United States: The VimpelCom Case: Moscow Court Sets Currency Band For Calculating US Dollar - Denominated Rent

Last Updated: February 17 2016
Article by Sergey Trakhtenberg

February was marked by a key event for the Russian commercial real estate market. The Moscow City Commercial Court finally released the full text of its high-profile decision in PAO Vimpel-Communications v. PAO Tizpribor. The court judicially modified a lease agreement, thus establishing upper and lower limits on the ruble / US dollar (RUB/USD) exchange rate which the parties may use when calculating rent payments.

Essence of the dispute

PAO Vimpel-Communications (VimpelCom), as tenant, sued PAO Tizpribor (Tizpribor), as landlord, seeking termination or judicial modification of a long-term lease.1 Under the lease, rent was payable in the form of the ruble equivalent of a dollar sum agreed by the parties, such ruble equivalent to be calculated based on the official RF Central Bank (CBR) RUB/USD rate prevailing on the date of payment.2

In its prayer for relief, VimpelCom asked the court inter alia to introduce into the lease a "currency band" provision, whereby:

  1. If on the date of payment the official RUB/USD exchange rate is less than 30 rubles, then settlement should be based on an exchange rate of 30 RUB/USD; and
  2. If on the date of payment the official RUB/USD exchange rate exceeds 42 rubles, then settlement should be based on an exchange rate of 42 RUB/USD.

VimpelCom's position

The following arguments formed the basis for VimpelCom's claims seeking termination or judicial modification of the lease:

  1. in the period from the date of the preliminary agreement (providing for the conclusion of the long-term lease agreement) up until signing of the long-term agreement in 2009, the official CBR RUB/USD exchange rate had not exceeded 32 rubles;
  2. the tenant agreed to the payment terms based on its understanding that the CBR had instituted a currency band in the form of upper and lower limits on the RUB/USD exchange rate and adjusted the ruble exchange rate through regular currency interventions. In November of 2014 the CBR discontinued the adjustment mechanism on which the tenant had relied when entering into the agreement. This led to a drop in the RUB/USD exchange rate and an increase in the actual ruble cost of rental by 250%, as compared with when the rent payment terms had been negotiated;
  3. the change in the CBR's currency policy and imposition of economic sanctions on Russia prevented the tenant from predicting the actual ruble cost of the lease. All of these circumstances together should be recognized as a material change of circumstances.

The above arguments are often seen in court claims in Russia, when plaintiffs seek modification or termination of agreements based on material change of circumstances (Art. 451 of the RF Civil Code). The difference is that VimpelCom did not refer directly to the exchange rate drop itself, but rather to the change in CBR policy (in addition to the economic sanctions imposed on Russia), which could not have been foreseen by the parties when they entered into the agreement, as an insurmountable circumstance now preventing VimpelCom from predicting rental expenses. VimpelCom carefully chose its line of argument, since established Russian court practice does not generally consider abrupt changes in exchange rates to be a material change of circumstances.

The change in policy by the CBR does not constitute a material change of circumstances

Upon consideration of the case, the court refused to terminate the agreement altogether. But the court nonetheless granted Vimpelcom's prayer for judicial modification to introduce a currency band into the agreement and thus establish a maximum ruble rental rate.

The court's refusal to terminate the agreement altogether was based on the standard arguments for cases in which one party seeks to modify or terminate an agreement claiming that a change in exchange rates constitutes a material change of circumstances. The court's stated reasoning was consistent with established court practice of rejecting such claims, as developed under RF Supreme Commercial Court decisions and applied following the 2008 economic crisis:

  1. the plaintiff has based its claim to terminate the agreement on a change in exchange rate;
  2. the court then finds that the change in the exchange rate alone does not constitute a reasonably unforeseeable circumstance;
  3. the court finds that the change in monetary or currency policy by the RF Government or CBR similarly does not constitute a material change of circumstances allowing for outright termination (note that the court in its decision did not comment on the argument regarding imposition of economic sanctions);
  4. the court finds that contractually denominating payment obligations in a foreign currency implies a risk of change in exchange rates, which the plaintiff (in our case, VimpelCom) always assumes as a standard business risk.

The court's reasoning

Bizarrely, having first rejected all of VimpelCom's arguments, the court nonetheless granted VimpelCom's prayer for judicial modification of the lease, based upon an entirely different rationale - which VimpelCom (as it appears from the court decision) itself had not even articulated:

  1. no one has the right to gain an advantage from their own misconduct;
  2. under the RF Supreme Commercial Court Plenum Ruling "On Freedom of Contract and its Limits," a court, when evaluating the good faith of a party's actions, goes by the conduct that is anticipated from any party to a business transaction, considering the rights and legal interests of the other party; where misconduct is found the court may take steps to secure the interests of a non-breaching party against misconduct;
  3. the amount of rent should not exceed typical rates paid for leasing similar premises in the given locality;
  4. substantially exceeding the market price for rent could entail unjust enrichment for a landlord;
  5. based on the expert opinions reviewed, the rent which VimpelCom is now paying indeed exceeds the market rent for similar premises;
  6. in order to maintain a balance between the parties' property interests, the court has decided to grant VimpelCom's claims and judicially modify the lease agreement, instituting a currency band for calculating the ruble equivalent of the rent;
  7. the court has therefore established limits on the RUB/USD exchange rate on the basis of VimpelCom's suggestions, in the absence of any competing suggestions from Tizpribor.

Following the court's logic, the court implicitly found that Tizpribor had acted in bad faith by merely refusing to renegotiate the rental with VimpelCom and instead demanding the contractually-agreed rental rate, which now appeared exorbitant when compared to the prevailing rental market. In the context of the RF Supreme Commercial Court Plenum Ruling "On Freedom of Contract and its Limits," this allowed the court to take steps securing VimpelCom's interests as the non-breaching party. That said, the text of the court's opinion did not expressly refer to any bad faith on the part of Tizpribor.
In our view, the court's rationale is dubious, both in law and logic. As follows from the court's reasoning, the court rejected VimpelCom's arguments entirely and instead formulated its own basis for the lawsuit, among other things, by emphasizing the RF Supreme Commercial Court Plenum Ruling "On Freedom of Contract and its Limits." Notably, in overt violation of the RF Commercial Procedure Code, various of the court's key findings do not specifically cite the laws or other regulations by which the court was guided. These and other circumstances give serious reason to believe that the judgment may be reversed – or at least substantially modified – upon appeal.

One-off controversial decision or new precedent?

Tizpribor has already appealed the case, without waiting for release of the full version of the decision. If the VimpelCom decision is upheld by the higher courts, this could trigger numerous lawsuits by tenants and completely turn the Russian commercial lease market into a ruble-based one.3 Moreover, it is no secret that in light of the drop in the RUB/USD exchange rate, many landlords have already made concessions to tenants and instituted currency bands. It is unclear whether the new practice could affect such agreements if tenants start bringing claims seeking further reductions in previously-agreed currency bands, or how (and by whom) such bands should be determined.

If unreversed, VimpelCom could also serve as grounds for the revision of other types of Russian-law contracts with payment obligations denominated in foreign currency (e.g., loan agreements, supply contracts, contractor agreements and the like).

It is apparent that in many ways it will depend on VimpelCom whether the Russian market sees a wave of attempts to revise foreign-currency-denominated contracts. That said, the issuance of a single judgment, even if highly unusual, does not always necessarily trigger formation of new court practice. Often such judgments remain isolated, one-off cases with little effect on general court practice.

Footnotes

1 The claims seeking termination and modification of the lease were originally filed as separate cases, which the Moscow City Commercial Court then consolidated into a single case in December 2015.

2 Readers will recall, it is common practice on the Moscow commercial real estate market for landlords to set rental payments in US dollars. At the same time, Russian foreign exchange regulations oblige Russian companies to effectuate actual payments between each other using only the ruble. Accordingly, their contracts often denominate obligations in US dollars whilst recognizing that the actual settlement will be in rubles (using the prevailing exchange rate at the time of settlement). This allows landlords to plan their rental streams accordingly, matching them to (often quite substantial) dollar-denominated financing obligations to lenders.

3 Notably, as many Moscow commercial landlords have US-dollar-denominated loans mortgaged by their properties, such a development could also easily push landlords into default under their loans.

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com www.dentons.com.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
26 Sep 2018, Conference, New York, United States

Dentons is delighted to support a global IT services and consulting firm Miratech as an event host partner at their annual conference called M-Force18 New York on September 27th. The event will be held at Dentons New York office in the heart of Midtown Manhattan, opposite Rockefeller Center.

2 Oct 2018, Seminar, Dallas, United States

We are pleased to offer a program of five sessions designed specifically for in-house counsel. Topics will include:

  • In-house corporate ethical issues
  • What recent Supreme Court decisions mean for business
  • Keeping lawyers out of your benefit plans
  • Litigation tactics for in-house counsel
  • Employment issues in the age of #MeToo
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions