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.


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.

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