Oda Russian Commercial Law 2007-1
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GENERAL RULES OF THE LAW OF OBLIGATIONS |
State enterprise, Prodintorg (seller) and a joint stock company, Nakhodtorg (buyer), concluded a contract of sale of imported citrus fruits on November 4, 1994. In order to perform its part of the obligation, Prodintorg concluded a contract with Landesman Trans Trade on the import of fruits on November 16, 1994. However, Nakhodtorg, in a telegramme dated November 22, refused to buy these fruits from Prodintorg, since it failed to secure a space in a refrigerated warehouse. Prodintorg was forced to nd another buyer, and eventually sold the products to another company at a considerably lower price. Prodintorg brought an action to court in order to recover the lost pro t, i.e. the difference between the contractual price and the price agreed in the subsequent contract. The court of rst instance acknowledged the claim of the plaintiff, which was upheld by the appellate court.
However, the Supreme Commercial Court found that between the refusal to perform the obligation by the buyer and the loss caused to the seller by selling the products to another buyer, a causal link was lacking. According to an expert report, a substantial part of the products which reached Russia were either rotten or did not meet the state standards. The difference of the value was therefore not 814,687,198 roubles as the plaintiff claimed, but 69.635 roubles. Besides, the products were insured and the plaintiff had been paid by the insurance company. Furthermore, by virtue of Article 393, para.4 of the Civil Code, measures taken by the seller to sell the products at the price agreed with Nakhodtorg to an alternative buyer and the fact that these measures were unsuccessful were not proven by the plaintiff. Therefore, the claim had to be dismissed.24
The right to full compensation for the breach of performance can be limited by law or contract. Sometimes, the amount of compensation is limited to penalties, to the value of goods or service, or to the real damage and not the expected income, i.e. the loss sustained but not the income foregone. In some cases, a ceiling is set for the amount of compensation. However, limitation on the amount of compensation by standard form contracts or contracts in which the creditor is an individual as a consumer, is void, if the amount of compensation for such instances or such kinds of violations is determined by law, and the contract had been concluded before the incident occurred (Art.400, para.2).
In order to claim compensation, the plaintiff must prove 1) the breach of obligation by the defendant, 2) existence of a causal link between the non-perfor- mance or inadequate performance and the damage, and 3) the scope of damage caused by the breach on the part of the defendant.
Contracts often provide for penalties (neustoika – sometimes called peni or shtraf ) for non-performance or inadequate performance. The relationship between penalties and compensation for damage varies. The general rule is that compensation covers the damage which is not covered by penalties (Art.394,
24Decision of the Presidium of the Supreme Commercial Court of April 23, 1996, Case 508/96.
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para.1). However, there are variations. In some cases, penalties are all that the creditor is to receive (liquidated damages), such as in the transport industry. In other cases, penalties are charged in addition to compensation of damage. There are also instances where either penalties or compensation is available (ibid.).
For non-performance of monetary obligations, including the use of another person’s money as a result of its unlawful retention, refusal to return the money, and other delays in payment or unjusti ed receipt or holding of another person’s money, interest must be paid on the amount of the money. The rate of interest is determined by the bank interest rate applicable at the place of residence of the creditor on the day of performance (Art.395, para.1). If the damage incurred by the creditor through illegitimate use of money by another person is more than the interest payable, the creditor may claim the difference as well (ibid., para.2).
Penalties can be reduced by discretion of the court if they are apparently disproportional to the result of the breach (Art.333). This power of the court is said to be widely utilised due to the “extremely low standards of contract” which often provides for 5-10% penalties a day!25 In order to be reduced, the penalty must be apparently disproportionate to the consequence of non-performance or inadequate performance.
A closed joint stock company “Visit” brought an action against Torgovyi Dom, Parnas-Agro, for the payment of 1,001,940 roubles plus interest of 51,003 roubles. The rst instance court acknowledged the basic claim in full, but regarding the interest, it reduced the interest rate to 8% per annum by virtue ofArticle 333 of the Civil Code. The plaintiff argued that the interest rate stipulated in the contract, calculated on the basis of the re nance rate of the Central Bank, could not be reduced below that level, since the re nance rate was a statutory minimum liability.
The Supreme Commercial Court, quoting the joint decision of the Plenum of the Supreme Commercial Court and the Plenum of the Supreme Court, ruled that the court is empowered to reduce the interest only when the penalty is apparently disproportional to the consequence of the inadequate performance of the obligation.The criteria for “apparent disproportionality” include an interest rate which is considerably higher than the re nance rate of the Central Bank. In this case, the re nance rate during the period in question was between 16-18%. Therefore, the court concluded that the interest rate as stipulated in the contract did not need to be reduced.26
In one case, an interest rate which was 6-10 times higher than the re nance rate of the Central Bank was found to be apparently disproportional.27
25Braginskii ed., supra, p.498.
26Decision of the Presidium of the Supreme Commercial Court of August 10, 2004, Case 2613/04.
27Decision of the Presidium of the Supreme Commercial Court of April 11, 2000, Case 1048/99.
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MEANS OF SECURING OBLIGATIONS
1GENERAL
The Russian Civil Code has a separate chapter on securing the performance of obligations. The starting provision in this chapter states as follows:
Performance of an obligation can be secured by a penalty (neustoika), a pledge, the withholding of the object, a suretyship, a bank guarantee, earnest money, and other means provided by law or contract (Art.329, para.1).
Penalties, pledges, withholding of the object, suretyship, and bank guarantees are covered in subchapters in this part. In addition, there is a provision which refers to the retention of title in the part on contract of sale. Bank guarantee is a novelty of the Code, while other means already existed in the socialist code. The Code has another provision which refers to the retention of title in a different part. If it is agreed in the contract that the title to the product is to be retained by the seller until payment or ful lment of other conditions, the seller is under an obligation not to alienate or otherwise dispose of the product (Art.491). It also allows the parties to agree on other means of securing obligations under a contract.
The list of means of securing performance of obligation is by not exhaustive. The above-mentioned provision refers to “other means provided by law or contract”. This means that the Code does not exclude atypical security rights (see infra).
Furthermore, the Law on Banking and Banking Activities provides that repayment of credit can be secured by a pledge on movables and immovables, including state and other securities, bank guarantees and other means provided by Federal law or contracts (Art.33).
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2REAL SECURITY RIGHTS (PLEDGE)
1)The Concept
The Russian term zalog is usually translated into English as “pledge”. The Civil Code provides that by virtue of zalog, the creditor has a right to have the claim satis ed from the assets of the debtor in priority to other creditors in case of the debtor’s default. Thus, in this context, zalog refers to security rights in general. The Code divides zalog into two categories; pledges with or without transfer of the collateral to the creditor. Zalog over immovables is known as hypothec (ipoteka), while pledges on other properties do not seem to have a speci c name under the Code. The 1992 Law on Pledge (zalog) called it zaklad. The 1998 Law on Hypothec recon rmed that zalog on immovables was hypothec. This arrangement was the reverse in the Tsarist law. There was no speci c term for the zalog on immovables, while zalog on movables was called zaklad.1
Pledge is regarded as a right in personam rather than a right in rem under the Code. Provisions on pledges are part of the law of obligations and not the law of property. This is different from German, French and English law, but it is similar to the Dutch Civil Code on which the Russians had modelled the Code. Those who took part in the preparation of the Code pointed out that this is indeed a Russian tradition from before the Revolution.
Indeed, the Svod zakonov had provisions on security rights in the part dealing with contracts. Volume X (Civil Law) of the Svod zakonov was composed of four books. It started with the rights and duties of the family, followed by the procedure of obtaining and consolidating property rights in general. This part basically covered property rights. It was followed by the procedure of obtaining and consolidating property rights in speci cs. This latter part contained provisions on, inter alia, the obtaining of property by gift, sale, and inheritance. Book Four contained provisions on contracts. There was a chapter here which was devoted to the means of securing the performance of obligations. This included suretyship, pledges, and penalties for delay.2
Pledge was de ned as a right to receive payment from the proceeds of sale of the collateral in case of default.3 Thus, a pledge was not regarded as a right over the collateral, but rather, a right to demand that the collateral be sold and to have the claim satis ed from the proceeds. Presumably, this was why it was not made part of property law, but part of the law of obligations. On the other hand, some
1D.I.Meier, Russkoe grazhdanskoe pravo, St.Petersburg 1902, pp.434-435.
2 Ibid., pp.43-48.
3Ibid., p.432.
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lawyers in the Tsarist period maintained that zalog was a real right.According to Verblovskii, “an essential feature of pledge is its nature as a real right (veshchnoe pravo, dingliches Recht)”.4
The present Code seems to have followed the model of Svod zakonov. Russian commentators stress that a pledge is not a right in rem, but a right in personam by referring to a number of grounds. First, the object of a pledge extends to rights (claims) as well as things. Second, a pledge can be placed on property or claim which the debtor is to acquire in the future. Third, a third party, whose right over the property of the debtor is endangered by the enforcement of a pledge, may discharge it by paying the creditor without the consent of the debtor. Fourth, in case of loss of the collateral, the person who provided the object of the pledge may replace it with another property of the same value. Fifth, secured creditors may assign the right to another person by following the procedure for the assignment of claims.5
However, there are some provisions which seem to contradict the nature of the pledge as a right in personam. The major difference between a right in rem and a right in personam is that rst, the former is valid against everybody, but the latter is valid only against those who are bound by contractual relations. Under the current Russian Code, these rights are valid not only against the contractual party, but against everybody, if the necessary requirements, such as registration, are met. In this respect, the Law on Registration of Immovables and Transactions Involving Them cautiously provides that real rights are subject to registration, and in addition, encumbrances such as servitude, hypothec, trust, and lease are also subject to registration.6 Second, if a pledge is a right in personam, it will not necessarily follow the fate of the collateral. For example, if the collateral changes hands, the pledge on it may not always be transferred at the same time. However, the Code provides that the pledge follows the collateral in such cases. Third, if there are encumbrances on the property such as servitude, rights in personam are normally subordinate to these rights. This is not the case in the Code.
Some problematic effects can be deduced if is viewed as a right in personam. An example is the Insolvency Law. Under the Insolvency Law, secured claims are not excluded from the bankruptcy estate as they used to be under the previous law. This is explained as being a result of the fact that a pledge is a right in personam; only objects of real rights are quali ed for exclusion from the bankruptcy estate.
4 |
F.A.Brokgaus et al. eds., Entsiklopedicheskii slovar’brokhaus, St.Petersburg, vol.23, p.189. |
5 |
M.I.Braginskii and V.V.Vitrianskii, Dogovornoe pravo, Vol.1, second edition, Moscow 2005, |
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pp.501-502. |
6Law on Registration of Immovables and Transactions Involving Them, Law No.122-FZ of July 21, 1997, Art.4, para.1.
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2)The Laws
At present, there are two statutes other than the Civil Code which provide for pledge. In 1998, a new Law on Hypothec was enacted. This Law has clari ed some matters which were left ambiguous by other laws. In addition, the Law on Pledge of 1992 is still valid, insofar as it does not contradict the Civil Code and the 1998 Law.
There are some other laws which are relevant and supplement the system of security. Firstly, there is the Law on Registration of Immovables and Transactions Involving Them which was enacted in 1997. Although the system of registration is still in the process of development, it is hoped that this Law will bring order into the present chaotic registration system where local authorities set up their own rules. Secondly, there is the Law on Civil Enforcement which was enacted in 1997.7 Thirdly, a new Law on Insolvency was enacted in 2002 to replace the 1998 Law.8
According to the Civil Code, a new law which deals with the security of “goods in circulation”, e.g. inventories, is to be enacted, but has not been adopted so far.
3)Objects of Pledge
The Code provides that any property can be the object of a pledge, including proprietary rights (claims), but excludes property which is withdrawn from circulation and claims which are inseparably linked with the personality of the creditor (Art.336, para.1). A commentary to the Code suggests that the basic requirement for an object of pledge is its nature as a commodity.9 The Code, in the General Part, refers to the capability of circulation (oborotosposobnost’) of objects of civil law rights (Art.129). Objects of rights under the Code are freely disposable and can be transferred to another party unless it is withdrawn from circulation or the circulation is restricted. What speci cally is meant by the term “withdrawn from circulation” is not necessarily clear. A commentary on the Civil Code refers to natural resources on the continental shelf and exclusive economic zones, and cites forests as well as assets related to national defence as examples. Gold or silver which is not processed into ornaments cannot be traded
7Law No.119-FZ of July 21, 1997.
8Law No.127-FZ of October 26, 2002.
9M.I.Braginskii and V.V.Vitrianski, supra, p.513.
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freely either.10 On the other hand, in stark contrast to the socialist system, while mineral resources belong to the state, once they are extracted, they can belong to private entities and can be pledged.
The 1998 Law on Hypothec lists the following objects of hypothec (Art.5, para.1):
i)pieces of land;
ii)enterprises, as well as buildings, installations and other immovables used for entrepreneurial purposes;
iii)residential houses, ats and parts of them which comprise one or several separate rooms;
iv)dacha, garden houses, garage and other structures of a consumerist nature;
v)aircraft, ships and satellites.
These are immovables as provided for in the Civil Code. The Code lists land, subsoil reserves, demarcated water objects, and other property which is rmly attached to the land, i.e. cannot be removed without unreasonable harm to its purpose of use, as immovables. These also include forests, perennial plants, buildings and installations, aircraft, ships, and satellites. Under a separate provision, an enterprise as a whole is considered an immovable (Art.130, para.1).
On the other hand, this Law has a provision which sets out exceptions. Thus, land which belongs to the state or municipality and agricultural land cannot be hypothecated (Art.63, para.1).
Goods in circulation can also be the object of a pledge. The goods remain in possession of the titleholder, but the “composition and the identity” of the goods may change, provided that the total value does not fall below the agreed amount. Goods which are disposed of by the pledger cease to be the object of the pledge, while goods which newly come into the possession of the pledger become an object of the pledge.
Rights are pledgeable. However, the Code does not have speci c provisions on the pledge on rights. The only reference to rights as objects of a pledge is a provision which requires that rights embodied in securities be transferred to the pledgee or deposited with a notary public unless otherwise agreed in the contract (Art.338, para.4). Therefore, at this moment, the 1992 Law on Pledge is applicable here. It provides that the right to possess and use a property, including leases as well as other rights, and claims emanating from obligations and other proprietary rights qualify as objects of a pledge.
10O.N.Sadikov ed., Kommentarii k grazhdanskomu kodekusu Rossiiskoi Federatsii, chasti pervoi, third edition, Moscow 2005, pp.365-368.
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Furthermore, the 1998 Law on Hypothec accommodates a provision on leases (arenda) of immovables (Art.5, para.5). A lease cannot be hypothecated without the consent of the owner. Furthermore, in the case of default by the debtor, the creditor is not entitled to take over the lease; the lease has to be realised, i.e. sold by auction.11
Securities can be pledged. In fact, the pledge of securities is widely utilised and is one of the few means through which juridical persons and individuals can receive a loan from a bank. Furthermore, it is, in many instances, the only collateral the creditor accepts. When the Bank of Russia (the Central Bank) extends loans to banks, treasury bonds are the only security accepted.12
Whether money in an account can be the object of a pledge or not is being discussed. The problem is whether the money in the account can be seized by a secured creditor in preference to others in the case of default by the debtor.
Sverbank initiated an action against Pakamar Bank claiming that the contract of pledge concluded between them was null and void. The pledged object was the “money in the correspondence account”. The Supreme Commercial Court found this contract to be null and void by virtue of Article 168 of the Civil Code, since money in a correspondence account was not transferable, while the Civil Code presupposes that the collateral should be transferable.13
The Supreme Commercial Court summarised this case as demonstrating that “the object of a pledge cannot be speci ed as money in the bank account”.14 However, this decision is being criticised.15 Perhaps the pledge should have been arranged as a pledge on the claim of the debtor to the money in the bank account. But even then, there is a problem with the realisation of the collateral (see infra).16
In contrast to a pledge on roubles in the account, using foreign currency as the object of a pledge is said to entail no problem.17
11V.Smirnov and Z.Lukina, Kommentarii k federal’nomu zakonu ob ipoteke, Moscow 1999, pp.30-31.
12A.A.Makovskaia, Zalog denezhnykh sredstv i tsennykh bumag, Moscow 1999, pp.25-26.
13Decision of the Presidium of the Supreme Commercial Court, July 2, 1996, Case 7695/95.
14Item 3, Information Letter of the Supreme Commercial Court No.26, January 15, 1998.
15A.Lisov, “Mogut li byt” predmetom zaloga nalichnye denezhnye sredstva?”, RIu 2002 No.7, pp.29-30.
16Sadikov ed., supra, p.827.
17Braginskii and Vitrianski, supra, pp.516-517. Lisov, supra.
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4)Form of Contracts and Registration
The Code requires that a contract of pledge be in written form.Apledge on movables or rights on property which secures a claim based upon a contract which is subject to notarisation, must be notarised (Art.339, para.2).
In a contract of pledge, the object of the pledge, its value, the nature, and the amount and time of performance of the secured obligation must be speci ed (ibid., para.1):
A bank brought an action against a joint stock company for the repayment of a debt and at the same time, the seizure of two automobiles which had been pledged. In the contract, the object of the pledge was speci ed as “automobiles and other means of transport which belong to the debtor”. During the hearing, it was found that the debtor had several automobiles in its possession. The court found this contract had not been concluded, since the object of the pledge was insuf ciently identi ed. In addition to the type of the property (“automobile”), individual characters of the object which allow the object to be distinguished from similar objects must be speci ed.18
The Law on Hypothec lists essential elements to be speci ed in the contract (Art.9).
Security rights over a property presuppose an appropriate system of publicity, particularly when the collateral remains in the possession of the debtor. The Code distinguishes two types of pledge; pledges with and without the transfer of the collateral to the creditor. Pledges on immovables (hypothec) and on “goods in circulation” belong to the latter.
The Code provides that a hypothec must be registered; otherwise, the contract is null and void (Art.339, para.3).
The system of registration of immovables was almost absent in Russia under socialism.After the collapse of socialism, until 1997, it was the task of the committees on land resources and land reallocation attached to the local government to register rights on land. However, since it was not clear whether a hypothec was a right which could be registered with the committee, there were cases where the committee simply refused to register such rights.After all, it was only in the early 1990s that the committee started to develop a register of rights over land. In one case, a commercial bank applied for the registration of a hypothec over a piece of land, which was refused by the committee. The bank appealed to the commercial court, which eventually ordered the committee to register the hypothec.
18 Item 2, Information Letter, supra.