Deciding Russian Law after Trial, Court Recognizes Corruption and Bribery in Russia as “Ordinary Course of Business and/or Customary Practice in Russia”

Deciding Russian Law after Trial, Court Recognizes Corruption and Bribery in Russia as “Ordinary Course of Business and/or Customary Practice in Russia”

By Louis M. Solomon

Creditanstalt Investment Bank AG, et al. v. Holme Roberts & Owen, LLP, et al., Case No. 01-CV-1677 (Denver Colo. District Court June 2011), is an example of international litigation in a U.S. court making its way through trial and decision.  The decision should be read in conjunction with the discussion we just had in the context of the Second Circuit's reversal of the District Court's decision in Chevron, which preliminarily found the Ecuadorian legal system so arguably corrupt as to justify an injunction against enforcement of an Ecuadorian judgment.  We anticipated negative judicial reaction to that finding by courts in the U.S., which has come in the form of a question from the Third Circuit as well as, now, a reversal (with opinion to follow) from the Second Circuit. 

Creditanstalt (the plaintiff is CAIB) involved claims of breach of contract by an investment bank operating in Russian in the 1990s.  CAIB engaged the defendants here as legal counsel "for due diligence and proposed acquisition of the Moscow based securities house" "Active".   Other work was apparently also done by HRO, and the issue in the case was the liability of HRO with respect to whether warnings were properly given by HRO to CAIB in connection with a transaction with Gazprom, a large oil and gas company originally owned by the Soviet Union with "a very close cooperation between Gazprom and the Kremlin".  The claims tried related to alleged bad or incomplete advice by the law firm, HRO, which allegedly damaged CAIB when various significant problems arose relating to Gazprom.

Noteworthy aspects of the trial court's decision include:

First, the trial court applied Russian law, relying on experts on non-U.S. who apparently came and testified. 

Second, in describing the Russian legal system, the court stated:

Russia was an emerging market and its legal system was imperfect, ambiguous, and constantly in flux.  Plaintiffs' expert on Russian law, Professor Alexander Makovsky, agreed that, in Russia, the rules were made as they went along. . . . Certain practices that would be illegal or unethical in other countries 'flourish and are considered appropriate business practice' in Russia' . . . Corruption was widespread in Russia at the time and was well-known in the business community"

In a remarkable finding, the Court relied on a provision in a contract "contemplating the need to pay bribes to the extent they were required in the 'ordinary course of business and/or customary practice in Russia'".    The Court concluded that "Plaintiffs were aware that operating in Russia involved many risks, including arbitrary and corrupt actions by the Russian government".

The Court did not discuss whether knowledge of such risks should or should not have been an appropriate phenomenon on which to base the Court's rulings.   That is, on whom should the risk of loss be placed in an instance where a client relies on the rule of law in a non-U.S. jurisdiction, or whether a U.S. court can, by taking evidence, conclude that a non-U.S. jurisdiction's laws are corrupt.

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