Oda Russian Commercial Law 2007-1

12 FOREIGN LAW

The commercial court may apply norms of foreign law on the basis of international treaties, Federal laws as well as agreements between the parties concluded in accordance with them. However, this may not contradict mandatory norms of Russian law as provided for in Book Four of the Civil Code (Code of Commercial Court Procedure, Art.13, para.5; the Civil Code, Art.1192, para.1). In applying norms of foreign law, the commercial court is to establish its content in accordance with its of cial interpretation, practice of application, and doctrines in the respective foreign state (Code of Commercial Court Procedure Art.14, para.1). The court may seek assistance of the Ministry of Justice and other Russian and foreign organisations, or invite experts (ibid., para.2).

The Code of Civil Procedure also allows the court of general jurisdiction to apply norms of foreign law in accordance with the Federal Law or international treaties (Art.11, para.5).

2

THE SYSTEM OF SETTLING DISPUTES – INSTITUTIONS

1THE COURTS

1)Historical Background

The modern court system in Russia emerged as an outcome of the Great Judicial Reform of 1864. The pre-Reform state of affairs could best be characterised as sheer lawlessness and chaos. The court system was organised in such a way that different lines of courts adjudicated cases involving people from different classes. In civil procedure, there could be 16 instances and 30 different procedures.1 There was no independence of the courts while judges were corrupt and susceptible to pressure from outside. “Our courts have got all the shortcomings which Western European courts used to have when the inquisitorial system prevailed”.2 I.S.Aksakov, a renowned philosopher, remarked in 1884; “Old courts! Simply thinking of them, your hair stands on end and your esh begins to creep.”3

In 1864, a new Statute on Court Organisation was enacted together with the rules of criminal and civil procedure. The reformed system was modelled entirely on the Western European system which existed at that time; there was a clear discontinuity with the indigenous Russian system. Laws of France, Switzerland, Belgium, Germany, andAustria as well as England were studied. There are different views as to the origin of institutions introduced by the Reform. “The most liberal foreign institutions” served as a model. More speci cally, the French system had a major in uence, although some German and English elements could also be seen.4 At that time, the German judicial system was in

1I.V.Gessen, Sudebnaia reforma, St.Petersburg 1905, p.65.

2 Ibid., p.28.

3Ibid., p.29.

4F.Kaiser, Die russische Justizreform von 1864, Leiden 1972, S.407-412. See also S.Kucherov,

Courts, Lawyers and Trials under the Last Three Tsars, Westport (Conn.), 1974 (reprint of the 1953 publication), pp.21-106.

local legislative body upon recommendation by the “quali cation committee”, comprising judges, was introduced in the same year. However, these changes proved to be insuf cient.As one commentator put it, the 1989 Law was still prepared “in the best tradition of law creation at the time of developed socialism”.7 Therefore, after the collapse of the socialist regime, the laws enacted towards the end of socialism were replaced by new laws, such as the Law on the Status of the Judges of 1992 and the Law on Court Organisation of 1996.8

The 1993 Constitution provides that judicial power is exercised only by the court, through constitutional, civil, administrative, and criminal proceedings (Art.118). The basic law which determines the court structure and the basic system of recruitment of judges is the Law on the Court System of the Russian Federation.9

There are two systems of court which deal with civil and commercial disputes: the ordinary court system and the commercial court system. The Law on Court Organisation covers both the ordinary court system and the commercial court system. As for procedural law, each system has a separate set of laws. The procedure for the commercial court is set by the Code of Commercial Court Procedure. The ordinary court procedure is determined by the Code of Civil Procedure.

In the early 2000s, in the course of judicial reform, the merger of the commercial court and ordinary court systems has been proposed, but it was strongly resisted, and in the end, the proposal failed to be realised.

There is also the Constitutional Court of the Russian Federation which has jurisdiction over the compatibility of the federal laws, normative acts of the President, both houses of the Parliament, and the cabinet, as well as the constitution and laws of the constituent entities of the Russian Federation with the Constitution of the Russian Federation. It was only towards the end of socialism that an embryonic form of constitutional review emerged. In 1990, the Committee on Constitutional Supervision started operation, later to develop into the Constitutional Court.10 There is a separate Law on the Constitutional Court which was enacted in 1994.11 There are some decisions of the Constitutional Court which are relevant to commercial law e.g. in the areas of tax law and bankruptcy law.

7V.Savitskii, Organizasiia sudebnoi vlasti v Rossiskoi Federatsii, Moscow 1996, p.17.

8For details of the reform since perestroika, see P.H.Solomon Jr. and T.S.Foglesong, Courts and

Transition in Russia: the Challenge of Judicial Reform, Boulder 2000.

9Law No.1-FKZ of December 31, 1996.

10R.Sharlet, “Russia’s Second Constitutional Court: Politics, Law, and Stability”, V.E.Bonnell and G.W.Breslauer eds., Russia in the New Century: Stability or Disorder?, New York 2001, p.59ff.

11Law No.1-FKZ of July 21, 1994.

There have been proposals for the introduction of a system of administrative courts for some years.12 As part of the package of judicial reform bills prepared by the government in 2001, a bill on the Law onAdministrative Courts prepared by the Supreme Court was submitted to the Duma, but it has remained there for some years.

2)Commercial Courts

Commercial courts are called “arbitrazhnyi sud” in Russian. However, the name is more historical than a re ection of the true nature of the institution. It should not be confused with arbitration institutions such as the International Arbitration Court of the Russian Chamber of Commerce or other arbitration institutions which are called treteiskii sud in Russian. In fact, at the time of preparing the 1992 Law on Arbitration Courts, some people proposed that instead of the traditional “arbitrazh”, the court should be called an economic court as was the case in the Tsarist period.13

In theTsarist period, commercial courts were set up in St.Petersburg, Moscow andothercitiesinthe1830s.ThesystemwasbasicallyGerman.14TherewasaStatute on the Procedure of the Commercial Court and brief Rules on Commercial Bankruptcy. Institutionwise, the Great Judicial Reform of 1864 did not affect the commercial courts, but in addition to the above-mentioned Statute, the general Statute on Civil Procedure came to be applied. The 1913 version of the Svod zakonov introduced the Statute on the Procedure of the Commercial Court.15 Part one of the Statute covered the organisation of the courts, while part two accommodated provisions on the procedure, and part three dealt with commercial bankruptcy. Commercial courts continued operation until they were abolished by the Decree on Courts in 1917.

After the October Revolution, already in the early 1920s, the necessity for setting up a specialised body to deal with disputes between the emerging state enterprises in the socialist sector was felt. After all, it was not practical to leave disputes between socialist enterprises to the court which was staffed with ostensibly elected judges without suf cient expertise in economic matters. By 1924, a system of arbitration commissions which handled proprietary disputes between

12V.Kriazhkov and Iu.Starilov, “Administrativnye sudy: kakimi im byt’?”, RIu, 2001, No.1, pp.18-20.

13M.Treushnikov, Arbitrazhnyi protess, Moscow 1995, p.6.

14L.Schultz, Russische Rechtsgeschichte, Lahr 1957, S.217.

15Svod zakonov Rossiiskoi Imperii, 1913 edition, vol.XI, part 2.

state and cooperative enterprises had been established. Incidentally, even at the time of the New Economic Policy in the 1920s, private enterprises did not ben- e t from the system; they had to go to ordinary courts, instead of the arbitration commission. After the introduction of the Planned Economy, arbitration commissions were transformed into the system of gosarbitrazh – state arbitration organisation in 1931.16

Gosarbitrazh institutions were subordinated to the Council of Ministers of the USSR and the same body at the lower level, down to the regional executive committees. They were designed to settle economic disputes between entities in the socialist sector in order to “ensure strengthening of planning and contractual discipline and economic accounting”. Separate procedural rules to civil procedure were applicable in the proceedings. A signi cant difference between these rules and the ordinary court system was that there was no lay element in gosarbitrazh; the case was settled by an arbitrator and representatives of both parties, as in commercial arbitration.

In fact, the primary purpose of gosarbitrazh was to ensure that the disputes were settled so that the state economic plan was appropriately carried out by state enterprises in a timely manner. Gosarbitrazh had a duty to “actively interfere with the activities of state enterprises in implementing economic plans and enforcing contractual obligations”.17 For this purpose, not only disputes arising from contracts, but pre-contractual disputes – disputes concerning the formation of contracts – fell within the jurisdiction of gosarbitrazh. The right of the parties to dispose of their rights was severely limited. Regardless of the intention of the parties, their superior agencies could bring the case to gosarbitrazh. Gosarbitrazh were even empowered to initiate the proceedings ex of cio. The parties were not entitled to freely accept the claim or withdraw the claim.18

There have been disputes concerning the legal nature of gosarbitrazh since its inception among Western observers. Some people regarded gosarbitrazh as a specialised court, while others considered it to be an administrative agency.19 One cannot deny that gosarbitrazh was an administrative agency – it was subordinated to the Council of Ministers of the USSR and had no independence. Although they were bound by statute laws, the Law on Gosarbitrazh of 1970 provided that gosarbitrazh handled “economic disputes on the basis of laws as well as decisions of the Council of Ministers and other legal acts and in

16T.Abova, Arbitrazhnyi protsess v SSSR, Moscow 1985, pp.8-11.

17Ibid., pp.9-10.

18Ibid., p.84.

19S.Kucherov, “The Organs of Soviet Administration of Justice: Their History and Operation”, Leiden 1970, pp.140-153.

accordance with the State Economic Plan”.20 The present author agrees with Professor D.A.Loeber, who pointed out that gosarbitrazh was an administrative agency though it acted, to a considerable extent, in a judicial manner.21

This system underwent a radical change after the collapse of socialism in 1990. In 1991, the Law on Commercial Courts (arbitrazhnyi sud) was enacted, followed by the Law on the Commercial Court Procedure of 1992. By virtue of these laws, gosarbitrazh was transformed into a system of commercial courts.22 The 1993 Constitution refers to the Supreme Commercial Court as the highest court in settling economic disputes and other cases assigned to the commercial court (Art.127).According to the Law on the Court System of 1996, commercial courts are part of the uni ed court system (Arts.3 and 4).

Commercial courts are independent in the same way as ordinary courts are. While gosarbitrazh had arbitrators, the commercial court now has judges who are quali ed in the same manner as ordinary court judges. Commercial courts do not have the power to initiate the proceedings ex of cio as gosarbitrazh used to. In the light of the coming into force of Part One of the Civil Code and other developments, the 1992 laws, which still had a legacy of socialism, were replaced by the Law on Commercial Courts and the Code on Commercial Court Procedure in 1995 (this Code was totally replaced by a new Code in 2002). The new commercial courts started operation in April 1992.

Thebasiclevelofcommercialcourtscomprises“commercialcourtsoftheconstituent entities of the Russian Federation”, i.e. commercial courts of the republics, regions(provinces),citieswithfederalstatus,andautonomousprovincesandregions. There are 81 such courts. These courts handle cases as the rst instance court.

Previously, appeals against the decisions of the rst instance court were handled by the same court, but by a different division thereof. This system was changed by the introduction of the new appellate courts. Now there are 20 appellate courts which review the legality and groundfulness of the decisions of therst instance court.

The third level courts are the Federal Territorial Commercial Courts. There are 10 such courts which handle cases as an instance of cassation in relation to the courts within the jurisdiction. The system of cassation in Russia is different from the original French system, in that in Russia, it is a system of remedy from

20VVS SSSR,1979 No.49, item 844. Article 4.

21D.A.Loeber, “Law and Contract Performance in the Soviet Union”, in W.R.LaFave, Law in the Soviet Society, Urbana 1965, pp.131-132.

22K.Pistor, “Supply and Demand for Contract Enforcement in Russia: Courts, Arbitration and Private Enforcement”, RCEL 1996 No.1, pp.69-70.

the legal point of view of the decisions of the rst instance court and also of the appellate instances which have already taken effect.

ThehighestlevelofcommercialcourtistheSupremeCommercialCourtofthe Russian Federation. The Supreme Commercial Court comprises the Plenum, the Presidium, the Department of Civil Cases, and the Department ofAdministrative Cases.ThePlenumiscomposedofalljudgesoftheSupremeAdministrativeCourt. representatives of the Parliament, the president of the Supreme Court, the president of the Constitutional Court, as well as the Procurator-General are entitled to attend the Plenum session. One of the most important functions of the Plenum is to issue decisions (formerly called “explanatory guidelines”) addressed to lower courts. The Supreme Commercial Court also has a Presidium which comprises the President, deputies and the heads of the department. The Presidium, among other things, reviews cases by way of supervision.

In 2005, commercial courts handled a total of 1,467,368 cases. There has been a steady increase in the number of cases handled by the commercial court. In 2002, the number was less than half – 697,085. There was an increase of 24.7% between 2003 and 2004, and 39.8% increase between 2004 and 2005.

These cases are largely divided into cases arising from civil law relations, bankruptcy cases, and cases involving administrative law relations. The number of cases involving civil law relations has not increased that much since 2002. There was a 10.9% increase in 2004 and 2.3% increase in 2005. In contrast, there was a signi cant increase in the number of cases involving administrative law relations. A great majority of these cases are tax related cases. The commercial court handles a substantial number of cases involving the collection of arrears and nes involving tax and other mandatory payments from individuals and organizations by the tax agency. These cases accounted for more than 900,000 cases. This number has increased by 36.5% in 2004, and by 85.1% in 2005.

Table 1 Categories of cases handled by the commercial court in 2005

(VVAS RF, 2006, No.5, pp.22-39)

By virtue of the Law on Insolvency, insolvency cases fall within the jurisdiction of the commercial court. Insolvency of individual entrepreneurs is also included. It should be noted that here, the requirement that both parties be juridical persons is dropped. Thus, creditors, not only juridical persons, but physical persons, not explicitly limited to entrepreneurs, are entitled to initiate the proceedings.23

It should be noted that the commercial court handled 1,200 cases involving foreign companies in 2005, of which 363 involved parties from the CIS countries. Foreign parties won the case in 583 cases.24

Until recently, international commercial arbitration in a third country was the preferred method of dispute settlement where foreign companies were involved. The signi cant number of such cases handled by Russian courts may be due to the increase in the number of disputes in the newly developed market economy.

23G.A.Zhilin ed., Kommentarii k arbitrazhnomu protesseual’nomu kodeksu Rossiiskoi Federatsii, Moscow 2003, pp.90-91.

24VVAS RF, 2006, No.5, p.41.

However, if at all possible, foreign entities should make efforts to avoid their disputes to be heard by a Russian court.

3)Ordinary Courts (Courts of General Jurisdiction)

The structure of the ordinary courts is provided by the Law on Court Organisation of 1996 as well as the Law on Court Organisation of the RSFSR of 1981.25 As late as August 2006, the latter is still in force with various amendments.

The basic level of the ordinary court system is the district court. District courts handle cases as rst instance courts. There are 2,440 district courts.26 In some areas, such as in Moscow, inter-district courts were formed. In relation to the justices of the peace, district courts are the courts of a higher instance.

The second level of courts are supreme courts of the constituent entities of the Russian Federation as well as regional (provincial) courts, courts of cities with federal status, and courts of autonomous provinces and regions. Currently, there are 87 such courts.27 These courts handle cases as second instance courts for the judgments of district courts. In some cases, such as cases involving state secrets, these courts handle cases as a rst instance court. They are also empowered to review cases in a supervisory procedure and cases reopened on newly found circumstances.

The Supreme Court of the Russian Federation is the highest court within the system of ordinary courts, i.e. in relation to the supreme courts of the subjects of the Russian Federation as well as regional (provincial) courts, courts of cities with federal status, courts of autonomous provinces and regions, and military tribunals. It also acts as a rst instance court in some limited cases, and as a second instance court in cases where supreme courts of the subjects of the Russian Federation as well as regional (provincial) courts, courts of cities with federal status, courts of autonomous provinces and regions handled the case as the rst instance court. The Supreme Court also reviews cases in a supervisory procedure and cases reopened on newly found circumstances.

TheSupremeCourthasaPlenum,Presidium,CivilandCriminalDepartments and CourtAdministration Department. The Plenum is composed of all judges of the Supreme Court plus the Procurator General and other of cials. The issuing of “explanatory guidance” is its most important function. The Presidium comprises the President, deputies, heads of the departments. It reviews cases by way of supervision.

25Law No.1-FKZ, 1996.

26V.I.Radchenko, “Sudebnaia reforma v Rossii”, ZhRP, 1999 No.1, p.70.

27Ibid., p.70.