The end of law


Our existence is permeated by lawyers. The lives of these connoisseurs of justice, one might think, are full of hard decisions on what is right and wrong. Yet their days are filled with meticulous rules, courtroom tactics and routine cases. ‘This is a court of law, young man, not a court of justice’ - words of Judge Oliver Holmes reflect the dullness of everyday reality: it is not often that lawyers get a chance to talk of ethical values or common sense.

The doctrine of the abuse of rights which forbids an improper use of otherwise lawful rights is just that, a curious artefact of vulgaris aequitas, the popular perception of a fair play. Few would question its existence but its exact nature remains veiled in mist.

Yukos Capital SARL, a Luxembourg company, and SamaraNefteGaz, one of Russia’s largest oil and gas producers, were once subsidiaries of Yukos Oil. SamaraNefteGas sold its products abroad at such a price that to stay afloat it had to borrow from other companies within the group. This was a transfer pricing arrangement aimed to keep profit offshore.

In July 2004, when the attack on Yukos was at its height, Yukos Capital and SamaraNefteGaz signed two loan agreements with an arbitration clause stating that all disputes would be resolved under Russian law by international tribunal in Moscow. A few months later the agreement was changed so that the disputes had to be sent to New York and decided under the laws of New York.

Later, when Yukos Capital tried to enforce the award SamaraNefteGaz claimed, among other things, that the new arbitration clause was invalid because the director of SamaraNefteGaz, who signed it, did not act in the interests of the company but ‘followed the orders of the management of Yukos Oil’ and, therefore, it was the abuse of rights.

‘These supplementary agreements were void because SamaraNefteGaz had no interest in these agreements whatsoever,’ said Dmitry Chernyy from Muranov, Chernyakov and Partners, who represented the defendant in court. ‘The director signed them with one purpose only: to make the process easier for Yukos and harder for SamaraNefteGaz.’ Judge Goldshtein went even further. He suggested that the whole transfer pricing arrangement was a sham and therefore enforcing the award would be against the public policy.

It is ironic that just a few months earlier, the Supreme Court of the Netherlands enforced an arbitration award in favour of Yukos Capital with a similar set of facts even though it had been set aside by Russian court. It is extremely ironic that it also appealed not to the letter of law but to its spirit.

The aim of the abuse of rights doctrine is to curb malevolence or selfishness. Article 10 of the Civil Code of Russia states that actions ‘taken exclusively with the intention of causing harm to another person are not allowed, nor is abuse of a legal right allowed in other form’.

This is a strange definition. Finding an act prompted by an intention exclusively to harm someone is not an easy task - a person hardly ever does something with a single motive. The ‘other forms of abuse’ is even worse. It confers almost praetorian powers on judges and stirs up empty rhetoric instead of law.

In practice, the concept of abuse is developed by judges. (Russian case law is peculiar in that an isolated decision can be disregarded. It is only when a principle has been laid down repeatedly by the courts that it can be considered as established.) The mass of precedents show that the principle is recognised and widely applied but the rationale of the court decisions is not always the same. Many separate wrongs are swept up into the net of the word ‘abuse’. Most often, however, the test judges apply is that of Soviet law: one must use one’s rights in a manner that is consistent with the purpose for which such rights are granted by law.

A director of a company abuses his rights if he does not attend the board’s meetings so that other members cannot dismiss him if, according to the company’s articles, the board is only competent when all directors are present. A minority shareholder is abusing his right when he repeatedly calls for the general meeting of shareholders to discuss a matter that had already been resolved. Setting the general meeting of shareholders abroad is against the law if such a location is inconvenient to some shareholders. Registration of a trademark in Russia, if a similar well-known trademark exists in another country, is an example of an abuse of rights.

Most interestingly, however, the principle can be invoked to set aside a contract when the company’s directors acted in bad faith. A joint stock company, a health resort, sold three buildings. A few days later, the seller rented one of the buildings back to the buyer at a price that recouped the money paid for all the buildings in just three months. The case was resolved with reference to the abuse of rights. This is a big leap forward because now a demonstratively unfair deal can be set aside without the need to prove corruption, pressure or fraud.

Like all ethical principles, well-meaning and imprecise, the abuse of rights doctrine takes the shape of the one who uses it. Put into practice, it highlights the salient features of law as a whole. In Russia these are its paternalistic nature, an element of anti-arbitration bias (only two out of three awards get enforced) and a touch of bitterness as regards unrestricted individualism.

When it comes to defining what is the end of law, or what is the purpose for which legal rights are given, a jurist steps into the murky territory of dubious guesses, questionable extrapolations and pure sentimentality. The concept of abuse carries the practical danger of being put into the indefinite variety of uses and be employed to invade any part of human activity. Yet, it is better than a system that gratifies spite and chicanery. Or is it?

picture: Mario -



The abuse of rights doctrine is well-established in Russian law