Global sanctions have reshaped the legal landscape for businesses involved in cross-border trade and international disputes. One of the most significant developments has been Russia’s Federal Law known as the Lugovoy Law, which has introduced a new layer of complexity for parties contracting with Russian entities.
Where parties obtain judgments under the Lugovoy Law, questions often arise about whether those judgments can be recognised and enforced outside Russia. For South African businesses, investors and legal practitioners, understanding the local approach to these judgments is becoming increasingly important.
What is the Lugovoy Law?
The Lugovoy Law was introduced in Russia in June 2020 through Federal Law. It amended Article 248 of the Russian Commercial (Arbitrazh) Procedure Code to allow Russian commercial courts to assume jurisdiction over disputes involving sanctioned Russian parties or disputes connected to international sanctions. In certain circumstances, this allows Russian courts to hear matters even where the parties have previously agreed that disputes should be resolved in another country’s courts or through international arbitration.
The legislation was introduced in response to the practical difficulties experienced by some Russian entities in accessing foreign courts and arbitral institutions because of international sanctions. While the legislation has been welcomed by some as a mechanism for ensuring access to justice, it has also raised significant questions regarding the recognition and enforcement of judgments outside Russia.
Why does it matter in South Africa?
Obtaining a judgment is often only part of the dispute resolution process. If the unsuccessful party’s assets are located outside Russia, the successful litigant may need to enforce that judgment in another jurisdiction.
Unlike the European Union, which has adopted measures prohibiting the recognition and enforcement of Lugovoy Law judgments in its member states, South Africa has not introduced legislation preventing their recognition. Instead, South African courts are likely to consider each application on its own merits, applying established common law principles governing the recognition and enforcement of foreign judgments.
Are Lugovoy Law judgments enforceable in South Africa?
There is currently no definitive South African judgment dealing specifically with the enforcement of a Lugovoy Law judgment. However, this does not mean that such judgments cannot be recognised.
South African law has long recognised that foreign judgments may be enforced, provided certain legal requirements are satisfied. There is also no requirement that South African judgments must be reciprocally enforceable in Russia before Russian judgments can be recognised locally. As a result, Lugovoy Law judgments are capable of recognition in principle, although every application will be determined according to its own facts.
What will South African courts consider?
When asked to recognise and enforce a foreign judgment, South African courts do not reconsider the merits of the dispute. Instead, they assess whether the judgment satisfies the requirements developed through South African common law.
Jurisdiction
One of the first questions will be whether the Russian court exercised jurisdiction in a manner recognised by South African law.
Simply because a Russian court assumed jurisdiction under the Lugovoy Law does not automatically mean a South African court will accept that jurisdiction. The court will consider whether the defendant was properly subject to the jurisdiction of the Russian court or whether it voluntarily submitted to that jurisdiction. Where the parties had previously agreed to resolve disputes before another court or through arbitration, the court may also consider whether that agreement had become impossible or impractical to perform because of sanctions or other external circumstances.
Finality of the judgment
Only final judgments are generally capable of enforcement.
Although a pending appeal does not necessarily prevent recognition, South African courts retain a discretion to postpone enforcement proceedings until appeal processes have been concluded where this would better serve the interests of justice.
Public policy
Public policy remains one of the most important considerations.
A South African court may decline to enforce a Lugovoy Law judgment where doing so would conflict with fundamental principles of fairness, natural justice or contractual certainty. The court may examine factors such as whether the defendant had a fair opportunity to present its case, whether the proceedings were conducted impartially, and whether enforcing the judgment would undermine an agreed dispute resolution clause.
Fraud
Recognition will generally be refused if the foreign judgment was obtained through fraud.
However, where allegations of fraud were already fully considered by the Russian court, South African courts are generally reluctant to revisit those findings unless exceptional circumstances exist.
Astreinte penalties
One of the more complex aspects of some Lugovoy Law judgments is the inclusion of substantial financial penalties, commonly referred to as astreinte penalties.
South African courts have historically been cautious about enforcing foreign judgments containing punitive or excessive damages that exceed genuine compensation for loss. At the same time, the courts have recognised that certain financial penalties may serve legitimate legal purposes beyond punishment. Whether an astreinte provision will be enforced is therefore likely to depend on its nature, purpose and proportionality in the particular case.
Practical considerations for businesses
Businesses involved in contracts with Russian counterparties should carefully consider the implications of the Lugovoy Law when negotiating dispute resolution clauses and managing legal risk.
Contractual provisions selecting foreign courts or international arbitration may not always prevent proceedings being instituted in Russia under the Lugovoy Law. Where disputes arise, businesses should also consider where assets are located, the jurisdictions in which enforcement may ultimately be required, and whether any foreign judgment is likely to satisfy the recognition requirements of those jurisdictions.
As international sanctions continue to evolve, enforcement strategies should form part of the broader commercial and legal planning process rather than being considered only after judgment has been obtained.
Conclusion
The recognition and enforcement of Russian Lugovoy Law judgments remains an evolving area of South African law. While South African courts have not yet issued a definitive ruling on the subject, the existing common law framework suggests that recognition is possible where the established legal requirements are met.
Ultimately, each application will turn on its own facts. Issues such as jurisdiction, procedural fairness, public policy, the finality of the judgment and the nature of any financial penalties will all play an important role in determining whether enforcement will be granted.
As international commerce becomes increasingly affected by sanctions and cross-border regulatory developments, businesses should seek legal advice early when drafting contracts or considering the enforcement of foreign judgments involving Russian parties.
Need advice on cross-border disputes?
Whether you are seeking to enforce a foreign judgment in South Africa or require advice on the implications of the Lugovoy Law for your business, the team at Pagel Schulenburg can provide practical guidance on international dispute resolution, cross-border enforcement and commercial litigation. Contact us to discuss your matter with one of our experienced legal professionals.
