Like other modern jurisdictions, Russia recognises the concept of limited liability. A non-Russian parent company and its Russian subsidiary are separate entities not liable for each other’s debts. Yet the number of cases is increasing where a Russian subsidiary picks up the bill when a parent company or another group entity is in breach of a contract with a Russian counterparty. This article explains when Asian businesses expect a hit on their Russian assets and how they can manage the exposure.
Partner
SL Legal
If a group has a Russian subsidiary, any ongoing contract between a group entity and a Russian or Russia-controlled company should be carefully reviewed. If a group entity (from any jurisdiction, “friendly” or “unfriendly”) fails to perform and the breach is related to Russia sanctions, the creditor may successfully reach out for compensation to the group’s subsidiary in Russia even though the subsidiary is not a contract party.
Examples are vast and cover all kinds of contracts – financial, M&A and commercial.
Almost universally, these contracts are not governed by Russian law and their dispute resolution provisions exclude jurisdiction of national courts. How do they end up in Russian court applying Russian law?
SL LEGAL’s previous article in Asia Business Law Journal explained the jurisdictional reach of Russian courts. In response, international companies increasingly use anti-suit injunctions issued outside Russia. The efficiency of these measures varies but as some very recent cases demonstrate, the strategy may finally be getting momentum.
As regards the choice of law, it is usually respected except where the enforcement of the relevant provisions would be against public order. For example, courts almost inevitably ignore a sanction clause.
Higher threshold for joint tortfeasorship
Partner
SL Legal
Another reason for Russian law and Russian jurisdiction is that the liability of a Russian subsidiary is extra-contractual (based on tort).
Once the breach is established, the claimant’s argument goes that a group company in default a Russian subsidiary are joint wrongdoers that acted together to avoid liability. This liability is joint and several so the claimant may request a full compensation from the Russian subsidiary.
The concept of “joint tortfeasorship” is not unique in the sanction context. However, what is the legal test for making a Russian subsidiary, often not involved in or benefitting from the contract, liable as an assisting wrongdoer?
Prior to 2025, the joint liability threshold was low: the claimant only needed to show that the subsidiary was a member of the same group. That practice changed after the Supreme Court reminded lower courts of the rule of separate liability in the Citibank and JP Morgan Bank cases and required them to better justify a departure from the basic principle.
No clear test for liability
The Supreme Court did not give any specific guidelines and no coherent test for a subsidiary’s liability has been developed to date. These are the factors that Russian courts usually tend to view as giving rise to the subsidiary’s liability:
Single structure. To show that the joint wrongdoers’ actions were concerted, the claimant must prove that a Russian subsidiary and group entity have a “single decision-making centre”. This can be achieved by showing the same ultimate owners and beneficiaries; “commonly known” corporate history; use of the same corporate name, brand and email address; and application by the subsidiary of group policies.
Acting in bad faith (abuse of corporate form). Even where the “single structure” is present, the question remains what role, if any, the Russian subsidiary is to play in relation to the contract or the default.
With some exceptions, the approach seems to be that a “single structure” has a “single interest”, which is to avoid liability. Where the group has a Russian subsidiary, the group can adapt its model to sanctions meaning, effectively, that the debtor should pass on its liability to the subsidiary. A failure to do so may be viewed as abuse of corporate form, which enables the court to ignore the limited liability.
High-risk factors for veil-piercing
The risks are especially high if the court concludes that:
-
- The group forces or encourages the subsidiary to follow Russia sanctions (e.g. through the enforcement of sanction policies or standard contracts terms);
- Russian subsidiaries continue earning profits for the group in Russia, while its other members refuse to discharge their obligations to Russian companies (the undistributed dividends are a huge factor here); and
- The group announced its intent to terminate or reduce its operations in Russia.
International groups with Russian subsidiaries find themselves between a rock and a hard place. They may have to pay compensation in Russia if they comply with Russia’s sanctions or be penalised in their country if they don’t. Giving a subsidiary general autonomy, careful application of compliance policies, keeping the subsidiary away from the group contracts and restructuring the liability where possible may help to manage the group’s exposure in Russia.
Georgy Daneliya and Natalia Kozyrenko are partners at SL LEGAL in Russia
SL LEGAL10 Presnenskaya Nab., block A
123112 Moscow, Russia
www.sl.legal
T: +7 495 134 22 00
E: info@sl.legal
