Учебный год 22-23 / William_Simons_Private_and_Civil_Law_in_the_R

Participants at the 2003 Leiden Conference in the Hortus Botanicus of the University of Leiden.

Sponsors of the 1998 and 2003 Leiden Conferences

The following institutions provided welcome financial support for the

Leiden conferences. We are most grateful to them for their interest in our work.

Academia Foundation

Canon Europa NV

Cebeco Handelsraad

Faculteit der Rechtsgeleerdheid, Universiteit Leiden

Gratama Fonds

Grid Group of Companies

Koninklijke Van Ommeren NV

Ministerie van Buitenlandse Zaken

Ministerie van Justitie

Moret Ernst & Young Business Lawyers

NV Nederlandse Gasunie

2.1.Chapter 4 of the Civil Code clearly defines the forms that entrepre- neurship can take.The Soviet economy did not require a variety of legal forms of businesses for entrepreneurial activity; its “assortment” included only state enterprises (which, in reality, were institutions [uchrezhdeniia]) and quasi-cooperatives, namely,collective farms (kolkhozy). The shift to a market economy, based primarily on private property, necessitated the (re) birth of another type of legal person, that is, of corporations. The types of corporations listed in the Civil Code, (Ch.4, secs.1, 2, RF Civil Code and unless otherwise noted, all other references herein will be to the RF

Civil Code)—joint-stock companies (aktsionernye obshchestva), companies with limited liability (obshchestva s ogranichennoi otvestvennost’iu), full partnerships (polnye tovarishchestva), and limited partnerships (kommandita) are well known in the legal systems of most countries of continental Europe. They were also known in pre-Revolutionary Russian legislation as well as in the Russian Soviet Federative Socialist Republic’s (RSFSR) first Civil

Code of 1922. Production cooperatives, permitted under the new Code (Ch.4, sec.3), also belong to the category of commercial organizations of a corporate type.

The Civil Code grants certain specific rights and obligations to the participants and founders of various types of legal persons. The Code also sets forth the specific rules of a legal person’s internal organization, and, more importantly, its liability vis-à-vis third parties (creditors). Therefore, although the Code allows entrepreneurs to choose from among different types of legal persons, it also prohibits the establishment of entrepreneurial organizations in any other form. Prior to the entry into force of new Code, it was possible to create all sorts of “legal sphinxes and centaurs” in the commercial sector—i.e., business forms unknown to the legislator—and this had been fertile soil for the growth of all sorts of fraud and speculation.

As of the late 1990s, there were approximately two million business organizations in Russia in the types set forth in the Civil Code. In addition to these, another 3.5 million citizens were engaged in entrepreneurial activities who have chosen not to form legal persons and who, rather, run their businesses as “individual entrepreneurs” (Arts.23-25). The Code stipulates that individual entrepreneurs must, nevertheless, register and extends to them many of the rules regulating the activities of legal persons.

2.2.On the basis of the 1993 RF Constitution, the Russian Civil Code establishes a system of property rights (functioning as the prerequisites for, and result of, commercial transactions), characteristic for a society with a developed market economy.

As opposed to the period when virtually all means of production were in the hands of the state and collective farms, the new RF Civil Code ac- cords equal recognition to the property of citizens, legal persons, and of the state as well as of municipalities. As a general rule, there is no limit to the amount and value of private property that may be owned by citizens or legal persons) (Art.213, para.2). The rights of all owners are equally protected (Art.212, para.4).

As a result of privatization, the bulk of state property has passed into private ownership. At the same time, the Civil Code provides for the statutory designation of “the types of property that may only be owned by the state or by municipal government” (Art.212, para.4). At present, it consists primarily of subsoil resources (although the use thereof can be transferred, e.g., leased), nature preserves, and national parks. Thus far, there is no general law on property that has been taken out of trade and commerce or on Russia’s national heritage.

Gradually, as the privatization of state and municipal property continues, the norms of the Civil Code that deal with property rights involve a growing number of assets, including land (there are several million owners of small plots in Russia) and housing (40% of municipal housing has already become private property).

The very restrictive way in which the Civil Code addresses the problem of the forced termination of the property rights is extremely important.Thecircumstancesinwhichsuchterminationisjustified(debt collection, appropriation for public needs, etc.) are precisely defined in the Civil Code (Art.235). As a general rule, the appropriation of one’s property—as well as its nationalization—can be effected only by a way of a court judgment, provided that the value of the property and other damages are indemnified.

2.3. ThenewCivilCodeoffersparticipantsincommercial(khoziaistvennye) transactions a wide range (the largest, perhaps, if compared with the codes of other countries) of institutions for use in entrepreneurial activities. In a market economy, the freedom of enterprise encourages participants in commercial transactions to create more and more new types of business relations. But if owing to the lack of business traditions they are not regulated, the necessity arises to regulate such relations by law.

In the Civil Code, the expansion of the civil-law “toolkit” has pri- marily affected the matter of contracts.Twenty-six chapters are devoted to this subject in Section IV of the Code (as compared with eighteen chapters in the 1964 RSFSR Civil Code). Together with the types of contract—well known in the previous Code, such as purchase and sale,

lease (arenda), independent contracting (podriad), transportation, agency (poruchenie),commission,etc.—thenewCodeincludesdetailedregulations on contracts for rent and lifetime support (Ch.33); the paid provision of services (Ch.39); factoring (Ch.43); agency (agentirovanie) (Ch.52); entrusted administration of property (Ch.53); and franchising (Ch.54). Also, some new variants of contracts have appeared on the horizon within the framework of contracts that have been considered traditional in Russian law; these new forms are: the sale of an enterprise (Arts.559-566); the lease of an enterprise (Arts.656-664); financial leasing (Arts.665-670); warehouse storage (Arts.907-918), etc.

As compared with the older Codes, the new RF Civil Code has been enriched primarily by the inclusion in the latter of contracts related to entrepreneurial activity.Yet nearly all these contracts, (with the exception of franchising), can involve one who is not an entrepreneur, i.e., a party who is an ordinary citizen or a non-profit organization. This was one of the reasons (but not the primary one) why Russia—following an old tradition—refrained from creating a distinct commercial (khoziaistvennyi or “economic”) code.

3. The main differences that can be seen in the effective implementa- tion of the Code are in the interstices between public and private law.

3.1.The Civil Code ensures the “transparency” (prozrachnost’) of the insti- tutionalenvironmentbyrequiringtheofficialregistrationoflegalpersons

(Art.51), as well as of the rights in, and transactions related to, immovable property (Art.131). Both registrations must be performed by justice departments on the basis of federal laws, i.e., in a uniform fashion throughout the country. However, it was not until the early 2000s that the law “On the Registration of Legal Persons” was adopted. Consequently, each of the Federation’s eighty-nine regions performed registration according to its own rules. In respect of this problem, the President pointed out to Parliament that “it is necessary to radically strengthen state supervision [kontrol’] of the legality of creating and of the functioning of entrepreneurial structures”. The Law “On State Registration of the Rights to Immovable Property and Transactions Related Thereto” was promulgated on 17 June 1997 and is currently being implemented. However, the establishment of a uniform system of government registration of immovable property was not an undertaking that could be completed overnight.

3.2.The norms of the Civil Code concerning the compensation for damages (inter alia Art.15), penalties (Arts.330-333), pledge (Arts.334-358), and

interest (Art.395), as well as many others enable the creditor to be held harmless for damages occasioned by a breach of contract or tort. However, court judgments rendered on the basis of these provisions often remained unexecutedduetoalackofsufficientfinancialorhumanresourcestosup- porttheenforcementthereof.Thefederallawsonbailiffsandenforcement proceedings of 21 July 1997 have contributed to major improvements in this area.

4. Although the norms of the Civil Code have been designed primarily to regulate commercial transactions within Russia, they have also been drafted to conform to existing international norms, such as the 1980 UN Convention on Contracts for the International Sale of Goods (the Vienna Convention) (inter alia Arts.455, 465, 470, and 524) and the 1988 Ottawa Conventions on International Financial Leasing (Ch.34, sec.6) and on

InternationalFactoring(Ch.43).Internationalcommercialcustom—such the uniform rules of the International Chamber of Commerce (ICC) for Collections (1978), Demand Guaranties (1992), and Documentary Credits

(1993)—has likewise served as the model for a whole range of provisions of the new Civil Code.

Furthermore, the application of the Civil Code to international commercial transactions is governed by detailed norms of private international law. Such norms were contained in the 1991 Principles (Osnovy) of Civil Legislation of the USSR and the Union Republics, and a portion of this document (Arts.156-170) continued to remain in force throughout the Russian Federation until the adoption of third part of the new Civil Code in 2001.

It should not be forgotten that the Civil Code accords national treatment to foreign citizens, stateless persons, and foreign legal persons (Art.2). Exceptions thereto may only be established by a federal law.

The Basic Features of the Process of the

Judicial Implementation of the Civil Code

5. Since the entry into force of the Civil Code, the courts have settled hundredsofthousandsofcasesonthebasisthereof.Atthesametime—as with all new legislation—numerous questions have arise concerning the correct interpretation of a number of rules found in the Code. In addition, someofitsnormshavebeendeemedtobeinsufficientlypreciseandseveral gaps have been discovered. Nevertheless, neither the RF Supreme Court nor the RF Higher Arbitrazh Court has considered it necessary to exercise its right of legal initiative and to propose amendments to the Code. At the same time, the interpretation of the Code by courts represented an

enormous contribution to the to the process of its implementation: in this way, the dry skeleton of the norms puts on flesh, which is the real life of the law.

One of the specific characteristics of the Russian judicial system is the right—shared by the two highest judicial instances (Arts.126 and 127, RF Constitution)—to “provide Guiding Explanations [raz”iasneniia] on issuesofcourtpractice”.Theexplanationsissuedbythesecourts—which are normally based on the generalization and analysis of the practice of lower courts as well as on decisions of the highest instances—constitute acts of judicial interpretation of the law and are mandatory for courts of all levels. By clarifying ambiguous or unclear issues that arise in the process of the application of the Civil Code, these “explanations” add to the stability of the Code. By the late 1990s, the RF Supreme Court and the RF Higher Arbitrazh Courthadjointlyissuedsuchclarificationsonissues related to the introduction of Part One of the Civil Code (28 February 1995), the application thereof (1 July 1996, No.6/8), and on the Law “On Joint-Stock Companies” (2 April 1997, No.4/8).

6. Russia’seconomyhasevolvedinadistinctlyunevenfashion.Atpres- ent,themaineconomicroleisplayedbyfinancialcapitalandtransactions related to the movement thereof. Consequently, the various institutions of the Civil Code are applied with varying frequency.The disputes most often encountered concern the legal status and liability of commercial organizations (Ch.4); financial obligations and banking transactions

(Ch.42-46); and securing the performance of obligations via pledge or suretyship, etc. (Ch.23). The ongoing privatization of state property also results in numerous disputes related to the right of ownership and leasing. The practice of applying the norms of the Civil Code to issues concerning the delivery of goods, construction contracts, and the transportation of goods is significantly more limited.

The transition from a rigid planned economy to a market economy (characterized by the principle of the freedom of contract) has created (especially in connection with a number of other reforms, e.g., administrative, military, and housing.) fertile soil for various abuses in the sphere of contractual relations. This has increased the importance of the courts in evaluating the terms and conditions of contracts in accordance with the provisions of the Civil Code on invalid transactions (Ch.9, sec.2), on the reduction of penalties (Art.333), and even on the abuse of legal rights (Art.10).

7. The RF Civil Code accords courts a greater role of independence than previously was the case. In many instances, the application of norms depends on the extent to which it agrees with the “essence” (sushchetvo) of the actual, concrete relationships (inter aliaArt.467, para.2;Art.479, para.2;

Art.480, para.3; Art.481, para.1). An expansion of courts’ discretionary powersalsoappearsintheusageofsomeoftheCode’snormsofconcepts and criteria that can only be interpreted by a court taking into account all the circumstances of a concrete case (“a serious violation” [sushchestvennoe narushenie], “reasonable period” [e.g., razymnyi srok], “essential expenses” [nobkhodimye raskhody]) Nevertheless, the boundaries of the freedom of discretionary judgment granted to the courts in Russia are substantially narrower than those found in the civil law of most Western states.

Russia’s Civil Code: Providing Security for Commercial Transactions

8. The variety of options that the market economy offers to economic actors as well as to their agents can only ensured in a stable and predictable legal environment. In Russia nowadays, such a stable legal environment is created mainly by the Civil Code.

8.1.The 1993 Russian Constitution (Art.71(o)) refers civil legislation to the exclusive jurisdiction of the Russian Federation. Therefore, the Civil Code as well as all other civil laws may only be federal laws, i.e., uniform for the whole country. The Subjects of the Federation do not always take account hereof, and time and again add new civil-law norms and even separate acts to their regional legislation. Undoubtedly, however, such additions will be overturned by the RF Constitutional Court as being in violation of the Constitution (Art.125(2) (b)).

Things become more complicated where legislation on land, water resources, forestry, housing, labor, and family is concerned. The RF Constitution refers these branches of legislation to the joint jurisdiction of the Federation and its Subjects (Art.72(2) (k)). It appears that the Civil Code provides a general solution to this problem where it states: “the norms of civil law contained in other laws must conform with the present Code” (Art.3, para.2). From this general principle spring more concrete rules concerning the relationship of civil legislation with legislation on land and other natural resources (Art.129, para.3; Art.209, para.3) as well as with housing legislation (Art.672, para.3).

8.2.In order to stabilize the legal environment for commercial transactions, the Civil Code assigns the principal role for the regulation thereof