Учебный год 22-23 / William_Simons_Private_and_Civil_Law_in_the_R

As I have mentioned, movables can be pledged in the Russian system as in the Dutch one without any registration.18 Especially in a society as disorganized as Russia is for the time being, such a right cannot be considered to be a particularly reliable means for a creditor to get back its money. The volatile character of movables that have remained in the uncontrolled hands of the debtor and the uncertainty of their value when it comes to realizing this value by public auction is not entirely compensated by the fact that the real function of such a right of pledge is often only to give a creditor a grip on the enterprise of the debtor. A brewery might finance a pub to be able to sell the beer it produces; receiving interest on the money lent to the pubkeeper will be only of secondary importance. Moreover, a right of pledge enables a creditor to keep away other creditors who might otherwise try to take recourse upon the goods for their own claims. For such reasons, a bank generally will rely less on the value of its assets and more on its expectations concerning the capacity of the enterprise in making profit. In this way, it could be said that for a bank thenaturalcollateralisnotthemachineryortherawmaterialsorfinished products of the enterprise but, rather, the money coming in by selling these products, which brings me to the possibility of a right of pledge on

(future) claims—inWestern practice, a quite common phenomenon.

The pledging of rights is possible under the Russian Code, even the pledging of future rights (Art.336 in connection with Art.340, para.6).19 But the Russian right of pledge on claims mis­ses one vital rule: there is no provision enabling the creditor to collect the money due from a debtor of its debtor. See, also, a decree of the Presidium of the Higher Arbitrazh Court of 2 July 1996, ruling that monetary assets cannot be the subject of a right of pledge because legislation does not regulate the possibility of realization of this subject, realization by public auction being impossible here.20 Article 334, sec.1 (last sentence), seems to give a pledgee the right to collect insurance proceeds, but this is not construed as a pledge on the claim against the insurer. Only Article 855, para.2, seems to make possible a realization of a right of pledge without auction, but the position of the pledgeholder is reduced here by placing him among the creditors of the fifth rank.

18The Dutch Art.3:237 states that a right of pledge on movables can be established “by an authentic or a registered deed under private writing”. But this has nothing to do with registration of the right itself.What is required here is a deed with a fixed date. Forthispurpose,thedeedisofferedtoanofficial,whocertifiesbymeansofamarkon the deed itself the day on which it was offered.

19In contrast to the Dutch Code (Art.3:239, para.1).

20See, for an English translation, Sudebnik 1996, 1069.

But the perhaps most fundamental weakness of the Russian right of pledge is the system of priorities. Articles 25 (para.3) and 64 of the Russian Civil Code and Article 106 of the new Russian Law “On Bankruptcy” of 8

January1998—allprescribingtheorderinwhichcreditorsaretobepaid— give a set of important claims priority over claims secured by pledge.21 This priority is notably given to:

(a)Claims concerning liability for causing harm to life and death; and

(b)Claims concerning the settlement of accounts for payment of severance allowances and payment for labor to persons under an employment agreement and payment of royalties under authors’ contracts.

The possibility of claims of this kind, and the eventual amount of those claims at the moment of levying execution, is a very insecure element and will considerably reduce the value of any goods as collateral.

Things are further complicated by Article 109 of the Law “On Bankruptcy”. This provision contains the following three rules. The amount of a claim secured by pledge of the debtor’s property shall be determined considering “the portion of the debtor’s indebtedness that is secured by pledge”. Pledgeholders have the position of the creditors of the lowest

(fifth) rank for the portion of the debt not secured under a pledge of the debtor’sproperty.Claimssecuredbypledgeofthedebtor’spropertyshallbe subject to satisfaction “out of all property of the debtor, including property that is not subject to said pledge”. It is not totally clear what these rules mean in practice.22 The text of Article 109 in connection with Articles 106 and 114 appears to leave no room for a separate dividing of the proceeds of individual goods subject to a right of pledge: the pledgeholder is satisfied

21See, also,Arts.49 and 78 of the Law “On Enforcement Proceedings” of 21 July 1997.The rank of a claim secured by pledge is given a special form there. According to Art.49, para.1, execution upon pledged property can only be on behalf of a creditor other than the pledgee with observance of the right of pledge. In addition,Art.49, para.2, provides that the pledgee, reserving for itself the pledged property, shall be bound to satisfy the demands of creditors with a higher priority out of the value of the pledged property but to an amount not exceeding this value. These rules explain why pledgees are ignored in Art.78, para.2, listing creditors with a priority position. This approach corresponds to Arts.419-424 of the Code of Civil Procedure of 1964, drafted in a period in which the right of pledge was much less important than it is now.

22According toV.V.Vitrianskii (“Insolvenzrecht in der GUS:Wege zurVervollkommnung undAnnäherung”, in Wege zu neuem Recht: Materialien internationaler Konferenzen in Sankt Petersburg und Bremen, Berlin 1998, 213), the rules were intended to reduce the influ- ence of the pledgeholders during insolvency proceedings. Especially the position of pledgeholders in the US and Canada was seen as something that, in Russia, would be unworkable.

not out of the proceeds of the collateral but, rather, “out of all property of the debtor” just as other creditors with a priority right. Probably the system is that each pledgeholder in case of bankruptcy has priority over creditors with a lower rank for an amount corresponding to the estimated valueofthesegoods,estimationofthedebtor’spropertybeingprescribed byArticle 102 of the Law “On Bankruptcy”. If this estimated value is lower than his full claim, the pledgeholder may participate for the difference in the dividing of the assets of the bankrupt estate as a creditor of the fifth rank. But this interpretation, if right, entails a problem. Estimation of the value of goods is a very uncertain matter and can lead to persistent disputes with an unpredictable outcome. Moreover, manipulation in this field(suchassystematicallyunderestimatingthevalueofpledgedgoods)is relatively easy.When the goods, after their valuation, are sold—a process uponwhichthepledgeholderinthissystemhasnoinfluence—differences between the estimated value and the price obtained will in reality remain concealed if the pledged goods are sold together with others as one parcel, as probably will be the normal procedure. In this way, it is possible to favor even creditors with a lower rank than pledgeholders have.

Of course, strong social arguments can be advanced for the priority of the two categories of claims going before pledge, as long as a good social-insurance system is lacking in the Russian Federation. But until then, Russian practice will have to manage without the reliable financing instrument that the right of pledge was meant to be in the Dutch Code. This raises a fundamental problem that I can explain best by referring to a characteristic Dutch experience, illustrating the sometimes unexpected effect that rules of mandatory law might have in practice.

Mandatory Law and Its Limits

Dutch experience in the period before 1992 teaches us that practical objections to the rules on pledge form a strong incentive for creditors to try to replace this right by contracts giving them full title to the goods.

The Dutch Code of 1838 excluded the possibility of a right of pledge on movables in the possession of the debtor. Moreover, according to this code, a right of pledge on claims did not include the power to collect the money due out of these claims. A special power of attorney was possible, but this did not help when it was most needed: such a power ends in the case of bankruptcy of the debtor. This resulted in a growing tension between those strict mandatory rules and the needs of practice that were felt more and more acutely, as the interests of both debtors and creditors were involved, the former being frustrated in their need to obtain credit for a reasonable interest rate, the latter being unable to protectthemselvesagainstinsolvencyoftheirdebtorsand,consequently,

missing opportunities of safe investment. In this situation at the end of the 1920s, the Dutch courts without any base in legislation accepted the constructionofafiduciarytransferofpropertytothecreditorinlinewith the Sicherheitsübertragung German style and, in fact, intended to circumvent the limitations of the right of pledge in the code. The result was a kind of informal right of pledge, giving the creditor fundamentally more rights than he could derive from the rules on pledge in the code even if the mandatory restrictions mentioned above would be abandoned. From the 1930s on, these fiduciary transactions became more and more impor- tant. It became in this way quite normal that all the important assets of an enterprise were, in fact, property of the financing bank. A drawback of this kind of right was the uncertainty of its exact limitations because the courts tended later on to apply by analogy at least some of the rules on pledge on fiduciary ownership. Even after 1992, this remained a rich source of lawsuits for the Supreme Court because cases originating from before this year kept coming in.

Under the new code, the situation has changed but less than it might seematfirstsight.Whatthenewcodehastriedtodoistoreplacefiduciary transfer by an extended right of pledge giving the creditor a position of approximately the same strength. Nevertheless, until the last moment, the opposition of practitioners against the new rules had been strong. Though the code contains in Article 3:84, para.3, a clear provision exclud- ing fiduciary transfer old-style, the pressure from legal and commercial practice to restore as much as possible the old situation has continued. Pleas to repeal Article 3:84, para.3, are not rare, though this alone would not have the desired effect: the gist of this rule already results from the closed system of Dutch rights in rem.

The discussion on this subject has not yet ended, connected as it is with the desire to introduce into Dutch law the possibility of creating institutions inspired by the trust of the common law.The Supreme Court, however, has accepted as valid the construction of sale and leaseback: the debtor sells and transfers goods that are already his property to the lease company; in the same contract, he leases the goods back from this company, which enables him to continue the use of these goods. Economically, the price obtained functions as a loan that has to be paid back in installments in the form of rent. At the end of the lease, the debtor may be entitled to become owner again for a symbolic consideration. It is possible that the goods were just furnished to the debtor by a supplier who is paid by the lease company, as was the situation in the case judged by the Supreme Court. But the court has added that this kind of transaction is valid irrespective of the period that the debtor was already

owner of the goods and of his intentions concerning the use of the money he received by selling the goods to the lease company. This—to many eyes—approximatesafiduciarytransfer.Somelegalscholarshavealready ventured the opinion that this judgment opens the gate for many other fiduciary transactions as well.

I wonder what the situation would be in such cases under the Russian Code. Russian bank practice tends, as I am told, to make more and more use of this kind of transaction in any case, preferring it to pledge contracts. The bad turn that the Russian economy took in the 1998 crash will probably enforce this tendency. This is understandable. The Russian Code regulates the contract of purchase and sale, as well as the contract of lease, including financial lease (Arts.665-670), which is a secured transac- tion giving to the creditor the ownership of the goods. Moreover, the new Law “On Leasing”, which entered into force on 28 October 1998, makes clear that leasing is seen as a very important instrument for financing. It is difficult to see, at first sight, on what grounds a contract of sale and leaseback could be judged invalid. Moreover, Article 329 of the code does not contain a closed system of means for securing obligations. In Russian law, a right of pledge is not a right in rem, which makes it impossible to rely here on the closed system of rights in rem ofArticle 216.This is different in Dutch law where pledge and mortgage are considered to be rights in rem and where this closed system is a major argument against fiduciary rights that do not fit into it.

On the other hand, this kind of contract can be seen as a disguised loan, the goods being used in fact as collateral. For that reason, other creditors, invoking Article 170 of the Russian Code, might claim that the whole thing is just a sham transaction to circumvent the mandatory rules on pledge and not a real transfer. The intent of the parties is not to give the transferee the rights of an owner but only to give him the right to take recourse on the goods in case the debtor fails to pay. In the strict system of the new Russian Code, such a transfer—serving exactly the purpose of a right of pledge without possession—seems at least questionable. Even if this is not thought to be decisive in case of a clear sale-and-leaseback construction as in the case judged by the Dutch Supreme Court, it prob- ably is a real obstacle for a fiduciary transfer German-style in general.

Essentially, fiducia is an instrument of unwritten law in the hands of the courts to break through written rules of law that are esteemed too strict for practice. In a new code, radical instruments like this should be super- fluous. Hostility to constructions of this nature might also be deduced from Article 209(4), excluding trust ownership.

However, it seems uncertain what turn Russian law will take in the long run. What we see here is, in fact, an example of the limits that even a legislator cannot exceed. In the end, it is judicial practice that deci­des where the tension on restrictive rules of mandatory law becomes too strong to contain­ the rising power of economic reality.23

The Role of Suppletive Law

The general part of the law of obligations is, in both codes, mainly a matter of suppletive law. This is in accordance with the nature of this subject matter. Parties may be aware of at least the mainlines of specific contracts such as purchase and sale, lease, and insurance. But it is unrealistic to suppose that they have in mind the general rules of contract law applicable in case of complications in the performance of their contract and know exactly what behavior is required from them by the still more general rules on obligations. The Dutch Code, for instance, has rather detailed rules on different categories of nonperformance and the rights and obligations of each of the parties in those categories. In the Dutch view, those rules are not so much indications for those parties on how to behave as they are standards for the courts to judge their behavior after the event. That means that those provisions must be seen in the general light of the requirements of reasonableness and equity that might easily lead a court to corrections based on the circumstances of the case, as it is entitled to do by referring to Articles 6:2, para.2, and 6:248.

The Russian approach seems to be slightly different. The emphasis is on another function of suppletive law, which can be explained by the difference of background of both codes. Drafting a reliable contract requires sufficient skill in compiling detailed sets of terms and condi- tions and a thorough knowledge of the problems that should be solved therein. In a society in transition as the Russian one is at this moment, this kind of skill and expertise is obviously lacking in many places. For that reason, the Russian Code offers substitute solutions or guidelines for practice in the form of suppletive law, not only in the general part of the law of obligations but perhaps even more so in the part on specific contracts. Moreover, Article 427 opens the possibility to assist practice by publishing model terms and conditions for contracts that might be used by parties referring to them in their agreement, and that eventually might be applied as business usage even in cases where the agreement does not refer to them.

23A possible development of Russian fiduciary transactions that might be used to cir- cumvent the limitations of the right of pledge is touched upon in other contributions in this volume as well; see, e.g., P.B. Maggs.

In The Netherlands, this function, though not entirely absent, is much less obvious. I have already referred to the importance of general conditions in Dutch practice. It can be left to legal practitioners to draw up sophisticated agreements needed by entrepreneurs and to develop new varieties of contracts in the field of insurance, leasing, factoring, securiti- zation, and so on. Moreover, the rules on protection against unreasonable and onerous general conditions make mandatory law concerning specific contracts, to a large extent, superfluous. In this light, it is understand- able that the Russian Code has suppletive and mandatory rules on many well-known contracts on which the Dutch Code is silent:24 power supply (Arts.539-548), sale of an enterprise (Arts. 559-566), lease of an enterprise

(Arts.656-664), financial leasing (Arts.671-688), credit (Arts.819-823), fac- toring (Arts.824-833), bank deposit, bank account, and some other bank transactions (Arts.834-885), and franchising (Arts.1027-1040). Some of thesenewruleshavebeeninspiredbyinternationalconventions(financial lease, factoring). Other contracts evidently have been inserted because they were usual under the planned economy of the past and were expected to stay in use at least for some time after this, such as delivery of goods for public needs (Arts.525-534).

Dutchexperiencewithlegislationonspecificcontractsintheperiod

1930-1960 teaches us that even recent suppletive law may soon lose its interest because parties prefer to regulate their economic relations by using their model contracts and general conditions.25 A similar development seems possible in Russia. This fading away of parts of a civil code in the course of time must be seen as a sign of a healthy civil-law system and might be expected from the activities of the reasonable practitioners who were introduced in my reflections under section heading “Style, General

Standards, and Interpretation” above and who are necessary to give the code its true meaning.

24At this moment, the Dutch Code only contains chapters on purchase and sale, provision of services, mandate, commercial agency, contract of medical treatment, traveling contract, deposit, employment agreement, suretyship, and contract of settlement, all inBook7.Moreover,aseriesofspecificcontractsinthefieldoftransportlawisplaced in Book 8. Drafts on hire-purchase of immovables, insurance, gift, leasing, and work contract are in different stages of parliamentary procedu­re. Some other subjects, like partnership, are in course of preparation.

25Large parts of the suppletive law inserted in the commercial code by the Law of 14 June 1930, concerning transport by seagoing ships, were rarely applied in practice because the customary forms of bills of lading and charter parties practically always contained more or less diverging clauses.The same phenomenon was seen after the entry into force on 1 November 1952 of the legislation on transport by ship of inland navigation. Here, general conditions were prepared in advance precisely to prevent the new legislation from ever having any practical effect.

Summary

Summing up my findings, I might add that new civil codes are a bit like seventeenth century landscape paintings.They seem to show a harmonious whole and a coherent conception. But when you look closer and make a real study of them, you will see that they are composed in fact out of many heterogeneous elements, brought together by the painter in his workshop from sketches and other paintings made on very dissimilar occasions.

Flowers blooming in different seasons might be seen next to each other.

A bull might have the head of a bull that is one year old and the body of one that is at least five years old; its legs might be taken from a sketch of a cow. In this respect, the resemblance of both codes is striking, although the elements are dissimilar even where they seem to concur.