2004 N 454-).
But even if the loser makes no objections against the amount of fees the court may shorten the amount of recoverable costs by its own initiative basing on the reasonable limits of such costs established by the court (paragraph 3 of Law review in the Information letter of the Presidium of the Supreme Commercial Court of the Russian Federation as of 05.12.2007 N 121).
Basing on the reason criterion courts seldom recover large amounts from the Federal Tax Service. But in 2012 Aelita Software Corporation, an American company proved that their legal costs for representative fees and computer technical expertise had been reasonable. Presidium of the Supreme Commercial Court of the Russian Federation ruled to recover the law firm fees in the equivalent of $98,000 from the loosing tax authority (Judgment as of 15.03.2012 N 16067/11). Before that Aelita Software Corporation who had been engaged in scientific application research, transferred copyright to computer programs and challenged additional charge of VAT, income tax, fines and penalties in the equivalent of $ 1,238,000.
If you need advice and representation in collecting debts in Russia, if you have contractual, extra-contractual or tax debts in Russsia, please refer to Standart LLC, Moscow.
debt, legal costs, payment, representation fee, Russia