A word spoken is past recalling: Russian Supreme Court explained the regulations on liability for breach of representations

A word spoken is past recalling: Russian Supreme Court explained the regulations on liability for breach of representations

29 March 2023

The Judicial Chamber on Economic Disputes of the Supreme Court of the Russian Federation has considered TrustForex LLC case (No. A40-167835/2021) concerning the essential issue of recovery of penalty for providing false representations while selling assets. We believe this case to be very important both for the court practice and for the business.

Starting from the moment the institution of representations was introduced into the Russian law, Russian courts often assessed the representations from the viewpoint of their accuracy before or at the time the relevant representations were given, and extended their effect only to the parties to the contract. This approach has sometimes made it difficult to protect the interests of buyers of assets in case of breach of representations. Besides, it was not always in line with requirements of business needs, as representations on the lack of potential future claims from the authorities became a common practice in the sale of shares, stakes, and other assets.

On 22 March 2023, the full text of the Supreme Court Ruling in the case of TrustForex LLC (the 'Ruling') was published. It contains a number of important conclusions aimed at unifying court practice in cases of liability for making false representations. Below we provide a brief overview of this case and the key findings of the Supreme Court of the Russian Federation.

1. TrustForex Case. Background

In August 2018, a certain person entered into an agreement for the sale of shares in the charter capital of TrustForex LLC (the 'Agreement' and the 'Company'), which contained representations that no claims would be made against the Company on any grounds arising before the conclusion of the Agreement, and the Company itself by the time the Agreement would be certified would have a valid forex dealer license , under which the Company would operate its key business.

However, a few months later the forex dealer license of TrustForex LLC was revoked by the Russian Central Bank due to violations committed during 2018, after which the buyer filed a claim with the court to recover a penalty in the amount of the price paid for the shares.

The lower courts dismissed the buyer’s claim on the following grounds:

  • Representations may only be provided with respect to specific facts that have taken place and for which a party to the SPA is responsible. At the time of the transaction the license was not revoked, and no claims were filed against the Company by the Central Bank of Russia.

  • The sellers of shares are not liable for the consequences of the results of the company's business activities.

  • The sellers of shares are not liable for claims by the Central Bank of Russia as these claims arise from actions of persons not being parties to the SPA.

2. Key points of the TrustForex Case

The Supreme Court of the Russian Federation overturned the decisions of the lower courts and remitted the case for reconsideration, giving some fundamental interpretations regarding representations in the sale of a business. Please find below the key points of the Supreme Court's ruling.

  • {{(A)}} The circumstances having possible future consequences relating to monetary loss for the party relying on it may be the subject of representations.

  • {{(B)}} The seller of a company share that has given a representation as to the absence of company’s violations is generally liable to the buyer for all losses and other negative consequences of claims of third parties, including the authorities, filed due to such violations revealed.

  • {{(C)}} Cancellation of a forex dealer license due to violations committed before entering into the SPA is a ground for claiming penalties (if an obligation to pay such penalties was expressly provided for in the agreement, as provided in Article 431.2 of the Civil Code as a consequence of false representations).

This Ruling is an important precedent, as the Supreme Court of the Russian Federation supported the buyer in the absence of uniform court practice on this issue. We believe that further court practice will be based on these findings, making disputes over representations more predictable and the inclusion of such representations in contracts more secure.

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Note: Please be aware that all information provided in this letter was taken from open sources. Neither ALRUD Law Firm, nor the author of this letter bear any liability for consequences of any decisions made in reliance upon this information.

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ALRUD Law Firm

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