Punitive damages – The Court of Cassation opens the door in Italy

25. November 2017

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The Russian law allows the parties to agree on recovery of contractual penalty for failure by the parties to fulfill contractual obligations.

Below are some typical examples of provisions that stipulate contractual penalty:

In the event of untimely delivery of the Goods under the Contract the Buyer shall be entitled to claim penalties in amount of 0,1 (zero point one) percent from the total value of untimely delivered Goods for each day of delay.

In the event of untimely payment for the Goods under the Contract the Seller shall be entitled to claim penalties in amount of 0,1 percent from the total value of untimely paid Goods for each day of delay.

The Civil Code of Russia (art. 333) allows the court to decrease the amount of penalty if such amount of penalty is disproportionate to the consequences of breach of contractual obligations, with that the court shall be entitled to decrease penalty only if the debtor files a motion with the request to decrease such excessive amount of penalty.

The decrease of penalty determined by the contract and subject to payment by the person who conducts business activities is allowed only in exceptional cases, if it is proved that the recovery of penalty in the amount stipulated by the contract can lead to receipt of the unjustified profit by the creditor.

In practice the parties file motions with the court of first instance with the request to decrease penalty with reference to art. 333 of the Civil Code and the court usually decreases the amount of penalty at its discretion.

In a recent case considered by the Supreme Court of Russia dated 29.05.2018 (case #A43-26319/2016) the Supreme Court ruled that the imposition of penalty even in the amount exceeding the total value of the contract was justified provided that the debtor failed to file a motion with the court of first instance with the request to decrease such penalty with reference to art. 333 of the Civil Code.

In this case the customer ordered the contractor to produce a pressure vessel. The price of such works of the contractor amounted to 2.700.000 rubles. The parties agreed that the pressure vessel will be produced by the contractor till 30.01.2015. The contractor produced the pressure vessel only on 01.03.2016.

The contract stipulated that in case of violation of terms of performance of works the contractor will pay to the customer a fixed fine in the amount of 5% from the price of works that the contractor failed to perform in time for each violation as well as penalty in the amount of 0,3% from the price of works that the contractor failed to perform in time for each day of delay starting with the 4th day of delay.

As a result, the customer demanded that the contractor pays penalty in the amount of 3.355.170 rubles.

The court of first instance ruled in favor of the contractor and ordered that the client shall pay the amount of penalty in full since the contractor failed to provide evidence that confirmed due fulfillment of the contract by the contractor, or that the contractor failed to perform its obligations in time due to circumstances that were out of his control. With that the contractor also failed to dispute the amount of penalty and failed to file a motion on application of art. 333 of the Civil Code.

The appeal court changed the ruling of the court of first instance and decreased the amount of penalty to 326.781 rubles based on its conclusions that the customer abused its rights by including in the contract the unfair penalty provisions.

The Cassation Court agreed with conclusions of the Court of Appeal, but the Supreme Court dismissed the rulings of both the Cassation Court and Court of Appeal and the decision of the court of first instance remained in force.

The Supreme Court based its decision on the fact that the contractor failed to file a motion with the request to decrease the amount of penalty and apply art. 333 of the Civil Code in the court of first instance. Therefore, the Court of Appeal had no right to decrease the amount of penalty at its own initiative.

The latest conclusions of the Supreme Court confirm that the contractual penalty can exceed the total value of the contract and the courts are not allowed to decrease such excessive amount of penalty at its own initiative.

Thus, if you have any dispute in Russia, please ensure that your company is duly represented in state commercial courts, since the failure of the parties to appear in court of first instance and file respective motions might lead to serious negative consequences that the failing party might not be able to cure in the courts of appeal.

Not what you would expect 

When can you terminate, how should you terminate, and how much are you exposed?!

The outcomes of termination of a business relationship with an Israeli counterpart in Israel arise again and again as a question in many disputes between International corporations and Israeli counterparts, such as distributors or franchisees.

This is mainly because Israeli law does not include specific laws regulating or regarding distribution or franchising or other kinds of business ventures (except a relatively new agency law – referring in a limited manner to specific kinds of agency only) – and thus disputes in said regards are determined based on the general principles of contract law, the contractual and factual bases – obviously resulting in considerable uncertainty as to specific matters.

However, substantial case law, such as in the matter of Johnson & Johnson International that ended up paying compensation in the equivalent to over 1.5 Million US$, indicates the basics and threshold of what can be expected in such disputes, and, if implemented wisely, may assist in planning the disengagement or termination of a business relationship, in a manner that would be the least costly for the terminating party and minimize its exposure to a lawsuit.

In many cases, domestic parties invest many years and/or fortunes, in order to penetrate the domestic market with the foreign service or products, and to promote sales in the subject region, for the benefit of both the international corporation and the domestic party.

Nevertheless, often the international corporation decides for various reasons (such as establishing an „in-house“ operation“ in the target location or substituting the distributor/franchisee) to terminate the oral or written contractual relationship.

What are the legal foundations involved in such termination as per due notice of termination and corresponding compensation – if at all?

Generally, this issue arises in cases in which the contract does not specify a period of the business relationship, and, as a principle of law, contracts may be terminated by reasonable notice and subject to the fundamental good faith principle.

Contracts are not perceived as binding upon the parties indefinitely. The question is always what is the reasonable time for termination notice, and is the termination done in good faith (which is always a tricky and vague issue). Compensation is commonly awarded in accordance with what the courts find as the due notice period that may also entail compensation for damages related to said breach.

As always, there are exceptions, such as breach of trust toward the manufacturer/franchisor, that may have great impact on any due notice obligations, as far as justification for immediate termination that can be deemed immune to breach of due notice or good faith obligations.

The truth is the reasonability of the due notice varies from case to case!

However, Israeli case law is extremely sensitive to the actual reasoning of termination and how genuine it is, as opposed to asserting a tactical breach argument in an attempt to „justify“ avoiding a due notice period or adequate compensation.

In this respect, in many cases simple „non-satisfaction“ was denied as a legitimate argument for breach of contract, while safeguarding the freedom of contracts and the right to terminate an ongoing contract with due notice and good faith.

There are various common parameters referred to in the case law, to determine the adequate time of due notice, including, for instance, the magnitude of investment; the time required for rearrangement of business towards the new situation (including time required to find an alternative supplier product which can be marketed); the magnitude of the product/service out of the entire distributor’s business, etc.

Time and again, although not as binding rule, the due notice period seems to be in the range of around 12 months, as a balance between the right of termination and the reasonable time for rearranging the business in light of the termination. There were, however, cases in which due notice for termination was deemed as short as three months and as long as two years – but these are rather exceptional.

Another guiding point in the case law is the factor of exclusivity or non-exclusivity, as well as the concept that the longer the business relationship, the less the distributor/franchisee may expect compensation/reimbursement for investment – based on the concept that he has enjoyed the fruits of the investment.

The outcome of not providing such adequate due notice might result in actual compensation reflecting the loss of profit of the business in the last year before the termination, or for the whole term the court finds a due notice was in place, or, in cases of bad faith, even a longer period reflecting the damages.

In conclusion, given the legal regime in Israel, such exposure might be extremely considerable for any international or foreign business. It would, therefore, be vital and as a consequence of real value to plan the strategy of disengagement/termination of the business with the domestic counterpart in Israel, in advance and prior to executing it, and there are, indeed, adequate and wise strategies that may be implemented for the best result.

It is often the case – in practice – that an ongoing commercial relationship builds slowly over time through a series of sales agreements, without the parties ever signing an actual distribution agreement to set down their respective rights and responsibilities.

At first blush this might appear to be a good thing: one can sidestep being bound, especially long-term, to the other party. But on closer scrutiny the solution becomes problematic, especially for anyone operating internationally.

One of the key issues that arises when an international contractual arrangement is not in writing, is identifying the court with jurisdiction over any dispute arising therefrom. In the European Union, the issue is resolved by the provisions of Regulation 1215/2012 (“Brussels I recast”). Pursuant to Article 7 of the Regulation, as an alternative to the defendant’s courts, jurisdiction in a contractual dispute may lie with the court in the place of performance of the obligation in question. Next to this general rule are two criteria to identify the “place of performance”, differentiated according to the type of contract at issue. For a contract for goods, it is the place of delivery for the goods; in a contract for services, it is the place where the services are provided.   

Thus, to identify the court with jurisdiction, it is crucial that a contract fall under one of these categories: goods or services.

No doubt this distinction is quite simple in many circumstances. In the case of a distribution agreement, or of a commercial concession agreement, the issue may become thorny.

The European Court of Justice has analysed this issue on a number of occasions, most recently in their judgement of 8 March 2018 (Case no. C-64/17) following the request for a preliminary ruling from a Portuguese Court of Appeal. The parties to the action were a Portuguese distributor, a company called Lusavouga, and a Belgian company called Saey Home & Garden, that produced articles for the home and garden, including a line of products branded “Barbecook”.

Following Saey’s decision to break off the commercial relationship – notice of which was sent in an email dated 17 July 2014 – Lusavouga brought action in Portugal seeking compensation for the unexpected termination of the agreement, and goodwill indemnity. Saey raised a plea of lack of jurisdiction of the Portuguese court, citing their general conditions of sale (mentioned in their invoices) which required that a Court in Belgium be competent for dispute resolution.

The facts thus presented two issues to be resolved in light of the Brussels I recast Regulation: deciding whether a jurisdiction clause in a vendor’s general terms and conditions pursuant to Art. 25 of the Regulation shall apply, and, if not, choosing the court with jurisdiction under Art. 7 of the Regulation.

Shall a jurisdiction clause contained within a vendor’s general terms and conditions apply to a distribution relationship?

The supplier company apparently considered their course of dealing with the Portuguese retailer nothing more than a concatenation of individual sales of goods, governed by their general terms and conditions. Consequently, they argued that any dispute arising from the relationship should be subject to the jurisdiction clause identifying Belgium as the court with jurisdiction under those terms and conditions.

Thus, a determination was needed on whether, under these facts, there was a valid prorogation of jurisdiction under Article 25, paragraph 1 of Regulation 1215/2012.

The Court of Justice has long opined that if the jurisdiction clause is included in the general contract conditions drafted by one of the parties, the contract signed by the other party must contain an express reference to those general conditions in order to ensure the real consent thereto by the parties (judgement of 14 December 1976, Estasis Salotti di Colzani, case no. 24/76; judgement of 16 March 1999, Castelletti, case no. C-159/97; judgement of 7 July 2016, Höszig, case no. C-225/15). Moreover, to be valid, the clause must involve a particular legal relationship (judgement of 20 April 2016, Profit Investment SIM, case no. C-366/13).

In the instant case, the referring court found it self-evident that the legal relationship at bar was a commercial concession agreement entered into for the purpose of distributing Saey products in Spain, a contract that was not evidenced in writing.

From this perspective, it is clear that the general conditions contained in the Saey invoices could have no bearing on the commercial concession agreement: assuming Lusavouga’s consent had been proven, the selection of Belgium as the forum would have applied if anything to the individual sales agreements, but not to those duties arising from the separate distribution agreement.

What, then, would be the court with jurisdiction for the duties arising from the commercial concession agreement?

Absent any jurisdiction clause, the issue would be decided under Art. 7, point 1 of Regulation 1215/2012, under which it becomes imperative to establish whether a contract is for goods or for services.

The “provision of services” has been defined by the Court of Justice as an activity, not mere omissions, undertaken in return for remuneration (judgement of 23 April 2009, Falco, case no. C-533/07).

With the judgements in Corman Collins of 19 December 2013 (case no. C-9/12), and Granarolo of 14 July 2016 (case no. C-196/15), the Court held that in a typical distribution agreement, the dealer renders a service, in that they are involved in increasing the distribution of supplier’s product, and receives in consideration therefor a competitive advantage, access to advertising platforms, know-how, or payment facilities. In light of such elements, the contract relationship should be deemed one for services. If on the other hand the commercial relationship is limited to a concatenation of agreements, each for the purpose of a delivery and pickup of merchandise, then what we have is not a typical distribution agreement, and the contractual relationship shall be construed as one for the sale of goods.

Once the contract has been categorised as one for services, one must then determine “the place where, under the contract, the services are provided”. The Court specifies that such location shall be understood as the member state of the place of the main provision of services, as it follows from the provisions of the contract  or – as in the case at issue – the actual performance of the same. Only where it is impossible to identify such location shall the domicile of the party rendering the service be used.

From the referring court’s description of the contractual relationship, and from the Court of Justice’s understanding of the distributor’s performance of services, it would be logical to find that the principal location for performance of services was Spain, where Lusavouga “was involved in increasing the distribution of products” of Saey.

It is clear that neither the manufacturer nor the distributor would ever have intended such a result, and they might have avoided it being chosen for them by reducing their agreement in writing, including a jurisdiction clause therein.

By the same token, viewed from the outside, the Portuguese judges’ apparent conviction that the situation was one of an actual dealership contract would leave ample room for debate. After all, a number of elements would lead to the opposite conclusion. However, even in terms of that aspect, the absence of a written contract left room for interpretation that might lead to unforeseen – and perhaps rather risky – consequences.

In conclusion, the wisdom of setting down the terms and conditions of a sales distribution agreement in writing appears clear. This is not only because one can avoid those ambiguities we have described above, but also because it specifies other important clauses stipulated by the parties that should not be left to chance: exclusivity of area, if any, or with respect to specific sales channels, the contract period and termination notice, any duties to promote the product, control over end-user personal data, and the possibility of, and methods for, any online sales of products.

State commercial court in Russia is named in the Russian language – Арбитражный суд. This name of the state commercial court is often translated into English as Arbitration court. Such translation in its turn often causes actual misunderstanding between the parties, since the Russian party will most probably consider the term “Arbitration court” as a state commercial court and the other (non-Russian) party might consider that it agreed to resolve disputes by arbitration rather than in a state court.

Below are some examples of dispute resolution clauses specified by the parties in commercial contracts that caused actual misunderstanding:

“…if there is no agreement, any disputes and claims between the parties relating to the contract will be resolved by arbitration under the Rules of International Chamber of Commerce in Moscow by one or more arbitrators appointed in accordance with the said rules. The Arbitration court shall use the Russian law.”

“…if a dispute is not resolved within 30 days of written notification of the dispute by one party to the other, anyone of the parties may submit the dispute arising out of or in connection with this agreement shall be finally settled under the Rules of Arbitration of the Moscow City Arbitration Court”.

The wording of such clauses and its translation, specifically translation of the term “Arbitration court” might result in resolution of claims by the state commercial courts in Russia, rather than by arbitration. In such situations failure of the non-Russian party to defend itself in the Russian state commercial courts might lead to serious negative consequences.

One of the well-known arbitration institutions in Russia – the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation recommends the following arbitration clause:

“Any dispute, controversy or claim which may arise out of or in connection with the present contract (agreement) [in case a separate arbitration agreement is concluded a particular contract (agreement) is to be indicated], or the entering into force, conclusion, alteration, execution, breach, termination or validity thereof, shall be settled by arbitration at the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation in accordance with its applicable regulations and rules. An arbitral award shall be final for the parties. It shall not be allowed to submit a motion to a state court to make a decision on the lack of jurisdiction of an arbitral tribunal in connection with the issuance by the arbitral tribunal of a separate order on existence of jurisdiction as a matter of preliminary nature”. (http://mkas.tpprf.ru/en/documents/)

As you can see the full name of the arbitration institution is “International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation” and using its short name “Arbitration court” might result in resolution of disputes by the state commercial court.

Another situation is when the parties actually wish to resolve commercial disputes in a state commercial court in Russia but fail to specify the name of the state commercial court correctly. Believe it or not, but there are many lawyers who consider Russian state courts as an effective and less expensive judicial body to resolve commercial disputes as opposed to arbitration.

There was one interesting case mentioned by the Supreme Court of Russia in this regard in its recent overview of court practice on resolving of disputes connected with protection of foreign investors in Russia.

A foreign company filed a claim with the state commercial court in Russia against another foreign company. The court determined that the parties of the dispute concluded prorogation agreement (choice of forum clause) in accordance with which all disputes arising from the specified contract and in connection with it shall be resolved in the courts of general competence of Russia.

The state commercial court of first instance considered that it lacked jurisdiction to resolve this case, because the parties did not agree to resolve their disputes in the state commercial courts, with that the courts of general competence do not resolve commercial disputes between companies in Russia. As a result, the court of first instance returned the claim to the claimant due to the lack of competence of the state commercial court to resolve this dispute.

In the appeal claim the claimant argued that the prorogation agreement was unenforceable, since the court specified by the parties (the courts of general competence) do not consider commercial disputes of legal entities in Russia. The foreign company also argued that there was a close connection of the dispute with the territory of the Russian Federation, and therefore the state commercial court had competence to consider this case.

The appeal court dismissed the ruling of the court of first instance and the case was returned for re-consideration to the court of first instance based on the following grounds.

The appeal court ruled that the enforceable prorogation agreement shall provide possibility to determine the actual intent (true intent) of the parties regarding competence of the state court to resolve disputes.

The appeal court determined that the prorogation agreement agreed by the parties was unenforceable, since such agreement failed to determine the intent of the parties to resolve disputes in a specific court or a system of competent state courts where the specific state court shall be determined based on the rules of internal competence of courts.

The appeal court further ruled that if prorogation agreement is unenforceable the competent court of the Russian Federation shall use general rules of competence of state commercial courts of the Russian Federation set forth in the Commercial procedural code of the Russian Federation.

In this specific case the subject of the disputed transaction was a sale of share in the charter capital of the company registered at the territory of the Russian Federation. The appeal court in this case established close connection of the dispute with the territory of the Russian Federation and ruled that the state commercial court was competent to consider such dispute.

Therefore, if the parties of the contract fail to correctly stipulate the specific state commercial court to consider their disputes in Russia, such prorogation agreement (choice of forum clause) might be considered by the state commercial court in Russia unenforceable and the claim might be returned to the claimant due to the lack of competence of the state commercial court to resolve such dispute.

Conclusions

If you wish to resolve disputes in the state commercial court in Russia, make sure that the full name of the state commercial court is specified correctly. 

If you wish to resolve disputes by arbitration in Russia it would be reasonable to use a recommended arbitration clause of respective arbitration institution.

And, of course, be sure to check translation of the English version of the contract into Russian.

With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

  1. Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
  2. The predictability of it; and
  3. Establish quantitative limits.

It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of  European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

                 

How to prevent this new risk

There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

Finally, this type of liability and risk may also be covered by a product liability insurance.

How to make sure that your claim can be enforced in the long run? A creditor may freeze assets that a debtor holds in Switzerland if certain conditions are fulfilled. In practice, there are two situations in which one might consider an attachment of assets: the first is where a creditor has a claim against a debtor without domicile in Switzerland; the second is where a creditor holds an enforceable judgment or award.

It is beyond doubt that the Swiss financial sector continues to play a dominant role in the financial world of today despite the regulatory pressure that it faces. The Swiss jurisdiction, therefore, is relevant for creditors who wish to enforce claims against a debtor who holds bank accounts or other assets in Switzerland. Even though practice shows that it is predominantly bank accounts that are being attached, other assets such as real estate, art works or claims against third parties are equally capable of being attached.

Upon application, the Swiss court at the seat of the bank or at the place where the assets are located will grant an ex parte freezing order to a creditor against a debtor with assets in Switzerland, if the applying creditor demonstrates on a prima facie basis that the following three prerequisites of the Swiss Debt Enforcement and Bankruptcy Act („DEBA“) are met:

  • The creditor seeking a freezing order has a mature and unsecured claim;
  • The debtor’s assets are located in Switzerland;
  • A legal ground for a freezing order exists.

As already pointed out, the most relevant grounds for a freezing order are:

  • The debtor is not resident in Switzerland and the claim itself has sufficient connection with Switzerland or is based on an acknowledgement of debt signed by the debtor („attachment against a non-Swiss resident“);
  • The creditor has an enforceable court decision or arbitral award against the debtor („enforceable title“).

Attachment against a non-Swiss resident: The mere fact that the assets are located in Switzerland will not suffice to establish a „sufficient connection with Switzerland“ in the sense of the DEBA. The requirement of „sufficient connection with Switzerland“ very much depends on the specific facts of the case which the Swiss court will review on a case-by-case basis. Swiss courts have confirmed that there was a sufficient connection in cases where the underlying contract was signed or fulfilled in Switzerland, where the underlying contract is governed by Swiss law, where the creditor lives in Switzerland or where the creditor’s claim is linked to a commercial activity in Switzerland.

Enforceable title: In order to rely on the second ground for a freezing order the creditor needs to have an enforceable title. The DEBA makes no distinction between domestic and foreign court decisions or arbitral awards. Provided that they are enforceable (either according to the Lugano Convention, the Swiss Private International Law Act or – in the case of a non-Swiss arbitral award – the New York Convention), all judgments and awards may serve as a ground for an attachment of Swiss assets.

The Swiss court will request the creditor to provide prima facie evidence on the prerequisites of an attachment as outlined above. Because the attachment itself will be granted ex parte, it will, in many instances, take the debtor by surprise. Thanks to this surprise effect and the nature of the attachment, i.e. the fact that it will prevent the debtor from further disposing of the attached assets, the attachment has a great potential for helping the creditor to secure and ultimately satisfy its claim.

[Initial note: This article is not aimed as a political article pro or con boycott movements or the Israeli government, but rather as a legal informative overview, in light of the actual and financial impact or exposure international business may have in the referred to matter.]

It is perhaps not known to many international trading players, but under Israeli law, Bill for prevention of damage to the State of Israel through boycott – 2011, affirmed by the Supreme Court in 2015 (after a slight interpretive adjustment), boycotting Israeli origin products, or deliberate avoidance of economic or academic ties, may give rise to a lawsuit for actual damages under civil law.

In light of the international BDS movement, attempting to place pressure upon the State of Israel by means of economic and cultural pressure, Israel has realized such activity, indeed, causes actual harm and damage to Israeli based business, manufacturers, importers/exporters, etc., as well as to academic students and professors, and so on, in cultural ties of many sorts – just because the origin is Israel.

This boycott movement affects the people and businesses of Israel, as opposed to  Israeli leaders or politicians or  the State of Israel as a state, and conveys questionable (to say the least) economic and cultural negative effects upon the people facing unprecedented obstacles in trade in the international arena – for no wrongdoing on their part.

Regardless of the political opinion one may have concerning the legitimacy, or rather the non-legitimacy, of the BDS movement or concerning the current political policy of the State of Israel – the relatively new law provides actual legal tools to deal with negative economic outcomes (damages, loss of profits, etc.) that businesses or private people encounter or suffer from boycott measures, solely because of their affiliation or relation to the State of Israel.

Regardless of any opinion of the act itself or its enactment, at the end of the day the act exists and may be used and exploited by filing civil lawsuits against anyone who called for or participated in a boycott. In that sense it creates a new civil wrong as part of the Israeli tort laws.

Moreover, even a deliberate avoidance of economic, cultural or academic ties can raise liability for the avoider towards the business or ties avoided, as well as liability for anyone who has called for the boycott or publicly expressed support of it.

The law goes even further – and also excludes the defense argument of „sufficient justification“ and thus provides that anyone who has caused or led to a breach of a contract, by calling for a boycott, may be liable for damages, as well.

As for the damages that can be claimed, after the adjustment to the law according to the Supreme Court ruling of 2015 (ruling that compensation must be awarded in correspondence with the actual damages or loss of profit caused, and cancelled the clause for penal compensation) – the entity that may sue for torts is the entity that suffered the damage and what can be sued for is the actual damage according to the regular Israeli torts law.

The law also prohibits a person who calls for a boycott from participating in any public tender, but this is a different focus from the side of the state.

It is worth mentioning  that the rationale for this legislation was also reviewed by the widely respected Israeli Supreme Court, that has strongly elaborated that such legislation is constitutional and, inter alia, that international entities and individuals such as the BDS movement (as opposed perhaps to states) should not be able to harm or interfere with international or domestic economic affairs without at least being accountable for the outcome of such, and that freedom of speech cannot be unlimitedly protected when it in fact calls for action (or for refraining from action)  that has an actual impact on another and is not simply an expression of an opinion.

To date, it seems that the Magistrates and District Courts of Israel have yet to render judgments in actual cases based on the boycott act, indicating that the implementation of the act is still inchoate. However, it seems that instances and measures of boycotting are on the rise and the methods of boycotting are becoming increasingly overt, in a manner that is bound to lead to considerable litigation in the near future.

Needless to say, issues of jurisdiction, and other aspects of private international law, or imposing jurisdiction on foreign players, are also yet to be resolved in reference to the emergence of lawsuits under the boycott law, but these will surely find their creative legal solutions with the actual submission of lawsuits concerning real life cases.

One of the commonly discussed advantages of international commercial arbitration over litigation in the cross-border context is the enforcement issue. For the purpose of swifter enforcement of foreign arbitral awards, the vast majority of countries signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

On contrary, there is no relevant international treaty of such scale for the enforcement of foreign court judgements. Normally, the special legal basis, such as agreement on judicial cooperation between two or more countries, needs to be relied upon in order to get a court judgment recognized and enforced in another country. There are quite many countries that do not have such an agreement with China. This includes, among others, US, Germany or the Netherlands.

Interestingly, however, recently the Chinese court in Wuhan enforced the US court judgement rendered by the Los Angeles Superior Court of California in the Liu Li v Tao Li and Tong Wu case.  It did so despite the fact that there is no agreement between China and US providing for mutual recognition and enforcement of such judgements. The court in Wuhan found, however, that the reciprocity in recognizing and enforcing the court judgments between China and US was established because of an earlier decision of the US District Court of the Central District of California recognizing and enforcing the Chinese judgement rendered by the Higher People’s Court of Hubei in the Hubei Gezhouba Sanlian Industrial Co., Ltd et. al. v Robinson Helicopter Co., Inc. case.

Interestingly, similar course of action was taken earlier in 2016 when the Chinese Nanjing Intermediate People’s Court enforced the Singaporean judgement relying on the reciprocity principle in the Kolma v SUTEX Group case.

How much does it tell us?

Should we now feel safe when opting for own courts in the dispute resolution clauses in the China-related deals? – despite the fact there are no relevant agreements between China and our country? The recent moves of the Chinese courts are, indeed, interesting developments changing the dispute resolution landscape in a desirable direction and increasing the chances for enforcing the foreign commercial court judgements. Yet, as of today, one should not see them as the universal door-openers for the foreign court judgements in similar situations. Accordingly, rather careful approach is recommended and the other dispute resolution methods securing the safer way of enforcement, like arbitration, should be kept in mind. The further changes remain to be seen.

The author of this post is Monika Prusinowska.

Roberto Luzi Crivellini

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    Switzerland – Secure the enforcement of your claim and seize your debtor’s assets

    20. November 2017

    • Schweiz
    • Schiedsgerichtsbarkeit
    • Kreditinkasso
    • Rechtsstreitigkeiten

    The Russian law allows the parties to agree on recovery of contractual penalty for failure by the parties to fulfill contractual obligations.

    Below are some typical examples of provisions that stipulate contractual penalty:

    In the event of untimely delivery of the Goods under the Contract the Buyer shall be entitled to claim penalties in amount of 0,1 (zero point one) percent from the total value of untimely delivered Goods for each day of delay.

    In the event of untimely payment for the Goods under the Contract the Seller shall be entitled to claim penalties in amount of 0,1 percent from the total value of untimely paid Goods for each day of delay.

    The Civil Code of Russia (art. 333) allows the court to decrease the amount of penalty if such amount of penalty is disproportionate to the consequences of breach of contractual obligations, with that the court shall be entitled to decrease penalty only if the debtor files a motion with the request to decrease such excessive amount of penalty.

    The decrease of penalty determined by the contract and subject to payment by the person who conducts business activities is allowed only in exceptional cases, if it is proved that the recovery of penalty in the amount stipulated by the contract can lead to receipt of the unjustified profit by the creditor.

    In practice the parties file motions with the court of first instance with the request to decrease penalty with reference to art. 333 of the Civil Code and the court usually decreases the amount of penalty at its discretion.

    In a recent case considered by the Supreme Court of Russia dated 29.05.2018 (case #A43-26319/2016) the Supreme Court ruled that the imposition of penalty even in the amount exceeding the total value of the contract was justified provided that the debtor failed to file a motion with the court of first instance with the request to decrease such penalty with reference to art. 333 of the Civil Code.

    In this case the customer ordered the contractor to produce a pressure vessel. The price of such works of the contractor amounted to 2.700.000 rubles. The parties agreed that the pressure vessel will be produced by the contractor till 30.01.2015. The contractor produced the pressure vessel only on 01.03.2016.

    The contract stipulated that in case of violation of terms of performance of works the contractor will pay to the customer a fixed fine in the amount of 5% from the price of works that the contractor failed to perform in time for each violation as well as penalty in the amount of 0,3% from the price of works that the contractor failed to perform in time for each day of delay starting with the 4th day of delay.

    As a result, the customer demanded that the contractor pays penalty in the amount of 3.355.170 rubles.

    The court of first instance ruled in favor of the contractor and ordered that the client shall pay the amount of penalty in full since the contractor failed to provide evidence that confirmed due fulfillment of the contract by the contractor, or that the contractor failed to perform its obligations in time due to circumstances that were out of his control. With that the contractor also failed to dispute the amount of penalty and failed to file a motion on application of art. 333 of the Civil Code.

    The appeal court changed the ruling of the court of first instance and decreased the amount of penalty to 326.781 rubles based on its conclusions that the customer abused its rights by including in the contract the unfair penalty provisions.

    The Cassation Court agreed with conclusions of the Court of Appeal, but the Supreme Court dismissed the rulings of both the Cassation Court and Court of Appeal and the decision of the court of first instance remained in force.

    The Supreme Court based its decision on the fact that the contractor failed to file a motion with the request to decrease the amount of penalty and apply art. 333 of the Civil Code in the court of first instance. Therefore, the Court of Appeal had no right to decrease the amount of penalty at its own initiative.

    The latest conclusions of the Supreme Court confirm that the contractual penalty can exceed the total value of the contract and the courts are not allowed to decrease such excessive amount of penalty at its own initiative.

    Thus, if you have any dispute in Russia, please ensure that your company is duly represented in state commercial courts, since the failure of the parties to appear in court of first instance and file respective motions might lead to serious negative consequences that the failing party might not be able to cure in the courts of appeal.

    Not what you would expect 

    When can you terminate, how should you terminate, and how much are you exposed?!

    The outcomes of termination of a business relationship with an Israeli counterpart in Israel arise again and again as a question in many disputes between International corporations and Israeli counterparts, such as distributors or franchisees.

    This is mainly because Israeli law does not include specific laws regulating or regarding distribution or franchising or other kinds of business ventures (except a relatively new agency law – referring in a limited manner to specific kinds of agency only) – and thus disputes in said regards are determined based on the general principles of contract law, the contractual and factual bases – obviously resulting in considerable uncertainty as to specific matters.

    However, substantial case law, such as in the matter of Johnson & Johnson International that ended up paying compensation in the equivalent to over 1.5 Million US$, indicates the basics and threshold of what can be expected in such disputes, and, if implemented wisely, may assist in planning the disengagement or termination of a business relationship, in a manner that would be the least costly for the terminating party and minimize its exposure to a lawsuit.

    In many cases, domestic parties invest many years and/or fortunes, in order to penetrate the domestic market with the foreign service or products, and to promote sales in the subject region, for the benefit of both the international corporation and the domestic party.

    Nevertheless, often the international corporation decides for various reasons (such as establishing an „in-house“ operation“ in the target location or substituting the distributor/franchisee) to terminate the oral or written contractual relationship.

    What are the legal foundations involved in such termination as per due notice of termination and corresponding compensation – if at all?

    Generally, this issue arises in cases in which the contract does not specify a period of the business relationship, and, as a principle of law, contracts may be terminated by reasonable notice and subject to the fundamental good faith principle.

    Contracts are not perceived as binding upon the parties indefinitely. The question is always what is the reasonable time for termination notice, and is the termination done in good faith (which is always a tricky and vague issue). Compensation is commonly awarded in accordance with what the courts find as the due notice period that may also entail compensation for damages related to said breach.

    As always, there are exceptions, such as breach of trust toward the manufacturer/franchisor, that may have great impact on any due notice obligations, as far as justification for immediate termination that can be deemed immune to breach of due notice or good faith obligations.

    The truth is the reasonability of the due notice varies from case to case!

    However, Israeli case law is extremely sensitive to the actual reasoning of termination and how genuine it is, as opposed to asserting a tactical breach argument in an attempt to „justify“ avoiding a due notice period or adequate compensation.

    In this respect, in many cases simple „non-satisfaction“ was denied as a legitimate argument for breach of contract, while safeguarding the freedom of contracts and the right to terminate an ongoing contract with due notice and good faith.

    There are various common parameters referred to in the case law, to determine the adequate time of due notice, including, for instance, the magnitude of investment; the time required for rearrangement of business towards the new situation (including time required to find an alternative supplier product which can be marketed); the magnitude of the product/service out of the entire distributor’s business, etc.

    Time and again, although not as binding rule, the due notice period seems to be in the range of around 12 months, as a balance between the right of termination and the reasonable time for rearranging the business in light of the termination. There were, however, cases in which due notice for termination was deemed as short as three months and as long as two years – but these are rather exceptional.

    Another guiding point in the case law is the factor of exclusivity or non-exclusivity, as well as the concept that the longer the business relationship, the less the distributor/franchisee may expect compensation/reimbursement for investment – based on the concept that he has enjoyed the fruits of the investment.

    The outcome of not providing such adequate due notice might result in actual compensation reflecting the loss of profit of the business in the last year before the termination, or for the whole term the court finds a due notice was in place, or, in cases of bad faith, even a longer period reflecting the damages.

    In conclusion, given the legal regime in Israel, such exposure might be extremely considerable for any international or foreign business. It would, therefore, be vital and as a consequence of real value to plan the strategy of disengagement/termination of the business with the domestic counterpart in Israel, in advance and prior to executing it, and there are, indeed, adequate and wise strategies that may be implemented for the best result.

    It is often the case – in practice – that an ongoing commercial relationship builds slowly over time through a series of sales agreements, without the parties ever signing an actual distribution agreement to set down their respective rights and responsibilities.

    At first blush this might appear to be a good thing: one can sidestep being bound, especially long-term, to the other party. But on closer scrutiny the solution becomes problematic, especially for anyone operating internationally.

    One of the key issues that arises when an international contractual arrangement is not in writing, is identifying the court with jurisdiction over any dispute arising therefrom. In the European Union, the issue is resolved by the provisions of Regulation 1215/2012 (“Brussels I recast”). Pursuant to Article 7 of the Regulation, as an alternative to the defendant’s courts, jurisdiction in a contractual dispute may lie with the court in the place of performance of the obligation in question. Next to this general rule are two criteria to identify the “place of performance”, differentiated according to the type of contract at issue. For a contract for goods, it is the place of delivery for the goods; in a contract for services, it is the place where the services are provided.   

    Thus, to identify the court with jurisdiction, it is crucial that a contract fall under one of these categories: goods or services.

    No doubt this distinction is quite simple in many circumstances. In the case of a distribution agreement, or of a commercial concession agreement, the issue may become thorny.

    The European Court of Justice has analysed this issue on a number of occasions, most recently in their judgement of 8 March 2018 (Case no. C-64/17) following the request for a preliminary ruling from a Portuguese Court of Appeal. The parties to the action were a Portuguese distributor, a company called Lusavouga, and a Belgian company called Saey Home & Garden, that produced articles for the home and garden, including a line of products branded “Barbecook”.

    Following Saey’s decision to break off the commercial relationship – notice of which was sent in an email dated 17 July 2014 – Lusavouga brought action in Portugal seeking compensation for the unexpected termination of the agreement, and goodwill indemnity. Saey raised a plea of lack of jurisdiction of the Portuguese court, citing their general conditions of sale (mentioned in their invoices) which required that a Court in Belgium be competent for dispute resolution.

    The facts thus presented two issues to be resolved in light of the Brussels I recast Regulation: deciding whether a jurisdiction clause in a vendor’s general terms and conditions pursuant to Art. 25 of the Regulation shall apply, and, if not, choosing the court with jurisdiction under Art. 7 of the Regulation.

    Shall a jurisdiction clause contained within a vendor’s general terms and conditions apply to a distribution relationship?

    The supplier company apparently considered their course of dealing with the Portuguese retailer nothing more than a concatenation of individual sales of goods, governed by their general terms and conditions. Consequently, they argued that any dispute arising from the relationship should be subject to the jurisdiction clause identifying Belgium as the court with jurisdiction under those terms and conditions.

    Thus, a determination was needed on whether, under these facts, there was a valid prorogation of jurisdiction under Article 25, paragraph 1 of Regulation 1215/2012.

    The Court of Justice has long opined that if the jurisdiction clause is included in the general contract conditions drafted by one of the parties, the contract signed by the other party must contain an express reference to those general conditions in order to ensure the real consent thereto by the parties (judgement of 14 December 1976, Estasis Salotti di Colzani, case no. 24/76; judgement of 16 March 1999, Castelletti, case no. C-159/97; judgement of 7 July 2016, Höszig, case no. C-225/15). Moreover, to be valid, the clause must involve a particular legal relationship (judgement of 20 April 2016, Profit Investment SIM, case no. C-366/13).

    In the instant case, the referring court found it self-evident that the legal relationship at bar was a commercial concession agreement entered into for the purpose of distributing Saey products in Spain, a contract that was not evidenced in writing.

    From this perspective, it is clear that the general conditions contained in the Saey invoices could have no bearing on the commercial concession agreement: assuming Lusavouga’s consent had been proven, the selection of Belgium as the forum would have applied if anything to the individual sales agreements, but not to those duties arising from the separate distribution agreement.

    What, then, would be the court with jurisdiction for the duties arising from the commercial concession agreement?

    Absent any jurisdiction clause, the issue would be decided under Art. 7, point 1 of Regulation 1215/2012, under which it becomes imperative to establish whether a contract is for goods or for services.

    The “provision of services” has been defined by the Court of Justice as an activity, not mere omissions, undertaken in return for remuneration (judgement of 23 April 2009, Falco, case no. C-533/07).

    With the judgements in Corman Collins of 19 December 2013 (case no. C-9/12), and Granarolo of 14 July 2016 (case no. C-196/15), the Court held that in a typical distribution agreement, the dealer renders a service, in that they are involved in increasing the distribution of supplier’s product, and receives in consideration therefor a competitive advantage, access to advertising platforms, know-how, or payment facilities. In light of such elements, the contract relationship should be deemed one for services. If on the other hand the commercial relationship is limited to a concatenation of agreements, each for the purpose of a delivery and pickup of merchandise, then what we have is not a typical distribution agreement, and the contractual relationship shall be construed as one for the sale of goods.

    Once the contract has been categorised as one for services, one must then determine “the place where, under the contract, the services are provided”. The Court specifies that such location shall be understood as the member state of the place of the main provision of services, as it follows from the provisions of the contract  or – as in the case at issue – the actual performance of the same. Only where it is impossible to identify such location shall the domicile of the party rendering the service be used.

    From the referring court’s description of the contractual relationship, and from the Court of Justice’s understanding of the distributor’s performance of services, it would be logical to find that the principal location for performance of services was Spain, where Lusavouga “was involved in increasing the distribution of products” of Saey.

    It is clear that neither the manufacturer nor the distributor would ever have intended such a result, and they might have avoided it being chosen for them by reducing their agreement in writing, including a jurisdiction clause therein.

    By the same token, viewed from the outside, the Portuguese judges’ apparent conviction that the situation was one of an actual dealership contract would leave ample room for debate. After all, a number of elements would lead to the opposite conclusion. However, even in terms of that aspect, the absence of a written contract left room for interpretation that might lead to unforeseen – and perhaps rather risky – consequences.

    In conclusion, the wisdom of setting down the terms and conditions of a sales distribution agreement in writing appears clear. This is not only because one can avoid those ambiguities we have described above, but also because it specifies other important clauses stipulated by the parties that should not be left to chance: exclusivity of area, if any, or with respect to specific sales channels, the contract period and termination notice, any duties to promote the product, control over end-user personal data, and the possibility of, and methods for, any online sales of products.

    State commercial court in Russia is named in the Russian language – Арбитражный суд. This name of the state commercial court is often translated into English as Arbitration court. Such translation in its turn often causes actual misunderstanding between the parties, since the Russian party will most probably consider the term “Arbitration court” as a state commercial court and the other (non-Russian) party might consider that it agreed to resolve disputes by arbitration rather than in a state court.

    Below are some examples of dispute resolution clauses specified by the parties in commercial contracts that caused actual misunderstanding:

    “…if there is no agreement, any disputes and claims between the parties relating to the contract will be resolved by arbitration under the Rules of International Chamber of Commerce in Moscow by one or more arbitrators appointed in accordance with the said rules. The Arbitration court shall use the Russian law.”

    “…if a dispute is not resolved within 30 days of written notification of the dispute by one party to the other, anyone of the parties may submit the dispute arising out of or in connection with this agreement shall be finally settled under the Rules of Arbitration of the Moscow City Arbitration Court”.

    The wording of such clauses and its translation, specifically translation of the term “Arbitration court” might result in resolution of claims by the state commercial courts in Russia, rather than by arbitration. In such situations failure of the non-Russian party to defend itself in the Russian state commercial courts might lead to serious negative consequences.

    One of the well-known arbitration institutions in Russia – the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation recommends the following arbitration clause:

    “Any dispute, controversy or claim which may arise out of or in connection with the present contract (agreement) [in case a separate arbitration agreement is concluded a particular contract (agreement) is to be indicated], or the entering into force, conclusion, alteration, execution, breach, termination or validity thereof, shall be settled by arbitration at the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation in accordance with its applicable regulations and rules. An arbitral award shall be final for the parties. It shall not be allowed to submit a motion to a state court to make a decision on the lack of jurisdiction of an arbitral tribunal in connection with the issuance by the arbitral tribunal of a separate order on existence of jurisdiction as a matter of preliminary nature”. (http://mkas.tpprf.ru/en/documents/)

    As you can see the full name of the arbitration institution is “International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation” and using its short name “Arbitration court” might result in resolution of disputes by the state commercial court.

    Another situation is when the parties actually wish to resolve commercial disputes in a state commercial court in Russia but fail to specify the name of the state commercial court correctly. Believe it or not, but there are many lawyers who consider Russian state courts as an effective and less expensive judicial body to resolve commercial disputes as opposed to arbitration.

    There was one interesting case mentioned by the Supreme Court of Russia in this regard in its recent overview of court practice on resolving of disputes connected with protection of foreign investors in Russia.

    A foreign company filed a claim with the state commercial court in Russia against another foreign company. The court determined that the parties of the dispute concluded prorogation agreement (choice of forum clause) in accordance with which all disputes arising from the specified contract and in connection with it shall be resolved in the courts of general competence of Russia.

    The state commercial court of first instance considered that it lacked jurisdiction to resolve this case, because the parties did not agree to resolve their disputes in the state commercial courts, with that the courts of general competence do not resolve commercial disputes between companies in Russia. As a result, the court of first instance returned the claim to the claimant due to the lack of competence of the state commercial court to resolve this dispute.

    In the appeal claim the claimant argued that the prorogation agreement was unenforceable, since the court specified by the parties (the courts of general competence) do not consider commercial disputes of legal entities in Russia. The foreign company also argued that there was a close connection of the dispute with the territory of the Russian Federation, and therefore the state commercial court had competence to consider this case.

    The appeal court dismissed the ruling of the court of first instance and the case was returned for re-consideration to the court of first instance based on the following grounds.

    The appeal court ruled that the enforceable prorogation agreement shall provide possibility to determine the actual intent (true intent) of the parties regarding competence of the state court to resolve disputes.

    The appeal court determined that the prorogation agreement agreed by the parties was unenforceable, since such agreement failed to determine the intent of the parties to resolve disputes in a specific court or a system of competent state courts where the specific state court shall be determined based on the rules of internal competence of courts.

    The appeal court further ruled that if prorogation agreement is unenforceable the competent court of the Russian Federation shall use general rules of competence of state commercial courts of the Russian Federation set forth in the Commercial procedural code of the Russian Federation.

    In this specific case the subject of the disputed transaction was a sale of share in the charter capital of the company registered at the territory of the Russian Federation. The appeal court in this case established close connection of the dispute with the territory of the Russian Federation and ruled that the state commercial court was competent to consider such dispute.

    Therefore, if the parties of the contract fail to correctly stipulate the specific state commercial court to consider their disputes in Russia, such prorogation agreement (choice of forum clause) might be considered by the state commercial court in Russia unenforceable and the claim might be returned to the claimant due to the lack of competence of the state commercial court to resolve such dispute.

    Conclusions

    If you wish to resolve disputes in the state commercial court in Russia, make sure that the full name of the state commercial court is specified correctly. 

    If you wish to resolve disputes by arbitration in Russia it would be reasonable to use a recommended arbitration clause of respective arbitration institution.

    And, of course, be sure to check translation of the English version of the contract into Russian.

    With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

    Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

    With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

    In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

    In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

    Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

    Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

    The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

    The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

    The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

    The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

    According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

    The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

    The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

    To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

    1. Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
    2. The predictability of it; and
    3. Establish quantitative limits.

    It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

    As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

    Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of  European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

                     

    How to prevent this new risk

    There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

    Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

    Finally, this type of liability and risk may also be covered by a product liability insurance.

    How to make sure that your claim can be enforced in the long run? A creditor may freeze assets that a debtor holds in Switzerland if certain conditions are fulfilled. In practice, there are two situations in which one might consider an attachment of assets: the first is where a creditor has a claim against a debtor without domicile in Switzerland; the second is where a creditor holds an enforceable judgment or award.

    It is beyond doubt that the Swiss financial sector continues to play a dominant role in the financial world of today despite the regulatory pressure that it faces. The Swiss jurisdiction, therefore, is relevant for creditors who wish to enforce claims against a debtor who holds bank accounts or other assets in Switzerland. Even though practice shows that it is predominantly bank accounts that are being attached, other assets such as real estate, art works or claims against third parties are equally capable of being attached.

    Upon application, the Swiss court at the seat of the bank or at the place where the assets are located will grant an ex parte freezing order to a creditor against a debtor with assets in Switzerland, if the applying creditor demonstrates on a prima facie basis that the following three prerequisites of the Swiss Debt Enforcement and Bankruptcy Act („DEBA“) are met:

    • The creditor seeking a freezing order has a mature and unsecured claim;
    • The debtor’s assets are located in Switzerland;
    • A legal ground for a freezing order exists.

    As already pointed out, the most relevant grounds for a freezing order are:

    • The debtor is not resident in Switzerland and the claim itself has sufficient connection with Switzerland or is based on an acknowledgement of debt signed by the debtor („attachment against a non-Swiss resident“);
    • The creditor has an enforceable court decision or arbitral award against the debtor („enforceable title“).

    Attachment against a non-Swiss resident: The mere fact that the assets are located in Switzerland will not suffice to establish a „sufficient connection with Switzerland“ in the sense of the DEBA. The requirement of „sufficient connection with Switzerland“ very much depends on the specific facts of the case which the Swiss court will review on a case-by-case basis. Swiss courts have confirmed that there was a sufficient connection in cases where the underlying contract was signed or fulfilled in Switzerland, where the underlying contract is governed by Swiss law, where the creditor lives in Switzerland or where the creditor’s claim is linked to a commercial activity in Switzerland.

    Enforceable title: In order to rely on the second ground for a freezing order the creditor needs to have an enforceable title. The DEBA makes no distinction between domestic and foreign court decisions or arbitral awards. Provided that they are enforceable (either according to the Lugano Convention, the Swiss Private International Law Act or – in the case of a non-Swiss arbitral award – the New York Convention), all judgments and awards may serve as a ground for an attachment of Swiss assets.

    The Swiss court will request the creditor to provide prima facie evidence on the prerequisites of an attachment as outlined above. Because the attachment itself will be granted ex parte, it will, in many instances, take the debtor by surprise. Thanks to this surprise effect and the nature of the attachment, i.e. the fact that it will prevent the debtor from further disposing of the attached assets, the attachment has a great potential for helping the creditor to secure and ultimately satisfy its claim.

    [Initial note: This article is not aimed as a political article pro or con boycott movements or the Israeli government, but rather as a legal informative overview, in light of the actual and financial impact or exposure international business may have in the referred to matter.]

    It is perhaps not known to many international trading players, but under Israeli law, Bill for prevention of damage to the State of Israel through boycott – 2011, affirmed by the Supreme Court in 2015 (after a slight interpretive adjustment), boycotting Israeli origin products, or deliberate avoidance of economic or academic ties, may give rise to a lawsuit for actual damages under civil law.

    In light of the international BDS movement, attempting to place pressure upon the State of Israel by means of economic and cultural pressure, Israel has realized such activity, indeed, causes actual harm and damage to Israeli based business, manufacturers, importers/exporters, etc., as well as to academic students and professors, and so on, in cultural ties of many sorts – just because the origin is Israel.

    This boycott movement affects the people and businesses of Israel, as opposed to  Israeli leaders or politicians or  the State of Israel as a state, and conveys questionable (to say the least) economic and cultural negative effects upon the people facing unprecedented obstacles in trade in the international arena – for no wrongdoing on their part.

    Regardless of the political opinion one may have concerning the legitimacy, or rather the non-legitimacy, of the BDS movement or concerning the current political policy of the State of Israel – the relatively new law provides actual legal tools to deal with negative economic outcomes (damages, loss of profits, etc.) that businesses or private people encounter or suffer from boycott measures, solely because of their affiliation or relation to the State of Israel.

    Regardless of any opinion of the act itself or its enactment, at the end of the day the act exists and may be used and exploited by filing civil lawsuits against anyone who called for or participated in a boycott. In that sense it creates a new civil wrong as part of the Israeli tort laws.

    Moreover, even a deliberate avoidance of economic, cultural or academic ties can raise liability for the avoider towards the business or ties avoided, as well as liability for anyone who has called for the boycott or publicly expressed support of it.

    The law goes even further – and also excludes the defense argument of „sufficient justification“ and thus provides that anyone who has caused or led to a breach of a contract, by calling for a boycott, may be liable for damages, as well.

    As for the damages that can be claimed, after the adjustment to the law according to the Supreme Court ruling of 2015 (ruling that compensation must be awarded in correspondence with the actual damages or loss of profit caused, and cancelled the clause for penal compensation) – the entity that may sue for torts is the entity that suffered the damage and what can be sued for is the actual damage according to the regular Israeli torts law.

    The law also prohibits a person who calls for a boycott from participating in any public tender, but this is a different focus from the side of the state.

    It is worth mentioning  that the rationale for this legislation was also reviewed by the widely respected Israeli Supreme Court, that has strongly elaborated that such legislation is constitutional and, inter alia, that international entities and individuals such as the BDS movement (as opposed perhaps to states) should not be able to harm or interfere with international or domestic economic affairs without at least being accountable for the outcome of such, and that freedom of speech cannot be unlimitedly protected when it in fact calls for action (or for refraining from action)  that has an actual impact on another and is not simply an expression of an opinion.

    To date, it seems that the Magistrates and District Courts of Israel have yet to render judgments in actual cases based on the boycott act, indicating that the implementation of the act is still inchoate. However, it seems that instances and measures of boycotting are on the rise and the methods of boycotting are becoming increasingly overt, in a manner that is bound to lead to considerable litigation in the near future.

    Needless to say, issues of jurisdiction, and other aspects of private international law, or imposing jurisdiction on foreign players, are also yet to be resolved in reference to the emergence of lawsuits under the boycott law, but these will surely find their creative legal solutions with the actual submission of lawsuits concerning real life cases.

    One of the commonly discussed advantages of international commercial arbitration over litigation in the cross-border context is the enforcement issue. For the purpose of swifter enforcement of foreign arbitral awards, the vast majority of countries signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

    On contrary, there is no relevant international treaty of such scale for the enforcement of foreign court judgements. Normally, the special legal basis, such as agreement on judicial cooperation between two or more countries, needs to be relied upon in order to get a court judgment recognized and enforced in another country. There are quite many countries that do not have such an agreement with China. This includes, among others, US, Germany or the Netherlands.

    Interestingly, however, recently the Chinese court in Wuhan enforced the US court judgement rendered by the Los Angeles Superior Court of California in the Liu Li v Tao Li and Tong Wu case.  It did so despite the fact that there is no agreement between China and US providing for mutual recognition and enforcement of such judgements. The court in Wuhan found, however, that the reciprocity in recognizing and enforcing the court judgments between China and US was established because of an earlier decision of the US District Court of the Central District of California recognizing and enforcing the Chinese judgement rendered by the Higher People’s Court of Hubei in the Hubei Gezhouba Sanlian Industrial Co., Ltd et. al. v Robinson Helicopter Co., Inc. case.

    Interestingly, similar course of action was taken earlier in 2016 when the Chinese Nanjing Intermediate People’s Court enforced the Singaporean judgement relying on the reciprocity principle in the Kolma v SUTEX Group case.

    How much does it tell us?

    Should we now feel safe when opting for own courts in the dispute resolution clauses in the China-related deals? – despite the fact there are no relevant agreements between China and our country? The recent moves of the Chinese courts are, indeed, interesting developments changing the dispute resolution landscape in a desirable direction and increasing the chances for enforcing the foreign commercial court judgements. Yet, as of today, one should not see them as the universal door-openers for the foreign court judgements in similar situations. Accordingly, rather careful approach is recommended and the other dispute resolution methods securing the safer way of enforcement, like arbitration, should be kept in mind. The further changes remain to be seen.

    The author of this post is Monika Prusinowska.

    Karin Graf

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      Boycot of Israeli products and business –  Risk to be sued for damages

      1. November 2017

      • Israelische
      • Internationaler Handel
      • Rechtsstreitigkeiten

      The Russian law allows the parties to agree on recovery of contractual penalty for failure by the parties to fulfill contractual obligations.

      Below are some typical examples of provisions that stipulate contractual penalty:

      In the event of untimely delivery of the Goods under the Contract the Buyer shall be entitled to claim penalties in amount of 0,1 (zero point one) percent from the total value of untimely delivered Goods for each day of delay.

      In the event of untimely payment for the Goods under the Contract the Seller shall be entitled to claim penalties in amount of 0,1 percent from the total value of untimely paid Goods for each day of delay.

      The Civil Code of Russia (art. 333) allows the court to decrease the amount of penalty if such amount of penalty is disproportionate to the consequences of breach of contractual obligations, with that the court shall be entitled to decrease penalty only if the debtor files a motion with the request to decrease such excessive amount of penalty.

      The decrease of penalty determined by the contract and subject to payment by the person who conducts business activities is allowed only in exceptional cases, if it is proved that the recovery of penalty in the amount stipulated by the contract can lead to receipt of the unjustified profit by the creditor.

      In practice the parties file motions with the court of first instance with the request to decrease penalty with reference to art. 333 of the Civil Code and the court usually decreases the amount of penalty at its discretion.

      In a recent case considered by the Supreme Court of Russia dated 29.05.2018 (case #A43-26319/2016) the Supreme Court ruled that the imposition of penalty even in the amount exceeding the total value of the contract was justified provided that the debtor failed to file a motion with the court of first instance with the request to decrease such penalty with reference to art. 333 of the Civil Code.

      In this case the customer ordered the contractor to produce a pressure vessel. The price of such works of the contractor amounted to 2.700.000 rubles. The parties agreed that the pressure vessel will be produced by the contractor till 30.01.2015. The contractor produced the pressure vessel only on 01.03.2016.

      The contract stipulated that in case of violation of terms of performance of works the contractor will pay to the customer a fixed fine in the amount of 5% from the price of works that the contractor failed to perform in time for each violation as well as penalty in the amount of 0,3% from the price of works that the contractor failed to perform in time for each day of delay starting with the 4th day of delay.

      As a result, the customer demanded that the contractor pays penalty in the amount of 3.355.170 rubles.

      The court of first instance ruled in favor of the contractor and ordered that the client shall pay the amount of penalty in full since the contractor failed to provide evidence that confirmed due fulfillment of the contract by the contractor, or that the contractor failed to perform its obligations in time due to circumstances that were out of his control. With that the contractor also failed to dispute the amount of penalty and failed to file a motion on application of art. 333 of the Civil Code.

      The appeal court changed the ruling of the court of first instance and decreased the amount of penalty to 326.781 rubles based on its conclusions that the customer abused its rights by including in the contract the unfair penalty provisions.

      The Cassation Court agreed with conclusions of the Court of Appeal, but the Supreme Court dismissed the rulings of both the Cassation Court and Court of Appeal and the decision of the court of first instance remained in force.

      The Supreme Court based its decision on the fact that the contractor failed to file a motion with the request to decrease the amount of penalty and apply art. 333 of the Civil Code in the court of first instance. Therefore, the Court of Appeal had no right to decrease the amount of penalty at its own initiative.

      The latest conclusions of the Supreme Court confirm that the contractual penalty can exceed the total value of the contract and the courts are not allowed to decrease such excessive amount of penalty at its own initiative.

      Thus, if you have any dispute in Russia, please ensure that your company is duly represented in state commercial courts, since the failure of the parties to appear in court of first instance and file respective motions might lead to serious negative consequences that the failing party might not be able to cure in the courts of appeal.

      Not what you would expect 

      When can you terminate, how should you terminate, and how much are you exposed?!

      The outcomes of termination of a business relationship with an Israeli counterpart in Israel arise again and again as a question in many disputes between International corporations and Israeli counterparts, such as distributors or franchisees.

      This is mainly because Israeli law does not include specific laws regulating or regarding distribution or franchising or other kinds of business ventures (except a relatively new agency law – referring in a limited manner to specific kinds of agency only) – and thus disputes in said regards are determined based on the general principles of contract law, the contractual and factual bases – obviously resulting in considerable uncertainty as to specific matters.

      However, substantial case law, such as in the matter of Johnson & Johnson International that ended up paying compensation in the equivalent to over 1.5 Million US$, indicates the basics and threshold of what can be expected in such disputes, and, if implemented wisely, may assist in planning the disengagement or termination of a business relationship, in a manner that would be the least costly for the terminating party and minimize its exposure to a lawsuit.

      In many cases, domestic parties invest many years and/or fortunes, in order to penetrate the domestic market with the foreign service or products, and to promote sales in the subject region, for the benefit of both the international corporation and the domestic party.

      Nevertheless, often the international corporation decides for various reasons (such as establishing an „in-house“ operation“ in the target location or substituting the distributor/franchisee) to terminate the oral or written contractual relationship.

      What are the legal foundations involved in such termination as per due notice of termination and corresponding compensation – if at all?

      Generally, this issue arises in cases in which the contract does not specify a period of the business relationship, and, as a principle of law, contracts may be terminated by reasonable notice and subject to the fundamental good faith principle.

      Contracts are not perceived as binding upon the parties indefinitely. The question is always what is the reasonable time for termination notice, and is the termination done in good faith (which is always a tricky and vague issue). Compensation is commonly awarded in accordance with what the courts find as the due notice period that may also entail compensation for damages related to said breach.

      As always, there are exceptions, such as breach of trust toward the manufacturer/franchisor, that may have great impact on any due notice obligations, as far as justification for immediate termination that can be deemed immune to breach of due notice or good faith obligations.

      The truth is the reasonability of the due notice varies from case to case!

      However, Israeli case law is extremely sensitive to the actual reasoning of termination and how genuine it is, as opposed to asserting a tactical breach argument in an attempt to „justify“ avoiding a due notice period or adequate compensation.

      In this respect, in many cases simple „non-satisfaction“ was denied as a legitimate argument for breach of contract, while safeguarding the freedom of contracts and the right to terminate an ongoing contract with due notice and good faith.

      There are various common parameters referred to in the case law, to determine the adequate time of due notice, including, for instance, the magnitude of investment; the time required for rearrangement of business towards the new situation (including time required to find an alternative supplier product which can be marketed); the magnitude of the product/service out of the entire distributor’s business, etc.

      Time and again, although not as binding rule, the due notice period seems to be in the range of around 12 months, as a balance between the right of termination and the reasonable time for rearranging the business in light of the termination. There were, however, cases in which due notice for termination was deemed as short as three months and as long as two years – but these are rather exceptional.

      Another guiding point in the case law is the factor of exclusivity or non-exclusivity, as well as the concept that the longer the business relationship, the less the distributor/franchisee may expect compensation/reimbursement for investment – based on the concept that he has enjoyed the fruits of the investment.

      The outcome of not providing such adequate due notice might result in actual compensation reflecting the loss of profit of the business in the last year before the termination, or for the whole term the court finds a due notice was in place, or, in cases of bad faith, even a longer period reflecting the damages.

      In conclusion, given the legal regime in Israel, such exposure might be extremely considerable for any international or foreign business. It would, therefore, be vital and as a consequence of real value to plan the strategy of disengagement/termination of the business with the domestic counterpart in Israel, in advance and prior to executing it, and there are, indeed, adequate and wise strategies that may be implemented for the best result.

      It is often the case – in practice – that an ongoing commercial relationship builds slowly over time through a series of sales agreements, without the parties ever signing an actual distribution agreement to set down their respective rights and responsibilities.

      At first blush this might appear to be a good thing: one can sidestep being bound, especially long-term, to the other party. But on closer scrutiny the solution becomes problematic, especially for anyone operating internationally.

      One of the key issues that arises when an international contractual arrangement is not in writing, is identifying the court with jurisdiction over any dispute arising therefrom. In the European Union, the issue is resolved by the provisions of Regulation 1215/2012 (“Brussels I recast”). Pursuant to Article 7 of the Regulation, as an alternative to the defendant’s courts, jurisdiction in a contractual dispute may lie with the court in the place of performance of the obligation in question. Next to this general rule are two criteria to identify the “place of performance”, differentiated according to the type of contract at issue. For a contract for goods, it is the place of delivery for the goods; in a contract for services, it is the place where the services are provided.   

      Thus, to identify the court with jurisdiction, it is crucial that a contract fall under one of these categories: goods or services.

      No doubt this distinction is quite simple in many circumstances. In the case of a distribution agreement, or of a commercial concession agreement, the issue may become thorny.

      The European Court of Justice has analysed this issue on a number of occasions, most recently in their judgement of 8 March 2018 (Case no. C-64/17) following the request for a preliminary ruling from a Portuguese Court of Appeal. The parties to the action were a Portuguese distributor, a company called Lusavouga, and a Belgian company called Saey Home & Garden, that produced articles for the home and garden, including a line of products branded “Barbecook”.

      Following Saey’s decision to break off the commercial relationship – notice of which was sent in an email dated 17 July 2014 – Lusavouga brought action in Portugal seeking compensation for the unexpected termination of the agreement, and goodwill indemnity. Saey raised a plea of lack of jurisdiction of the Portuguese court, citing their general conditions of sale (mentioned in their invoices) which required that a Court in Belgium be competent for dispute resolution.

      The facts thus presented two issues to be resolved in light of the Brussels I recast Regulation: deciding whether a jurisdiction clause in a vendor’s general terms and conditions pursuant to Art. 25 of the Regulation shall apply, and, if not, choosing the court with jurisdiction under Art. 7 of the Regulation.

      Shall a jurisdiction clause contained within a vendor’s general terms and conditions apply to a distribution relationship?

      The supplier company apparently considered their course of dealing with the Portuguese retailer nothing more than a concatenation of individual sales of goods, governed by their general terms and conditions. Consequently, they argued that any dispute arising from the relationship should be subject to the jurisdiction clause identifying Belgium as the court with jurisdiction under those terms and conditions.

      Thus, a determination was needed on whether, under these facts, there was a valid prorogation of jurisdiction under Article 25, paragraph 1 of Regulation 1215/2012.

      The Court of Justice has long opined that if the jurisdiction clause is included in the general contract conditions drafted by one of the parties, the contract signed by the other party must contain an express reference to those general conditions in order to ensure the real consent thereto by the parties (judgement of 14 December 1976, Estasis Salotti di Colzani, case no. 24/76; judgement of 16 March 1999, Castelletti, case no. C-159/97; judgement of 7 July 2016, Höszig, case no. C-225/15). Moreover, to be valid, the clause must involve a particular legal relationship (judgement of 20 April 2016, Profit Investment SIM, case no. C-366/13).

      In the instant case, the referring court found it self-evident that the legal relationship at bar was a commercial concession agreement entered into for the purpose of distributing Saey products in Spain, a contract that was not evidenced in writing.

      From this perspective, it is clear that the general conditions contained in the Saey invoices could have no bearing on the commercial concession agreement: assuming Lusavouga’s consent had been proven, the selection of Belgium as the forum would have applied if anything to the individual sales agreements, but not to those duties arising from the separate distribution agreement.

      What, then, would be the court with jurisdiction for the duties arising from the commercial concession agreement?

      Absent any jurisdiction clause, the issue would be decided under Art. 7, point 1 of Regulation 1215/2012, under which it becomes imperative to establish whether a contract is for goods or for services.

      The “provision of services” has been defined by the Court of Justice as an activity, not mere omissions, undertaken in return for remuneration (judgement of 23 April 2009, Falco, case no. C-533/07).

      With the judgements in Corman Collins of 19 December 2013 (case no. C-9/12), and Granarolo of 14 July 2016 (case no. C-196/15), the Court held that in a typical distribution agreement, the dealer renders a service, in that they are involved in increasing the distribution of supplier’s product, and receives in consideration therefor a competitive advantage, access to advertising platforms, know-how, or payment facilities. In light of such elements, the contract relationship should be deemed one for services. If on the other hand the commercial relationship is limited to a concatenation of agreements, each for the purpose of a delivery and pickup of merchandise, then what we have is not a typical distribution agreement, and the contractual relationship shall be construed as one for the sale of goods.

      Once the contract has been categorised as one for services, one must then determine “the place where, under the contract, the services are provided”. The Court specifies that such location shall be understood as the member state of the place of the main provision of services, as it follows from the provisions of the contract  or – as in the case at issue – the actual performance of the same. Only where it is impossible to identify such location shall the domicile of the party rendering the service be used.

      From the referring court’s description of the contractual relationship, and from the Court of Justice’s understanding of the distributor’s performance of services, it would be logical to find that the principal location for performance of services was Spain, where Lusavouga “was involved in increasing the distribution of products” of Saey.

      It is clear that neither the manufacturer nor the distributor would ever have intended such a result, and they might have avoided it being chosen for them by reducing their agreement in writing, including a jurisdiction clause therein.

      By the same token, viewed from the outside, the Portuguese judges’ apparent conviction that the situation was one of an actual dealership contract would leave ample room for debate. After all, a number of elements would lead to the opposite conclusion. However, even in terms of that aspect, the absence of a written contract left room for interpretation that might lead to unforeseen – and perhaps rather risky – consequences.

      In conclusion, the wisdom of setting down the terms and conditions of a sales distribution agreement in writing appears clear. This is not only because one can avoid those ambiguities we have described above, but also because it specifies other important clauses stipulated by the parties that should not be left to chance: exclusivity of area, if any, or with respect to specific sales channels, the contract period and termination notice, any duties to promote the product, control over end-user personal data, and the possibility of, and methods for, any online sales of products.

      State commercial court in Russia is named in the Russian language – Арбитражный суд. This name of the state commercial court is often translated into English as Arbitration court. Such translation in its turn often causes actual misunderstanding between the parties, since the Russian party will most probably consider the term “Arbitration court” as a state commercial court and the other (non-Russian) party might consider that it agreed to resolve disputes by arbitration rather than in a state court.

      Below are some examples of dispute resolution clauses specified by the parties in commercial contracts that caused actual misunderstanding:

      “…if there is no agreement, any disputes and claims between the parties relating to the contract will be resolved by arbitration under the Rules of International Chamber of Commerce in Moscow by one or more arbitrators appointed in accordance with the said rules. The Arbitration court shall use the Russian law.”

      “…if a dispute is not resolved within 30 days of written notification of the dispute by one party to the other, anyone of the parties may submit the dispute arising out of or in connection with this agreement shall be finally settled under the Rules of Arbitration of the Moscow City Arbitration Court”.

      The wording of such clauses and its translation, specifically translation of the term “Arbitration court” might result in resolution of claims by the state commercial courts in Russia, rather than by arbitration. In such situations failure of the non-Russian party to defend itself in the Russian state commercial courts might lead to serious negative consequences.

      One of the well-known arbitration institutions in Russia – the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation recommends the following arbitration clause:

      “Any dispute, controversy or claim which may arise out of or in connection with the present contract (agreement) [in case a separate arbitration agreement is concluded a particular contract (agreement) is to be indicated], or the entering into force, conclusion, alteration, execution, breach, termination or validity thereof, shall be settled by arbitration at the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation in accordance with its applicable regulations and rules. An arbitral award shall be final for the parties. It shall not be allowed to submit a motion to a state court to make a decision on the lack of jurisdiction of an arbitral tribunal in connection with the issuance by the arbitral tribunal of a separate order on existence of jurisdiction as a matter of preliminary nature”. (http://mkas.tpprf.ru/en/documents/)

      As you can see the full name of the arbitration institution is “International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation” and using its short name “Arbitration court” might result in resolution of disputes by the state commercial court.

      Another situation is when the parties actually wish to resolve commercial disputes in a state commercial court in Russia but fail to specify the name of the state commercial court correctly. Believe it or not, but there are many lawyers who consider Russian state courts as an effective and less expensive judicial body to resolve commercial disputes as opposed to arbitration.

      There was one interesting case mentioned by the Supreme Court of Russia in this regard in its recent overview of court practice on resolving of disputes connected with protection of foreign investors in Russia.

      A foreign company filed a claim with the state commercial court in Russia against another foreign company. The court determined that the parties of the dispute concluded prorogation agreement (choice of forum clause) in accordance with which all disputes arising from the specified contract and in connection with it shall be resolved in the courts of general competence of Russia.

      The state commercial court of first instance considered that it lacked jurisdiction to resolve this case, because the parties did not agree to resolve their disputes in the state commercial courts, with that the courts of general competence do not resolve commercial disputes between companies in Russia. As a result, the court of first instance returned the claim to the claimant due to the lack of competence of the state commercial court to resolve this dispute.

      In the appeal claim the claimant argued that the prorogation agreement was unenforceable, since the court specified by the parties (the courts of general competence) do not consider commercial disputes of legal entities in Russia. The foreign company also argued that there was a close connection of the dispute with the territory of the Russian Federation, and therefore the state commercial court had competence to consider this case.

      The appeal court dismissed the ruling of the court of first instance and the case was returned for re-consideration to the court of first instance based on the following grounds.

      The appeal court ruled that the enforceable prorogation agreement shall provide possibility to determine the actual intent (true intent) of the parties regarding competence of the state court to resolve disputes.

      The appeal court determined that the prorogation agreement agreed by the parties was unenforceable, since such agreement failed to determine the intent of the parties to resolve disputes in a specific court or a system of competent state courts where the specific state court shall be determined based on the rules of internal competence of courts.

      The appeal court further ruled that if prorogation agreement is unenforceable the competent court of the Russian Federation shall use general rules of competence of state commercial courts of the Russian Federation set forth in the Commercial procedural code of the Russian Federation.

      In this specific case the subject of the disputed transaction was a sale of share in the charter capital of the company registered at the territory of the Russian Federation. The appeal court in this case established close connection of the dispute with the territory of the Russian Federation and ruled that the state commercial court was competent to consider such dispute.

      Therefore, if the parties of the contract fail to correctly stipulate the specific state commercial court to consider their disputes in Russia, such prorogation agreement (choice of forum clause) might be considered by the state commercial court in Russia unenforceable and the claim might be returned to the claimant due to the lack of competence of the state commercial court to resolve such dispute.

      Conclusions

      If you wish to resolve disputes in the state commercial court in Russia, make sure that the full name of the state commercial court is specified correctly. 

      If you wish to resolve disputes by arbitration in Russia it would be reasonable to use a recommended arbitration clause of respective arbitration institution.

      And, of course, be sure to check translation of the English version of the contract into Russian.

      With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

      Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

      With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

      In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

      In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

      Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

      Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

      The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

      The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

      The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

      The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

      According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

      The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

      The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

      To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

      1. Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
      2. The predictability of it; and
      3. Establish quantitative limits.

      It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

      As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

      Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of  European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

                       

      How to prevent this new risk

      There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

      Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

      Finally, this type of liability and risk may also be covered by a product liability insurance.

      How to make sure that your claim can be enforced in the long run? A creditor may freeze assets that a debtor holds in Switzerland if certain conditions are fulfilled. In practice, there are two situations in which one might consider an attachment of assets: the first is where a creditor has a claim against a debtor without domicile in Switzerland; the second is where a creditor holds an enforceable judgment or award.

      It is beyond doubt that the Swiss financial sector continues to play a dominant role in the financial world of today despite the regulatory pressure that it faces. The Swiss jurisdiction, therefore, is relevant for creditors who wish to enforce claims against a debtor who holds bank accounts or other assets in Switzerland. Even though practice shows that it is predominantly bank accounts that are being attached, other assets such as real estate, art works or claims against third parties are equally capable of being attached.

      Upon application, the Swiss court at the seat of the bank or at the place where the assets are located will grant an ex parte freezing order to a creditor against a debtor with assets in Switzerland, if the applying creditor demonstrates on a prima facie basis that the following three prerequisites of the Swiss Debt Enforcement and Bankruptcy Act („DEBA“) are met:

      • The creditor seeking a freezing order has a mature and unsecured claim;
      • The debtor’s assets are located in Switzerland;
      • A legal ground for a freezing order exists.

      As already pointed out, the most relevant grounds for a freezing order are:

      • The debtor is not resident in Switzerland and the claim itself has sufficient connection with Switzerland or is based on an acknowledgement of debt signed by the debtor („attachment against a non-Swiss resident“);
      • The creditor has an enforceable court decision or arbitral award against the debtor („enforceable title“).

      Attachment against a non-Swiss resident: The mere fact that the assets are located in Switzerland will not suffice to establish a „sufficient connection with Switzerland“ in the sense of the DEBA. The requirement of „sufficient connection with Switzerland“ very much depends on the specific facts of the case which the Swiss court will review on a case-by-case basis. Swiss courts have confirmed that there was a sufficient connection in cases where the underlying contract was signed or fulfilled in Switzerland, where the underlying contract is governed by Swiss law, where the creditor lives in Switzerland or where the creditor’s claim is linked to a commercial activity in Switzerland.

      Enforceable title: In order to rely on the second ground for a freezing order the creditor needs to have an enforceable title. The DEBA makes no distinction between domestic and foreign court decisions or arbitral awards. Provided that they are enforceable (either according to the Lugano Convention, the Swiss Private International Law Act or – in the case of a non-Swiss arbitral award – the New York Convention), all judgments and awards may serve as a ground for an attachment of Swiss assets.

      The Swiss court will request the creditor to provide prima facie evidence on the prerequisites of an attachment as outlined above. Because the attachment itself will be granted ex parte, it will, in many instances, take the debtor by surprise. Thanks to this surprise effect and the nature of the attachment, i.e. the fact that it will prevent the debtor from further disposing of the attached assets, the attachment has a great potential for helping the creditor to secure and ultimately satisfy its claim.

      [Initial note: This article is not aimed as a political article pro or con boycott movements or the Israeli government, but rather as a legal informative overview, in light of the actual and financial impact or exposure international business may have in the referred to matter.]

      It is perhaps not known to many international trading players, but under Israeli law, Bill for prevention of damage to the State of Israel through boycott – 2011, affirmed by the Supreme Court in 2015 (after a slight interpretive adjustment), boycotting Israeli origin products, or deliberate avoidance of economic or academic ties, may give rise to a lawsuit for actual damages under civil law.

      In light of the international BDS movement, attempting to place pressure upon the State of Israel by means of economic and cultural pressure, Israel has realized such activity, indeed, causes actual harm and damage to Israeli based business, manufacturers, importers/exporters, etc., as well as to academic students and professors, and so on, in cultural ties of many sorts – just because the origin is Israel.

      This boycott movement affects the people and businesses of Israel, as opposed to  Israeli leaders or politicians or  the State of Israel as a state, and conveys questionable (to say the least) economic and cultural negative effects upon the people facing unprecedented obstacles in trade in the international arena – for no wrongdoing on their part.

      Regardless of the political opinion one may have concerning the legitimacy, or rather the non-legitimacy, of the BDS movement or concerning the current political policy of the State of Israel – the relatively new law provides actual legal tools to deal with negative economic outcomes (damages, loss of profits, etc.) that businesses or private people encounter or suffer from boycott measures, solely because of their affiliation or relation to the State of Israel.

      Regardless of any opinion of the act itself or its enactment, at the end of the day the act exists and may be used and exploited by filing civil lawsuits against anyone who called for or participated in a boycott. In that sense it creates a new civil wrong as part of the Israeli tort laws.

      Moreover, even a deliberate avoidance of economic, cultural or academic ties can raise liability for the avoider towards the business or ties avoided, as well as liability for anyone who has called for the boycott or publicly expressed support of it.

      The law goes even further – and also excludes the defense argument of „sufficient justification“ and thus provides that anyone who has caused or led to a breach of a contract, by calling for a boycott, may be liable for damages, as well.

      As for the damages that can be claimed, after the adjustment to the law according to the Supreme Court ruling of 2015 (ruling that compensation must be awarded in correspondence with the actual damages or loss of profit caused, and cancelled the clause for penal compensation) – the entity that may sue for torts is the entity that suffered the damage and what can be sued for is the actual damage according to the regular Israeli torts law.

      The law also prohibits a person who calls for a boycott from participating in any public tender, but this is a different focus from the side of the state.

      It is worth mentioning  that the rationale for this legislation was also reviewed by the widely respected Israeli Supreme Court, that has strongly elaborated that such legislation is constitutional and, inter alia, that international entities and individuals such as the BDS movement (as opposed perhaps to states) should not be able to harm or interfere with international or domestic economic affairs without at least being accountable for the outcome of such, and that freedom of speech cannot be unlimitedly protected when it in fact calls for action (or for refraining from action)  that has an actual impact on another and is not simply an expression of an opinion.

      To date, it seems that the Magistrates and District Courts of Israel have yet to render judgments in actual cases based on the boycott act, indicating that the implementation of the act is still inchoate. However, it seems that instances and measures of boycotting are on the rise and the methods of boycotting are becoming increasingly overt, in a manner that is bound to lead to considerable litigation in the near future.

      Needless to say, issues of jurisdiction, and other aspects of private international law, or imposing jurisdiction on foreign players, are also yet to be resolved in reference to the emergence of lawsuits under the boycott law, but these will surely find their creative legal solutions with the actual submission of lawsuits concerning real life cases.

      One of the commonly discussed advantages of international commercial arbitration over litigation in the cross-border context is the enforcement issue. For the purpose of swifter enforcement of foreign arbitral awards, the vast majority of countries signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

      On contrary, there is no relevant international treaty of such scale for the enforcement of foreign court judgements. Normally, the special legal basis, such as agreement on judicial cooperation between two or more countries, needs to be relied upon in order to get a court judgment recognized and enforced in another country. There are quite many countries that do not have such an agreement with China. This includes, among others, US, Germany or the Netherlands.

      Interestingly, however, recently the Chinese court in Wuhan enforced the US court judgement rendered by the Los Angeles Superior Court of California in the Liu Li v Tao Li and Tong Wu case.  It did so despite the fact that there is no agreement between China and US providing for mutual recognition and enforcement of such judgements. The court in Wuhan found, however, that the reciprocity in recognizing and enforcing the court judgments between China and US was established because of an earlier decision of the US District Court of the Central District of California recognizing and enforcing the Chinese judgement rendered by the Higher People’s Court of Hubei in the Hubei Gezhouba Sanlian Industrial Co., Ltd et. al. v Robinson Helicopter Co., Inc. case.

      Interestingly, similar course of action was taken earlier in 2016 when the Chinese Nanjing Intermediate People’s Court enforced the Singaporean judgement relying on the reciprocity principle in the Kolma v SUTEX Group case.

      How much does it tell us?

      Should we now feel safe when opting for own courts in the dispute resolution clauses in the China-related deals? – despite the fact there are no relevant agreements between China and our country? The recent moves of the Chinese courts are, indeed, interesting developments changing the dispute resolution landscape in a desirable direction and increasing the chances for enforcing the foreign commercial court judgements. Yet, as of today, one should not see them as the universal door-openers for the foreign court judgements in similar situations. Accordingly, rather careful approach is recommended and the other dispute resolution methods securing the safer way of enforcement, like arbitration, should be kept in mind. The further changes remain to be seen.

      The author of this post is Monika Prusinowska.

      Benjamin Leventhal

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        A US Court Judgment Enforced in China – What Does it Mean for You?

        9. Oktober 2017

        • China
        • USA
        • Schiedsgerichtsbarkeit
        • Rechtsstreitigkeiten

        The Russian law allows the parties to agree on recovery of contractual penalty for failure by the parties to fulfill contractual obligations.

        Below are some typical examples of provisions that stipulate contractual penalty:

        In the event of untimely delivery of the Goods under the Contract the Buyer shall be entitled to claim penalties in amount of 0,1 (zero point one) percent from the total value of untimely delivered Goods for each day of delay.

        In the event of untimely payment for the Goods under the Contract the Seller shall be entitled to claim penalties in amount of 0,1 percent from the total value of untimely paid Goods for each day of delay.

        The Civil Code of Russia (art. 333) allows the court to decrease the amount of penalty if such amount of penalty is disproportionate to the consequences of breach of contractual obligations, with that the court shall be entitled to decrease penalty only if the debtor files a motion with the request to decrease such excessive amount of penalty.

        The decrease of penalty determined by the contract and subject to payment by the person who conducts business activities is allowed only in exceptional cases, if it is proved that the recovery of penalty in the amount stipulated by the contract can lead to receipt of the unjustified profit by the creditor.

        In practice the parties file motions with the court of first instance with the request to decrease penalty with reference to art. 333 of the Civil Code and the court usually decreases the amount of penalty at its discretion.

        In a recent case considered by the Supreme Court of Russia dated 29.05.2018 (case #A43-26319/2016) the Supreme Court ruled that the imposition of penalty even in the amount exceeding the total value of the contract was justified provided that the debtor failed to file a motion with the court of first instance with the request to decrease such penalty with reference to art. 333 of the Civil Code.

        In this case the customer ordered the contractor to produce a pressure vessel. The price of such works of the contractor amounted to 2.700.000 rubles. The parties agreed that the pressure vessel will be produced by the contractor till 30.01.2015. The contractor produced the pressure vessel only on 01.03.2016.

        The contract stipulated that in case of violation of terms of performance of works the contractor will pay to the customer a fixed fine in the amount of 5% from the price of works that the contractor failed to perform in time for each violation as well as penalty in the amount of 0,3% from the price of works that the contractor failed to perform in time for each day of delay starting with the 4th day of delay.

        As a result, the customer demanded that the contractor pays penalty in the amount of 3.355.170 rubles.

        The court of first instance ruled in favor of the contractor and ordered that the client shall pay the amount of penalty in full since the contractor failed to provide evidence that confirmed due fulfillment of the contract by the contractor, or that the contractor failed to perform its obligations in time due to circumstances that were out of his control. With that the contractor also failed to dispute the amount of penalty and failed to file a motion on application of art. 333 of the Civil Code.

        The appeal court changed the ruling of the court of first instance and decreased the amount of penalty to 326.781 rubles based on its conclusions that the customer abused its rights by including in the contract the unfair penalty provisions.

        The Cassation Court agreed with conclusions of the Court of Appeal, but the Supreme Court dismissed the rulings of both the Cassation Court and Court of Appeal and the decision of the court of first instance remained in force.

        The Supreme Court based its decision on the fact that the contractor failed to file a motion with the request to decrease the amount of penalty and apply art. 333 of the Civil Code in the court of first instance. Therefore, the Court of Appeal had no right to decrease the amount of penalty at its own initiative.

        The latest conclusions of the Supreme Court confirm that the contractual penalty can exceed the total value of the contract and the courts are not allowed to decrease such excessive amount of penalty at its own initiative.

        Thus, if you have any dispute in Russia, please ensure that your company is duly represented in state commercial courts, since the failure of the parties to appear in court of first instance and file respective motions might lead to serious negative consequences that the failing party might not be able to cure in the courts of appeal.

        Not what you would expect 

        When can you terminate, how should you terminate, and how much are you exposed?!

        The outcomes of termination of a business relationship with an Israeli counterpart in Israel arise again and again as a question in many disputes between International corporations and Israeli counterparts, such as distributors or franchisees.

        This is mainly because Israeli law does not include specific laws regulating or regarding distribution or franchising or other kinds of business ventures (except a relatively new agency law – referring in a limited manner to specific kinds of agency only) – and thus disputes in said regards are determined based on the general principles of contract law, the contractual and factual bases – obviously resulting in considerable uncertainty as to specific matters.

        However, substantial case law, such as in the matter of Johnson & Johnson International that ended up paying compensation in the equivalent to over 1.5 Million US$, indicates the basics and threshold of what can be expected in such disputes, and, if implemented wisely, may assist in planning the disengagement or termination of a business relationship, in a manner that would be the least costly for the terminating party and minimize its exposure to a lawsuit.

        In many cases, domestic parties invest many years and/or fortunes, in order to penetrate the domestic market with the foreign service or products, and to promote sales in the subject region, for the benefit of both the international corporation and the domestic party.

        Nevertheless, often the international corporation decides for various reasons (such as establishing an „in-house“ operation“ in the target location or substituting the distributor/franchisee) to terminate the oral or written contractual relationship.

        What are the legal foundations involved in such termination as per due notice of termination and corresponding compensation – if at all?

        Generally, this issue arises in cases in which the contract does not specify a period of the business relationship, and, as a principle of law, contracts may be terminated by reasonable notice and subject to the fundamental good faith principle.

        Contracts are not perceived as binding upon the parties indefinitely. The question is always what is the reasonable time for termination notice, and is the termination done in good faith (which is always a tricky and vague issue). Compensation is commonly awarded in accordance with what the courts find as the due notice period that may also entail compensation for damages related to said breach.

        As always, there are exceptions, such as breach of trust toward the manufacturer/franchisor, that may have great impact on any due notice obligations, as far as justification for immediate termination that can be deemed immune to breach of due notice or good faith obligations.

        The truth is the reasonability of the due notice varies from case to case!

        However, Israeli case law is extremely sensitive to the actual reasoning of termination and how genuine it is, as opposed to asserting a tactical breach argument in an attempt to „justify“ avoiding a due notice period or adequate compensation.

        In this respect, in many cases simple „non-satisfaction“ was denied as a legitimate argument for breach of contract, while safeguarding the freedom of contracts and the right to terminate an ongoing contract with due notice and good faith.

        There are various common parameters referred to in the case law, to determine the adequate time of due notice, including, for instance, the magnitude of investment; the time required for rearrangement of business towards the new situation (including time required to find an alternative supplier product which can be marketed); the magnitude of the product/service out of the entire distributor’s business, etc.

        Time and again, although not as binding rule, the due notice period seems to be in the range of around 12 months, as a balance between the right of termination and the reasonable time for rearranging the business in light of the termination. There were, however, cases in which due notice for termination was deemed as short as three months and as long as two years – but these are rather exceptional.

        Another guiding point in the case law is the factor of exclusivity or non-exclusivity, as well as the concept that the longer the business relationship, the less the distributor/franchisee may expect compensation/reimbursement for investment – based on the concept that he has enjoyed the fruits of the investment.

        The outcome of not providing such adequate due notice might result in actual compensation reflecting the loss of profit of the business in the last year before the termination, or for the whole term the court finds a due notice was in place, or, in cases of bad faith, even a longer period reflecting the damages.

        In conclusion, given the legal regime in Israel, such exposure might be extremely considerable for any international or foreign business. It would, therefore, be vital and as a consequence of real value to plan the strategy of disengagement/termination of the business with the domestic counterpart in Israel, in advance and prior to executing it, and there are, indeed, adequate and wise strategies that may be implemented for the best result.

        It is often the case – in practice – that an ongoing commercial relationship builds slowly over time through a series of sales agreements, without the parties ever signing an actual distribution agreement to set down their respective rights and responsibilities.

        At first blush this might appear to be a good thing: one can sidestep being bound, especially long-term, to the other party. But on closer scrutiny the solution becomes problematic, especially for anyone operating internationally.

        One of the key issues that arises when an international contractual arrangement is not in writing, is identifying the court with jurisdiction over any dispute arising therefrom. In the European Union, the issue is resolved by the provisions of Regulation 1215/2012 (“Brussels I recast”). Pursuant to Article 7 of the Regulation, as an alternative to the defendant’s courts, jurisdiction in a contractual dispute may lie with the court in the place of performance of the obligation in question. Next to this general rule are two criteria to identify the “place of performance”, differentiated according to the type of contract at issue. For a contract for goods, it is the place of delivery for the goods; in a contract for services, it is the place where the services are provided.   

        Thus, to identify the court with jurisdiction, it is crucial that a contract fall under one of these categories: goods or services.

        No doubt this distinction is quite simple in many circumstances. In the case of a distribution agreement, or of a commercial concession agreement, the issue may become thorny.

        The European Court of Justice has analysed this issue on a number of occasions, most recently in their judgement of 8 March 2018 (Case no. C-64/17) following the request for a preliminary ruling from a Portuguese Court of Appeal. The parties to the action were a Portuguese distributor, a company called Lusavouga, and a Belgian company called Saey Home & Garden, that produced articles for the home and garden, including a line of products branded “Barbecook”.

        Following Saey’s decision to break off the commercial relationship – notice of which was sent in an email dated 17 July 2014 – Lusavouga brought action in Portugal seeking compensation for the unexpected termination of the agreement, and goodwill indemnity. Saey raised a plea of lack of jurisdiction of the Portuguese court, citing their general conditions of sale (mentioned in their invoices) which required that a Court in Belgium be competent for dispute resolution.

        The facts thus presented two issues to be resolved in light of the Brussels I recast Regulation: deciding whether a jurisdiction clause in a vendor’s general terms and conditions pursuant to Art. 25 of the Regulation shall apply, and, if not, choosing the court with jurisdiction under Art. 7 of the Regulation.

        Shall a jurisdiction clause contained within a vendor’s general terms and conditions apply to a distribution relationship?

        The supplier company apparently considered their course of dealing with the Portuguese retailer nothing more than a concatenation of individual sales of goods, governed by their general terms and conditions. Consequently, they argued that any dispute arising from the relationship should be subject to the jurisdiction clause identifying Belgium as the court with jurisdiction under those terms and conditions.

        Thus, a determination was needed on whether, under these facts, there was a valid prorogation of jurisdiction under Article 25, paragraph 1 of Regulation 1215/2012.

        The Court of Justice has long opined that if the jurisdiction clause is included in the general contract conditions drafted by one of the parties, the contract signed by the other party must contain an express reference to those general conditions in order to ensure the real consent thereto by the parties (judgement of 14 December 1976, Estasis Salotti di Colzani, case no. 24/76; judgement of 16 March 1999, Castelletti, case no. C-159/97; judgement of 7 July 2016, Höszig, case no. C-225/15). Moreover, to be valid, the clause must involve a particular legal relationship (judgement of 20 April 2016, Profit Investment SIM, case no. C-366/13).

        In the instant case, the referring court found it self-evident that the legal relationship at bar was a commercial concession agreement entered into for the purpose of distributing Saey products in Spain, a contract that was not evidenced in writing.

        From this perspective, it is clear that the general conditions contained in the Saey invoices could have no bearing on the commercial concession agreement: assuming Lusavouga’s consent had been proven, the selection of Belgium as the forum would have applied if anything to the individual sales agreements, but not to those duties arising from the separate distribution agreement.

        What, then, would be the court with jurisdiction for the duties arising from the commercial concession agreement?

        Absent any jurisdiction clause, the issue would be decided under Art. 7, point 1 of Regulation 1215/2012, under which it becomes imperative to establish whether a contract is for goods or for services.

        The “provision of services” has been defined by the Court of Justice as an activity, not mere omissions, undertaken in return for remuneration (judgement of 23 April 2009, Falco, case no. C-533/07).

        With the judgements in Corman Collins of 19 December 2013 (case no. C-9/12), and Granarolo of 14 July 2016 (case no. C-196/15), the Court held that in a typical distribution agreement, the dealer renders a service, in that they are involved in increasing the distribution of supplier’s product, and receives in consideration therefor a competitive advantage, access to advertising platforms, know-how, or payment facilities. In light of such elements, the contract relationship should be deemed one for services. If on the other hand the commercial relationship is limited to a concatenation of agreements, each for the purpose of a delivery and pickup of merchandise, then what we have is not a typical distribution agreement, and the contractual relationship shall be construed as one for the sale of goods.

        Once the contract has been categorised as one for services, one must then determine “the place where, under the contract, the services are provided”. The Court specifies that such location shall be understood as the member state of the place of the main provision of services, as it follows from the provisions of the contract  or – as in the case at issue – the actual performance of the same. Only where it is impossible to identify such location shall the domicile of the party rendering the service be used.

        From the referring court’s description of the contractual relationship, and from the Court of Justice’s understanding of the distributor’s performance of services, it would be logical to find that the principal location for performance of services was Spain, where Lusavouga “was involved in increasing the distribution of products” of Saey.

        It is clear that neither the manufacturer nor the distributor would ever have intended such a result, and they might have avoided it being chosen for them by reducing their agreement in writing, including a jurisdiction clause therein.

        By the same token, viewed from the outside, the Portuguese judges’ apparent conviction that the situation was one of an actual dealership contract would leave ample room for debate. After all, a number of elements would lead to the opposite conclusion. However, even in terms of that aspect, the absence of a written contract left room for interpretation that might lead to unforeseen – and perhaps rather risky – consequences.

        In conclusion, the wisdom of setting down the terms and conditions of a sales distribution agreement in writing appears clear. This is not only because one can avoid those ambiguities we have described above, but also because it specifies other important clauses stipulated by the parties that should not be left to chance: exclusivity of area, if any, or with respect to specific sales channels, the contract period and termination notice, any duties to promote the product, control over end-user personal data, and the possibility of, and methods for, any online sales of products.

        State commercial court in Russia is named in the Russian language – Арбитражный суд. This name of the state commercial court is often translated into English as Arbitration court. Such translation in its turn often causes actual misunderstanding between the parties, since the Russian party will most probably consider the term “Arbitration court” as a state commercial court and the other (non-Russian) party might consider that it agreed to resolve disputes by arbitration rather than in a state court.

        Below are some examples of dispute resolution clauses specified by the parties in commercial contracts that caused actual misunderstanding:

        “…if there is no agreement, any disputes and claims between the parties relating to the contract will be resolved by arbitration under the Rules of International Chamber of Commerce in Moscow by one or more arbitrators appointed in accordance with the said rules. The Arbitration court shall use the Russian law.”

        “…if a dispute is not resolved within 30 days of written notification of the dispute by one party to the other, anyone of the parties may submit the dispute arising out of or in connection with this agreement shall be finally settled under the Rules of Arbitration of the Moscow City Arbitration Court”.

        The wording of such clauses and its translation, specifically translation of the term “Arbitration court” might result in resolution of claims by the state commercial courts in Russia, rather than by arbitration. In such situations failure of the non-Russian party to defend itself in the Russian state commercial courts might lead to serious negative consequences.

        One of the well-known arbitration institutions in Russia – the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation recommends the following arbitration clause:

        “Any dispute, controversy or claim which may arise out of or in connection with the present contract (agreement) [in case a separate arbitration agreement is concluded a particular contract (agreement) is to be indicated], or the entering into force, conclusion, alteration, execution, breach, termination or validity thereof, shall be settled by arbitration at the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation in accordance with its applicable regulations and rules. An arbitral award shall be final for the parties. It shall not be allowed to submit a motion to a state court to make a decision on the lack of jurisdiction of an arbitral tribunal in connection with the issuance by the arbitral tribunal of a separate order on existence of jurisdiction as a matter of preliminary nature”. (http://mkas.tpprf.ru/en/documents/)

        As you can see the full name of the arbitration institution is “International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation” and using its short name “Arbitration court” might result in resolution of disputes by the state commercial court.

        Another situation is when the parties actually wish to resolve commercial disputes in a state commercial court in Russia but fail to specify the name of the state commercial court correctly. Believe it or not, but there are many lawyers who consider Russian state courts as an effective and less expensive judicial body to resolve commercial disputes as opposed to arbitration.

        There was one interesting case mentioned by the Supreme Court of Russia in this regard in its recent overview of court practice on resolving of disputes connected with protection of foreign investors in Russia.

        A foreign company filed a claim with the state commercial court in Russia against another foreign company. The court determined that the parties of the dispute concluded prorogation agreement (choice of forum clause) in accordance with which all disputes arising from the specified contract and in connection with it shall be resolved in the courts of general competence of Russia.

        The state commercial court of first instance considered that it lacked jurisdiction to resolve this case, because the parties did not agree to resolve their disputes in the state commercial courts, with that the courts of general competence do not resolve commercial disputes between companies in Russia. As a result, the court of first instance returned the claim to the claimant due to the lack of competence of the state commercial court to resolve this dispute.

        In the appeal claim the claimant argued that the prorogation agreement was unenforceable, since the court specified by the parties (the courts of general competence) do not consider commercial disputes of legal entities in Russia. The foreign company also argued that there was a close connection of the dispute with the territory of the Russian Federation, and therefore the state commercial court had competence to consider this case.

        The appeal court dismissed the ruling of the court of first instance and the case was returned for re-consideration to the court of first instance based on the following grounds.

        The appeal court ruled that the enforceable prorogation agreement shall provide possibility to determine the actual intent (true intent) of the parties regarding competence of the state court to resolve disputes.

        The appeal court determined that the prorogation agreement agreed by the parties was unenforceable, since such agreement failed to determine the intent of the parties to resolve disputes in a specific court or a system of competent state courts where the specific state court shall be determined based on the rules of internal competence of courts.

        The appeal court further ruled that if prorogation agreement is unenforceable the competent court of the Russian Federation shall use general rules of competence of state commercial courts of the Russian Federation set forth in the Commercial procedural code of the Russian Federation.

        In this specific case the subject of the disputed transaction was a sale of share in the charter capital of the company registered at the territory of the Russian Federation. The appeal court in this case established close connection of the dispute with the territory of the Russian Federation and ruled that the state commercial court was competent to consider such dispute.

        Therefore, if the parties of the contract fail to correctly stipulate the specific state commercial court to consider their disputes in Russia, such prorogation agreement (choice of forum clause) might be considered by the state commercial court in Russia unenforceable and the claim might be returned to the claimant due to the lack of competence of the state commercial court to resolve such dispute.

        Conclusions

        If you wish to resolve disputes in the state commercial court in Russia, make sure that the full name of the state commercial court is specified correctly. 

        If you wish to resolve disputes by arbitration in Russia it would be reasonable to use a recommended arbitration clause of respective arbitration institution.

        And, of course, be sure to check translation of the English version of the contract into Russian.

        With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

        Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

        With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

        In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

        In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

        Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

        Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

        The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

        The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

        The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

        The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

        According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

        The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

        The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

        To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

        1. Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
        2. The predictability of it; and
        3. Establish quantitative limits.

        It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

        As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

        Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of  European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

                         

        How to prevent this new risk

        There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

        Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

        Finally, this type of liability and risk may also be covered by a product liability insurance.

        How to make sure that your claim can be enforced in the long run? A creditor may freeze assets that a debtor holds in Switzerland if certain conditions are fulfilled. In practice, there are two situations in which one might consider an attachment of assets: the first is where a creditor has a claim against a debtor without domicile in Switzerland; the second is where a creditor holds an enforceable judgment or award.

        It is beyond doubt that the Swiss financial sector continues to play a dominant role in the financial world of today despite the regulatory pressure that it faces. The Swiss jurisdiction, therefore, is relevant for creditors who wish to enforce claims against a debtor who holds bank accounts or other assets in Switzerland. Even though practice shows that it is predominantly bank accounts that are being attached, other assets such as real estate, art works or claims against third parties are equally capable of being attached.

        Upon application, the Swiss court at the seat of the bank or at the place where the assets are located will grant an ex parte freezing order to a creditor against a debtor with assets in Switzerland, if the applying creditor demonstrates on a prima facie basis that the following three prerequisites of the Swiss Debt Enforcement and Bankruptcy Act („DEBA“) are met:

        • The creditor seeking a freezing order has a mature and unsecured claim;
        • The debtor’s assets are located in Switzerland;
        • A legal ground for a freezing order exists.

        As already pointed out, the most relevant grounds for a freezing order are:

        • The debtor is not resident in Switzerland and the claim itself has sufficient connection with Switzerland or is based on an acknowledgement of debt signed by the debtor („attachment against a non-Swiss resident“);
        • The creditor has an enforceable court decision or arbitral award against the debtor („enforceable title“).

        Attachment against a non-Swiss resident: The mere fact that the assets are located in Switzerland will not suffice to establish a „sufficient connection with Switzerland“ in the sense of the DEBA. The requirement of „sufficient connection with Switzerland“ very much depends on the specific facts of the case which the Swiss court will review on a case-by-case basis. Swiss courts have confirmed that there was a sufficient connection in cases where the underlying contract was signed or fulfilled in Switzerland, where the underlying contract is governed by Swiss law, where the creditor lives in Switzerland or where the creditor’s claim is linked to a commercial activity in Switzerland.

        Enforceable title: In order to rely on the second ground for a freezing order the creditor needs to have an enforceable title. The DEBA makes no distinction between domestic and foreign court decisions or arbitral awards. Provided that they are enforceable (either according to the Lugano Convention, the Swiss Private International Law Act or – in the case of a non-Swiss arbitral award – the New York Convention), all judgments and awards may serve as a ground for an attachment of Swiss assets.

        The Swiss court will request the creditor to provide prima facie evidence on the prerequisites of an attachment as outlined above. Because the attachment itself will be granted ex parte, it will, in many instances, take the debtor by surprise. Thanks to this surprise effect and the nature of the attachment, i.e. the fact that it will prevent the debtor from further disposing of the attached assets, the attachment has a great potential for helping the creditor to secure and ultimately satisfy its claim.

        [Initial note: This article is not aimed as a political article pro or con boycott movements or the Israeli government, but rather as a legal informative overview, in light of the actual and financial impact or exposure international business may have in the referred to matter.]

        It is perhaps not known to many international trading players, but under Israeli law, Bill for prevention of damage to the State of Israel through boycott – 2011, affirmed by the Supreme Court in 2015 (after a slight interpretive adjustment), boycotting Israeli origin products, or deliberate avoidance of economic or academic ties, may give rise to a lawsuit for actual damages under civil law.

        In light of the international BDS movement, attempting to place pressure upon the State of Israel by means of economic and cultural pressure, Israel has realized such activity, indeed, causes actual harm and damage to Israeli based business, manufacturers, importers/exporters, etc., as well as to academic students and professors, and so on, in cultural ties of many sorts – just because the origin is Israel.

        This boycott movement affects the people and businesses of Israel, as opposed to  Israeli leaders or politicians or  the State of Israel as a state, and conveys questionable (to say the least) economic and cultural negative effects upon the people facing unprecedented obstacles in trade in the international arena – for no wrongdoing on their part.

        Regardless of the political opinion one may have concerning the legitimacy, or rather the non-legitimacy, of the BDS movement or concerning the current political policy of the State of Israel – the relatively new law provides actual legal tools to deal with negative economic outcomes (damages, loss of profits, etc.) that businesses or private people encounter or suffer from boycott measures, solely because of their affiliation or relation to the State of Israel.

        Regardless of any opinion of the act itself or its enactment, at the end of the day the act exists and may be used and exploited by filing civil lawsuits against anyone who called for or participated in a boycott. In that sense it creates a new civil wrong as part of the Israeli tort laws.

        Moreover, even a deliberate avoidance of economic, cultural or academic ties can raise liability for the avoider towards the business or ties avoided, as well as liability for anyone who has called for the boycott or publicly expressed support of it.

        The law goes even further – and also excludes the defense argument of „sufficient justification“ and thus provides that anyone who has caused or led to a breach of a contract, by calling for a boycott, may be liable for damages, as well.

        As for the damages that can be claimed, after the adjustment to the law according to the Supreme Court ruling of 2015 (ruling that compensation must be awarded in correspondence with the actual damages or loss of profit caused, and cancelled the clause for penal compensation) – the entity that may sue for torts is the entity that suffered the damage and what can be sued for is the actual damage according to the regular Israeli torts law.

        The law also prohibits a person who calls for a boycott from participating in any public tender, but this is a different focus from the side of the state.

        It is worth mentioning  that the rationale for this legislation was also reviewed by the widely respected Israeli Supreme Court, that has strongly elaborated that such legislation is constitutional and, inter alia, that international entities and individuals such as the BDS movement (as opposed perhaps to states) should not be able to harm or interfere with international or domestic economic affairs without at least being accountable for the outcome of such, and that freedom of speech cannot be unlimitedly protected when it in fact calls for action (or for refraining from action)  that has an actual impact on another and is not simply an expression of an opinion.

        To date, it seems that the Magistrates and District Courts of Israel have yet to render judgments in actual cases based on the boycott act, indicating that the implementation of the act is still inchoate. However, it seems that instances and measures of boycotting are on the rise and the methods of boycotting are becoming increasingly overt, in a manner that is bound to lead to considerable litigation in the near future.

        Needless to say, issues of jurisdiction, and other aspects of private international law, or imposing jurisdiction on foreign players, are also yet to be resolved in reference to the emergence of lawsuits under the boycott law, but these will surely find their creative legal solutions with the actual submission of lawsuits concerning real life cases.

        One of the commonly discussed advantages of international commercial arbitration over litigation in the cross-border context is the enforcement issue. For the purpose of swifter enforcement of foreign arbitral awards, the vast majority of countries signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

        On contrary, there is no relevant international treaty of such scale for the enforcement of foreign court judgements. Normally, the special legal basis, such as agreement on judicial cooperation between two or more countries, needs to be relied upon in order to get a court judgment recognized and enforced in another country. There are quite many countries that do not have such an agreement with China. This includes, among others, US, Germany or the Netherlands.

        Interestingly, however, recently the Chinese court in Wuhan enforced the US court judgement rendered by the Los Angeles Superior Court of California in the Liu Li v Tao Li and Tong Wu case.  It did so despite the fact that there is no agreement between China and US providing for mutual recognition and enforcement of such judgements. The court in Wuhan found, however, that the reciprocity in recognizing and enforcing the court judgments between China and US was established because of an earlier decision of the US District Court of the Central District of California recognizing and enforcing the Chinese judgement rendered by the Higher People’s Court of Hubei in the Hubei Gezhouba Sanlian Industrial Co., Ltd et. al. v Robinson Helicopter Co., Inc. case.

        Interestingly, similar course of action was taken earlier in 2016 when the Chinese Nanjing Intermediate People’s Court enforced the Singaporean judgement relying on the reciprocity principle in the Kolma v SUTEX Group case.

        How much does it tell us?

        Should we now feel safe when opting for own courts in the dispute resolution clauses in the China-related deals? – despite the fact there are no relevant agreements between China and our country? The recent moves of the Chinese courts are, indeed, interesting developments changing the dispute resolution landscape in a desirable direction and increasing the chances for enforcing the foreign commercial court judgements. Yet, as of today, one should not see them as the universal door-openers for the foreign court judgements in similar situations. Accordingly, rather careful approach is recommended and the other dispute resolution methods securing the safer way of enforcement, like arbitration, should be kept in mind. The further changes remain to be seen.

        The author of this post is Monika Prusinowska.

        France – Abrupt termination of contract

        26. September 2017

        • Frankreich
        • Verträge
        • Vertrieb
        • Rechtsstreitigkeiten

        The Russian law allows the parties to agree on recovery of contractual penalty for failure by the parties to fulfill contractual obligations.

        Below are some typical examples of provisions that stipulate contractual penalty:

        In the event of untimely delivery of the Goods under the Contract the Buyer shall be entitled to claim penalties in amount of 0,1 (zero point one) percent from the total value of untimely delivered Goods for each day of delay.

        In the event of untimely payment for the Goods under the Contract the Seller shall be entitled to claim penalties in amount of 0,1 percent from the total value of untimely paid Goods for each day of delay.

        The Civil Code of Russia (art. 333) allows the court to decrease the amount of penalty if such amount of penalty is disproportionate to the consequences of breach of contractual obligations, with that the court shall be entitled to decrease penalty only if the debtor files a motion with the request to decrease such excessive amount of penalty.

        The decrease of penalty determined by the contract and subject to payment by the person who conducts business activities is allowed only in exceptional cases, if it is proved that the recovery of penalty in the amount stipulated by the contract can lead to receipt of the unjustified profit by the creditor.

        In practice the parties file motions with the court of first instance with the request to decrease penalty with reference to art. 333 of the Civil Code and the court usually decreases the amount of penalty at its discretion.

        In a recent case considered by the Supreme Court of Russia dated 29.05.2018 (case #A43-26319/2016) the Supreme Court ruled that the imposition of penalty even in the amount exceeding the total value of the contract was justified provided that the debtor failed to file a motion with the court of first instance with the request to decrease such penalty with reference to art. 333 of the Civil Code.

        In this case the customer ordered the contractor to produce a pressure vessel. The price of such works of the contractor amounted to 2.700.000 rubles. The parties agreed that the pressure vessel will be produced by the contractor till 30.01.2015. The contractor produced the pressure vessel only on 01.03.2016.

        The contract stipulated that in case of violation of terms of performance of works the contractor will pay to the customer a fixed fine in the amount of 5% from the price of works that the contractor failed to perform in time for each violation as well as penalty in the amount of 0,3% from the price of works that the contractor failed to perform in time for each day of delay starting with the 4th day of delay.

        As a result, the customer demanded that the contractor pays penalty in the amount of 3.355.170 rubles.

        The court of first instance ruled in favor of the contractor and ordered that the client shall pay the amount of penalty in full since the contractor failed to provide evidence that confirmed due fulfillment of the contract by the contractor, or that the contractor failed to perform its obligations in time due to circumstances that were out of his control. With that the contractor also failed to dispute the amount of penalty and failed to file a motion on application of art. 333 of the Civil Code.

        The appeal court changed the ruling of the court of first instance and decreased the amount of penalty to 326.781 rubles based on its conclusions that the customer abused its rights by including in the contract the unfair penalty provisions.

        The Cassation Court agreed with conclusions of the Court of Appeal, but the Supreme Court dismissed the rulings of both the Cassation Court and Court of Appeal and the decision of the court of first instance remained in force.

        The Supreme Court based its decision on the fact that the contractor failed to file a motion with the request to decrease the amount of penalty and apply art. 333 of the Civil Code in the court of first instance. Therefore, the Court of Appeal had no right to decrease the amount of penalty at its own initiative.

        The latest conclusions of the Supreme Court confirm that the contractual penalty can exceed the total value of the contract and the courts are not allowed to decrease such excessive amount of penalty at its own initiative.

        Thus, if you have any dispute in Russia, please ensure that your company is duly represented in state commercial courts, since the failure of the parties to appear in court of first instance and file respective motions might lead to serious negative consequences that the failing party might not be able to cure in the courts of appeal.

        Not what you would expect 

        When can you terminate, how should you terminate, and how much are you exposed?!

        The outcomes of termination of a business relationship with an Israeli counterpart in Israel arise again and again as a question in many disputes between International corporations and Israeli counterparts, such as distributors or franchisees.

        This is mainly because Israeli law does not include specific laws regulating or regarding distribution or franchising or other kinds of business ventures (except a relatively new agency law – referring in a limited manner to specific kinds of agency only) – and thus disputes in said regards are determined based on the general principles of contract law, the contractual and factual bases – obviously resulting in considerable uncertainty as to specific matters.

        However, substantial case law, such as in the matter of Johnson & Johnson International that ended up paying compensation in the equivalent to over 1.5 Million US$, indicates the basics and threshold of what can be expected in such disputes, and, if implemented wisely, may assist in planning the disengagement or termination of a business relationship, in a manner that would be the least costly for the terminating party and minimize its exposure to a lawsuit.

        In many cases, domestic parties invest many years and/or fortunes, in order to penetrate the domestic market with the foreign service or products, and to promote sales in the subject region, for the benefit of both the international corporation and the domestic party.

        Nevertheless, often the international corporation decides for various reasons (such as establishing an „in-house“ operation“ in the target location or substituting the distributor/franchisee) to terminate the oral or written contractual relationship.

        What are the legal foundations involved in such termination as per due notice of termination and corresponding compensation – if at all?

        Generally, this issue arises in cases in which the contract does not specify a period of the business relationship, and, as a principle of law, contracts may be terminated by reasonable notice and subject to the fundamental good faith principle.

        Contracts are not perceived as binding upon the parties indefinitely. The question is always what is the reasonable time for termination notice, and is the termination done in good faith (which is always a tricky and vague issue). Compensation is commonly awarded in accordance with what the courts find as the due notice period that may also entail compensation for damages related to said breach.

        As always, there are exceptions, such as breach of trust toward the manufacturer/franchisor, that may have great impact on any due notice obligations, as far as justification for immediate termination that can be deemed immune to breach of due notice or good faith obligations.

        The truth is the reasonability of the due notice varies from case to case!

        However, Israeli case law is extremely sensitive to the actual reasoning of termination and how genuine it is, as opposed to asserting a tactical breach argument in an attempt to „justify“ avoiding a due notice period or adequate compensation.

        In this respect, in many cases simple „non-satisfaction“ was denied as a legitimate argument for breach of contract, while safeguarding the freedom of contracts and the right to terminate an ongoing contract with due notice and good faith.

        There are various common parameters referred to in the case law, to determine the adequate time of due notice, including, for instance, the magnitude of investment; the time required for rearrangement of business towards the new situation (including time required to find an alternative supplier product which can be marketed); the magnitude of the product/service out of the entire distributor’s business, etc.

        Time and again, although not as binding rule, the due notice period seems to be in the range of around 12 months, as a balance between the right of termination and the reasonable time for rearranging the business in light of the termination. There were, however, cases in which due notice for termination was deemed as short as three months and as long as two years – but these are rather exceptional.

        Another guiding point in the case law is the factor of exclusivity or non-exclusivity, as well as the concept that the longer the business relationship, the less the distributor/franchisee may expect compensation/reimbursement for investment – based on the concept that he has enjoyed the fruits of the investment.

        The outcome of not providing such adequate due notice might result in actual compensation reflecting the loss of profit of the business in the last year before the termination, or for the whole term the court finds a due notice was in place, or, in cases of bad faith, even a longer period reflecting the damages.

        In conclusion, given the legal regime in Israel, such exposure might be extremely considerable for any international or foreign business. It would, therefore, be vital and as a consequence of real value to plan the strategy of disengagement/termination of the business with the domestic counterpart in Israel, in advance and prior to executing it, and there are, indeed, adequate and wise strategies that may be implemented for the best result.

        It is often the case – in practice – that an ongoing commercial relationship builds slowly over time through a series of sales agreements, without the parties ever signing an actual distribution agreement to set down their respective rights and responsibilities.

        At first blush this might appear to be a good thing: one can sidestep being bound, especially long-term, to the other party. But on closer scrutiny the solution becomes problematic, especially for anyone operating internationally.

        One of the key issues that arises when an international contractual arrangement is not in writing, is identifying the court with jurisdiction over any dispute arising therefrom. In the European Union, the issue is resolved by the provisions of Regulation 1215/2012 (“Brussels I recast”). Pursuant to Article 7 of the Regulation, as an alternative to the defendant’s courts, jurisdiction in a contractual dispute may lie with the court in the place of performance of the obligation in question. Next to this general rule are two criteria to identify the “place of performance”, differentiated according to the type of contract at issue. For a contract for goods, it is the place of delivery for the goods; in a contract for services, it is the place where the services are provided.   

        Thus, to identify the court with jurisdiction, it is crucial that a contract fall under one of these categories: goods or services.

        No doubt this distinction is quite simple in many circumstances. In the case of a distribution agreement, or of a commercial concession agreement, the issue may become thorny.

        The European Court of Justice has analysed this issue on a number of occasions, most recently in their judgement of 8 March 2018 (Case no. C-64/17) following the request for a preliminary ruling from a Portuguese Court of Appeal. The parties to the action were a Portuguese distributor, a company called Lusavouga, and a Belgian company called Saey Home & Garden, that produced articles for the home and garden, including a line of products branded “Barbecook”.

        Following Saey’s decision to break off the commercial relationship – notice of which was sent in an email dated 17 July 2014 – Lusavouga brought action in Portugal seeking compensation for the unexpected termination of the agreement, and goodwill indemnity. Saey raised a plea of lack of jurisdiction of the Portuguese court, citing their general conditions of sale (mentioned in their invoices) which required that a Court in Belgium be competent for dispute resolution.

        The facts thus presented two issues to be resolved in light of the Brussels I recast Regulation: deciding whether a jurisdiction clause in a vendor’s general terms and conditions pursuant to Art. 25 of the Regulation shall apply, and, if not, choosing the court with jurisdiction under Art. 7 of the Regulation.

        Shall a jurisdiction clause contained within a vendor’s general terms and conditions apply to a distribution relationship?

        The supplier company apparently considered their course of dealing with the Portuguese retailer nothing more than a concatenation of individual sales of goods, governed by their general terms and conditions. Consequently, they argued that any dispute arising from the relationship should be subject to the jurisdiction clause identifying Belgium as the court with jurisdiction under those terms and conditions.

        Thus, a determination was needed on whether, under these facts, there was a valid prorogation of jurisdiction under Article 25, paragraph 1 of Regulation 1215/2012.

        The Court of Justice has long opined that if the jurisdiction clause is included in the general contract conditions drafted by one of the parties, the contract signed by the other party must contain an express reference to those general conditions in order to ensure the real consent thereto by the parties (judgement of 14 December 1976, Estasis Salotti di Colzani, case no. 24/76; judgement of 16 March 1999, Castelletti, case no. C-159/97; judgement of 7 July 2016, Höszig, case no. C-225/15). Moreover, to be valid, the clause must involve a particular legal relationship (judgement of 20 April 2016, Profit Investment SIM, case no. C-366/13).

        In the instant case, the referring court found it self-evident that the legal relationship at bar was a commercial concession agreement entered into for the purpose of distributing Saey products in Spain, a contract that was not evidenced in writing.

        From this perspective, it is clear that the general conditions contained in the Saey invoices could have no bearing on the commercial concession agreement: assuming Lusavouga’s consent had been proven, the selection of Belgium as the forum would have applied if anything to the individual sales agreements, but not to those duties arising from the separate distribution agreement.

        What, then, would be the court with jurisdiction for the duties arising from the commercial concession agreement?

        Absent any jurisdiction clause, the issue would be decided under Art. 7, point 1 of Regulation 1215/2012, under which it becomes imperative to establish whether a contract is for goods or for services.

        The “provision of services” has been defined by the Court of Justice as an activity, not mere omissions, undertaken in return for remuneration (judgement of 23 April 2009, Falco, case no. C-533/07).

        With the judgements in Corman Collins of 19 December 2013 (case no. C-9/12), and Granarolo of 14 July 2016 (case no. C-196/15), the Court held that in a typical distribution agreement, the dealer renders a service, in that they are involved in increasing the distribution of supplier’s product, and receives in consideration therefor a competitive advantage, access to advertising platforms, know-how, or payment facilities. In light of such elements, the contract relationship should be deemed one for services. If on the other hand the commercial relationship is limited to a concatenation of agreements, each for the purpose of a delivery and pickup of merchandise, then what we have is not a typical distribution agreement, and the contractual relationship shall be construed as one for the sale of goods.

        Once the contract has been categorised as one for services, one must then determine “the place where, under the contract, the services are provided”. The Court specifies that such location shall be understood as the member state of the place of the main provision of services, as it follows from the provisions of the contract  or – as in the case at issue – the actual performance of the same. Only where it is impossible to identify such location shall the domicile of the party rendering the service be used.

        From the referring court’s description of the contractual relationship, and from the Court of Justice’s understanding of the distributor’s performance of services, it would be logical to find that the principal location for performance of services was Spain, where Lusavouga “was involved in increasing the distribution of products” of Saey.

        It is clear that neither the manufacturer nor the distributor would ever have intended such a result, and they might have avoided it being chosen for them by reducing their agreement in writing, including a jurisdiction clause therein.

        By the same token, viewed from the outside, the Portuguese judges’ apparent conviction that the situation was one of an actual dealership contract would leave ample room for debate. After all, a number of elements would lead to the opposite conclusion. However, even in terms of that aspect, the absence of a written contract left room for interpretation that might lead to unforeseen – and perhaps rather risky – consequences.

        In conclusion, the wisdom of setting down the terms and conditions of a sales distribution agreement in writing appears clear. This is not only because one can avoid those ambiguities we have described above, but also because it specifies other important clauses stipulated by the parties that should not be left to chance: exclusivity of area, if any, or with respect to specific sales channels, the contract period and termination notice, any duties to promote the product, control over end-user personal data, and the possibility of, and methods for, any online sales of products.

        State commercial court in Russia is named in the Russian language – Арбитражный суд. This name of the state commercial court is often translated into English as Arbitration court. Such translation in its turn often causes actual misunderstanding between the parties, since the Russian party will most probably consider the term “Arbitration court” as a state commercial court and the other (non-Russian) party might consider that it agreed to resolve disputes by arbitration rather than in a state court.

        Below are some examples of dispute resolution clauses specified by the parties in commercial contracts that caused actual misunderstanding:

        “…if there is no agreement, any disputes and claims between the parties relating to the contract will be resolved by arbitration under the Rules of International Chamber of Commerce in Moscow by one or more arbitrators appointed in accordance with the said rules. The Arbitration court shall use the Russian law.”

        “…if a dispute is not resolved within 30 days of written notification of the dispute by one party to the other, anyone of the parties may submit the dispute arising out of or in connection with this agreement shall be finally settled under the Rules of Arbitration of the Moscow City Arbitration Court”.

        The wording of such clauses and its translation, specifically translation of the term “Arbitration court” might result in resolution of claims by the state commercial courts in Russia, rather than by arbitration. In such situations failure of the non-Russian party to defend itself in the Russian state commercial courts might lead to serious negative consequences.

        One of the well-known arbitration institutions in Russia – the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation recommends the following arbitration clause:

        “Any dispute, controversy or claim which may arise out of or in connection with the present contract (agreement) [in case a separate arbitration agreement is concluded a particular contract (agreement) is to be indicated], or the entering into force, conclusion, alteration, execution, breach, termination or validity thereof, shall be settled by arbitration at the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation in accordance with its applicable regulations and rules. An arbitral award shall be final for the parties. It shall not be allowed to submit a motion to a state court to make a decision on the lack of jurisdiction of an arbitral tribunal in connection with the issuance by the arbitral tribunal of a separate order on existence of jurisdiction as a matter of preliminary nature”. (http://mkas.tpprf.ru/en/documents/)

        As you can see the full name of the arbitration institution is “International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation” and using its short name “Arbitration court” might result in resolution of disputes by the state commercial court.

        Another situation is when the parties actually wish to resolve commercial disputes in a state commercial court in Russia but fail to specify the name of the state commercial court correctly. Believe it or not, but there are many lawyers who consider Russian state courts as an effective and less expensive judicial body to resolve commercial disputes as opposed to arbitration.

        There was one interesting case mentioned by the Supreme Court of Russia in this regard in its recent overview of court practice on resolving of disputes connected with protection of foreign investors in Russia.

        A foreign company filed a claim with the state commercial court in Russia against another foreign company. The court determined that the parties of the dispute concluded prorogation agreement (choice of forum clause) in accordance with which all disputes arising from the specified contract and in connection with it shall be resolved in the courts of general competence of Russia.

        The state commercial court of first instance considered that it lacked jurisdiction to resolve this case, because the parties did not agree to resolve their disputes in the state commercial courts, with that the courts of general competence do not resolve commercial disputes between companies in Russia. As a result, the court of first instance returned the claim to the claimant due to the lack of competence of the state commercial court to resolve this dispute.

        In the appeal claim the claimant argued that the prorogation agreement was unenforceable, since the court specified by the parties (the courts of general competence) do not consider commercial disputes of legal entities in Russia. The foreign company also argued that there was a close connection of the dispute with the territory of the Russian Federation, and therefore the state commercial court had competence to consider this case.

        The appeal court dismissed the ruling of the court of first instance and the case was returned for re-consideration to the court of first instance based on the following grounds.

        The appeal court ruled that the enforceable prorogation agreement shall provide possibility to determine the actual intent (true intent) of the parties regarding competence of the state court to resolve disputes.

        The appeal court determined that the prorogation agreement agreed by the parties was unenforceable, since such agreement failed to determine the intent of the parties to resolve disputes in a specific court or a system of competent state courts where the specific state court shall be determined based on the rules of internal competence of courts.

        The appeal court further ruled that if prorogation agreement is unenforceable the competent court of the Russian Federation shall use general rules of competence of state commercial courts of the Russian Federation set forth in the Commercial procedural code of the Russian Federation.

        In this specific case the subject of the disputed transaction was a sale of share in the charter capital of the company registered at the territory of the Russian Federation. The appeal court in this case established close connection of the dispute with the territory of the Russian Federation and ruled that the state commercial court was competent to consider such dispute.

        Therefore, if the parties of the contract fail to correctly stipulate the specific state commercial court to consider their disputes in Russia, such prorogation agreement (choice of forum clause) might be considered by the state commercial court in Russia unenforceable and the claim might be returned to the claimant due to the lack of competence of the state commercial court to resolve such dispute.

        Conclusions

        If you wish to resolve disputes in the state commercial court in Russia, make sure that the full name of the state commercial court is specified correctly. 

        If you wish to resolve disputes by arbitration in Russia it would be reasonable to use a recommended arbitration clause of respective arbitration institution.

        And, of course, be sure to check translation of the English version of the contract into Russian.

        With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

        Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

        With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

        In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

        In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

        Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

        Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

        The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

        The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

        The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

        The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

        According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

        The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

        The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

        To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

        1. Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
        2. The predictability of it; and
        3. Establish quantitative limits.

        It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

        As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

        Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of  European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

                         

        How to prevent this new risk

        There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

        Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

        Finally, this type of liability and risk may also be covered by a product liability insurance.

        How to make sure that your claim can be enforced in the long run? A creditor may freeze assets that a debtor holds in Switzerland if certain conditions are fulfilled. In practice, there are two situations in which one might consider an attachment of assets: the first is where a creditor has a claim against a debtor without domicile in Switzerland; the second is where a creditor holds an enforceable judgment or award.

        It is beyond doubt that the Swiss financial sector continues to play a dominant role in the financial world of today despite the regulatory pressure that it faces. The Swiss jurisdiction, therefore, is relevant for creditors who wish to enforce claims against a debtor who holds bank accounts or other assets in Switzerland. Even though practice shows that it is predominantly bank accounts that are being attached, other assets such as real estate, art works or claims against third parties are equally capable of being attached.

        Upon application, the Swiss court at the seat of the bank or at the place where the assets are located will grant an ex parte freezing order to a creditor against a debtor with assets in Switzerland, if the applying creditor demonstrates on a prima facie basis that the following three prerequisites of the Swiss Debt Enforcement and Bankruptcy Act („DEBA“) are met:

        • The creditor seeking a freezing order has a mature and unsecured claim;
        • The debtor’s assets are located in Switzerland;
        • A legal ground for a freezing order exists.

        As already pointed out, the most relevant grounds for a freezing order are:

        • The debtor is not resident in Switzerland and the claim itself has sufficient connection with Switzerland or is based on an acknowledgement of debt signed by the debtor („attachment against a non-Swiss resident“);
        • The creditor has an enforceable court decision or arbitral award against the debtor („enforceable title“).

        Attachment against a non-Swiss resident: The mere fact that the assets are located in Switzerland will not suffice to establish a „sufficient connection with Switzerland“ in the sense of the DEBA. The requirement of „sufficient connection with Switzerland“ very much depends on the specific facts of the case which the Swiss court will review on a case-by-case basis. Swiss courts have confirmed that there was a sufficient connection in cases where the underlying contract was signed or fulfilled in Switzerland, where the underlying contract is governed by Swiss law, where the creditor lives in Switzerland or where the creditor’s claim is linked to a commercial activity in Switzerland.

        Enforceable title: In order to rely on the second ground for a freezing order the creditor needs to have an enforceable title. The DEBA makes no distinction between domestic and foreign court decisions or arbitral awards. Provided that they are enforceable (either according to the Lugano Convention, the Swiss Private International Law Act or – in the case of a non-Swiss arbitral award – the New York Convention), all judgments and awards may serve as a ground for an attachment of Swiss assets.

        The Swiss court will request the creditor to provide prima facie evidence on the prerequisites of an attachment as outlined above. Because the attachment itself will be granted ex parte, it will, in many instances, take the debtor by surprise. Thanks to this surprise effect and the nature of the attachment, i.e. the fact that it will prevent the debtor from further disposing of the attached assets, the attachment has a great potential for helping the creditor to secure and ultimately satisfy its claim.

        [Initial note: This article is not aimed as a political article pro or con boycott movements or the Israeli government, but rather as a legal informative overview, in light of the actual and financial impact or exposure international business may have in the referred to matter.]

        It is perhaps not known to many international trading players, but under Israeli law, Bill for prevention of damage to the State of Israel through boycott – 2011, affirmed by the Supreme Court in 2015 (after a slight interpretive adjustment), boycotting Israeli origin products, or deliberate avoidance of economic or academic ties, may give rise to a lawsuit for actual damages under civil law.

        In light of the international BDS movement, attempting to place pressure upon the State of Israel by means of economic and cultural pressure, Israel has realized such activity, indeed, causes actual harm and damage to Israeli based business, manufacturers, importers/exporters, etc., as well as to academic students and professors, and so on, in cultural ties of many sorts – just because the origin is Israel.

        This boycott movement affects the people and businesses of Israel, as opposed to  Israeli leaders or politicians or  the State of Israel as a state, and conveys questionable (to say the least) economic and cultural negative effects upon the people facing unprecedented obstacles in trade in the international arena – for no wrongdoing on their part.

        Regardless of the political opinion one may have concerning the legitimacy, or rather the non-legitimacy, of the BDS movement or concerning the current political policy of the State of Israel – the relatively new law provides actual legal tools to deal with negative economic outcomes (damages, loss of profits, etc.) that businesses or private people encounter or suffer from boycott measures, solely because of their affiliation or relation to the State of Israel.

        Regardless of any opinion of the act itself or its enactment, at the end of the day the act exists and may be used and exploited by filing civil lawsuits against anyone who called for or participated in a boycott. In that sense it creates a new civil wrong as part of the Israeli tort laws.

        Moreover, even a deliberate avoidance of economic, cultural or academic ties can raise liability for the avoider towards the business or ties avoided, as well as liability for anyone who has called for the boycott or publicly expressed support of it.

        The law goes even further – and also excludes the defense argument of „sufficient justification“ and thus provides that anyone who has caused or led to a breach of a contract, by calling for a boycott, may be liable for damages, as well.

        As for the damages that can be claimed, after the adjustment to the law according to the Supreme Court ruling of 2015 (ruling that compensation must be awarded in correspondence with the actual damages or loss of profit caused, and cancelled the clause for penal compensation) – the entity that may sue for torts is the entity that suffered the damage and what can be sued for is the actual damage according to the regular Israeli torts law.

        The law also prohibits a person who calls for a boycott from participating in any public tender, but this is a different focus from the side of the state.

        It is worth mentioning  that the rationale for this legislation was also reviewed by the widely respected Israeli Supreme Court, that has strongly elaborated that such legislation is constitutional and, inter alia, that international entities and individuals such as the BDS movement (as opposed perhaps to states) should not be able to harm or interfere with international or domestic economic affairs without at least being accountable for the outcome of such, and that freedom of speech cannot be unlimitedly protected when it in fact calls for action (or for refraining from action)  that has an actual impact on another and is not simply an expression of an opinion.

        To date, it seems that the Magistrates and District Courts of Israel have yet to render judgments in actual cases based on the boycott act, indicating that the implementation of the act is still inchoate. However, it seems that instances and measures of boycotting are on the rise and the methods of boycotting are becoming increasingly overt, in a manner that is bound to lead to considerable litigation in the near future.

        Needless to say, issues of jurisdiction, and other aspects of private international law, or imposing jurisdiction on foreign players, are also yet to be resolved in reference to the emergence of lawsuits under the boycott law, but these will surely find their creative legal solutions with the actual submission of lawsuits concerning real life cases.

        One of the commonly discussed advantages of international commercial arbitration over litigation in the cross-border context is the enforcement issue. For the purpose of swifter enforcement of foreign arbitral awards, the vast majority of countries signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

        On contrary, there is no relevant international treaty of such scale for the enforcement of foreign court judgements. Normally, the special legal basis, such as agreement on judicial cooperation between two or more countries, needs to be relied upon in order to get a court judgment recognized and enforced in another country. There are quite many countries that do not have such an agreement with China. This includes, among others, US, Germany or the Netherlands.

        Interestingly, however, recently the Chinese court in Wuhan enforced the US court judgement rendered by the Los Angeles Superior Court of California in the Liu Li v Tao Li and Tong Wu case.  It did so despite the fact that there is no agreement between China and US providing for mutual recognition and enforcement of such judgements. The court in Wuhan found, however, that the reciprocity in recognizing and enforcing the court judgments between China and US was established because of an earlier decision of the US District Court of the Central District of California recognizing and enforcing the Chinese judgement rendered by the Higher People’s Court of Hubei in the Hubei Gezhouba Sanlian Industrial Co., Ltd et. al. v Robinson Helicopter Co., Inc. case.

        Interestingly, similar course of action was taken earlier in 2016 when the Chinese Nanjing Intermediate People’s Court enforced the Singaporean judgement relying on the reciprocity principle in the Kolma v SUTEX Group case.

        How much does it tell us?

        Should we now feel safe when opting for own courts in the dispute resolution clauses in the China-related deals? – despite the fact there are no relevant agreements between China and our country? The recent moves of the Chinese courts are, indeed, interesting developments changing the dispute resolution landscape in a desirable direction and increasing the chances for enforcing the foreign commercial court judgements. Yet, as of today, one should not see them as the universal door-openers for the foreign court judgements in similar situations. Accordingly, rather careful approach is recommended and the other dispute resolution methods securing the safer way of enforcement, like arbitration, should be kept in mind. The further changes remain to be seen.

        The author of this post is Monika Prusinowska.

        Marika Devaux

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          To infinity and beyond – Perpetual contracts under Québec law

          9. August 2017

          • Kanada
          • Verträge
          • Rechtsstreitigkeiten

          The Russian law allows the parties to agree on recovery of contractual penalty for failure by the parties to fulfill contractual obligations.

          Below are some typical examples of provisions that stipulate contractual penalty:

          In the event of untimely delivery of the Goods under the Contract the Buyer shall be entitled to claim penalties in amount of 0,1 (zero point one) percent from the total value of untimely delivered Goods for each day of delay.

          In the event of untimely payment for the Goods under the Contract the Seller shall be entitled to claim penalties in amount of 0,1 percent from the total value of untimely paid Goods for each day of delay.

          The Civil Code of Russia (art. 333) allows the court to decrease the amount of penalty if such amount of penalty is disproportionate to the consequences of breach of contractual obligations, with that the court shall be entitled to decrease penalty only if the debtor files a motion with the request to decrease such excessive amount of penalty.

          The decrease of penalty determined by the contract and subject to payment by the person who conducts business activities is allowed only in exceptional cases, if it is proved that the recovery of penalty in the amount stipulated by the contract can lead to receipt of the unjustified profit by the creditor.

          In practice the parties file motions with the court of first instance with the request to decrease penalty with reference to art. 333 of the Civil Code and the court usually decreases the amount of penalty at its discretion.

          In a recent case considered by the Supreme Court of Russia dated 29.05.2018 (case #A43-26319/2016) the Supreme Court ruled that the imposition of penalty even in the amount exceeding the total value of the contract was justified provided that the debtor failed to file a motion with the court of first instance with the request to decrease such penalty with reference to art. 333 of the Civil Code.

          In this case the customer ordered the contractor to produce a pressure vessel. The price of such works of the contractor amounted to 2.700.000 rubles. The parties agreed that the pressure vessel will be produced by the contractor till 30.01.2015. The contractor produced the pressure vessel only on 01.03.2016.

          The contract stipulated that in case of violation of terms of performance of works the contractor will pay to the customer a fixed fine in the amount of 5% from the price of works that the contractor failed to perform in time for each violation as well as penalty in the amount of 0,3% from the price of works that the contractor failed to perform in time for each day of delay starting with the 4th day of delay.

          As a result, the customer demanded that the contractor pays penalty in the amount of 3.355.170 rubles.

          The court of first instance ruled in favor of the contractor and ordered that the client shall pay the amount of penalty in full since the contractor failed to provide evidence that confirmed due fulfillment of the contract by the contractor, or that the contractor failed to perform its obligations in time due to circumstances that were out of his control. With that the contractor also failed to dispute the amount of penalty and failed to file a motion on application of art. 333 of the Civil Code.

          The appeal court changed the ruling of the court of first instance and decreased the amount of penalty to 326.781 rubles based on its conclusions that the customer abused its rights by including in the contract the unfair penalty provisions.

          The Cassation Court agreed with conclusions of the Court of Appeal, but the Supreme Court dismissed the rulings of both the Cassation Court and Court of Appeal and the decision of the court of first instance remained in force.

          The Supreme Court based its decision on the fact that the contractor failed to file a motion with the request to decrease the amount of penalty and apply art. 333 of the Civil Code in the court of first instance. Therefore, the Court of Appeal had no right to decrease the amount of penalty at its own initiative.

          The latest conclusions of the Supreme Court confirm that the contractual penalty can exceed the total value of the contract and the courts are not allowed to decrease such excessive amount of penalty at its own initiative.

          Thus, if you have any dispute in Russia, please ensure that your company is duly represented in state commercial courts, since the failure of the parties to appear in court of first instance and file respective motions might lead to serious negative consequences that the failing party might not be able to cure in the courts of appeal.

          Not what you would expect 

          When can you terminate, how should you terminate, and how much are you exposed?!

          The outcomes of termination of a business relationship with an Israeli counterpart in Israel arise again and again as a question in many disputes between International corporations and Israeli counterparts, such as distributors or franchisees.

          This is mainly because Israeli law does not include specific laws regulating or regarding distribution or franchising or other kinds of business ventures (except a relatively new agency law – referring in a limited manner to specific kinds of agency only) – and thus disputes in said regards are determined based on the general principles of contract law, the contractual and factual bases – obviously resulting in considerable uncertainty as to specific matters.

          However, substantial case law, such as in the matter of Johnson & Johnson International that ended up paying compensation in the equivalent to over 1.5 Million US$, indicates the basics and threshold of what can be expected in such disputes, and, if implemented wisely, may assist in planning the disengagement or termination of a business relationship, in a manner that would be the least costly for the terminating party and minimize its exposure to a lawsuit.

          In many cases, domestic parties invest many years and/or fortunes, in order to penetrate the domestic market with the foreign service or products, and to promote sales in the subject region, for the benefit of both the international corporation and the domestic party.

          Nevertheless, often the international corporation decides for various reasons (such as establishing an „in-house“ operation“ in the target location or substituting the distributor/franchisee) to terminate the oral or written contractual relationship.

          What are the legal foundations involved in such termination as per due notice of termination and corresponding compensation – if at all?

          Generally, this issue arises in cases in which the contract does not specify a period of the business relationship, and, as a principle of law, contracts may be terminated by reasonable notice and subject to the fundamental good faith principle.

          Contracts are not perceived as binding upon the parties indefinitely. The question is always what is the reasonable time for termination notice, and is the termination done in good faith (which is always a tricky and vague issue). Compensation is commonly awarded in accordance with what the courts find as the due notice period that may also entail compensation for damages related to said breach.

          As always, there are exceptions, such as breach of trust toward the manufacturer/franchisor, that may have great impact on any due notice obligations, as far as justification for immediate termination that can be deemed immune to breach of due notice or good faith obligations.

          The truth is the reasonability of the due notice varies from case to case!

          However, Israeli case law is extremely sensitive to the actual reasoning of termination and how genuine it is, as opposed to asserting a tactical breach argument in an attempt to „justify“ avoiding a due notice period or adequate compensation.

          In this respect, in many cases simple „non-satisfaction“ was denied as a legitimate argument for breach of contract, while safeguarding the freedom of contracts and the right to terminate an ongoing contract with due notice and good faith.

          There are various common parameters referred to in the case law, to determine the adequate time of due notice, including, for instance, the magnitude of investment; the time required for rearrangement of business towards the new situation (including time required to find an alternative supplier product which can be marketed); the magnitude of the product/service out of the entire distributor’s business, etc.

          Time and again, although not as binding rule, the due notice period seems to be in the range of around 12 months, as a balance between the right of termination and the reasonable time for rearranging the business in light of the termination. There were, however, cases in which due notice for termination was deemed as short as three months and as long as two years – but these are rather exceptional.

          Another guiding point in the case law is the factor of exclusivity or non-exclusivity, as well as the concept that the longer the business relationship, the less the distributor/franchisee may expect compensation/reimbursement for investment – based on the concept that he has enjoyed the fruits of the investment.

          The outcome of not providing such adequate due notice might result in actual compensation reflecting the loss of profit of the business in the last year before the termination, or for the whole term the court finds a due notice was in place, or, in cases of bad faith, even a longer period reflecting the damages.

          In conclusion, given the legal regime in Israel, such exposure might be extremely considerable for any international or foreign business. It would, therefore, be vital and as a consequence of real value to plan the strategy of disengagement/termination of the business with the domestic counterpart in Israel, in advance and prior to executing it, and there are, indeed, adequate and wise strategies that may be implemented for the best result.

          It is often the case – in practice – that an ongoing commercial relationship builds slowly over time through a series of sales agreements, without the parties ever signing an actual distribution agreement to set down their respective rights and responsibilities.

          At first blush this might appear to be a good thing: one can sidestep being bound, especially long-term, to the other party. But on closer scrutiny the solution becomes problematic, especially for anyone operating internationally.

          One of the key issues that arises when an international contractual arrangement is not in writing, is identifying the court with jurisdiction over any dispute arising therefrom. In the European Union, the issue is resolved by the provisions of Regulation 1215/2012 (“Brussels I recast”). Pursuant to Article 7 of the Regulation, as an alternative to the defendant’s courts, jurisdiction in a contractual dispute may lie with the court in the place of performance of the obligation in question. Next to this general rule are two criteria to identify the “place of performance”, differentiated according to the type of contract at issue. For a contract for goods, it is the place of delivery for the goods; in a contract for services, it is the place where the services are provided.   

          Thus, to identify the court with jurisdiction, it is crucial that a contract fall under one of these categories: goods or services.

          No doubt this distinction is quite simple in many circumstances. In the case of a distribution agreement, or of a commercial concession agreement, the issue may become thorny.

          The European Court of Justice has analysed this issue on a number of occasions, most recently in their judgement of 8 March 2018 (Case no. C-64/17) following the request for a preliminary ruling from a Portuguese Court of Appeal. The parties to the action were a Portuguese distributor, a company called Lusavouga, and a Belgian company called Saey Home & Garden, that produced articles for the home and garden, including a line of products branded “Barbecook”.

          Following Saey’s decision to break off the commercial relationship – notice of which was sent in an email dated 17 July 2014 – Lusavouga brought action in Portugal seeking compensation for the unexpected termination of the agreement, and goodwill indemnity. Saey raised a plea of lack of jurisdiction of the Portuguese court, citing their general conditions of sale (mentioned in their invoices) which required that a Court in Belgium be competent for dispute resolution.

          The facts thus presented two issues to be resolved in light of the Brussels I recast Regulation: deciding whether a jurisdiction clause in a vendor’s general terms and conditions pursuant to Art. 25 of the Regulation shall apply, and, if not, choosing the court with jurisdiction under Art. 7 of the Regulation.

          Shall a jurisdiction clause contained within a vendor’s general terms and conditions apply to a distribution relationship?

          The supplier company apparently considered their course of dealing with the Portuguese retailer nothing more than a concatenation of individual sales of goods, governed by their general terms and conditions. Consequently, they argued that any dispute arising from the relationship should be subject to the jurisdiction clause identifying Belgium as the court with jurisdiction under those terms and conditions.

          Thus, a determination was needed on whether, under these facts, there was a valid prorogation of jurisdiction under Article 25, paragraph 1 of Regulation 1215/2012.

          The Court of Justice has long opined that if the jurisdiction clause is included in the general contract conditions drafted by one of the parties, the contract signed by the other party must contain an express reference to those general conditions in order to ensure the real consent thereto by the parties (judgement of 14 December 1976, Estasis Salotti di Colzani, case no. 24/76; judgement of 16 March 1999, Castelletti, case no. C-159/97; judgement of 7 July 2016, Höszig, case no. C-225/15). Moreover, to be valid, the clause must involve a particular legal relationship (judgement of 20 April 2016, Profit Investment SIM, case no. C-366/13).

          In the instant case, the referring court found it self-evident that the legal relationship at bar was a commercial concession agreement entered into for the purpose of distributing Saey products in Spain, a contract that was not evidenced in writing.

          From this perspective, it is clear that the general conditions contained in the Saey invoices could have no bearing on the commercial concession agreement: assuming Lusavouga’s consent had been proven, the selection of Belgium as the forum would have applied if anything to the individual sales agreements, but not to those duties arising from the separate distribution agreement.

          What, then, would be the court with jurisdiction for the duties arising from the commercial concession agreement?

          Absent any jurisdiction clause, the issue would be decided under Art. 7, point 1 of Regulation 1215/2012, under which it becomes imperative to establish whether a contract is for goods or for services.

          The “provision of services” has been defined by the Court of Justice as an activity, not mere omissions, undertaken in return for remuneration (judgement of 23 April 2009, Falco, case no. C-533/07).

          With the judgements in Corman Collins of 19 December 2013 (case no. C-9/12), and Granarolo of 14 July 2016 (case no. C-196/15), the Court held that in a typical distribution agreement, the dealer renders a service, in that they are involved in increasing the distribution of supplier’s product, and receives in consideration therefor a competitive advantage, access to advertising platforms, know-how, or payment facilities. In light of such elements, the contract relationship should be deemed one for services. If on the other hand the commercial relationship is limited to a concatenation of agreements, each for the purpose of a delivery and pickup of merchandise, then what we have is not a typical distribution agreement, and the contractual relationship shall be construed as one for the sale of goods.

          Once the contract has been categorised as one for services, one must then determine “the place where, under the contract, the services are provided”. The Court specifies that such location shall be understood as the member state of the place of the main provision of services, as it follows from the provisions of the contract  or – as in the case at issue – the actual performance of the same. Only where it is impossible to identify such location shall the domicile of the party rendering the service be used.

          From the referring court’s description of the contractual relationship, and from the Court of Justice’s understanding of the distributor’s performance of services, it would be logical to find that the principal location for performance of services was Spain, where Lusavouga “was involved in increasing the distribution of products” of Saey.

          It is clear that neither the manufacturer nor the distributor would ever have intended such a result, and they might have avoided it being chosen for them by reducing their agreement in writing, including a jurisdiction clause therein.

          By the same token, viewed from the outside, the Portuguese judges’ apparent conviction that the situation was one of an actual dealership contract would leave ample room for debate. After all, a number of elements would lead to the opposite conclusion. However, even in terms of that aspect, the absence of a written contract left room for interpretation that might lead to unforeseen – and perhaps rather risky – consequences.

          In conclusion, the wisdom of setting down the terms and conditions of a sales distribution agreement in writing appears clear. This is not only because one can avoid those ambiguities we have described above, but also because it specifies other important clauses stipulated by the parties that should not be left to chance: exclusivity of area, if any, or with respect to specific sales channels, the contract period and termination notice, any duties to promote the product, control over end-user personal data, and the possibility of, and methods for, any online sales of products.

          State commercial court in Russia is named in the Russian language – Арбитражный суд. This name of the state commercial court is often translated into English as Arbitration court. Such translation in its turn often causes actual misunderstanding between the parties, since the Russian party will most probably consider the term “Arbitration court” as a state commercial court and the other (non-Russian) party might consider that it agreed to resolve disputes by arbitration rather than in a state court.

          Below are some examples of dispute resolution clauses specified by the parties in commercial contracts that caused actual misunderstanding:

          “…if there is no agreement, any disputes and claims between the parties relating to the contract will be resolved by arbitration under the Rules of International Chamber of Commerce in Moscow by one or more arbitrators appointed in accordance with the said rules. The Arbitration court shall use the Russian law.”

          “…if a dispute is not resolved within 30 days of written notification of the dispute by one party to the other, anyone of the parties may submit the dispute arising out of or in connection with this agreement shall be finally settled under the Rules of Arbitration of the Moscow City Arbitration Court”.

          The wording of such clauses and its translation, specifically translation of the term “Arbitration court” might result in resolution of claims by the state commercial courts in Russia, rather than by arbitration. In such situations failure of the non-Russian party to defend itself in the Russian state commercial courts might lead to serious negative consequences.

          One of the well-known arbitration institutions in Russia – the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation recommends the following arbitration clause:

          “Any dispute, controversy or claim which may arise out of or in connection with the present contract (agreement) [in case a separate arbitration agreement is concluded a particular contract (agreement) is to be indicated], or the entering into force, conclusion, alteration, execution, breach, termination or validity thereof, shall be settled by arbitration at the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation in accordance with its applicable regulations and rules. An arbitral award shall be final for the parties. It shall not be allowed to submit a motion to a state court to make a decision on the lack of jurisdiction of an arbitral tribunal in connection with the issuance by the arbitral tribunal of a separate order on existence of jurisdiction as a matter of preliminary nature”. (http://mkas.tpprf.ru/en/documents/)

          As you can see the full name of the arbitration institution is “International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation” and using its short name “Arbitration court” might result in resolution of disputes by the state commercial court.

          Another situation is when the parties actually wish to resolve commercial disputes in a state commercial court in Russia but fail to specify the name of the state commercial court correctly. Believe it or not, but there are many lawyers who consider Russian state courts as an effective and less expensive judicial body to resolve commercial disputes as opposed to arbitration.

          There was one interesting case mentioned by the Supreme Court of Russia in this regard in its recent overview of court practice on resolving of disputes connected with protection of foreign investors in Russia.

          A foreign company filed a claim with the state commercial court in Russia against another foreign company. The court determined that the parties of the dispute concluded prorogation agreement (choice of forum clause) in accordance with which all disputes arising from the specified contract and in connection with it shall be resolved in the courts of general competence of Russia.

          The state commercial court of first instance considered that it lacked jurisdiction to resolve this case, because the parties did not agree to resolve their disputes in the state commercial courts, with that the courts of general competence do not resolve commercial disputes between companies in Russia. As a result, the court of first instance returned the claim to the claimant due to the lack of competence of the state commercial court to resolve this dispute.

          In the appeal claim the claimant argued that the prorogation agreement was unenforceable, since the court specified by the parties (the courts of general competence) do not consider commercial disputes of legal entities in Russia. The foreign company also argued that there was a close connection of the dispute with the territory of the Russian Federation, and therefore the state commercial court had competence to consider this case.

          The appeal court dismissed the ruling of the court of first instance and the case was returned for re-consideration to the court of first instance based on the following grounds.

          The appeal court ruled that the enforceable prorogation agreement shall provide possibility to determine the actual intent (true intent) of the parties regarding competence of the state court to resolve disputes.

          The appeal court determined that the prorogation agreement agreed by the parties was unenforceable, since such agreement failed to determine the intent of the parties to resolve disputes in a specific court or a system of competent state courts where the specific state court shall be determined based on the rules of internal competence of courts.

          The appeal court further ruled that if prorogation agreement is unenforceable the competent court of the Russian Federation shall use general rules of competence of state commercial courts of the Russian Federation set forth in the Commercial procedural code of the Russian Federation.

          In this specific case the subject of the disputed transaction was a sale of share in the charter capital of the company registered at the territory of the Russian Federation. The appeal court in this case established close connection of the dispute with the territory of the Russian Federation and ruled that the state commercial court was competent to consider such dispute.

          Therefore, if the parties of the contract fail to correctly stipulate the specific state commercial court to consider their disputes in Russia, such prorogation agreement (choice of forum clause) might be considered by the state commercial court in Russia unenforceable and the claim might be returned to the claimant due to the lack of competence of the state commercial court to resolve such dispute.

          Conclusions

          If you wish to resolve disputes in the state commercial court in Russia, make sure that the full name of the state commercial court is specified correctly. 

          If you wish to resolve disputes by arbitration in Russia it would be reasonable to use a recommended arbitration clause of respective arbitration institution.

          And, of course, be sure to check translation of the English version of the contract into Russian.

          With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

          Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

          With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

          In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

          In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

          Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

          Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

          The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

          The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

          The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

          The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

          According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

          The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

          The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

          To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

          1. Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
          2. The predictability of it; and
          3. Establish quantitative limits.

          It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

          As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

          Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of  European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

                           

          How to prevent this new risk

          There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

          Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

          Finally, this type of liability and risk may also be covered by a product liability insurance.

          How to make sure that your claim can be enforced in the long run? A creditor may freeze assets that a debtor holds in Switzerland if certain conditions are fulfilled. In practice, there are two situations in which one might consider an attachment of assets: the first is where a creditor has a claim against a debtor without domicile in Switzerland; the second is where a creditor holds an enforceable judgment or award.

          It is beyond doubt that the Swiss financial sector continues to play a dominant role in the financial world of today despite the regulatory pressure that it faces. The Swiss jurisdiction, therefore, is relevant for creditors who wish to enforce claims against a debtor who holds bank accounts or other assets in Switzerland. Even though practice shows that it is predominantly bank accounts that are being attached, other assets such as real estate, art works or claims against third parties are equally capable of being attached.

          Upon application, the Swiss court at the seat of the bank or at the place where the assets are located will grant an ex parte freezing order to a creditor against a debtor with assets in Switzerland, if the applying creditor demonstrates on a prima facie basis that the following three prerequisites of the Swiss Debt Enforcement and Bankruptcy Act („DEBA“) are met:

          • The creditor seeking a freezing order has a mature and unsecured claim;
          • The debtor’s assets are located in Switzerland;
          • A legal ground for a freezing order exists.

          As already pointed out, the most relevant grounds for a freezing order are:

          • The debtor is not resident in Switzerland and the claim itself has sufficient connection with Switzerland or is based on an acknowledgement of debt signed by the debtor („attachment against a non-Swiss resident“);
          • The creditor has an enforceable court decision or arbitral award against the debtor („enforceable title“).

          Attachment against a non-Swiss resident: The mere fact that the assets are located in Switzerland will not suffice to establish a „sufficient connection with Switzerland“ in the sense of the DEBA. The requirement of „sufficient connection with Switzerland“ very much depends on the specific facts of the case which the Swiss court will review on a case-by-case basis. Swiss courts have confirmed that there was a sufficient connection in cases where the underlying contract was signed or fulfilled in Switzerland, where the underlying contract is governed by Swiss law, where the creditor lives in Switzerland or where the creditor’s claim is linked to a commercial activity in Switzerland.

          Enforceable title: In order to rely on the second ground for a freezing order the creditor needs to have an enforceable title. The DEBA makes no distinction between domestic and foreign court decisions or arbitral awards. Provided that they are enforceable (either according to the Lugano Convention, the Swiss Private International Law Act or – in the case of a non-Swiss arbitral award – the New York Convention), all judgments and awards may serve as a ground for an attachment of Swiss assets.

          The Swiss court will request the creditor to provide prima facie evidence on the prerequisites of an attachment as outlined above. Because the attachment itself will be granted ex parte, it will, in many instances, take the debtor by surprise. Thanks to this surprise effect and the nature of the attachment, i.e. the fact that it will prevent the debtor from further disposing of the attached assets, the attachment has a great potential for helping the creditor to secure and ultimately satisfy its claim.

          [Initial note: This article is not aimed as a political article pro or con boycott movements or the Israeli government, but rather as a legal informative overview, in light of the actual and financial impact or exposure international business may have in the referred to matter.]

          It is perhaps not known to many international trading players, but under Israeli law, Bill for prevention of damage to the State of Israel through boycott – 2011, affirmed by the Supreme Court in 2015 (after a slight interpretive adjustment), boycotting Israeli origin products, or deliberate avoidance of economic or academic ties, may give rise to a lawsuit for actual damages under civil law.

          In light of the international BDS movement, attempting to place pressure upon the State of Israel by means of economic and cultural pressure, Israel has realized such activity, indeed, causes actual harm and damage to Israeli based business, manufacturers, importers/exporters, etc., as well as to academic students and professors, and so on, in cultural ties of many sorts – just because the origin is Israel.

          This boycott movement affects the people and businesses of Israel, as opposed to  Israeli leaders or politicians or  the State of Israel as a state, and conveys questionable (to say the least) economic and cultural negative effects upon the people facing unprecedented obstacles in trade in the international arena – for no wrongdoing on their part.

          Regardless of the political opinion one may have concerning the legitimacy, or rather the non-legitimacy, of the BDS movement or concerning the current political policy of the State of Israel – the relatively new law provides actual legal tools to deal with negative economic outcomes (damages, loss of profits, etc.) that businesses or private people encounter or suffer from boycott measures, solely because of their affiliation or relation to the State of Israel.

          Regardless of any opinion of the act itself or its enactment, at the end of the day the act exists and may be used and exploited by filing civil lawsuits against anyone who called for or participated in a boycott. In that sense it creates a new civil wrong as part of the Israeli tort laws.

          Moreover, even a deliberate avoidance of economic, cultural or academic ties can raise liability for the avoider towards the business or ties avoided, as well as liability for anyone who has called for the boycott or publicly expressed support of it.

          The law goes even further – and also excludes the defense argument of „sufficient justification“ and thus provides that anyone who has caused or led to a breach of a contract, by calling for a boycott, may be liable for damages, as well.

          As for the damages that can be claimed, after the adjustment to the law according to the Supreme Court ruling of 2015 (ruling that compensation must be awarded in correspondence with the actual damages or loss of profit caused, and cancelled the clause for penal compensation) – the entity that may sue for torts is the entity that suffered the damage and what can be sued for is the actual damage according to the regular Israeli torts law.

          The law also prohibits a person who calls for a boycott from participating in any public tender, but this is a different focus from the side of the state.

          It is worth mentioning  that the rationale for this legislation was also reviewed by the widely respected Israeli Supreme Court, that has strongly elaborated that such legislation is constitutional and, inter alia, that international entities and individuals such as the BDS movement (as opposed perhaps to states) should not be able to harm or interfere with international or domestic economic affairs without at least being accountable for the outcome of such, and that freedom of speech cannot be unlimitedly protected when it in fact calls for action (or for refraining from action)  that has an actual impact on another and is not simply an expression of an opinion.

          To date, it seems that the Magistrates and District Courts of Israel have yet to render judgments in actual cases based on the boycott act, indicating that the implementation of the act is still inchoate. However, it seems that instances and measures of boycotting are on the rise and the methods of boycotting are becoming increasingly overt, in a manner that is bound to lead to considerable litigation in the near future.

          Needless to say, issues of jurisdiction, and other aspects of private international law, or imposing jurisdiction on foreign players, are also yet to be resolved in reference to the emergence of lawsuits under the boycott law, but these will surely find their creative legal solutions with the actual submission of lawsuits concerning real life cases.

          One of the commonly discussed advantages of international commercial arbitration over litigation in the cross-border context is the enforcement issue. For the purpose of swifter enforcement of foreign arbitral awards, the vast majority of countries signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

          On contrary, there is no relevant international treaty of such scale for the enforcement of foreign court judgements. Normally, the special legal basis, such as agreement on judicial cooperation between two or more countries, needs to be relied upon in order to get a court judgment recognized and enforced in another country. There are quite many countries that do not have such an agreement with China. This includes, among others, US, Germany or the Netherlands.

          Interestingly, however, recently the Chinese court in Wuhan enforced the US court judgement rendered by the Los Angeles Superior Court of California in the Liu Li v Tao Li and Tong Wu case.  It did so despite the fact that there is no agreement between China and US providing for mutual recognition and enforcement of such judgements. The court in Wuhan found, however, that the reciprocity in recognizing and enforcing the court judgments between China and US was established because of an earlier decision of the US District Court of the Central District of California recognizing and enforcing the Chinese judgement rendered by the Higher People’s Court of Hubei in the Hubei Gezhouba Sanlian Industrial Co., Ltd et. al. v Robinson Helicopter Co., Inc. case.

          Interestingly, similar course of action was taken earlier in 2016 when the Chinese Nanjing Intermediate People’s Court enforced the Singaporean judgement relying on the reciprocity principle in the Kolma v SUTEX Group case.

          How much does it tell us?

          Should we now feel safe when opting for own courts in the dispute resolution clauses in the China-related deals? – despite the fact there are no relevant agreements between China and our country? The recent moves of the Chinese courts are, indeed, interesting developments changing the dispute resolution landscape in a desirable direction and increasing the chances for enforcing the foreign commercial court judgements. Yet, as of today, one should not see them as the universal door-openers for the foreign court judgements in similar situations. Accordingly, rather careful approach is recommended and the other dispute resolution methods securing the safer way of enforcement, like arbitration, should be kept in mind. The further changes remain to be seen.

          The author of this post is Monika Prusinowska.

          Switzerland – An excellent choice for arbitration

          17. Juli 2017

          • Schweiz
          • Schiedsgerichtsbarkeit
          • Rechtsstreitigkeiten

          The Russian law allows the parties to agree on recovery of contractual penalty for failure by the parties to fulfill contractual obligations.

          Below are some typical examples of provisions that stipulate contractual penalty:

          In the event of untimely delivery of the Goods under the Contract the Buyer shall be entitled to claim penalties in amount of 0,1 (zero point one) percent from the total value of untimely delivered Goods for each day of delay.

          In the event of untimely payment for the Goods under the Contract the Seller shall be entitled to claim penalties in amount of 0,1 percent from the total value of untimely paid Goods for each day of delay.

          The Civil Code of Russia (art. 333) allows the court to decrease the amount of penalty if such amount of penalty is disproportionate to the consequences of breach of contractual obligations, with that the court shall be entitled to decrease penalty only if the debtor files a motion with the request to decrease such excessive amount of penalty.

          The decrease of penalty determined by the contract and subject to payment by the person who conducts business activities is allowed only in exceptional cases, if it is proved that the recovery of penalty in the amount stipulated by the contract can lead to receipt of the unjustified profit by the creditor.

          In practice the parties file motions with the court of first instance with the request to decrease penalty with reference to art. 333 of the Civil Code and the court usually decreases the amount of penalty at its discretion.

          In a recent case considered by the Supreme Court of Russia dated 29.05.2018 (case #A43-26319/2016) the Supreme Court ruled that the imposition of penalty even in the amount exceeding the total value of the contract was justified provided that the debtor failed to file a motion with the court of first instance with the request to decrease such penalty with reference to art. 333 of the Civil Code.

          In this case the customer ordered the contractor to produce a pressure vessel. The price of such works of the contractor amounted to 2.700.000 rubles. The parties agreed that the pressure vessel will be produced by the contractor till 30.01.2015. The contractor produced the pressure vessel only on 01.03.2016.

          The contract stipulated that in case of violation of terms of performance of works the contractor will pay to the customer a fixed fine in the amount of 5% from the price of works that the contractor failed to perform in time for each violation as well as penalty in the amount of 0,3% from the price of works that the contractor failed to perform in time for each day of delay starting with the 4th day of delay.

          As a result, the customer demanded that the contractor pays penalty in the amount of 3.355.170 rubles.

          The court of first instance ruled in favor of the contractor and ordered that the client shall pay the amount of penalty in full since the contractor failed to provide evidence that confirmed due fulfillment of the contract by the contractor, or that the contractor failed to perform its obligations in time due to circumstances that were out of his control. With that the contractor also failed to dispute the amount of penalty and failed to file a motion on application of art. 333 of the Civil Code.

          The appeal court changed the ruling of the court of first instance and decreased the amount of penalty to 326.781 rubles based on its conclusions that the customer abused its rights by including in the contract the unfair penalty provisions.

          The Cassation Court agreed with conclusions of the Court of Appeal, but the Supreme Court dismissed the rulings of both the Cassation Court and Court of Appeal and the decision of the court of first instance remained in force.

          The Supreme Court based its decision on the fact that the contractor failed to file a motion with the request to decrease the amount of penalty and apply art. 333 of the Civil Code in the court of first instance. Therefore, the Court of Appeal had no right to decrease the amount of penalty at its own initiative.

          The latest conclusions of the Supreme Court confirm that the contractual penalty can exceed the total value of the contract and the courts are not allowed to decrease such excessive amount of penalty at its own initiative.

          Thus, if you have any dispute in Russia, please ensure that your company is duly represented in state commercial courts, since the failure of the parties to appear in court of first instance and file respective motions might lead to serious negative consequences that the failing party might not be able to cure in the courts of appeal.

          Not what you would expect 

          When can you terminate, how should you terminate, and how much are you exposed?!

          The outcomes of termination of a business relationship with an Israeli counterpart in Israel arise again and again as a question in many disputes between International corporations and Israeli counterparts, such as distributors or franchisees.

          This is mainly because Israeli law does not include specific laws regulating or regarding distribution or franchising or other kinds of business ventures (except a relatively new agency law – referring in a limited manner to specific kinds of agency only) – and thus disputes in said regards are determined based on the general principles of contract law, the contractual and factual bases – obviously resulting in considerable uncertainty as to specific matters.

          However, substantial case law, such as in the matter of Johnson & Johnson International that ended up paying compensation in the equivalent to over 1.5 Million US$, indicates the basics and threshold of what can be expected in such disputes, and, if implemented wisely, may assist in planning the disengagement or termination of a business relationship, in a manner that would be the least costly for the terminating party and minimize its exposure to a lawsuit.

          In many cases, domestic parties invest many years and/or fortunes, in order to penetrate the domestic market with the foreign service or products, and to promote sales in the subject region, for the benefit of both the international corporation and the domestic party.

          Nevertheless, often the international corporation decides for various reasons (such as establishing an „in-house“ operation“ in the target location or substituting the distributor/franchisee) to terminate the oral or written contractual relationship.

          What are the legal foundations involved in such termination as per due notice of termination and corresponding compensation – if at all?

          Generally, this issue arises in cases in which the contract does not specify a period of the business relationship, and, as a principle of law, contracts may be terminated by reasonable notice and subject to the fundamental good faith principle.

          Contracts are not perceived as binding upon the parties indefinitely. The question is always what is the reasonable time for termination notice, and is the termination done in good faith (which is always a tricky and vague issue). Compensation is commonly awarded in accordance with what the courts find as the due notice period that may also entail compensation for damages related to said breach.

          As always, there are exceptions, such as breach of trust toward the manufacturer/franchisor, that may have great impact on any due notice obligations, as far as justification for immediate termination that can be deemed immune to breach of due notice or good faith obligations.

          The truth is the reasonability of the due notice varies from case to case!

          However, Israeli case law is extremely sensitive to the actual reasoning of termination and how genuine it is, as opposed to asserting a tactical breach argument in an attempt to „justify“ avoiding a due notice period or adequate compensation.

          In this respect, in many cases simple „non-satisfaction“ was denied as a legitimate argument for breach of contract, while safeguarding the freedom of contracts and the right to terminate an ongoing contract with due notice and good faith.

          There are various common parameters referred to in the case law, to determine the adequate time of due notice, including, for instance, the magnitude of investment; the time required for rearrangement of business towards the new situation (including time required to find an alternative supplier product which can be marketed); the magnitude of the product/service out of the entire distributor’s business, etc.

          Time and again, although not as binding rule, the due notice period seems to be in the range of around 12 months, as a balance between the right of termination and the reasonable time for rearranging the business in light of the termination. There were, however, cases in which due notice for termination was deemed as short as three months and as long as two years – but these are rather exceptional.

          Another guiding point in the case law is the factor of exclusivity or non-exclusivity, as well as the concept that the longer the business relationship, the less the distributor/franchisee may expect compensation/reimbursement for investment – based on the concept that he has enjoyed the fruits of the investment.

          The outcome of not providing such adequate due notice might result in actual compensation reflecting the loss of profit of the business in the last year before the termination, or for the whole term the court finds a due notice was in place, or, in cases of bad faith, even a longer period reflecting the damages.

          In conclusion, given the legal regime in Israel, such exposure might be extremely considerable for any international or foreign business. It would, therefore, be vital and as a consequence of real value to plan the strategy of disengagement/termination of the business with the domestic counterpart in Israel, in advance and prior to executing it, and there are, indeed, adequate and wise strategies that may be implemented for the best result.

          It is often the case – in practice – that an ongoing commercial relationship builds slowly over time through a series of sales agreements, without the parties ever signing an actual distribution agreement to set down their respective rights and responsibilities.

          At first blush this might appear to be a good thing: one can sidestep being bound, especially long-term, to the other party. But on closer scrutiny the solution becomes problematic, especially for anyone operating internationally.

          One of the key issues that arises when an international contractual arrangement is not in writing, is identifying the court with jurisdiction over any dispute arising therefrom. In the European Union, the issue is resolved by the provisions of Regulation 1215/2012 (“Brussels I recast”). Pursuant to Article 7 of the Regulation, as an alternative to the defendant’s courts, jurisdiction in a contractual dispute may lie with the court in the place of performance of the obligation in question. Next to this general rule are two criteria to identify the “place of performance”, differentiated according to the type of contract at issue. For a contract for goods, it is the place of delivery for the goods; in a contract for services, it is the place where the services are provided.   

          Thus, to identify the court with jurisdiction, it is crucial that a contract fall under one of these categories: goods or services.

          No doubt this distinction is quite simple in many circumstances. In the case of a distribution agreement, or of a commercial concession agreement, the issue may become thorny.

          The European Court of Justice has analysed this issue on a number of occasions, most recently in their judgement of 8 March 2018 (Case no. C-64/17) following the request for a preliminary ruling from a Portuguese Court of Appeal. The parties to the action were a Portuguese distributor, a company called Lusavouga, and a Belgian company called Saey Home & Garden, that produced articles for the home and garden, including a line of products branded “Barbecook”.

          Following Saey’s decision to break off the commercial relationship – notice of which was sent in an email dated 17 July 2014 – Lusavouga brought action in Portugal seeking compensation for the unexpected termination of the agreement, and goodwill indemnity. Saey raised a plea of lack of jurisdiction of the Portuguese court, citing their general conditions of sale (mentioned in their invoices) which required that a Court in Belgium be competent for dispute resolution.

          The facts thus presented two issues to be resolved in light of the Brussels I recast Regulation: deciding whether a jurisdiction clause in a vendor’s general terms and conditions pursuant to Art. 25 of the Regulation shall apply, and, if not, choosing the court with jurisdiction under Art. 7 of the Regulation.

          Shall a jurisdiction clause contained within a vendor’s general terms and conditions apply to a distribution relationship?

          The supplier company apparently considered their course of dealing with the Portuguese retailer nothing more than a concatenation of individual sales of goods, governed by their general terms and conditions. Consequently, they argued that any dispute arising from the relationship should be subject to the jurisdiction clause identifying Belgium as the court with jurisdiction under those terms and conditions.

          Thus, a determination was needed on whether, under these facts, there was a valid prorogation of jurisdiction under Article 25, paragraph 1 of Regulation 1215/2012.

          The Court of Justice has long opined that if the jurisdiction clause is included in the general contract conditions drafted by one of the parties, the contract signed by the other party must contain an express reference to those general conditions in order to ensure the real consent thereto by the parties (judgement of 14 December 1976, Estasis Salotti di Colzani, case no. 24/76; judgement of 16 March 1999, Castelletti, case no. C-159/97; judgement of 7 July 2016, Höszig, case no. C-225/15). Moreover, to be valid, the clause must involve a particular legal relationship (judgement of 20 April 2016, Profit Investment SIM, case no. C-366/13).

          In the instant case, the referring court found it self-evident that the legal relationship at bar was a commercial concession agreement entered into for the purpose of distributing Saey products in Spain, a contract that was not evidenced in writing.

          From this perspective, it is clear that the general conditions contained in the Saey invoices could have no bearing on the commercial concession agreement: assuming Lusavouga’s consent had been proven, the selection of Belgium as the forum would have applied if anything to the individual sales agreements, but not to those duties arising from the separate distribution agreement.

          What, then, would be the court with jurisdiction for the duties arising from the commercial concession agreement?

          Absent any jurisdiction clause, the issue would be decided under Art. 7, point 1 of Regulation 1215/2012, under which it becomes imperative to establish whether a contract is for goods or for services.

          The “provision of services” has been defined by the Court of Justice as an activity, not mere omissions, undertaken in return for remuneration (judgement of 23 April 2009, Falco, case no. C-533/07).

          With the judgements in Corman Collins of 19 December 2013 (case no. C-9/12), and Granarolo of 14 July 2016 (case no. C-196/15), the Court held that in a typical distribution agreement, the dealer renders a service, in that they are involved in increasing the distribution of supplier’s product, and receives in consideration therefor a competitive advantage, access to advertising platforms, know-how, or payment facilities. In light of such elements, the contract relationship should be deemed one for services. If on the other hand the commercial relationship is limited to a concatenation of agreements, each for the purpose of a delivery and pickup of merchandise, then what we have is not a typical distribution agreement, and the contractual relationship shall be construed as one for the sale of goods.

          Once the contract has been categorised as one for services, one must then determine “the place where, under the contract, the services are provided”. The Court specifies that such location shall be understood as the member state of the place of the main provision of services, as it follows from the provisions of the contract  or – as in the case at issue – the actual performance of the same. Only where it is impossible to identify such location shall the domicile of the party rendering the service be used.

          From the referring court’s description of the contractual relationship, and from the Court of Justice’s understanding of the distributor’s performance of services, it would be logical to find that the principal location for performance of services was Spain, where Lusavouga “was involved in increasing the distribution of products” of Saey.

          It is clear that neither the manufacturer nor the distributor would ever have intended such a result, and they might have avoided it being chosen for them by reducing their agreement in writing, including a jurisdiction clause therein.

          By the same token, viewed from the outside, the Portuguese judges’ apparent conviction that the situation was one of an actual dealership contract would leave ample room for debate. After all, a number of elements would lead to the opposite conclusion. However, even in terms of that aspect, the absence of a written contract left room for interpretation that might lead to unforeseen – and perhaps rather risky – consequences.

          In conclusion, the wisdom of setting down the terms and conditions of a sales distribution agreement in writing appears clear. This is not only because one can avoid those ambiguities we have described above, but also because it specifies other important clauses stipulated by the parties that should not be left to chance: exclusivity of area, if any, or with respect to specific sales channels, the contract period and termination notice, any duties to promote the product, control over end-user personal data, and the possibility of, and methods for, any online sales of products.

          State commercial court in Russia is named in the Russian language – Арбитражный суд. This name of the state commercial court is often translated into English as Arbitration court. Such translation in its turn often causes actual misunderstanding between the parties, since the Russian party will most probably consider the term “Arbitration court” as a state commercial court and the other (non-Russian) party might consider that it agreed to resolve disputes by arbitration rather than in a state court.

          Below are some examples of dispute resolution clauses specified by the parties in commercial contracts that caused actual misunderstanding:

          “…if there is no agreement, any disputes and claims between the parties relating to the contract will be resolved by arbitration under the Rules of International Chamber of Commerce in Moscow by one or more arbitrators appointed in accordance with the said rules. The Arbitration court shall use the Russian law.”

          “…if a dispute is not resolved within 30 days of written notification of the dispute by one party to the other, anyone of the parties may submit the dispute arising out of or in connection with this agreement shall be finally settled under the Rules of Arbitration of the Moscow City Arbitration Court”.

          The wording of such clauses and its translation, specifically translation of the term “Arbitration court” might result in resolution of claims by the state commercial courts in Russia, rather than by arbitration. In such situations failure of the non-Russian party to defend itself in the Russian state commercial courts might lead to serious negative consequences.

          One of the well-known arbitration institutions in Russia – the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation recommends the following arbitration clause:

          “Any dispute, controversy or claim which may arise out of or in connection with the present contract (agreement) [in case a separate arbitration agreement is concluded a particular contract (agreement) is to be indicated], or the entering into force, conclusion, alteration, execution, breach, termination or validity thereof, shall be settled by arbitration at the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation in accordance with its applicable regulations and rules. An arbitral award shall be final for the parties. It shall not be allowed to submit a motion to a state court to make a decision on the lack of jurisdiction of an arbitral tribunal in connection with the issuance by the arbitral tribunal of a separate order on existence of jurisdiction as a matter of preliminary nature”. (http://mkas.tpprf.ru/en/documents/)

          As you can see the full name of the arbitration institution is “International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation” and using its short name “Arbitration court” might result in resolution of disputes by the state commercial court.

          Another situation is when the parties actually wish to resolve commercial disputes in a state commercial court in Russia but fail to specify the name of the state commercial court correctly. Believe it or not, but there are many lawyers who consider Russian state courts as an effective and less expensive judicial body to resolve commercial disputes as opposed to arbitration.

          There was one interesting case mentioned by the Supreme Court of Russia in this regard in its recent overview of court practice on resolving of disputes connected with protection of foreign investors in Russia.

          A foreign company filed a claim with the state commercial court in Russia against another foreign company. The court determined that the parties of the dispute concluded prorogation agreement (choice of forum clause) in accordance with which all disputes arising from the specified contract and in connection with it shall be resolved in the courts of general competence of Russia.

          The state commercial court of first instance considered that it lacked jurisdiction to resolve this case, because the parties did not agree to resolve their disputes in the state commercial courts, with that the courts of general competence do not resolve commercial disputes between companies in Russia. As a result, the court of first instance returned the claim to the claimant due to the lack of competence of the state commercial court to resolve this dispute.

          In the appeal claim the claimant argued that the prorogation agreement was unenforceable, since the court specified by the parties (the courts of general competence) do not consider commercial disputes of legal entities in Russia. The foreign company also argued that there was a close connection of the dispute with the territory of the Russian Federation, and therefore the state commercial court had competence to consider this case.

          The appeal court dismissed the ruling of the court of first instance and the case was returned for re-consideration to the court of first instance based on the following grounds.

          The appeal court ruled that the enforceable prorogation agreement shall provide possibility to determine the actual intent (true intent) of the parties regarding competence of the state court to resolve disputes.

          The appeal court determined that the prorogation agreement agreed by the parties was unenforceable, since such agreement failed to determine the intent of the parties to resolve disputes in a specific court or a system of competent state courts where the specific state court shall be determined based on the rules of internal competence of courts.

          The appeal court further ruled that if prorogation agreement is unenforceable the competent court of the Russian Federation shall use general rules of competence of state commercial courts of the Russian Federation set forth in the Commercial procedural code of the Russian Federation.

          In this specific case the subject of the disputed transaction was a sale of share in the charter capital of the company registered at the territory of the Russian Federation. The appeal court in this case established close connection of the dispute with the territory of the Russian Federation and ruled that the state commercial court was competent to consider such dispute.

          Therefore, if the parties of the contract fail to correctly stipulate the specific state commercial court to consider their disputes in Russia, such prorogation agreement (choice of forum clause) might be considered by the state commercial court in Russia unenforceable and the claim might be returned to the claimant due to the lack of competence of the state commercial court to resolve such dispute.

          Conclusions

          If you wish to resolve disputes in the state commercial court in Russia, make sure that the full name of the state commercial court is specified correctly. 

          If you wish to resolve disputes by arbitration in Russia it would be reasonable to use a recommended arbitration clause of respective arbitration institution.

          And, of course, be sure to check translation of the English version of the contract into Russian.

          With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

          Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

          With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

          In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

          In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

          Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

          Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

          The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

          The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

          The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

          The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

          According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

          The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

          The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

          To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

          1. Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
          2. The predictability of it; and
          3. Establish quantitative limits.

          It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

          As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

          Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of  European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

                           

          How to prevent this new risk

          There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

          Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

          Finally, this type of liability and risk may also be covered by a product liability insurance.

          How to make sure that your claim can be enforced in the long run? A creditor may freeze assets that a debtor holds in Switzerland if certain conditions are fulfilled. In practice, there are two situations in which one might consider an attachment of assets: the first is where a creditor has a claim against a debtor without domicile in Switzerland; the second is where a creditor holds an enforceable judgment or award.

          It is beyond doubt that the Swiss financial sector continues to play a dominant role in the financial world of today despite the regulatory pressure that it faces. The Swiss jurisdiction, therefore, is relevant for creditors who wish to enforce claims against a debtor who holds bank accounts or other assets in Switzerland. Even though practice shows that it is predominantly bank accounts that are being attached, other assets such as real estate, art works or claims against third parties are equally capable of being attached.

          Upon application, the Swiss court at the seat of the bank or at the place where the assets are located will grant an ex parte freezing order to a creditor against a debtor with assets in Switzerland, if the applying creditor demonstrates on a prima facie basis that the following three prerequisites of the Swiss Debt Enforcement and Bankruptcy Act („DEBA“) are met:

          • The creditor seeking a freezing order has a mature and unsecured claim;
          • The debtor’s assets are located in Switzerland;
          • A legal ground for a freezing order exists.

          As already pointed out, the most relevant grounds for a freezing order are:

          • The debtor is not resident in Switzerland and the claim itself has sufficient connection with Switzerland or is based on an acknowledgement of debt signed by the debtor („attachment against a non-Swiss resident“);
          • The creditor has an enforceable court decision or arbitral award against the debtor („enforceable title“).

          Attachment against a non-Swiss resident: The mere fact that the assets are located in Switzerland will not suffice to establish a „sufficient connection with Switzerland“ in the sense of the DEBA. The requirement of „sufficient connection with Switzerland“ very much depends on the specific facts of the case which the Swiss court will review on a case-by-case basis. Swiss courts have confirmed that there was a sufficient connection in cases where the underlying contract was signed or fulfilled in Switzerland, where the underlying contract is governed by Swiss law, where the creditor lives in Switzerland or where the creditor’s claim is linked to a commercial activity in Switzerland.

          Enforceable title: In order to rely on the second ground for a freezing order the creditor needs to have an enforceable title. The DEBA makes no distinction between domestic and foreign court decisions or arbitral awards. Provided that they are enforceable (either according to the Lugano Convention, the Swiss Private International Law Act or – in the case of a non-Swiss arbitral award – the New York Convention), all judgments and awards may serve as a ground for an attachment of Swiss assets.

          The Swiss court will request the creditor to provide prima facie evidence on the prerequisites of an attachment as outlined above. Because the attachment itself will be granted ex parte, it will, in many instances, take the debtor by surprise. Thanks to this surprise effect and the nature of the attachment, i.e. the fact that it will prevent the debtor from further disposing of the attached assets, the attachment has a great potential for helping the creditor to secure and ultimately satisfy its claim.

          [Initial note: This article is not aimed as a political article pro or con boycott movements or the Israeli government, but rather as a legal informative overview, in light of the actual and financial impact or exposure international business may have in the referred to matter.]

          It is perhaps not known to many international trading players, but under Israeli law, Bill for prevention of damage to the State of Israel through boycott – 2011, affirmed by the Supreme Court in 2015 (after a slight interpretive adjustment), boycotting Israeli origin products, or deliberate avoidance of economic or academic ties, may give rise to a lawsuit for actual damages under civil law.

          In light of the international BDS movement, attempting to place pressure upon the State of Israel by means of economic and cultural pressure, Israel has realized such activity, indeed, causes actual harm and damage to Israeli based business, manufacturers, importers/exporters, etc., as well as to academic students and professors, and so on, in cultural ties of many sorts – just because the origin is Israel.

          This boycott movement affects the people and businesses of Israel, as opposed to  Israeli leaders or politicians or  the State of Israel as a state, and conveys questionable (to say the least) economic and cultural negative effects upon the people facing unprecedented obstacles in trade in the international arena – for no wrongdoing on their part.

          Regardless of the political opinion one may have concerning the legitimacy, or rather the non-legitimacy, of the BDS movement or concerning the current political policy of the State of Israel – the relatively new law provides actual legal tools to deal with negative economic outcomes (damages, loss of profits, etc.) that businesses or private people encounter or suffer from boycott measures, solely because of their affiliation or relation to the State of Israel.

          Regardless of any opinion of the act itself or its enactment, at the end of the day the act exists and may be used and exploited by filing civil lawsuits against anyone who called for or participated in a boycott. In that sense it creates a new civil wrong as part of the Israeli tort laws.

          Moreover, even a deliberate avoidance of economic, cultural or academic ties can raise liability for the avoider towards the business or ties avoided, as well as liability for anyone who has called for the boycott or publicly expressed support of it.

          The law goes even further – and also excludes the defense argument of „sufficient justification“ and thus provides that anyone who has caused or led to a breach of a contract, by calling for a boycott, may be liable for damages, as well.

          As for the damages that can be claimed, after the adjustment to the law according to the Supreme Court ruling of 2015 (ruling that compensation must be awarded in correspondence with the actual damages or loss of profit caused, and cancelled the clause for penal compensation) – the entity that may sue for torts is the entity that suffered the damage and what can be sued for is the actual damage according to the regular Israeli torts law.

          The law also prohibits a person who calls for a boycott from participating in any public tender, but this is a different focus from the side of the state.

          It is worth mentioning  that the rationale for this legislation was also reviewed by the widely respected Israeli Supreme Court, that has strongly elaborated that such legislation is constitutional and, inter alia, that international entities and individuals such as the BDS movement (as opposed perhaps to states) should not be able to harm or interfere with international or domestic economic affairs without at least being accountable for the outcome of such, and that freedom of speech cannot be unlimitedly protected when it in fact calls for action (or for refraining from action)  that has an actual impact on another and is not simply an expression of an opinion.

          To date, it seems that the Magistrates and District Courts of Israel have yet to render judgments in actual cases based on the boycott act, indicating that the implementation of the act is still inchoate. However, it seems that instances and measures of boycotting are on the rise and the methods of boycotting are becoming increasingly overt, in a manner that is bound to lead to considerable litigation in the near future.

          Needless to say, issues of jurisdiction, and other aspects of private international law, or imposing jurisdiction on foreign players, are also yet to be resolved in reference to the emergence of lawsuits under the boycott law, but these will surely find their creative legal solutions with the actual submission of lawsuits concerning real life cases.

          One of the commonly discussed advantages of international commercial arbitration over litigation in the cross-border context is the enforcement issue. For the purpose of swifter enforcement of foreign arbitral awards, the vast majority of countries signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

          On contrary, there is no relevant international treaty of such scale for the enforcement of foreign court judgements. Normally, the special legal basis, such as agreement on judicial cooperation between two or more countries, needs to be relied upon in order to get a court judgment recognized and enforced in another country. There are quite many countries that do not have such an agreement with China. This includes, among others, US, Germany or the Netherlands.

          Interestingly, however, recently the Chinese court in Wuhan enforced the US court judgement rendered by the Los Angeles Superior Court of California in the Liu Li v Tao Li and Tong Wu case.  It did so despite the fact that there is no agreement between China and US providing for mutual recognition and enforcement of such judgements. The court in Wuhan found, however, that the reciprocity in recognizing and enforcing the court judgments between China and US was established because of an earlier decision of the US District Court of the Central District of California recognizing and enforcing the Chinese judgement rendered by the Higher People’s Court of Hubei in the Hubei Gezhouba Sanlian Industrial Co., Ltd et. al. v Robinson Helicopter Co., Inc. case.

          Interestingly, similar course of action was taken earlier in 2016 when the Chinese Nanjing Intermediate People’s Court enforced the Singaporean judgement relying on the reciprocity principle in the Kolma v SUTEX Group case.

          How much does it tell us?

          Should we now feel safe when opting for own courts in the dispute resolution clauses in the China-related deals? – despite the fact there are no relevant agreements between China and our country? The recent moves of the Chinese courts are, indeed, interesting developments changing the dispute resolution landscape in a desirable direction and increasing the chances for enforcing the foreign commercial court judgements. Yet, as of today, one should not see them as the universal door-openers for the foreign court judgements in similar situations. Accordingly, rather careful approach is recommended and the other dispute resolution methods securing the safer way of enforcement, like arbitration, should be kept in mind. The further changes remain to be seen.

          The author of this post is Monika Prusinowska.

          Karin Graf

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            China – Dispute Resolution Methods

            24. Mai 2017

            • China
            • Schiedsgerichtsbarkeit
            • Rechtsstreitigkeiten

            The Russian law allows the parties to agree on recovery of contractual penalty for failure by the parties to fulfill contractual obligations.

            Below are some typical examples of provisions that stipulate contractual penalty:

            In the event of untimely delivery of the Goods under the Contract the Buyer shall be entitled to claim penalties in amount of 0,1 (zero point one) percent from the total value of untimely delivered Goods for each day of delay.

            In the event of untimely payment for the Goods under the Contract the Seller shall be entitled to claim penalties in amount of 0,1 percent from the total value of untimely paid Goods for each day of delay.

            The Civil Code of Russia (art. 333) allows the court to decrease the amount of penalty if such amount of penalty is disproportionate to the consequences of breach of contractual obligations, with that the court shall be entitled to decrease penalty only if the debtor files a motion with the request to decrease such excessive amount of penalty.

            The decrease of penalty determined by the contract and subject to payment by the person who conducts business activities is allowed only in exceptional cases, if it is proved that the recovery of penalty in the amount stipulated by the contract can lead to receipt of the unjustified profit by the creditor.

            In practice the parties file motions with the court of first instance with the request to decrease penalty with reference to art. 333 of the Civil Code and the court usually decreases the amount of penalty at its discretion.

            In a recent case considered by the Supreme Court of Russia dated 29.05.2018 (case #A43-26319/2016) the Supreme Court ruled that the imposition of penalty even in the amount exceeding the total value of the contract was justified provided that the debtor failed to file a motion with the court of first instance with the request to decrease such penalty with reference to art. 333 of the Civil Code.

            In this case the customer ordered the contractor to produce a pressure vessel. The price of such works of the contractor amounted to 2.700.000 rubles. The parties agreed that the pressure vessel will be produced by the contractor till 30.01.2015. The contractor produced the pressure vessel only on 01.03.2016.

            The contract stipulated that in case of violation of terms of performance of works the contractor will pay to the customer a fixed fine in the amount of 5% from the price of works that the contractor failed to perform in time for each violation as well as penalty in the amount of 0,3% from the price of works that the contractor failed to perform in time for each day of delay starting with the 4th day of delay.

            As a result, the customer demanded that the contractor pays penalty in the amount of 3.355.170 rubles.

            The court of first instance ruled in favor of the contractor and ordered that the client shall pay the amount of penalty in full since the contractor failed to provide evidence that confirmed due fulfillment of the contract by the contractor, or that the contractor failed to perform its obligations in time due to circumstances that were out of his control. With that the contractor also failed to dispute the amount of penalty and failed to file a motion on application of art. 333 of the Civil Code.

            The appeal court changed the ruling of the court of first instance and decreased the amount of penalty to 326.781 rubles based on its conclusions that the customer abused its rights by including in the contract the unfair penalty provisions.

            The Cassation Court agreed with conclusions of the Court of Appeal, but the Supreme Court dismissed the rulings of both the Cassation Court and Court of Appeal and the decision of the court of first instance remained in force.

            The Supreme Court based its decision on the fact that the contractor failed to file a motion with the request to decrease the amount of penalty and apply art. 333 of the Civil Code in the court of first instance. Therefore, the Court of Appeal had no right to decrease the amount of penalty at its own initiative.

            The latest conclusions of the Supreme Court confirm that the contractual penalty can exceed the total value of the contract and the courts are not allowed to decrease such excessive amount of penalty at its own initiative.

            Thus, if you have any dispute in Russia, please ensure that your company is duly represented in state commercial courts, since the failure of the parties to appear in court of first instance and file respective motions might lead to serious negative consequences that the failing party might not be able to cure in the courts of appeal.

            Not what you would expect 

            When can you terminate, how should you terminate, and how much are you exposed?!

            The outcomes of termination of a business relationship with an Israeli counterpart in Israel arise again and again as a question in many disputes between International corporations and Israeli counterparts, such as distributors or franchisees.

            This is mainly because Israeli law does not include specific laws regulating or regarding distribution or franchising or other kinds of business ventures (except a relatively new agency law – referring in a limited manner to specific kinds of agency only) – and thus disputes in said regards are determined based on the general principles of contract law, the contractual and factual bases – obviously resulting in considerable uncertainty as to specific matters.

            However, substantial case law, such as in the matter of Johnson & Johnson International that ended up paying compensation in the equivalent to over 1.5 Million US$, indicates the basics and threshold of what can be expected in such disputes, and, if implemented wisely, may assist in planning the disengagement or termination of a business relationship, in a manner that would be the least costly for the terminating party and minimize its exposure to a lawsuit.

            In many cases, domestic parties invest many years and/or fortunes, in order to penetrate the domestic market with the foreign service or products, and to promote sales in the subject region, for the benefit of both the international corporation and the domestic party.

            Nevertheless, often the international corporation decides for various reasons (such as establishing an „in-house“ operation“ in the target location or substituting the distributor/franchisee) to terminate the oral or written contractual relationship.

            What are the legal foundations involved in such termination as per due notice of termination and corresponding compensation – if at all?

            Generally, this issue arises in cases in which the contract does not specify a period of the business relationship, and, as a principle of law, contracts may be terminated by reasonable notice and subject to the fundamental good faith principle.

            Contracts are not perceived as binding upon the parties indefinitely. The question is always what is the reasonable time for termination notice, and is the termination done in good faith (which is always a tricky and vague issue). Compensation is commonly awarded in accordance with what the courts find as the due notice period that may also entail compensation for damages related to said breach.

            As always, there are exceptions, such as breach of trust toward the manufacturer/franchisor, that may have great impact on any due notice obligations, as far as justification for immediate termination that can be deemed immune to breach of due notice or good faith obligations.

            The truth is the reasonability of the due notice varies from case to case!

            However, Israeli case law is extremely sensitive to the actual reasoning of termination and how genuine it is, as opposed to asserting a tactical breach argument in an attempt to „justify“ avoiding a due notice period or adequate compensation.

            In this respect, in many cases simple „non-satisfaction“ was denied as a legitimate argument for breach of contract, while safeguarding the freedom of contracts and the right to terminate an ongoing contract with due notice and good faith.

            There are various common parameters referred to in the case law, to determine the adequate time of due notice, including, for instance, the magnitude of investment; the time required for rearrangement of business towards the new situation (including time required to find an alternative supplier product which can be marketed); the magnitude of the product/service out of the entire distributor’s business, etc.

            Time and again, although not as binding rule, the due notice period seems to be in the range of around 12 months, as a balance between the right of termination and the reasonable time for rearranging the business in light of the termination. There were, however, cases in which due notice for termination was deemed as short as three months and as long as two years – but these are rather exceptional.

            Another guiding point in the case law is the factor of exclusivity or non-exclusivity, as well as the concept that the longer the business relationship, the less the distributor/franchisee may expect compensation/reimbursement for investment – based on the concept that he has enjoyed the fruits of the investment.

            The outcome of not providing such adequate due notice might result in actual compensation reflecting the loss of profit of the business in the last year before the termination, or for the whole term the court finds a due notice was in place, or, in cases of bad faith, even a longer period reflecting the damages.

            In conclusion, given the legal regime in Israel, such exposure might be extremely considerable for any international or foreign business. It would, therefore, be vital and as a consequence of real value to plan the strategy of disengagement/termination of the business with the domestic counterpart in Israel, in advance and prior to executing it, and there are, indeed, adequate and wise strategies that may be implemented for the best result.

            It is often the case – in practice – that an ongoing commercial relationship builds slowly over time through a series of sales agreements, without the parties ever signing an actual distribution agreement to set down their respective rights and responsibilities.

            At first blush this might appear to be a good thing: one can sidestep being bound, especially long-term, to the other party. But on closer scrutiny the solution becomes problematic, especially for anyone operating internationally.

            One of the key issues that arises when an international contractual arrangement is not in writing, is identifying the court with jurisdiction over any dispute arising therefrom. In the European Union, the issue is resolved by the provisions of Regulation 1215/2012 (“Brussels I recast”). Pursuant to Article 7 of the Regulation, as an alternative to the defendant’s courts, jurisdiction in a contractual dispute may lie with the court in the place of performance of the obligation in question. Next to this general rule are two criteria to identify the “place of performance”, differentiated according to the type of contract at issue. For a contract for goods, it is the place of delivery for the goods; in a contract for services, it is the place where the services are provided.   

            Thus, to identify the court with jurisdiction, it is crucial that a contract fall under one of these categories: goods or services.

            No doubt this distinction is quite simple in many circumstances. In the case of a distribution agreement, or of a commercial concession agreement, the issue may become thorny.

            The European Court of Justice has analysed this issue on a number of occasions, most recently in their judgement of 8 March 2018 (Case no. C-64/17) following the request for a preliminary ruling from a Portuguese Court of Appeal. The parties to the action were a Portuguese distributor, a company called Lusavouga, and a Belgian company called Saey Home & Garden, that produced articles for the home and garden, including a line of products branded “Barbecook”.

            Following Saey’s decision to break off the commercial relationship – notice of which was sent in an email dated 17 July 2014 – Lusavouga brought action in Portugal seeking compensation for the unexpected termination of the agreement, and goodwill indemnity. Saey raised a plea of lack of jurisdiction of the Portuguese court, citing their general conditions of sale (mentioned in their invoices) which required that a Court in Belgium be competent for dispute resolution.

            The facts thus presented two issues to be resolved in light of the Brussels I recast Regulation: deciding whether a jurisdiction clause in a vendor’s general terms and conditions pursuant to Art. 25 of the Regulation shall apply, and, if not, choosing the court with jurisdiction under Art. 7 of the Regulation.

            Shall a jurisdiction clause contained within a vendor’s general terms and conditions apply to a distribution relationship?

            The supplier company apparently considered their course of dealing with the Portuguese retailer nothing more than a concatenation of individual sales of goods, governed by their general terms and conditions. Consequently, they argued that any dispute arising from the relationship should be subject to the jurisdiction clause identifying Belgium as the court with jurisdiction under those terms and conditions.

            Thus, a determination was needed on whether, under these facts, there was a valid prorogation of jurisdiction under Article 25, paragraph 1 of Regulation 1215/2012.

            The Court of Justice has long opined that if the jurisdiction clause is included in the general contract conditions drafted by one of the parties, the contract signed by the other party must contain an express reference to those general conditions in order to ensure the real consent thereto by the parties (judgement of 14 December 1976, Estasis Salotti di Colzani, case no. 24/76; judgement of 16 March 1999, Castelletti, case no. C-159/97; judgement of 7 July 2016, Höszig, case no. C-225/15). Moreover, to be valid, the clause must involve a particular legal relationship (judgement of 20 April 2016, Profit Investment SIM, case no. C-366/13).

            In the instant case, the referring court found it self-evident that the legal relationship at bar was a commercial concession agreement entered into for the purpose of distributing Saey products in Spain, a contract that was not evidenced in writing.

            From this perspective, it is clear that the general conditions contained in the Saey invoices could have no bearing on the commercial concession agreement: assuming Lusavouga’s consent had been proven, the selection of Belgium as the forum would have applied if anything to the individual sales agreements, but not to those duties arising from the separate distribution agreement.

            What, then, would be the court with jurisdiction for the duties arising from the commercial concession agreement?

            Absent any jurisdiction clause, the issue would be decided under Art. 7, point 1 of Regulation 1215/2012, under which it becomes imperative to establish whether a contract is for goods or for services.

            The “provision of services” has been defined by the Court of Justice as an activity, not mere omissions, undertaken in return for remuneration (judgement of 23 April 2009, Falco, case no. C-533/07).

            With the judgements in Corman Collins of 19 December 2013 (case no. C-9/12), and Granarolo of 14 July 2016 (case no. C-196/15), the Court held that in a typical distribution agreement, the dealer renders a service, in that they are involved in increasing the distribution of supplier’s product, and receives in consideration therefor a competitive advantage, access to advertising platforms, know-how, or payment facilities. In light of such elements, the contract relationship should be deemed one for services. If on the other hand the commercial relationship is limited to a concatenation of agreements, each for the purpose of a delivery and pickup of merchandise, then what we have is not a typical distribution agreement, and the contractual relationship shall be construed as one for the sale of goods.

            Once the contract has been categorised as one for services, one must then determine “the place where, under the contract, the services are provided”. The Court specifies that such location shall be understood as the member state of the place of the main provision of services, as it follows from the provisions of the contract  or – as in the case at issue – the actual performance of the same. Only where it is impossible to identify such location shall the domicile of the party rendering the service be used.

            From the referring court’s description of the contractual relationship, and from the Court of Justice’s understanding of the distributor’s performance of services, it would be logical to find that the principal location for performance of services was Spain, where Lusavouga “was involved in increasing the distribution of products” of Saey.

            It is clear that neither the manufacturer nor the distributor would ever have intended such a result, and they might have avoided it being chosen for them by reducing their agreement in writing, including a jurisdiction clause therein.

            By the same token, viewed from the outside, the Portuguese judges’ apparent conviction that the situation was one of an actual dealership contract would leave ample room for debate. After all, a number of elements would lead to the opposite conclusion. However, even in terms of that aspect, the absence of a written contract left room for interpretation that might lead to unforeseen – and perhaps rather risky – consequences.

            In conclusion, the wisdom of setting down the terms and conditions of a sales distribution agreement in writing appears clear. This is not only because one can avoid those ambiguities we have described above, but also because it specifies other important clauses stipulated by the parties that should not be left to chance: exclusivity of area, if any, or with respect to specific sales channels, the contract period and termination notice, any duties to promote the product, control over end-user personal data, and the possibility of, and methods for, any online sales of products.

            State commercial court in Russia is named in the Russian language – Арбитражный суд. This name of the state commercial court is often translated into English as Arbitration court. Such translation in its turn often causes actual misunderstanding between the parties, since the Russian party will most probably consider the term “Arbitration court” as a state commercial court and the other (non-Russian) party might consider that it agreed to resolve disputes by arbitration rather than in a state court.

            Below are some examples of dispute resolution clauses specified by the parties in commercial contracts that caused actual misunderstanding:

            “…if there is no agreement, any disputes and claims between the parties relating to the contract will be resolved by arbitration under the Rules of International Chamber of Commerce in Moscow by one or more arbitrators appointed in accordance with the said rules. The Arbitration court shall use the Russian law.”

            “…if a dispute is not resolved within 30 days of written notification of the dispute by one party to the other, anyone of the parties may submit the dispute arising out of or in connection with this agreement shall be finally settled under the Rules of Arbitration of the Moscow City Arbitration Court”.

            The wording of such clauses and its translation, specifically translation of the term “Arbitration court” might result in resolution of claims by the state commercial courts in Russia, rather than by arbitration. In such situations failure of the non-Russian party to defend itself in the Russian state commercial courts might lead to serious negative consequences.

            One of the well-known arbitration institutions in Russia – the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation recommends the following arbitration clause:

            “Any dispute, controversy or claim which may arise out of or in connection with the present contract (agreement) [in case a separate arbitration agreement is concluded a particular contract (agreement) is to be indicated], or the entering into force, conclusion, alteration, execution, breach, termination or validity thereof, shall be settled by arbitration at the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation in accordance with its applicable regulations and rules. An arbitral award shall be final for the parties. It shall not be allowed to submit a motion to a state court to make a decision on the lack of jurisdiction of an arbitral tribunal in connection with the issuance by the arbitral tribunal of a separate order on existence of jurisdiction as a matter of preliminary nature”. (http://mkas.tpprf.ru/en/documents/)

            As you can see the full name of the arbitration institution is “International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation” and using its short name “Arbitration court” might result in resolution of disputes by the state commercial court.

            Another situation is when the parties actually wish to resolve commercial disputes in a state commercial court in Russia but fail to specify the name of the state commercial court correctly. Believe it or not, but there are many lawyers who consider Russian state courts as an effective and less expensive judicial body to resolve commercial disputes as opposed to arbitration.

            There was one interesting case mentioned by the Supreme Court of Russia in this regard in its recent overview of court practice on resolving of disputes connected with protection of foreign investors in Russia.

            A foreign company filed a claim with the state commercial court in Russia against another foreign company. The court determined that the parties of the dispute concluded prorogation agreement (choice of forum clause) in accordance with which all disputes arising from the specified contract and in connection with it shall be resolved in the courts of general competence of Russia.

            The state commercial court of first instance considered that it lacked jurisdiction to resolve this case, because the parties did not agree to resolve their disputes in the state commercial courts, with that the courts of general competence do not resolve commercial disputes between companies in Russia. As a result, the court of first instance returned the claim to the claimant due to the lack of competence of the state commercial court to resolve this dispute.

            In the appeal claim the claimant argued that the prorogation agreement was unenforceable, since the court specified by the parties (the courts of general competence) do not consider commercial disputes of legal entities in Russia. The foreign company also argued that there was a close connection of the dispute with the territory of the Russian Federation, and therefore the state commercial court had competence to consider this case.

            The appeal court dismissed the ruling of the court of first instance and the case was returned for re-consideration to the court of first instance based on the following grounds.

            The appeal court ruled that the enforceable prorogation agreement shall provide possibility to determine the actual intent (true intent) of the parties regarding competence of the state court to resolve disputes.

            The appeal court determined that the prorogation agreement agreed by the parties was unenforceable, since such agreement failed to determine the intent of the parties to resolve disputes in a specific court or a system of competent state courts where the specific state court shall be determined based on the rules of internal competence of courts.

            The appeal court further ruled that if prorogation agreement is unenforceable the competent court of the Russian Federation shall use general rules of competence of state commercial courts of the Russian Federation set forth in the Commercial procedural code of the Russian Federation.

            In this specific case the subject of the disputed transaction was a sale of share in the charter capital of the company registered at the territory of the Russian Federation. The appeal court in this case established close connection of the dispute with the territory of the Russian Federation and ruled that the state commercial court was competent to consider such dispute.

            Therefore, if the parties of the contract fail to correctly stipulate the specific state commercial court to consider their disputes in Russia, such prorogation agreement (choice of forum clause) might be considered by the state commercial court in Russia unenforceable and the claim might be returned to the claimant due to the lack of competence of the state commercial court to resolve such dispute.

            Conclusions

            If you wish to resolve disputes in the state commercial court in Russia, make sure that the full name of the state commercial court is specified correctly. 

            If you wish to resolve disputes by arbitration in Russia it would be reasonable to use a recommended arbitration clause of respective arbitration institution.

            And, of course, be sure to check translation of the English version of the contract into Russian.

            With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

            Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

            With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

            In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

            In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

            Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

            Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

            The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

            The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

            The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

            The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

            According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

            The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

            The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

            To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

            1. Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
            2. The predictability of it; and
            3. Establish quantitative limits.

            It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

            As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

            Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of  European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

                             

            How to prevent this new risk

            There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

            Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

            Finally, this type of liability and risk may also be covered by a product liability insurance.

            How to make sure that your claim can be enforced in the long run? A creditor may freeze assets that a debtor holds in Switzerland if certain conditions are fulfilled. In practice, there are two situations in which one might consider an attachment of assets: the first is where a creditor has a claim against a debtor without domicile in Switzerland; the second is where a creditor holds an enforceable judgment or award.

            It is beyond doubt that the Swiss financial sector continues to play a dominant role in the financial world of today despite the regulatory pressure that it faces. The Swiss jurisdiction, therefore, is relevant for creditors who wish to enforce claims against a debtor who holds bank accounts or other assets in Switzerland. Even though practice shows that it is predominantly bank accounts that are being attached, other assets such as real estate, art works or claims against third parties are equally capable of being attached.

            Upon application, the Swiss court at the seat of the bank or at the place where the assets are located will grant an ex parte freezing order to a creditor against a debtor with assets in Switzerland, if the applying creditor demonstrates on a prima facie basis that the following three prerequisites of the Swiss Debt Enforcement and Bankruptcy Act („DEBA“) are met:

            • The creditor seeking a freezing order has a mature and unsecured claim;
            • The debtor’s assets are located in Switzerland;
            • A legal ground for a freezing order exists.

            As already pointed out, the most relevant grounds for a freezing order are:

            • The debtor is not resident in Switzerland and the claim itself has sufficient connection with Switzerland or is based on an acknowledgement of debt signed by the debtor („attachment against a non-Swiss resident“);
            • The creditor has an enforceable court decision or arbitral award against the debtor („enforceable title“).

            Attachment against a non-Swiss resident: The mere fact that the assets are located in Switzerland will not suffice to establish a „sufficient connection with Switzerland“ in the sense of the DEBA. The requirement of „sufficient connection with Switzerland“ very much depends on the specific facts of the case which the Swiss court will review on a case-by-case basis. Swiss courts have confirmed that there was a sufficient connection in cases where the underlying contract was signed or fulfilled in Switzerland, where the underlying contract is governed by Swiss law, where the creditor lives in Switzerland or where the creditor’s claim is linked to a commercial activity in Switzerland.

            Enforceable title: In order to rely on the second ground for a freezing order the creditor needs to have an enforceable title. The DEBA makes no distinction between domestic and foreign court decisions or arbitral awards. Provided that they are enforceable (either according to the Lugano Convention, the Swiss Private International Law Act or – in the case of a non-Swiss arbitral award – the New York Convention), all judgments and awards may serve as a ground for an attachment of Swiss assets.

            The Swiss court will request the creditor to provide prima facie evidence on the prerequisites of an attachment as outlined above. Because the attachment itself will be granted ex parte, it will, in many instances, take the debtor by surprise. Thanks to this surprise effect and the nature of the attachment, i.e. the fact that it will prevent the debtor from further disposing of the attached assets, the attachment has a great potential for helping the creditor to secure and ultimately satisfy its claim.

            [Initial note: This article is not aimed as a political article pro or con boycott movements or the Israeli government, but rather as a legal informative overview, in light of the actual and financial impact or exposure international business may have in the referred to matter.]

            It is perhaps not known to many international trading players, but under Israeli law, Bill for prevention of damage to the State of Israel through boycott – 2011, affirmed by the Supreme Court in 2015 (after a slight interpretive adjustment), boycotting Israeli origin products, or deliberate avoidance of economic or academic ties, may give rise to a lawsuit for actual damages under civil law.

            In light of the international BDS movement, attempting to place pressure upon the State of Israel by means of economic and cultural pressure, Israel has realized such activity, indeed, causes actual harm and damage to Israeli based business, manufacturers, importers/exporters, etc., as well as to academic students and professors, and so on, in cultural ties of many sorts – just because the origin is Israel.

            This boycott movement affects the people and businesses of Israel, as opposed to  Israeli leaders or politicians or  the State of Israel as a state, and conveys questionable (to say the least) economic and cultural negative effects upon the people facing unprecedented obstacles in trade in the international arena – for no wrongdoing on their part.

            Regardless of the political opinion one may have concerning the legitimacy, or rather the non-legitimacy, of the BDS movement or concerning the current political policy of the State of Israel – the relatively new law provides actual legal tools to deal with negative economic outcomes (damages, loss of profits, etc.) that businesses or private people encounter or suffer from boycott measures, solely because of their affiliation or relation to the State of Israel.

            Regardless of any opinion of the act itself or its enactment, at the end of the day the act exists and may be used and exploited by filing civil lawsuits against anyone who called for or participated in a boycott. In that sense it creates a new civil wrong as part of the Israeli tort laws.

            Moreover, even a deliberate avoidance of economic, cultural or academic ties can raise liability for the avoider towards the business or ties avoided, as well as liability for anyone who has called for the boycott or publicly expressed support of it.

            The law goes even further – and also excludes the defense argument of „sufficient justification“ and thus provides that anyone who has caused or led to a breach of a contract, by calling for a boycott, may be liable for damages, as well.

            As for the damages that can be claimed, after the adjustment to the law according to the Supreme Court ruling of 2015 (ruling that compensation must be awarded in correspondence with the actual damages or loss of profit caused, and cancelled the clause for penal compensation) – the entity that may sue for torts is the entity that suffered the damage and what can be sued for is the actual damage according to the regular Israeli torts law.

            The law also prohibits a person who calls for a boycott from participating in any public tender, but this is a different focus from the side of the state.

            It is worth mentioning  that the rationale for this legislation was also reviewed by the widely respected Israeli Supreme Court, that has strongly elaborated that such legislation is constitutional and, inter alia, that international entities and individuals such as the BDS movement (as opposed perhaps to states) should not be able to harm or interfere with international or domestic economic affairs without at least being accountable for the outcome of such, and that freedom of speech cannot be unlimitedly protected when it in fact calls for action (or for refraining from action)  that has an actual impact on another and is not simply an expression of an opinion.

            To date, it seems that the Magistrates and District Courts of Israel have yet to render judgments in actual cases based on the boycott act, indicating that the implementation of the act is still inchoate. However, it seems that instances and measures of boycotting are on the rise and the methods of boycotting are becoming increasingly overt, in a manner that is bound to lead to considerable litigation in the near future.

            Needless to say, issues of jurisdiction, and other aspects of private international law, or imposing jurisdiction on foreign players, are also yet to be resolved in reference to the emergence of lawsuits under the boycott law, but these will surely find their creative legal solutions with the actual submission of lawsuits concerning real life cases.

            One of the commonly discussed advantages of international commercial arbitration over litigation in the cross-border context is the enforcement issue. For the purpose of swifter enforcement of foreign arbitral awards, the vast majority of countries signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

            On contrary, there is no relevant international treaty of such scale for the enforcement of foreign court judgements. Normally, the special legal basis, such as agreement on judicial cooperation between two or more countries, needs to be relied upon in order to get a court judgment recognized and enforced in another country. There are quite many countries that do not have such an agreement with China. This includes, among others, US, Germany or the Netherlands.

            Interestingly, however, recently the Chinese court in Wuhan enforced the US court judgement rendered by the Los Angeles Superior Court of California in the Liu Li v Tao Li and Tong Wu case.  It did so despite the fact that there is no agreement between China and US providing for mutual recognition and enforcement of such judgements. The court in Wuhan found, however, that the reciprocity in recognizing and enforcing the court judgments between China and US was established because of an earlier decision of the US District Court of the Central District of California recognizing and enforcing the Chinese judgement rendered by the Higher People’s Court of Hubei in the Hubei Gezhouba Sanlian Industrial Co., Ltd et. al. v Robinson Helicopter Co., Inc. case.

            Interestingly, similar course of action was taken earlier in 2016 when the Chinese Nanjing Intermediate People’s Court enforced the Singaporean judgement relying on the reciprocity principle in the Kolma v SUTEX Group case.

            How much does it tell us?

            Should we now feel safe when opting for own courts in the dispute resolution clauses in the China-related deals? – despite the fact there are no relevant agreements between China and our country? The recent moves of the Chinese courts are, indeed, interesting developments changing the dispute resolution landscape in a desirable direction and increasing the chances for enforcing the foreign commercial court judgements. Yet, as of today, one should not see them as the universal door-openers for the foreign court judgements in similar situations. Accordingly, rather careful approach is recommended and the other dispute resolution methods securing the safer way of enforcement, like arbitration, should be kept in mind. The further changes remain to be seen.

            The author of this post is Monika Prusinowska.

            Enforcement of foreign decisions and arbitral awards in Venezuela

            21. März 2017

            • Venezuela
            • Schiedsgerichtsbarkeit
            • Verträge
            • Rechtsstreitigkeiten

            The Russian law allows the parties to agree on recovery of contractual penalty for failure by the parties to fulfill contractual obligations.

            Below are some typical examples of provisions that stipulate contractual penalty:

            In the event of untimely delivery of the Goods under the Contract the Buyer shall be entitled to claim penalties in amount of 0,1 (zero point one) percent from the total value of untimely delivered Goods for each day of delay.

            In the event of untimely payment for the Goods under the Contract the Seller shall be entitled to claim penalties in amount of 0,1 percent from the total value of untimely paid Goods for each day of delay.

            The Civil Code of Russia (art. 333) allows the court to decrease the amount of penalty if such amount of penalty is disproportionate to the consequences of breach of contractual obligations, with that the court shall be entitled to decrease penalty only if the debtor files a motion with the request to decrease such excessive amount of penalty.

            The decrease of penalty determined by the contract and subject to payment by the person who conducts business activities is allowed only in exceptional cases, if it is proved that the recovery of penalty in the amount stipulated by the contract can lead to receipt of the unjustified profit by the creditor.

            In practice the parties file motions with the court of first instance with the request to decrease penalty with reference to art. 333 of the Civil Code and the court usually decreases the amount of penalty at its discretion.

            In a recent case considered by the Supreme Court of Russia dated 29.05.2018 (case #A43-26319/2016) the Supreme Court ruled that the imposition of penalty even in the amount exceeding the total value of the contract was justified provided that the debtor failed to file a motion with the court of first instance with the request to decrease such penalty with reference to art. 333 of the Civil Code.

            In this case the customer ordered the contractor to produce a pressure vessel. The price of such works of the contractor amounted to 2.700.000 rubles. The parties agreed that the pressure vessel will be produced by the contractor till 30.01.2015. The contractor produced the pressure vessel only on 01.03.2016.

            The contract stipulated that in case of violation of terms of performance of works the contractor will pay to the customer a fixed fine in the amount of 5% from the price of works that the contractor failed to perform in time for each violation as well as penalty in the amount of 0,3% from the price of works that the contractor failed to perform in time for each day of delay starting with the 4th day of delay.

            As a result, the customer demanded that the contractor pays penalty in the amount of 3.355.170 rubles.

            The court of first instance ruled in favor of the contractor and ordered that the client shall pay the amount of penalty in full since the contractor failed to provide evidence that confirmed due fulfillment of the contract by the contractor, or that the contractor failed to perform its obligations in time due to circumstances that were out of his control. With that the contractor also failed to dispute the amount of penalty and failed to file a motion on application of art. 333 of the Civil Code.

            The appeal court changed the ruling of the court of first instance and decreased the amount of penalty to 326.781 rubles based on its conclusions that the customer abused its rights by including in the contract the unfair penalty provisions.

            The Cassation Court agreed with conclusions of the Court of Appeal, but the Supreme Court dismissed the rulings of both the Cassation Court and Court of Appeal and the decision of the court of first instance remained in force.

            The Supreme Court based its decision on the fact that the contractor failed to file a motion with the request to decrease the amount of penalty and apply art. 333 of the Civil Code in the court of first instance. Therefore, the Court of Appeal had no right to decrease the amount of penalty at its own initiative.

            The latest conclusions of the Supreme Court confirm that the contractual penalty can exceed the total value of the contract and the courts are not allowed to decrease such excessive amount of penalty at its own initiative.

            Thus, if you have any dispute in Russia, please ensure that your company is duly represented in state commercial courts, since the failure of the parties to appear in court of first instance and file respective motions might lead to serious negative consequences that the failing party might not be able to cure in the courts of appeal.

            Not what you would expect 

            When can you terminate, how should you terminate, and how much are you exposed?!

            The outcomes of termination of a business relationship with an Israeli counterpart in Israel arise again and again as a question in many disputes between International corporations and Israeli counterparts, such as distributors or franchisees.

            This is mainly because Israeli law does not include specific laws regulating or regarding distribution or franchising or other kinds of business ventures (except a relatively new agency law – referring in a limited manner to specific kinds of agency only) – and thus disputes in said regards are determined based on the general principles of contract law, the contractual and factual bases – obviously resulting in considerable uncertainty as to specific matters.

            However, substantial case law, such as in the matter of Johnson & Johnson International that ended up paying compensation in the equivalent to over 1.5 Million US$, indicates the basics and threshold of what can be expected in such disputes, and, if implemented wisely, may assist in planning the disengagement or termination of a business relationship, in a manner that would be the least costly for the terminating party and minimize its exposure to a lawsuit.

            In many cases, domestic parties invest many years and/or fortunes, in order to penetrate the domestic market with the foreign service or products, and to promote sales in the subject region, for the benefit of both the international corporation and the domestic party.

            Nevertheless, often the international corporation decides for various reasons (such as establishing an „in-house“ operation“ in the target location or substituting the distributor/franchisee) to terminate the oral or written contractual relationship.

            What are the legal foundations involved in such termination as per due notice of termination and corresponding compensation – if at all?

            Generally, this issue arises in cases in which the contract does not specify a period of the business relationship, and, as a principle of law, contracts may be terminated by reasonable notice and subject to the fundamental good faith principle.

            Contracts are not perceived as binding upon the parties indefinitely. The question is always what is the reasonable time for termination notice, and is the termination done in good faith (which is always a tricky and vague issue). Compensation is commonly awarded in accordance with what the courts find as the due notice period that may also entail compensation for damages related to said breach.

            As always, there are exceptions, such as breach of trust toward the manufacturer/franchisor, that may have great impact on any due notice obligations, as far as justification for immediate termination that can be deemed immune to breach of due notice or good faith obligations.

            The truth is the reasonability of the due notice varies from case to case!

            However, Israeli case law is extremely sensitive to the actual reasoning of termination and how genuine it is, as opposed to asserting a tactical breach argument in an attempt to „justify“ avoiding a due notice period or adequate compensation.

            In this respect, in many cases simple „non-satisfaction“ was denied as a legitimate argument for breach of contract, while safeguarding the freedom of contracts and the right to terminate an ongoing contract with due notice and good faith.

            There are various common parameters referred to in the case law, to determine the adequate time of due notice, including, for instance, the magnitude of investment; the time required for rearrangement of business towards the new situation (including time required to find an alternative supplier product which can be marketed); the magnitude of the product/service out of the entire distributor’s business, etc.

            Time and again, although not as binding rule, the due notice period seems to be in the range of around 12 months, as a balance between the right of termination and the reasonable time for rearranging the business in light of the termination. There were, however, cases in which due notice for termination was deemed as short as three months and as long as two years – but these are rather exceptional.

            Another guiding point in the case law is the factor of exclusivity or non-exclusivity, as well as the concept that the longer the business relationship, the less the distributor/franchisee may expect compensation/reimbursement for investment – based on the concept that he has enjoyed the fruits of the investment.

            The outcome of not providing such adequate due notice might result in actual compensation reflecting the loss of profit of the business in the last year before the termination, or for the whole term the court finds a due notice was in place, or, in cases of bad faith, even a longer period reflecting the damages.

            In conclusion, given the legal regime in Israel, such exposure might be extremely considerable for any international or foreign business. It would, therefore, be vital and as a consequence of real value to plan the strategy of disengagement/termination of the business with the domestic counterpart in Israel, in advance and prior to executing it, and there are, indeed, adequate and wise strategies that may be implemented for the best result.

            It is often the case – in practice – that an ongoing commercial relationship builds slowly over time through a series of sales agreements, without the parties ever signing an actual distribution agreement to set down their respective rights and responsibilities.

            At first blush this might appear to be a good thing: one can sidestep being bound, especially long-term, to the other party. But on closer scrutiny the solution becomes problematic, especially for anyone operating internationally.

            One of the key issues that arises when an international contractual arrangement is not in writing, is identifying the court with jurisdiction over any dispute arising therefrom. In the European Union, the issue is resolved by the provisions of Regulation 1215/2012 (“Brussels I recast”). Pursuant to Article 7 of the Regulation, as an alternative to the defendant’s courts, jurisdiction in a contractual dispute may lie with the court in the place of performance of the obligation in question. Next to this general rule are two criteria to identify the “place of performance”, differentiated according to the type of contract at issue. For a contract for goods, it is the place of delivery for the goods; in a contract for services, it is the place where the services are provided.   

            Thus, to identify the court with jurisdiction, it is crucial that a contract fall under one of these categories: goods or services.

            No doubt this distinction is quite simple in many circumstances. In the case of a distribution agreement, or of a commercial concession agreement, the issue may become thorny.

            The European Court of Justice has analysed this issue on a number of occasions, most recently in their judgement of 8 March 2018 (Case no. C-64/17) following the request for a preliminary ruling from a Portuguese Court of Appeal. The parties to the action were a Portuguese distributor, a company called Lusavouga, and a Belgian company called Saey Home & Garden, that produced articles for the home and garden, including a line of products branded “Barbecook”.

            Following Saey’s decision to break off the commercial relationship – notice of which was sent in an email dated 17 July 2014 – Lusavouga brought action in Portugal seeking compensation for the unexpected termination of the agreement, and goodwill indemnity. Saey raised a plea of lack of jurisdiction of the Portuguese court, citing their general conditions of sale (mentioned in their invoices) which required that a Court in Belgium be competent for dispute resolution.

            The facts thus presented two issues to be resolved in light of the Brussels I recast Regulation: deciding whether a jurisdiction clause in a vendor’s general terms and conditions pursuant to Art. 25 of the Regulation shall apply, and, if not, choosing the court with jurisdiction under Art. 7 of the Regulation.

            Shall a jurisdiction clause contained within a vendor’s general terms and conditions apply to a distribution relationship?

            The supplier company apparently considered their course of dealing with the Portuguese retailer nothing more than a concatenation of individual sales of goods, governed by their general terms and conditions. Consequently, they argued that any dispute arising from the relationship should be subject to the jurisdiction clause identifying Belgium as the court with jurisdiction under those terms and conditions.

            Thus, a determination was needed on whether, under these facts, there was a valid prorogation of jurisdiction under Article 25, paragraph 1 of Regulation 1215/2012.

            The Court of Justice has long opined that if the jurisdiction clause is included in the general contract conditions drafted by one of the parties, the contract signed by the other party must contain an express reference to those general conditions in order to ensure the real consent thereto by the parties (judgement of 14 December 1976, Estasis Salotti di Colzani, case no. 24/76; judgement of 16 March 1999, Castelletti, case no. C-159/97; judgement of 7 July 2016, Höszig, case no. C-225/15). Moreover, to be valid, the clause must involve a particular legal relationship (judgement of 20 April 2016, Profit Investment SIM, case no. C-366/13).

            In the instant case, the referring court found it self-evident that the legal relationship at bar was a commercial concession agreement entered into for the purpose of distributing Saey products in Spain, a contract that was not evidenced in writing.

            From this perspective, it is clear that the general conditions contained in the Saey invoices could have no bearing on the commercial concession agreement: assuming Lusavouga’s consent had been proven, the selection of Belgium as the forum would have applied if anything to the individual sales agreements, but not to those duties arising from the separate distribution agreement.

            What, then, would be the court with jurisdiction for the duties arising from the commercial concession agreement?

            Absent any jurisdiction clause, the issue would be decided under Art. 7, point 1 of Regulation 1215/2012, under which it becomes imperative to establish whether a contract is for goods or for services.

            The “provision of services” has been defined by the Court of Justice as an activity, not mere omissions, undertaken in return for remuneration (judgement of 23 April 2009, Falco, case no. C-533/07).

            With the judgements in Corman Collins of 19 December 2013 (case no. C-9/12), and Granarolo of 14 July 2016 (case no. C-196/15), the Court held that in a typical distribution agreement, the dealer renders a service, in that they are involved in increasing the distribution of supplier’s product, and receives in consideration therefor a competitive advantage, access to advertising platforms, know-how, or payment facilities. In light of such elements, the contract relationship should be deemed one for services. If on the other hand the commercial relationship is limited to a concatenation of agreements, each for the purpose of a delivery and pickup of merchandise, then what we have is not a typical distribution agreement, and the contractual relationship shall be construed as one for the sale of goods.

            Once the contract has been categorised as one for services, one must then determine “the place where, under the contract, the services are provided”. The Court specifies that such location shall be understood as the member state of the place of the main provision of services, as it follows from the provisions of the contract  or – as in the case at issue – the actual performance of the same. Only where it is impossible to identify such location shall the domicile of the party rendering the service be used.

            From the referring court’s description of the contractual relationship, and from the Court of Justice’s understanding of the distributor’s performance of services, it would be logical to find that the principal location for performance of services was Spain, where Lusavouga “was involved in increasing the distribution of products” of Saey.

            It is clear that neither the manufacturer nor the distributor would ever have intended such a result, and they might have avoided it being chosen for them by reducing their agreement in writing, including a jurisdiction clause therein.

            By the same token, viewed from the outside, the Portuguese judges’ apparent conviction that the situation was one of an actual dealership contract would leave ample room for debate. After all, a number of elements would lead to the opposite conclusion. However, even in terms of that aspect, the absence of a written contract left room for interpretation that might lead to unforeseen – and perhaps rather risky – consequences.

            In conclusion, the wisdom of setting down the terms and conditions of a sales distribution agreement in writing appears clear. This is not only because one can avoid those ambiguities we have described above, but also because it specifies other important clauses stipulated by the parties that should not be left to chance: exclusivity of area, if any, or with respect to specific sales channels, the contract period and termination notice, any duties to promote the product, control over end-user personal data, and the possibility of, and methods for, any online sales of products.

            State commercial court in Russia is named in the Russian language – Арбитражный суд. This name of the state commercial court is often translated into English as Arbitration court. Such translation in its turn often causes actual misunderstanding between the parties, since the Russian party will most probably consider the term “Arbitration court” as a state commercial court and the other (non-Russian) party might consider that it agreed to resolve disputes by arbitration rather than in a state court.

            Below are some examples of dispute resolution clauses specified by the parties in commercial contracts that caused actual misunderstanding:

            “…if there is no agreement, any disputes and claims between the parties relating to the contract will be resolved by arbitration under the Rules of International Chamber of Commerce in Moscow by one or more arbitrators appointed in accordance with the said rules. The Arbitration court shall use the Russian law.”

            “…if a dispute is not resolved within 30 days of written notification of the dispute by one party to the other, anyone of the parties may submit the dispute arising out of or in connection with this agreement shall be finally settled under the Rules of Arbitration of the Moscow City Arbitration Court”.

            The wording of such clauses and its translation, specifically translation of the term “Arbitration court” might result in resolution of claims by the state commercial courts in Russia, rather than by arbitration. In such situations failure of the non-Russian party to defend itself in the Russian state commercial courts might lead to serious negative consequences.

            One of the well-known arbitration institutions in Russia – the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation recommends the following arbitration clause:

            “Any dispute, controversy or claim which may arise out of or in connection with the present contract (agreement) [in case a separate arbitration agreement is concluded a particular contract (agreement) is to be indicated], or the entering into force, conclusion, alteration, execution, breach, termination or validity thereof, shall be settled by arbitration at the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation in accordance with its applicable regulations and rules. An arbitral award shall be final for the parties. It shall not be allowed to submit a motion to a state court to make a decision on the lack of jurisdiction of an arbitral tribunal in connection with the issuance by the arbitral tribunal of a separate order on existence of jurisdiction as a matter of preliminary nature”. (http://mkas.tpprf.ru/en/documents/)

            As you can see the full name of the arbitration institution is “International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation” and using its short name “Arbitration court” might result in resolution of disputes by the state commercial court.

            Another situation is when the parties actually wish to resolve commercial disputes in a state commercial court in Russia but fail to specify the name of the state commercial court correctly. Believe it or not, but there are many lawyers who consider Russian state courts as an effective and less expensive judicial body to resolve commercial disputes as opposed to arbitration.

            There was one interesting case mentioned by the Supreme Court of Russia in this regard in its recent overview of court practice on resolving of disputes connected with protection of foreign investors in Russia.

            A foreign company filed a claim with the state commercial court in Russia against another foreign company. The court determined that the parties of the dispute concluded prorogation agreement (choice of forum clause) in accordance with which all disputes arising from the specified contract and in connection with it shall be resolved in the courts of general competence of Russia.

            The state commercial court of first instance considered that it lacked jurisdiction to resolve this case, because the parties did not agree to resolve their disputes in the state commercial courts, with that the courts of general competence do not resolve commercial disputes between companies in Russia. As a result, the court of first instance returned the claim to the claimant due to the lack of competence of the state commercial court to resolve this dispute.

            In the appeal claim the claimant argued that the prorogation agreement was unenforceable, since the court specified by the parties (the courts of general competence) do not consider commercial disputes of legal entities in Russia. The foreign company also argued that there was a close connection of the dispute with the territory of the Russian Federation, and therefore the state commercial court had competence to consider this case.

            The appeal court dismissed the ruling of the court of first instance and the case was returned for re-consideration to the court of first instance based on the following grounds.

            The appeal court ruled that the enforceable prorogation agreement shall provide possibility to determine the actual intent (true intent) of the parties regarding competence of the state court to resolve disputes.

            The appeal court determined that the prorogation agreement agreed by the parties was unenforceable, since such agreement failed to determine the intent of the parties to resolve disputes in a specific court or a system of competent state courts where the specific state court shall be determined based on the rules of internal competence of courts.

            The appeal court further ruled that if prorogation agreement is unenforceable the competent court of the Russian Federation shall use general rules of competence of state commercial courts of the Russian Federation set forth in the Commercial procedural code of the Russian Federation.

            In this specific case the subject of the disputed transaction was a sale of share in the charter capital of the company registered at the territory of the Russian Federation. The appeal court in this case established close connection of the dispute with the territory of the Russian Federation and ruled that the state commercial court was competent to consider such dispute.

            Therefore, if the parties of the contract fail to correctly stipulate the specific state commercial court to consider their disputes in Russia, such prorogation agreement (choice of forum clause) might be considered by the state commercial court in Russia unenforceable and the claim might be returned to the claimant due to the lack of competence of the state commercial court to resolve such dispute.

            Conclusions

            If you wish to resolve disputes in the state commercial court in Russia, make sure that the full name of the state commercial court is specified correctly. 

            If you wish to resolve disputes by arbitration in Russia it would be reasonable to use a recommended arbitration clause of respective arbitration institution.

            And, of course, be sure to check translation of the English version of the contract into Russian.

            With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

            Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

            With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

            In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

            In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

            Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

            Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

            The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

            The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

            The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

            The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

            According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

            The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

            The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

            To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

            1. Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
            2. The predictability of it; and
            3. Establish quantitative limits.

            It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

            As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

            Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of  European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

                             

            How to prevent this new risk

            There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

            Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

            Finally, this type of liability and risk may also be covered by a product liability insurance.

            How to make sure that your claim can be enforced in the long run? A creditor may freeze assets that a debtor holds in Switzerland if certain conditions are fulfilled. In practice, there are two situations in which one might consider an attachment of assets: the first is where a creditor has a claim against a debtor without domicile in Switzerland; the second is where a creditor holds an enforceable judgment or award.

            It is beyond doubt that the Swiss financial sector continues to play a dominant role in the financial world of today despite the regulatory pressure that it faces. The Swiss jurisdiction, therefore, is relevant for creditors who wish to enforce claims against a debtor who holds bank accounts or other assets in Switzerland. Even though practice shows that it is predominantly bank accounts that are being attached, other assets such as real estate, art works or claims against third parties are equally capable of being attached.

            Upon application, the Swiss court at the seat of the bank or at the place where the assets are located will grant an ex parte freezing order to a creditor against a debtor with assets in Switzerland, if the applying creditor demonstrates on a prima facie basis that the following three prerequisites of the Swiss Debt Enforcement and Bankruptcy Act („DEBA“) are met:

            • The creditor seeking a freezing order has a mature and unsecured claim;
            • The debtor’s assets are located in Switzerland;
            • A legal ground for a freezing order exists.

            As already pointed out, the most relevant grounds for a freezing order are:

            • The debtor is not resident in Switzerland and the claim itself has sufficient connection with Switzerland or is based on an acknowledgement of debt signed by the debtor („attachment against a non-Swiss resident“);
            • The creditor has an enforceable court decision or arbitral award against the debtor („enforceable title“).

            Attachment against a non-Swiss resident: The mere fact that the assets are located in Switzerland will not suffice to establish a „sufficient connection with Switzerland“ in the sense of the DEBA. The requirement of „sufficient connection with Switzerland“ very much depends on the specific facts of the case which the Swiss court will review on a case-by-case basis. Swiss courts have confirmed that there was a sufficient connection in cases where the underlying contract was signed or fulfilled in Switzerland, where the underlying contract is governed by Swiss law, where the creditor lives in Switzerland or where the creditor’s claim is linked to a commercial activity in Switzerland.

            Enforceable title: In order to rely on the second ground for a freezing order the creditor needs to have an enforceable title. The DEBA makes no distinction between domestic and foreign court decisions or arbitral awards. Provided that they are enforceable (either according to the Lugano Convention, the Swiss Private International Law Act or – in the case of a non-Swiss arbitral award – the New York Convention), all judgments and awards may serve as a ground for an attachment of Swiss assets.

            The Swiss court will request the creditor to provide prima facie evidence on the prerequisites of an attachment as outlined above. Because the attachment itself will be granted ex parte, it will, in many instances, take the debtor by surprise. Thanks to this surprise effect and the nature of the attachment, i.e. the fact that it will prevent the debtor from further disposing of the attached assets, the attachment has a great potential for helping the creditor to secure and ultimately satisfy its claim.

            [Initial note: This article is not aimed as a political article pro or con boycott movements or the Israeli government, but rather as a legal informative overview, in light of the actual and financial impact or exposure international business may have in the referred to matter.]

            It is perhaps not known to many international trading players, but under Israeli law, Bill for prevention of damage to the State of Israel through boycott – 2011, affirmed by the Supreme Court in 2015 (after a slight interpretive adjustment), boycotting Israeli origin products, or deliberate avoidance of economic or academic ties, may give rise to a lawsuit for actual damages under civil law.

            In light of the international BDS movement, attempting to place pressure upon the State of Israel by means of economic and cultural pressure, Israel has realized such activity, indeed, causes actual harm and damage to Israeli based business, manufacturers, importers/exporters, etc., as well as to academic students and professors, and so on, in cultural ties of many sorts – just because the origin is Israel.

            This boycott movement affects the people and businesses of Israel, as opposed to  Israeli leaders or politicians or  the State of Israel as a state, and conveys questionable (to say the least) economic and cultural negative effects upon the people facing unprecedented obstacles in trade in the international arena – for no wrongdoing on their part.

            Regardless of the political opinion one may have concerning the legitimacy, or rather the non-legitimacy, of the BDS movement or concerning the current political policy of the State of Israel – the relatively new law provides actual legal tools to deal with negative economic outcomes (damages, loss of profits, etc.) that businesses or private people encounter or suffer from boycott measures, solely because of their affiliation or relation to the State of Israel.

            Regardless of any opinion of the act itself or its enactment, at the end of the day the act exists and may be used and exploited by filing civil lawsuits against anyone who called for or participated in a boycott. In that sense it creates a new civil wrong as part of the Israeli tort laws.

            Moreover, even a deliberate avoidance of economic, cultural or academic ties can raise liability for the avoider towards the business or ties avoided, as well as liability for anyone who has called for the boycott or publicly expressed support of it.

            The law goes even further – and also excludes the defense argument of „sufficient justification“ and thus provides that anyone who has caused or led to a breach of a contract, by calling for a boycott, may be liable for damages, as well.

            As for the damages that can be claimed, after the adjustment to the law according to the Supreme Court ruling of 2015 (ruling that compensation must be awarded in correspondence with the actual damages or loss of profit caused, and cancelled the clause for penal compensation) – the entity that may sue for torts is the entity that suffered the damage and what can be sued for is the actual damage according to the regular Israeli torts law.

            The law also prohibits a person who calls for a boycott from participating in any public tender, but this is a different focus from the side of the state.

            It is worth mentioning  that the rationale for this legislation was also reviewed by the widely respected Israeli Supreme Court, that has strongly elaborated that such legislation is constitutional and, inter alia, that international entities and individuals such as the BDS movement (as opposed perhaps to states) should not be able to harm or interfere with international or domestic economic affairs without at least being accountable for the outcome of such, and that freedom of speech cannot be unlimitedly protected when it in fact calls for action (or for refraining from action)  that has an actual impact on another and is not simply an expression of an opinion.

            To date, it seems that the Magistrates and District Courts of Israel have yet to render judgments in actual cases based on the boycott act, indicating that the implementation of the act is still inchoate. However, it seems that instances and measures of boycotting are on the rise and the methods of boycotting are becoming increasingly overt, in a manner that is bound to lead to considerable litigation in the near future.

            Needless to say, issues of jurisdiction, and other aspects of private international law, or imposing jurisdiction on foreign players, are also yet to be resolved in reference to the emergence of lawsuits under the boycott law, but these will surely find their creative legal solutions with the actual submission of lawsuits concerning real life cases.

            One of the commonly discussed advantages of international commercial arbitration over litigation in the cross-border context is the enforcement issue. For the purpose of swifter enforcement of foreign arbitral awards, the vast majority of countries signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

            On contrary, there is no relevant international treaty of such scale for the enforcement of foreign court judgements. Normally, the special legal basis, such as agreement on judicial cooperation between two or more countries, needs to be relied upon in order to get a court judgment recognized and enforced in another country. There are quite many countries that do not have such an agreement with China. This includes, among others, US, Germany or the Netherlands.

            Interestingly, however, recently the Chinese court in Wuhan enforced the US court judgement rendered by the Los Angeles Superior Court of California in the Liu Li v Tao Li and Tong Wu case.  It did so despite the fact that there is no agreement between China and US providing for mutual recognition and enforcement of such judgements. The court in Wuhan found, however, that the reciprocity in recognizing and enforcing the court judgments between China and US was established because of an earlier decision of the US District Court of the Central District of California recognizing and enforcing the Chinese judgement rendered by the Higher People’s Court of Hubei in the Hubei Gezhouba Sanlian Industrial Co., Ltd et. al. v Robinson Helicopter Co., Inc. case.

            Interestingly, similar course of action was taken earlier in 2016 when the Chinese Nanjing Intermediate People’s Court enforced the Singaporean judgement relying on the reciprocity principle in the Kolma v SUTEX Group case.

            How much does it tell us?

            Should we now feel safe when opting for own courts in the dispute resolution clauses in the China-related deals? – despite the fact there are no relevant agreements between China and our country? The recent moves of the Chinese courts are, indeed, interesting developments changing the dispute resolution landscape in a desirable direction and increasing the chances for enforcing the foreign commercial court judgements. Yet, as of today, one should not see them as the universal door-openers for the foreign court judgements in similar situations. Accordingly, rather careful approach is recommended and the other dispute resolution methods securing the safer way of enforcement, like arbitration, should be kept in mind. The further changes remain to be seen.

            The author of this post is Monika Prusinowska.