Oda Russian Commercial Law 2007

Obligations related to entrepreneurial activities with several debtors or creditors are joint and several, unless the law, legal acts, or terms of obligation provide otherwise (Art.322).

4CHANGE OF THE PARTIES

1)Assignment of Claims

The right (claim) which belongs to the creditor can be assigned by a juristic act (contract) or shift to another person by law (Art.382, para.1). As an exception, rights which are inseparable from the personality of the creditor cannot be assigned. These include the right to alimony and the right to compensation for damage on the life and health of an individual (Art.383). Also assignment is not allowed if it is against the law, legal acts, or contract (Art.388). Thus, it is possible to restrict the right to assign the claim by means of a contract.

For assignment of claims, the consent of the debtor is generally not needed, unless otherwise provided by law or contract. However, noti cation is necessary. If the debtor was not noti ed in writing of the assignment of the claim, the new creditor bears the risk of disadvantageous consequences; performance of obligation to the original creditor is regarded as an appropriate performance in such cases (Art.382, para.3). Consent of the debtor is needed, however, if the identity of the creditor has an essential meaning to the debtor (Art.388, para.2).

The rights of the original creditor are transferred to the new creditor in the same scope and with conditions which existed at the time of the assignment. What is particularly important is that the rights which secure the performance of the obligation, e.g. pledge, as well as other rights related to the obligation, such as the right to unpaid interest, shift to the new creditor (Art.384). Whether the agreement concerning the place of dispute settlement would be transferred together with the claim was disputed at the former Foreign Trade Arbitration Commission in Moscow in 1984. The Commission concluded that the agreement was independent from the main contract and could not be transferred.7 The issue in the following case was whether or not this conclusion can be maintained under this provision in the Civil Code:

By an agreement concluded in 1996, a Belgian company assigned to a US company a claim against a Russian joint stock company in lieu of the repayment of a loan. The US company, which opened an of ce in Russia, brought an action against the

7Sadikov ed., Komentarii k grazhdanskomu kodeksu Rossiiskoi Federatsii, Chasti Pervoi, rst edition, Moscow 1996, p.379.

Russian company for the enforcement of the claim in the Russian commercial court. The original loan agreement had an arbitration clause, referring the dispute to the StockholmArbitration Institute. The US company, in bringing the case to a Russian court, was of the view that the arbitration clause was independent of the loan agreement, had a procedural nature, and therefore, had not been transferred together with the claim to the assignee of the claim.

The Russian commercial court ruled that the right to bring the case to court was one of the component parts of the claim and should be recognised to have been assigned to the new creditor together with the claim by virtue of Article 384 of the Civil Code.8

The debtor is entitled to refuse performance until the new creditor presents evidence that the claim has been transferred to this person. The assignor of the claim is under an obligation to provide documents which certify the claim and any relevant information to the new creditor (Art.385). The debtor may set up the objection he had against the original creditor also against the new creditor up to the moment of notice of assignment (Art.386).

The creditor who assigned the claim is liable to the assignee for the invalidity of the claim which has been assigned, but is not liable for the non-performance of the claim unless the assignor guaranteed performance by the debtor to the assignee (Art.390).

2)Assumption of Debt

Transfer of debt by the debtor is allowed only with the consent of the creditor (Art.391). The new debtor is entitled to set up objections against the claim based upon the relationship between the creditor and the original debtor (Art.392).

5TERMINATION OF OBLIGATION

1)General

Obligations are terminated on the following grounds (arts.407-419):

i) performance;

ii) substitute performance (otstupnoe); iii) set-off;

8Item 15, Decision of the Plenum of the Supreme Commercial Court, February 16, 1998 No.29.

iv) merger of the status of the creditor and the debtor; v) novation;

vi) discharge;

vii) impossibility of performance; viii) act of government;

ix) death of a physical person or liquidation of a juridical person.

2)Substitute Performance

Performance of an obligation can be substituted by another kind of action subject to agreement of the parties (Art.409). Substitute performance has been practised for many years, but the present Civil Code has, for the rst time since 1922, accommodated a provision on it.9 The Code refers to payment of money and transfer of property as substitute performance, but it can be in other forms, such as provision of service.

Substitute performance is widely practised in Russia due to the “ineffectiveness of pledge as a means of securing performance”.10 A contract of substitute performance by transferring property (collateral) from the debtor to the creditor is concluded simultaneously with the basic loan contract. This is a contract with condition precedent and comes into effect by the debtor defaulting in the basic loan contract. The basic loan contract is terminated by substitute performance. The court practice seems to acknowledge this as “substitute performance of obligations secured by pledge”. In principle, all agreements of pledge which provide for the transfer of the collateral to the creditor in case of default are null and void, but as an exception, if the agreement quali es as substitute performance or novation, it is valid.11

3)Set-off

Set-off is possible between countering claims of the same nature which are due, have no xed time of performance, or become due on presentation. It is effected by an act of one of the parties (Art.410). The requirement of the same nature means that the object of the claim should be of the same kind, e.g. pecuriary. Setoffis not allowed when the counter claim is extinct by prescription, is a claim on

9O.Iu.Shilokhvost, Otstupnoe v grazhdanskom prave, Moscow 1999, pp.60-132.

10Ibid., pp.213-216.

11Decision of the Plenums of the Supreme Court and the Supreme Commercial Court, No.6/8 of July 1, 1996.

A company which manufactures aircrafts in Kazan, KAPO, brought an action against a state transportation company, Rossiia, for the rescission of a contract and payment of damages for its non-performance. The court of rst instance acknowledged the claim, which was upheld by the appellate court and the court of cassation. The Supreme Commercial Court quashed the judgment of the lower court on the following grounds.

According to the contract of May 25, 1994, the plaintiffwas under an obligation to produce an aircraft – IL-62M – and the defendant was under the obligation to take it. 80% of the price was to be paid in advance by June 1994 in order to nance the purchase of the engine and other components. However, the government decided that the production of this type of aircraft was not appropriate, and the budget did not provide nance for the advance payment. KAPO was informed on August 31, 1994.

Article 416 of the Civil Code provides that an obligation is terminated by impossibility of performance, provided that it has been caused by reasons for which the debtor is not liable. The Supreme Commercial Court found that the non-alloca- tion of the budget to the debtor quali es as such a ground. Therefore, the obligation shall be deemed to have been terminated on August 31, 1994.14

6LIABILITY FOR THE BREACH OF OBLIGATIONS

Debtors are liable for compensation for the loss caused to the creditor by nonperformance or inadequate performance of an obligation (Art.393, para.1). As a rule, this is a liability based upon fault (intent or negligence).

The present Code has introduced a de nition of fault for the rst time. A person is found to have not been at fault, if this person has taken all measures to ensure the adequate performance of the obligation with the standard of care and foreseeability which are required of this person in accordance with the nature of the obligation and the terms of business (Art.401, para.1).15 The absence of fault has to be proved by the person who is in breach of obligation (ibid., para.2).

In most jurisdictions, the absence of fault is not a defence in monetary obligations. However, in Russia, there have been cases where fault was required in pursuing the liability for the delay of performance in monetary obligations of government institutions:

14Decision of the Presidium of the Supreme Commercial Court of March 11, 1997, Case 7522/95.

15M.I.Braginskii ed., Nauchno-prakticheskii kommentarii k chasti pervoi grazhdanskogo kodeksa Rossiiskoi Federatsii, second edition, Moscow 1999, p.521.

Agovernment institution was sued for the delay in payment for the service provided by a joint stock company. The Supreme Commercial Court rejected the argument of the defendant that the penalties were unreasonable, but found that the delay of payment was due to the delay in the allocation of funds to the government institution from the federal budget and that this could mean that the institution was not at fault.16

For those involved in entrepreneurial activities, the Code provides for stricter liability. A person who failed to perform an obligation or performed an obligation in an inadequate manner while performing entrepreneurial activities is liable for compensation, unless it is proved that adequate performance was impossible due to force majeure (insurmountable force, nepreodolimaia sila), i.e. circumstances which are extraordinary and impossible to prevent (ibid., para.3). This applies when a law or a contract does not provide otherwise.

Force majeure includes natural disasters like earthquakes, oods, severe changes of temperature, military activities, epidemics, and large scale strikes as well as acts of government. Acts of government in this context include declaration of quarantine, prohibition of transport, and international trade sanctions.17 The Code explicitly provides that the breach of an obligation by a third party in relation to the debtor, absence of the goods in the market, or absence of money with the debtor are not force majeure (ibid.).

A foreign trading company with a representative of ce in Russia brought an action against a Russian foreign trade organisation for payment of the price for the sugar supplied to this Russian organisation. The defendant claimed that the money was transferred to a foreign bank in accordance with the term of the contract with the trading company, but was stolen from the bank, and argued that it could not be held liable for the fault of a third party. The commercial court, by referring to the Vienna Convention on the Sale of Goods, ruled that the defendant had failed to prove that the act of a third party in this case was a “hindrance out of control”.18

Bank “Kodeks, Vektris i kompaniia” brought an action against another bank, Rosbank, claiming the return of 3,700,000 roubles which was paid out from the plaintiff’s account. The rst instance court acknowledged the claim in full. This decision was quashed by the court of cassation.

The Supreme Commercial Court ruled upon the protest as follows.

16D.V.Murzin ed., Grazhdanskii kodeks RF s postateinymi materialami iz praktiki VAS RF, Moscow 1999, pp.402-403. See also S.V.Sarbash, Arbitrazhnaia praktika po grazhdanskim delam, Moscow 2000, pp.379-384.

17Sadikov ed., supra, third edition, pp.901-902.

18Item 4, Decision of the Plenum of the Supreme Commercial Court, No.29 of February 16, 1998.

The contested amount was transferred from the plaintiff’s account to the account of a limited liability company Terentina upon the instruction of the plaintiff. However, the plaintiff had never given such an instruction. In fact, the instruction was forged by an accountant of one of the group companies of the plaintiff. The accountant was convicted of theft by the ordinary court and the judgment had taken effect. Thus, the payment by Rosbank was effected without proper instruction by the holder of the account.According to the decision of the Plenum of the Supreme Commercial Court regarding transactions involving bank accounts of April 19, 1999, the power of the person who is given the right to dispose of the money in the account is to be veri ed by the bank in a manner set out by the bank’s regulations and in the contract with the client. Unless otherwise stipulated in the law or the contract, the defendant bank is liable for the consequences of the execution of an instruction given by an unauthorised person even in cases where the bank, by resorting to the procedure set out by the bank’s regulations and the contract with the client, was unable to establish that the instruction was given by an unauthorised person.19

In a similar case, a company opened a foreign currency account with a bank. After receiving a payment instruction from the company signed by the head of the company and the senior accounting of cer, the bank paid 1,570,275 US dollars to another company as a payment for a transaction on shares. Later it was found that these signatures as well as the share purchase contract were forged. The Supreme Commercial Court found that by transferring money without authorisation, the bank had failed to perform its obligation in an adequate manner, and thus, was in breach of law and the contract.20

If non-performance or inadequate performance of the obligation was caused by the fault of both parties, the court must accordingly reduce the amount of liability of the debtor. The court is entitled to do the same if the creditor by intention or negligence contributed to the increase of damage caused by non-performance or inadequate performance, or failed to take reasonable measures towards the reduction of damage (Art.404).

An act of employees of the debtor in performance of obligation is regarded as an act of the debtor. The debtor is liable for the acts of employees in relation to non-performance or inadequate performance (Art.402). If the debtor entrusted the performance of an obligation to a third party, the debtor is liable for nonperformance or inadequate performance by this person unless the law provides that the third party is liable (Art.403).

19Decision of the Presidium of the Supreme Commercial Court of September 10, 2002, Case 3468/02.

20Decision of the Presidium of the Supreme Commercial Court of June 30, 1998, Case 2310/98.