In both cases the arbitration court ruled that the termination was legal on condition that no outstanding obligations existed at the time. The core of the matter is that, by the court’s logic, future payment arising from netting does not qualify as an outstanding obligation. LIBOR rate is determined by the international loan market dynamic and can not be known by the parties in advance, therefore, neither party is under obligation until the time of the next payment. Furthermore, it is unknown whether the obligation will arise in the future or not, explained the Moscow Arbitration Court, citing the Civil Code that stipulates that an obligation must “exist” and be “definite”.

Unicredit has filed an appeal, say the ombudsman’s representatives. The appeal is currently with attorneys who will pass it to Titov, who will decide on upholding it, says Titov’s representative. According to law, business ombudsman can not influence court judgment, however Titov can write a statement that will be attached to the bank’s appeal to the Supreme Arbitration Court. SAC can also pass its opinion at a plenary session on derivatives — this will become possible if the Court is convinced that derivatives arbitration decisions are a worthy cause, explains Head of NAUFOR Alexey Timofeev.

Agroterminal, in turn, has countered Unicredit’s move and approached Titov with an appeal of their own. “We have approached Titov, because we see an attempt to put pressure on courts that we need to blow the whistle on”, says Agroterminal General Director Anton Komarov. He cites media reports on potential loss of appeal by the financial market if derivatives lose court protection, and also points out that Unicredit forced the interest swap contract on the company as a prerequisite for the loan. “The bank approved our line of credit and on 26 August the parties signed the loan agreement, the first tranche was due and the money never came through, three weeks later the bank notified us of a new term: the transfer would happen if the company signed the interest swap contract”, says Komarov. From the execution date (October 2008) until termination date (March 2012) the fixed rate was always above LIBOR, therefore the difference payment obligation was only with the company — and it ended up paying some USD 2mn, says the appeal. USD 4.2 млн, says Komarov. In recent similar cases in England and the USA, courts ruled in favor of the client, “terminating contracts on client’s demand if the bank had taken advantage of the client’s lack of financial experience”, insists Komarov.

“We have pointed this out to Advisory Board members last Friday, stating that recent court precedents that failed to protect derivative contract obligations undermined the very basis for Russian financial market growth, making Moscow International Financial Center an absolutely impossible dream”, said a source close to Sberbank top ranks. He hopes that the state bankers’ plea will be heard. A representative of Sberbank (where Central Bank executives are Advisory Board members) declined comment. However, the information was confirmed by another source close to Sberbank.

The currency swap case will be studied by a workgroup of legislative and court authorities — who may initiate amendments to the Civil Code, says Head of Banking Business Ombudsman’s Office Alexey Chirkov. Regardless of parties’ obligations in this particular case, the court decision is based on a misinterpretation of the nature of the interest swap, affecting the development of the entire market, stresses Timofeev.

The court based its line of arguments on a literal interpretation of the contract (ambiguities can not be construed in favor of the party that executed the contract, i.e. the bank). The misinterpretation leads to the view that since only outstanding obligations make termination illegal, and in this case they can not be deemed outstanding until settlement date, thus the contract may be terminated, says Agroterminal legal advisor Konstantin Sklovsky.

Margarita Papchenkova, Tatiana Voronova

Project Group №2