Учебный год 22-23 / William_Simons_Private_and_Civil_Law_in_the_R

However, considerable difficulties arise upon determining whether or not an international arbitration award violates public policy.

According to one award of MKAS, an African company was awarded 1.8 million dollars from Joint Stock Company Vneshintorg as payment for goods delivered by theAfrican party under an agreement concluded in 1991, under which settlements were to have been made in clearing dollars.

A Moscow city court refused to overturn this ruling, with which the judicial collegium for civil cases of the Supreme Court concurred.

In accordance with a protest lodged by the RF Deputy General Prosecutor, stating that the MKAS had violated public order of the Russian Federation insofar as it had changed the terms of an agreement in terms of payment for goods, the case was reviewed by the Presidium of the RF Supreme Court by way of judicial supervision. The Presidium concurred with the MKAS that settlements could not be made in clearing dollars; the Supreme Court, therefore, held that performance under foreign trade agreements in freely convertible hard currency did not violate RF public order.

direction of that period, was nonetheless necessary to preserve its historical essence, and which corresponded to its initial meaning and content.

This conclusion may be applied to many institutes of contract law since the domestic economic life of Russia was regulated by a series of legal norms built on the foundations of a planned economy and denying the principle of freedom of contract, which obviously is a part of the foundations of private law’s method of regulating commercial relations.

In particular, civil law norms on liability for the non-performance of contractual obligations were subject to considerable deformation in actual practice. For example, the practice of compensating losses suffered due to a violation of commercial obligations was almost completely replaced byprovisionforliquidateddamages(statutorypenalty);compensationfor lost profits was hardly ever considered in the resolution of disputes.

In domestic doctrine, the role of judicial and arbitrazh practice in the lawmaking process has been repeatedly emphasized, in particular in terms of the regulation of relations in the field of private international law. Relations arising from foreign trade transactions, being of a private law nature, could of course not be established and regulated according to unilateral directives. Therefore, it is not surprising that an analysis of international commercial arbitration regarding the application of domestic norms to such relations played a significant role in the elaboration of the corresponding provisions of the 1994 RF Civil Code, which sought to restore a private law character to domestic civil law.

Support for this proposition can be seen in the norm on the interpretation of agreements. Legislation previously in force (prior to the adoption of the 1991 Principles (Osnovy) of Civil Legislation of the USSR and the Republics) lacked normative provisions on the principles of interpreting agreements. Due to detailed regulation of the normative acts to be applied in the resolution of domestic economic disputes, which provided parties with few opportunities to exercise their will in concluding agreements, the practice of resolving such disputes lacked the preconditions and incentives to develop general rules for interpreting agreements.

The nature of court proceedings during the resolution of economic disputes—which in many ways reflected an inquisitorial approach—also failed to stimulate parties in a dispute to use varied methods of interpreting an agreement. On the other hand, the practice of international arbitration—whichencompassesdisputesarisingfromtransactionswhere parties are free to directly exercise their will and where the process of examination of disputes creates considerable opportunities for competi- tion—has accumulated sufficient experience in the use of various means of interpreting agreements in examining foreign trade disputes, where

quiteoftentheneedtointerpretanagreementarisesinordertodiscover the real content of the agreement.

The experience of international arbitration involving the application ofnormsofaprivatelawnatureallowsonetoconcludethat—inanumber of instances of the application by international arbitration tribunals and state arbitrazh courts of the same provisions of civil legislation in a dif- ferent way—the position which dominated in international arbitration appeared to be closer to an interpretation of the content of such norms based on private law.

InaccordancewithcurrentlyeffectiveRussianlegislation(seeArt.28,

Law “On International CommercialArbitration” of 7 July 1993), in the resolution of disputes, international commercial arbitration tribunals should be guided by the following in applying law. (1) Arbitration tribunals should resolve disputes in accordance with those legal norms which the parties have designated as applicable law in relation to the essence of the dispute.

(2) Any designation of the law or a system of laws of any state should be interpreted as a direct reference to the substantive law of that state, and notmerelytoitsconflictsnorms.(3)Intheabsenceofanyreferencemade by the parties, the arbitration tribunal should apply the law determined in accordance with conflicts norms which it deems to be applicable. (4) In all instances, the arbitration tribunal should render its decision in accordance with the terms of the agreement and by taking into consideration commercial practice applicable to the relevant transaction.

The success of the unification of international trade law on the international level has narrowed considerably the sphere in which domestic law is applied in the regulation of the rights and obligations of participants in international trade and commercial relations. However, eveninthosetypesofagreementsinwhichunificationisquiteadvanced, the application of domestic legal norms continues to remain an issue. In particular, the 1980 UN Convention on Contracts for the International Sale of Goods (the Vienna Convention) may serve as an example. Since the Vienna Convention does not deal with all the issues which may arise between the parties under international purchase and sale agreements, it stipulates (Art.7(2)) that questions within its scope but not expressly addressed in the convention, will be subject to resolution in accordance with the general principles on which it is based; and in the absence of such principles, according to the law applicable under the norms of private international law.

In practice, it is no a simple task to determine the general principles of the Vienna Convention that are not expressly formulated therein, yet theabsenceofwhichservesasaprerequisitefortheapplicationofrelevant

domestic law to international purchase and sale agreements. It should be noted that priority is given to the application of the general principles of the Vienna Convention only in relation to issues relating to its subject of regulation. This may serve as grounds for the direct application by parties of a particular domestic law to an international purchase and sale agreement only where issues arise which are strictly beyond the regulation of purchase and sale agreements and relate, instead, to general provisions on agreements, for example. Yet even where a provision is deemed to be a general principle of the Vienna Convention and may be applied in a particular case, its content will always remain less clearly defined than the relevant regulation present in a domestic legal system.

Judging from published accounts of such incidents, the application ofthegeneralprinciplesoftheViennaConventionisquiterare,whilethe subsidiary application of domestic law in instances where the Convention does not expressly regulate matters occurs quite often. In particular, the application of the Vienna Convention by the International Commercial Court ofArbitration under the aegis of the Chamber ofTrade and Industry of the Russian Federation attests to this as well.

The RF Civil Code in the Practice of the International

Commercial Court of Arbitration

The provisions of the new Civil Code of the Russian Federation began to be applied by the ICCA immediately after they entered into force. In large part, this concerned the application of Article 395, which stipulates liability for failure to perform monetary obligations on a timely basis. However, before analyzing this practice, the application of a new regulation to a situation which traditionally occupied a special position in foreign trade transactions merits our attention, viz., the consequences of abolishing the rules under Russian law requiring two signatures for foreign trade obligations.

The ICCA declared that if a dispute is heard after the new Civil

Codeenteredintoforce(1January1995),therulerequiringaforeigntrade transaction to be declared invalid due to a violation of procedure regarding signature would not be further applied—regardless of the time at which the transaction was concluded. This approach was based on a reference to Article 9 of the Law of 30 November 1994, “On the Entry into Force of Part One of the Civil Code of the Russian Federation”. In accordance with this article, the norms of the Civil Code concerning grounds for, andtheconsequencesof,theinvalidityoftransactions(Arts.162,165-180) are applicable to transactions, the invalidity of which is considered after 1 January 1995, regardless of the time at which the relevant transaction

was concluded. Insofar as these articles do not contain provisions on the invalidity of foreign trade transactions involving a failure to observe the procedure for their signature by two signatories, the International Com- mercialCourtofArbitrationconcludedthatadefendant’sclaimtodeclare invalid a document certifying the relationship between parties (that had only been signed by one party) should not be subject to satisfaction.

Asindicatedabove,therequirementofpaymentofinterestinconnec- tion with a failure to timely perform monetary obligations was reviewed by the ICCA during the resolution of a considerable number of disputes. In several instances, this issue was resolved by applying Article 395 of the Civil Code, either as a result of parties to an agreement having chosen Russian civil law as the applicable law, or on the basis of the application of private international law norms. In particular, the aforementioned article was applied in instances where relations were covered by the Vienna Convention. Since the Vienna Convention does not address the amounts of and procedure for designating annual interest under overdue monetary obligations, Article 395 of the Civil Code was applied.

Often, claims for payment of annual interest were made in instances of the failure to pay for—or late payment of—delivered as well as nonperformance of work, and a seller’s failure to return an advance paid for goods which were not delivered.

In certain instances, the application of said article requires qualify- ing obligations that have been violated as monetary obligations. For example, upon the resolution of one dispute, the ICCA reviewed the issue of the consequences of a failure to deliver in the period established by a contract. The court declared that failure to perform said obligation, in fact, transformed it into a monetary obligation since the defendant was obligedtopaytheplaintiffthecostofthegoodswhichwerenotdelivered in monetary form, keeping in mind that the defendant had received goods to the amount of said sum from the plaintiff.

The ICCAalso interpreted as monetary obligation the duty of a seller who had received a pre-payment for goods but had failed to perform her obligations in fact within the term stipulated by the contract, to refund, at the request of the buyer, the paid pre-payment in place of actual per- formance of the obligation. It must be noted that during the examination of disputes by arbitration, the issue of a debtor paying interest upon its overdue performance of monetary obligations was only considered in instances where the plaintiff made such a request. There is no doubt that such a fundamental position on the part of the ICCA in this issue is fully legitimate in terms of both the meaning of norms on interest in

the context of a private law approach, as well as of the principles of legal proceedings in international commercial arbitration.

Another important aspect emphasizing the economic content of the aforementioned norm in a market economy is the ICCA’s approach to the application of Article 395 of the Civil Code, under which the issue of whetheraplaintiffactuallyusedthemonetaryfundscomprisinghisdebt, and whether he received revenue from such, was not taken into consideration when he was obliged to pay interest on the outstanding sum.

In connection with the fact that, as a general rule, claims filed with the ICCA are expressed in foreign currency, certain problems arose concerning the rates at which interest should be charged on the basis of Article 395 of the RF Civil Code. Such a situation resulted from the fact that the wording of the article allowed various interpretations, depending on whether monetary obligations were expressed in Russian or foreign currency. In accordance with legislation in force, the latter is fully acceptable (Art.317, RF Civil Code).

In particular, this concerns provisions stipulating that interest rates payable upon the failure to timely perform monetary obligations must be determined using the banking discount rate effective for the location of thecreditor.Difficultyinapplyingthisnormwasconnectedwiththefact that neither the Civil Code, nor any other legislative act clearly defines the term “banking discount rate”.

The opinion exists that in this case, where obligations expressed in Russian currency are at issue, the discount rate of the RF Central Bank should be applied. It has been established that:

“at the present time, interest in the amount of the discount rate of the Central Bank for credit resources provided by commercial banks are to be paid in relations between organizations and citizens of the Russian Federation.”

It should be noted that this provision does not expressly mention international trade, being limited to relations among Russian legal subjects.

Insofar as the above approach to interpreting Article 395 of the RF Civil Code, in terms of monetary obligations expressed in foreign currency, leads to a dead end because the RF Central Bank does not establish refi- nancing rates for foreign currency credit, it has also been acknowledged thatininstancesinvolvingforeigncurrencythediscountratewouldequal the effective market interest rate established for the use of borrowed funds, i.e., the rate for credit extended by commercial banks.

It seems that this approach more closely corresponds to a consistent interpretation of the general content and intent of the aforementioned provisions of Article 395, as norms designated to both act under conditions of an existing banking services market and to directly compensate

losses incurred by creditors upon a failure to make timely payment of monetary amounts since in the event of non-payment of receivable sums creditors are forced to use funds borrowed from commercial banks at the effectiveinterestratesofthelatter.Thisapproachwillalsohelpsolvethe problem of determining the interest rate which may arise when creditors involved in overdue monetary obligations expressed in rubles are located abroad. It should be noted that the existing two-pronged interpretation of the banking discount rate leads to a situation where, in cases of monetary obligations expressed in Russian currency, a creditor must make a greater effort in order to receive full compensation for losses incurred by failure to timely perform monetary obligations, due to the need to prove that losses comprise the difference between the refinancing rate and the interest rate of commercial banks, as opposed to the same situation where obligations are expressed in foreign currency, since the commercial bank interest rate is directly taken as the basis for determining the amount of compensation. In this case, there is no need for a creditor to prove that the commercial rate is higher than the refinancing rate.

When the issue of determining the rate of interest due upon a failure to timely perform monetary obligations was put before the ICCA, the currency interest rates of commercial banks at the location of the Russian creditor were used. Considering the inadequate level of development of the Russian credit market, these rates differed substantially in various regionsofRussia.Ineachspecificcase,theICCAevaluatedtheevidence submitted by creditors in support of the interest rate they had indicated as effectivefortheirlocation.Asarule,intheresolutionofdisputeswherea creditor is located in Russia, in terms of evaluating evidence of the banking discount rate in foreign currency, statements from leading banks in the location of the creditor confirming their rates for short-term foreign currency credit, on the basis of which the average amount of the banking discount rate is determined, were taken into consideration as was informa- tion from the creditor’s own bank. In cases where foreign organizations acted as creditors, the bank interest rates effective at the location of the foreign creditor were taken into account. At the same time, these were generally banks servicing such creditors.

In the event that a creditor failed to submit any evidence of the banking discount rate, ICCA practice shows that such claims remained unexamined or were denied satisfaction in this part of the claim. Instead, it seems that from the point of view of the regulation of relations between contractual parties in the conditions of market relations, a better approach to resolving the issue of interest payments where a creditor has failed to submit evidence of the interest rate, would be the position expressed in

the ruling of the International Commercial Court of Arbitration in one such case. In this matter, the ICCA, referring to legislative norms on pay- mentofinterestuponafailuretotimelyperformmonetaryobligations—in particular, Article 395 of the RF Civil Code—found it fair, based on its practice of reviewing cases related to settlements made in freely convertible currency, to confirm the plaintiff’s right to receive the statutory average banking discount rate at 10% annual interest.

Major Directions in the Reform of

Private International Law in Russia from the Vantage Point of International Commercial Arbitration

An important element in the analysis of international commercial arbitration in Russia is the fact that, according to long-standing tradition, the international court of arbitration most often applies conflicts norms effectiveatthelocationinwhichadisputeisbeingheard,i.e., under pres- ent conditions—Russian conflicts of law norms. And although Russian legislation, currently in force, and the 1961 European (Geneva) Conven- tion on International Commercial Arbitration—in which the Russian Federationisaparticipant—stipulatethat,wherepartiesfailtodesignate applicable substantive law, the arbitration tribunal is to apply the law in accordancewiththeconflictsnormsitdeemsappropriate,onerarelysees asignificantdivergencefromtheestablishedpracticeofapplyingconflicts norms in this case.

A significant stage in the development of Russian private interna- tional law was marked by the new provisions of Chapter VII of the 1991 Principles of Civil Legislation. And while the new Russian regulations in both form and content have begun to meet to a greater degree the needs of foreign trade practices and correspond to the level of development achieved in this area of both domestic and international law thus far, the need for its further improvement remains a quite topical.

The section on private international law in the RF Civil Code has now been completed. This work was carried out taking into account pres- ently effective international and domestic legal acts concerning issues of conflicts of law regulation, reflecting the current level of development of private international law. In this connection, we would like to devote the reader’s attention to the following: the Third Part of the RF Civil Code doesnotprovideforseparateconflictsrulesforobligationsunderforeign trade and other transactions as was the case with the 1991 Principles. Yet, in a number of instances, they contain more detailed regulations. For example, in terms of establishing general rules concerning an agreement

between parties vis-à-vis the choice of applicable law, the Civil Code now provides that such agreement shall either be expressly stated or shall arise from the terms of the agreement and the aggregate of relevant circum- stances involved in the specific matter. This provision means that lack of an express designation of applicable law shall not automatically lead the court to apply the relevant conflicts norms; rather, the court is now obliged to analyze all of the terms of the agreement and the totality of the circumstances of the transaction.

In this regard, we should mention a problem that also arises in the absence of an express designation of applicable law by parties to a transaction and that has become increasingly important in the last few years in the practice of international commercial arbitration: the application of contemporary lex mercatoria.

It should be noted that in Russia, legal doctrine has thus far not devoted much attention to this problem, reviewing it instead from a critical position and skeptically evaluating the developmental perspective of lex mercatoria as the aggregate of transnational legal norms regulating international trade. It appears that actual international commercial arbitration practice,includingthatoftheRussianFederation—inviewofitsversatility and the specific nature of international arbitration proceedings—is not as categorical in this issue; this is underscored by the established tradition of applying international commercial custom in dispute resolution proceedings. In addition, the new norms of Russian private international law should take this trend into account.

The innovations in modern-day Russian civil legislation also include a rule establishing restrictions—through the corresponding imperative norms—upon the autonomy of parties in designating applicable law. It is stipulated that if the aggregate of circumstances in a matter effective at the moment at which applicable law is chosen leads to the conclusion that the agreement is, in fact, only connected with one country, then the parties’choiceofthelawofanothercountrywillnotaffecttheoperation of the imperative norms of the first country.

This norm should prevent the creation of “artificial” conflicts con- nections and create an obstacle to parties abusing their autonomy in designating applicable law.

The position of Russian law on the issue of establishing conflicts connections to various types of contractual relations has undergone fundamental change. The approach of establishing the priority of the rule providingthat—intheabsenceofanagreementonapplicablelawbetween parties—thelawofthecountrywithwhichtheagreementismoreclosely connectedisappliedmayberegardedasfullyjustifiedandcorresponding