Учебный год 22-23 / William_Simons_Private_and_Civil_Law_in_the_R

The court system which has jurisdiction to hear bankruptcy cases is that of the arbitrazh courts, a rather confusing term used to indicate the system of commercial courts, which hears all types of commercial disputes among enterprises. Apart from Arbitrazh courts, the Russian court system also has courts of general jurisdiction and a Constitutional Court. International commercial disputes are often heard by the International Commercial Court of Arbitration attached to the Russian Chamber of Commerce and Industry in Moscow.The arbitrazh court of the raion, where the debtor has its registered seat or—in the case of a natural person— has his permanent residence, is competent to hear the case. Bankruptcy cases may not be heard by private courts, including commercial arbitrazh tribunals.

The person who is appointed by the arbitrazh court to administer the bankrupt assets is called the “arbitrazh manager”. To qualify for such an appointment, the arbitrazh manager must be a Russian citizen with higher education and who is registered as an individual entrepreneur. Further requirements include not less than two years employment experience in a “leading” (management) function; having passed a theoretical exam for the preparation of arbitrazh managers; having held a traineeship of not less than six months as the assistant of an arbitrazh manager; the absence of a criminal record evidencing that the person has not committed any economic crimes or crimes of so-called “medium-seriousness” (or worse); membership of a professional organization.

One of the targets of the 2002 Law is to raise the professional standards of the arbitrazh manager. Instruments for achieving this goal include professional training, the exam, mandatory membership in professional organizations that monitor their members activities, and mandatory insurance with a coverage of professional risks of not less than 3 million rubles (appr. 100,000 US dollars), as well as drawing up a code of conduct. The professional organizations of arbitrazh managers—which are called “self-regulatory organizations”—have been accorded a substantial role in educating and monitoring their members. They may issue their own regulations and standards with which their members must comply.

The Law provides for five different insolvency procedures:

—Supervision;

—Financial restructuring;

—External management;

—Bankruptcy proceedings;

—Amicable settlement.

In principle, bankruptcy will lead to liquidation, whereas the other pro- cedures will lead to corporate rescue.The procedure of financial restruc- turing is new. Supervision is aimed at preserving the assets of the debtor, conductingananalysisofthefinancialstatusofthedebtor,andcompiling a register of all outstanding claims, and conducting a first meeting of the creditors.Financialrestructuringisaimedatrestoringthedebtor’ssolvency and settling its debts. External management is also aimed at restoring a debtor’s solvency. Bankruptcy intends to pay the debtor’s creditors in an even and proportional manner. An amicable settlement can be reached at any stage of the proceedings with the resulting termination of the proceedings through an agreement between the debtor and its creditors.

As regards these different procedures, it should be noted that there isnomechanismaccordingtowhichaspecificprocedurecanbeselected. Currently, the differences between supervision, financial restructuring, and external management are not substantial since they are all aimed at restoring the enterprise’s solvency. Therefore, in my view, it would be preferable to join them into one financial restructuring procedure.

Apart from the above procedures, the Law also provides for so-called “pre-judicial restructuring”, i.e., the possibility of obtaining funds from creditors to restore solvency in exchange for assuming certain obligations.

One of the new features of the 2002 Law is a strengthened role for the state due to the fact that, previously, the state often was the big loser in bankruptcies.Apart from the aforementioned “authorized bodies”, which may file claims on behalf of the state, a second important state agency is the so-called “regulating body”, the main task of which is to supervise the self-regulatory organizations of arbitrazh managers.

Another new feature is that, when filing a petition to initiate bank- ruptcy proceedings, the applicant must submit a document evidencing that the claims have been confirmed by a relevant judgment of a court of law (or an arbitral award). Claims submitted by authorized bodies and relating to unpaid tax liabilities must be confirmed by the tax or customs authorities.The background of this requirement is that, in the past, nu- merous fictitious claims had apparently been used to initiate bankruptcy proceedings.

Changes have also been made in the order of priority of payment of creditors’ claims. After having settled expenses for the bankruptcy pro- cedure itself—such as court expenses and remuneration of the arbitrazh manager—claims of creditors must be satisfied in the following order:

(a)claims of citizens for damage to life or health;

(b)claims of employees and claims for royalties arising out of copyright; and

(c)claims of all other creditors.

As regards claims which have been secured by a pledge against the assets of the debtor, the secured creditor is to be satisfied on account of the collateral prior to all other creditors with the exception of the case where the claims under items (a) and (b) arose prior to the contract under which the pledge was established.

Another new feature includes transparency. The new law provides for the possibility to sell the insolvent enterprise through an open auction. Closed auctions are allowed only under certain, strict conditions. The initial price is established by a meeting of creditors based on market valuesasdeterminedbyanindependentandcertifiedvaluator.Moreover, the initial price must not be less than the value indicated by the debtor whenfilingitspetitionforinitiatingbankruptcyproceedings.Inaddition, collateral may only be sold at open auctions.

Finally, some statistics:28

In conclusion, the 2002 Law most definitely provides for a better bal- ance between the interests of debtors on the one hand and creditors on the other. It appeared that many of the flaws of its predecessors were due to the parties involved, in particular, the arbitrazh managers and the arbitrazh judges. Better training and professional organization—coupled with a greater degree of transparency—should provide for open and fair bankruptcy procedures under which the interests of all parties involved can be taken into account.

28Osnovnye pokazateli raboty arbitrazhnykh sudov Rossiiskoi Federatsii v 1992-2006 gg., reproduced at <www.arbitr.ru>.

sumers. On the whole, the result is a balanced set of statutory provisions that one might hope (and foresee) will be applied in the courts to build up an effective and predictable commercial jurisprudence.

In this exposition on entrepreneurs and consumers as subjects of civil law, there are two pieces of legislation that will not be examined in detail. First, there is what might be regarded as the main precursor to the new Russian Civil Code, the USSR Principles (Osnovy) of Civil Legislation of 31 May 1991,5 which were applied on the territory of the Russian Federation following the RSFSR Supreme Soviet decree of 14 July 1992 “On the Regulation of Civil Legal Relations During the Period of Conducting Economic Reforms”.6 There are clear signs that some initiatives in the USSR Principles were expanded in the new Russian Civil Code,7 but there will be no detailed textual comparison in this chapter.

Second, as this chapter focuses on the provisions of the Civil Code itself, there will not be discussion of the specific law of the Russian Fed- eration on the protection of consumer rights of 1992, which entered into force on 7 April of that year. On this, readers are referred to a discussion of the working of the law in Pamela Jordan’s interesting article “Russian

Lawyers as Consumer Protection Advocates: 1992-1995”.8

The intent of this chapter is to highlight the provisions in the Russian Civil Code9 that specifically focus on entrepreneurs and consumers, within the context of the Code as a whole. On the one hand, for entre- preneurs,theCode’smainconcernistoemphasizetheirrighttoconduct entrepreneurial activity; on the other, for consumers, it is to provide protection in situations where, to put it briefly, there might be inequality of bargaining power.

5Adopted by the USSR Supreme Soviet on 31 May 1991, Izvestiia 25 June 1991, 3-7. English translation by William E. Butler in Basic Legal Documents of the Soviet Legal System, 3rd ed., New York/London/Rome 1992, 97-180.

6Vedomosti S”ezda narodnykh deputatov RSFSR i Verkhovnogo Soveta RSFSR 1992 No.30 item 1800.

7For example, the USSR 1991 Principle’s Arts.100 and 129, “transport organizations in common use” and “responsibility for harm caused as a consequence of defects of good and work” seem to have informed the Russian Civil Code Art.426, discussed below, and Art.1095 “grounds for compensation of harm caused as consequence of defects of good, work or service”.

83 Parker School Journal of East European Law 1996 No.4-5, 487-517.

9This chapter discusses provisions in Parts 1 and 2 of the Code; Part 3 had not been passed at the time of writing. However, as Part 3 contains Section V, Inheritance Law and Section VI, International Private Law, it contains little mention of either consumers or entrepreneurs, apart from (for consumers) Art.1177 delineating the rules for inheriting rights connected with participation in a consumer cooperative, and Art.1212 dealing with the law subject to application to a contract with the participation of a consumer. Of particular relevance to entrepreneurs are Art.1211, definingthesignificantpartytodecidejurisdictionforcrossbordercontractsabsent a choice of law clause, and Art.1221 which gives the victim choice of law for issues of law subject to application to responsibility for harm caused as consequences of defects of good, work or service.

Rights to Be an Entrepreneur

The basic principles of the Code specified inArticle 1 include the equal- ity of participants, freedom of contract (Art.1(1)), and free movement of goods and services (Art.1(3)). The Code is clearly frameworked for a market economy; to that end, it includes the useful notion of the “customs of business turnover” in a number of provisions (Arts.5, 312, 451(2) (ii), et al.) fulfilling an analogous role to the customary implied terms in

English contract law.

Article 2(1), para. 3, defines entrepreneurial activity as:

“autonomous activity effectuated at one’s own risk directed toward the systematic obtainingofprofitfromtheuseofproperty,thesaleofgoods,thefulfillmentofwork, or the rendering of services by persons registered in this capacity in the procedure established by law […].”

Article18includesinthecontentoflegalcapacityofcitizensto“[…]engage in entrepreneurial and any other activity not prohibited by law […]”, and Article 22 protects the legal capacity of citizens, specifically including at section (2) their entrepreneurial activity, from unwarranted deprivation or limitation. Individual entrepreneurship by a citizen is allowed, with state registration, under Article 23, with the provisions relating to insolvency inArticle 25.The finding by a court of insolvency of an individual entre- preneur causes his registration to lose force (Art.25(1)).

There are a few other specific articles facilitating entrepreneurial activity that bear mention. Article 184 allows commercial representation, defined inArticle 184(1):

“a person who permanently and autonomously is representing in the name of entrepreneurs when they conclude contracts in the sphere of entrepreneurial activity shall be a commercial representative.”

UnderArticle 358, a pawnshop may be licensed as an entrepreneurial activ- ity, and underArticle 665, there is a specific contract of finance lease, i.e., lending property for “temporary possession and use for entrepreneurial purposes”. Article 933 allows for insurance of entrepreneurial risk.

One provision that protects the entrepreneur from arbitrary activity by its contractual partner is in Article 315, which deals with performance before time. Basically, this is not permitted if “[…] connected with the effectuation of entrepreneurial activity” unless “[…] provided for by a law, other legal acts, or by the conditions of the obligation or arises from the customs of business turnover or the essence of the obligation”. Thus, business plans cannot be disrupted by an overeager contractual partner’s performing his or her obligation prematurely.

The rules on grounds of liability for breach of obligations in Article 401(3) impose strict liability where the violator is acting as an entrepreneur. The usual rule in Article 401(1) is that:

“[…] a person who has not performed an obligation or who performed it improp- erly shall bear responsibility where there is fault (intent or negligence) except for instances where by a law or by contract other grounds of responsibility have been provided for”.

The standard for fault is set in Article 401(1), para. 2:

“The person shall be deemed to be not at fault if with that degree of concern and attentiveness that is required of him according to the characteristics of the obliga- tion and conditions of turnover he has taken all measures for proper performance of the obligation.”

But by Article 401(3):

“unless provided otherwise by a law or by contract, the person who has not performed orwhohasimproperlyperformedanobligationshall,wheneffectuatingentrepreneur- ial activity, bear responsibility unless it is proved that proper performance proved to be impossibleasaconsequenceofinsuperableforce,thatis,extraordinaryandunavoid- able circumstances under the particular conditions. There shall not be relegated to such circumstances, in particular, a violation of duties on the part of the contracting parties of the debtor, the absence in the market of goods necessary for performance, and the lack of necessary monetary means on the part of the debtor.”

This latter proviso is reminiscent of the English rules on frustration of a contract whereby a party is not excused breach—in other words, there is no frustration—merely because of their own bad planning or cash-flow problems.The rule is exemplified by the cases ofDavis Contractors Ltd v.

Fareham Urban District Council10 and Tsakiroglou & Co Ltd v. Noblee Thorl GmbH.11 In July 1946, Davis Contractors had undertaken to build 78 houses for Fareham District Council within an eight-month period. Unfortunately for Davis, the written contract did not include any provision for variation if materials and skilled labor were in short supply. That was indeed the case, unsurprisingly in the immediate post-war circumstances of the contract, and the building work took twenty-two months. However, both the Court of Appeal and the Judicial Committee of the House of Lords held that Davis was unable to claim that the contract had been frustrated by the delay.As Lord Radcliffe put it:

“To my mind, it is useless to pretend that the contractor is not at risk if delay does occur, even serious delay. And I think it a misuse of legal terms to call in frustration to get him out of his unfortunate predicament.”12

10[1956] AC 696.

11[1962] AC 93.

12Davis Contractors wanted the contract deemed frustrated so that they could claim a larger sum for the work done than the original contract price had been, under the restitutionary claim for quantum meruit. At risk of straying from the immediate

The Tsakiroglou case involved a contract for the sale and delivery of groundnuts from Sudan to Hamburg. The price was set on the basis that the shipment would go through the Suez Canal, although there was no stipulation as to route. After the contract was made but before perfor- mance, the Suez Canal was closed to commercial traffic as a result of the political crisis in 1956.The alternate route, round the Cape of Good Hope, was more than twice as long and doubled the shipping costs. The House of Lords held that the contract was not frustrated. It was still capable of performance, even at much greater expense and inconvenience.

Protection of Consumers

Turning to consider the provisions in the Russian Civil Code that give protection to consumers, it may be noted that the Code does not appear togiveadefinitionofaconsumer.However,itisassumedthatitsusageof thetermwillfollowthedefinitiongiveninthe1992ConsumerProtection

Law, namely “a citizen who is using, obtaining, ordering, or intends to obtain or order, goods (works and services) for his own everyday needs”.13

The Civil Code includes three provisions that provide very important general protection for the potentially weaker party to a contract. These are:Article179onduressandsimilarinfluences;Article426,dealingwith the institution of a public contract; and Article 428 on the contract of adhesion.The first and last of these apply irrespective of whether or not the person contracting is a consumer, but clearly will have special relevance in consumer cases.

Theprovisionsgivingprotectionagainstdifferenttypesofillegitimate influence are inArticle 179:

“Invalidity of transaction concluded under influence of fraud, coercion, threat, or ill-intentioned agreement of a representative of one party with another party or confluence of grave circumstances.”

A court may deem the transaction to be invalid at the suit of the victim. Then there is restitution of property to the victim (if possible, with

topic, but as a colorful example of the pragmatic logic of a common-law judge, I cannotresistaquotationfromanotheroftheLawLordshearingthecase.LordReid, discussing the theoretical basis of the doctrine of frustration, cites the original view that it depended on an implied term:

“I may be allowed to note an example of the artificiality of the theory of an implied term given by Lord Sands in Scott & Sons v. Del Sel [… ]‘A tiger has escaped from a travelling menagerie. The milkgirl fails to deliver the milk. Possibly the milkman may be exonerated from any breach of contract; but, even so, it would seem hardly reasonable to base that exoneration on the ground that “tiger days excepted” must be written into the milk contract’.”

monetary compensation to make up where restitution is impossible), and forfeiture to the state revenue of property received by the victim, as well as an indemnity of any actual damages suffered by the victim.

The institution of a public contract is more directly concerned with consumers.Apublic contract is defined inArticle 426(1) as:

“A contract concluded by a commercial organization and establishing its duties relating to the sale of goods, fulfillment of work, or rendering of services that this organizationbythecharacterofitsactivitymusteffectuatewithrespecttoeveryone who has recourse to it (retail trade, carriage by common-use transport, communications services, electric-power supply, medical, hotel servicing, and so forth) shall be deemed to be a public contract.

Acommercial organization shall not have the right to prefer one person to others with respect to the conclusion of a public contract except for the instances provided by law or other legal acts.”

Article 426(2) then determines that:

“The price of goods, works, and services, and also other conditions of a public contract, shall be established identically for all consumers except for instances where the granting of privileges for individual categories of consumers is permitted by law and other legal acts.”

Article 426(3):

“A refusal of a commercial organization to conclude a public contract when it is possible to grant the respective goods or services to the consumer or to fulfill the respective work for him shall not be permitted.”

And an unjustified refusal to conclude a public contract may trigger obligatory procedure, whereby a court may compel the contract to be concluded by Article 445(4).

Article 426(4) specifies that:

“In instances provided for by law, the Government of the Russian Federation may issue rules binding upon the parties when concluding and performing public contracts (standard contracts, statutes, etc.).”

If a public contract fails to conform to any such rules, or the general re- quirements in the first paragraph ofArticle 426, it is void.

The notion of a public contract is an interesting one, and a neat way ofensuringbasicfairnessatleastbetweendifferentindividualconsumers dealing with the same contractor.14 Mediaeval English common law had a somewhat analogous institution with respect to certain trades, the so-called

‘commoncallings’.Thesewereusuallydefinedasthecommoncarrier,the innkeeper, the smith, and the farrier.15 Anyone practicing one of the com-

14Dutch law has an analogous provision. Information from Ger van den Berg in discussion at the Leiden conference on the Impact of the Russian Civil Code on Legal Practice and Its Meaning for Comparative Legal Studies, 27-29 May 1998.

15The Compact edition of the Oxford English Dictionary, Oxford 1971, 946, defines a farrier as: “one who shoes horses; hence, also one who treats the diseases of horses.”

mon callings was not allowed to refuse to contract with a member of the publicwhofulfilledthenormalrequirementsofsomeoneinneedoftheir services; so for instance, the innkeeper could not refuse to serve a bona fide traveler. This principle was exemplified as recently as 1944, in the celebrated case of Constantine v. Imperial Hotels Ltd.16 Learie Constantine was a renowned West Indian cricketer.17 He had booked accommodation at the Imperial Hotel, but when he arrived was refused a room. At that time in England it was not unlawful, as it has been since the passage of the 1976 Race Relations Act and subsequent legislation, to discriminate on the basis of “colour, race, nationality or ethnic or national origins”,18 but Mr. Constantine was able to bring a successful action against the hotel based on their customary innkeeper’s duty.19

In the Russian Civil Code, fairness between the contracting parties is assisted by the provision in Article 428 on contracts of adhesion (stan-

Common carriers were apparently much used. David Hey, Family History and Local History in England, London/New York 1987, (82) gives examples, e.g.: “The whole of

England was linked by a network of carriers’ routes. A 1787 directory of Sheffield, for example, shows that local people could take advantage of forty-two different services leading directly or through connections in distant towns to most parts of England, Scotland and Wales.”

16[1944] 2 All ER 171.

17Born 21 September 1901, died 1 July 1971. The Encyclopaedia Britannica entry for him cites him as being a “Trinidadian professional cricketer, government official, and fighter against racial prejudice”. In 1928 he became the first West Indian player to achieve the double of 1,000 runs and 100 wickets in a single season. “He was an extraordinary hitter and on of the greatest fast bowlers of all time.” He was knighted in 1962 and made a life peer in 1969.

18List taken from sec.1 (1) of the 1976 act.

19To quote from the judgment of Birkett J. (at 171):

“The plaintiff’s claim was simply that the defendants were innkeepers; that the

Imperial Hotel was a common inn kept by the defendants for the accommodation of travellers and that they were under a duty in the circumstances to receive and lodge him; that they refused to receive and lodge him; that he was compelled to go elsewhere and was put to much inconvenience. No special damage was alleged or claimed. Counsel for the defendants conceded from the outset: (i) that the defendants, for the purpose of this case at least, were innkeepers and that the Imperial Hotel was a common inn; (ii) that the plaintiff came to the Imperial Hotel on 30 July 1943, and requested the defendants’ servants to receive and lodge him as a traveller; (iii) that the defendants had sufficient room for the purpose of receiving him; (iv) that he was ready and willing to pay to the defendants all their proper charges and had in fact previously paid a deposit of £2 for the necessary accommodation; (v) that he was a man of high character and attainments, a British subject from the West Indies, and, although he was a man of colour, no ground existed on which the defendants were entitled to refuse to receive and lodge him. It is important that that should be known.”