Oda Russian Commercial Law 2007-1
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The buyer is under obligation to accept the goods except in cases where he is entitled to a replacement or to refuse performance. The buyer also has a duty to cooperatewiththeseller:heisobligedtoperformactswhich,inthelightofnormally presented requirements, are necessary for ensuring the transfer and acceptance of the goods, unless otherwise provided by law or other legal acts (Art.484, paras.1 and 2).
(3)Transfer of Risk
As a rule, the risk for accidental loss or damage on goods is transferred to the buyer when, by law or contract, the seller is regarded to have performed his obligation to transfer the goods to the buyer. The risk of goods in transity is transferred to the buyer from the moment of conclusion of the contract of sale, unless the contract provides otherwise or there is a different commercial custom (Art.459, para.2).
(4)Third Parties
The seller is under an obligation to transfer the goods to the buyer without any encumbrance by rights of a third party, unless the buyer agreed otherwise. A breach of this obligation will result in the right of the buyer to demand a reduction in price or rescission of the contract, if it is not proved that the buyer had known or should have known of the existence of the third party’s right on the goods. The same applies when there was a claim on the goods which the seller was aware of, and this claim was subsequently found by an established procedure to be with grounds (Art.460).
If the object of sale was taken away from the buyer by a third party on the ground which had existed before the performance of the contract, the seller is liable for the damage unless the seller proves that the buyer had known or should have known of the existence of such a ground. An agreement to exempt or limit the liability of the seller in such cases is null and void (Art.461).
Exemption of the liability of the seller if he proves that the buyer should have known of the existence of the third party’s right is rather questionable in that it gives too much protection to the seller who was aware of the existence of such a right.
If a third party initiates litigation vis à vis the buyer for taking away the object of sale on the ground which had emerged before the performance of the contract, the buyer may cause the seller to take part in the proceedings and the seller is under an obligation to take part on the side of the buyer. If the seller was not involved in the proceedings, the seller is exempted from liability, if he successfully proves that had he participated, he could have prevented the third party from taking away the property (Art.462).
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(5)Quality of Goods
The seller has a duty to transfer to the buyer the goods which in terms of their qual-ity correspond to the requirements set out in the contract. If there are no requirements in the contract, the seller is under an obligation to provide goods which are produced for the purpose for which such goods are normally used for. If the buyer had informed the seller of the speci c purpose or use for the goods, the seller must provide goods for that particular purpose (Art.469, paras.1 and 2). If, there is a mandatory requirement as to the quality of the goods, the seller, who is engaged in entrepreneurial activities, is under an obligation to provide the goods which correspond to such mandatory requirements (ibid., para.4).
The buyer who receives goods of inappropriate quality may, by his choice, require the seller the following (Art.475, para.1):
i)commensurate reduction in price;
ii)free removal of defects within a reasonable period;
iii)reimbursement of the cost of the removal of the defect incurred by the buyer.
If there was a substantial breach of the requirement of quality, de ned by the Code as an irreparable defect, defect which cannot be removed without disproportional cost or time, or repeatedly appearing defects, the buyer may choose from the following alternatives (ibid., para.2):
i)refuse the performance of the contract of sale and require the reimbursement of the money paid for the goods
ii)require the replacement of the defective goods with those which meet the quality requirements
In retail sale, the buyer is entitled to require replacement even if there is no substantial breach regarding the quality of goods (Art.503, para.1).
As a rule, the seller is liable for the defect of the goods if the buyer has successfully proved that the defect of goods or the cause of the defect had emerged before the transfer of the goods to the buyer. Only when the seller has guaranteed the quality of the goods, does the burden of proof shift to the seller; the seller must then prove that the defect of goods or the cause of the defect emerged after the transfer of the goods to the buyer and as a result of the breach of the rules of use or storage by the buyer, an act of a third party, or by force majeure (Art.476). In contrast with laws in other jurisdictions as well as the EU directive on product liability, where the burden of proof usually lies with the seller, this seems to be rather disadvantageous to the buyer.
The procedure of inspecting the quality of goods is established by law and other legal acts, mandatory requirements of the state standards, or by contract.
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In the absence of such procedure, the inspection is carried out in accordance with commercial custom or other normally applicable requirements to the given goods (Art.474, paras.1 and 2):
Limited liability company, Firma SDM-Servis, brought an action in the Commercial Court of Krasnodarsk Region against the joint stock companyAgrokompleks claiming compensation for supplying substandard bricks.
The rst instance court dismissed the claim on the ground that the plaintiff had failed to prove that the bricks were substandard. This was upheld by the appellate instance. Upon protest, the Supreme Commercial Court quashed the original judgment.
In this case, the plaintiff supplied the defendant with an excavator and machinery for cutting bricks, which were to be supplied by the defendant. The inspection of the brickwork on the 7th oor on May 13, 1996 revealed that the bricks were cracking and collapsing. The bricks were sent to the laboratory for technical examination. The plaintiff had submitted the report of this test as well as a report prepared with the participation of a director of a construction material plant. The director had agreed that the bricks were substandard.
The rst instance court dismissed the claim because the plaintiff had failed to follow the procedure set by an instruction of the former USSR gosarbitrazh on the acceptance of products.
The Supreme Commercial Court found this reasoning to be unjusti able, since the contract between the parties of March 5, 1996 was governed by Book Two of the Civil Code and the above instructions were not applicable any more. According to Article 513, para.2 of the Code, the buyer is under an obligation to inspect the quantity and quality of the accepted goods in accordance with the procedure set by law and other legal acts, contract or business custom. The contract was silent on this matter.
The Court also noted that the lower court failed to examine the result of a random test referred to in the report. The Court concluded that the plaintiff’s claim should be satis ed.14
As a rule, the buyer must inform the seller of the breach of the terms of the contract regarding quantity, quality, packaging etc. within the period determined by law, and other legal acts or by the contract itself. If such a period is not determined, the claim has to be presented within a reasonable period by taking into account the nature and purpose of the goods (Art.483, para.1). There is a separate provision for discovering defects. If there was no guarantee period or period of use speci ed, the defect should be found within a reasonable period, but less than 2 years from the transfer of goods to the buyer unless law or contract provides
14 VVAS 1998 No.5, pp.46-47.
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for a longer period. If a period of guarantee or usage is established, the claim has to be presented within this period (Art.477).
For sale of goods to consumers, there is a special law – the Law on the Protection of Consumers of 1996.15 “Consumers” in this Law means individuals who order, acquire or use the goods exclusively for personal needs not related to gaining of pro ts. Consumers are guaranteed the right to information on manufacturer and seller of the goods as well as the goods themselves (Arts.8- 12). Manufacturers and sellers are liable for inappropriate information. There are detailed provisions on the consequence of sale of goods with inadequate quality (Art.18).
(3)Sale of Immovables
The de nition of immovables is given in the General Part of the Civil Code (Art.130). The sale of immovable requires a written form – a single document signed by the parties (Art.550). Previously, some transactions involving immovables, e.g. sale of accommodation, required notarisation, but with the introduction of the system of state registration of immovables, this ceased to be mandatory except for transactions on hypothecs securing obligations subject to notarisation.
An important requirement for the sale of immovables is that in the contract information that allows the demarcation of the immovable to be transferred must be speci ed. This is an “essential term” of the contract as provided in the general part of the contract law (Art.432). If there is no such information, the parties are deemed to have failed to agree on the terms, and therefore, the contract is null and void (Art.554). This may be rather dif cult in a sale of land where, in many areas, with the insuf cient development of the Land Register, the demarcation of the land is not clear.
The transfer of immovables by the seller and acceptance by the buyer are effected by a “transfer document” or other documents signed by both parties. The seller’s duty to transfer the object is considered to be ful lled by handing over of the object to the buyer and signing of the transfer document (Art.556, para.1).
The transfer of title to immovables is subject to state registration. The contract itself takes effect between the parties at the time of conclusion. The signi cance of state registration is that only after the registration, may the buyer become a titleholder in relation to a third party. Performance of the contract of sale of immovables before state registration is not a ground for a change of relations vis à vis a third party (Art.551, paras. 1 and 2). In cases where one of the
15 Originally enacted in 1992, Law 2300-1 of February 7, 1992.
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parties fails to register the transaction, the court, upon the petition of the other party, may render a decision to register the transaction. The party that failed to register without justi able grounds is liable for damages to the other party.
True to the tradition of Russian law, the Civil Code provides that if a building, installation, or other immovable is sold, the right over the piece of land which the immovable occupies and which is needed for its use is transferred to the buyer together with the title to the immovable (Art.552, para.1). The right over the land which the buyer obtains depends on the right which the seller had held. If the seller had a title-ownership right over the land, then the buyer may acquire either an ownership right, the right of lease, or other rights over the land as provided by the contract of sale (ibid., para.2). If the seller did not have the title over the land, nevertheless, he is entitled to sell the building, installation etc., without the consent of the owner of the land, provided that it is not against the terms of use of the land determined by law or contract. In such cases, the buyer obtains the right to use the land on the same terms as the seller (ibid., para.3).
Conversely, if a piece of land on which a building, installation, or other immovable belonging to the seller is located is sold, the seller retains his right to use the land which is occupied by the building etc., and the land which is needed for its use. The terms of use are to be determined by the contract of sale. In the absence of contractual provisions, the seller retains the right of servitude over the land (Art.553).
The above arrangement contradicts the arrangement in the Land Code [see Chapter 9].
Since most of the immovables – land, buildings, and enterprises – used to be state-owned, the title of the current seller emanates from state or municipal property. However, the process of the transfer of title to the private sector was at the best, murky. Therefore, the title of the seller is often contested in court:
A deputy procurator of the Perm Province brought an action in the Commercial Court of the Perm Province “for the interest of the state” to declare void the decision of the city government of the Solikamsk on the sale of a non-residential building and the contract of sale between the municipal enterprise of retail trade, Sosenka, and an open joint stock company Sosenka. The claim was based on the ground that property which belonged to the municipality had been transferred to the company in breach of the privatisation law.
The retail enterprise Sosenka was set up by the city committee for the administration of municipal assets in 1992. The shop was used on the basis of a lease agreement betweentheenterprise and the committee which was renewed every year.In 1998, the premises were transferred for the right of economic management of the enterprise by the decision of the city government, and Sosenka was granted permission for its sale to the newly established joint stock company on the condition that the latter fully assume the debt of the enterprise.
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The rst instance court and the appellate instance dismissed the claim of the procurator on the ground that the sale of the premise was effected in accordance with articles 215, 295 and other provisions of the Civil Code. However, the Supreme Commercial Court pointed out that the lower courts failed to take into account that enterprises are prohibited from alienating assets directly needed for production purposes which belong to its economic management. Such transfer is void on the basis of Art.168, regardless of the existence of the owner’s (city government) consent. The case was referred for a new hearing.16
Thus, the buyer can never be certain of whether the seller’s title to the immovable is free from any claims.
(4)Sale of Enterprises
There are separate provisions for the sale of enterprises in addition to the provisions on the sale of immovables, although, according to the Civil Code, enterprises are immovables. If the object of sale is state or municipal property, the Law on Privatisation also applies.
Under a contract of sale, an enterprise as a whole – a “proprietary complex” – is transferred to the buyer. This includes the trade name, trademark, service mark and other means of identi cation. The contract has to be in writing, and subject to registration. Unlike the contract of sale of other immovables, not only the title, but the contract itself has to be registered. The contract takes effect only with registration (Art.560, para.3).
Before the signing of the contract, act of inventory, balance sheet, opinion of an independent auditor on the composition and the value of the enterprise, list of all the debts with the indication of the name of the creditor, nature, amount and the time of payment must be prepared and inspected by the parties (Art.561).
There are protections for creditors. Creditors must be noti ed of the sale in writing by one of the parties before the transfer of the enterprise to the seller. Creditors who did not give consent to the transfer of debt to either the seller or the buyer are entitled to require, within three month of the receipt of the notice, the termination of the claim or accelerated payment and compensation of loss by the seller. Creditors may also require the contract of sale to be recognised as null and void in its entirety or its part. They may initiate litigation within a year from the time of becoming aware of the transfer, or should have become aware of the transfer.After the transaction, the seller and the buyer bear joint and
16Decision of the Presidium of the Supreme Commercial Court, October 19, 1999, Case 5733/99.
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several liability for the debt for which the creditor’s consent was not obtained (Art.562).
An enterprise is deemed to have been transferred to the buyer from the date of the signing of the transfer act by both parties. From this moment, the risk of accidental loss or damage shifts to the buyer (Art.563).
The consequence of the transfer of enterprise with defects, including the quality of the assets, is determined by the provisions on the seller’s liability in the general part of the contract of sale. Particularly important is that the buyer is entitled to a reduction in price if a debt which was not indicated in the contract of sale or the transfer act was transferred to the buyer, unless the seller proves that the buyer was aware of such a debt at the time of the conclusion of the contract and the transfer of the enterprise (Art.565, para.3). The buyer is entitled to rescind the contract or require revision of the contract, if the enterprise is nott for the purpose indicated in the contract due to a defect for which the seller is liable, provided that the defect has not been removed in accordance with the terms, procedure, and time as set by law and other legal acts or contract, or that removal of the defect is impossible (ibid., para.5).
3)Contract of Lease
(1)The Concept and Types of Lease
There are two Russian terms for lease: arenda and naem. The term arenda, according to a Tsarist Russian source, originates from the Latin reditta. It denotes a lease of immovables, i.e. a contract by which a person provides immovable property to another for a xed period for a rent.17 The concept of imushchestvennyi naem also existed at that time, but there was a clear distinction between arenda and naem. The object of arenda was of “productive nature”, while naem was for objects of an “instrumental character”.18
Thus, arenda was historically used in relation to lease of means of production. There was no wonder the term arenda did not appear in the civil codes of the socialist period when means of production was monopolised by the state. Instead, the term “proprietary lease (imushchestvennyi naem)” was used for a limited scope of properties. Lease of land and enterprises existed in the NEP period, but disappeared in the late 1920s. Under socialism, not only was the
17F.A.Brokgaus et al. eds., Entsiklopediicheskii slovar’, vol.II, St.Petersburg, 1890, pp.54-55.
18Ibid., vol.XX, p.450.
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object of “imushchestvennyi naem” limited, but its length was also limited to the maximum term of 10 years.19
A signi cant change was introduced by the Fundamental Principles of the Law on Lease of the USSR in 1989. It was not only that the term arenda was of - cially restored. This Law de ned a lease as a contract of possession and use (not disposal) of land and other natural resources, enterprises and proprietary complexes as well as all other properties needed by the lessee for economic and other activities. These objects which were hitherto unavailable for lease could now be leased by entities such as state enterprises and local governments. Juridical persons and individuals including foreign ones were allowed to be lessees. While this Law remained in force only until 1992, it marked a radical turn towards market economy in that it enabled individuals and private entities to establish business on the basis of leased assets. In fact, by leasing state enterprises and eventually purchasing them, which was allowed by this Law, “spontaneous privatisation” of state enterprises in the form of management and/or employees buy-out spread rapidly. In this sense, together with the Law on Cooperatives, it accelerated the transition to the market economy.
The current Civil Code has a chapter on lease (arenda) and another chapter on lease (naem) of residential premises. The chapter on lease (arenda) is further divided into different types of lease.After the general part applicable to all kinds of lease (arenda), there are provisions on hire (prokat), lease of means of transportation, lease of buildings and installations, lease of enterprise, and nancial lease (lizing). Hire denotes a contract in which the lessor leases movables as a permanent entrepreneurial activity. (Art.626, para.1). Financial lease is de ned as a contract in which the lessor is under obligation to acquire a property designated by the lessee from the seller and provide it to the lessee for the possession and use for entrepreneurial purposes of a xed period in exchange for payment (Art.665).
(2)General Rules
The object of a lease includes all durable property, from land and other “natural objects”, enterprises and other proprietary complexes, buildings, installations, equipment, means of transportation and other things which do not lose their natural attributes with their use. It is possible to determine by law types of property in respect of which lease is prohibited or restricted (Art.607, para.1).At present,
19 Art.277, 1964 Civil Code of RSFSR.
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there is no such law.20 Information which enables the object of lease to be identi-ed has to be indicated in the contract; otherwise, the contract is regarded not to have been agreed and concluded (ibid., para.3).
A contract of lease for more than a year, or in cases where at least one of the parties is a juridical person, regardless of the term, must be concluded in writing. A contract of lease of immovable is subject to state registration (Art.609, paras.1 and 2).
The length of lease is determined by the contract. If there is no such term, the lease is regarded to be for an indeterminate period. This means that either party may terminate the lease with one month’s notice (in the case of immovables, three months’notice).
As a rule, it is the owner of the property who may be a lessor. In addition, those who are empowered to do so by law or by the owner may lease the property under his control. Thus, state enterprises may lease state property only with the consent of the owner.
The lessor is liable for the defects of the property provided to the lessee which inhibits its use wholly or partly, even if he was not aware of such a defect at the time of the conclusion of the contract. The lessor is not liable if the defect could have been discovered by the lessee at the time of inspection or check at the time of the conclusion of the contract or transfer of the property (Art.612, paras.1 and 2).
If a defect is found, the lessee has the following alternatives:
i)require gratuitous removal of the defect, reduction of the price, or reimbursement of the cost of removing the defect;
ii)withhold part of the rent corresponding to the cost incurred for the removal of the defect with advance notice;
iii)require early termination of the contract.
If neither of the above measures covers the loss incurred by the lessee, the lessee is entitled to compensation (ibid., para.1).
Provision of the property for lease is not a ground for termination or modi - cation of the right of a third party on this property, e.g. servitude or pledge. When concluding a contract of lease, the lessor is under an obligation to disclose to the lessee all the rights of the third party on the object of lease. Failure of the lessor to ful l this duty results in the right of the lessee to demand reduction of rent, or rescission of the contract and payment of damages (Art.613).
20M.N.Braginskii et al., Kommentari k chasti vtoroi Grazhdanskogo kodeksa Rossiiskoi Federatsii, rst edition, Moscow 1996, p.73.
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The lessee may, with the consent of the lessor, sublet the property, assign the rights and duties of the lessee to another person, provide the leased property for gratuitous use of another person, pledge the right of lease, and contribute it to the capital of a company. In these cases, except for the assignment of the rights and duties of the lessee to another person, the lessee remains liable to the lessor (Art.615, para.2).
Lease can be rescinded only via court procedure. Upon the action of the lessor, the contract can be rescinded by the court if the lessee (Art.619):
i)uses the property with a substantial breach of the terms of the contract or the purpose of the property, or repeatedly breached the terms;
ii)substantially worsened the property;
iii)more than twice failed to pay the rent in time;
iv)in cases where a capital repair is the responsibility of the lessee, failed to carry out such a repair.
The lessee may take an action in court to rescind the contract in the following instances (Art.620):
i)the lessor has failed to provide the property for the use of the lessee, or has created obstacles for its use in accordance with the term of the contract or the purpose of the property;
ii)the property has a defect which inhibits its use and this defect was not known to the lessee before, and could not have been detected by the lessee on inspection;
iii)the lessor has failed to carry out a capital repair which he is under obligation to carry out;
iv)the property, due to a cause not attributable to the lessee, has turned out to be unsuitable for use.
The lessee who has appropriately performed his obligation, has a pre-emptive right ahead of others to conclude a contract for a new period, if the terms offered by the others are the same as the lessee’s, unless otherwise provided by law or contract.Thelesseemustinformtheintentiontorenewthecontractwithinareasonable period in advance. If the lessor refused to conclude a contract with the lessee, but within one year of the expiry of the contract, has concluded a contract of lease with another person, the previous lessee has the following choices (Art.621, para.1):
i)bring an action to court requiring the rights and duties of the lessee in the new contract to be transferred to him and claim compensation for not renewing the contract;
ii)claim compensation for not renewing the contract only.