Our law firm regularly represents the interests of clients from Russia. The range of matters on which Russian clients seek our help is quite broad, and disputes between entrepreneurs engaged in international economic activity are far from the least significant among them. This article is about one large Russian pharmaceutical company that found itself in conflict with a German company supplying pharmaceuticals. In this conflict, Russian "it'll be fine" collided with German calculation, right up to a breach of German law. It fell to our attorneys to bring everything back to a common denominator — compliance with contractual obligations, even where the contract itself allowed those obligations to be breached with impunity.
High Technology, High Returns
Pre-trial dispute resolution
Before turning to the courts over a commercial dispute with a foreign counterparty, it is worth sending a written demand letter first — this is not only a requirement of many contracts, but also a strong argument in any subsequent proceedings.
Our client — a Russian pharmaceutical company we will call "Farmatsia" — has a business model built on not having its own retail network. Farmatsia's business strategy is to conclude exclusive-representation agreements with the world's manufacturers of the newest medical preparations, for Russia, Ukraine and Kazakhstan. The company has been working successfully under this model since the free market first appeared in the post-Soviet space. Farmatsia's partners include the largest pharmaceutical manufacturers in the United States, France and Germany. Farmatsia's responsibilities within these business relationships included certifying the products in the territory of its exclusive activity, communicating information to the main consumers — medical institutions and pharmacy chains — and ensuring sales of the product in the volumes provided for by the contract. Years of experience should, in principle, have protected Farmatsia from conflicts with its partners. And Farmatsia's share of the worldwide pharmaceutical turnover, which experts estimate at more than 1,200 billion US dollars, meant it could afford its own team of top-class lawyers. But something went wrong.
Tragedies Large and Small
Most of today's medical research is aimed at developing treatments for diseases that, until recently, were considered incurable. For a person lying in a hospital ward looking eternity in the eye, whichever pharmaceutical preparation offers relief or hope of a cure takes on an almost religious significance. But the mechanism behind this "religion" is nothing more than scientific and intellectual potential, and funding, funding, funding for this or that piece of research. Once the sought-after result has been found, years of clinical trials often follow, in order to obtain a proven, stable result, study the drug's side effects on the body, and learn about its compatibility with other chemical compounds. And if, at this stage, the drug receives a positive assessment from the researchers, distribution can begin. All the investment poured into development and clinical trials must somehow be returned to the investors — and preferably with a profit. This explains the often very high price of innovative drugs. And even at such prices, a drug can still be in short supply. Food and medicine are humanity's eternal needs.
In 2007, the Moscow-based company Farmatsia concluded an agreement for the exclusive distribution, in Russia, Ukraine and Kazakhstan, of a drug that was ultra-new at the time and is used in bone marrow transplants. Such operations are mainly performed for blood cancer or bone marrow cancer. Whereas bone marrow used to be extracted directly from the pelvic bones using a special wide needle, this drug made it possible to obtain the blood-forming bone marrow cells directly from the donor's blood instead. For the donor, this procedure became completely safe and painless. But the price of a single vial of the agent that releases the necessary cells from the bone marrow into the blood runs into the thousands of euros. Every unit of human pain gets converted into hard currency. Such is the law of the market. But it is easy to imagine what things would be like if such laws did not apply, simply by recalling the general state of medicine in the countries of the socialist bloc.
Friendship Is One Thing, Business Another
Farmatsia actively promoted this German-made drug. The overall positive trend in oncological illness rates in Russia, Ukraine and Kazakhstan, combined with the drug's effectiveness, guaranteed demand for it for years to come. This, naturally, also drove positive growth in profits for both Farmatsia and the manufacturer. The exclusive-trading agreement between the partners was concluded for a term of ten years. And while the supplier had no complaints about its Russian partner during that time, Farmatsia's grievances grew with every year of cooperation. The German manufacturer of the expensive drug regularly missed delivery deadlines or delivery volumes. Six months before the contract was due to expire, Farmatsia notified its German partner that it did not intend to extend it. The partnership was set to expire in November 2017.
In early October, a month before the contract expired, Farmatsia placed an order for seven hundred vials of the bone-marrow-transplant drug. The German firm confirmed it could supply only four hundred vials. Yet even that turned out to be only half fulfilled. Farmatsia's order book was once again falling apart at the seams. And that meant not only direct financial losses but also reputational losses which, given the nature of doing business with a limited number of clients, could threaten the company's very presence on the market. Farmatsia's lawyers filed yet another demand. In response, they received the now-familiar answer: "Under the terms of the contract, the supplier bears no liability for missed deliveries or shortfalls in volume." Given the enormous work that had gone into promoting the drug, the fact that every certification hurdle had already been cleared, and the fact that the next exclusive representative would bear none of the financial and organizational costs of promoting the drug — and, not least, stung by a certain rudeness from a longstanding partner — Farmatsia's management decided to go to court to recover the lost profit caused by the supplier's fault.
Less Is Often More
Farmatsia's lawyers prepared and sent a demand to the manufacturer and supplier of the drug at the heart of the dispute, having calculated every instance of missed deliveries and shortfalls in volume. The total came to more than one and a half million euros. The reply that came back was, in essence: under the contract, the company bears no responsibility on almost any point. After that, Farmatsia turned to our firm and asked us to represent its interests in Germany and conduct the case in court.
Having studied the contract, our attorneys were astonished — and it takes a great deal to provoke that reaction in experienced practitioners of the law. The contract had been drafted in such a way that liability for any breach whatsoever fell solely on Farmatsia. The German manufacturer was obliged to supply the drug in set annual volumes, but in the section on "Liability of the Parties," the German company was, so to speak, an infant — answerable for nothing. So the first question we put to the company's management was how such terms of cooperation could possibly have been signed. It turned out that the company had simply trusted the assurance of "It's all fine in the contract" given by the lawyer who had handled the deal at the time. That lawyer soon left Farmatsia, but the problems remained. The only real chance of satisfying our client's interest was to challenge the lawfulness of the contract itself.
The second issue concerned the amount of the claim. Based on an analysis of the business correspondence between the partner companies, only one realistic figure emerged that our attorneys could claim as lost profit caused by the supplier's fault: two hundred thousand euros, representing the shortfall that resulted from the German company delivering only half of the volume it had confirmed. Our Russian client asked us to apply German law to this issue. Had Russia been a member of the European Union, the Investment Protection Act would also have applied to it, under which a multi-million-euro compensation could have been claimed. But alas... Farmatsia's management agreed to reduce the amount of the claim, and the legal wheels began to turn.
Our firm's attorneys asked the defendant company to clarify whether the contract concluded with the Moscow company was an individually negotiated agreement or a standard-form contract. The answer we received allowed us to take the next steps in asserting our client's lawful claims. The contract turned out to be a standard-form contract, from which the Berlin pharmaceutical company's lawyers had removed every clause concerning their own company's liability. That, in turn, brought the matter within the scope of the rules governing standard contract terms that carry a public-interest dimension in Germany.
Our firm's attorneys drafted and filed a claim for compensation of the lost profit. The German Civil Code (Bürgerliches Gesetzbuch) contains §§ 305-310, which govern standard contract terms (Allgemeine Geschäftsbedingungen). Section 307 in particular provides that provisions of standard contract terms that contravene fundamental statutory rules, or that are insufficiently clear, are void. In Farmatsia's case, the contract contained no liability whatsoever for the supplier's failure to meet its contractual obligations — short deliveries, missed deadlines and the resulting loss of profit — which is contrary to the requirements of the law. A one-sided disclaimer of liability of this kind is not balanced between the parties, and it is on this argument that our attorneys are building their strategy for defending our client's interests in court.
As for the lost profit and its amount, there are two systems of calculation. Under one, proof is required of all the circumstances relating to the earning opportunities that were lost through the fault of a third party — but this approach suits private individuals better. In the case of legal entities, the procedure is much simpler. It is enough to give the court an overall picture of how the business is run, and, on that basis, to apply the formula of "what would have happened in the ordinary course of business." We requested the minimum amount of damages. However, the supply contracts for this drug with medical institutions in Russia, and the range of prices prevailing on the market, which were submitted together with the claim, would allow the court to award a larger amount of compensation.
The case is currently at the litigation stage. But our firm's attorneys have no doubt that it will be decided in our client's favour.
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THE LAW FIRM REPRESENTS CLIENTS' INTERESTS THROUGHOUT GERMANY
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