Just 10–15 years ago, corporate legal departments were typically small, with most legal work outsourced to outside counsel. However, over time, companies began to realize that this approach could be too costly and not always effective. External lawyers often lack the in-depth knowledge of the client’s business specifics, unlike in-house lawyers. This issue became particularly acute in Russia after 2014, when Western sanctions led to the withdrawal of international law firms from the Russian legal market, leaving domestic companies without support in cross-border transactions governed by foreign law.
As it became clear that the legal function needed to be expanded and strengthened, management and chief legal officers faced a choice: adopt a proactive strategy or stick to a ‘reactive’ approach. In a proactive approach, lawyers actively analyze existing or draft contracts and internal documents, identifying potential risks and gaps to prevent problems before they arise. The ‘reactive’ approach, on the other hand, focuses on addressing legal issues only after a problem has already surfaced.
Historically, the legal function in Russia has often been undervalued, partly because most companies are led by finance and tech executives. As a result, lawyers are rarely given the opportunity to take the initiative, leading to the adoption of the ‘cross that bridge when you come to it’ approach. While this approach may solve immediate tasks, it is strategically flawed in the long run.
Recognizing the need for sustainable growth, the most forward-thinking companies are beginning to reassess their approach to the legal function. This process starts with a thorough analysis and management of contracts, emphasizing pre-litigation dispute resolution as an effective way to address potential conflicts at an early stage, before they escalate into full-blown litigation.
This is why the concept of pre-litigation dispute resolution, which is not only important in Russia but is in most cases legally required, is gaining increasing importance in the strategic management of the legal function.
What the Legislation Says
Pre-litigation or other forms of dispute resolution are mandatory in cases provided by law or contract (Part 5 of Article 4 of the Arbitration Procedure Code of the Russian Federation, Clause 3 of Article 132 of the Civil Procedure Code of the Russian Federation, Part 3 of Article 4 of the Code of Administrative Court Procedure of the Russian Federation).
Pre-litigation procedures are not required in the following cases:
- on the establishment of facts that have legal significance (Chapter 27 of the Arbitration Procedure Code of the Russian Federation);
- on the awarding of compensation for the violation of the right to legal proceedings within a reasonable time or the right to the execution of a court act within a reasonable time (Chapter 27.1 of the Arbitration Procedure Code of the Russian Federation);
- on insolvency (bankruptcy) (Chapter 28 of the Arbitration Procedure Code of the Russian Federation);
- in corporate disputes (Chapter 28.1 of the Arbitration Procedure Code of the Russian Federation);
- on the protection of the rights and lawful interests of a group of persons (Chapter 28.2 of the Arbitration Procedure Code of the Russian Federation);
- in order-for-payment proceedings (Chapter 29.1 of the Arbitration Procedure Code of the Russian Federation);
- related to the performance by arbitration courts of functions of assistance and control over arbitration tribunals (Chapter 30 of the Arbitration Procedure Code of the Russian Federation);
- on the recognition and enforcement of decisions of foreign courts and foreign arbitration awards (Chapter 31 of the Arbitration Procedure Code of the Russian Federation),
and also when the prosecutor, state bodies, or local self-government bodies file a lawsuit with the arbitration court in defense of public interests, rights, and lawful interests of organizations and citizens in the sphere of entrepreneurial and other economic activities (Articles 52, 53 of the Arbitration Procedure Code of the Russian Federation).
If the pre-trial (pre-litigation) procedure is not followed, the statement of claim will be returned by the court (Clause 5 of Part 1 of Article 129 of the Arbitration Procedure Code of the Russian Federation, Clause 1 of Part 1 of Article 135 of the Civil Procedure Code of the Russian Federation, Clause 1 of Part 1 of Article 129 of the Code of Administrative Court Procedure of the Russian Federation), and if it is accepted for proceedings, it will be left without consideration (Clause 2 of Part 1 of Article 148 of the Arbitration Procedure Code of the Russian Federation, Paragraph 2 of Article 222 of the Civil Procedure Code of the Russian Federation, Clause 1 of Part 1 of Article 196 of the Code of Administrative Court Procedure of the Russian Federation).
Also, see the Resolution of the Plenum of the Supreme Court of the Russian Federation dated June 22, 2021 No. 18 ‘On Certain Issues of Pre-trial Dispute Resolution in Civil and Arbitration Court Proceedings’ and the Overview of the Practice of Application by Arbitration Courts of Procedural Legislation Provisions on Mandatory Pre-trial Dispute Resolution, approved by the Presidium of the Supreme Court of the Russian Federation on July 22, 2020.
Advantages of Pre-Trial Dispute Resolution:
- Time and Cost Savings: Pre-trial resolution allows companies to avoid lengthy court proceedings, which can drag on for years and require significant financial resources. Resolving disputes at an early stage reduces legal costs and minimizes the diversion of management resources to litigation.
- Preservation of Business Relationships: Unlike court proceedings, which often escalate conflict and destroy business relationships, pre-trial resolution allows for a compromise solution, preserving the partnership between the parties.
- Control Over the Outcome: In the pre-trial resolution process, the parties can independently determine the terms of the agreement, whereas in court, the decision is made by a judge, and the outcome can be unpredictable.
- Confidentiality: Unlike court processes, which are usually public, pre-trial resolution can be confidential, allowing companies to avoid negative impacts on their reputation and unwanted attention from the media or competitors.
- Flexibility in Approaches: Pre-trial resolution provides the opportunity to use a wide range of dispute resolution methods, including negotiations and mediation, allowing the parties to choose the most appropriate method for each specific situation.
Disadvantages of Pre-Trial Dispute Resolution:
- Limited Enforcement Capabilities: If one party refuses to comply with the terms of the pre-trial agreement, it may be necessary to go to court for enforcement, which reduces the advantages of pre-trial resolution.
- Risk of Inequality Between Parties: In cases where one party is significantly stronger than the other, pre-trial resolution may result in an unfair agreement, as the weaker party may agree to terms that are not optimal for them in order to avoid litigation.
- Not Always Applicable: Some disputes, especially those involving complex legal issues or of principle importance to the parties, may require judicial consideration to establish a precedent or obtain a final and binding decision.
- Costs of Alternative Methods: The use of mediation or arbitration may require additional expenses, which can be significant, especially if the process drags on or requires the involvement of expensive experts.
- Limited Impact on the Dispute: In some cases, parties may use pre-trial resolution as a tactical move to delay time or gain advantages in future litigation, which can reduce the effectiveness of this method.
Conclusion
Pre-trial dispute resolution is not only an effective way to reduce legal costs but also a strategic tool for maintaining and strengthening business relationships. In today’s environment, where companies strive for sustainable development and long-term success, a proactive approach to legal functions is becoming increasingly important.
We recommend that companies integrate pre-trial dispute resolution into their overall risk management strategy. This will not only prevent the emergence of complex and costly disputes but also enhance the overall efficiency of legal work. Developing a proactive approach, which includes thorough analysis of existing or planned contracts and managing relationships with counterparties, will help companies minimize risks and, consequently, reduce current expenses and future losses.
Looking ahead, pre-trial dispute resolution should be an integral part of successful legal risk management. Companies that effectively integrate this strategy will be able to not only minimize potential losses but also create additional opportunities for growth and sustainable development, especially in the face of global economic challenges.
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This material is for general information only and is not intended to provide legal advice. If you have any questions or would like to learn more about the topic of this article or our firm’s Dispute Resolution practice, please do not hesitate to contact us at info@danilovpartners.com.