Russian Law in Brief: Digest for Foreign Investors

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Copyright ОАО «ЦКБ «БИБКОМ» & ООО «Aгентство Kнига-Cервис»

ST. PETERSBURG STATE UNIVERSITY FACULTY OF LAW

RUSSIAN ACADEMY OF SCIENCES INSTITUTE OF STATE AND LAW ST. PETERSBURG BRANCH

V. A. MUSIN, N. M. KROPACHEV

RUSSIAN LAW in BRIEF Digest for foreign investors Edited by Prof. JANE M. PICKER, Professor Emerita, Cleveland State University, USA, Professor Honoris Causa, St. Petersburg State University, Russia Fifth (revised) edition

2015

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Valeriy Musin, Honorable Professor of Law at St. Petersburg State University, Head of the Civil Procedure Department of the Faculty of Law, St. Petersburg State University, Corresponding Member of the Russian Academy of Sciences, Director of the St. Petersburg branch of the Institute of State and Law of the Russian Academy of Sciences, Adviser to the Constitutional Court of the Russian Federation, Chairman of the Presidium of the Dispute Resolution Centre of the Economic Court of the Commonwealth of Independent States, Member of the Scientific — Consultative Council of the Supreme State Arbitration Court of the Russian Federation Member of the Scientific-Consultative Council of the Federal State Arbitration Court of the North-West Circuit, Arbitrator of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation, Chairman of the Arbitration Court of the St. Petersburg Chamber of Commerce and Industry, Substitute Member of the Commission for Democracy through Law (Venice Commission) of the Council of Europe (2006–2009), Ad Hoc Judge of the European Court of Human Rights (2006–2009). Member of the Board of Directors of the OJSC “Gazprom”, and Senior Partner of the Russian-British law firm “Musin, Ibragimov & Partners” associated with LLP “Clyde & Co” of London: Chapter 1, Chapter 2, Chapter 3, § 1 (Section 1.1, 1.4), § 2 (Section 2.1), § 3, Chapter 4, Chapter 5, Chapter 6, § 2 and § 3, Chapter 7, Chapter 8, Chapter 9, Chapter 10. Nikolai Kropachev, Professor of Law at St. Petersburg State University, Rector of St. Petersburg State University, ViceChairman of the Commission on Education, Science and Technologies before the President of the Russian Federation, and Chairman in Retirement of the Charter Court of the City of St. Petersburg: Chapter 3, § 1 (Sections 1.2, 1.3), § 2 (Sections 2.2, 2.3), Chapter 6, § 1.

Edited by Jane M. Picker, Professor Emerita, Cleveland State University, USA; Professor Honoris Causa, St.  Petersburg State University, Russia Musin V. A., Kropachev N. M. Russian law in brief: Digest for foreign investors. Fifth (revised) edition. — St. Petersburg University Press, 2015. — 718 p. ISBN 978-5-288-05608-6 The Edition provides foreigners with a comprehensive review of the Russian Legal System, сourt system, legislative rules referred to business with foreign investors, encompasses the major changes and development in law, examines in detail renewed Russian legislation. The prospective foreign investor, as well as his or her lawyer, should find this Handbook a helpful distillation of the various legal issues that could arise within the context of an investment decision.

Published by St. Petersburg University Press, V. I., 6th line, 11, St. Petersburg, 199004, Russia [email protected]; [email protected] www.unipress.ru; www.lawpress.ru Tel./fax 7 812 3284422 All Rights Reserved © St. Petersburg University Press, 2014

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TO OUR ALMA MATER the authors

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Preface of the President of the Russian Federation to the first edition

Dear friends! You hold in your hands a book whose task is to acquaint foreign investors with the modern Russian legal system. You will find in it an analytical review of the effective rules of our legislation, and the practice of its application. During the last 20 years the main mechanisms have been created for the protection of human rights and for ensuring the legitimate interests of businesses. A number of important decisions aimed at the integration of our domestic economy into the world economy have been adopted. The currency regime has been liberalized, taxation has been simplified, and the procedure for investment into strategic branches of the economy has been established. The creation of the most comfortable and attractive environment for business activity is one of our priorities. We are modernizing our judicial system, abolishing superfluous administrative barriers, and perfecting migration and customs regulations. Last but not least – most serious attention is paid to preferences for innovation activity. I believe that this review will help to form an objective picture of the situation in the Russian market, and that it will facilitate the development of mutually beneficial business contacts. I wish you success and all the best. Dmitry Medvedev, President of the Russian Federation (2008–2012)

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Editor’s Preface

Visits of the authors of this Handbook to the law schools of Cleveland, Ohio, in the early 1990’s led Professor Valeriy A. Musin to present, in 1995, a series of lectures on Russian business law at the Case Western Reserve University School of Law and at Cleveland State University’s Cleveland Marshall College of Law. Seeing the very favorable response of students and faculty alike to such an unfamiliar subject, it seemed obvious that a far broader audience could benefit from an expanded and updated treatment of Russian Law. Consequently, Professor Nikolai Kropachev has now joined Professor Musin in this new effort, adding materials on criminal responsibility and administrative law liability, as well as taxation, to the Handbook. A book on the subject of Russian civil law, which has its origins in Roman law, represents a particular challenge to the common law lawyer. Readers not already familiar with the civil law will discover a legal system that is theoretically based, rather than one in which judicial interpretation with an emphasis on the role of precedents, predominates. This Handbook also helps the reader understand historical changes resulting from Russia’s gradual adoption of a market economy. Of particular importance are the explanations of what constitutes controlling law in a legal system that often appears to present conflicting rules. The prospective foreign investor who is not legally trained, as well as his or her lawyer, should find this Handbook a helpful distillation of the various legal issues that could arise within the context of an investment decision. Jane M. Picker

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contents

Preface of the President of the Russian Federation to the first edition 4 Editor’s Preface

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Author’s Preface

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Chapter 1. Legal System of the Russian Federation: A General Overview

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§ 1. Introductory notes 14 1.1 Russia’s Civil Codes 14 1.2 The role of precedent in Russian law (general overview) 16 1.3. Precedent functions of the Constitutional Court of the Russian Federation 17 1.4. Precedents of the European Court of Human Rights 18 1.5. Gradual convergence of the Continental European and Anglo-American legal systems 22 § 2. The Sources and hierarchy of Russian law 22 2.1. Kinds of normative legal acts 22 2.2. When a normative act becomes effective 24 2.3. Retroactive effect of law 26 2.4. The Russian Federation and its Subjects 29 § 3. Relationship between the RF Civil Code and other federal statutes containing civil law norms 32 3.1. Historical overview 32 3.2. Current situation 33 3.3. Analogy of lex and analogy of jus 36 Chapter 2. Russia’s Court System § 1. General provisions 1.1. The Constitutional Court of the Russian Federation; Constitutional and Charter Courts of Subjects of the Russian Federation 1.2. Courts of general jurisdiction 1.3. State arbitration courts 1.4. The problem of court supervision 1.5. Review of court judgments due to new or newly-discovered evidence § 2. Basic rules of Russian civil procedure 2.1. General overview 2.2. Filing a statement of claim 2.3. Security of a claim 2.4. Trial Court Proceedings 2.5. Proceedings in an appellate court 2.6. Proceedings in a cassation court 2.7. Proceedings in a supervisional court 6

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2.8. Review of effective court judgments and decisions upon new or newly-discovered evidence 2.9. Enforcement proceedings 2.9.1. General provisions 2.9.2. Some aspects of enforcement proceedings in light of European Court of Human Rights case law 2.10. Enforcement of foreign court judgments in Russia 2.11. Jurisdictional immunity of a foreign state and its property § 3. International Commercial Arbitration 3.1. General provisions 3.2. Jurisdiction of international commercial arbitration 3.3. Arbitration agreements 3.4. Commencement of arbitral proceedings 3.5. Formation of an arbitral panel 3.6. Substitution of the parties to the dispute and involvement of third persons 3.7. Conduct of arbitral proceedings and issuance of an arbitral award 3.8. Enforcement of an arbitral award 3.9. Appeal of an arbitral award 3.9.1. General Provisions 3.9.2 Litigants’ bases for appealing awards 3.9.2.1. Capacity of the parties 3.9.2.2. Validity of an arbitration Agreement 3.9.2.3. Scope of an arbitral agreement 3.9.2.4. Procedure for formation of an arbitral panel 3.9.2.5. Procedure for considering a case in voluntary arbitration 3.9.2.6. Contentiousness of arbitral proceedings 3.9.2.7. Legal force of an arbitral award 3.9.3. Appeals independent of a litigant’s motion 3.9.3.1. Subject matter not capable of settlement under the law 3.9.3.2. Awards contrary to public policy § 4. Mediation 4.1. General provisions 4.2. Mediation proceedings

89 90 90 93 96 103 107 107 109 112 118 123 127 131 134 137 137 138 138 139 142 142 143 143 144 145 145 146 150 150 151

Chapter 3. Responsibility under Russian Law 154 § 1. Legal Responsibility: General provisions 154 1.1. Types of responsibility in civil law 157 1.1.1. Contractual responsibility 157 1.1.1.1. Recovery of losses 158 1.1.1.2. Determining the amount of the losses 158 1.1.1.3.Recovery for moral harm 160 1.1.1.4.Penalties 162 1.1.1.5.Payment of interest 164 1.1.2. Non-contractual responsibility 166 1.2. Criminal Responsibility 167 1.2.1. General provisions 167 1.2.2. Crime 167 1.2.3. Punishment and sentencing 172 1.3. Responsibility in administrative law 179 1.3.1. Administrative law violations 179 1.3.2 Administrative punishment 183 1.4. Competence to apply legal responsibility 185 § 2. Persons who may bear legal responsibility 186 2.1. Responsibility for civil law violations 186 7

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2.1.1. Citizens (natural persons) 2.1.2. Legal entities 2.1.3. Civil responsibility of several persons 2.1.4. Responsibility for acts of other persons (vicarious liability) 2.2. Persons who may bear responsibility in the field of criminal law 2.2.1. General provisions 2.2.2. Criminal responsibility of several persons 2.2.3. Territorial Jurisdiction of the RF Criminal Code. Criminal responsibility of foreign nationals in the territory of the Russian Federation and that of Russian nationals outside the Russian Federation 2.2.3.1. Jurisdiction of the RF Criminal Code 2.2.3.1.1. in the territory of the Russian Federation 2.2.3.1.2. Criminal jurisdiction in relation to sea-going vessels 2.2.3.1.3. Criminal jurisdiction relating to aircraft 2.2.3.1.4. Jurisdiction over crimes committed by Russian nationals outside Russia 2.2.3.1.5. Jurisdiction with regard to crimes committed by foreign nationals within Russian territory 2.2.3.1.6. Extradition 2.3. Persons who may be held responsible for administrative law violations

187 190 191 192 193 193 196 197 197 197 200 201 202 204 205 207

§ 3. Conditions of responsibility 209 3.1. General provisions 209 3.2. Illegal behavior 209 3.3. Causal connection 212 3.4. Fault (guilt) 215 3.4.1. General provisions 215 3.4.1.1. Forms of fault in criminal law 215 3.4.1.2. Forms of fault in administrative law 216 3.4.1.3. Fault in civil law (general provisions) 216 3.4.1.4. Mixed fault 217 3.4.1.5. Burden of proof with regard to fault 219 3.4.2. Peculiarities of civil responsibility 220 3.4.2.1. Responsibility for the fault of others 220 3.4.2.2. Strict Liability 221 3.4.2.2.1. Strict liability in business transactions 221 3.4.2.2.2. Force majeure 222 3.4.2.2.3. Strict liability with regard to a source of increased danger 224 3.4.2.2.4. Strict liability for nuclear damage 227 3.4.2.2.5. Peculiarities of liability of public agencies 227 Chapter 4. Types and Organizational Forms of Businesses with Foreign InvestmentS § 1. Types of businesses with foreign investments (general overview) § 2. Legal entities in Russia (general provisions) 2.1. Concept of a legal entity 2.2. Types of legal entities 2.3. Commercial corporations § 3. Full partnership § 4. Limited partnership § 5. Limited liability company 5.1. General provisions 8

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5.2. Constituent documents 5.3. Chartered capital 5.4. Increase of chartered capital 5.5. Decrease of chartered capital 5.6. Disposal of participant’s share 5.7. Withdrawal of a participant from the company 5.8. Company’s bodies 5.8.1. General meeting of participants 5.8.2. Chief executive officer 5.8.3. Management board § 6. Joint stock company 6.1. General provisions 6.2. Stocks and chartered capital 6.3. Company’s bodies 6.3.1. General meeting of stockholders 6.3.2. Board of directors (supervisory council) 6.3.3. Chief executive officer and management board § 7. Economic partnership 7.1. General provisions 7.2. Formation of an economic partnership 7.3. Management of an economic partnership Chapter 5. Legal Capacity of Businesses with Foreign InvestmentS: its Scope, Starting Point and Termination § 1. Scope of legal capacity of businesses with foreign investments (general overview) 1.1. Development of modern Russian civil law rules concerning capacity of commercial organizations 1.2. Capacity of businesses with foreign investments § 2. On privileges for businesses with foreign investments in Russia 2.1. General overview 2.2. Specific privileges in the sphere of taxation § 3. State registration of businesses with foreign investments 3.1. Historical overview 3.2. Current situation § 4. Reorganization of businesses with foreign investments 4.1. Forms of reorganization 4.2. Stages of reorganization 4.3. Legal consequences of reorganization 4.4. Invalidity of reorganization § 5. Liquidation of businesses with foreign investments 5.1. General provisions 5.2. Stages of liquidation § 6. Bankruptcy of businesses with foreign investments 6.1. General provisions 6.2. Supervisory Proceedings 6.3. Financial recovery 6.4. External management 6.5. Final bankruptcy proceedings Chapter 6. Taxation, Customs and Currency Rules with Specific Reference to Businesses with Foreign Investments § 1. Taxation rules 1.1. General provisions

252 254 255 257 258 261 266 266 271 274 275 275 278 282 282 284 286 288 288 291 292 293 293 293 296 298 298 300 303 303 305 309 310 311 316 321 322 322 324 328 328 329 332 334 335 339 339 339 9

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1.2. Federal Taxes 1.2.1. Value added tax (VAT) 1.2.2 Excise tax 1.2.3. Organizations’ profit tax 1.2.4. Natural persons’ revenue tax 1.2.5. A unified social tax 1.2.6. State duty 1.3. Regional taxes 1.3.1. A transport tax 1.3.2. Organizations’ property tax 1.4. Local taxes 1.4.1. A land tax 1.4.2. Natural persons’ property tax § 2. Customs Rules 2.1. General provisions 2.2. Customs procedures 2.3. Customs payments § 3. Currency rules 3.1. General provisions 3.2. Currency operations and payments 3.3. Residents’ currency accounts in foreign banks 3.4. Non-residents’ accounts in Russian banks

343 343 349 351 356 360 361 362 362 363 364 364 364 366 366 371 375 376 376 381 385 385

Chapter 7. Unusual Aspects of Investments in Some Specific Fields § 1. Special economic zones 1.1. General provisions 1.2. Residents of special economic zones 1.3. Residents’ investment commitments 1.4. Residents’ privileges 1.5. “Skolkovo” Innovation Centre and some peculiarities of its legal regime § 2. Production-Sharing agreements 2.1. Entering into the agreement 2.2. Parties to the agreement 2.3. Use of subsoil and distribution of mineral resources 2.4. Taxation issues 2.5. Measures to ensure stability of the agreement § 3. Foreigners’ rights to property located in Russia 3.1. Movable and immovable property 3.2. State registration of immovables. 3.3. Foreigners’ rights to immovable property in Russia

387 387 387 389 390 392 393 395 395 395 397 399 400 402 402 403 406

Chapter 8. Foreign Trade Contracts § 1. An offer 1.1. General indicia 1.2. Quantity of goods 1.3. Quality of goods 1.4. Price of goods 1.5. Offeror’s intention to be bound 1.6. Effectiveness of an offer and its binding effect § 2. An acceptance 2.1. General requirements 2.2. Discrepancy between an offer and an acceptance 2.3. Effectiveness of an acceptance 2.4. Late acceptance

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2.5. Legal consequences of failure to conclude a contract 2.6. Form of a foreign trade contract § 3. Basic conditions 3.1. General provisions 3.2. Transfer of goods 3.3. Passing or risk 3.4. Variations of basic conditions 3.4.1. EXW 3.4.2. FCA 3.4.3. CPT 3.4.4. CIP 3.4.5. DAT 3.4.6. DAP 3.4.7. DDP 2.4.8. FAS 3.4.9. FOB 3.4.10. CFR 3.4.11. CIF § 4. Legal consequences of a contract breach 4.1. Remedies available to the aggrieved party 4.2. Preconditions for recovery of losses 4.3. Calculation of losses

427 428 430 430 431 433 434 435 436 436 437 437 437 438 438 439 440 440 441 441 445 447

§ 5. Statutes of limitation 5.1. General provisions 5.2. Starting point of the time limitation period (general rules) 5.3. Specific rules for certain obligations 5.4. Final day of the time limitation period 5.5. Suspension of the time limitation period 5.6. Interruption of the time limitation period 5.7. The problem of reinstatement of the time limitation period

450 450 451 453 454 456 457 462

§ 6. Establishment of governing law 6.1. General provisions 6.2. Lex voluntatis principle 6.3. Exclusions from lex voluntatis principle 6.4. Establishment of governing law in the absence of agreement of the litigants 6.5. Application of foreign law rules by Russian courts 6.6. Super-mandatory norms (norms of direct application) 6.7. Public policy

463 463 465 467 468 471 472 475

CHAPTER 9. Some Issues of Intellectual Property Law § 1. General provisions 1.1. Intellectual property and its kinds 1.2. Alienation of an exclusive right 1.3. License contract with regard to the exclusive right § 2. Some issues of patent law 2.1. Patent rights and their objects (general overview) 2.2. Right to receipt a patent 2.2.1. Righholders 2.2.2. Procedure of a receipt of a patent 2.2.3. Legal consequences of the issuance of a patent § 3. Right to a trade mark 3.1. General provisions 3.2. State registration of a trade mark

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§ 4. Legal protection of certain intellectual rights 4.1. General provisions 4.2. Disputes to be resolved by administrative agencies 4.3. Disputes to be resolved by courts

494 494 494 495

Chapter 10. Legal Aspects of Employment with Specific Reference to Recruitment of Foreign Manpower 497 § 1. General provisions 497 1.1. Introduction 497 1.2. Social partnership 498 § 2. Pre-employment issues 502 2.1. Age requirements 502 2.2. Other specific requirements 503 2.3. Special Characteristics of pre-employment issues concerning foreign manpower 504 § 3. Contract of employment 510 3.1. General provisions 510 3.2. Duration of work 511 3.3. Rest time 514 3.4. Wages 517 3.5. Amendment of an employment contract 519 3.6. Termination of an employment contract 521 3.7. Labor law principles of financial responsibility 527 3.8. Unusual aspects of employment contracts with certain kinds of employees 529 3.9. Governing law 532

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§ 4. Occupational health and safety; social security 4.1. Health and safety 4.2. Social security § 5. Investigation of industrial accidents. Compensation for injury and death 5.1. Investigation of industrial accidents 5.2. Compensation for injury and death § 6. Labor dispute resolution 6.1. Resolution of collective labor disputes 6.2. Resolution of individual labor disputes

533 533 534 535 535 537 538 539 540

Appendices Constitution of the Russian Federation (1993) (extract) Civil Code of the Russian Federation (extract) Arbitration Procedure Code of the Russian Federation (extract) Law on International Commercial Arbitration Criminal Code of the Russian Federation (extract) Code of the Russian Federation of Administrative Violations (extract) On Foreign Investments in the Russian Federation (extract) On Currency Regulation and Currency Control (extract) United Nations Convention on Contracts for the International Sale of Goods (1980) Convention on the Recognition and Enforcement of Foreign Arbitral Awards Unidroit Principles of International Commercial Contracts 2010 UNCITRAL Arbitration Rules Rules of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation

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Authors’ Preface

The basic idea of the relationship between a lawyer and his client is very precisely reflected in a Western business proverb: “A lawyer gives advice, a client gives instructions.” To some extent, in a sense, the relationship between a lawyer and his client is quite similar to that between a shipmaster and a pilot. If a ship is in some obscure or unexplored area of the ocean it is rather dangerous to sail without a pilot, but then again, the pilot only advises. It is the shipmaster, not the pilot, who is the decision-maker. But since the shipmaster bases his decision upon the pilot’s recommendation, effectively the pilot has no right to make an error. A question may naturally arise, what about the Latin proverb “errare humanum est,” that is, “to err is human.” Well, it certainly is, but we should use our best endeavors to avoid or at least to minimize it. Having said that, it makes sense to provide a foreign reader with some basic knowledge of the law and the court system of the Russian Federation.

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Chapter 1 Legal System of the Russian Federation: A General Overview

§ 1. Introductory notes While, there are numerous legal systems in the world, in practice, several “law families” are most important with respect to Russia and its foreign economic relations. The continental European law family is divided into two branches, the French branch and the German branch. There is also an Anglo-American law family. One may ask to what family or branch of the law does Russia belong? It may seem curious and surprising that while Russia traditionally drew greatly on French culture and while, in pre-revolutionary times, for example, the French language was much more popular than English is even today, nevertheless Russia drew primarily on Germany for its legal culture. Since economic legal relations are basically regulated by norms of civil law (which substantially, although not entirely, are concentrated in Russia’s Civil Code), the latter deserves special attention.

1.1. Russia’s Civil Codes Since the 1917 October Revolution there have been three Civil Codes in Russia. The 1922 Civil Code of the RSFSR,1 prepared during the era of Russia’s New Economic Policy (NEP), regulated what was effectively a market economy albeit with strong state influence, particularly with respect to heavy industry. The 1922 Code remained in effect until 1964, at which time another Civil Code of the RSFSR, based upon a socialist planned economy, became effective. The most recent Civil Code of the Russian Federation consists of four parts which were drafted and took effect step by step, unlike earlier civil codes all parts of which had taken effect simultaneously.   RSFSR — Russian Soviet Federative Socialist Republic as a member of the USSR — the Union of Soviet Socialist Republics (1922–1991). 1

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§ 1. Introductory notes

Part One of the new Civil Code (including basic provisions and others relating to persons, objects of civil rights, transactions and representation, time periods, statu­ tes of limitations, ownership title and other rights in rem, and general provisions of the law of obligations)2 was adopted at the end of 1994 and, with some exceptions (which will be referred to later) took effect January 1, 1995.3 Part Two (concerning individual obligations, both contractual and non-contractual) took effect March 1, 1996.4 Part Three (including the law of inheritance and private international law, i. e. conflicts of laws) took effect March 1, 2002.5 The Fourth and final part (including norms relating to legal protection of different types of intellectual property and means of individualization, such as copyright law, patent law, law concerning industrial secrets, i. e. know-how, and trademark law, etc.) took effect January 1, 2008.6 Lawmakers preferred to issue the Civil Code in parts, rather than as a whole, to keep in step with Russia’s development of a market economy. The Russian legal system and its 1964 Civil Code had been based on German principles, and some aspects of a market had always been permitted even when Russia was a socialist state with a planned economy. In order to keep the Civil Code updated to a modern level of market relations both in domestic economy and in international trade the President of the Russian Federation issued the Decree of July 18, 2008 No 1108 “On Improvement of the Civil Code of the Russian Federation,” according to which the Concept of development of civil legislation of the Russian Federation should be elaborated. This Concept had been considered and approved at the meeting of the Council on codification and improvement of civil legislation chaired by the President of the Russian Federation, 7 October 2009 and then published.7 Further on, in order to harmonize the text of the RF Civil Code with the Concept, a draft federal law “On introduction of amendments into Parts One, Two, Three   These provisions relate both to contractual and non-contractual obligations.   Federal Law of November 30, 1994 No 52-FZ “On introduction of Part One of the Civil Code of the Russian Federation.” 4   Federal Law of January 26, 1996 No 15-FZ “On introduction of Part Two of the Civil Code of the Russian Federation.” 5   Federal Law November 26, 2001, No 147-FZ “On introduction of Part Three of the Civil Code of the Russian Federation.” 6   Federal Law December 18, 2006 No 231-FZ “On introduction of Part Four of the Civil Code of the Russian Federation.” 7   Bulletin of the Supreme State Arbitration Court of the Russian Federation, 2009. Nо 11. Р. 6–99. 2 3

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Chapter 1. Legal System of the Russian Federation: A General Overview

and Four of the Civil Code of the Russian Federation as well as in certain legislative acts of the Russian Federation” had been prepared, which draft was submitted by the President of the Russian Federation to our Parliament. (see: its text in: Российская газета, February 7, 2012) Given that the aim of this book is, inter alia, to highlight main trends which will determine the further development of Russian civil law, and in anticipation that these draft amendments will hopefully be adopted in due course quite soon, the texts of Articles of the RF Civil Code referred to or quoted in this book are put in compliance with their versions as contained in the draft. As soon as amendments to the Civil Code are formally introduced through federal legislation, they will be referenced.

1.2. The role of precedent in Russian law (general overview) In Russia, as in Germany, France and other continental European states, prece­dents are not formally a source of law. Russia’s approach is that even in similar cases, there always may be a possibility (which often occurs) that prevents application of a particular court decision to another even similar situation. Therefore courts have no right to base their decisions only on a Supreme Court decision in a similar case. Arguments to a court and decisions of a court may only be based upon norms of law.8 Nevertheless, a very important reservation must be noted. To say that there is no system of precedents in Russia shouldn’t be construed to mean that court practice is of no legal significance. Certainly no court of law or arbitration tribunal can ignore judgments of the Supreme Court of the Russian Federation, or, depending upon the matter under consideration, the Supreme State Arbitration Court of the Russian Federation, or indeed the Constitutional Court of the Russian Federation. If a local court were to ignore a Supreme Court decision, for example, it would be in danger of having its judgment overruled. In practice, this means that in addition to statutory law there are judicial decisions from which legal norms can be deduced. So one may ask whether it is actually correct to say that there is no use of precedent in Russia. Another very important point is that the Supreme Courts, both the Supreme Court of the Russian Federation and the Supreme State Arbitration Court of the Russian Federation, have very specific jurisdictions. This issue will be considered infra in some detail (see: Chapter 2).   The phrase “norms of law” means general rules as set forth in statutes adopted by the legislature and acts of other state bodies which are entitled to issue obligatory general provisions, such as, Presidential Decrees, Governmental Decisions, Ministerial Ordinances etc. Such acts are called “normative legal acts.” 8

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§ 1. Introductory notes

These courts act not only as the courts of highest level to review decisions of lower courts and to affirm or overrule them if they find such judgments to be wrong. In addition, both Supreme Courts have the authority to issue official interpretations of laws in the course of their application by the courts.9 Such interpretations are binding on any lower court, and any court may base its judgment not only upon the law itself but also upon official and, therefore, obligatory interpretations of such laws as are set forth in special acts — ordinances of the Plenum (s) of Supreme Court(s).10 Thus, while courts (including the supreme ones) may not make law, they may (moreover, must) interpret laws.

1.3. Precedent functions of the Constitutional Court of the Russian Federation Indeed, there is a clear trend today to increase the significance of court precedents in the Russian legal system. A function of the Constitutional Court of the Russian Federation is to control whether a federal law is consistent with the Constitution of the Russian Federation. Proceedings in the Constitutional Court may begin at the request of a court, a public agency, and also by the filing of complaints by individuals or legal entities which believe that a federal law contravenes the Constitution and limits or eliminates the applicants’ rights or freedoms as guaranteed by the Constitution. It should be emphasized that the Constitutional Court of the Russian Federation only deals with checking the constitutionality of federal laws. As for assessment of other normative acts in the light of their consistency with the Constitution of the Russian Federation, this matter is within the jurisdiction of other courts.11

  See: Article 19, Section 5 and Article 23, Section 5 of the Federal Constitutional Law “On the Court System of the Russian Federation” 1996 (Российская газета, January 6,1997, as subsequently amended). 10   The Plenum of the Supreme Court of the Russian Federation (and, respectively, the Plenum of the Supreme State Arbitration Court of the Russian Federation) consists of the Chief Justice, his deputies and all judges of the relevant Supreme Court. A Plenum, inter alia, is in charge of analyzing judicial applications of laws as well as issuing interpretations of laws, which interpretations are binding on lower courts. 11   A complaint may be rejected when the Constitutional Court finds that it is beyond its jurisdiction or relevant issues have already been resolved in the course of consideration of other complaint(s). E. g. if an applicant alleges that his rights are infringed by a Presidential decree or a Governmental decision or Ministerial order which is, in his view, inconsistent with the Constitution of the Russian Federation, the complaint will be within the jurisdiction of the RF Supreme Court 9

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The Constitutional Court’s decisions 1)  are final, that is, they are not subject to review, and 2) are binding upon all public agencies, courts, organizations and individuals within the territory of the Russian Federation. This means, inter alia, that a court judgment or sentence based upon a law which is subsequently recognized by the Constitutional Court as inconsistent with the Constitution will be reviewed and overruled (see: Article 311 (6) of the Arbitration Procedure Code,12 Article 413, Section 4 (1) of the Criminal Procedure Code). Thus, the Constitutional Court creates precedents binding on inferior courts and administrative agencies.13

1.4. Precedents of the European Court of Human Rights Another example of the binding character of case law results from Russia’s participation in the Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR) adopted by the Council of Europe in 1950. Since Russia is a party to the Convention, its norms are binding on Russia. This is recognized under Russian law by Article 15 (Section 4) of the Constitution of the Russian Federation which provides that generally recognized principles and norms of international law and international treaties of the Russian Federation shall be deemed an integral part of Russia’s legal system. The Convention provides a legal mechanism for procuring unified interpretation of its rules — the European Court of Human Rights. The case law of this court is binding on member countries and their national authorities, including their courts. As provided in Article 46 (Section 1) of the Convention, “the High Contacting Parties undertake to abide by the final judgment of the Court in any case to which they are parties.” This approach is completely followed in Russia. The Plenum of the Supreme Court of the Russian Federation has issued a special Ordinance of October 10, 2003, Nо 5 “On application of generally recognized principles and norms of international law and international treaties of the Russian Federation by courts of general jurisdiction.” Provisions of this Ordinance deal with European Court judgments relating to the Russian Federation. or the RF Supreme State Arbitration Court (depending on whether the act in question concerns rights relating to business activity). 12   This Code regulates proceedings in state arbitration (i. e. state commercial) courts. 13   The problem of assessment of reviewing the consistency of laws with a Constitution is resolved in different ways in different countries. E. g., in Germany those issues are within the jurisdiction of the Constitutional Court, while in the USA there is no constitutional court and it is the federal Supreme Court which is competent to judge such matters. 18

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This Ordinance provides that “the Russian Federation as a party to the Convention for the Protection of Human Rights and Fundamental Freedoms recognizes the jurisdiction of the European Court of Human Rights as binding in issues of construction and application of the Convention and Protocols thereto in case of alleged violation of these treaties by the Russian Federation (emphasis added. — V. M.) when an alleged violation took place after its inception in relation to the Russian Federation. Therefore, application of the above mentioned Convention by courts must be performed with due consideration of the practice of the European Court of Human Rights in order to avoid any violation of the Convention for the Protection of Human Rights and Fundamental Freedoms.”14 (Section 10, Paragraph 3 of the Ordinance) With a reference to Article 46 (Section 1) of the Convention (as quoted above), the Ordinance emphasizes that judgments of the European Court relating to the Russian Federation shall be binding on all public agencies of the Russian Federation, including courts which within their competence act to ensure performance of obligations of the state resulting from the participation of the Russian Federation in the Convention for the Protection of Human Rights and Fundamental Freedoms (see: Section 11). A few months later, the Supreme Court of the Russian Federation issued another Ordinance — the Ordinance “On court judgments” of December 19, 2003 No.23. This ordinance contains a recommendation to courts, in preparing their judgments to consider, inter alia, decisions of the European Court of Human Rights “where there is an interpretation of provisions of the Convention for the Protection of Human Rights and Fundamental Freedoms which should be applied in the case.” (Section 4 (b) of the Ordinance) Unlike the earlier Ordinance of October 10, 2003, in the Ordinance of December 19, 2003, there is no mention that only those decisions of the European Court of Human Rights which were issued with respect to Russia should be taken into consideration. In other words, Russian courts shall keep in mind the European Court’s decisions construing the norms of the Convention without regard to whether those decisions were issued with respect to Russia or another country. Such an approach was confirmed by the Ordinance of the Plenum of the Supreme Court of the Russian Federation of June 27, 2013, N 21 “On application by courts of general jurisdiction of the Convention for the Protection of Human Rights and Fundamental Freedoms of November 4, 1950, аnd the Protocols thereto” (see: Section 2).   This circumstance is emphasized in Russia’s legal doctrine. See, e. g. T.N. Neshatayeva. Уроки судебной практики о правах человека: европейский и российский опыт. [Lessons of Court Practice on Human Rights: European and Russian Experience]. Moscow, 2007, p. 11. 14

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It is also noted in the Ordinance that legal positions of the European Court shall be taken into consideration by court in the course of application of legislation of the Russian Federation. In particular, contents of rights and freedoms as provided by the Russian legislation should be established with due consideration of the contents of similar rights and freedoms as discovered by the European Court in the course of application of the Convention and the Protocols thereto (see: Section 3). This approach is in line with Protocol No 16 to the Convention according to which the highest court of a Contracting Party, in the context of a case pending before it, may request the European Court “to give advisory opinions on questions of principle relating to the interpretation of the rights and freedoms defined in the Convention or the protocols thereto.” (see Article 1). In this connection it should be noted that the Constitutional Court of the Russian Federation, when addressing a problem of protection of human rights, refers to the European Court’s decisions issued not only with respect to Russia but also those relating to other countries as well. Such an approach wisely creates a possibility for Russian courts to resolve disputes, giving due consideration to the European Court’s case law, prior to the actual involvement of the Russian Federation in a case in the European Court. Examples include analysis of Article 3 of Protocol No.1 to the Convention15 when the Constitutional Court made reference to the European Court’s judgments in two cases: “Mathieu-Mohin and Clerfayt v. Belgium” (March 2, 1987) and “Gitonas and Others v. Greece” (July 1, 1997).16 Likewise, when dealing with the principle of the final and binding nature of effective judicial decisions, the Constitutional Court cited both the European Court’s judgment in “Ryabykh v. Russia” (July 24, 2003) and also its judgment in “Brumaresku v. Romania” (October 28, 1999).17

  It provides: “The High Contracting Parties undertake to hold free elections at reasonable intervals by secret ballot, under conditions which will ensure the free expression of the opinion of the people in the choice of the legislature.” 16   See: the Ruling of the Constitutional Court of the Russian Federation of December 21, 2005 No 13-P “In the case of examination of constitutionality of some provisions of the Federal Law ‘On General Principles of Organization of Legislative (Representative) and Executive Bodies of State Powers of Subjects of the Russian Federation’ in connection with complaints of a number of citizens” (see: Section 2, Paragraph 8). 17   See: the Ruling of the Constitutional Court of the Russian Federation of February 20, 2006 No 1-P “In the case of examination of the constitutionality of provisions of Article 226 of the Civil Procedure Code of the Russian Federation in connection with complaints of citizens K.A. Ineshin, N.S. Nikonov and the open joint stock company ‘Nizhnekamskneftekhim.” (see: Section 2, Paragraph 8). 15

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Moreover, the Constitutional Court of the Russian Federation stated that both the Convention and the European Court’s judgments — to the extent they interpreted the rights and freedoms set forth in the Convention, including the right of access to courts and fair justice, on the basis of generally recognized principles and rules of international law — should be an integral part of the Russian legal system. They should also then be taken into consideration by the federal law-maker when regulating social relations, and by law-applying bodies when applying relevant rules of law.18 The Constitutional Court also indicated that binding effect of the European Court judgments for the Russian Federation emanates from Article 46 of the Convention according to which a participating State undertakes to execute a final European Court judgment in cases where this state is a party.19 It should be noted that the Russian Federation has ratified Protocol No 14 to the Convention20 aimed to expedite proceedings in the European Court. Given the above, judgments of the Constitutional Court of the Russian Federation and those of the European Court of Human Rights may now be deemed to be sources of Russian law, in addition to statutes adopted by Russian legislative bodies. A similar approach was taken by the Supreme State Arbitration Court of the Russian Federation which noted that its legal position would be binding on lower courts regardless of whether such a position was manifested in an Ordinance of the Plenum (i. e. a document interpreting application of rules of law through analysis of the practice in numerous cases of similar character) or in a ruling of the Presidium issued in the course of supervisory review of an actual case.21 In the latter situation the ruling effectively creates none other than a precedent. This approach was supported by the Constitutional Court of the Russian Fede­ ration.22   Ruling of the Constitutional Court of the Russian Federation of March 5, 2007 No 2-P “In the case of examination of the constitutionality of provisions of Articles 16, 20, 112, 336, 376, 377, 380, 381, 382, 383, 387, 388 and 389 of the Civil Procedure Code of the Russian Federation in connection with application of the Cabinet of Ministers of the Tatarstan Republic, complaints of the open joint stock companies “Nizhnekamskneftekhim” and “Khakasenergo,” as well as complaints of a number of citizens. (see: Section 2, Subsection 2.1, Paragraph 2) 19   Ruling of the Constitutional Court of the Russian Federation of February 26, 2010 No 4-P “In the case of examination of constitutionality of Part two of Article 392 of the Civil Procedure Code of the Russian Federation in connection with complaints of citizens A.A. Doposhok, A.E. Kot and E.Y. Fedotova,” (see: Section 2, Subsection 2.1) 20   Federal Law of February 4, 2010 No 5-FZ. (Российская газета, February 8, 2010) 21   See: the Ordinance of the Plenum of the Supreme State Arbitration Court of the Russian Federation of March 12, 2007 No 7, as subsequently amended, Section 5.1. 22   See: the Ruling of the Constitutional Court of the Russian Federation of January 21, 2010 No 1-П. 18

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1.5. Gradual convergence of the Continental European and Anglo-American legal systems One can thus conclude that Russia and the continental European legal system (where, at least formally, the only sources of law are written statutes) have gradually been moving closer to the Anglo-American legal system (where norms of law result not only from legislation but also from court precedents).23 Such convergence is a natural result of the progressing globalization of the world economy.

§ 2. The Sources and hierarchy of Russian law 2.1. Kinds of normative legal acts First of all it should be noted that according to Russia’s legal doctrine the concept “law” embraces normative legal acts, i. e. those acts of public agencies which contain legally binding general rules of behavior in different areas of social relations. For example, when the President of the Russian Federation issues a decree setting general principles of official behavior for public servants (see: the Decree of June 16, 2009 No 814), this is a normative legal act and, accordingly, a type of law. However, if the President of the Russian Federation issues a decree appointing someone to public office (e. g. as a minister), it is an act of an individual character. From a legal perspective, this is an application of law (since the President, when issuing this decree, is acting within his competence as Head of State), rather than a type of law since it concerns a specific person and does not establish general rules of behavior. The Constitution of the Russian Federation (1993) is the supreme law of the land having the highest legal force in Russia. Federal constitutional laws regulate the principal basic matters of social life (see: for example, the Constitutional Federal Law “On the Court System of the Russian Federation” of December 31, 1996). The Constitution, at the top of the hierarchy, is followed by federal constitutional laws which must not contravene the Constitution. The only exception is for those federal laws which introduce amendments to the Constitution itself. But the procedure for adopting such constitutional laws is quite complicated.

  See: Professor V.D. Zorkin. Конституционно-правовое развитие России. [Constitu­ tional-Legal Development of Russia]. Moscow. 2011, pp. 150–152. 23

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Federal laws24 must comply with, and may not conflict with, either the Constitution or with federal constitutional laws.25 Presidential Decrees may not conflict with the Constitution, federal constitutional laws, or federal laws. However, between 1991 and 1994, there were two types of presidential decrees which needed to be considered with respect to disputes that originated during those years. At the end of 1991 the Congress of People’s Deputies of the Russian Federation granted the President a specific power to issue decrees which, with the exception of the Constitution, could overrule any law. This authority was granted to the President to facilitate the economic and social reconstruction of Russia and its society. Therefore, in relation to that time period, it is necessary to determine whether a particular decree was a special decree which could overrule any law except the Constitution, or whether it was an ordinary decree which was required to comply not only with the Constitution but also with the legislation. In determining how to distinguish these two types of decrees it was necessary to consider the language of the decree. At the very end of a special decree there was usually the following sentence: “This decree was issued in accordance with a (stated) decision of a Congress of People’s Deputies of the Russian Federation.” Without such language it would be considered to be an ordinary decree which could not contradict the law. Since the 1993 Constitution does not differentiate among various kinds of presidential decrees, this problem ceased to exist at the beginning of 1994 and has now become a matter of historical interest. According to the Constitution, a presidential decree now may not contradict the Constitution, federal constitutional laws and federal laws.   Both federal constitutional laws and federal laws are adopted by the Federal Assembly, i. e. the Parliament of the Russian Federation. The Federal Assembly consists of two chambers: the Federation Council and the State Duma (see: Article 95, Section 1of the Constitution). The procedure for adopting laws (put briefly) is as follows: a law must be adopted by the State Duma by a majority of votes of the entire number of deputies (for a federal constitutional law at least 2/3 majority is required). The law should then be approved by the Federation Council by a majority of votes of the entire number of its members. (For a federal constitutional law ¾ majority is needed.) Thereafter the law must be signed by the President of the Russian Federation and then officially published (see: Articles 105–108 of the Constitution). 25   The RF Constitution also expressly stipulates that “generally recognized principles and norms of international law and international treaties of the Russian Federation are an integral part of its legal system. If an international treaty of the Russian Federation establishes rules different from those provided by law, then the rules of the international treaty shall apply.” (Article 15, Section 4) See in detail: Professor V.D. Zorkin., Ed. Комментарий к Конституции Российской Федерации. [Commentary on the Constitution of the Russian Federation] Moscow, 2011, pp. 158–164. 24

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Governmental Decisions are the next level of the hierarchy. A governmental decision must comply with the Constitution, with federal constitutional laws, with federal laws and with presidential decrees. This lower level includes acts of different ministries, state committees and other federal bodies, such as the Federal Tax Service, the Federal Customs Service, etc. These normative acts not only may not contravene laws and presidential decrees but governmental decisions as well.

2.2. When a normative act becomes effective Theoretically, there are a number of different ways to decide when acts become effective. For example, an act could become effective when it was duly signed, or from the time when it was delivered to those whom it concerned. Or it could enter into force once it was published and became publicly available. This latter option appeared to be the fairest and most reasonable, and for this reason was adopted. Now no law may be deemed to take effect until it is officially published. Accor­ ding to the Constitution of the Russian Federation “Laws are subject to official publication. Unpublished laws shall not apply. Any normative legal acts related to rights, freedoms and duties of human beings and citizens shall not apply unless they have been officially published so as to become publicly available.” (Article 15, Section 3). Another question then arises: where must the law be published in order to be deemed effective? While there are numbers of newspapers and magazines that specialize in publishing legal matters, very few publications are deemed to be official, such as the Russian Gazette (Российская газета) the Parliamentary Gazette (Парламентская газета), the Customs news for customs normative legal acts, and some others. While the Constitution, federal constitutional laws, federal laws, presidential decrees and governmental decisions are deemed to take effect when they are officially published, there are some exceptions. For example, in dealing with a complex and lengthy law, it would be reasonable and fair to provide some time to scrutinize it and to prepare for its application. The Civil Code of the Russian Federation may serve as an example. Part One was adopted at the end of 1994. It was published on December 8, 1994, but the main part of it became effective January 1, 1995, about a month having been provided for those interested to be able to read and familiarize themselves with it. Chapter 4, one of the most important chapters of the Civil Code, provides another exception to this rule. Chapter 4, describing legal entities, became effective December 8, 1994, immediately after the Code’s publication. On the other hand, there is also a very important chapter, Chapter 17 of the Civil Code, which describes easements and other rights in rem to land which did not take effect until October 30, 24

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2001. This was due to a provision in the Federal Law “On Introduction of Part One of the Civil Code of the Russian Federation.” Article 13 of that Law provided that this chapter would become effective simultaneously with the effective date of the new Land Code, which was not officially published until October 30, 2001. The effective dates of the remaining Parts of the Civil Code thus reflect the dates of their official publication. Part 2 of the Civil Code, adopted January 26, 1996, became effective March 1, 1996; Part 3, adopted November 26, 2001, became effective March 1, 2002. Part 4, adopted December 18, 2006, became effective January 1, 2008. Thus, although subject to some exceptions, the general rule may be stated as follows: unless otherwise provided, any normative act becomes effective only once it is officially published. This means, for example, that if it is a law, it should be published in the Russian Gazette, (Российская газета) but not, that is, in Economy and Life (Экономика и жизнь). Another detail relates only to normative legal acts issued by different federal bodies (not including the President and the Government)26 such as, for example, ministers, chairmen of state committees, the Head of the Federal Customs Service, the Head of the Federal Tax Service, etc. In addition to publication, if these acts somehow relate to civil rights, freedoms or duties of individuals, or establish the legal status of organizations or at least touch on relations between or among different state bodies, such normative legal acts must also be registered with the Ministry of Justice. So, unlike the Constitution, a constitutional law, a federal law, a presidential decree and a governmental decision, for which official publication is sufficient for normative legal acts to become effective (unless otherwise prescribed), normative legal acts of other federal bodies (such as ministers, state committees, Federal Services, etc.) must not only be officially published but also must be registered with the Ministry of Justice in order to become effective. This is expressly provided by the Decree of the President of the Russian Federation of May 23, 1996 No 763 (see: Section 8). This Decree further provides that normative legal acts of federal executive po­ wer bodies which are not registered or, if registered, have not been published in due course, shall be deemed invalid and no legal consequences shall flow from them. Such normative legal acts must not be referred to in dispute resolution proceedings (see: Section 10). With respect to such a sensitive and complex subject as taxation, it is wellknown from many publications that if, for example, there is a dispute between a   The Government of the Russian Federation consists of the Chairman of the Government, Vice-Chairmen of the Government and Federal Ministers (see: Article 110, Section 2 of the Constitution of the Russian Federation). 26

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taxpayer and the tax inspectorate and the latter makes reference to some normative instruction or ordinance of the Federal Tax Service (as it sometimes does), then the prudent taxpayer or the experienced lawyer may request that the instruction or ordinance be produced in court so that it can be determined when, or indeed if, it was registered with the Ministry of Justice. In addition, when and where it was officially published can be questioned. If either of these conditions is not complied with, a court may not base its judgment on such an act. In a number of cases, taxpayers have won cases against tax inspectorates just because ordinances of the Federal Tax Service had not been published at all or, even if published, had not been previously registered with the Ministry of Justice. Thus, for the tax inspectorate to win its case it is necessary to establish three facts. First, the ordinance in question must have been duly adopted. Second, it must have been registered with the Ministry of Justice. Third, it must have been officially published. If these three conditions are met, then even if the tax inspectorate for some reason fails to produce the document in court, the court will certainly find some way to acquaint itself with such a normative act, and may base its decision on it. Perhaps in some situations, an ordinance may have been officially published, but not registered with the Ministry of Justice. Then, at a later time, the Federal Tax Service does manage to have it duly registered. The question that then may arise is whether the tax inspectorate could request the court to review the decision for that reason. This raises the important question of the retroactive effect of law.

2.3. Retroactive effect of law Generally speaking, Russia’s approach to this issue is that the Constitution provides that any law which introduces responsibility or increases it cannot have retroactive effect (see: Article 54, Section 1).27 Nor can laws which introduce new taxes or make a taxpayer’s situation more difficult have retroactive effect (see: Article 57).28 In practical terms this means that if a new tax is introduced in the middle (or at the end) of a calendar year, such a tax may not be retroactively imposed upon taxpayers from the beginning of the year in which the tax was imposed.   The background of this rule is self-explanatory: nobody should be responsible for his act (or omission) which was not deemed a violation of law at the time when it was performed (see: id., Section 2). Meanwhile, if after commission of a violation, responsibility for it is abolished or softened, a new law shall apply (see: id.). Thus, a law abolishing or softening responsibility does have retroactive force. 28   This rule is further developed in the Tax Code. (see: infra Chapter 7, § 1, Section 1.1). 27

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The approach to retroactivity is more flexible for norms of civil law. Article 4, Section 1 of the Civil Code provides: “Acts of civil legislation do not have retroactive effect and shall apply to relations that arose after they came into effect.29   With regard to legal relations which had arisen before a new law became effective, the new law shall apply to those rights and duties which arise after its introduction (see: Article 4, Section 2 of the Civil Code; see also e. g., Article 5, Paragraph 2 of the Federal Law of January 25 1996 No 15-FZ “On Introduction of Part Two of the Civil Code of the Russian Federation”). Here is an illustration of this rule: neither the 1922 Civil Code nor the 1964 Civil Code as well as the 1991 Fundamentals of Civil Legislation of the USSR and Republics (the “1991 Fundamentals”) contained norms regulating lease of transport vehicles (whether with or without crew). There were accordingly no rules on the issue of the responsibility of a lessor or a lessee for losses caused to third persons during use of a rented transport vehicle. Assume that in December 1995 a contract for lease of a truck with a driver for a two year term was concluded in which contract there was no clause relating to this issue. The lease agreement created a contractual obligation between the lessor and the lessee, however the third person who sustained the losses did not participate in the contract. So the third party could recover his losses by framing his claim in tort, alleging that he was a victim and, therefore, a creditor. A question arises, if he was a creditor, who was the debtor? One must keep in mind that according to Russian civil law and doctrine a truck may be considered to be “a source of increased danger” whose possessor is strictly liable for harm caused to third persons in the course of use of such an object (see: Article 454 of the Civil Code 1964; a similar norm was contained in Article 128, Section 1 of the 1991 Fundamentals). The concept of a possessor of a source of increased danger includes both an owner of a particular object and a person who used it under some legal ground, including, inter alia, a lease contract (see: Professor E.A.Sukhanov, Ed. Гражданское право, [Civil Law], volume 2, Moscow, 1993. P. 405). Given such an approach, the lessee would be held responsible for the losses in question. So if an accident occurred, e. g., in January 1995, the third person as a victim would have a direct claim against the lessee to recover the losses. Now assume that in May 1996 (i. e. after introduction of Part Two of the RF Civil Code, which became effective March 1, 1996) a second traffic accident with the rented truck occurred and some property belonging to a third person was damaged. Part Two of the Civil Code contains norms specifically designated to regulate the lease of transport vehicles both with and without crew (§ 3 of Chapter 34) and there is a norm stating that in case of lease of a transport vehicle with crew “liability for harm caused to third persons by a leased means of transport, its mechanisms, apparatus, and equipment shall be borne by the lessor in accordance with the rules provided by Chapter 59 of the present Code. [Chapter 59 of the Civil Code deals with obligations in tort.] He shall have the right to present a recourse claim to the lessee for compensation for amounts paid to third persons if he proves that the harm arose due to the fault of the lessee.” (Article 640) As it clearly appears from the quoted text, the loss in question can be recovered within the framework of a remedy in tort. Chapter 59 of the Civil Code contains a concept of a source of increased danger (Article 1079, Section 1, Paragraph 1) similar to that known to previous norms 29

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The effect of a statute applies to relations that arose before it came into effect only in cases when this is directly provided for by statute.” Thus, norms of civil law have no retroactive effect unless the law expressly so provides. An example of such provision occurred when the Civil Code introduced a rule relating to “acquisitive” prescription, which was unknown in the 1922 and 1964 Ci­vil Codes. According to Article 242 of the Civil Code “a person  — a citizen or a legal entity — who is not the owner of property but who has openly, and uninterruptedly possessed as his own immovable property30 for fifteen years, or movable property for five years and a persons who has possessed movable or immovable property that escaped possession of its owner beyond his will for thirty years, shall acquire ownership of this property (acquisitive prescription).” (see: Section 1). It further states that a person who would like to support a title based on acquisitive prescription is entitled to join to the time of his possession the entire time during which the property was possessed by previous possessors provided possession had been acquired by each of them upon the will of the previous one (see: Section 2, Paragraph 2). In this way the norms relating to acquisitive prescription were retroactively extended to relationships which had arisen prior to the adoption (and introduction). The Civil Code also provides that parties to a contract are entitled to provide that its terms and conditions shall be applied to their relations which arose before conclusion of the contract unless otherwise established by law or follows from the essence of relevant relations (see: Article 425, Section 2). This permits the parties to provide retroactive effect to the terms and conditions of an agreement which they entered into at a later time. It should be added that, according to the position of the Supreme State Arbitration Court of the Russian Federation, acts of lower courts may be reviewed if they are inconsistent with a legal position expressed at some later stage (i. e. after those

of Russian civil law. It is also provided in this article that the person who is responsible for losses caused by a source of increased danger is its possessor, inter alia, a lessee (id, Paragraph 2). Meanwhile the norm contained in Article 640 of the Civil Code imposes this responsibility upon a lessor in a mandatory way. The norm of Article 640 is a special rule as compared with the norm of Article 1079 which is a general rule. Due to the principle “lex specialis derogat lex generalis” the former norm shall prevail over the latter one. Therefore the person who is obliged to recover losses sustained by the third person shall be the lessor who will thereafter be entitled to submit a recourse claim against the lessee. 30   Immovable property means plots of land and other objects such as, buildings, construction, etc. which are closely connected with land and cannot be removed without substantial damage. (see in more detail: infra Chapter 7, § 3, Section 3.1) 28

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acts had become effective) in a general ordinance of the Plenum of the Supreme State Arbitration Court or in a ruling of its Presidium issued ad hoc.31 In such a way a Plenum’s ordinance or a Presidium’s ruling may be provided with retroactive effect. This position was supported by the Constitutional Court of the Russian Federation which indicated that while interpretations of law by higher courts shall generally be deemed binding upon lower courts only prospectively, such interpretations nevertheless may be provided with retroactive effect if the following preconditions are met: 1) A special express reservation with respect to retroactive effect should be set forth in the ordinance of the Plenum of the Supreme Court or in the ruling of its Presi­dium.32 2) In case a legal position, as manifested either in an ordinance of the Plenum or in a ruling of the Presidium, introduces or increases responsibility, such a legal position should not be given retroactive effect.33

2.4. The Russian Federation and its Subjects Federal normative legal acts have been considered above. These are acts of a federa­ ted state. The Russian Federal Constitution, Article 65, Section 1, lists all the Federation’s various subjects among which are included: a) republics, such as the Republic of Adygea, the Republic of Bashkortostan, the Republic of Karelia, etc; b) krais,34 such as, the Altayskiy krai, the Krasnodarskiy krai, the Primorskiy krai; c) regions, such as, the Amur region, the Archangelsk region, the Bryansk region, the Moscow region; d) the Jewish autonomous region;   See: the Ordinance of the Supreme State Arbitration Court of the Russian Federation of March 12, 2007 No 17 (as subsequently amended), Section 5.1. 32   Such a reservation reads along the following lines: “effective Judicial acts of state arbitration courts in cases with similar factual circumstances issued on a basis of a norm of law in its interpretation different from that as contained in this ruling, may be reviewed on the basis of Item 5 of Section 3 of Article 311 of the Arbitration Procedure Code of the Russian Federation unless there are no other obstacles for it” (see: e. g.: the Ruling of the Presidium of the Supreme State Arbitration Court of the Russian Federation of July 27, 2011, No 2600/11). 33   See: the Ruling of the Constitutional Court of the Russian Federation o1 January 21, 2010. No 1-P, Sections 3–5. 34   A krai is a large region. 31

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e) autonomous circuits, such as the Koryak autonomous circuit, the KhantyMansiysk autonomous circuit, the Chucotka autonomous circuit; f) cities of the federal level — Moscow and St. Petersburg. The legal status of a republic, as a subject of the Russian Federation, is regulated by the Constitution of the Russian Federation and the Constitution of the particular republic (see: the Constitution of the Russian Federation, Article 66, Section 1). The legal status of other subjects of the Russian Federation is regulated by the Constitution of the Russian Federation and the Charter of the relevant subject of the Russian Federation adopted by its legislative body (see: id, Section 2). The distribution of power and legislative jurisdiction between the Russian Fede­ ration, on the one hand, and the subjects of the Russian Federation, on the other, raises important problems. The Constitution of the Russian Federation distributes power and jurisdiction in three ways: First, the Constitution sets forth those matters which lie within the exclusive jurisdiction of the Russian Federation. Next it enumerates those matters included in the joint jurisdiction of the Russian Federation and its subjects. Finally, the Constitution sets forth those matters within the exclusive jurisdiction of the subjects of the Russian Federation. While constitutional law mainly governs these matters, a general overview may prove helpful. Matters within the exclusive jurisdiction of the Russian Federation include, inter alia, federal state-owned property and its management; establishment of the legal foundations of the Russian market; financial, currency, credit, and customs regulations; civil law, civil procedure and state arbitration procedural law and conflicts of laws, criminal law and criminal procedure (Article 71 of the Constitution). While these are examples, many other matters also lie within the exclusive jurisdiction of the Russian Federation. Only bodies of the Russian Federation, including its Parliament, the President, the Government and to some extent federal ministries and similar agencies at the federal level are entitled to issue normative legal acts. Customs regulations may serve as an example. The 2003 RF Customs Code35 is a federal law adopted by Parliament as is the 1993 Law “On Customs Tariffs” (Российская газета, June 5, 1993), as subse-

  Previously there was the 1993 RF Customs Code which is now invalid having been replaced with the 2003 Customs Code. Currently, due to formation of the Customs Union among the Republic of Belarus, the Republic of Kazakhstan and the Russian Federation, the Customs Union Customs Code has been adopted. Its rules prevail over those set forth in the RF Customs Code 2003 (see: infra, Chapter 6, § 2). 35

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§ 2. The Sources and hierarchy of Russian law

quently amended. On the other hand, there are also some governmental decisions relating to customs matters. For example, the Federal Law on Customs Tariffs includes rules relating to the establishment and payment of export and import customs duties. This Law provides that only the Russian Federal Government may grant immunities or exemptions from these duties (Article 34). Some governmental decisions relate to this matter, such as the Decision of July 23, 1996, whereby the in-kind contribution of a foreign investor to the chartered capital of a business with foreign investments shall be exempted from import customs duty (based on some preconditions to be described further on (see: infra, Chapter 6, § 2)). In addition, the Federal Customs Service, a federal body with a status similar to that of a ministry, issues instructions and ordinances, etc., that explain how to apply different parts of the Customs Code and the Law on Customs Tariff. So, although a matter may be within federal jurisdiction, there may be more than one federal body competent to issue normative legal acts with respect to a particular matter. While there may be a number of them, all of them must be at the federal level. Matters involving the joint jurisdiction of the Russian Federation and its subjects include, inter alia, protection of human rights; possession, use and disposal of land, subsoil, water and other natural resources; environmental protection; taxation; administrative, labor, family, and housing legislation (Article 72 of the Constitution). When both the Russian Federation and its subjects are entitled to issue laws, a law of a subject of the Federation must be issued in compliance with (and, accordingly, may not contravene) a relevant federal law (Article 76, Section 2). The Russian Constitution also provides that any matter not included within the exclusive federal jurisdiction or the joint federal and federation subject jurisdiction is, therefore, within the exclusive jurisdiction of the subject of the Federation (see: Article 76, Section 4 of the Constitution) with which the Federation has no right to interfere. On such matters only the Federation subject may be the lawmaker and apply its local laws (id, Section 6). Given the subject matter of this treatise, civil law, financial-currency law, credit regulations, customs regulations, arbitration procedure, and conflicts of laws, are of greatest importance. These are all matters within the exclusive jurisdiction of the Russian Federation.36

  Of course, subjects such as tax law and labor law matters, in which the Russian Federation and its subjects have joint jurisdiction, are also of substantial significance and will be considered in Chapters 6 and 10. 36

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§ 3. Relationship between the RF Civil Code and other federal statutes containing civil law norms 3.1. Historical overview The vast majority of foreign trade contracts and other transactions are none other than civil law transactions made more complicated due to the involvement of a foreign element. Such transactions are mainly civil law matters regulated by norms of the Civil Code. However, the Civil Code of the Russian Federation currently in effect introduced a hierarchy of laws substantially different from what was described earlier. In the event of any conflicts among different federal laws a judge must base his decision on the law having the prevailing legal force. Therefore it is necessary to establish what the criterion is to determine which law is the prevailing one. In previous times it was usual that if there were two laws, both duly adopted by the same body, that is, now by the parliament, but in previous times by the Supreme Council of the Russian Soviet Federative Socialist Republic (RSFSR), the law which was adopted the latest in time would be the prevailing one. The Supreme Council of the RSFSR adopted the Civil Code of the RSFSR in 1964. In 1990, when economic reform had begun in Russia, some new and completely different laws were enacted, such as the Law on Property, the Law on Business and Business Activities, and many others. Now these laws are all invalid. However, for several years they were effective and introduced tremendous innovation into a society that was earlier regulated by the Civil Code. In this case, when a question arose as to which law had prevailing legal force, the answer was simple: when there are two (or more) laws on the same subject issued by the same body but at different times then the latest one enacted enjoys prevailing legal force. “Lex posterior derogat prior” (a subsequent law overrules a prior one) was a familiar principle under Roman law. That is why the Law on Property and the Law on Business and Business Activities lawfully replaced relevant chapters of the 1964 Civil Code of the RSFSR without specific provisions in the later laws so stating. Theoretically (and formally) no specific reference to such a substitution or partial invalidation of the code was required due to such an approach. For the same reasons, when, at the end of 1994, a new Civil Code of the Russian Federation was enacted, the older one became almost completely ineffective since a number of new laws had entered into force in the late 1980’s and early 1990’s. However, Part One of the RF Civil Code created a situation which was completely new. While Article 3, Section 2 of the Civil Code reiterated that: “Civil legislation consists of the present Code and other federal statutes adopted in accordance with 32

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it,” the Code now provides an important further provision: “Norms of civil law contained in other statutes shall comply with the present Code.” Thus, new civil legislation, subsequently enacted, could not overrule relevant norms of the present Civil Code. In other words, the Civil Code could only be amended through the introduction of new provisions in the Code itself. Unless this was done, the Civil Code would prevail over a later enacted federal law with respect to civil law norms that are set forth in the newer laws. The Law “On Joint Stock Companies” of December 26,1995 No 208-FZ (Российская газета, December 29,1995), as subsequently amended, can demonstrate the application of this rule. Assume that a problem resolved one way in the Civil Code in a certain manner was regulated differently in the joint stock companies law. Chapter  4 of the Civil Code, which became effective December 8, 1994 (i. e. even earlier than Part One of the Civil Code as a whole), regulates legal entities, including joint stock companies. The Law On Joint Stock Companies took effect much later than the Civil Code (beginning January 1, 1996). So, in case of a conflict between the Code and the Law in question, the Code should prevail over the Law on Joint Stock Companies. The Civil Code is thus placed on a higher level with respect to the regulation of civil law transactions than other federal laws. The purpose of this approach was to provide the Civil Code with an additional level of stability.

3.2. Current situation This concept, however, did not prove to be sufficiently viable. As the Constitutional Court of the Russian Federation repeatedly emphasized, “no federal law, by virtue of Article 76 of the Constitution of the Russian Federation, has prevailing legal force in relation to another federal law.” (Ruling of November 5, 1999 No 182‑0, Section 3, Paragraph 8) (See also Ruling of February 3, 2000 No 22-0, Section 3, Paragraph 3). Therefore federal statutes containing norms of civil law (differing from those in the Civil Code) which were adopted and became effective after the effective date of the Civil Code now prevail over relevant norms of the Civil Code due to the old rule “lex posterior derogat prior” (a subsequent law overrules a prior one). Meanwhile there is another principle also well known from Roman law: “lex specialis derogat lex generalis” (a special law overrules a general law). In accordance with this principle the Civil Code provides that “the rules established by civil legislation shall apply to relations in which foreign nationals, stateless persons and foreign legal entities participate unless provided otherwise by a federal law.” (Article 2, Section 1, Paragraph 4) 33

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One such law was the Law “On Foreign Investment in the RSFSR,” which was adopted July 5, 1991 and became effective September 1, 1991. Some of its norms differed substantially from those later set forth in Part I of the Civil Code. Let us consider a practical example. The Civil Code (in its original version) mandates that at least half of the chartered capital37 of a limited liability company shall be paid by its participants by the time of registration, with the remainder contributed within the first year of the company’s activities (see: Article 90, Section  3). Similar provisions are also set forth in the Federal Law “On Limited Liability Companies” of February 8, 1998 (see: Article 16) (Российская газета, February 17, 1998, as subsequently amended). Meanwhile, Article 19, Paragraph 2 of the 1991 Law “On Foreign Investment in the RSFSR,” provided that 50% of the chartered capital of a business with fo­ reign investments had to be paid within one year following the state registration of such a business. However, there was no deadline whatsoever for contribution of the remainder of the chartered capital for businesses with foreign investments. The participants were therefore at liberty to pay the remainder of the chartered capital within two or even more years after the state registration of the business if they had so agreed and stipulated in the constituent documents of the business. Therefore neither rule requiring 50% prepayment of the chartered capital nor the provision declaring that the entire chartered capital of a company should be paid within one year after its state registration were applicable to companies with foreign investments. If, on the other hand, there is a situation which is in some way or other regulated by the Civil Code (or other general civil law statutes such as those on Joint Stock Companies, Limited Liability Companies, etc.,) without a provision relating to the Law On Foreign Investments, then (even though foreign persons are involved) the relevant norms of the Civil Code or other general civil statute shall apply. Consider as a problem, for example, the minimum amount of chartered capital required of a company with foreign investments. The 1991 Law “On Foreign Investment in the RSFSR” was silent on this point. However, the 1998 Law On Limited Liability Companies required a minimum chartered capital of one hundred minimum monthly salaries as set forth in a federal law relating to the date of submission of a company’s constituent document for its state registration (see: Article 64, Section 7).38 The same minimum amount is required of closed joint stock companies. However, the minimum chartered capital amount for open ones is one thousand minimum monthly salaries (Articles 26 of the Law on Joint Stock Companies).39 Since   According to a new version of the Civil Code this figure is increased for any type of a company up to three fourth of the chartered capital (see: Article 662, Section 4). 38   Currently it is 10,000.00 rubles (see: Article 662, Section 2, Paragraph 1 of the Civil Code). 39   Currently it is 100, 000.00 rubles for a joint stock Company (see: id., Paragraph 2). 37

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there were no rules in the 1991 Law “On Foreign Investment in the RSFSR” on this point, the above mentioned norms are extended to limited liability (and accordingly, joint stock) companies with foreign investments. It should be noted, however, that the 1991 Law “On Foreign Investment in the RSFSR” is now invalid, having been replaced with the Federal Law ”On Foreign Investments in the Russian Federation” of July 9, 1999 No 160-FZ, which took effect July 14, 1999 when it was published in Российская газета, July14,1999 (as subsequently amended). The latter law put businesses with foreign investments in the same position as domestic commercial organizations in almost every respect including the procedure (and terms) of formation of a company’s chartered capital. An explanation of such a change of approach of Russia’s lawmakers is clear: The 1991 Law “On Foreign Investment in the RSFSR” had been adopted when Russia’s legal system was designa­ ted to regulate a planned economy, so businesses with foreign investments inevitably needed some specific rules. However, by 1999 the Russian legal system needed to be able to regulate a market economy. The Law on Foreign Investments in the Russian Federation currently in effect therefore provides businesses with foreign participation the same legal regime as that established for domestic businesses. The norms referred to above are mandatory. Russian civil law distinguishes mandatory norms, on the one hand, and optional norms, on the other. A mandatory norm means that what it prescribes is absolutely obligatory. No deviation from such a rule can be permitted. So the parties to a contract regulated by mandatory rules have no option. That is why a mandatory rule, even one related to a contract, applies even though the parties to the contract are reluctant to comply with it. In other words, a mandatory norm may not be amended or deviated from by agreement of the parties. However, an optional norm applies only when the parties did not agree otherwise. A rental contract is a typical example. A very important problem is who will be in charge and whose responsibility it will be to provide capital repairs and current repairs and maintenance. The parties may resolve these problems by agreement. But if they fail to do so (even if just through forgetfulness) then an optional norm in the Civil Code provides that, unless otherwise agreed, capital repairs are the responsibili­ ty of the lessor while current repair and maintenance shall be borne by the lessee (see: Article 616). In summary, as described above, there is a hierarchy among legal normative acts of different levels. According to the Constitution of the Russian Federation, if a court in the course of considering a case establishes that there is a conflict between an act of any state agency, on the one hand, and the law, on the other, the court shall decide the case in accordance with the law (see: Article 120, Section 2). This idea has been developed 35

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further in the Federal Constitutional Law of December 31, 1996 “On the Court System of the Russian Federation.” This law mandates that if a court, when considering a case, discovers that any act of a state agency or official is inconsistent with the Constitution of the Russian Federation, a Federal Constitutional Law, a Federal Law, generally accepted principles and norms of international law, or the Constitution, Charter, or law of a subject of the Russian Federation, then the court must base its decision upon the law having the prevailing legal effect (see: Article 5, Section 3).

3.3. Analogy of lex and analogy of jus Civil law is currently very detailed; but it cannot include the whole diversity of possible relationships in this field. That is why some gaps may (and from time to time do) appear. The Civil Code provides for certain ways to cope with this problem. If particular civil law relationships are not directly regulated either by law or by custom or usage, then civil law regulating similar relationships can be applied to these relationships, unless to do so would be inconsistent with their nature. This is called “analogy of lex” (see: Article 6, Section 1). There are three preconditions to applying analogy of lex: 1)  the legal relationships in question must be of a civil law nature; 2) there is no law regulating these relationships; and 3) there is a law regulating similar relationships. If, however, there is no law regulating the relationship in question, nor one regulating a similar relationship, then the relationship will be regulated on the basis of analogy of jus, in which the general principles and intentions of civil law will be applied, also taking into account the requirements of good faith, reasonableness and justice (see: Article 6, Section 2). Both analogy of lex and analogy of jus also apply with respect to civil procedural law. According to Article 1, Section 4 of the RF Civil Procedure Code, if there is no civil procedure law norm regulating relationships arising in the course of a civil law matter, courts are directed to apply the norm regulating a similar relationship (analogy of lex). In the absence of such a norm, courts act on the basis of principles of justice in the Russian Federation (analogy of jus). A question may arise whether analogy of lex and analogy of jus may only be applied by courts or also by administrative agencies when they deal with civil law relationships. Theoretically the latter variant is not prohibited, albeit in practical terms both types of analogy are used by courts. 36

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§ 1. General provisions 1.1. The Constitutional Court of the Russian Federation; Constitutional and Charter Courts of Subjects of the Russian Federation In Chapter 1 § 1 of this book, examining sources of Russian law, references were made to the Constitutional Court of the Russian Federation, the Supreme Court of the Russian Federation and the Supreme State Arbitration Court of the Russian Federation. This chapter will consider the Russian court system in more detail. The Constitutional Court of the Russian Federation. The activities of Russia’s Constitutional Court are regulated by the Constitution itself (see: Article 125) and the Federal Constitutional Law of July 21, 1994 No 1-FCZ “On the Constitutional Court of the Russian Federation.” Its jurisdiction includes, inter alia, such matters as: 1) determination of the constitutionality of — a) federal laws, normative acts of the President of the Russian Federation, the State Duma, and the Government of the Russian Federation; b) constitutions and charters, as well as laws and other legal normative acts, of subjects of the Russian Federation relating to issues within the jurisdiction of federal bodies and also those within the joint competence of federal bodies and subjects of the Russian Federation; c) agreements between federal bodies and subjects of the Russian Federation, and also agreements between bodies of subjects of the Russian Federation; and 37

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d) international treaties of the Russian Federation which have not yet entered into force;1 2) the resolution of conflicts of jurisdiction: a) between and among federal bodies; b) between and among federal bodies and subjects of the Russian Federation; c) between and among supreme bodies of the subjects of the Russian Federation; 3) interpretation of the Constitution of the Russian Federation.2 Legislation or separate provisions thereof which are recognized to be inconsistent with the Constitution of the Russian Federation shall be invalid3 and international treaties of the Russian Federation which are inconsistent with the Constitution shall not enter into force and become applicable (see: Article 125 of the Constitution). Court judgments and decisions of other bodies based upon legislation which is recognized to be unconstitutional shall not be enforceable and, in due course, should be reviewed (see: Article 79, Paragraph 3 of the Law “On the Constitutional Court of the Russian Federation”). A Constitutional Court judgment is not subject to appeal but is final and binding. It becomes effective immediately upon its announcement (see: id., Paragraph 1). Judges of the Constitutional Court of the Russian Federation are appointed by the Federation Council upon recommendation of the President of the Russian Federation (see: Article 128, Section 1 of the Constitution). A judge of the Constitutional Court of the Russian Federation, as well as any other federal judge, holds a life-time office. The ultimate age of a judge is 70 years old (see: Article 12 of the Law “On the Constitutional Court of the Russian Federation”, Article 11 of the Law “On the Status of Judges in the Russian Federation” of 1   Proceedings with respect to those issues may be initiated by the Constitutional Court upon motion of the President of the Russian Federation, the Federation Council, the State Duma, one fifth of the members of the Federation Council or deputies of the State Duma, the RF Government, the RF Supreme Court, the RF Supreme State Arbitration Court, or legislative and executive bodies of subjects of the Russian Federation. Motions to examine the constitutionality of a federal law to be applied in a specific case may be submitted by any court or by citizens who complain of violation of their rights and freedoms as guaranteed by the Constitution. 2   Relevant motions may be submitted by the President of the Russian Federation, the Federation Council, the State Duma, the RF Government, or by legislative bodies of subjects of the Russian Federation (see: Professor G. A. Gadjiev, ed. Комментарий к Федеральному конституционному закону “О Конституционном Суде Российской Федерации” [Commentary on the Federal Constitutional Law “On Constitutional Court of the Russian Federation.” Moscow, 2012, p. 586–593). 3   In such a case a state body or official who adopted the unconstitutional act should issue a new one, quashing or amending it (see: Article 79, Paragraph 4 of the Law “On the Constitutional Court of the Russian Federation”).

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June 26, 1992.) Upon attainment of this age a judge should leave the office and be granted the status of honorable retirement. Constitutional and Charter Courts. Subjects of the Russian Federation may create their own constitutional (charter) courts to consider issues of conflicts of their laws and normative legal acts with the Constitution of the Russian Federation. They may also interpret their own constituent documents which, in the case of the republics are called “Constitutions,” and in the case of other subjects of the Russian Federation are referred to as “Charters” (See: Constitution, Article 66, Sections l & 2; Article 27, Section 1 of the Federal Constitutional Law “On the Court System of the Russian Federation” of December 31,1996, No 1-FCZ). The functions of these courts are very specific and judgments issued within their jurisdiction are not subject to review by any other court (see: id., Section 4). In addition to the Constitutional Court of the Russian Federation and constitutional and charter courts of subjects of the Russian Federation there are two court systems in Russia: courts of general jurisdiction, on the one hand, and state arbitration courts, on the other. There are different levels of courts within each system.

1.2. Courts of general jurisdiction Courts of general jurisdiction consider cases involving non-economic disputes between — or at least with the participation of — private individuals (who may include foreigners and stateless persons as well as citizens), such as: 1) criminal cases; 2) other matters of a public law nature4 and 3) civil law disputes.5 Justices of the peace. Justices of the Peace constitute the lowest level of courts of general jurisdiction.6 Their jurisdiction includes:   Except those relegated to state arbitration courts (see infra, Subsection 1.3 of this text).   Except those relegated to state arbitration courts (see infra, Subsection 1.3 of this text). It should be noted that criminal proceedings are governed by the RF Criminal Procedure Code; proceedings in other public law cases, as well as in civil law cases in courts of general jurisdiction, are governed by the RF Civil Procedure Code. 6   Justices of the peace are not federal judges; they are judges of subjects of the Russian Federation (see: Federal Constitutional Law “On Courts of General Jurisdiction in the Russian Federation” of February 7, 2011, N 1-FCZ, Article 1, Section 3. See also: M.I.Kleandrov. Статус судьи. Правовой и смежные компоненты. [Status of a Judge. Legal and Contiguous Components] Moscow, 2008, p. 104.) 4 5

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a) criminal cases with a maximum punishment of 3 years deprivation of freedom7 such as, inter alia, swindling (Article 159 of the Criminal Code); b) some civil law cases, including, for example: (i) divorce (provided there is no dispute between the spouses concerning children); (ii) disputes between spouses concerning distribution of joint property if the amount of the claim does not exceed 50,000.00 rubles; (iii) other cases arising out of family relations (with the exception of those related to challenging of paternity (maternity), establishment of paternity, deprivation of parental rights, and adoption of a child); (iv) property disputes (except those relating to inheritance and to the creation and use of intellectual property) so long as the amount of the claim does not exceed 50,000.00 rubles; (v) priorities with respect to the use of property, e. g. priorities among neighbors to the use of plots of land between them (see: Article 23 of the Civil Procedure Code). Federal District Courts. Decisions and sentences of a justice of the peace may be appealed within one month to a federal district court of general jurisdiction Article 321 of the Civil Procedure Code; Articles 354, 356 of the Criminal Procedure Code). District courts also act as trial courts with respect to cases of a criminal, or other public or civil law nature8 except for those relegated to courts of a higher level. In practice, district courts deal with the vast majority of cases (see: Article 24 of the Civil Procedure Code). Courts of Subjects of the Russian Federation. A district court judgment or sentence may be appealed within one month to the civil cases collegium or the cri­ mi­nal cases collegium of court of general jurisdiction of the appropriate subject of the Russian Federation. This collegiums act as a court of appeal.9   See: Article 3, Section 1 (1) of the Federal Law “On Judges of Peace in the Russian Federation” of December 17, 1998 No 188-FZ. 8   District courts deal with civil law disputes which are beyond the jurisdiction of justicies of the peace, such as, labor disputes, family disputes concerning children; challenge of paternity or maternity, deprivation of parental rights; adoption of children; proprietary disputes with amount of claims exceeding 50,000.00 rubles; inheritance disputes; those concerning creation and use of results of intellectual activity; challenge of decisions, acts or omissions of state bodies, municipalities or officials, such as, inter alia, disputes between individuals as taxpayers and tax inspectorates. 9   Ruling of a court of appeal (or a trial court judgment which was not appealed to a court of appeal within one month) becomes effective and may be enforced. 7

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The collegium of a court of general jurisdiction of a subject of the Russian Federation may also act as a trial court, such as in cases: 1) arising out of collective labor disputes; 2) connected with state secrets; 3) challenging normative legal acts of bodies of subjects of the Russian Federation which are alleged to affect rights, freedoms and other lawful interests of citizens and organizations; 4) challenging decisions of electoral commissions of subjects of the Russian Federation; 5) relating to suspension of activities of regional branches of political parties or social associations or their liquidation; 6) on payment of compensation for violation of the right to judicial proceedings within a reasonable term or the right to enforcement of a judicial ect within a reasonable term in cases that are within the jurisdiction of justicies of the peace and district courts (see: Article 26 of the Civil Procedure Code). Supreme Court of the Russian Federation. Judgments and sentences issued by courts of general jurisdiction of subjects of the Russian Federation, acting as trial courts, may be appealed within one month to the Civil Cases Collegium or the Criminal Cases Collegium of the Supreme Court of the Russian Federation acting as the court of appeal (see: Article 3201, item 3 of the Civil Procedure Code; Article 355, Section 3 (2) of the Criminal Procedure Code). The Collegia of the Supreme Court of the Russian Federation can also act as trial courts, to consider cases such as those: 1) challenging non-normative legal acts of: a) the President of the Russian Federation, b) the Chambers of the Federal Assembly and; c) the Government of the Russian Federation; 2) challenging normative legal acts of: a) the President of the Russian Federation; b) the Government of the Russian Federation; and c) other federal bodies, which acts affect rights, freedoms and lawful interests of citizens and organizations; 3) appealing decisions of the Central Electoral Commission of the Russian Federation; 4) suspending activities or liquidation of political parties or all  — Russian or international social associations; 5) on payment of compensation for violation of the right to judicial proceedings within a reasonable term or the right to enforcement of a judicial act within a reasonable term in cases that are within the jurisdiction of federal courts (except district courts) (see: Article 27, Section 1 of the Civil Procedure Code). 41

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The judgments of a collegium which acted as a trial court may be appealed within one month to the Appeal Collegium of the Supreme Court of the Russian Federation. (see: Article 320-1, item 4 of the Civil Procedure Code)

1.3. State arbitration courts Relationships of a similar legal nature (whether public or private) may be regulated to some extent in different ways depending upon whether they relate to consumer or business activities. “Business activity” is defined in the Civil Code as “autonomous activity performed at one’s own risk directed towards the systematic derivation of profit from the use of property, sale of goods, fulfillment of work or rendering of services by persons registered in this capacity in the procedure established by law” (Article 2, Section 1, Paragraph 3). Accordingly a special court system was created in Russia to resolve: 1) civil law disputes between and among businesses (also including foreign ones) where businesses (i. e. companies, partnerships or individual entrepreneurs), are both plaintiffs and defendants; 2) public law disputes between and among businesses, on the one hand, and a state body or bodies, on the other.10   There are, however, some exclusions from this general rule. On the one hand, all criminal cases, including those connected with business activities (such as, fictitious bankruptcy or offenses affecting interests of commercial organizations), shall be considered by courts of general jurisdiction. On the other hand, bankruptcy proceedings in relation to an individual who is not registered as a sole business, shall be held by state arbitration courts (see: Article 33, Section 1 (1) of the Arbitration Procedure Code), also so-called “corporate disputes,” e. g. disputes connected with creation of a legal entity, management of it, or participation in it, inter alia, disputes concerning ownership to stocks (shares) in chartered capital of companies. Such disputes are within the jurisdiction of state arbitration courts even if a stockholder (shareholder) is a private individual not registered as a sole business (see: Article 225.1 of the Code. Earlier these disputes were mentioned in Article 33 of the Code). Court practice follows these rules. Z. sued K. who bought a share in a limited liability company which transaction was, in Z’s view, illegal. The statement of claim was filed with a state arbitration court. The Court terminated proceedings on the ground that since Z., G. and K. were natural persons not registered as sole businesses, the case was beyond the jurisdiction of a state arbitration court. The trial court ruling was upheld by the appellate court and by the court of cassation. Z. applied to the RF Supreme State Arbitration Court with a motion to review the case in the course of supervision. (Supervision is discussed infra at Section 1.4) The Presidium of the Supreme State Arbitration Court pointed out in its Ruling that disputes between participants of companies connected with companies’ activities are within the jurisdiction of state arbitration 10

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Such cases are within the jurisdiction of state arbitration courts11 which should not be mistaken for voluntary arbitration forums.12 State arbitration courts, under Russian law are, in fact, state commercial courts. The state arbitration court system consists of courts of several levels. The state arbitration courts of the subjects of the Russian Federation are the lowest level courts in this system. Such a court may act within the territory of one or several subjects of the Russian Federation.13 These courts are trial courts (or courts of the first level) and consider cases, whether of a public or private nature, within the jurisdiction of the state arbitration courts.14 Depending upon the legal nature of a dispute, it will be considered respectively by a civil law disputes collegium or courts in accordance with Article 33 of the Arbitration Procedure Code (see: Ruling No 4405/08 of September 9, 2008, Bulletin of the RF Supreme State Arbitration Court, 2008, No 11, pp. 163–166). Currently judicial practice in this field has become even more flexible. Here is an illustrative case: A contract between LLC “SAB Miller RUS” and LLC “The Knight of Primorye” was secured by a suretyship contract between Mr. K (a Russian national and sole founder of LLC “The Knight of Primary,” who had not been registered as an individual entrepreneur), and LLC “SAB Miller RUS.” Under this contract Mr. K as a surety assumed joint and several liability for nonperformance of LLC’s “The Knight of Primorye” duties before LLC “SAB Miller RUS.” The former was later reorganized as an acquisition to the LLC “Alexandrit,” which company became a universal successor to the LLC “The Knight of Primary.” When LLC “Alexandrit” failed to perform its duties under the contract with LLC “SAB Miller RUS,” the latter sued both LLC “Alexandrit” (the principal debtor) and Mr. K (the surety) for non-performance of the contractual duty secured by the suretyship contract. The statement of claim was filed with the State Arbitration Court of the City of Moscow. The trial court terminated the proceedings since Mr. K did not have the status of an individual entrepreneur. His involvement in a civil law dispute was therefore within the competence of the courts of general jurisdiction rather than the state arbitration courts. This position was upheld by the court of appeal and the cassation court. However, the Presidium of the RF Supreme State Arbitration Court in its Ruling N 9007/12 of November 13, 2012 noted that an arbitration court had no reason to terminate the proceedings since the dispute arose out of a suretyship contract in which the surety was a natural person and sole founder of a company, and the contract was of a business character aimed at securing the company’s business transaction. The case was referred back to the trial court for its consideration on the merits (see: Bulletin of the RF Supreme State Arbitration Court, 2013, N 3, pp. 228–232). 11   Proceedings in state arbitration courts are regulated by the RF Arbitration Procedure Code. 12   There are such forums in Russia and they are considered infra at § 3. 13   E. g., there is a state arbitration court of the City of Moscow, on the one hand, and a state arbitration court of Moscow Region, on the other. At the same time there is a state arbitration court of the City of St. Petersburg and Leningrad Region acting within the territory of both these subjects of the Russian Federation. 14  Except those relegated to the competence of the Supreme State Arbitration Court, such as cases which 43

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an administrative law disputes collegium of the relevant state arbitration court (see: Article 55, Section 1 of the Federal Constitutional Law “On State Arbitration Courts in the Russian Federation” of April 28,1995 No I-FCZ, as subsequently amended). These judgments may be appealed within one month to the state arbitration court of appeal acting within the territory of several subjects of the Russian Federation. There are 20 such state arbitration courts of appeal in the Russian Federation. E. g., the Thirteenth state arbitration appellate court (located in St. Petersburg) reviews judgments issued by state arbitration courts of the Kaliningrad Region, the Republic of Karelia, the Murmansk Region, and the City of St. Petersburg and the Leningrad Region. The Fourteenth state arbitration appellate court (located in Vologda) reviews judgments issued by trial courts of the Archangelsk Region, the Vologda Region, the Novgorod Region, the Pskov Region, and the Tver Region (see: Article 33-1, Section 2(7) of the Law “On State Arbitration Courts”). In appellate proceedings, courts reconsider cases on the basis of existing and additional evidence.15 An appellate court ruling (as well as a trial court judgment which a) challenge normative legal acts of the President of the Russian Federation, the Government of the Russian Federation, or federal bodies affecting rights and lawful interests of organization and citizens in the sphere of business activities; b) challenge non-normative legal acts of the President of the Russian Federation, the Federation Council, the State Duma and the Government of the Russian Federation affecting the abovementioned rights and interests; c) economical disputes between: (i) the Russian Federation and its subjects; (ii) subjects of the Russian Federation. The first level venue for consideration of such disputes is (respectively) the Civil Law Disputes Collegium and the Administrative Law Disputes Collegium of the Supreme State Arbitration Court of the Russian Federation. It should be noted that in October 2013 the President of the Russian Federation introduced in the State Duma a draft law aimed at merger of the top levels of systems of courts of general jurisdiction and state arbitration courts. In order to achieve this aim was proposed to abolish the RF Supreme State Arbitration Court whose functions would be referred to the RF Supreme Court. Realization of this idea resulted in relevant amendments in the Constitution of the Russian Federation and certain laws, such as the Federal Constitutional Law “On the Court System of the Russian Federation” and some others. See: Federal Constitutional Law of the Russian Federation on Amendment to the Constitution of the Russian Federation of February 5, 2014 No 2-FCZ “On the Supreme Court of the Russian Federation and the State Attorney Office of the Russian Federation;” the Federal Constitutional Law of February 5, 2014 No 4-FCZ “On Introduction of Amendments into the Federal Constitutional Law ‘On the Court System of the Russian Federation;’ ” the Federal Constitutional Law of February 5, 2014 No 3-FCZ “On the Supreme Court of the Russian Federation.” 15   Additional evidence may be accepted by an appellate court if the litigant explains that he could not submit them to the trial court due to circumstances beyond his control and the appellate court recognized those circumstances to be justified reasons. 44

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was not appealed within the required one month period) becomes effective and enforceable. However, an appellate court ruling may, in its turn, be appealed within two months16 to a state arbitration court of cassation level, i. e. to a state arbitration court of the appropriate circuit. There are 10 federal circuits in Russia and, accordingly, 10 circuit state arbitration courts. E. g., the State Arbitration Court of the North-West Circuit includes the Archangelsk Region, the Vologda Region, the Kaliningrad Region, the Karelia Republic, the Murmansk Region, the Novgorod Region, the Pskov Region, the City of St. Petersburg, the Leningrad Region, and the Tver Region. The State Arbitration Court of the North-West Circuit acts as a court of cassation for trial court judgments of the abovementioned subjects of the Russian Federation as well as for rulings issued by the Thirteenth and Fourteenth State arbitration appellate courts (see: Article 24, Section 1(7) of the Law “On State Arbitration Courts”). These courts, sitting as Cassation courts, examine whether lower courts properly applied norms of substantive and procedural law on the basis of the evidence of the case. It is prohibited to submit new evidence in cassation court. Quite recently a specialized court has been created within the system of state arbitration courts, i. e. the Court on intellectual rights. This court combines both functions of a trial court and those of a court of cassation. As a trial court it deals with cases both of public law and civil law nature, such as: 1) cases on contesting normative legal acts of federal executive power bodies affecting rights and legitimate interests of an applicant in the sphere of legal protection of patent rights and those on trade marks; 2) cases on disputes concerning provision or termination of legal protection of patent rights, rights to trade marks, etc. The Presidium of this Court, acting as a cassation court, considers: 1) cases resolved by this court as a trial court; 2) cases on protection of intellectual rights resolved by state arbitration courts as trial courts and by state arbitration courts of appeal (see: the Federal Law   Originally a trial court judgment which had not been appealed might also be challenged to the court of cassation within two months after the expiration of the one month period for appeal. Currently a court of cassation shall deal with a trial court judgment provided it has already been reviewed by an appellate court or, if a term for appeal had been missed, the appellate court rejected a motion to reinstate it (see: Article 273 of the Arbitration Procedure Code). Enforcement of the appellate court ruling or the trial court judgment may be suspended by the cassation court by the filing of a motion by the person who submitted the cassation complaint (see: Article 283 of the Arbitration Procedure Code). 16

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of December 8, 2011 No 422-FZ “On Introduction of Amendments into some legislative acts of the Russian Federation in connection of creation of the Court on Intellectual rights in the system of state arbitration courts”, Ar­ ticle 2, items 9 (в)17, 24, 25 (б).18 Until recently the system of state arbitration courts was headed by the Supreme State Arbitration Court of the Russian Federation. After merger of both top level courts, the newly created Supreme Court of the Russian Federation became the successor to the previous RF Supreme Court and the RF Supreme State Arbitration Court, as specifically noted in the Federal Constitutional Law of February 5, 2014 N  3-FCZ “On the Supreme Court of the Russian Federation” (See: Article 25, Section 5). Its structure includes: 1) Plenum of the RF Supreme Court; 2) Presidium of the RF Supreme Court; 3) Appeal Collegium of the RF Supreme Court; 4) Administrative Cases Collegium of the RF Supreme Court; 5) Civil Cases Collegium of the RF Supreme Court; 6) Criminal Cases Collegium of the RF Supreme Court; 7) Economic Disputes Collegium of the RF Supreme Court; 8) Military Servicemen Cases Collegium of the RF Supreme Court; and 9) Disciplinary Collegium of the RF Supreme Court (See: Article 2, Section 2 of the Federal Constitutional Law of February 5, 2014 No 3-FCZ). Ergo: currently the Russian court system looks as follows (see: «Экономика и жизнь» (Economics and Life), 2014 № 6. Constitutional Court of the Russian Federation

Supreme Court of the Russian Federation

Federal courts of general jurisdiction

Federal state arbitration courts

military and courts of subjects state arbitration courts of circuits specialized courts of the Russian Federation (state arbitration courts of cassation) district courts

state arbitration courts of appeal state arbitration courts of the subjects of the Russian Federation

  The English for “в” is “c”.   The English for “б” is “в”.

17 18

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1.4. The problem of court supervision Court decisions may also be reviewed in the course of court supervision. Historically, in Soviet times such proceedings could be triggered only by certain top officials of higher courts or state attorneys who were entitled to submit so-called “supervisional protests” to appropriate higher courts. Litigants were not in a position themselves to initiate supervisional proceedings. They could only request the abovementioned officials to submit such protests. Such requests were not binding on the officials to whom they were addressed who had discretion to decide whether or not to enter a supervisional protest. Upon receipt of a supervisional protest, the appropriate higher court had the statutory obligation to review the case and overrule, change, or leave the judgment unamended. Until court reforms in the early 2000s there were several levels of court supervision. In courts of general jurisdiction these levels were: a) district court judgments and sentences,19 as well as judgments and rulings of a relevant collegium of a court of a subject of the Russian Federation, could be reviewed during the course of supervision by the presidium of a coust of a subject of the Russian Federation upon supervisional protests of a chairman or vice-chairman of that court or the regional state attorney or his deputy; b) rulings of the presidium of a court of a subject of the Russian Federation could be reviewed during the course of court supervision by the appropriate Collegium of the RF Supreme Court upon receipt of supervisional protests of the Chairman or Vice-Chairman of the RF Supreme Court or the RF Attorney General or his deputy; c) rulings of the Collegium of the RF Supreme Court could be reviewed during the course of court supervision by the Presidium of the RF Supreme Court upon a supervisional protest of the officials indicated in Section b) above. In the system of state arbitration courts the only supervisional court was the Presidium of the RF Supreme State Arbitration Court which could review judgments and rulings of lower courts upon supervisional protests of the Chairman or ViceChairman of the RF Supreme State Arbitration Court or the RF Attorney General or his deputy.20   There were no justices of the peace in Soviet times. They existed in the Russian Empire. After the October Revolution 1917 they had been abolished and re-appeared in 1998. 20   In addition, the Presidium of the RF Supreme State Arbitration Court was (and is now) entitled to consider some issues of court practice (especially those where lower courts experience difficulties and resolve them in different ways) and to issue information letters containing appropriate recommendations (see: Article 16 of the Law “On State Arbitration Courts”). 19

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d) If a supervisional protest was rejected it could be resubmitted any number of times with no time period limitation for resubmissions. The situation, however, substantially changed after Russia became a party to the Convention for the Protection of Human Rights and Fundamental Freedoms21 and re­ cognized the binding effect of the judgments of the European Court of Human Rights. The European Court pays special attention to the principle of legal certainty emanating from the right to a fair hearing guaranteed by Article 6 (Section 1) of the Convention.22 This means, inter alia, that once a court judgment becomes effective it should not be reviewed on the merits. except to correct a grave error made by the court.23 The European Court has repeatedly emphasized that since review of a case du­ ring the course of court supervision depends upon discretionary powers of the appropriate officials, it may not be deemed an effective method of court protection within the meaning of the Convention.24 Moreover, the fact that supervisional proceedings may be initiated by a top official of the court that is in charge of reviewing the case can create doubt of the impartiality of the court. This may lead to a violation of the norm set forth in Article 6, Section 1 of the Convention. As stated in one of the judgments of the European Court: “a protest of the Vice-Chairman of the Regional Court was submitted to the Presidium of the same Court. The Vice-Chairman of the Regional Court considered the protest submitted by him to the Presidium, where he was a member and a Vice-Chairman, together with his colleagues-members of the Presidium. Such a practice is inconsistent with the impartiality of a judge who considers a specific case since nobody may be both the plaintiff and the judge in his own case.”25 In keeping with this point of view of the European Court, the Constitutional Court of the Russian Federation emphasized that a court decision which had already became effective could be amended or overruled exclusively when, as a result of error during the course of previous proceedings, substantial violations of rights and lawful interests subject to court protection occurred and could not be restored without quashing or amending the erroneous court decision.26 This approach has influ  The Convention was ratified by the Federal Law of March 30, 1998 No 54-FZ.   See, e. g. the judgment in the case “Brumaresku v. Romania” (October 28, 1996). 23   See, e. g. the judgment in the case “Ryabykh v. Russia” (July 24, 2003). 24   See, e. g. the judgments in the cases “Tumilovich v. Russia” (June 22, 1999), “Sovtransavto v. Ukraine” (25th July 2002), Nikitin v. Russia (July 20, 2004). 25   See: the judgment in the case “Naumenko v. Ukraine” (November 9, 2004). 26   See: Section 3.1, Paragraph 2 of the Ruling of March 5, 2007 No 2-P in the case “On examination of constitutionality of provisions of Articles 16, 20, 112, 336, 376, 377, 380, 381, 21 22

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enced further development of Russian procedural norms governing the review of cases during court supervision. These norms have now been amended to provide: 1) Supervisional proceedings may be initiated only by persons whose rights and obligations have been injured by the judgment (see: Article 292, Sections 1 and 2 of the Arbitration Procedure Code 2002; Article 376, Section 1 of the Civil Procedure Code). 2) Such persons may initiate supervisional proceedings only after all other legal possibilities of review of the appropriate court’s decision (i. e. appealing and cassation proceedings) have been exhausted (see: Article 292, Section 3 of the Arbitration Procedure Code, Article 376, Section 2 of the Civil Procedure Code). 3) A supervisional complaint may be submitted only within a fixed time period commencing from the date when the appropriate court decision became effective, which for decisions of state arbitration courts is a 3 month period (see: Article 392, Section 3 of the Arbitration Procedure Code; for acts of courts of general jurisdiction — 6 months (see: Article 376, Section 2 of the Civil Procedure Code).27 4) The Arbitration Procedure Code expressly prohibits repeated submissions of a supervisional complaint by the same person based on the same ground (see: Article 299, Section 9). This modernized scheme of supervisory proceedings in the system of Russian state arbitration courts was assessed by the European Court of Human Rights in a  positive way in the judgment of December 24, 2008 in the case “Kovaleva and Others v. Russia.” The European Court indicated, inter alia, that “the binding and enforceable decisions delivered by the commercial courts in the company’s case were not liable to challenge indefinitely, but only once, before a supreme judicial instance, upon the party’s request, on the basis of restricted grounds and within a clearly defined and limited time-frame. As a result the procedure followed in the present case was not incompatible with the principle of legal certainty enshrined in the Convention… In the court’s view, the supervisory review so construed appears as an ultimate element in the chain of domestic remedies at the disposal of the parties…” “That the lower courts judgments became binding and enforceable before the application for supervisory review does not in itself make the latter extraordinary 382, 383, 387, 388 and 389 of the Civil Procedure Code of the Russian Federation in connection with application of the Cabinet of Ministers of the Tatarstan Republic, complaints of open joint stock companies “Nizhnekamskneftekhim” and “Khacasenergo” as well as complaints of a number of citizens.” 27   As amended by the Federal Law of December 4, 2007 No 330-FZ. Currently this term is decreased down to 3 months (see: the Federal Law of December 9, 2010 No 353-FZ). 49

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or otherwise unsuitable for exhaustion under Article 35 § 1.28 Indeed, a judgment that has become enforceable is not necessarily final for Convention purposes. For example, the court found that the cassation instance in the Russian commercial procedure (third level of jurisdiction) was effective and subject to exhaustion under Article 35 § 1, notwithstanding that the judgment delivered on appeal (second level of jurisdiction) had become binding and enforceable… Likewise, supreme judicial instances in numerous contracting States decide on a case after lower courts’ judgments have become binding and enforceable, This does not obviate the requirement for the applicants under Article 35 § 1 to submit their grievances to such supreme instances, provided they are considered effective for remedying alleged violations of the Convention….” In view of the foregoing, the Court concludes that the application for supervisory review before the Supreme Commercial Court has to be considered as an effective remedy capable of preventing and putting right possible violations of the Convention at the domestic level.” As it appears from the quoted text, the European Court is of the opinion that the principle of legal certainty does not mean a prohibition of review of binding and enforceable court judgments by higher courts upon certain preconditions, such as: 1) review proceedings may only be triggered by a losing party; 2)  a relevant complaint should be filed within a short term; 3)  a court judgment may only be quashed or amended in the course of such a review upon a limited number of legal grounds. The European Court, having considered the system of cassation and supervisory review provided by the RF Arbitration Procedure Code for Russian state arbitration courts acknowledged that it met the above preconditions and does not contradict the principle of legal certainty. Meanwhile the Civil Procedure Code until recently retained the three-stage level of supervisional proceedings, i. e.: a) the Presidium of the Court of the appropriate Subject of the Russian Federation; b) the appropriate Collegium of the RF Supreme Court; c) the Presidium of the RF Supreme Court (see: Article 377); but stipulated that at each of the three supervisional levels, a complaint must be filed within the abovementioned 6 month period provided for courts of general jurisdiction.29   Article 35 § 1 states: “The Court may only deal with the matter after all domestic remedies have been exhausted, according to the generally recognized rules of international law, and within a period of six mouths from the date on which the final decision was taken.” 29   This circumstance has been specifically emphasized by the Ordinance of the Plenum of the RF Supreme Court of February 12, 2008 No 2 “On application of norms of civil procedure legislation in a court of supervisional level in connection with adoption and introduction of the 28

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It should be noted in this connection that according to the initiative of the President of the Russian Federation the judicial reform should be developed further in order to: 1) introduce appellate proceedings to review all judgments of trial courts of general jurisdiction (until recently appeal was only limited to review of decisions of justicies of peace); 2) provide cassation proceedings to review judgments of courts of general jurisdiction; 3) concentrate supervisory review of court judgments in the Presidium of the RF Supreme Court.30 Further to this approach a Federal Law of December 9, 2010 No 353-FZ was adopted whereby appropriate amendments were introduced into the RF Civil Procedure Code according to which (as of January 1, 2012): 1) appellate proceedings are in place (see: supra, Section 1.2 of this Chapter of the book); 2) cassation proceedings are introduced for contesting of effective court acts (except those issued by the RF Supreme Court). A cassation appeal may be submitted by persons participating in the case or other persons whose rights and lawful interests were affected by court acts provided other means of contesting of those acts have been exhausted. A cassation appeal contesting an appellate ruling of civil cases collegiums of a  court of general jurisdiction shall be filed with the Presidium of the same court (see: Article 377, Section 2 (1) of the RF Civil Procedure Code). A cassation ruling of the Presidium of a court of general jurisdiction of a subject of the Russian Federation may be, in its turn, appealed to the Civil Cases Collegium of the RF Supreme Court (see: Article 377, Section 2 (3) of the RF Civil Procedure Code). It means that currently there is two-stage cassation level in courts of general jurisdiction. 3) Supervisory review of courts acts is now entirely imposed upon the Presidium of the RF Supreme Court provided: (а)  a supervisory complaint may be submitted within 3 months from the date when the contested court act became effective (see: Article 3912, Section 2 of the RF Civil Procedure Code);

Federal Law of December 4, 2007 No 330-FZ “On Introduction of Amendment into the Civil Procedure Code of the Russian Federation” (Section 1, Paragraph 2). 30   See: Российская газета, January 11, 2010. 51

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(b) a supervisory complaint may be submitted by persons who participated in the case or by other persons whose rights, freedoms or legitimate interests were affected by the contested court act (see: Article 3911, Section 1 of the RF Civil Procedure Code).31 Implementation of these rules made the system of review of judgments of courts of general jurisdiction closer to that of state arbitration courts. It should be noted, however, that these two systems retain some differences, since: 1) there is only one court of cassation level among state arbitration courts (i. e. a federal state arbitration court of an appropriate circuit), meanwhile with regard to courts of general jurisdiction there are two levels of cassation (the Presidium of a court of appropriate subject of the Russian Federation and the Civil Cases Collegium of the RF Supreme Court); 2) albeit in both systems the only venue for supervisory review is the Presidium of the RF Supreme State Arbitration Court and, respectively, the Presidium of the RF Supreme Court, the supervisory proceedings at the latter venue may be initiated not only by interested persons but (on certain preconditions) by the Chief Justice or his deputy which possibility is unavailable with regard to judicial acts of state arbitration court.

1.5. Review of court judgments due to new or newly-discovered evidence A judgment may be reviewed based upon new or newly-discovered evidence by the court which issued the original judgment (see: Article 310 of the Arbitration Procedure Code, Article 393 of the Civil Procedure Code). An application for such review must be submitted to the court by a person who participated in the case within 3 months from the date of discovery of the relevant evidence (see: Article 312 of the Arbitration Procedure Code, Article 394 of the Civil Procedure Code). Both Codes differentiate newly-discovered evidence, on the one hand, and new evidence, on the other.

  It is also provided by Article 39111 of the RF Civil Procedure Code that the Chief Justice of the RF Supreme Court or his deputy is entitled, upon a complaint of interested persons or a motion of a state attorney, to approach the Presidium of the RF Supreme Court with a statement on supervisory review of court acts in order to abolish fundamental violation of rules of substantive or procedural law which violations influenced legality of the contested court acts and deprived parties of disputable substantive or procedural legal relations of a possibility to use the rights guaranteed by this Code, or substantially restricted these rights. Such a statement may by submitted within 6 months from the date when the contested court act became effective. 31

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A list of newly-discovered evidence providing grounds for such review includes: 1)  evidence which could have substantially influenced a court’s judgment had this evidence been known to the applicant; 2)  falsification of evidence, false expert opinion, false witness evidence, or false translation, resulting in issuance of an illegal or ungrounded judgment, if such actions were proved by an effective court sentence; 3) criminal actions of a person participating in the case, or his representative, or criminal actions of a judge committed during the course of consideration of the case, if such actions were proved by an effective court sentence. A list of new evidence embraces: 1)  the quashing of a decision of a court of general jurisdiction or that of a state arbitration court or that of another body which decision was the ground for issuance of the judgment; 2) a transaction declared void by an effective judgment of a court of general jurisdiction or that of a state arbitration court where the transaction evolved issuance of an illegal or ungrounded judgment; 3) the unconstitutionality of a law applied by a state arbitration court in a case in which the applicant had approached the Constitutional Court of the Russian Federation which recognized the law to be inconsistent with the Constitution of the Russian Federation; 4)  violation of provisions of the Convention on Protection of Human Rights and Fundamental Freedoms by a state arbitration court during consideration of a  case in which the applicant had approached the European Court of Human Rights which had established the violation (see: Article 311 of the Arbitration Procedure Code). 5) Establishment or change of practice of application of appropriate rule of law by an Ordinance of the Plenum of the RF Supreme State Arbitration Court or Ruling of the Presidium of this Court if the Ordinance or Ruling in question contains an indication to a possibility of review of effective judicial acts due to this evidence (see: Article 311 of the Arbitration Procedure Code). A similar norm is contained in Article 392 of the Civil Procedure Code albeit until recently the list of relevant evidence did not include that mentioned in Sections 4 and 5 above. It should be noted, however, that the Civil Procedure Code expressly provides for the possible use of both analogy of lex and analogy of jus (see: Article 1, Section 4). There is no doubt that such factors may well provide reasons for review of a judgment of a court of general jurisdiction upon newly discovered evidence upon application of appropriate norms of Article 311 of the Arbitration Procedure Code by analogy of lex. 53

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The Constitutional Court of the Russian Federation, having confirmed such a possibility, indicated that, in view of Article 15 (Section 4) of the Constitution, according to which rules of international treaties of the Russian Federation shall prevail over relevant rules of Russian law, the very fact that Article 392 (Section 2) of the RF Civil Procedure Code does not expressly mention judgments of the European Court of Human Rights, does not mean that a court of general jurisdiction may refuse to review its judgment if it became inconsistent with a judgment of the European Court. The Constitutional Court also noted the need for federal legislation provide appropriate amendments in the RF Civil Procedure Code.32 Further to this approach of the Constitutional Court these amendments were introduced by the Federal Law of December 9, 2010 No 353-FZ, so as of January  1, 2012 the rules contained in Article 392 of the Civil Procedure Code are quite close to those of Article 311 of the Arbitration Procedure Code.

§ 2. Basic rules of Russian civil procedure 2.1. General overview The resolution of commercial disputes of both a private and public law nature takes place in state arbitration courts, the activities of which are regulated by the Arbitration Procedure Code. Relevant provisions of this Code deserve discussion. To begin, Russian courts are open to both Russian and foreign persons; the latter enjoy procedural rights and bear procedural duties equally with Russian citizens and organizations (see: Article 254 of the Arbitration Procedure Code, Article 398 of the Civil Procedure Code). The court shall provide a person participating in a court proceeding who does not have command of the Russian language the possibility to speak his native language or another language of his choice and to use an interpreter (see: Article 10 of the Law “On Court System of the Russian Federation,” Article 12 of the Arbitration Procedure Code, Article 9 of the Civil Procedure Code). It should be noted that the very fact that an individual in question is a foreign national does not in and of itself necessarily result in obligatory approintment of an interpreter if the individual has sufficient command of the language in which the judicial proceedings are performed.   See: Ruling of the Constitutional Court of the Russian Federation of February 26, 2010 No 4П, Section 3.3, Paragraph 1, 3.5, Paragraphs 1 and 4. 32

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Here is an illustrative case where this issue arose in the course of criminal proceedings, albeit the same approach may apparently be used in the sphere of civil proceedings as well. A person who had been condemned for a grave offense appealed the sentence on the reason that he had not been provided with service of an interpreter from Chinese dungan dialect (that was his native language). However, as it was established by a trial court, a convict (who was a national of Kyrgyz Republic) had graduated from Russian high school, he had served in the Russian army in the territory of the Russian Federation where he had been living for a long time, and speaks fluent Russian. Given these circumstances the trial court came to a conclusion that the convict did not need to use an interpreter. This approach was upheld by the Criminal Cases Collegium of the RF Supreme Court (see: Bulletin of the RF Supreme Court, 2009, No 11, pp.13–14). An interpreter shall be appointed by the court at its discretion (the court may approach, e. g., a linguistic school of a University or a translation office of the local Chamber of Commerce and Industry). He shall be paid from the federal treasury (see: Article 97, Part 1 of the Civil Procedure Code, Article 109, Part 3 of the Arbitration Procedure Code). Thus, an interpreter’s service is free of charge to the litigant or other person participating in the case. A plaintiff shall file a statement of claim in writing with the state arbitration court of the subject of the Russian Federation where the respondent is located33 (see: Article 35 of the Code).34 It may also be submitted by completing a form available on the official site of the state arbitration court on the Internet (see: Article 125, Section 1 of the Arbitration Procedure Code).35 The location of a legal entity is the place of its state registration which shall be the place of location of its permanent executive body (see: Article 54, Section 2 of the Civil Code). The location of a natural person is the place of his residence, i. e. the place where he permanently or primarily lives (see: Article 20, Section 2 of the Civil Code). 33   Except cases relegated to the competence of the RF Supreme State Arbitration Court (see: Article 34, Part 2 of the Code). 34   The same norm is provided in Article 28 of the Civil Procedure Code for cases to be resolved by courts of general jurisdiction. 35   Interim procedure of submission documents to state arbitration courts of the Russian Federation in electronic form has been approved by the Order of the RF Supreme State Arbitration court of January 12, 2011, No 1. Later, the Plenum of the RF Supreme State Arbitration Court by its Ordinance of November 6, 2013 No 80 approved the Procedure for submission of documents in electronic version to state arbitration courts of the Russian Federation.

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However, the Code provides three exceptions to this general rule: First, in certain situations a plaintiff has the right to file a statement of claim either at the place of the respondent’s location or elsewhere. Such situations are called “alternative court competence”36 and, as summarized in Article 36 of the Code, include: 1)  if the respondent’s location is unknown, the statement of claim may be filed with the state arbitration court at the place where his property is located or at the last known place of the respondent’s location in Russia (see: Article 36, Section 1); 2) if there are several respondents located in the territories of different subjects of the Russian Federation, the statement of claim shall be filed with the state arbitration court in the place of location of one of them (see: id., Section 2); 3)  if the respondent is located abroad, the statement of claim may be filed with the state arbitration court at the place of location of the respondent’s property in the Russian Federation (see: id., Section 3); 4) if a claim is based on a contract specifying the place of its performance, the statement of claim may also be filed with the state arbitration court at the place of performance of the contract (see: id., Section 4); 5) if a claim against a legal entity arose out of activities of its branch or representative office located outside the place of location of the legal entity, the statement of claim may be filed with the state arbitration court at the place of location of the legal entity or that of its branch (representative) office (see: id., Section 5);37   See: Professor V.V. Yarkov., Ed., Арбитражный процесс [Arbitration Procedure], Moscow, 2003, pp. 103-104. 37   If a respondent legal entity is a foreign person having its branch or representative office in Russia, a statement of claim may be filed with the state arbitration court at the place of location of such an office regardless of whether the claim in question is or is not connected with this office’s activity (see: Article 247, Section 1 (2) of the Arbitration Procedure Code; see also: Professor M.S. Shakaryan, Ed., Комментарий к Aрбитражному процессуальному кодексу Российской Федерации [Commentary on the Arbitration Procedure Code of the Russian Federation]. Moscow, 2003. P. 573–574. A similar norm is contained in Article 402, Section 3 (1) of the Civil Procedure Code. See also: Professor V.M. Zhuikov, Professor V.K. Puchinskiy, Professor M.K. Treushnikov., Eds., Scientific — Practical Commentary on the Civil Procedure Code of the Russian Federation. Moscow, 2003, p. 825). The Presidium of the RF Supreme State Arbitration Court in its Ruling of April 24, 2012 N 16404/11 noted that a statement of claim against a legal entity may be filed with the state arbitration court at the place of location of the respondent’s branch office as long as the claim is connected with the activity of that branch office. This conclusion was supported by reference to the Judgment of the Court of Justice of the European Union in “Blanckaert & Willems v. Trost” of March 18, 1981 N 139/80. In its Judgment, the Court of Justice stated that according to Article 5 of the Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Cases of September 27, 36

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6) claims to recover losses caused by a collision of ships or claims with respect to salvage may be filed with a state arbitration court at the place of the actual physical location of the respondent’s ship or at the place of its registration or at the place where the losses occurred (see: id., Section 7).38 Second, there are some cases to be considered by certain state arbitration courts, where no alternative venue is permitted: “exclusive court jurisdiction” includes such cases as: 1)  claims with respect to rights related to immovable property shall be filed with the state arbitration court at the place where the property is located (see: Article 38, Section 1 of the Code); 2) claims with respect to rights related to sea- and river-going vessels, aircraft, and space objects shall be filed with the state arbitration court at the place where such objects have been publicly registered (see: id., Section 2); 3)  claims against a carrier of goods, passengers or baggage shall be filed with the state arbitration court at the place of the carrier’s location; 4)  claims to declare a debtor bankrupt shall be filed with the state arbitration court at the place of the debtor’s location (see: id., Section 4).39 Third, the Arbitration Procedure Code also provides for “contractual court competence” upon a relevant agreement whereby the plaintiff and the respondent

1968 “a person domiciled in a Contracting State, may, in another Contracting State, be sued: …5. as regards a dispute arising out of the operation of a branch, agency or other establishment, in the courts for the place in which the branch, agency or other establishment is situated.” (NOTE: Russia is not a party to this Convention.) This approach is supported in the Information Letter of the Presidium of the RF Supreme State Arbitration Court of July 9, 2013 N 158, “Review of judicial practice certain issues considered by state arbitration courts of cases involving foreign persons” (see: Section 8). 38   A similar approach is followed in Article 29 of the Civil Procedure Code with regard to courts of general jurisdiction, although with some specific rules according to which certain claims may be filed with the court located at the place where the plaintiff has his residence, such as: a) claims for alimony and establishment of paternity(see: id, Section 3); b) claims for divorce if a minor child lives with the plaintiff or due to his health condition it is difficult for him to go for the place of residence of the respondent (see: id., Section 4); c) claims for restoration of labor, pension and housing rights; d) claims for consumer protection (see: id., Section 7). See in more detail: Professor M.K.  Treushnikov., Ed., Гражданский процесс [Civil Procedure]. Moscow, 2007, pp. 106–108. 39   A similar norm is contained in Article 30 of the Civil Procedure Code where it is also indicated that claims of creditors of a deceased person which claims had been advanced prior to acceptance of inherited property by heirs shall be filed with the court of general jurisdiction at the place where a claim for inheritance was opened (see: id., Section 2), i. e. at the last place of residence of the deceased person (see: Article 1115 of the Civil Code). 57

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may change a venue for consideration of a case (if not within the exclusive jurisdiction of a court) before the case is accepted by the court (see: Article 37).40 Such agreements are also allowed with respect to disputes in which foreign persons participate provided the case is not within the exclusive jurisdiction of a Russian court (see: Article 247, Section 4 of the Arbitration Procedure Code, Article 404 of the Civil Procedure Code). In line with this rule the Presidium of the RF Supreme State Arbitration Court indicated that if the parties in a civil law relationship concluded an agreement whereby a dispute arising out of this relationship shall be referred for resolution to a foreign court (a prorogation agreement), such a dispute will be beyond the jurisdiction of the Russian state arbitration courts, provided that the prorogation agreement is legally valid and enforceable. Here is an illustrative case. A Russian limited liability company filed a statement of claim against a foreign company in a Russian state arbitration court seeking the contract between them to be declared invalid. A foreign company objected to the jurisdiction of a Russian state arbitration court with respect to the prorogation agreement which provided that disputes connected with the contract, including those concerning its validity, were to be resolved by the Tokyo Circuit Court. The trial court noted that under the prorogation agreement the dispute would be referred to to the jurisdiction of this foreign court, thereby excluding the dispute from the jurisdiction of a court of any other country including Russia; the exclusive jurisdiction of a Russian state arbitration court as provided by Article 248 of the RF Arbitration Procedure Code was not violated. The trial court recognized the prorogation agreement to be valid and enforceable and, further to the motion of the respondent did not consider the statement of claim. This was upheld by the court of appeal and the cassation court (see: Section 6 of the “Review of judicial practice concerning certain issues considered by state arbitration courts involving foreign persons” of July 9, 2013). This Review also indicates that in case of rights arising out of a contract containing a prorogation clause, the latter shall be binding both upon a new creditor and debtor (see: Section 5). In other words, a prorogation agreement is subject to succession. The Arbitration Procedure Code also contains some norms concerning a situation when a Russian court becomes aware that the same case (i. e. the case in dispute between the same litigants on the same subject and based on the same legal grounds) is already under consideration by a foreign court.   Such a possibility is also provided by Article 32 of the Civil Procedure Code.

40

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Legal consequences of such a situation differ in two ways depending upon whether the case is still under consideration by the foreign court or if the dispute has already been resolved abroad. In the first situation what the outcome of the case will be is still unknown: whether the foreign court will resolve the case on its merits or the proceedings will be terminated for some reason or other as provided for by lex fori (the law of the forum). Given the latter possibility it makes sense to preserve an opportunity for the litigants to have their dispute resolved by a Russian court. So, in this situation, a Russian State arbitration court should not consider the statement of the claim (see: Article 252, Section 1). In the second situation it is necessary to prevent a potential conflict between judgments of Russian and foreign courts in the same case. So, if there is already a foreign court judgment in force in the same case, a Russian state arbitration court shall terminate its proceedings (see: id., Section 2).41 It should be noted, however, that the norms designated for both the above situations apply only if two preconditions are met: 1)  if the case in question is not within the exclusive jurisdiction of a Russian court42 and 2) if the foreign court judgment is subject to recognition and enforcement in Russia (see: Article 252 of the Arbitration Procedure Code).43

  If the proceedings in the case have been terminated, a repeated approach to the court by the same litigants concerning the same dispute is not allowed (see: Article 151, Section 3 of the Arbitration Procedure Code). 42  Exclusive jurisdiction of Russian state arbitration courts include disputes in which foreign persons participate, i. e. concerning: 1) property owned by the Russian Federation; 2) real estate located in the territory of the Russian Federation; 3) registration or issuance of patents, trade marks, industrial designs, utility models and other rights to results of intellectual activity which are subject to registration in Russia; 4) claims relating to invalidation of entries in state registers; 5) creation, liquidation or registration of legal entities and sole businesses in the territory of the Russian Federation; 6) disputes connected with contesting of decisions of bodies of legal entities as registered in the territory of the Russian Federation; 7) public law relations (see: Article 248 of the Arbitration Procedure Code). 43   Relevant norms of the Civil Procedure Code (see: Article 406) are effectively similar to those of the Arbitration Procedure Code. 41

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2.2. Filing a statement of claim A statement of claim must be signed by a plaintiff or his representative. If a plaintiff is a legal entity, the statement of claim may be signed by its chief executive officer who is not required to have a power of attorney. Any other person (regardless of whether he is a staff member of the legal entity) may sign a statement of claim on behalf of a legal entity only if he is: 1) provided with a power of attorney signed by the chief executive officer and stamped with the legal entity’s seal (see: Article 61, Section 5 of the Arbitration Procedure Code); and 2)  the power of attorney expressly authorizes him to sign this document (see: Ar­ ticle 62, Section 2 of the Arbitration Procedure Code).44 If a plaintiff is a foreign person and a power of attorney is issued abroad, the relevant rules of law must be observed. Here is an illustration of how Russian courts follow this approach: A Russian trial court established that a statement of claim of a foreign plaintiff (a Swiss company) had been signed on behalf of the company by a representative holding a power of attorney signed jointly by the company’s general and regional managers. The court, having examined the company’s charter, refused to entertain the claim noting that the charter did not contain any provision authorizing these officials to sign a power of attorney on behalf of the company. This ruling was upheld by the appellate court. The Presidium of the RF Supreme State Arbitration Court, when reviewing the case during the course of court supervision, ruled that the authority of a company’s officials to sign a power of attorney could be based either on the language of the company’s charter or by the trade regis­ ter of the country where the company is incorporated. The abstract of the trade register of Canton Basel-Schtadt (Switzerland), listed the two officials as entitled jointly to sign a power of attorney on behalf of the company. Given this information, the Presidium of the RF Supreme State Arbitration Court quashed the rulings of both the trial and the appellate courts and remanded the case to the trial court for its consideration on the merits.45 Such a power of attorney will be accepted by a Russian court if the document is duly formalized (see infra, Section 2.4 of this text). Since a power of attorney is   There are also some other procedural rights which a representative may exercise only if those rights are specifically indicated in the power of attorney such as, a motion for security measures, transfer of the case to voluntary arbitration, conclusion of an amicable agreement, appeal of a judgment, etc. 45   See: Ruling of the Presidium of the RF Supreme State Arbitration Court of July 18, 2000 No 7006/99 (Bulletin of the RF Supreme State Arbitration Court, 2000, No10, p. 49). 44

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issued to present to a Russian court, the right to sign a statement of claim (and other rights of a representative which are listed in Article 62, Section 2 of the Arbitration Procedure Code) should be specifically set forth in the power of attorney. It is specifically stated in the Arbitration Procedure Code that foreign persons enjoy procedural rights and bear procedural duties on an equal basis with Russian organizations and nationals. Foreign persons are entitled to apply to Russian state arbitration courts for protection of their rights and legitimate interests in matters of business and other economic activity (see: Article 254, Sections 1 and 2). Similar rules are set forth in Article 398 (Section 1 and 2) of the Civil Procedure Code. Foreign persons participating in a case must provide a court with evidence confirming their legal status (see: Article 254, Section 3 of Arbitration Procedure Code). The legal status of a foreign person should be assessed by a Russian court under the relevant foreign law. Here is an illustrative case. A foreign company sued a Russian company in a Russian state arbitration court alleging improper performance of a contract on the international sale of goods. The Russian respondent submitted duly verified documents evidencing that by the time of filing the statement of claim the foreign company had been excluded from the foreign state’s companies register due to its non-payment of annual duties. The court noted that according to Article 1202 of the RF Civil Code legal status of a legal entity, including the extent of its capacity, shall be determined on the basis of the law of the country where the legal entity was created. Based on the rules of the applicable foreign law, a legal entity may be excluded from the companies register due to non-payment of annual duties. In such case a legal entity is not entitled to carry out business activity or initiate judicial proceedings. After payment of its indebtedness such a legal entity may be restored to the register and its capacity reinstated. The court came concluded that the foreign company in question had been deprived of its active procedural capacity by the time it filed its statement of claim and therefore was not entitled to participate in judicial proceedings in Russian courts until its restoration in the companies register. Based on this reasoning the court did not consider the statement of claim (see: Information Letter of the Presidium of the RF Supreme State Arbitration Court of July 9, 2013 N 158, “Review of judicial practice regarding certain issues concerned by state arbitration courts in cases involving foreign persons” Section 23). A statement of claim to be filed with an appropriate Russian court must meet a number of conditions:

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Prior to the filing of a statement of claim a state duty, based upon the amount of the claim, must be paid. The chart below indicates the amount that must be paid in state arbitration courts: amount of the claim

amount of State duty

up to 100,000 rubles

4% of the amount of the claim, but at least 2000 rubles

between 100,001.00 and 200,000.00 rubles

4,000.00 rubles plus 3% of the claims exceeding 100,000.00 rubles

between 200,001.00 and 1,000,000.00 rubles

700,000.00 rubles plus 2% of the claim exceeding 200,000.00 rubles

between 1,000,001.00 and 2,000,000.00 rubles

23,000.00 rubles plus 1% of the claim exceeding 1,000,000.00 Rubles

more than 2,000,000.00 rubles

33,000.00 rubles plus 0.5% of the claim exceeding 2,000,000.00 rubles but not more than 200,000 00 rubles

Thus, with regard to economic claims, the minimum amount of state duty is 2000 rubles and the maximum is 200.000.00 rubles. With respect to non-economic claims (e. g., those challenging normative legal acts or decisions or omissions of state or municipal bodies and officials) state duties are set at 200 rubles for individuals and 2,000.00 rubles for legal entities (see: Ar­ ticle 333_21 of the Tax Code). A document confirming payment of the state duty must be attached to the statement of claim (see: Article 126, Section 2 of the Arbitration Procedure Code).46 Since state duties must be paid in rubles, a question may arise as to how a foreign plaintiff without a ruble account in a Russian bank can cope with this requirement. The Presidium of the RF Supreme State Arbitration Court has explained (in its information letter of May 29, 2007 No 118 “On payment of state duty by Russian and foreign persons via representatives”) that both Russian and foreign persons are entitled to act through representatives who can, inter alia, pay state duties on behalf of their principals. Payment of a state duty from a representative’s bank account satisfies the requirement of payment from a principal. In such a case a payment order (whereby the representative instructs his bank to remit the amount of the state duty   A state arbitration court is entitled, upon a relevant motion of the plaintiff and with due consideration of his financial conditions, to decrease the amount of state duty or to defer its payment (see: Article 333_22, Section 2, Article 333_41 of the Tax Code). 46

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from his ruble account to the federal treasury) must state that the payer is acting on behalf of his principal (see: Paragraph 4).47 Another requirement for submission of a statement of claim to a state arbitration court is that the plaintiff must send copies of the statement of claim to the respondent and other persons participating in the case,48 such as third persons whose legal relationship with the litigants may be influenced by the court judgment, also a state attorney or public agencies or municipalities involved in proceedings to protect public interests. A general rule also provides that any document filed in the course of court proceedings (including those issued by a court) must be sent to the persons mentioned above by registered mail with return receipt (see: Article 122, Section 1 of the Arbit­ ration Procedure Code). A document evidencing the plaintiff’s performance of this legal requirement must be attached to the statement of the claim submitted to the court (see: Ar­ticle 126, Section 1 of the Arbitration Procedure Code).49 This rule also applies to foreign persons or their representatives which are located in the territory of the Russian Federation (see: Article 121, Section 5 of the Arbitration Procedure Code). If these persons are outside Russia, court documents (such as a writ of summons, copies of court orders, etc.) shall be sent to them via the RF Ministry of Justice which is charged with communicating with the appro­priate foreign body (see: Article 253, Section 3 of the Arbitration Procedure Code).50

  See: Bulletin of the RF Supreme State Arbitration Court, 2007. No 7, p. 95.   It should be noted that in the Civil Procedure Code this issue is resolved in a different way. The plaintiff must submit to the court of general jurisdiction the original statement of the claim together with its copies according to the number of persons participating in the case (see: Article 132 of the Code), and it is the court which shall send copies to the appropriate persons. 49   At this stage it is sufficient to provide the court with documentary evidence confirming that a copy of a statement of the claim has actually been sent to the persons mentioned above. Meanwhile, by the date of a court hearing the court should be provided with a document confirming receipt of the copy of a statement of the claim by appropriate persons (see: Article 123, Section 1 of the Arbitration Procedure Code). 50   This norm complies with provisions of the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (The Hague, November 15, 1965), to which Convention Russia is a Party. As is provided in Article 2, “each Contracting State shall designate a Central Authority which will undertake to receive requests for service coming from other Contracting States. Each State shall organize the Central Authority in conformity with its own law.” In Russia such a Central Authority is the RF Ministry of Justice (see: Article 1 of the Decree of the President of the Russian Federation of August 24, 2004. No 1101). 47 48

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Legislation or a contract may provide that prior to filing a statement of claim with a court a plaintiff shall send a pre-suit letter to the respondent. For example, according to Article 797 (Section 1) of the RF Civil Code, prior to suing a carrier for a claim arising out of a contract of carriage of goods a presuit letter shall be sent to the carrier as prescribed by applicable transport legislative rules. The Rules of the Railway Transport of the Russian Federation (Federal Law of January 10, 2003 N 18 FZ) establish such a duty. A pre-suit letter shall be appended with documents supporting the claimant’s demands. If the documents presented are duly verified copies rather than originals a carrier is entitled to require the original documents for its consideration of the pre-suit letter (see: Article 120). A pre-suit letter claiming damage or a shortage of goods must be submitted within six months from the date of release of the goods; a claim to recover for loss of goods must be submitted no later than thirty days after the final date for delivery of the goods (see: Article 123). The RF Civil Code provides that a shipper or a consignee may sue a carrier if the latter completely or partly refuses to satisfy or fails to reply within thirty days to the claim set forth in the pre-suit letter (see: Article 797, Section 2). Some disputes by law first require a claimant to apply to a particular public agency, and only if it rejects the claim is a lawsuit permissible. For example, the RF Tax Code requires a taxpayer who disagrees with a tax inspectorate’s decision imposing responsibility for a tax violation first to challenge the decision to a superior tax agency.51 Only in the event that it refuses to overrule the decision is the taxpayer entitled to file a court case (see: Article 101.2). When either a pre-suit letter or a preliminary consideration of a claim by a public body is required, a statement of claim filed with a court must be accompanied by documents evidencing that these requirements have been complied with (see: Article 126 (7) of the RF Arbitration Procedure Code, Article 132, Paragraph 7 of the RF Civil Procedure Code).

  A complaint may be submitted within 3 months from the date when a taxpayer became (or should have become) aware of the violation of his rights. Supporting documents should be appended to the complaint. In case the time period for submission of the complaint to the superior tax agency is missed for a justified reason, it may be reinstated by this tax agency (see: Article 139 of the Tax Code). 51

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2.3. Security of a claim The vast majority of claims submitted for resolution to a state arbitration court (as well as to a court of general jurisdiction) are for money damages, to enable a plaintiff, for example, to receive from a respondent a sum of money in compensation for the purchase price of goods or recovery of a plaintiff’s losses. Actions may also be brought to seek return of the fruits of unjust enrichment or of personal or real property. However, due to the inevitable gap in time between the filing of a statement of claim with a court and issuance of the court’s judgment,52 a respondent (who may feel that his legal position is not sufficiently strong) may attempt to dispose of the property in dispute in the hope that by the time the court could issue a judgment against him there would be no property available to award. In order to prevent such a result, procedural law provides for a claim to be secured. A number of issues arise in connection with obtaining security: 1) the preconditions for obtaining security; 2)  what time periods apply, since security measures must be taken promptly to be effective; 3) whether the list of available security measures is illustrative or exhaustive; 4) whether one security measure can be substituted for another or lifted; 5)  whether a statement of the claim must always be filed prior to a motion for security measures. These issues have been resolved in the following ways: 1. Security measures may be ordered by a court upon a plaintiff’s motion53 if it would otherwise be difficult, or indeed impossible, to enforce the court’s judgment.54 Examples include inter alia, when enforcement measures sought would be expected to take place outside the territory of the Russian Federation; also applicants may seek security measures in order to prevent their possible substantial losses (see: Article 90, Section 1 and 2 of the Arbitration Procedure Code).55   Of course, the judgment may be appealed both prior to the time when it becomes effective (and, therefore, enforceable) and, on certain conditions, even after this time. 53   Such a motion may be included in the statement of claim or submitted separately (see: Article 92, Section 1 of the Arbitration Procedure Code). 54   Difficulty or impossibility of enforcement of a court judgment may result from the debtor’s lack of financial assets or his actions intended to decrease his assets (see: Section 9, Paragraph 2 of the Ordinance of the Plenum of the Supreme State Arbitration Court of the Russian Federation of October 12, 2006 No 55 “On application of security measures by state arbitration courts”). 55   A similar norm is contained in Article 139 of the Civil Procedure Code. As a matter of historical comparison it may be noted that according to the 1964 RSFSR Civil Procedure Code a court was also authorized to provide a security measure upon its own initiative (see: Article 52

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2. A state arbitration court must consider a motion for security measures ex parte no later than the day following the date of filing of the motion with the court (see: Article 93 Section 1 of the Arbitration Procedure Code).56 Prior to submitting a motion for security measures, an applicant must pay a state duty (see: Article 90, Section 4 of the Arbitration Procedure Code). Its amount is currently 1,000.00 rubles (see: Article 333_21 Section 1(9) of the Tax Code). A court ruling on application of security measures is subject to immediate enforcement (see: Article 96, Section 1 of the Arbitration Procedure Code, see also: Article 142, Section 2 of the Civil Procedure Code). 3. The available security measures are listed in Article 91 (Section 1) of the Arbitration Procedure Code. The list includes, inter alia: — seizure of financial assets or other property57 belonging to the respondent and in his possession or that of other persons; — prohibiting the respondent and other persons from performing certain actions concerning the subject of the dispute; — imposing a duty upon the respondent to perform certain actions to prevent deterioration of the property in dispute; — transferring property in dispute to the plaintiff or another person for safekeeping. The court may take several security measures simultaneously (see: id., Paragraph 2). It may also take security measures58 other than those listed above. In other words this list is illustrative rather than exhaustive.59 It should be noted that security measures may be taken by a court with respect to both civil law and public law claims. E. g., in case of a challenge to non-normative legal acts, decisions, acts or omissions of state bodies, municipalities, or other public bodies and officials, a state arbitration court may, upon the motion of an applicant, 133). Currently such a possibility does not exist and a court of general jurisdiction, like a state arbitration court, may only take security measures upon a motion of the plaintiff. 56   If the next day is a day off, the motion shall be considered either within the day of filing of the motion or the first working day after the day off (see: Section 6 of the Ordinance of October 12, 2006 No55). In a court of general jurisdiction such a motion shall be considered ex parte within the day of its filing with by the court (see: Article 141 of the Civil Procedure Code). 57   “Seizure of the debtor’s property includes a prohibition to dispose of the property, and if necessary — restriction of the right to use the property or withdrawal of the property” (Article 80, Section 4 of the Federal Law of February 2, 2007 No 229-FZ “On enforcement Proceedings”). 58   Additional security measures may be established by a federal law or an international treaty of the Russian Federation (see: Section 1, Paragraph 4 of the Ordinance of October 12, 2006 No 55). 59   A similar approach is reflected in Article 140 of the Civil Procedure Code. 66

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suspend application of the legal act or decision in dispute (see: Article 199, Section 3 of the Arbitration Procedure Code).60 However, one needs to bear in mind that the list of security measures, although illustrative, is not boundless. Some limits are either expressly indicated in the law or are derived from its meaning. E. g., when a normative legal act is challenged, submission of a relevant application to a state arbitration court does not suspend the effectiveness of the normative legal act (see: Article 193, Section 3 of the Arbitration Procedure Code; see also: Article 251, Section 7 of the Civil Procedure Code). While such norms relate to public law claims, there are also some restrictions to the provision of security measures with respect to claims of a civil law nature. A very typical example concerns disputes arising between a company, on the one hand, and some of its share or stockholders, on the other. The latter, especially those in a minority, in earlier times filed a motion asking a court to secure their claims by prohibiting the respondent company from convening a general meeting of share (stock) holders since such a meeting could authorize actions affecting the plaintiffs’ interests. At the same time, according to Article 31 of the Constitution, citizens of the Russian Federation have the right to assemble peacefully, without weapons, to hold meetings, demonstrations and to picket. Referring to this provision, the RF Supreme Court held that a security measure prohibiting a company from holding its general shareholders meeting was illegal.61 The Supreme State Arbitration Court agreed with this approach62 and pointed out that there was nothing illegal in providing security measures such as prohibiting those participating in a general meeting from making decisions with respect to particular matters or to take actions pursuant to certain decisions.63 In any case, security measures should not preclude the respondent from carrying out business activities.64 In sum, security measures should ensure a fair balance of interests of the litigants.65   Such a suspension does not entail the invalidity of the relevant act or decision. It prohibits performance of actions as provided for in the act or decision (see: Section 29, Paragraph 3 of the Ordinance of October 12, 2006 No 55). E. g. often a taxpayer when challenging a demand of a tax inspectorate for payment of tax (which tax he, in his view, is not obligated to pay) may move the court to suspend performance of this demand until the court judgment becomes effective, and the court is entitled to take such a security measure. This security measure is also provided for in Article 254 (Section 4) of the Civil Procedure Code. 61   See: Ordinance of the RF Supreme Court of October 10, 2001. No 12. 62   See: Ordinance of the RF Supreme State Arbitration Court of July 9, 2003. No 11. Section 2. 63   See: id., Section 5. 64   See: id. 65   See: Ordinance of the Supreme State Arbitration Court of October 12, 2006. No 55. Section 10. Paragraph 7. 60

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4. In order to maintain such a balance the Arbitration Procedure Code provides that: a) one security measure may be replaced by another, inter alia, the respondent, in lieu of a security measure requested by the plaintiff, may transmit to the depositary account of the court the amount of money equal to the amount of the plaintiff’s claim (see: Article 94, Section 2).66 The relevant motion shall be considered by the court at the latest the next day after its filing with the court (see: Article 95).67 b) a motion to lift a security measure must be considered by a court within 5 days of the date of its filing with the court (see: Article 97, Parts 1 and 2).68 c) a court, having ordered a security measure, may, upon the respondent’s motion or upon the court’s initiative, require the plaintiff to provide countersecurity (such as a bank guarantee or suretyship) to provide recovery of the respondent’s possible eventual losses (see: Article 94, Part 1).69 5. Usually a motion concerning security measures accompanies a statement of a claim. However, in certain situations necessity may create the need for security measures at an even earlier stage. For example, if a collision of ships within the waters of a port resulted in serious damage to one ship, but not to the ship whose crew was at fault and which was about to leave the port, the likelihood of a plaintiff recovering losses from the wrongdoer could become problematic (especially if the departing ship belonged to a foreign company). In some situations, security measures (e. g. seizure of the ship), unless taken immediately, would be useless. However preparation of a statement of claim requires time to estimate losses and collect documents and other evidence related to the incident. Therefore in such (and other similar) circumstances it makes sense to take security measures before filing a statement of claim and the Arbitration Procedure Code provides such a possibility. According to Article 99 (Section 1) an interested person (i. e. an eventual plaintiff) may approach the court with a motion to apply preliminary security measures, to protect the applicant’s financial interests prior to the filing of a statement of claim. This rule is based upon two factors: first, since court proceedings have not yet begun, special steps are needed to avoid abuse of a right which may result in substantial losses to the respondent; and second, the court will apply preliminary security   See: Article 143, Section 2 of the Civil Procedure Code.   Courts of general jurisdiction must consider such a motion the day of its delivery (see: Article 143 of the Civil Procedure Code). 68   In case the respondent transmitted the amount of claim to the court’s depository account the motion to lift the security measure must be considered by the court, at the latest, the next day after its delivery (see: Article 97, Section 3). 69   See: also Article 146 of the Civil Procedure Code. 66 67

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measures when it anticipates that the statement of claim is about to be submitted. So an applicant should be encouraged to submit a claim as soon as possible. These ideas led to the following rules: 1) a motion to apply preliminary security measures must be accompanied by a document evidencing a counter-security protecting the respondent’s inte­ rests (a bank guarantee or guarantee letter of Protecting and Indemnity Association, etc.)70 provided by the applicant (see: Article 99, Section 4); 2)  a statement of claim must be filed by the applicant with the competent court no later than 15 days period after the date when the court has ruled on an application for preliminary security measures, in which ruling the exact term (not exceeding 15 days) in which to submit the statement of claim must be specified (see: id., Part 5);71 3) if no statement of claim is submitted within the stated term the preliminary security measures must be lifted (see: id., Part 8).72 Rules on security measures (including preliminary ones) are applicable in cases in which foreign nationals (that is, foreign natural persons and/or foreign legal entities) participate on the same basis as Russian nationals (see: Article 250 of the Arbit­ ration Procedure Code; see also: the Ordinance of the RF Supreme State Arbitration Court of October 12, 2006 No 55, Section 32). Should a foreign court, during consideration of a case involving a Russian national issue an order for a security measure (for example, seizure) of property belonging to the Russian respondent located in the territory of the Russian Federation, a question arises whether such a foreign court order is enforceable in Russia. As specifically indicated in the Ordinance mentioned above of the RF Supreme State Arbitration Court of October 12, 2006 No 55, “foreign courts ordering security measures shall not be subject to recognition and enforcement in the territory of the Russian Federation since they are not final court judgments on the merits of the case issued in course of adversarial proceedings.” (Section 33) 70   Protecting and Indemnity Associations (P&I clubs) are associations of shipowners who agree to provide insurance coverage to each other in respect of some risks arising out of the operation of their vessels. (see in detail: Symon Poland and Tony Rooth, Gard Handbook on P&I Insurance, London, 1996, p. 20 at seq.) 71   When a trial court, having granted a motion for application of preliminary security measures, required the applicant to submit a statement of claim but failed to specify the deadline for such a submission, this ruling was quashed by the appellate court (see: Bulletin of the RF Supreme State Arbitration Court, 2004, No 8, p. 14). 72   It should be noted that the Civil Procedure Code does not contain norms related to preliminary security measures. Still, courts of general jurisdiction are entitled to apply relevant norms of the Arbitration Procedure Code by analogy of lex as permitted by Article 1 (Section 4) of the Civil Procedure Code.

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Here is an illustrative case. A Russian company filed a statement of claim with a state arbitration court against a foreign bank and a Russian company. The Plaintiff demanded that the Court declare the guarantee agreement between the respondents to be invalid. The trial court rejected the claim stating that it was ungrounded and time barred. This judgment was upheld by the court of appeal. The Plaintiff challenged those decisions in the cassation court. In the course of cassation proceedings the foreign bank filed a motion to discontinue proceedings based on a lack of jurisdiction of the Russian courts due to an anti-suit injunction that had been issued by a foreign court at the bank’s request. The cassation court rejected the motion for following reasons: under the principle of sovereignty, a basic principle of international law, states are legally equal to one another. This means, inter alia, that a court of one state is not entitled to exercise any power over a court of another state (par in parem non habet imperium). Therefore an anti-suit injunction issued by a foreign court cannot prevent consideration of a case by a Russian court since such an anti-suit injunction is inconsistent with rules both of international law and those of the Russian law (see: Information Letter of the Presidium of the RF Supreme State Arbitration Court of July 9, 2013 N 158, Section 32).

2.4. Trial Court Proceedings All statements of a claim filed with a court must be distributed by the chairman of the court to its judges. The judge who is in charge of a particular case (which has been assigned to him by the chairman of the court) examines the statement of the claim and, if it complies with statutory requirements, issues a ruling accepting it. In such a case the proceedings are deemed to have begun as of the date of the judge’s ruling (see: Article 127 of the Arbitration Procedure Code. See also: Article 133 of the Civil Procedure Code).73

  In case of violation of these requirements (e. g. if the statement of claim is not accompanied with a payment order confirming payment of a state duty or a document evidencing that a copy of the statement of claim has been duly sent to the defendant, etc.) the judge shall issue a ruling whereby the statement of claim is set aside and a time period for rectification set. If the violations are timely rectified, the statement of claim shall be deemed filed as of the date of its original submission to the court and accepted for proceedings (see: Article 128, Sections 1-3 of the Arbitration Procedure Code). If there is no timely rectification, the statement of claim is then returned to the applicant (see: id., Section 4). 73

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Thereafter within a period to be specified by the judge with due consideration of circumstances of the case, the judge must prepare the case for hearing (see: Article 134 of the Arbitration Procedure Code). During this period the judge, inter alia: 1) summons the parties or their representatives to clarify the merits of the case, explains to them their rights and duties, suggests that they disclose evidence and produce additional evidence; 2) assists the parties in obtaining evidence and, upon their motions, requires persons having evidence to produce it. It should be noted that in civil law disputes a court may require third persons to produce evidence if a litigant approaches the court with an appropriate motion. However, in cases arising out of public law relations a court may upon its own initiative require state agencies and officials to provide evidence. (See: Article 66, Section 5 of the Arbitration Procedure Code); 3) points out the possibility for the parties to refer the dispute to voluntary arbitration74 or to a mediator, and encourages the parties to resolve their dispute amicably by agreement;75 4) performs other functions as may be needed to ensure consideration of the case (see: Article 135 of the Arbitration Procedure Code). A preliminary hearing is the final stage of preparation of the case. During the preliminary hearing the judge assesses whether there is enough evidence to resolve the dispute, and if finding that there is, sets the time of the main hearing (see: Article 137 of the Code).A case should be resolved by a trial court within 3 months from the date of filing of the statement of claim with the court, which period may be extended by the chairman of the court for up to 6 months with due consideration of the complexity of the case (see: Article 152). In the trial court a case is heard by a single judge except in those cases where the Code provides for a panel of several judges, such as: 1) any cases for which the RF Supreme State Arbitration Court serves as the trial court; 2) cases challenging normative legal acts; 3) cases referred to the trial court for new consideration with an indication that the proceedings shall be held by a panel of judges;

  If the litigants agree upon voluntary arbitration, then the judge does not consider the statement of the claim further (see: Article 148, Section 6 of the Arbitration Procedure Code). 75   If the litigants entered into a voluntary agreement and the court approves it it shall become enforceable in the same manner as a court judgment (see: Article 142 of the Arbitration Procedure Code); that is why the court, having approved a voluntary agreement, then terminates the proceedings (see: Article 150, Section 2 of the Code). 74

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4)  cases which due to their specific complexity shall be considered by a panel of judges based on a decision of the chairman of the court panel which in turn is based on a motivated recommendation of a judge. In civil law disputes, upon a motion of either party, a case shall be heard by a  panel consisting of a chairing judge and two arbitration assessors (see: Article 17, Section 3, Paragraph 1 of the Arbitration Procedure Code).76 Arbitration assessors cannot sit in cases relating to public law litigation (see: id., Paragraph 2). Court hearings shall be recorded in minutes which are prepared by the judge, his assistant or secretary (see: Article 155 of the Arbitration Procedure Code). The minutes must be signed by whichever of these persons prepared them (see: id., Section 4). Before describing the conduct of the court hearing it may be helpful to highlight the basic concept of Russia’s civil procedure doctrine. There are no civil procedural relations between the parties, i. e. the plaintiff and the defendant.77 Certainly, some legal relations between them do exist, but these are of a substantive law nature arising out of, for example, a contract, a tort, or unjust enrichment. Civil procedure relations exist between, for example, the plaintiff, on the one hand, and the court, on the other; and, in the same way, between the defendant and the court. In other words, civil procedural relations exist between the court and each person participating in the case. The court is an obligatory participant in civil procedural relations.78 Therefore, in a courtroom every activity is subject to the order or permission of the court. If, for example, a plaintiff needs to obtain a document from the defendant, the plaintiff addresses a motion to the court rather than to the defendant, and it is up to the court either to sustain or deny the motion. The defendant’s reply to the plaintiff’s statement of the claim has usually been received by the court by the date of the court hearing.79 If not, the court may consider the case upon the basis of the evidence which has already been submitted (see: Article 156, Section 1 of the Arbitration Procedure Code). Both the plaintiff and the defendant must be provided with an opportunity to present their positions in the case orally. They may also submit presentations in wri­ ting on their own initiative and must do so at the court’s request. The parties may   Arbitration assessors shall be appointed from a list approved by the Presidium of the RF Supreme State Arbitration Court. All three panelists enjoy the same powers. 77   See: Professor M.K. Treushinikov, Ed., Civil Procedure. Moscow, 2007, p. 83; see also: T.V. Sakhnova, Курс гражданского процесса. [Course of Civil Procedure], Moscow, 2008, p. 150. 78   See: Professor M.K. Treushnikov, Ed., Civil Procedure, pp. 83; 90; T.V. Sakhnova, op. cit., p. 178. 79   A copy of the reply shall be sent to the plaintiff and other persons participating in the case by registered mail, return receipt. (see: Article 131, Section 2 of the Arbitration Procedure Code). 76

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question one another as well, and they must answer questions put to them by the court (see: Article 81 of the Arbitration Procedure Code).80 Next the court considers the evidence, including an examination of documents, submitted by the parties. It should be noted that according to mandatory norms of the Code both a plaintiff and a defendant are permitted during the course of the hea­ ring to refer only to evidence which has been made available to the opposing party beforehand (see: Article 65, Section 4).81 In theory this means that a court may refuse to accept evidence submitted to an opposing party only on short notice, or during the course of the hearing on no notice at all. However, in practice, Russian courts don’t go that far (perhaps because this provision is quite new and was not included in prior arbitration procedure codes,82 nor is it included in the Civil Procedure Code). Nevertheless, in such a situation, if the opposing party files an appropriate motion, the court will announce a break or adjourn the hearing in order to grant the opposing party enough time to examine the document and consider its options. Should the court conclude during the course of the hearing that expert evidence is needed, the judge may stay the proceedings (see: Article 144, Section 1 of the Arbitration Procedure Code). Before giving evidence, expert as well as fact witnesses must be warned by the court of their criminal responsibility for false testimony (see: Article 55, Section 5, Article 56, Section 4).83 However, a witness may refuse to give evidence against himself, his spouse and a circle of close relatives defined by law (see: Article 56, Section 6 of the Arbitration Procedure Code).84 The Code also states that if a law provides that certain matters must be proved by specified evidence then other evidence will not be accepted by a court as sufficient proof. For example, if a mandatory norm of law requires that a transaction must be in writing, but the transaction was concluded orally, in case of a dispute   It should be noted that, upon a motion of persons participating in the case, videoconference telecommunication system may be used by court in order to hear statements of persons participating in the case, evidence of witnesses, explanation of experts and their answers to additional questions. (see: Article 1531 of the Arbitration Procedure Code. See also: the Ordinance of the Plenum of the RF Supreme State Arbitration Court of February 17, 2011, No  12, Section 23. See also: Professor A.A. Ivanov, Ed. Commentary on the Arbitration Procedure Code of the Russian Federation, Moscow, 2011, p. 593). 81   It is also specifically emphasized that evidence obtained in violation of a law is prohibited (see: Article 64, Section 3 of the Arbitration Procedure Code). 82   The first code was adopted in 1992, the second in 1995. 83   Article 307 of the RF Criminal Code provides criminal responsibility for false witness statements, false expert opinions and false translations by an interpreter in court. 84   This circle includes: children (including adopted ones), parents, grandparents, grandchildren, and brothers and sisters. (see: Article 69, Section 4 of the Civil Procedure Code) 80

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the parties cannot prove the transaction and its conditions with witness testimony; only written evidence will be admissible (see: Article 162, Section One of the Civil Code).85 Assume a sales agreement between two Russian companies, but no written cont­ ract. Transactions between legal entities must be in writing. (see: Article 161, Section 1 (1) of the Civil Code) When there is no written contract, in order to prove the existence, and terms and conditions of a transaction, a court will accept such documents as correspondence between the seller and the buyer, payment orders, railway bills, etc., but witness testimony will not be accepted. Questions sometimes arise as to whether a Russian court will accept a document sent by facsimile or electronic communication. Such documents are admissible as long as it is possible to establish reliably that the document comes from a relevant party (see: Article 434, Section 2 of the Civil Code). This idea is further developed in the Federal Law of 27th July 2006 No 149-FZ “On Information, Information Technologies and on Protection of Information.” According to this Law “an electronic message signed by an electronic digital signature or other analog of a handwritten signature shall be deemed a document equivalent to that signed by a handwritten signature unless federal laws or other normative legal acts establish or imply a requirement to prepare such a document on paper” (Article 11, Section 3). This Law also provides that in concluding civil law contracts, or formalizing other legal relations in which persons participate who exchange electronic messages, an exchange of such messages, each of which is signed by an electronic digital signature or other analog of the sender’s handwritten signature, shall be deemed an exchange of documents so long as such an exchange is provided for by federal law, other normative legal acts, or agreement of the parties (see: id., Section 4). Some specific requirements concern documents issued abroad. Such a document will be accepted by a Russian court provided it is:   There are some additional strict rules with respect to certain transactions, such as, inter alia, foreign trade transactions which shall be deemed invalid in the event of non-observance of the requirement of a written contract. (see: Article 162, Section 3 of the Civil Code, original version). It is useful to note that, as mentioned in the Concept of development of civil legislation, [hereinafter the Concept] this provision was introduced in view of the state monopoly of foreign trade. Currently such a rule puts parties to foreign trade transactions in an unequal situation as compared with parties to domestic transactions and therefore should be eliminated from the Civil Code (see: the Concept, Section 4.1.4). In line with this approach Section 3 of Article 162 of the Civil Code is declared void. Other examples of transations which shall be deemed invalid due to non-observance of a statutory requirement with regard to written form thereof are a contract of sale of immorable property (see: Article 550000 of the Civil Code) and a countract of trust management of property (see: Article 1017 of the Civil Code). 85

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1) duly legalized86 or apostilled,87 and 2)  accompanied by a duly verified translation into the Russian language (see: Article 75, Sections 5 and 6, Article 255 of the Arbitration Procedure Code; see also: Article 71, Section 4, Article 408 of the Civil Procedure Code). It is also very important to establish whose verification suffices to meet the requirements of Russian Law. In this connection, according to the RF Fundamentals 86   Legalization of foreign documents means establishment and verification of genuineness of signatures on such documents and compliance thereof with laws of the relevant foreign state. Legalization shall be made by Russian consuls abroad (see: Article 8, Paragraph 9 of the Regulations on Consular Institution of the Russian Federation approved by the Decree of the President of the Russian Federation of November 5, 1998. No 1330). The Convention on Consular Relations (Vienna 1963) allows performance of consular functions by diplomatic agencies (see: Article 3). Russian court practice takes the approach that foreign documents issued for presentation to Russian courts may only be legalized by Russian diplomatic or consular institutions. In one case a foreign firm submitted some documents to the Russian State Arbitration Court verified by a foreign consul in Russia. The Presidium of the Supreme State Arbitration Court noted that a Russian court should accept official foreign documents as evidence provided they have been legalized by Russian diplomatic or consular agencies in the foreign country where the documents were issued. Since the documents in question did not comply with this requirement, a Russian court should not accept them (see Review of practice of resolution of disputes connected with protection of foreign investors, Section 1. Information letter of the Presidium of the Supreme State Arbitration Court of January 18, 2001. No 58). 87   An official document issued in a country, which, like Russia, participates in the Convention Abolishing Requirement of Legalization of Foreign Public Documents (the Hague, 1961), shall be provided with an apostille, i. e. a stamp of the special form verifying genuineness of the signature, and the capacity of the signatory. Russian courts are very keen to check whether these provisions are complied with. Having established that apostilles on foreign documents were put in the form of a computer version, without genuine signatures and stamps, the Civil Cases Collegium of the RF Supreme Court noted that such apostilles do not meet the requirements as established by the Convention and therefore have no evidentiary effect (see: Bulletin of the RF Supreme Court, 2006, 3 11, p. 3). In some situations neither legalization nor apostille is required. E. g., according to the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (the Hague, 1965) “the authority or judicial officer competent under the law of the State in which the documents originate shall forward to the General Authority of the State addressed a request conforming to the model annexed to the present Convention, without any requirement of legalization or other equivalent formality.” (Article 3, Paragraph 1) The Convention on Legal Assistance and Legal Relations in Civil, Family and Criminal Cases (Minsk, 1993) provides that documents issued or verified in the territory of one of the Contracting Parties by an institution or authorized official within their competence in due form and stamped with a crest seal, shall be accepted in the territories of other Contracting States without any official verification (see: Article 13, Section 1; see also: Agreement on the Procedure of Resolution of Disputes Connected with Performance of Economic Activity, Kiev, 1992. Article 6).

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of the Law on the Notariat, a notary’s functions include, inter alia, verification of a translation from one language to another. The Fundamentals distinguish two situations depending upon whether the notary has a command of the relevant language. A notary with knowledge of the relevant language verifies the translation itself. Otherwise the notary verifies only the signature of the translator (see: Article 81). Sometimes during the conduct of a case, a Russian court needs to have some procedural acts performed abroad (such as, obtaining witness testimony or the opinion of an expert where it is not possible for such individuals to attend a court hearing in Russia). In such a situation a Russian court may request a foreign court to examine the fact or expert witness and to send the written testimony or expert opinion to the Russian court. A court request (rogatory letter) shall contain, inter alia: a)  the name of the foreign court (if known) to which it is addressed; b) the names and addresses of the parties and their representatives (if any); c) the character and subject of the case for which the evidence is needed; d) the evidence needed or other judicial act to be performed (see: the Convention of Receipt Abroad of Proofs in Civil or Commercial Cases, the Hague, 1970, Article 3). A rogatory letter (accompanied by a verified translation into the relevant foreign language) shall be sent abroad by a Russian requesting court via the RF Ministry of Justice (see: id., Articles 1 and 2).88 The court addressed (or other body or official to whose competence the relevant action is relegated according to the law of the State addressed) shall apply lex fori in performing the request. However, if a requesting court would like a specific procedure to be complied with, such a request shall be honored provided it does not contradict the law of the forum, nor is inconsistent with the practice of local courts (see: Article 9 of the Hague Convention 1970).89 These rules shall be applied by Russian courts in the course of responding to rogatory letters from foreign courts (see: Article 256, Section 3 of the Arbitration Procedure Code).90 There is an exhaustive (and very limited) list of situations when a foreign court’s request may be refused, i. e.: 88   In some other international treaties this procedure is substantially simplified. E. g., according to the Agreement on the Procedure of Resolution of Disputes Connected with the Performance of Economic Activity (Kiev, 1992) courts of the countries — participants of the Commonwealth of Independent States may communicate with each other directly (see: Article 5, Paragraph 3). 89   While affidavits are unknown in Russian law, nevertheless they do not in any way conflict with Russian law. Given this circumstance a Russian notary (who is competent, inter alia, to verify somebody’s signature on a document) may and, if he is so requested, will verify a signature of a person who signed an affidavit. 90   See also: Article 407, Section 3 of the Civil Procedure Code.

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1)  if performance of the request would violate basic principles of Russian law (i. e. the public policy of the Russian Federation); 2)  if performance of the request is beyond the competence of the court add­ ressed. Such a situation could occur for various reasons such as: a) the court addressed is a state arbitration court, while the request concerns a procedural matter that is within the competence of a court of general jurisdiction; b) performance of the request is beyond the competence of any court, but is within the competence of some other public body, for example, a local govern­ment; c)  performance of the request is beyond the competence of any Russian public body. In the last situation performance of the request is impossible since there is no body to which it can be addressed. However, in two previous situations a request could not be sent back solely because it was beyond the competence of the court. According to the 1970 Hague Convention, if a body to which the request is made is not competent to deal with it, the request should immediately be transferred to the public body which is competent to do so (see Article 6).91 Therefore, a court during the course of the hearing should consider the evidence as submitted by the parties who, if necessary, may request the court’s assistance in obtaining evidence both within and outside Russia. In general, persons making allegations have the burden of proving them (see: Article 65, Section 1 of the Arbitration Procedure Code).92 However, there are some exceptions to this rule, when the burden of proof is imposed upon the opposing party. For example, in case of a challenge to a decision, act or omission of a public body or official, the latter must prove the legality of its behavior (see: id.).93 For example, the Presidium of the RF Supreme State Arbitration Court in its Ruling of June 21, 2012 N 17140/11 ruled that a taxpayer’s indebtedness to the treasury in and of itself should not exempt the tax agency from the duty to prove such indebtedness. The lower courts had erroneously absolved the tax agency from proving the legal grounds for recovery of the amount in dispute and had refrained from consideration of the merits of the taxpayer’s objections. The Presidium therefore referred the case back to the trial court for review. Similar rules govern some civil law disputes. For example, “a citizen shall have the right to demand through a court the refutation of information disparaging his honor, dignity or business reputation, unless the disseminator of such information   A similar norm is contained in Article 8 (Section 2) of the Minsk Convention 1993.   See also: Article 56, Section 1 of the Civil Procedure Code. 93   See also: Article 249, Section 1 of the Civil Procedure Code. 91 92

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proves it to be true.” (Article 152, Section 1 of the Civil Code) It further specifically states that “the rules of the present Article concerning the protection of the business reputation of a citizen94 shall also apply to the protection of the business reputation of a legal entity.”95 (Article 152, Section 7). In such a situation it is sufficient for the plaintiff to make a statement that the disputed information affects the plaintiff’s honor, dignity or business reputation, and it is then up to the defendant to prove that the information in question is true.96 Another example of this rule is set forth in Article 168 of the Merchant Shipping Code (MSC). This Article exempts the carrier from liability for the loss of or damage to goods which arrived at the port of destination in serviceable cargo space with the seals of the shipper intact, delivered in undamaged tare without any trace of being tampered with during the course of the voyage, or when the goods were accompanied by a representative of the shipper or the consignee, unless the consignee proves that loss of or damage to the goods occurred due to the carrier’s fault. According to the law there is no need to prove certain matters, such as: 1)  those acknowledged by the parties (see: Article 70, Sections 1 and 2 of the Arbitration Procedure Code);97   The reference to a “citizen” should be interpreted as “natural person” regardless of his/ her nationality since according to the Constitution of the Russian Federation” foreign nationals and stateless persons shall enjoy in the Russian Federation rights and bear duties equally with Russian nationals except instances as provided for by federal law or international treaty of the Russian Federation.” (Article 62, Section 3) 95   The Plenum of the RF Supreme Court noted in its Ordinance of February 24, 2005. No 3 “On judicial practice in cases on protection of honor and dignity of citizens as well as the business reputation of citizens and legal entities” that disputes concerning protection of business reputation with respect to entrepreneurial and other economic activities are beyond the competence of courts of general jurisdiction (see: Section 3, Paragraph 1). This conclusion is in line with the norm of Article 33 (Section 1(5) of the Arbitration Procedure Code providing that such disputes are within the jurisdiction of state arbitration courts. 96   A firm sued a television company and demanded to refute defaming information spread in a TV program. A trial court (the State Arbitration Court of the City of Moscow) rejected the claim for the reason that the plaintiff failed to prove that the information was not correct. The judgment was upheld by the Appellate Court. The plaintiff approached the RF Supreme State Arbitration Court with a motion to review the case during a course of supervision. The Presidium of the Supreme State Arbitration Court emphasized in its ruling that according to Article 152 (Section 1) of the Civil Code a plaintiff is obliged to prove the fact of spreading the information by a defendant and the defaming character of the information. As to whether the information is true, it is the defendant who must prove it (see: the Ruling No 6461/08 of September 2, 2008. Bulletin of the RF Supreme State Arbitration Court, 2008, No 11, pp. 134–138). 97   Unless the court has evidence giving reason to conclude that such a recognition was aimed at concealing some facts or was given under the influence of fraud, violence, threat or misunderstanding, in which case the circumstances in question must be proved (see: id., Section 4). 94

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2)  those recognized by the court as generally known;98 3) those established by a court judgment in effect, that was resolved earlier in the case, in which the same persons participated.99 Sometimes behavior entails legal consequences in the fields of both criminal and civil law. For example, theft, a criminal offense, may also result in liability in tort. The procedural aspect of such a situation may be twofold: a) A victim may file a civil law suit during the course of criminal proceedings, in which case the court of general jurisdiction in sentencing must deal with both the criminal aspect of the case and with the relevant civil law relationship. b)  If the victim for some reason refrained from filing a civil lawsuit, then the court of general jurisdiction will only issue a sentence for the criminal offense and the punishment of the criminal. Civil law consequences of the offense will need to be resolved in a separate court proceeding to be held by a court of general jurisdiction or by a state arbitration court, depending upon whether the victim was a private individual, on the one hand, or a legal entity (or a sole business), on the other. In such a situation a question arises, to what extent (if any) do the facts established by the court during the criminal proceedings bind the court resolving a civil law dispute that resulted from the offense. The answer to this question is given in Article 69 (Section 4) of the Arbitration Procedure Code according to which “an effective court sentence in a criminal case shall be binding on a state arbitration court concerning the issues of whether certain actions took place and whether they were committed by a certain person.”100 This means, for example, that for a state arbitration court considering a case concerning recovery of losses resulting from an offense, the court sentence in a particular criminal case is binding only with respect to issues relating to the cause of the losses and the guilt of the defendant. All other matters (the amount of the losses, the financial condition of the defendant, etc.), even if they were established in the court sentence, must be proved during resolution of the civil law dispute.101   Facts may be generally known worldwide, or throughout the country, or within some locality. E. g., the Presidium of the State Supreme Arbitration Court noted that a flood occurred in the Republic of Sakha (Yakutia) [this Republic is one of the subjects of the Russian Federation] in May 2008 is a generally known fact which is not subject to proof (see: Bulletin of the RF Supreme State Arbitration Court, 2001. No 3). 99   See in detail: I.V. Reshetnikova. Доказывание в гражданском процессе [Proof in Civil Procedure] . Moscow, 2010, pp. 135–143. 100   See also: Article 61, Section 4 of the Civil Procedure Code. 101   See: Professor V.V. Yarkov, Ed., Commentary on the Arbitration Procedure Code of the Russian Federation. Moscow, 2011. P. 255. See also: V.I.Radchenko. Ed., Commentary on the Civil Procedure Code of the Russian Federation. M., 2006. P. 208-209. 98

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In the view of the Presidium of the RF Supreme State Arbitration Court, decisions of investigative agencies or administrative bodies have no binding effect on a court and shall be considered by it in conjunction with other evidence.102 When all the evidence has been considered in due course, the court turns to “pleadings,” the oral submissions of persons participating in the case (i. e. litigants, third persons, state attorney, public agencies) and their representatives who summarize and support their positions (see: Article 164, Sections 1–3 of the Arbitration Procedure Code).103 During the course of pleadings it is prohibited to refer to matters which have not been examined by the court and to evidence which has not been considered by the court or which has been declared inadmissible by the court (see: id., Section 4). If the court, during or after the course of pleadings, concludes that it is necessary to clarify some additional matters or to consider new evidence, consideration of the evidence shall be reopened after which the court will turn again to the pleadings (see: Article 165 of the Arbitration Procedure Code).104 The court may return to consideration of the evidence both upon its own initiative or upon a motion of persons participating in the case.105 Once the pleadings are over, the judge (or judges) withdraw into a deliberation room to issue the court’s judgment (see: Article 166 of the Arbitration Procedure Code).106 As soon as the judgment has been reached, the judge returns to the court room to announce it (see: Article 176, Section 1 of the Arbitration Procedure Code).107 Only the essential part of the judgment (whether the claim is granted or rejected, in full or in part) may be announced at the hearing, in which case the full text of the judgment shall be issued within 5 days.108 The date when the full text of the judgment is issued is deemed to be the date of issuance of the judgment (see: Article 176, Section 2 of the Arbitration Procedure Code). 102   See: Ruling of the Presidium of the RF Supreme State Arbitration Court, February 8, 2002. No 7286/1. 103   See also: Article 190 of the Civil Procedure Code. 104   See also: Article 191 of the Civil Procedure Code. 105   See: Professor V.V. Yarkov, Ed. Commentary on the Arbitration Procedure Code of the Russian Federation, pp. 577–578; see also: V.I.Radchenko, Ed., Commentary on the Civil Procedure Code of the Russian Federation. p. 457. 106   See also: Article 193 of the Civil Procedure Code. 107   If only the essential part of the judgment is announced, it should be in writing and signed by the judge(s) (see: Article 176, Section 3 of the Arbitration Procedure Code; see also: Article 199 of the Civil Procedure Code). 108   See also: Article 199 of the Civil Procedure Code.

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The Arbitration Procedure Code contains special rules concerning typos, slips and arithmetic errors in a judgment. Such mistakes may be corrected by the court on its own initiative or on the basis of the relevant application of persons participating in the case, a bailiff or other organizations and officials involved in enforcement of the judgment. However, the contents of the judgment must remain unchanged (see: Article 179, Section 3). The RF Supreme State Arbitration Court is very strict in its control over observance of this requirement. Here is an illustrative case: The Presidium of the Supreme State Arbitration Court in the course of supervisional review of lower courts’ rulings in a certain case, considered the following situation: The court of cassation corrected some mistakes in its ruling. However, the Presidium found that, based on the original text of the ruling, the court of cassation concurred with conclusions of the trial court and the appellate court that there were no reasons to satisfy the claim, so both the trial court judgment and the ruling of the appellate court were upheld. However after correcting mistakes in the text of the ruling of the court of cassation the new version of the court of cassation concluded that opinions of the lower courts were erroneous and therefore should be rejected. The Presidium indicated that the court of cassation, when correcting mistakes, effectively changed the content of its ruling taking a position opposite to its original one. The Presidium quashed the cassation ruling and referred the case back to the court of cassation for review.109 The trial court judgment becomes effective (and therefore, enforceable) one month from the date of its issuance unless it is appealed (see: Article 180, Section 1 of the Arbitration Procedure Code).110 There are, however, some exceptions to this rule, i. e. some judgments become effective immediately after they are issued, such as: 1) judgments in cases challenging normative legal acts; and 2) any judgments (regardless of whether they are cases of a public or private law nature) issued by the RF Supreme State Arbitration Court as a trial court (see: Article 180, Section 2 of the Arbitration Procedure Code).   See: Bulletin of the RF Supreme State Arbitration Court, 2013, N 3, pp. 243–247.   The judgment of a trial court of general jurisdiction shall become effective unless it is challenged in the court of appeal level within one month from the date of issuance of the full text of the judgment (see: Article 321of the Civil Procedure Code). 109 110

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2.5. Proceedings in an appellate court The trial court judgment may be challenged by filing an appellate complaint with the state arbitration court of appeal within one month from the date of issuance of the judgment. The time period, if expired, may be reinstated by the appellate court upon a motion of the applicant,111 provided: 1) the motion has been submitted within 6 months from the date of issuance of the judgment;112 2)  the appellate court finds justified reasons for missing the one month deadline (see: Article 259 of the Arbitration Procedure Code).113 The complaint must be signed by the applicant or its representative.114 It may also be submitted by completing a form on the official website of the court (see: Article 260, Section 1 of the Arbitration Procedure Code). Payment of state duty (currently 2000 rubles) and the sending of copies of the complaint to other persons participating in the case must precede the filing of the complaint. (See: Article 260, Section 4 of the Arbitration Procedure Code). An appellate complaint must be filed with the trial court. The trial court must send the complaint, together with the case file, to the appellate court within 3 days from the date when the complaint was delivered to the trial court (see: Article 257, Section 2 of the Arbitration Procedure Code).   Such a motion may be included in the complaint or it may be set forth in a separate document attached to the complaint. 112   The RF Constitutional Court repeatedly emphasized (see: its Decision of November 17, 2005. No 11–17, Rulings of January 16, 2007. No 233-0-P and 234-0-P) that if the 6 month time period was missed by a person who was not notified of the hearing and only became aware of it afterwards, such a person’s motion to reinstate the time for appeal of the court’s judgment should be granted. The Chief Justice of the RF Supreme State Arbitration Court drew the attention of lower courts to this approach of the RF Constitutional Court (see: the letter of the Chief Justice of the RF Supreme State Arbitration Court of February 15, 2008. No BAC-C01/УЗ-259. Bulletin of the RF Supreme State Arbitration Court, 2008. No 3, pp. 70–71). 113   An example of justified reasons is a situation when an applicant was unaware of the judgment due to late delivery of its copy by the post office (see: Section 14, paragraph 2 of the Ordinance of the Plenum of the Supreme State Arbitration Court of the Russian Federation of May 28, 2009, No 36 “On application of the Arbitration Procedure Code of the Russian Federation upon consideration of cases by state arbitration court of appeal.”On the other hand, such circumstances as change of a company’s chief executive officer, absence of an inhouse counsel on the company’s staff or if the company’s representative was on leave or on secondment, shall not be deemed justified reasons (see: id., para. 4). 114   A representative may sign a complaint if a right to challenge the court’s act is specifically mentioned in the power of attorney (this general provision concerning any kind of challenge of a judgment is provided in Article 62, Section 2 of the Arbitration Procedure Code). 111

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The complaint shall be considered by the appellate court within two months from the date when the complaint was received by the appellate court (see: Article 267 of the Arbitration Procedure Code). The complaint shall be considered in the appellate court by a panel consisting of 3 judges (arbitration assessors are not permitted).115 During the course of the hearing, the appellate court reviews the case on the merits on the basis of the existing and additional evidence. Additional evidence may only be admitted if the relevant person explains to the satisfaction of the appellate court why it was impossible to submit the evidence to the trial court, for example, if the trial court had rejected that person’s motion to summon a fact or expert witness (see: Article 268, Sections 1–3 of the Arbitration Procedure Code). The appellate court shall not accept a new claim not considered by the trial court (see: id., Section 7), such as a request to decrease the amount of a penalty or a fine, if the request was not submitted to the trial court (see: Section 25, Paragraph 6 of the Ordinance of the Plenum of the Supreme State Arbitration Court of the Russian Federation of May 28, 2009. No 36). The appellate court may quash or amend a trial court judgment if the appellate court discovers: 1) incomplete examination of factual matters relevant to the case; 2)  unsubstantiated evidentiary findings (relevant to the case) which the trial court deemed to be established; 3) inconsistency of the conclusions, as set forth in the judgment, with the factual findings of the case; 4) violation or misapplication of norms of substantive or procedural law (see: Article 270, Section 1 of the Arbitration Procedure Code). Misapplication of substantive law norms may be manifested by: 1) non-application of a law that should have been applied; 2) application of a law that should not have been applied.116 3) misinterpretation of a law (see: Article 270, Section 2 of the Arbitration Procedure Code). Violation of procedural law norms may serve as a reason to overrule or amend the trial court judgment if the violation resulted or could have resulted in issuance of a wrong judgment (see: Article 270, Section 3 of the Arbitration Procedure Code).   See: Article 266, Section 1 of the Arbitration Procedure Code.   Assume a contract of carriage of goods by sea in the form of a voyage charter concluded between a carrier and a shipper. However, a trial court, in resolving a dispute that arose out of this contract, characterized the relationship between the carrier and the shipper as one resulting from a time-charter contract. In such a case the trial court: 1) failed to apply norms regulating a voyage charter contract and 2) applied norms regulating a time-charter contract which are inapplicable to the situation. 115 116

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There is an exhaustive list of procedural violations each of which would inevitab­ ly require overruling a trial court judgment. This list includes: 1) the illegal formation of a court panel;117 2) consideration of the case in the absence of a person participating in it who was not notified, as required, of the place and time of the hearing;118 3) violation of rules concerning the language to be used during consideration of the case;119 4) issuing a judgment concerning rights and duties of persons not involved in the case; (when, for example, a court resolved a dispute between A and B concerning property which in reality was owned by C); 5) if the judgment was not signed by the judge or one of the judges (if the case was considered by a panel) or it was signed by judges other than those indicated in the judgment;120 6) failure to keep minutes of the hearing or the signing of minutes by persons other than those authorized in Article 155 of the Code.121 7) violation of the privacy of the deliberation room (see: Article 270, Section 4 of the Arbitration Procedure Code).122 In the event of a violation set forth in this list, the trial court judgment must be overruled (without regard to whether or not it was a correct ruling as to the merits of the case).   Assume, for example, that a bankruptcy case was considered by a panel consisting of the judge and two arbitration assessors, while such a panel until recently was required to consist of three judges (now such cases shall be considered by a single judge) and involvement of arbitration assessors is prohibited (see: Article 223, Section 2 of the Arbitration Procedure Code). 118   Where a hearing had been set for (and was held) 10th December 2007 but the notice of it was delivered to the post office at the location of the party the next day (11th December 2007), the Presidium of the RF Supreme State Arbitration Court quashed the court judgment since the party had been deprived of the right to participate in the hearing and to protect his interests (see: the Ruling N 4405/08 of September 9, 2008, Bulletin of the RF Supreme State Arbitration court, 2008, No 11, p. 166). 119   For example, if a person who does not have an adequate command of the Russian language was not provided with an interpreter. 120   The Presidium of the RF Supreme State Arbitration Court overruled a judgment where the introductory part of the lower court judgment indicated that the case had been considered by the chairing judge F and judges I and M. However, the judgment had been signed by F (as a chairing judge) and by judges I and K (instead of M.) (see: Bulletin of the RF Supreme State Arbitration Court, 2007, 3 11, p. 141). 121   For example, if the minutes were signed by the assistant of a judge other than that of the judge who considered the case. 122   Similar rules are set forth in Articles 328-330 of the Civil Procedure Code with regard to powers of the appellate courts of general jurisdiction. 117

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An appellate court decision becomes effective the date of its issuance (see: Article 271, Section 5 of the Arbitration Procedure Code) but may be appealed to the state arbitration court of cassation within two months from the date when the appellate decision became effective (see: Article 276, Section 1 of the Arbitration Procedure Code).123

2.6. Proceedings in a cassation court Like an appellate complaint, a cassation complaint must be signed by the applicant or his representative (duly authorized to challenge court judgments and orders by his power of attorney) and filed with the trial court. It may also be submitted by completing a form on the official website of the court (see: Article 277, Section 1 of the Arbitration Procedure Code). State duty (in the same amount as for an appellate complaint) must be paid and copies of the complaint sent to other participants in the case (see: Article 277 of the Arbitration Procedure Code). The trial court must send the cassation complaint, together with the case file, to the cassation court (i. e. the state arbitration court of the appropriate circuit) within 3 days (see: Article 275 of the Arbitration Procedure Code). Since an appellate decision takes effect once it is issued, it becomes enforceable from that date. However, consideration of a cassation complaint may result in the overruling of the appellate court decision as well as the trial court judgment. (This can happen if the latter was not amended by the appellate court.) But, if by the time of the cassation court’s decision the challenged acts have already been enforced, it becomes difficult (if not impossible) to recover money or other property already transferred to others during the course of enforcement proceedings. 123   Grounds for reinstatement of this time period are similar to those required for reinstatement of the time period to submit an appellate complaint, i. e.: a) an appropriate motion of the applicant; b) cassation court’s ruling that the deadline was missed for justified reasons; c) the filing of the cassation appeal within 6 months from the date when the appellate court decision took effect (see: Article 276, Section 2 of the Arbitration Procedure Code). In case the motion is submitted after this deadline by a person who was not notified of the hearing and only later became aware of the court’s action, the missed time period shall be reinstated (see: letter of the Chief Justice of the RF Supreme State Arbitration Court of Feb. 15, 2008 No BAC-C01/УЗ-259, Bulletin, 2008, No 3, pp. 70–71). Originally it was also possible to appeal to the cassation court a trial court judgment that was not appealed to the appellate court. However currently it is only permissible provided a trial court judgment was reviewed by an appellate court or the latter refused to reinstate a missed period for submission of an appeal (see: Article 181, Section 2 of the Code as amended by the Federal Law of July 27, 2010. No 228-FZ)

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In order to prevent this from happening, the cassation court may stay enforcement of both the trial court judgment and the appellate court decision upon an appropriate motion of the applicant (see: Article 283 of the Arbitration Procedure Code). The cassation court must consider the cassation complaint within one month from the date that the complaint (together with the case file) was filed with the cassation court (see: Article 285 of the Arbitration Procedure Code). Unlike the appellate court (which reviews the case on the merits), the cassation court only reviews whether the acts of the lower courts are consistent with the relevant norms of substantive and procedural law applicable to the court’s findings and evidence contained in the case file (see: Article 286 of the Arbitration Procedure Code). One more difference between the proceedings in the cassation and appellate courts (which emanates from this norm of Article 286) is that an appellate court is entitled (upon certain conditions) to accept new evidence, which the cassation court is not permitted to do. The cassation court may quash or amend the trial court judgment or the appellate court decision if conclusions of these courts are inconsistent with findings as established by lower courts and with the evidence contained in the case file, as well as if there have been violations or misapplications of norms of substantive or procedural law (see: Article 288, Section 1 of the Arbitration Procedure Code).124 A cassation court decision takes effect from the date of its issuance (see: 290 of the Arbitration Procedure Code). However, it may be challenged, within 3 months from the date when it took effect, to the RF Supreme State Arbitration Court for review during the course of court supervision (see: Articles 292–293 of the Arbitration Procedure Code).125

  Misapplication of norms of substantive and procedural law indicated in Article 288, Sections 2–4 of the Code are identical to those set forth in Article 270 (Sections 2–4) of the Code relating to appellate courts. 125   This time period, if expired, may be reinstated by the judge of the Supreme State Arbitration Court upon a motion of the applicant, provided: a) the deadline was missed by the appellant for justified reasons; b) the motion is filed within 6 months from the date when the cassation court judgment became effective (see: Article 292, Section 4 of the Arbitration Procedure Code). However, the RF Supreme State Arbitration court in some situations finds it possible to accept a supervisional appeal filed after lapse of a much longer period of time, such as three or even four years after the date when the judgment in question took effect when it is established that the appeal was submitted by a person who had not been informed of the proceedings and had only recently become aware of a judgment which violated his rights (see: Arbitration Disputes. Information-analytical magazine of the Federal State Arbitration Court of the North-West Circuit, 2008. No 4. P. 35). 124

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It should be noted that, further to reunion of the Supreme Court of the Russian Federation and the Supreme State Arbitration Court of the Russian Federation, the RF Arbitration Procedure Code was amended so as to modify cassation proceedings. According to innovations a ruling of a circuit state arbitration court may be appealed to the Economic Disputes Collegium of the Supreme Court of the Russian Federation as a second cassation level. A cassation complaint to a ruling of a circuit state arbitration court should be sent directly to the Collegium of the RF Supreme Court, whose judge upon perusal of the complaint is entitled to refer the complaint to the Collegium or to refuse it. In the latter situation the Chief Justice the Supreme Court of the Russian Federation or his Deputy may disagree with the judge’s position and refer the complaint to the Collegium (see: Article 2911–29115 of the Code). Ergo: currently cassation proceedings both in courts of general jurisdiction and in state arbitration courts consist of two stages.

2.7. Proceedings in a supervisional court An application to review a court’s actions during the course of supervision (hereinafter referred to as “the supervisional application”) must be signed by the applicant or his duly authorized representative126 and a state duty (in the same amount accompanying appeal and cassation complaints) must be paid.127 However, supervisional proceedings have more specific procedural rules than cases in appellate and cassation courts. First, while both appellate and cassation complaints are sent by the trial court to the appropriate appellate or cassation court, a supervisional application must be sent directly to the RF Supreme State Arbitration Court (see: Article 294, Section 1 of the Arbitration Procedure Code). Second, copies of appellate and cassation complaints must be sent by the applicant to other persons participating in the case. However, the supervisional application must be sent to the RF Supreme State Arbitration Court together with copies for each person participating in the case (see: Article 294, Section 4 of the Code). Third, a supervisional application, once accepted for proceedings by a single judge of the Supreme State Arbitration Court, shall be considered ex parte by a panel

  It may also be submitted by completing a form on the official website of the Supreme State Arbitration Court. 127   If the court’s act was challenged to a cassation court, a supervisional application should be exempted from state duty (see: Article 333_22 (6) of the Tax Code). 126

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consisting of three Supreme State Arbitration Court judges128 who decide whether to refer the application to the Presidium of the Supreme State Arbitration Court or to reject it. In the latter situation, the same person is prohibited from making repeated applications to review the court’s action on the same grounds (see: Article 299, Section 9 of the Code). In the former situation, copies of the relevant ruling of the panel shall be sent within 5 days to all persons participating in the case together with copies of the supervisional application and enclosed documents attached (see: Article 299, Section 5 of the Code in its acting version of February 3, 2014).129 These persons shall be notified of the place and time of hearing of the case by the Presidium of the Supreme State Arbitration Court (see: Article 302 of the Code), so that they have the possibility of attending the hearing and presenting their positions (see: Article 303, Section 6 of the Code in its acting version of February 3, 2014). It should be noted that reunion of the Supreme Court of the Russian Federation and the Supreme State Arbitration Court of the Russian Federation entailed modification of supervisional proceedings. Now the problem as to whether to refer the complaint to the Presidium of the Supreme Court of the Russian Federation or to reject it shall be resolved not by a panel of three Supreme Court judges but by a single judge (see Article 3084 Sections 1–6 of the Code). If this judge rules to reject the complaint, the Chief Justice of the RF Supreme Court or his Deputy may disagree with such a ruling, in which case the ruling will be quashed and the complaint along with the materials of the case will be referred to the Presidium of the RF Supreme Court (see: Article 3084, Section 7 of the Code). The Chief Justice of the RF Supreme Court (or his Deputy) who referred the complaint to the Presidium of the RF Supreme Court may not participate in consideration of the complaint by the Presidium (see: Article 3089, Section 4 of the Code). It is further provided by Article 30810 of the Code that the Chief Justice of the RF Supreme Court or his Deputy may, upon a complaint of the interested persons, submit to the Presidium of the RF Supreme Court a statement on review of judicial acts in the course of supervision in order to eliminate fundamental violations of rules of substantive or procedural law which violations produced adverse impact upon legality of the judicial acts in question and deprived the participants of disputable substantive or procedural legal relations of a possibility to realize rights guaranteed   The panel may stay enforcement of the challenged court act on an appropriate motion of the applicant (see: Article 298, Section 1 of the Code). 129   In this ruling a period of time shall be indicated within which these persons may submit their replies to the application (see: id.). 128

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by this Code, including the right for access to justice, the right for fair judicial proceedings on the basis of adversariality and equality of the parties, or substantially limited these rights. In such a situation the Chief Justice of the RF Supreme Court or his Deputy who submitted the statement may not participate in considering of the case by the Presidium. The Presidium of the RF Supreme Court may quash or amend the challenged court act if the latter: 1) violates the requirement of uniformity in interpretation and application of norms of law by state arbitration courts; 2) violates rights and freedoms of a human being and citizen as provided for by generally recognized principles and norms of international law and international treaties of the Russian Federation.130 3)  violates rights and lawful interests of an indefinite circle of persons or other public interests131 (see: Article 3088 of the Code).

2.8. Review of effective court judgments and decisions upon new or newly-discovered evidence Unlike in appellate, cassational and supervisional proceedings, where a challenged court action is reconsidered by a higher court, review of a court judgment or decision based on new or newly-discovered evidence is undertaken by the same court that issued the challenged act (see: Article 310 of the Arbitration Procedure Code).   One of the most typical international treaties in question is the Convention for the Protection of Human Rights and Fundamental Freedoms. The Convention deals with rights and freedoms belonging mainly to natural persons, albeit some of them may belong to legal entities as well (e. g. such as those indicated in Articles 6 “Right to a Fair Trial” (Paragraph 1), 34 “Individual Applications,”Article 1 “Protection of Property” of Protocol No 1). S imilarly, Chapter 2 “Rights and freedoms of a human being and citizen” of the Constitution of the Russian Federation regulates rights and freedoms of individuals (mainly) and organizations (when applicable), such as, Article 34, Section 1 on everyone’s right to free use of his abilities and property for business and other economic activities not prohibited by law, Article 35 on the right of private ownership, Article 36 on private ownership to land (see: Professor V.D. Zorkin, Ed. Комментарий к Конституции Российской Федерации. [Commentary on the Constitution of the Russian Federation.] Moscow, 211, pp. 319–345). 131   Court protection of interests of an indefinite circle of unnamed persons may occur, for example, in cases related to challenges of normative acts. A s for other public interests, they may be connected with claims arising out of violations of antimonopoly laws, etc. 130

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The reasons providing for such a review are listed in Article 311 of the Arbitration Procedure Code.132 The application for review must be signed by a person participating in the case or his duly authorized representative with copies sent to other persons participating in the case. The application may also be submitted by completing a form on the official website of the court (see: Article 313 of the Arbitration Procedure Code).133 The time period for filing such an application is three months from the date of discovery of the relevant evidence. If the court rules that the 3 month term was missed for justifiable reasons (see: Article 312 of the Arbitration Procedure Code), this time period, if expired, may be reinstated by the court, upon a motion of the applicant filed with the court no later than 6 months from the date of discovery of the evidence cited. The application must be considered by the court within one month from the date of its filing with the court (see: Article 316, Section 1 of the Arbitration Procedure Code). The persons participating in the case shall be notified of the place and time of the hearing (see: id., Section 2) so that they may attend and present their positions. In the event that the application is granted, the court shall reconsider the case on the merits (see: Article 317 of the Arbitration Procedure Code). This new judgment or decision may then, in turn, be appealed (see: id., Section 5).

2.9. Enforcement proceedings Enforcement proceedings are regulated by the relevant norms of the Arbitration Procedure Code (see: Articles 318-332)134 as well as the Federal Law of October 2, 2007. No 229-FZ “On Enforcement Proceedings” and the Federal Law of July 21, 1997. No 118-FZ “On Bailiffs.” 2.9.1. General provisions A successful litigant who would like to have a court judgment enforced must apply to the court with a motion to issue a writ of execution which shall be granted   The RF Supreme State Arbitration Court specifically emphasized that such reasons should be of a substantial character, i. e. they should be able to influence the court’s conclusions upon issuance of the judgment. This means that had the relevant circumstances been known, they would have undoubtedly led to issuance of a different judgment (see: Section 4, 5 of the Ordinance of the Plenum of the RF Supreme State Arbitration Court of March 12, 2007 No 17 “On application of the Arbitration Procedure Code in the course of review of effective courts acts upon newly-discovered circumstances”). 133   No state duty is required for such an application (see: Section 22 of the Ordinance). 134   See also: Articles 428–446 of the Civil Procedure Code. 132

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once the judgment becomes effective (see: Article 319 of the Arbitration Procedure Code).135 A writ of execution is valid for 3 years after a court judgment becomes effective. Enforcement of the judgment may be brought within this time period (see: Article 311 of the Arbitration Procedure Code).136 This deadline, if missed, may be reinstated by the court, upon a motion of the applicant, if the court rules that the deadline was missed for justified reasons (see: Articles 322, 117 of the Arbitration Procedure Code).137 The Federal Bailiffs Service (FBS),138 which is a subdivision of the RF Ministry of Justice, enforces court judgments.139 Accordingly, a creditor who obtains a writ of execution may submit it (together with his application to initiate enforcement proceedings) to the appropriate local agency of the FBS.140 There is one exception to this general rule: With respect to the enforcement of monetary awards a creditor may submit a writ of execution directly to the bank where the debtor’s monetary resources are deposited (see: Article 8, Section 1 of the Law “On Enforcement Proceedings”). Once the bailiff receives the writ of execution and the creditor’s application, he shall initiate enforcement proceedings within 3 days. However, the debtor must be granted a 5 day grace period to permit him to perform his obligation voluntarily (see: Article 30, Section 8, 12 of the Law). The claims set forth in the writ of execution must be enforced by the bailiff within 2 months (see: Article 36, Section 1). There are, however, two exceptions to this rule. On the one hand, in some situations the bailiff must act immediately. For example, a claim of reinstatement of an employee to his job shall be enforced no later than the first working day after the date of delivery of the writ of execution to the FBS agency (see: id., Section 4). An application to enforce security measures must be enforced the same day that the writ of execution is received by the FBS agency (see: id., Section 6).   See also: Article 428 of the Civil Procedure Code.   See also: Article 21, Section 1 of the Law “On Enforcement Proceedings”). 137   See also: Articles 432, 112 of the Civil Procedure Code. 138   See: Article 5 of the Law “On Enforcement Proceedings.” 139   See: Article 7 of the Law “On Bailiffs.” 140   If the debtor is a private individual, the writ of execution shall be submitted to the FBS agency at his place of residence or at the location of his property. If the debtor is a legal entity, the writ of execution shall be submitted to the FBS agency at the place of the location of its branch or representative office (see: Article 33, Sections 1 and 2 of the Law “On Enforcement Proceedings”). 135 136

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On the other hand, in some situations enforcement proceedings may be stayed by the court or by the bailiff. For example, the court shall stay enforcement proceedings in case of submission of a statement of claim to lift the seizure of the property as indicated in the writ of execution, or in case of a challenge to the evaluation of the seized property (see: Article 39, Section 1 of the Law). The bailiff must stay enforcement proceedings, inter alia, in case of bankruptcy of the debtor (see: Article 40, Section 1 of the Law). Under a writ of execution, recovery of the claim must be paid first out of the debtor’s monetary resources whether in rubles or in foreign currency (see: Article 69, Section 3 of the Law). If a debtor who is obliged to pay a claim in rubles does not have enough rubles in his bank account, but does have enough foreign currency in his currency account, the bailiff must order the bank to sell sufficient foreign currency for rubles to pay the claim in the internal currency market of the Russian Federation (see: Article 71, Sections 1–3 of the Law). Similarly, if a debtor does not have enough foreign currency to pay a creditor’s foreign currency claim but has enough rubles in his ruble bank account, the bailiff shall order the bank to buy the relevant amount of foreign currency for rubles and to transfer the foreign currency amount to the creditor’s foreign currency bank account (see: Article 72, Section 5 of the Law). In the event of insufficient monetary resources to pay the claim, it must be satisfied out of other property of the debtor (see: Article 69, Section 4 of the Law). However, individual debtors may not be deprived of certain types of property as set forth in the Civil Procedure Code.141 A similar list applicable to debtors that are legal entities shall be established by federal law142 (see: Article 79 of the Law).   According to Article 446 of the Civil Procedure Code this list includes, inter alia: — a dwelling house or apartment, if it is the only living quarters for the debtor and family members living with him, unless it is mortgaged; — a plot of land where the family dwelling house or apartment is located (unless mortgaged); — objects of ordinary household wares and items of home use, as well as items of individual use (clothes, footwear, etc.) with the exception of jewelry. 142   Currently there is no federal law containing a consolidated list of such items with respect to legal entities. However there are relevant norms in laws regulating the status of different organizations. E. g., according to Article 1201 of the Civil Code “a fiscal institution shall be liable for its obligations to the extent of the monetary resources at its disposal.” Therefore, any other property belonging to a fiscal institution (except its monetary resources) is protected with immunity during the course of enforcement proceedings. (Originally such an immunity was granted to any kind of institution see: V.I.Radchenko, Ed. Commentary on the Civil Procedure Code of 141

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A “chain” of priorities governs the satisfaction of claims during enforcement proceedings. These include: the first priority — movable property not directly involved in the manufacturing of goods, performing work (for example, if a debtor is a construction company) or rendering services (for example, if a debtor is a consulting firm); the second priority — property rights which are not directly involved in the activities described in the first priority; the third priority — immovable property (upon the same precondition); the fourth priority — property rights and property (both movable and immo­ vable) directly involved in the manufacturing of goods, performance of work or rendering services (see: Article 34, Section 1 of the Law).143 The debtor may indicate the property that he wishes to be sold first, but, in the final analysis, it is the bailiff who has the right to make this decision (see: Article 69, Section 5 of the Law). Sale of the debtor’s property is entrusted to special organizations to be specified upon the basis of open tender (see: the Order of the RF Ministry of Justice of June  27, 2001. No 188). Sale of immovable property, securities, property rights, artworks, items of historical value, as well as any item whose value exceeds 500 thousand rubles, must be at public auction (see: Article 87 of the Law). Succession is possible in the course of enforcement proceedings. According to Article 52 of the Law, in the event of death of an individual, reorganization of a legal entity, assignment of a right or transfer of a debt, the bailiff must substitute the successor for the party subject to the enforcement proceedings. The successor is then bound by the actions taken during the enforcement proceedings prior to the succession (see: Article 52 of the Law). 2.9.2. Some aspects of enforcement proceedings in light of European Court of Human Rights case law Enforcement of a court judgment is deemed to be an integral part of a court’s consideration of a case since only after a judgment’s execution can the principle of the the Russian Federation., Moscow, 2006, p. 446; See also: Professor I.V.Reshetnikova, Ed., Commentary on the Federal law “On Enforcement Proceedings” and Practice of its Application. Ed., Moscow, 2009, pp. 398–401.) 143   This list applies both to legal entities and to sole proprietorships (see: id., Section 2). 93

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rule of law be deemed to have been complied with. That is the approach both of the European Court of Human Rights144 and of the RF Supreme Court.145 Article 6 of the Convention for the Protection of Human Rights and Fundamental Freedoms provides: “In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.” When interpreting Article 6, the European Court repeatedly emphasizes that one of the substantial requirements of a court judgment’s effectiveness is the conclusion of court proceedings within a reasonable period of time. In order to clarify whether proceedings in a specific case comply with this requirement, the following aspects should be taken into consideration: the complexity of the case, the actions of the claimant, on the one hand, and those of relevant state authorities, on the other, and the importance of the issue being considered in the case (or, in other words, what is at stake) for the claimant. The European Court is of the opinion that delay in legal proceedings may only be deemed to be unreasonable if it results from inefficient activities of public agencies. In the course of dealing with this problem in a specific situation where there was a time period of almost ten years between the date of the filing of a statement of claim and issuance of a final court judgment, the European Court noted the conduct of the claimant. The hearing had been adjourned numerous times at the request of the claimant who had repeatedly challenged the judges, and changed attorneys (and a new attorney naturally needed some time to study the case file) which inevitably resulted in delaying resolution of the dispute. However public authorities (including the courts) acted within the time limits provided by law and, inter alia, considered each motion of the claimant on the same day when it had been submitted. The European Court indicated that the delay in legal proceedings had effectively been caused by the claimant who appeared to be the architect of his own hardship. It  therefore ruled that the requirement of concluding court proceedings within a rea  See: Michele de Salvia. Precedents of the European Court of Human Rights. Leading Principles of Judicial Practice Relevant to the European Convention on Human Rights and Fundamental Freedoms. St. Petersburg, 2004, p. 302. 145   Section 12 (Paragraph 3) of the Ordinance of the Plenum of the RF Supreme Court of October 10, 2003 No 5 “On application by courts of general jurisdiction of generally recognized principles and norms of international law and international treaties of the Russian Federation” specifically states that, within the meaning of Section 1 of Article 6 of the Convention, the time period of the court proceedings begins at the time of filing the statement of the claim and ends when the court judgment is enforced. 144

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sonable time period had been met (see: Konstantin Antonov v. the Russian Federation, judgment of November 3, 2005). The European Court’s approach was substantially different in another very interesting case: A number of plots of land belonging to applicants were expropriated for a public purpose and compensation was paid to them by state authorities. The applicants demanded additional payments and their claims were granted by the trial court. The state authorities challenged this judgment, which was upheld by the Court of Cassation March 12, 1996. The additional amount was paid to the plaintiff November 17, 1997. The European Court held the additional payment to be a violation of Article 1 of Protocol 1 to the Convention.146 When addressing the problem of the length of the proceedings, the European Court pointed out that “the delay in paying the additional compensation awarded by the domestic courts was attributable to the expropriating authority and caused the owner to sustain loss additional to that of the expropriated land (Kayihan and others v. Turkey, Judgment of April 8, 2004). It appears from this statement that the European Court considered this delay to be unreasonable. While the 18 month delay does not seem to be too long (especially as compared with the several years delay in the previous case), it could not be deemed justified since it resulted from inefficient activity of state authorities. These illustrations show that, when considering the problem of what is a reasonable length of time to complete legal proceedings, the European Court’s position is based upon some criteria which, on the one hand, are quite definite, yet, on the other hand, are sufficiently flexible. It is useful to note that relevant federal law was adopted in Russia quite recently (April 30, 2010). Conditious of responsibility for unreasonable delay in court proceedings according to this law are similar but not identical to those established by case law of the European Court of Human Rights (see: infra, Chapter 3, § 3, Section 3.4.2.2.5).

  This Article states: “Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provision shall not, however, in any way impair the right of a state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.” 146

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2.10. Enforcement of foreign court judgments in Russia Foreign court judgments are recognized and enforced in Russia on the basis of an international treaty or a federal law147 (see: Article 241, Section 1 of the Arbitration Procedure Code).148 There are a number of international treaties (both multilateral and bilateral) which provide different methods of enforcement of foreign court judgments. The simplest way of enforcement of foreign court judgments is provided by the Agreement between the Russian Federation and the Republic or Belarus on the Procedure of mutual Enforcement of judicial Acts of State Arbitration Courts of the Russian Federation and those of Economic Courts of the Republic of Belarus of January 17, 2001. According to this Agreement judicial acts of competent courts of the Parties do not need a special procedure of recognition and shall be enforced in the same order as that for enforcement judicial acts of domestic courts on the basis of enforcement documents issued by courts which issued judgments (see: Article 1). A writ of execution shall be sent by the winning litigant directly to a bailiff’s service of the country where the debtor is located. As for monetary claims, a writ of execution shall be sent by the winning litigant directly to the debtor’s bank (see: Article 3). Another way of enforcement of foreign judicial acts is fixed in the Agreement of the Procedure of Resolution of Disputes connected with Performance of Economic Activity (Kiev, 1992), according to which a judgment issued by a court of one Contracting State Participant of the Commonwealth of Independent States (CIS) shall be enforced in the territory of another Contraction State Participant of the CIS on the basis of appropriate ruling of the court of the latter State albeit in a simplified manner (see: Article 7). The motion shall be accompanied by: 1) a duly verified copy of the judgment to be enforced; 2) a document showing that the judgment had become effective (unless this was evident from the text of the judgment); 3) proof that the opposing party had been notified; and 4) the writ of execution given by the court which had issued the judgment (see: Article 8).   For example, according to the Federal Law “On Insolvency (Bankruptcy)” foreign court bankruptcy judgments shall be recognized in Russia on the basis of reciprocity (see: Article 1, Section 6). 148   See also: Article 409, Section 1 of the Civil Procedure Code. 147

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Simplification relates to the last point (4) since usually, when enforcement of a foreign court judgment is subject to appropriate confirmation by the court of the country where enforcement is sought, it is the latter court that shall issue a writ of execution once it issued a ruling whereby enforcement should be granted (see infra this text). Enforcement may be refused if the opposing party proves to the court at the place where enforcement is requested that: a) there is a foreign court judgment in the dispute between the same parties, on the same subject and on the same ground; b) the dispute has been resolved by an incompetent court; c) the opposing party was not notified of the hearing; or d) the three year time period for submission of the judgment for enforcement has expired (see: Article 9). A more formalized procedure is provided in the Convention on Legal Assistance and Legal Relations in Civil, Family and Criminal Cases (Minsk, 1993) and in the Convention on Legal Assistance and Legal Relations in Civil, Family and Criminal Cases (Kishinev, 2002). These Conventions provide that a motion for enforcement of a foreign court judgment shall be considered by a competent court of the state in the territory in which enforcement is requested (see: Article 57, Section 1 of the 2002 Kishinev Convention). The motion (along with the documents attached) may be sent by the applicant (who won the case) to the competent foreign court directly or via the national trial court which issued the judgment in question. In the latter situation the national trial court shall send the motion to the competent foreign court which will issue a writ of execution (see: Article 56, Section 1 of the 2002 Convention). Reasons for refusal to enforce are similar to those set forth above (see: Ar­ ticle 59 of the 2002 Convention). Given the different provisions for enforcement in these international treaties a question arose in litigation which provision would apply (that of the 1992 Kiev Treaty, or that of the 1993 Minsk Convention and the 2002 Kishinev Convention) to enforce a court judgment in an economic dispute between organizations that were residents of states parties to both the Kiev Treaty and the Minsk (and Kishinev) Conventions. The enforcement provisions in the Minsk and Kishinev documents are the same, but the litigation was only between parties to the Kiev and Minsk, but not the Kishinev, Conventions. Upon consideration of this issue in the decision in the case No 01-1/2-06 of February 21, 2007 the Economic Court of the CIS noted that the Minsk and Kishinev Conventions did not affect provisions of other international treaties between states 97

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which were also parties to these Conventions. Therefore the Minsk and Kishinev Conventions did not affect the legal force of the Kiev Treaty. Giving due consideration to the general legal principle “lex specialis derogat lex generalis,” States Parties to the 1992 Kiev Treaty in economic disputes should apply its norms to issues relating to the rendering of legal assistance, choice of language of documents, recognition and enforcement of foreign court judgments.149 In a number of other international treaties there is a provision that in the course of rendering legal assistance, including recognition and enforcement of court judgments in civil law disputes, institutions of the Contracting Parties shall communicate with each other via Ministries of Justice150 or through diplomatic channels.151 In its relations with these countries, foreign court judgments are enforced in Russia on the basis of the norms of Chapter 31 of the Arbitration Procedure Code.152 A motion of a winning creditor to enforce a foreign court judgment must be submitted to the state arbitration court at the place of the debtor’s location (or residence), and, if this place is unknown, then at the place where the debtor’s property is located (see: Article 242, Section 1 of the Arbitration Procedure Code).153 The motion should be made in writing. It may also be submitted by completing a form on the official website of the court. This motion shall include: a) the names and addresses of the creditor and the debtor, their representatives and their telephone numbers, fax numbers, and e-mail addresses; b) information concerning the foreign court judgment for which enforcement is requested;   See: Decisions of the Economic Court of the Commonwealth of Independent States, 2007. Minsk, 2008, p. 10–11. 150   See, e. g., Article 4 of the Treaty between the Russian Federation and the Latvian Republic on Legal Assistance and Legal Relations in Civil, Family and Criminal Cases, Riga, 1993; Article 4 of the Treaty between the Russian Federation and Lithuanian Republic on Legal Assistance and Legal Relations in Civil, Family and Criminal Cases, Vilnius, 1992; Article 4 of the Treaty between the Russian Federation and the Estonian Republic on Legal Assistance and Legal Relations in Civil, Family and Criminal Cases, Moscow, 1993. 151   See, e. g., Article 4 of the Convention between the Union of Soviet Socialist Republics and the Republic of Italy on Legal Assistance in Civil Cases (Rome, 1979), Article 4 of the Treaty between the Union of Soviet Socialist Republics and the Republic of Cyprus on Legal Assistance in Civil and Criminal Cases (Moscow, 1984). 152   If a judgment is issued concerning a civil law dispute of a non-commercial nature, norms of Chapter 45 of the Civil Procedure Code shall apply. 153   See also: Article 410 of the Civil Procedure Code according to which the motion shall be submitted to the court of general jurisdiction of a relevant subject of the Russian Federation. 149

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c) the creditor’s request for recognition and enforcement of the judgment in question (see: Article 242, Section 2 of the Arbitration Procedure Code). The following documents shall accompany the motion: 1)  a duly verified154 copy of the foreign court judgment; 2)  a duly verified155 document confirming that the judgment had taken effect (unless it is indicated in the text of the judgment).156 3)  a duly verified157 document providing proof that the debtor was timely notified of the hearing in the foreign court; 4)  a duly verified158 power of attorney or other document159 confirming the signatory’s authority to approach the state arbitration court; 5) a document providing proof that a copy of the motion has been sent to the debtor; 6) a duly verified160 translation of the documents mentioned above into the Russian language; and 7) a document providing proof of payment of the state duty161 (see: Article 242, Section 3 of the Arbitration Procedure Code). The motion must be considered by the court within one month from the date of filing of the motion. The persons participating in the case shall be notified by the court of the place and time of the hearing. However, the hearing does not require their presence (see: Article 243, Sections 1 and 2 of the Arbitration Procedure Code). The court hearing shall result in a ruling either granting or denying enforcement of the foreign court judgment.162 If enforcement is granted, the court will issue a writ of execution according to which the foreign judgment shall be enforced on the basis

  That is, legalized or apostilled.   That is, legalized or apostilled. 156   A foreign court judgment may be submitted for enforcement within 3 years from the date when it took effect. If this deadline is missed for justifiable reasons, it may be reinstated by the state arbitration court upon the motion of the creditor (see: Article 246, Section 2 of the Arbitration Procedure Code). 157   That is, legalized or apostilled. 158   That is, legalized or apostilled. 159   For example, an abstract from the minutes of the company’s general shareholders’ meeting appointing the Chief Executive Officer who is entitled to sign documents on behalf of the company ex officio without need a power of attorney. 160   That is, notarized. 161   Its amount is 2000 rubles (see: Article 333_21, Section 1 (8) of the Tax Code). 162   The ruling may be appealed directly to the cassation court within one month from the date of its issuance (see: Article 245, Section 3 of the Arbitration Procedure Code). 154 155

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of the relevant norms of the Arbitration Procedure Code and the Law on Enforcement (see supra, § 2, Section 2.9, Subsection 2.9.1). It is only possible to refuse enforcement of a foreign court judgment in a limited number of situations, that is, if: 1) the judgment in question had not taken effect or was not enforceable under lex fori; 2) the losing party had not been duly notified of the place and time of the hearing and so had no possibility of participating in the hearing; 3) the case in question was within the exclusive competence of a Russian court; 4) an identical case between the same parties had already been resolved (or was being considered) by a Russian court prior to commencement of the proceedings in a foreign court; 5) enforcement of the judgment would violate the public policy of the Russian Federation; or 6) the time period to submit the judgment for enforcement had expired and a creditor’s motion to reinstate it had not been granted by the Russian court (see: Article 244, Section 1 of the Arbitration Procedure Code). The Code emphasizes that the Russian court is not entitled to review the foreign court judgment on the merits during its consideration of the case (see: Article 243, Section 4), The Presidium of the RF Supreme State Arbitration Court has drawn the attention of lower courts to this provision. In a typical case a Russian debtor objected to enforcement of a foreign court judgment in Russia alleging that the foreign court in the course of resolution of the dispute had violated norms of substantive and procedural laws of lex fori. A Russian state arbitration court rejected those objections since such reasons were not included in the list of grounds for refusal to enforce a foreign court judgment as set forth in Article 244 (Section 1) of the Arbitration Procedure Code. Such arguments may serve as reasons to challenge the judgment in the country where it was issued. However, they may not be taken into consideration by a Russian court considering recognition and enforcement of the foreign court judgment in the Russian Federation.163 A question arises, whether it is possible for a foreign court judgment to be enforced in Russia in the absence of an international treaty between the Russian Federation and the country in which the court had issued the judgment.164   See: Information letter of the Presidium of the RF Supreme State Arbitration Court of December 22, 2005 (Section 4). 164   It is worthwhile to note in this connection that in some countries foreign court judgments are subject to enforcement provided they satisfy certain conditions. E.g. in France a foreign court judgment shall be enforced if a French court establishes that the judgment in question was issued by a foreign court within its competence and does not contradict 163

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The approach to this problem has gradually evolved as may be illustrated by the changing attitude of the Civil Cases Collegium of the Supreme Court of the Russian Federation. The Collegium initially was of the opinion that in the absence of an international treaty enforcement of a foreign court judgment in Russia was precluded. Indeed, in 1999 the Collegium had refused enforcement in Russia of a Finnish court judgment since there was no treaty between Russia and Finland providing for the mutual enforcement of court judgments.165 This position, however, was criticized in Russian legal doctrine due to the progressive integration of the Russian economy into the world economic system which inevitably was accompanied by substantial growth both in the number and diversity of international transactions in which Russian persons were involved. In this situation, an unequivocal prohibition of enforcement of foreign court judgments in Russia, absent an international treaty, created serious obstacles to the protection of foreign persons in Russia and Russian persons abroad.166 It was also emphasized that ignoring international principles of reciprocity and comity with regard to recognition of foreign court judgments might lead to a refusal to enforce Russian court judgments abroad.167 Arguments of this kind substantially influenced Russian judicial practice, and the approach of the Civil Cases Collegium of the Supreme Court of the Russian Federation became more flexible. In its Ruling of June 7, 2002, N 5-ГО2-64 the Collegium stated that the absence of a treaty between the Russian Federation and the United Kingdom of Great Britain and Northern Ireland should not be grounds to refuse recognition and enforcement of a foreign court judgment in Russia. It also indicated that a motion to recognize and enforce a foreign court judgment may be satisfied by a competent Russian court even in the absence of a relevant ininternational public policy (see in detail: D.V. Litvinsky. Признание иностранных решений по гражданским делам (сравнительно-правовой анализ французского законодательства, судебной практики и юридической доктрины) [Recognition of Foreign Court Judgments in Civil Cases (Comparatively – Legal Analysis of French Legislation. Judicial Practice and Legal Doctrine]. St. Petersburg, 2005, p. 54–55). Similar concept is accepted in the Republic of Korea (see in detail: Jasper Kim. Korean Business Law. The Legal Landscape and Beyond. Caroline Academic Press, 2010, p. 23–24). 165   See: Bulletin of the Supreme Court of the Russian Federation, 1999, N 7, p. 5. 166   See: A.I. Muranov. Международный договор и взаимность как основания приведения в исполнение в России иностранных судебных решений [International Treaty and Reciprocity as Grounds for Enforcement of Foreign Court Judgments in Russia] Moscow. 2003, p. 30. 167   See: T.N. Neshatayeva. Международное частное право и международный граждан­ ский процесс [International Private Law and International Civil Procedure]. Moscow, 2004, p. 30. 101

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ternational treaty if courts of the foreign state recognize Russian court judgments on the basis of reciprocity. This approach is shared by the Supreme State Arbitration Court of the Russian Federation. In the Ordinance of June 11, 1999 N 8 “On effectiveness of international treaties of the Russian Federation with regard to arbitration procedure” its Plenum came to the following conclusion: It is possible to send letters rogatory abroad concerning performance of procedural acts (including, inter alia, those related to enforcement of a court judgment) and, accordingly, to execute similar letters rogatory received from abroad “on conditions of international comity in the absence of an international treaty on legal assistance” (Section 20). Given these positions of both Supreme Courts, Russian civil procedure currently distinguishes two situations in which enforcement of foreign court judgments in Russia may be either 1) obligatory or 2) non-obligatory. Enforcement is obligatory when there is an international treaty on mutual recognition and enforcement of court judgments. In such a case a foreign court judgment shall be enforced unless it is legally impossible due to obstacles established by national law (see: Article 412, 414, 417 of the RF Civil Procedure Code) or by international treaty. Non-obligatory enforcement is based upon principles of international law such as reciprocity and international comity. Thus, at this time, recognition and enforcement of foreign court judgments is now possible on the basis of an international treaty to which the Russian Federation is a party or on the basis of principles of reciprocity and international comity.168 The European Court of Human Rights has supported this approach. In its judgment of October 10, 2010 in “Petr Korolev v. Russia” the European Court addressed, inter alia, an issue of enforcement in Russia of a judgment of the High Court of the South-African Republic concerning recovery of salary due the master of a Russian tanker from its owner. Having noted the absence of a treaty on mutual recognition and enforcement of court judgments between the Russian Federation and the South African Republic, the European Court, referring to the Ruling of the Civil Cases Collegium of the RF Supreme Court of June 7, 2002 M 5-ГО 2-64, concluded that the Russian legal system does not preclude enforcement of judgments issued by courts of a state with which Russia has no relevant treaty. Therefore the European Court took the view that Russian courts (both those of general jurisdiction and state arbitration courts) are entitled to enforce foreign court   See: G.L. Osokina. Гражданский процесс. Особенная часть. [Civil Procedure. Special Part]. Moscow, 2007, p. 799–800. 168

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judgments in the absence of an international treaty on mutual recognition and enforcement of court judgments, provided: • There are no grounds to refuse enforcement of the foreign court judgment (see: Article 412 of the RF Civil Procedure Code, Article 244 of the Arbitration Procedure Code); and • the relevant foreign state honors the principle of reciprocity with regard to enforcement of Russian court judgments. The European Court’s judgment in “Petr Korolev v. Russia” is binding on the Russian Federation in accordance with Article 46 (Section 1) of the European Convention on Protection of Human Rights and Fundamental Freedoms which provides: “The High Contracting Parties undertake to abide by the final judgment of the Court in any case to which they are parties.”

2.11. Jurisdictional immunity of a foreign state and its property The legal status of a state is defined by its sovereignty. This feature, in and of itself, does not preclude the possibility of suing the state. According to Article 1069 of the Civil Code “harm caused to a citizen or legal entity as a result of the illegal actions or omissions of state agencies, municipalities or officials of these agencies, including as a result of the issuance of an act of a state agency or municipality which does not correspond to a law or other legal act, shall be subject to compensation. Harm shall be compensated at the expense, respectively, of the treasury of the Russian Federation, the treasury of the subject of the Russian Federation or the treasury of the municipality.” However, proceedings against the state must be initiated in its own courts.169 A lawsuit against the state in a foreign court must take into consideration the inherent power attributable to its sovereignty. Ancient Romans used to say: “par in parem non habet imperium.” In other words, states are equal participants in international relations. Therefore one state cannot, without its consent, be subject to another state’s jurisdiction. For this reason a state enjoys immunity from involvement in a case being considered in a foreign court. Jurisdictional immunity of a foreign state with respect to a case initiated in a Russian court means that, without the consent of the foreign state, the Russian court shall not: 1) consider a claim against this foreign state;   See: M.M. Boguslavsky. Международное частное право [International Private Law]. Moscow, 2004, p. 177. 169

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2) involve a foreign state in the case as a defendant or as a third party; 3)  take security measures with respect to a claim submitted against a foreign state, such as seizure of property of the state; 4) enforcing a judgment against a foreign state. A separate consent of the foreign state is needed for a Russian court to perform any of the acts mentioned above. Such a consent (i. e. waiver of jurisdictional immunity) must be given by competent bodies of the appropriate state in accordance with its laws.170 That is, briefly, the essence of a foreign state’s jurisdictional immunity. However, the doctrine of jurisdictional immunity has evolved in its historical development in line with the growing participation of states in civil law relations. Originally the concept of jurisdictional immunity was based upon the idea that a state should enjoy immunity from involvement in legal proceedings in a foreign court regardless of whether the state acted as the sovereign or in commerce.171 This concept was known as a theory of “absolute immunity.” Later, the concept of jurisdictional immunity of a foreign state was modified to take into account the theory of “functional immunity,” according to which a state was entitled to immunity only with respect to its public functions as opposed to those functions of a commercial nature.172 Such an approach is reflected, inter alia, in the 1972 European Convention on State Immunity and the laws of some countries, e. g., in the United States, the 1976 Foreign Sovereign Immunities Act and in the United Kingdom, the 1978 State Immunity Act. Similar ideas have also been incorporated into the 2004 United Nations Convention on Jurisdictional Immunities of States and Their Property. In Russia, both doctrine and law for a long time have been based on the theory of absolute state immunity.173 However, transition of Russia’s economy into a market system led to equal protection of rights of different ownership interests, such as private individuals, legal entities, the Russian Federation and its subjects, and municipalities (see: Article 8 of the Constitution, Article 236 of the Civil Code).

170   Waiver of jurisdictional immunity may be manifested, inter alia, in filing a statement of claim by the state in a foreign court. In this situation the state may not refer to its immunity with respect to counter claims directly connected with the original claim (see: Article 32, Section 3 of the Vienna Convention on Diplomatic Relations 1961). 171   See: Dicey, Conflict of Laws. London. 1932, pp. 192–194. 172   See: Cheshire and North, Private International Law, 10th edition, London, 1979, pp. 101. 173   See: M.M. Boguslavsky. Иммунитет государства [State Immunity]. Moscow, 1962, pp.  164–170, L.A. Lunts. Курс международного частного права [Course of International Private Law]. Moscow, 1975, pp. 74–81.

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Accordingly, the Russian Federation, its subjects and municipalities, in ci­ vil law relationships, must act “on equal principles with other participants of these relations — citizens and legal entities.” (Article 124, Section 1 of the Civil Code) These legal provisions are compatible with the theory of “functional immunity” and entailed some innovations in Russia’s civil procedural law. The RF Arbitration Procedure Code 2002 grants a foreign state jurisdictional immunity in Russian state arbitration courts when a foreign state is acting “as a holder of power”, i.e. as a sovereign (see: Article 251, Section 1). In other words, if a foreign state is involved in commercial transactions, it does not enjoy jurisdictional immunity in Russian state arbitration courts.174 Given such a concept, a Russian court, in order to establish whether a foreign state should enjoy jurisdictional immunity, needs to clarify the legal nature of its relations with the foreign state.175 The fact that a foreign state enters into a civil law contract with a Russian counterpart does not necessarily lead to a loss of jurisdictional immunity in a case under consideration by a Russian court. The key determinant is the purpose of the contract in question. Here is a practical illustration of this idea. According to an international treaty between Russia and a foreign state a hotel for accommodation of guests of the Russian ambassador was to be built in the capital of the foreign state at the expense of the Russian federal treasury. Similarly, a hotel for accommodation of the fo­reign ambassador’s guests was to be built in Moscow at the expense of the foreign state. The foreign embassy concluded a construction contract with a Russian firm. When the Russian contractor sued the foreign embassy in the state arbitration court for payment of its fee, the embassy claimed jurisdictional immunity with respect to legal proceedings in Russian courts. The Presidium of the RF Supreme State Arbitration Court noted during the course of supervisional review of the case that the foreign embassy had entered into a civil law contract with the aim of providing proper conditions for the foreign state’s performance of public (as opposed to commercial) activities. Consequently, in a Russian court, the foreign state was protected with jurisdictional immunity, and so the proceedings against the foreign state would have to be terminated.176 174   See: M.S. Shakaryan, Ed.Commentary on the Arbitration Procedure Code of the Russian Federation., Moscow, 2003, p. 583. 175   See: T.N. Neshatayeva. Международное частное право и международный гражданский процесс [International Private Law and International Civil Procedure]. Moscow, 2004. P. 146. See also: V.V. Yarkov, Ed. Commentary on the Arbitration Procedure Code of the Russian Federation, Moscow, 2011, pp. 936–938. 176   See: Review of the practice of resolution by state arbitration courts of disputes connected with protection of foreign investors, Section 5. Information Letter of the Presidium of

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In another case a foreign embassy sued a Russian contractor in a Russian state arbitration court. The defendant, in its turn, filed a counterclaim against the embassy which objected to the counterclaim claiming jurisdictional immunity. In its judgment, the trial court supported the position of the embassy. The court of cassation overruled the judgment stating that by filing a statement of claim with a Russian court the fo­ reign embassy lost its right to claim jurisdictional immunity against a counterclaim.177 The Russian court’s position is in keeping with Article 32 (Section 3) of the 1961 Vienna Convention on Diplomatic Relations, which provides: “the initiation of proceedings by a diplomatic agent or by a person enjoying immunity from jurisdiction shall preclude him from invoking immunity from jurisdiction in respect of any counterclaim directly connected to the principal claim.” Article 251, Section 2 of the Arbitration Procedure Code also provides that international organizations enjoy jurisdictional immunity in accordance with international treaty of the Russian Federation and federal law. Similar rule (albeit in different legend) is contained in Article 401, Section 2 of the RF Civil Procedure Code that states: “International organizations shall be subject to jurisdiction of courts in the Russian Federation in civil cases within limits established by international treaties of the Russian Federation, federal laws.” Here is an illustrative case. R who was an employee of the Euro-Asian Bank of Development sued the Bank with a claim to recover salary and moral harm. In the course of court hearing, prior to consideration of the case on its merits, the Bank submitted a statement of its judicial immunity in the territory of the Russian Federation and requested to discontinue the proceedings. The motion had been granted by the trial court whose ruling was upheld by the court of cassation. The Civil Cases Collegium of the RF Supreme Court, having reviewed the case in the course of court supervision upon R’s complaint, came to the following conclusions. The Euro-Asian bank of Development is an international organization created and acting in accordance with the Agreement on foundation of the Euro-Asian Bank of Development of January 12, 2206. The Bank’s Charter is an integral part of the Agreement. Article 3 of the Agreement between the RF Government and the Euro-Asian Bank of Development on conditions of location of the Bank in the territory of the Russian Federation provides that the Bank, its branch and representative offices as well as its property enjoy jurisdictional immunity except instances indicated in Arthe RF Supreme State Arbitration Court of January 18, 2001. No 58. Bulletin of the RF Supreme State Arbitration Court, 2001. No 3, pp. 72–73. 177   See: Id., p. 73. 106

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ticle 31, Section 1 of the Charter and instances when the Bank expressly waives its immunity. According to Article 31, Section 1 of the Charter the Bank enjoys judicial immunity except instances which are not connected with performance of its authorities. Therefore the Bank’s judicial immunity shall be applied to cases resulting from performance of its authorities or connected with performance of these authorities. Pursuant to Article 2 of the Charter the bank’s authorities include: performance of investments, consultancy of Bank’s participants on issues of economic development, use of resources, extension of trade-economic liaisons, etc. As it appears from this provision, the Bank’s jurisdictional immunity is limited with the Bank’s activities on performance of its authorities indicated in the Agreement and the Bank’s Charter. Labour relations between R and the Bank do not result from the performance by the Bank of its principal functions and therefore are not embraced by the Bank’s jurisdictional immunity. The Collegium quashed the lower courts’ acts and referred the case back to the trial court for review.178

§ 3. International Commercial Arbitration 3.1. General provisions Article 11 (Section 1) of the RF Civil Code states that courts of general jurisdiction, state arbitration courts and voluntary arbitration courts shall provide redress when civil rights are violated or contested. They may deal with purely domestic legal disputes (internal or domestic arbitration) or with those related to foreign trade (international commercial arbitration). Federal laws regulating the formation and activities of each type of voluntary arbitration include the Law “On International Commercial Arbitration” of July 7, 1993 No 5339-1 based on the 1985 UNCITRAL Model Law on International Commercial Arbitration179 and the Federal Law “On [Voluntary] Arbitration Courts in the Russian Federation” of July 24, 2002 No 102-FZ. During Soviet times parties to civil law disputes rarely used arbitration although arbitration in foreign trade disputes was quite typical. Two permanent forums in the USSR heard such disputes: the Foreign Trade Arbitration Commission and the Mari  See: Bulletin of the Supreme Court of the Russian Federation, 2011. No 4, pp. 28–30.   United Nations documents A/40/17/ annex 1 and A/61/17/ annex 1.

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time Arbitration Commission (both established within the USSR Chamber of Commerce and Industry).180 Now the situation has changed substantially. Currently there are hundreds of voluntary arbitration courts in Russia, and the number continues to grow. The background of this trend is twofold: the transition of Russia to a market economy inevitably results in growing numbers of civil law transactions and related disputes. In addition, there are some advantages to voluntary arbitration when compared with the state court system. These advantages emanate from the fact that in a voluntary arbitration forum the parties to the dispute have much more influence on the proceedings than in the state courts. Advantages of voluntary arbitration. There are five important advantages of voluntary arbitration. They are: 1) In state courts it is the responsibility of the chief justice to distribute cases among the judges and to appoint a judge who will consider each case. However, in voluntary arbitration it is up to the litigants to appoint or (depending upon rules of a particular forum) to nominate the arbitrators to resolve the dispute. 2) Proceedings in the state courts are very strictly regulated by law. No deviation from those rules is generally permitted. In voluntary arbitration, the relevant provisions of law are mainly optional and only apply if the parties to the dispute don’t otherwise agree. 3) Consideration of a case in the state courts may (and often does) go through several courts which will require a longer time for final resolution of the dispute. In voluntary arbitration only one court will hear the dispute and its award will be final and binding on the parties. 4)  Hearings in state courts are open to the public, so anyone who would like to attend the proceedings may be present in the courtroom. However, voluntary arbitration proceedings are confidential; no one may enter the court room during the hearing without the express permission of the litigants. 5) A state court judgment may be overruled or amended by a higher court considering whether there has been a misapplication of norms of substantive or procedural law. Such reasons are not sufficient to set aside or refuse to enforce an arbitral award. An arbitral award may only be set aside or enforcement refused for a very limited number of reasons as set forth in an exhaustive list. (See: Article 46 of the Federal Law “On [Voluntary] Arbitration Courts in the Russian Federation,” and Article 36 of the Law “On International Commer-

  The Foreign Trade Arbitration Commission was created in 1932. Currently this forum’s name is the International Commercial Arbitration Court (ICAC). The Maritime Arbitration Commission (MAC) was created in 1930. 180

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cial Arbitration.” See also: Articles 233 and 239 of the Arbitration Procedure Code, Articles 421, 426 of the Civil Procedure Code).181 Disadvantages of voluntary arbitration. The disadvantages of voluntary arbitration are often the reverse side of its advantages. These disadvantages relate to the problem of enforcement of arbitral awards. Once a state court judgment takes effect, the bailiffs’ service is available to the winning party to enforce the court judgment. However, an arbitral award is supposed to be executed voluntarily. If the losing party is not enthusiastic at this prospect, a problem of enforcement can arise. The bailiffs’ service will only enforce an arbitral award by order of a competent state court. For this reason the law provides for a specific relationship between state courts and voluntary arbitration forums in some areas, including (but not limited to) enforcement matters. Russia is a party to certain international conventions relating to international commercial arbitration, such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) and the European Convention on International Commercial Arbitration (Geneva, 1961). Both international conventions and domestic law provide for two kinds of commercial arbitration: ad hoc arbitration and permanent arbitral forums. Each permanent forum has its own rules set by the body which created it (for example, the Chamber of Commerce and Industry). The Law “On [voluntary] Arbitration Courts in the Russian Federation” provides that, unless the parties agree otherwise, upon submission of a dispute to a permanent arbitration institution its rules are to be deemed an integral part of the arbitration agreement (see: Article 7, Section 3) and therefore binding on the litigants. Although the law “On International Commercial Arbitration” does not contain a similar provision, it is certainly implied. In ad hoc arbitration, the procedural rules may be agreed to by the parties. The litigants may, for example, agree to use the 2010 UNCITRAL Arbitration Rules as the procedural rules for dispute resolution.

3.2. Jurisdiction of international commercial arbitration The law “On International Commercial Arbitration” applies to civil law disputes of both a contractual and non-contractual nature arising in the course of foreign trade and other types of international economic relations. At least one party must be a commercial enterprise located abroad. It also applies to disputes among businesses

  See in detail: infra, Section 3.9 of this Paragraph.

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with foreign investments established in the territory of the Russian Federation, disputes among their participants and disputes of such businesses with other Russian legal entities or sole proprietorships (see: Article 1, Section 2). Article 1 (Section 2) of the federal law “On [voluntary] Arbitration Courts in the Russian Federation” regulates proceedings in domestic forums and provides that a voluntary arbitration court may resolve any dispute resulting from a civil law transaction unless a federal law provides: otherwise. It is clear from these rules, that voluntary arbitration forums (both domestic and international) may deal only with civil law disputes. This conclusion is based on Article 4 (Section 6) of the Arbitration Procedure Code which states: “By agreement of the parties a dispute arising out of civil law relations, which dispute is within the jurisdiction of a state arbitration court, may, before issuance by the state arbitration court of the judicial decision completing its consideration of the case on the merits, be referred by the parties to a voluntary arbitration forum, unless a federal law provides otherwise.” The reservation “unless a federal law provides otherwise” means that there may be, and indeed there are, some civil law disputes excluded from the jurisdiction of voluntary arbitration forums. Article 248 of the Arbitration Procedure Code provides for the exclusive competence of Russian state arbitration courts, inter alia, of “disputes involving immovable property or property rights, if such property is located in the territory of the Russian Federation.”182 It should be noted that this problem has a history of its own. Until recently state arbitration courts (including the Supreme State Arbitration Court of the Russian Federation) were of opinion that since civil law disputes of this kind are relegated to the exclusive competence of Russian state arbitration courts, they were therefore beyond the jurisdiction of any other venue, whether a state or voluntary one and whether in Russia or abroad. However this issue became a subject of a very active discussion and in the long run it was referred to the Constitutional Court of the Russian Federation which held in its Ruling of May 26, 2011 No 10-P as follows: The norm of Article 248 of the Arbitration Procedure Code, “given its meaning within the system of other provisions of Chapter 32 “Competence of state arbitra  As indicated above, the concept of “immovable property” includes both objects which are physically immovable (such as plots of land, buildings, construction etc.) and sea-going and inland navigation vessels (see: Article 130, Section 1 of the Civil Code). However, vessels may enter foreign territorial waters and thus become subject to foreign jurisdiction. Given these circumstances the concept “immovable property” in the meaning of this Article includes only objects which are physically immovable, such as those mentioned above (see: Professor M.S.Shakaryan, Ed., Commentary on the Arbitration Procedure Code of the Russian Federation. Moscow, 2003, p. 579). 182

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tion courts in the Russian Federation on consideration of cases with involvement of foreign persons”  — is designated on demarcation of competence of state courts of different countries on consideration of transnational disputes.” Therefore this norm does not prohibit litigants to use alternative dispute resolution forms, including voluntary arbitration (see: Section 4, Paragraph 11). It also clearly appears from the provisions mentioned above that no legal disputes except those of a civil law nature may be referred to voluntary arbitration. If a dispute arose out of public law relationships, a voluntary arbitration forum is not in a position to consider it even though both parties may have agreed to resolve the dispute in such a forum. Assume a dispute between a taxpayer and a tax inspectorate with the parties to the dispute reaching an agreement to submit the dispute to a voluntary arbitration forum instead of to a state court. Despite such an agreement, a voluntary arbitration forum cannot accept such a case due to its public law nature. State arbitration courts were also of opinion that a public law dispute, even if it includes some civil law matters, is still beyond the jurisdiction of a voluntary arbitration forum. For example, according to Article 223 (Section 2) of the Civil Code (original version) “when alienation of property is subject to state registration, the right of ownership of the acquirer shall arise at the time of such registration, unless otherwise established by law.” Article 131 (Section 1) of the Civil Code provides that the right of ownership and other rights in rem to immovable things, limitations of these rights, the origin thereof, and termination shall be subject to state registration in the unified state regis­ ter of rights to immovable property. As the 1997 Federal Law “On State Registration of Rights to Immovable Property and Transactions therewith” specifically emphasizes, a state registration certificate shall be the only evidence of existence of the relevant rights. A registration agency is a type of state authority. Thus state registration of a right to immovable property shall be performed within the context of public law relationships, so a dispute between a registration agency and an applicant concerning state registration of a title to an immovable object will be of a public law nature. Such disputes therefore cannot be considered by a voluntary arbitration forum (see: Section 27 of the Information letter of the Presidium of the RF Supreme State Arbitration Court of December 22, 2005 No 96 “Review of the practice of consideration by state arbitration courts of cases on recognition and enforcement of foreign court judgments, on challenge of arbitral awards and on issuance of writs of execution for enforcement of arbitral awards.”) 111

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Since recognition of title to immovable property entails not only civil law consequences but also those of a public law nature, Russian state courts took the position that the issue of a right of ownership to immovable property is within the exclusive jurisdiction of the state courts.183 However the Constitutional Court of the Russian Federation having dealt with this issue in its Ruling of May 26, 2011 No 11-P noted that “a public law character of disputes pre-determining impossibility of referring thereof to [voluntary] arbitration is preconditioned not by the kind of a property, but by a specific character of legal relations which result in a dispute concerning this property and by a complement of persons participating in the dispute” (Section 4, Paragraph 6). Accordingly “obligatoriness of state registration of rights to immovable property and transactions with there cannot be considered as a circumstance excluding a possibility to refer disputes with regard to immovable property to [voluntary] arbitration” (see: Section 4, Paragraph 9). Furhter to this approach the Presidium of the RF Supreme State Arbitration Court noted in its Ruling No 530/10 of September 27, 2011 that since currently federal law does not include disputes concerning immovable property in exclusive jurisdiction of state courts, voluntary arbitration forums are entitled to resolve, inter alia, disputes with regard to public sale of mortgaged immovable items. The Presidium accordingly upheld rulings of lower courts whereby writs of execution of arbitral awards had been issued.184 As for civil law disputes which cannot be resolved by a voluntary arbitration, they are, e. g. bankruptcy cases (see: Article 33, Section 3 of the Federal Law of October 26, 2002, No 127-FZ “On Insolvency (Bankruptcy).” Thus there are two preconditions for the relegation of a legal dispute to the jurisdiction of a voluntary arbitration forum: 1) the dispute must be of a civil law nature, and 2) it must be included among the disputes which the parties have agreed to refer to voluntary arbitration.

3.3. Arbitration agreements The Convention on the Recognition and Enforcement of Foreign Arbitral Awards provides:   See: Letter of the RF Supreme State Arbitration Court of the Russian Federation of August 23, 2007 No BAC-C06/ОПП-1200 “On practice of consideration of disputes on issues of registration of rights to immovable property on the basis of arbitral awards,” para. 22. 184   See: Bulletin of the Supreme State Arbitration Court of the Russian Federation, 2011, No 12, pp. 265–269. 183

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“1. Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration. 2. The term “agreement in writing” shall include the arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.” (Article II). Further to these rules, the UNCITRAL Model Law “On International Commercial Arbitration (1985)” as amended in 2006 (and the Russian Law “On International Commercial Arbitration” which is based upon the original version of this Model Law) ascertains that “an agreement is in writing if it is contained in a document signed by the parties or in an exchange of letters, telex, telegrams or other means of telecommunication185 which provide a record of the agreement, or in an exchange of statements of claim and defense in which the existence of an agreement is alleged by one party and not denied by another.” (Article 7, Section 2) In other words, there are three possible written forms of an arbitration agreement: 1) a single document signed by both parties which, in its turn, may be set forth: a) in a clause of a contract; or b) in a separate agreement; 2) an exchange of correspondence between the parties which correspondence shall be deemed to constitute an offer and an acceptance; 3) an exchange of a statement of claim (as submitted to a voluntary arbitration forum) and a reply, if the reply does not contain any objection to the arbitration forum. Once there is an arbitration agreement in writing, it is binding on those of its parties who are also, at the same time, parties to some civil law transaction. However, it may (and sometimes does) happen that the parties to this transaction are substituted for other persons by operation of law (for example, in case of reorganization of a legal entity, or as a result of subrogation) or on a contractual basis (in case of assignment of a right).   The wording “other means of telecommunication” includes e-mail messages since the Civil Code expressly provides that an agreement may be concluded by exchange of documents by means of electronic or other communication enabling it to be reliably established that the document emanates from a party. (see: Article 434, Section 2) According to amendments introduced in the UNCITRAL Model Law in 2006 “the requirement that an arbitration agreement be in writing is met by an electronic communication if the information contained therein is accessible so as to be useable to subsequent reference” (Article 7, Section 4). 185

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Should substitution occur, an arbitration agreement entered into by previous parties remains binding on their successors. While it has been questioned,186 the Presidium of the RF Supreme State Arbitration Court is of the opinion that Article 384 of the Civil Code applies. According to it “unless provided otherwise by a law or by a contract, the right of the initial creditor shall pass to the new creditor in that amount and on those conditions which existed at the moment of transfer of the right.” The Presidium considers this language to include a contractual condition which provides an arbitration forum for dispute resolution of the parties to the contract (see: Decision of June 17, 1997 in the case No 1533/97).187 A similar approach is taken by the International Commercial Arbitration Court at the RF Chamber of Commerce and Industry188 which is the most authoritative Russian permanent arbitration forum. The binding effect of an arbitration agreement for its parties derives from the agreement that they undertook. This agreement is twofold: first, voluntarily to exe­ cute an arbitral award, and second, to refrain from submitting relevant disputes to any other venue, including the state court system. This is why the 1958 New York Convention provides that “the court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an [arbitration] agreement…, shall, on the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.” (Article II, Section 3). This language of the Convention does not further explain what the wording “refer the parties to arbitration” means, and so leaves the procedure for such a reference to the national laws of Contracting States. In Russia, the 1964 Civil Procedure Code and in the 1995 Arbitration Procedure Code provided different solutions until recently to this problem.

  See: B.R.Karabelnikov. Исполнение и оспаривание решений международных коммерческих арбитражей [Enforcement and Challenge of International Commercial Arbitral Awards]. Moscow, 2008. P. 88–99., O.Y. Skvortsov. Третейское разбирательство предпринимательских споров в России [Arbitral Resolution of Business Disputes in Russia]. Moscow, 2005, pp. 305–319. See also: B.R. Karabelnikov. Международный коммерческий арбитраж [International Commercial Arbitration]. Moscow, 2012, pp. 95–99. 187   Bulletin of the Supreme State Arbitration Court of the Russian Federation, 1997. No 9, pp. 66–67. 188   See: M.G. Rosenberg., Ed. Практика Международного коммерческого арбит­ ражного суда при Торгово-промышленной палате Российской Федерации в 1998 г. [Practice of the International Commercial Arbitration Court of the Chamber of Commerce and Indust­ ry of the Russian Federation in 1998]. Moscow, 1999, p. 246. 186

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According to the 1964 Civil Procedure Code, a court of general jurisdiction is required to terminate proceedings once it is established that the plaintiff and the defendant have entered into an arbitration agreement (see: Article 219, Section 7). However, the 1995 Arbitration Procedure Code, in a similar situation, provides that a state arbitration court should not consider a statement of claim if the defendant has moved to refer the dispute to a voluntary arbitration forum. Such a motion must be filed no later than the defendant’s first reply to the merits of the case (see: Article 87, Section 2). One should bear in mind the different legal consequences of terminating proceedings or not considering the statement of the claim. When proceedings are terminated “a repeated approach to the court with a dispute between the same parties, on the same subject and on the same grounds shall not be allowed” (see: Article 219 of the 1964 Civil Procedure Code; see also: Article 221 of the 2002 Civil Procedure Code; Article 86, Section 3 of the 1995 Arbitration Procedure Code; and Article 151, Section 3 of the 2002 Arbitration Procedure Code). However, if a statement of claim is not considered, then after removal of the circumstances which prevented its consideration, an interested person may again approach the court with the statement of a claim (see: Article 222, Paragraph 2 of the 1964 Civil Procedure Code; see also: Article 223, Section 2 of the 2002 Civil Procedure Code; Article 88, Section 4 of the 1995 Arbitration Procedure Code; Ar­ ticle 149, Section 3 of the 2002 Arbitration Procedure Code). The basic distinction between these situations results from the fact that termination of proceedings by a state court precludes reopening the same case in a state court if, for whatever reason, a voluntary arbitration forum did not resolve the dispute. If the court does not consider the statement of the claim, the possibility of reopening is reserved. Therefore the latter of the two possibilities is the more flexible and both the 2002 Civil Procedure Code (see: Article 222 (Paragraph 6) and the 2002 Arbitration Procedure Code (see: Article 148, Section 6) now provide for not considering the statement of the claim. It is necessary to emphasize that a defendant who wishes to contest the competence of a state court to resolve a dispute where there is an arbitration clause must so state prior to (or at least simultaneously with) his first reply on the merits of the case at the trial court. A motion brought to the court’s attention at some later stage (for example, the next day or, even, to a higher court) will be legally irrelevant since, as is said in Russia, “the train has already left the station.” The key issue for a voluntary arbitration forum is whether it has jurisdiction to deal with a particular case. A defendant may object to the jurisdiction of the arbitral tribunal provided that such 115

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a plea is made “no later than the submission of the statement of defense.” (Article 16, Section 2 of the Law “On International Commercial Arbitration.”) The law further states that the arbitral tribunal may rule on such a plea either as a preliminary matter or in its award on the merits. In the first situation, within thirty days after having received notice of the ruling of the arbitral tribunal, any party may request a competent state court189 to decide the matter, and such a decision is not subject to appeal (see: id., Section 3). In keeping with this rule, according to the 2002 Arbitration Procedure Code where an international treaty of the Russian Federation and a federal law so provide,190 any party, within one month from the date after becoming aware of the arbitral tribunal’s ruling, may move a state arbitration court to quash a preliminary ruling of the arbitral tribunal with respect to its competence (see: Article 235, Section 1 and 2). Sometimes a motion to quash an arbitral tribunal’s preliminary ruling is accompanied by an applicant’s request to the state court, as a security measure, to prohibit the arbitral tribunal from considering the case until the state court has issued its decision with respect to the arbitral tribunal’s jurisdiction to hear the case. This raises two different issues: one purely legal, and the other practical. According to a mandatory legal norm, while the motion to challenge the arbitral tribunal’s jurisdiction is pending, “the arbitral tribunal may continue the arbitral proceedings and make an award.” (Article 16, Section 3 of the Law “On International Commercial Arbitration.”) This means that such a security measure cannot apply. However, in practical terms an arbitral tribunal which continues proceedings in such a situation assumes the risk of the eventual lack of enforceability of its award should the state court decide that the arbitral tribunal has no jurisdiction in the case. To avoid this risk, it makes sense for the arbitral tribunal to stay the proceedings on its own initiative. Having considered security measures in connection with assessment of the jurisdiction of an arbitral tribunal by a state court, it may now be useful to look more deeply into the problem of security measures and arbitral proceedings. Security Measures in Arbitration. The law “On International Commercial Arbitration” expressly provides that “unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, order any party to take such interim measure of protection as the arbitral tribunal may consider necessary in respect of the subject189   A competent state court with regard to an international commercial arbitration forum located in the Russian territory shall be the state arbitration court of the subject of the Russian Federation in whose territory the arbitral tribunal considers the case, as set forth in Article 230, Section 3 of the Arbitration Procedure Code. 190   The Law “On International Commercial Arbitration” is such a federal law.

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matter of the dispute. The arbitral tribunal may require any party to provide appropriate security in connection with such a measure.” (Article 17) Amendments introduced in UNCITRAL Model Law “On International Commercial Arbitration 1985” in 2006 deal in detail with security measures (including preliminary ones) which may be taken by arbitral tribunal. However, international commercial arbitration, being a voluntary forum for civil dispute resolution, may not enforce its award without the assistance of a state court, since only the latter may trigger action of the bailiffs’ service. Further, Russian civil procedure law only regulates enforcement of final arbitral awards which resolve a dispute on the merits. It does not provide such a possibility for the rulings of arbitral tribunals. Russian practice has invented a way out of this dilemma: an arbitral tribunal issues an interim award on security measures and this award may be enforced in the same manner as a final award. However, when a motion for security measures is first considered by an arbitral tribunal and then later (for enforcement purposes) by a state arbitration court, this two-stage procedure inevitably requires a longer time period. In the meantime, the opposing litigant may be able to take steps to dispose of the property thus, as a practical matter, making the tribunal’s eventual ruling ineffective. Whether a party to arbitral proceedings is entitled to submit its motion on security measures directly to a competent state court is addressed in the law “On International Commercial Arbitration.” It provides in Article 9 that “it is not incompatible with an arbitration agreement for a party to request, before or during arbitral proceedings, from a [competent state] court an interim measure of protection and for a  court to grant such a measure.” However, this rule, not having a counterpart in the 1995 Arbitration Procedure Code, “hung in thin air.” This rule is developed further in the 1999 Merchant Shipping Code which provides that a vessel may be subject to seizure for security of a marine claim regardless of the fact that, in accordance with prorogation or an arbitral agreement, it should be considered by a foreign state court or arbitration forum (see: Article 388, Section 4). However, this provision related only to certain specific situations and therefore could not solve the general problem. When the 2002 Arbitration Procedure Code became effective, the situation was substantially changed. Article 90 (Section 3) states that “security measures may be applied by a state arbitration court upon a motion of a party to arbitral proceedings at the place of location of the arbitral tribunal, or at the place of location or place of residence of a debtor, or at the place of location of the debtor’s property.” 117

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There is no requirement here that such a motion must be preliminarily conside­ red by the arbitral tribunal. Therefore the motion in question may be submitted directly to the state arbitration court. In this way the 2002 Arbitration Procedure Code actually made the rule of Article 9 of the law “On International Commercial Arbitration” viable.

3.4. Commencement of arbitral proceedings According to the UNCITRAL Model Law “On International Commercial Arbitration” (Article 21), “Unless otherwise agreed by the parties, the arbitral proceedings in respect of a particular dispute commence on the date on which a request to that dispute to be referred to arbitration is received by the respondent.” The same rule is contained in Article 21 of the Russian law “On International Commercial Arbitration.” The request for arbitration and reply. The request for arbitration is none other than a brief version of a statement of claim. Rules of some foreign permanent arbitration forums provide also for a written response to the request which is a brief version of a reply to the merits of the case (see, for example, the Rules of the London Court of International Arbitration (LCIA), Articles 1 and 2; the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce, Articles 2, 5). Both the request for arbitration and the response to it shall be submitted to the arbitral forum which, in its turn, shall send the documents to the other party. Then “within the period of time agreed by the parties or determined by the arbitral tribunal, the claimant shall state the facts supporting his claim, the points of issue and the relief or remedy sought and the respondent shall state the defense in respect of these particulars, unless the parties have otherwise agreed as to the required elements of such statements. The parties may submit with their statements all documents or other evidence they consider to be relevant or may add a reference to the documents or other evidence they will submit.” (Article 23 both of the UNCITRAL Model Law and the Russian law “On International Commercial Arbitration.”). The list of documents to be attached to a statement of claim shall include, inter alia, a document confirming payment of a registration fee. At the International Commercial Arbitration Court of the RF Chamber of Commerce and Industry (ICAC) it is usually a fixed amount, (for example. 1000 USD  — see: §2 of the Regulations on arbitral dues and expenses as enclosed with the ICAC Rules). Arbitration dues should also be paid, the amount of which depends upon the amount of the claim. As it appears from the rules above, the filing of a statement of claim with a vo­ luntary arbitration forum is preconditioned on submission of a request for arbitration. 118

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However, this matter is simplified to some extent in the Rules of the ICAC, since “arbitral proceedings shall commence with submission of the statement of claim to the ICAC.”191 (the Rules, § 8, Section 1) As soon as the ICAC receives a statement of claim, the executive secretary shall notify the respondent and send its copy to him with a request to submit a reply within a 30 day period (see: § 12, Sections 1 and 2 of the ICAC Rules). The means of communication to be used to deliver documents to an addressee are set forth in the law “On International Commercial Arbitration” which provides that: “unless otherwise agreed by the parties —  any written communication is deemed to have been received if it is delivered to the addressee personally or if it is delivered at his place of business, habitual residence or mailing address; if none of these can be found after making a reasonable inquiry, a written communication is deemed to have been received if it is sent to the addressee’s last-known place of business, habitual residence or mailing address by registered letter or any other means which provide a record of the attempt to deliver it; —  the communication is deemed to have been received on the day it is so deli­ vered.” (Article 3, Section 1) Russia’s court practice follows these norms. A respondent in a case resolved by a voluntary arbitration forum challenged an award whereby he had been obligated to pay a sum of money to the plaintiff. In his application to a state arbitration court, the respondent explained that he had had no possibility to appoint an arbitrator because the notice had been sent to him at a wrong address. He also stated that he had made a statement to that effect at the beginning of the arbitral tribunal’s hearing of the case. The tribunal, having established that the notice had been sent to the respondent at the address indicated in the statement of claim and the post office returned the notice with the receipt confirming that the addressee was not located at this place, came to the conclusion that the respondent should be deemed to have been duly notified. In compliance with the forum’s rules, the chairman of the voluntary arbitration court appointed the arbitrator for the respondent. The state arbitration court discovered during the course of the hearing that the arbitral tribunal had been aware of the respondent’s other address which was typed on the letterhead of the respondent’s letter enclosed with the statement of claim. In 191   The number of copies of the statement of claim to be submitted to a voluntary arbitration forum depends upon the number of arbitrators. If an arbitration panel consists of 3 arbitrators, then 5 copies of a statement of claim are needed: 3 copies for the arbitrators, 1 copy for the respondent and 1 for the forum’s secretariat. If a case is to be resolved by a single arbitrator, 3 copies of the statement of claim are enough: 1 for the arbitrator, 1 for the respondent and 1 for the secretariat.

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this situation, the court ruled that the tribunal had sent a notice to the wrong address, since a new address of the respondent was known to the tribunal. For that reason the court refused to enforce the arbitral award; this ruling was upheld by the Presidium of the Supreme State Arbitration Court in the course of supervision.192 Counterclaims. A respondent may react to a statement of claim in various ways. For example, both the Arbitration Procedure Code and the Civil Procedure Code enable a respondent to submit a counterclaim. Any counterclaim is always based upon a substantive civil law relationship between the parties to the original claim where the original debtor (the respondent) is a creditor and, therefore, a plaintiff, and the original creditor (the plaintiff) is a debtor and, accordingly, a respondent. This is typical of any counterclaim regardless of whether it is filed with a state court or with a voluntary arbitration forum. According to Article 132 (Section 3) of the Arbitration Procedure Code a counterclaim shall be accepted by a state arbitration court if: 1) the purpose of the counterclaim is to set off the original claim; or 2) satisfaction of the counterclaim excludes satisfaction of the original claim completely or in part; or 3) there is an interconnection between the counterclaim and the original claim and joint consideration of them would facilitate resolution of the disputes. Similar rules are contained in Article 138 of the Civil Procedure Code. However, the conditions for submission of a counterclaim in a state court, on the one hand, and in a voluntary arbitration forum, on the other, are substantially different. A Federal law “On [voluntary] Arbitration Courts in the Russian Federation” expressly stipulates that “a respondent is entitled to sue the plaintiff with a counterclaim if there is an interconnection between the counterclaim and the claim of the plaintiff and also provided that the counterclaim may be considered by the arbitral tribunal in accordance with the arbitration agreement.” (Article 24, Section 1). However, a counterclaim filed with a state court may be based both upon the same substantive law basis of the original claim193 and upon another basis.194

  See: the Ruling of the Presidium of the Supreme State Arbitration Court No 1473/06 of June 20,2006. Bulletin of the Supreme State Arbitration Court of the Russian Federation. 2006. No 9, pp. 137–140. 193   E. g., an original claim is submitted by a seller to require a buyer to pay the purchase price for goods delivered, and the buyer’s counterclaim seeks to recover expenses from the seller for repair of goods of poor quality. 194   E. g., the original claim is submitted by a seller to require the buyer to pay a purchase price, while the subject of a counterclaim is the rental fee for use of property rented by the seller from the buyer. 192

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Interconnection between an original claim and a counterclaim may be either legal or solely economical.196 In some situations set forth in Items 1 and 2 of Section 3 of Article 132 of the Arbitration Procedure Code, no interconnection (of either kind) is necessary at all.197 195

A voluntary arbitration forum’s acceptance of a counterclaim is subject to much stricter preconditions since its jurisdiction is based upon (and, accordingly, limited by) an arbitral agreement. In other words, a voluntary arbitration forum may only accept a counterclaim provided it is included within an arbitral agreement aimed at resolving disputes arising out of a specific obligation. Thus both the original claim and the counterclaim must be based on the same substantive civil law transaction. Submission of a statement of a counterclaim to an arbitration court must be preceded by payment of a registration fee and arbitration dues. It is quite typical for a state court, but hardly possible in a voluntary arbitration forum, for an original claim and a counterclaim to be based upon different substantive civil law transactions. The reason for such a conclusion is self-explanatory. If an original claim results from another contract between the same persons but without an arbitration clause, the counterclaim is not included in the arbitration clause, so a counterclaim based on that contract may not be an appropriate subject for arbitration. Similar situations arise when both contracts (the one included in the original claim and the other in the counterclaim) contain arbitration clauses in favor of the same voluntary forum. In such a case each claim must be considered by a separate arbitral tribunal.198 To combine consideration of the original claim and the counterclaim in such a situation is possible only by written agreement of the parties.   E. g., the original claim is submitted by a pledge holder who must sell pledged property to obtain repayment of the loan secured by the pledge, and the counterclaim is submitted by the pledgor to declare null and void the pledge contract concluded between the pledgor and the borrower who was also a pledge holder. 196   E. g., under one contract a seller undertook to deliver equipment to the buyer and, under another contract, spare parts for this equipment. An original claim is filed by the seller against the buyer for the purchase price of equipment, and a counter claim is filed by the buyer against the seller to recover the expenses of eliminating defects discovered in the spare parts. 197   E. g., an original claim is submitted by a lender against a borrower for repayment of a loan, and a counterclaim is submitted by the borrower against the lender to terminate the loan debt by set off of the value of the borrower’s car which was completely destroyed as a result of a traffic accident caused by the fault of a driver of another car belonging to the lender. 198   See: M.G.Rosenberg. Контракт международной купли-продажи. Современная практика заключения. Разрешение споров [International Buy-Sell Contract. Contemporary Practice of its Conclusion. Dispute Resolution]. Moscow, 1996, p. 82. 195

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Set-offs. These same ideas are also fully applicable to set-offs. General rules concerning set-offs are set forth in Article 410 of the Civil Code which provides: “An obligation shall be terminated wholly or partly by the set-off of a counter demand of the same type, the period of which has matured or the period of which has not been specified or is determined by the time of demand. The statement of one party is sufficient for a set-off.” As it appears from this rule, the following circumstances are preconditions for a set-off: 1) the claims must be opposite each other (i. e. a creditor and a debtor in one claim shall change their positions in the other claim); 2) both claims must be of the same type (for example, a monetary claim may be advanced for set-off only against another claim for payment of money); 3) both claims must have matured (that is, both claims must have become enforceable). Generally speaking, the claims in question may arise both out of the same substantive civil law transactions and also out of different ones.199 The two situations must be distinguished. If both claims arose out of the same transaction, an application for a set-off may be included in the respondent’s objection to the statement of claim, so it is not necessary to file a counterclaim. However, if those claims are based on different transactions, a set-off must be set forth in a counterclaim since the scope of the court proceedings is limited by the nature of the disputed legal transaction which is the basis of the suit. Another legal transaction may only be involved in the proceedings by changing the basis of the suit or by filing a counterclaim.200 These ideas relate to application of set-off in proceedings in state courts. In a voluntary arbitration forum, a set-off is available under the same conditions as for a counterclaim. Unlike the Federal Law “On [voluntary] Arbitration Courts in the Russian Fede­ ration,” the Law “On International Commercial Arbitration” does not include provisions concerning counterclaims and set-offs. Such silence should not, however, be interpreted as prohibiting them. Both counterclaims and set-offs are used in arbitral court practice under some circumstances.   See: Professor E.A.Sukhanov, Ed., Гражданское право. Учебник [Civil Law Textbook]. Volume II, semi-volume 1, Moscow, 2000, p. 144. 200   See: G.A.Zhilin, Ed., Commentary on the Civil Procedure Code of the RSFSR. Moscow, 2002, p. 235. 199

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Indeed, the ICAC Rules expressly provide for such a possibility. According to § 13, “a respondent is entitled to file a counterclaim and submit a demand for a setoff provided there is an arbitration agreement which can include such a claim or demand in addition to those claims based upon the original claim.”201

3.5. Formation of an arbitral panel Once arbitral proceedings have begun, one or more arbitrators must be appointed. Two issues must be resolved: 1) the number of arbitrators to be appointed, and 2) the procedure for their appointment. Article 10 of the Law “On International Commercial Arbitration” (in keeping with the UNCITRAL Model Law) provides that “the parties are free to determine the number of arbitrators” (Section 1) and “failing such determination, the number of arbitrators shall be three” (Section 2). Since this norm is optional, the parties — or the rules of permanent arbitration forums —may resolve this issue in different ways. The parties may agree to appoint a single arbitrator. The rules of permanent arbit­­­ration forums also provide such a possibility. For example, the ICAC Rules sti­ pulate that, with due consideration of the complexity of the case, the amount of the claim (usually if it does not exceed 25,000 US Dollars) and other circumstances, the Presidium of the ICAC, in its discretion, may decide that the case is to be resolved by a single arbitrator. Otherwise the arbitration panel shall consist of three arbitrators (see: § 17, Section 2). The typical number of arbitrators is three, although it depends upon the agreement of the parties or the rules of a permanent arbitration forum. See, for example, the Rules of the Maritime Arbitration Commission of the RF Chamber Commerce and Industry which expressly provide that the usual number of arbitrators is to be two (see: Article 6, Section 3). The appointment of arbitrators is regulated by the provisions of Article 11 of the Law “On International Commercial Arbitration” which permits the parties to agree on the procedure. However, should they fail to agree, then:   It is worthwhile to note peculiarities of the Civil Procedure Code of Switzerland (effective as of January 1, 2011), which in its Part 3 “Arbitration” differentiates approach with regard to a counterclaim, on the one hand, and to a set-off, on the other. A counterclaim may be accepted by an arbitral tribunal provided such a claim is covered by a relevant arbitral agreement (see: Article 377, Section 2). As for a set-off, an arbitral tribunal may consider it even if an obligation on which the setoff is based is not embraced by an arbitral agreement or is a subject of other arbitral agreement or prorogation agreement (see: Article 377, Section 1). 201

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“in an arbitration with three arbitrators, each party shall appoint one arbitrator, and the two arbitrators thus appointed shall appoint the third arbitrator; if a party fails to appoint the arbitrator within thirty days of receipt of a request to do so from the other party, or if the two arbitrators fail to agree on the third arbitrator within thirty days of their appointment, the appointment shall be made, at the request of a party, by the authority specified in Section 1 of Article 6.” In arbitration with a single arbitrator, if the parties are unable to agree on the arbitrator, he shall be appointed, at the request of a party, by the authority specified in Section 1 of Article 6, whose decision on this issue “shall not be subject to appeal.” Section 1 of Article 6 entrusts these functions to the President of the Chamber of Commerce and Industry of the Russian Federation. However, these issues are also dealt with in the 1961 European Convention on International Commercial Arbitration, to which Russia is a party. Its provisions are therefore binding on the Russian Federation. Article IV of the European Convention provides: “1. The parties to an arbitration agreement shall be free to submit their disputes: (a) to a permanent arbitral institution; in this case, the arbitration proceedings shall be held in conformity with the rules of the said institution; (b) to an ad hoc arbitral procedure; in this case, they shall be free, inter alia, (i) to appoint arbitrators or to establish means for their appointment in the event of an actual dispute; (ii) to determine the place of arbitration; and (iii) to lay down the procedure to be followed by the arbitrators. 2. Where the parties have agreed to submit any disputes to an ad hoc arbitration, and where within thirty days of the notification of the request for arbitration to the respondents one of the parties fails to appoint his arbitrator, the latter shall, unless otherwise provided, be appointed on the request of the other party by the President of the competent Chamber of Commerce of the country of the defaulting party’s habitual place of residence or seat at the time of the introduction of the request for arbitration.” This paragraph shall also apply to the replacement of the arbitrator(s) appointed by one of the parties or by the President of the Chamber of Commerce above referred to.” As the quoted text indicates, the rules of the European Convention pertaining to the procedure for appointment of arbitrators differ from those of the RF Law “On International Commercial Arbitration.” According to the Convention, the President of the Chamber of Commerce of the relevant country only appoints an arbitrator (when a party fails to do so in due time) with regard to ad hoc arbitration. 124

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If the parties agree to submit their one or more disputes to a permanent arbitral institution, the entire proceedings, including the appointment of arbitrators, is regulated by the rules of that institution. As provided in the RF Constitution, international treaties of the Russian Federation are deemed to be an integral part of its legal system; if an international treaty introduces rules which differ from those of Russian law, then those of the international treaty prevail (see: Article 15, Section 4). Hence the provisions of Article 6 (Section 1) of the RF Law “On International Commercial Arbitration” shall apply in conjunction with those of Article IV (Sections 1 and 2) of the European Convention on International Commercial Arbitration. Given the correlation of these rules it becomes clear that the rules of Article 6 (Section 1) of the Law will apply only to ad hoc arbitration. The rules of a permanent arbitration institution regulate the procedure for appointment of arbitrators. For example, the ICAC Rules state that if a party fails to appoint an arbitrator within 15 days upon receipt of the relevant notification of the ICAC, the Presidium of the ICAC shall appoint the arbitrator. The Presidium may relegate this function to the Chairman of the ICAC (see: § 17, Sections 4, 6, 10). Another distinction between the RF Law “On International Commercial Arbitration” and the ICAC Rules is one which is quite compatible with the optional character of the relevant rules of that Law. Unlike the Law (see Article 11, Sections 2 and 3), the ICAC Rules provide that if an arbitral tribunal consists of 3 arbitrators, the third arbitrator (who will be the chairman of the panel) shall be appointed by the Presidium of the ICAC (see: § 17, Section 7). Should dispute resolution be entrusted to a single arbitrator, the latter shall be appointed by the Presidium of the ICAC (see: § 17, Section 9).202 In addition, in accordance with the ICAC Rules, a litigant shall appoint (or, if he fails to do so in time, the Presidium of the ICAC or its Chairman) both an arbitrator and an alternate arbitrator, in case the arbitrator for some reason should become unable to perform his functions. There are certain requirements of an arbitrator. The Law “On International Commercial Arbitration” provides that an arbitrator must be 1) competent, and 2) impartial and independent (see: Article 12). The arbitrator’s nationality is irrelevant, unless otherwise agreed by the parties (see: Article 11, Section 2). This Law contains no requirement concerning the legal education of arbitrators. However, the Law “On [voluntary] Arbitration Courts in the Russian Federation” expressly states in Article 8 that a single arbitrator shall have a higher legal edu­cation.203 202   This function may be relegated by the Presidium to the Chairman of the ICAC (see: § 17, Section 10). 203   Currently there is a two-level higher education system in Russia:1) a four-year term of education resulting in a bachelor’s degree, and 2) two more years of education resulting in

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In case a panel consists of several arbitrators the chairing arbitrator must meet this requirement (see: Section 2). These requirements, if not met, can lead to a challenge to the arbitrator. In this connection, the following provisions of the law need to be kept in mind: First, any person considered for possible appointment as an arbitrator is under a statutory obligation to “disclose any circumstances likely to give rise to justifiable doubts as to his impartiality or independence” (see: Article 12 of the Law “On International Commercial Arbitration,” Section 1). Second, an arbitrator, once he has been appointed “shall without delay disclose any such circumstances to the parties unless they have already been informed of them by him” (id.). Third, “an arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his impartiality or independence, or if he does not possess qualifications agreed to by the parties. A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.” (Article 12, Section 2) The challenge procedure is set forth in the law. These rules concern 1) the limitation of time for a challenge, and 2) the legal consequences of a challenge. The details are set forth in Article 13 of the Law “On International Commercial Arbitration,” which provides: 1)  Unless otherwise agreed by the parties, “a party which intends to challenge an arbitrator shall within fifteen days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstance referred to in Article 12 (2) send a written statement of the reasons for the challenge to the arbitral tribunal.” 2)  Legal consequences of the challenge may lead to one of the following outcomes: a)  the challenged arbitrator may withdraw from his office, or b) the other party may agree to the challenge. In either of these situations the appeal is deemed granted and the arbitrator is to be replaced. c) In the event the challenged arbitrator does not withdraw from his office, nor the other party agrees to the challenge, then “the arbitral tribunal shall decide the challenge.” The tribunal’s decision may either: a master’s degree (see: Article 6 of the Federal Law “On Higher and Post-Higher Professional Education of August 22 1996. No 125-FZ, as subsequently amended). Formally, while either level meets the requirement of higher education, in practice a master’s degree is required for positions such as judge, prosecutor, barrister, or notary. A similar attitude pertains to arbitrators. 126

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(i) deem the challenge to be granted, in which case the arbitrator shall be replaced; or (ii) reject the challenge. If the challenge is rejected, the challenging party may ask an authorized body to take up the matter. Given the correlation between the 1961 European Convention on International Commercial Arbitration and the Russian Law “On International Commercial Arbitration,” the nature of the body to be established will depend upon whether the arbitral tribunal was formed in accordance with the Rules of a permanent arbitral institution or pursuant to an ad hoc arbitration. Rules of a permanent arbitration forum will provide for such a body. For examp­ le, according to the ICAC Rules this issue shall be finally decided by the Presidium of the ICAC (see: § 18, Section 2). With respect to an ad hoc tribunal, the challenge must finally be decided by the President of the Chamber of Commerce and Industry of the Russian Federation. This decision will not be subject to appeal.

3.6. Substitution of the parties to the dispute and involvement of third persons The problem of substitution may arise not only with respect to arbitrators (see supra, Section 3.5 of this text) but also with respect to the litigants (that is, the plaintiff and respondent). In order to establish who are proper plaintiffs and respondents, it is necessary to clarify who the parties are to the substantive legal transaction in dispute. Accordingly, in a dispute arising out of a civil law contractual matter a proper plaintiff is the person who holds the infringed right and the respondent is the person who violated this right (for example, in case of nonperformance of a sale contract by a seller the latter will be the respondent and the buyer will be the plaintiff). When it becomes clear to an arbitrator that either the plaintiff or the respondent, or perhaps both, are not parties to the substantive civil law transaction in dispute, then the question of their substitution with proper persons arises. While this problem may arise either in a state court or in a voluntary arbitral tribunal, the solution differs in these two types of venue. In the state courts this problem has a history of its own. According to Article 36 of the 1964 Civil Procedure Code a court, having established during consideration of a case that the claim was submitted either by a person who had no relevant right, or against a person who had no relevant duty, the court 127

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could, with the plaintiff’s consent, allow substitution of the original plaintiff or respondent with the proper plaintiff or respondent. Since a court of general jurisdiction could only substitute a party with the consent of the plaintiff, the Code also contained rules to deal with a situation where the plaintiff did not give his consent to his substitution by another person. In this case the latter could join the case on his own initiative as a third person advancing an independent demand in relation to the subject-matter of the dispute (see: Article 36, Paragraph 2). Such a person would enjoy all the rights and bear all the duties of the plaintiff (see: Article 37). If the plaintiff objected to substitution of the respondent with another person, the court, in its discretion, could join this person as a second respondent (see: Article 36, Paragraph 3). After substitution of an improper party, consideration of the case starts over from the very beginning (see: Article 36, Paragraph 4). The 1995 Arbitration Procedure Code contained similar rules (see: Article 36); except that if the plaintiff objected to substitution of a respondent the court could appoint a second respondent only with the plaintiff’s consent (see: Section 3). Both the 2002 Civil Procedure Code and the 2002 Arbitration Procedure Code (which are currently both in effect), provide for the possibility of substituting an improper respondent with the consent of the plaintiff (see: Article 41 of the Civil Procedure Code, Article 47 of the Arbitration Procedure Code)204 and do not mention a similar possibility with respect to an improper plaintiff. The theory behind this approach was that it is within the plaintiff’s discretion to decide whether or not to submit a statement of claim. And once he insists upon his claim, the case must be considered on its merits. If the court establishes that the plaintiff has no relevant right, then his claim must be rejected. A third person who considers himself to be the holder of the right in question and, thus, the proper plaintiff, has the option either to enter the case as a third person making an independent demand in relation to the subject-matter of the dispute (where no consent of the plaintiff would be needed) or to submit an independent claim to be resolved in separate proceedings.205 Therefore, substitution of an improper respondent with a proper one is only allowed in state courts with the plaintiff’s consent, but the consent of a “new” res­ pondent is not required.   When a plaintiff refuses to give his consent, the case shall be considered on the merits, and if the court concludes that the claim was submitted against an improper respondent, the claim will be rejected. 205   See: Professor M.S.Shakaryan, Ed. Commentary on the Arbitration Procedure Code of the Russian Federation, pp. 116–117. See also: Professor M.S.Shakaryan, Ed. Commentary on the Civil Procedure Code of the Russian Federation, p. 101. 204

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However, in voluntary arbitration the situation is substantially different. If a person who is supposed to be the proper respondent is not a party to the arbitration agreement, his involvement in the case without his consent would be inconsistent with the voluntary nature of arbitration. If such a person refuses to give his consent, an arbitral tribunal must consider the case on the merits and, having established that the claim was submitted against an improper respondent, apparently will reject the claim. In such a situation a claim against the proper respondent who is not a party to the arbitration agreement may only be filed with a state court. If a proper respondent gives his consent to participate in arbitral proceedings, then, by analogy of lex, the rule of Article 47 (Section 3) of the Arbitration Procedure Code206 which provides that the case shall be considered ab initio shall be applied. In a state court the same judge will consider the case ab initio. In voluntary arbitration, the “new” respondent may argue that since he did not participate in the formation of an arbitral panel he should be provided with the possibility of appoin­ ting an arbitrator. The legal assessment of such a position may be twofold. On the one hand, the “new” respondent enters into arbitral proceedings in which each party is entitled to appoint an arbitrator and the plaintiff and the previous respondent exercised this right. Consequently, it would be unfair to deprive the “new” respondent of this right, since it would put him in an unequal position as compared with the other participants in the case. On the other hand, the “new” respondent, substituting for the improper one, is entering arbitral proceedings which are already underway. In other words, a procedural succession takes place in this situation. Neither the Law “On International Commercial Arbitration” nor the Federal Law “On [voluntary] Arbitration Courts in the Russian Federation” contain specific provisions relating to a procedural succession and its legal consequences. However, it is possible to apply, by analogy of lex, the relevant rules of the Arbitration Procedure Code and Civil Procedure Code. According to Article 48 of the Arbitration Procedure Code succession is allowed at any stage of arbitration proceedings (see: Section 1), and all actions which have been performed during the course of the proceedings before the successor has entered the case shall be binding on the successor to the same extent that it was binding on his predecessor (see: Section 3). Similar norms are set forth in Article 44 of the Civil Procedure Code. Based on these rules, all procedural actions performed by the original respondent are binding on the proper respondent who entered the case as a result of procedural   See also Article 41, Section 1 of the Civil Procedure Code.

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succession. Therefore the very fact of the respondent’s substitution does not entail reformation of an arbitral tribunal already formed. In the meantime, the “new” respondent is entitled to challenge any arbitrator (or, perhaps the whole panel) if reasons provided by Article 12 (Section 2) of the Law “On International Commercial Arbitration” are met, that is, “if circumstances exist that give rise to justifiable doubts as to his impartiality or independence, or if he does not possess qualifications agreed upon by the parties.”207 Sometimes it makes sense to involve third persons in the case who do not advance an independent claim in relation to the subject matter in dispute. Indeed, in a certain situation there is even a statutory obligation to do so. For example, according to Article 462 of the Civil Code if a buyer of goods is sued by somebody whose claim would deprive the buyer of the purchased goods, the buyer shall involve the seller in the case, and the seller is obliged to enter the case at the buyer’s side to help the buyer refute the claim. Should the buyer refrain from involving the seller in the case, the seller will be exempted from liability before the buyer as long as the seller proves that, if he had been involved in the case, he would have been able to prevent satisfaction of the claim. On the other hand, if a seller ignores the buyer’s demand to enter the case, the seller has no right to prove that the buyer acted wrongly in the case. This rule is effectively addressed both to the buyer (who is obligated to involve the seller in the case) and to the court (which is obligated to sustain a relevant motion of the plaintiff). In a state court this presents no problem since, on the basis of this rule, the court will issue a ruling on involvement of the seller in the case at the buyer’s side without regard to whether the respondent agrees. However, in voluntary arbitration the situation is substantially different. Involvement of a third person in arbitral proceedings legally means extension of the arbitration agreement to a person who is not a party to it. Given the voluntary character of an arbitration agreement, any change to the complement of its participants is possible only with the consent of all relevant persons, including both the original signatories and the third person in question. That is the background of the norm now contained in § 28 of the ICAC Rules whereby bringing a third party into arbitral proceedings is only permitted with the litigants’ consent. Consent of the third party is also needed.208 207   See also: Articles 8 and 11 of the Federal Law “On [voluntary] Arbitration Courts in the Russian Federation.” 208   When a respondent moved to involve a certain company as a third person, and a plaintiff objected, the ICAC rejected the respondent’s motion based on the lack of both litigants’ consent

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3.7. Conduct of arbitral proceedings and issuance of an arbitral award Litigants in a case referred to international commercial arbitration are usually residents of different countries. Consequently the language of the proceedings becomes a matter of importance, a matter resolved in substantially different ways in a voluntary forum and in the state courts. According to both the Arbitration Procedure Code (Article 12) and to the Civil Procedure Code (Article 9), proceedings in Russian state courts must be conducted in the Russian language and persons participating in the case who have insufficient command of Russian must be provided with an interpreter’s services. However, the parties who refer their dispute to a voluntary venue are free to agree on the language or languages to be used in the arbitral proceedings. Failing agreement, the arbitral tribunal determines the language or languages to be used (see: Article 22, Section 1 of the Law “On International Commercial Arbitration.”) The litigants may submit evidence to support their positions; the arbitral tribunal, in turn, may, unless otherwise agreed by the parties, “appoint one or more experts to report to it on specific issues to be determined by the arbitral tribunal” (Article 26, Section 1(a) of the Law “On International Commercial Arbitration).” For example, ICAC Rules provide the tribunal with discretion to summon witnesses and request evidence from third parties (see: § 31, Section 1). In this connection “the arbitral tribunal or a party with the approval of the arbitral tribunal may request assistance from a competent court in taking evidence.” (Article 27 of the Law “On International Commercial Arbitration”) In order properly to assess the legal relationship between the parties to an international commercial dispute the arbitral tribunal shall establish the governing substantive civil law. As mentioned above, both state courts and voluntary forums are bound by the agreement of the parties as to the governing law. If there is no such agreement, a state court is bound by lex fori conflict of laws rules. However, a voluntary arbitral tribunal is generally not bound by such norms since “failing any designation by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable.” (Article 28, Section 2 of the Law “On International Commercial Arbitration”) The ICAC in such situations has established that the governing substantive law shall be based on Russian conflict of laws rules.

which is required by the ICAC’s Rules (see: Professor M.G.Rosenberg, Ed. Practice of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation in 2006. Moscow, 2008, p. 133). 131

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How the dispute will be heard is set forth in Article 24 of the Law: “Subject to any contrary agreement of the parties the arbitral tribunal shall decide whether to hold oral hearings for the presentation of evidence or for oral arguments or whether the proceedings should be conducted on the basis of documents and other materials. However, unless the parties have agreed that no hearings should be held, the arbitral tribunal shall hold such hearings at an appropriate stage of the proceedings, if so requested by a party.” (Section 1) In such a case “the parties shall be given sufficient advance notice of any hearing.” (Section 2) The Law also provides that “in arbitral proceedings with more than one arbitrator, any decision of the arbitral tribunal shall be made, unless otherwise agreed by the parties, by a majority of all its members.”209 (Article 29) Similar rules are contained in the Arbitration Procedure Code (Article 20, Section 1) and in the Civil Procedure Code (Article 15, Section 1). However, neither Code contains any rule for a situation (which while actually rare is still theoretically possible) where each member of a three judge panel has a  different view of the case. Without even two of the judges able to reach a joint solution, each of the three judges presents a separate opinion. The ICAC Rules do provide a solution to this deadlock. They state that “if an award cannot be taken by a majority of votes, it shall be taken by the chairing arbit­ rator” (see: § 38 (Section 2)). Both a state court judgment and an arbitral award must be in writing and signed, but the signing requirements are different with respect to state court judgments and arbitral awards. A state court judgment must be signed by all the judges including one submitting a dissenting opinion (see: Article 169, Section 3 of the Arbitration Procedure Code; Article 197, Section 2 of the Civil Procedure Code). If any judge refrains from signing the judgment, it must be quashed (see: Article 270, Section 4(5); Article 288, Section 4(5) of the Arbitration Procedure Code; Article 364, Section 2 (5) of the Civil Code). The Law “On International Commercial Arbitration” takes a more flexible approach. It provides: “in arbitral proceedings with more than one arbitrator, the signatures of the majority of all members of the arbitral tribunal shall suffice, provided that the reason for any omitted signature is stated.” (Article 31, Section 1)210   If there are two arbitrators (as, e. g., in the Maritime Arbitration Commission at the RF Chamber of Commerce and Industry), in case they fail to come to unanimous decision, they should within a10 day period elect a third arbitrator who will be the chairman of the panel (see: Article 6, Section 3 of the MAC Rules). 210   It should, however, be noted that the Presidium of the RF Supreme State Arbitration Court advances certain additional requirements in such situation. Here is an illustrative case. 209

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A state court judgment must be announced in the court room either in full or at least in its essential part (that is, whether the claim is granted or rejected), with a reservation that the full text of the judgment shall be issued within 5 days (see: Article 176, Part 2 of the Arbitration Procedure Code; Article 199 of the Civil Procedure Code). A similar rule is set forth in the Federal Law “On [voluntary] Arbitration Courts in the Russian Federation.” However, the period for preparation of the judgment is 15 days unless the parties agree on another time period (see: Article 32, Section 1, Paragraph 2). The Law “On International Commercial Arbitration” includes no such requirement. In practice, the essential part of an arbitral award is usually announced. However, in complicated cases the arbitrators may refrain from doing so and instead will send the parties the full text of the award once it is made within the period of time specified in the rules of an arbitration forum or agreed to by the parties (for example, 15 days).211

A contractual dispute had been submitted to the ICAC for resolution. ICAC’s tribunal consisting of 3 arbitrators completed the hearing without announcement of the essential part of the award that is permissible under the ICAC Rules (see: § 39, Section 3. See also: Scientific-Practical Commentary on the Rules of the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation. Professor A.S. Komarov, Ed. Moscow, 2012, p. 189). Prior to issuance of the full text of the award one of the arbitrators died. The award was signed by two arbitrators and the Chairman of the ICAC who explained the absence of a signature of the third arbitrator. The award was challenged by one of the litigants to the state arbitration court. The trial court recognized the award to be valid since the absence of a signature of one of arbitrators was explained in writing by the Chairman of the ICAC. This position was upheld by the cassation court. The Presidium of the RF Supreme State Arbitration Court, having reviewed the case in the course of supervisional proceedings, noted in its Ruling that, as it appears from the materials of the case, the late arbitrator had not expressed his assessment of the merits of the dispute (e.g. by preparation of a draft award or submission of his dissenting opinion, etc.). In such a situation the award was effectively issued not by the whole panel consisting of three arbitrators but only by two of them; that meant none other than a violation of the procedure of issuance of the award. The latter was declared invalid (see: the Ruling of the Presidium of the RF supreme State Arbitration Court of July 20, 2010 N 4325/10). Ergo: according to the standpoint of the RF Supreme State Arbitration Court when an arbitral award is signed by majority of arbitrators rather than by the whole panel, and the absence of a signature of one of the arbitrators is explained in due course, the award shall be deemed valid provided the arbitrator whose signature is absent expressed (in some way or other) his opinion on the merits of the case. 211   See: Article 48 of the Rules of the Arbitration Court at the St. Petersburg Chamber of Commerce and Industry. 133

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3.8. Enforcement of an arbitral award As indicated supra (see § 2, Section 2.10) both foreign state court judgments and foreign arbitral awards must be enforced in Russia if so provided by an international treaty or a federal law. With respect to arbitral awards the Convention on Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958), to which the Russian Federation is a party, provides that the Convention “shall apply to the recognition and enforcement of arbitral awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought… It also shall apply to arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought.” (Article 1, Section 1) This means that the legal mechanism set forth in the Convention shall be used for enforcement of arbitral awards regardless of whether enforcement is sought in the country where the arbitral award was issued or in another country. For example, the Convention applies to enforcement in Russia of awards made both by the ICAC and the Arbitration Institute of the Stockholm Chamber of Commerce. To enforce an arbitral award is comparatively simple. According to Article IV of the Convention: “1. To obtain the recognition and enforcement [of such award] the party applying for recognition and enforcement shall, at the time of the application, supply: (a) the duly authenticated original award or a duly certified copy thereof,212 and (b) the original [arbitration] agreement or duly certified copy thereof. 2. If the said award or agreement is not made in an official language of the country in which the award is relied upon, the party applying for recognition and enforcement of the award shall produce a translation of these documents into such language. The translation shall be certified by an official or sworn translator or by a diplomatic or consular agent.”   A question arises as to the meaning of “duly certified copy.” This issue apparently must be resolved in compliance with the law of the country of the document’s origin. If, e. g., it is an ICAC award to be enforced abroad, it should be noted that the Law “On International Commercial Arbitration” is silent on this point. Meanwhile the Federal Law “On [voluntary] Arbitration Courts in the Russian Federation” contains some rules on verification of copies of an arbitral award which rules differ depending on whether the award in question is issued by a permanent arbitration forum or by an ad hoc tribunal. In the former situation a copy of an award must be verified by the chairman of the permanent arbitration institution, and in the latter situation it should be notarized (see: Article 45, Section 3(1). These norms may be applied by analogy of lex to copies of awards of an international commercial arbitration issued in Russia. 212

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According to the 1958 Convention, each Contracting State shall enforce foreign arbitral awards “with the rules of procedure of the territory where the award is relied upon…there shall not be imposed substantially more onerous conditions or higher fees or charges on the recognition or enforcement of arbitral awards to which this Convention applies than are imposed on the recognition or enforcement of domestic arbitral awards.” (Article III) This language leaves two issues unresolved: 1) what court has jurisdiction to resolve this matter; 2) what procedural rules apply during consideration of the matter. Both issues must be resolved under the relevant national procedural law. In the Russian Federation, rules concerning these matters are set forth in the Law “On International Commercial Arbitration” and in the Arbitration Procedure Code. The Law “On International Commercial Arbitration” provides that the competent court shall be the court of general jurisdiction of the relevant subject of the Russian Federation (see: Article 6, Section 2). However, according to the Arbitration Procedure Code an application for recognition and enforcement of an arbitral award shall be filed with the state arbitration court of the subject of the Russian Federation where the respondent is located or, if this place is unknown, where the respondent’s property is located (see: Article 236, Section 3; Article 242, Section 1). The discrepancy between these two federal laws is obvious. In order to establish which norm shall prevail, the following considerations should be kept in mind. First, the Law “On International Commercial Arbitration” was issued in 1993, while the Arbitration Procedure Code currently in effect was adopted in 2002, i. e., at a later stage. Second, as expressly provided in the Federal Law of July 24, 2002 No 96-FZ “On Introduction of the Arbitration Procedure Code,” from the time when the Code’s jurisdictional rules became effective, all inconsistent rules of other federal laws were deemed to be invalid (see: Article 6, Paragraph 2). Therefore, at this time, a competent state court shall be determined on the basis of the rules set forth in the Arbitration Procedure Code, and the rules of the Law “On International Commercial Arbitration” are no longer applicable. It should be noted that the Arbitration Procedure Code determines the competent state arbitration court depending upon whether or not the debtor’s place of location is known to the creditor. If known, the case shall be within the competence of the state arbitration court of the subject of the Russian Federation where the debtor is located. If unknown, the creditor should approach the state arbitration court of the subject of the Russian Federation where the debtor’s property is located. 135

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For example, let’s assume that the debtor is located in St. Petersburg while some of his immovable property is located in Moscow. If the creditor is aware of both these locations, the application to enforce the arbitral award must be filed with the state arbitration court of St. Petersburg and the Leningrad Region. Such an application may only be submitted to the state arbitration court of the city of Moscow if the debtor’s location is unknown to the creditor. Otherwise the creditor has no option. The rules of the Code are based upon the assumption that both the debtor and his property are located in Russia. Now let us assume a situation where a dispute between a Russian plaintiff and a foreign respondent is resolved by international commercial arbitration (whether in Russia or abroad) in favor of the plaintiff. The foreign respondent is located abroad, although he has some property located in St. Petersburg; and both these places are known to the Russian plaintiff. In such a situation is the plaintiff entitled to approach the Russian state arbitration court of St. Petersburg and the Leningrad Region or must he submit his application to a foreign state court where the respondent is located since the plaintiff is aware of it? The question is resolved by Article 247 (Section 1, item 1) of the Arbitration Procedure Code according to which Russian state arbitration courts may consider cases in which foreign persons participate as long as a respondent’s property is located in the territory of the Russian Federation. This rule means that if a respondent’s property is located in Russia, a plaintiff may approach the relevant Russian state arbitration court even if the place of the foreign respondent’s location is also known to the plaintiff. Given this provision we may conclude that in such a situation the plaintiff is entitled to approach the Russian state arbitration court for enforcement of the arbitral award. Procedural rules regulating a court’s consideration of a case seeking recognition and enforcement of an arbitral award are quite simple. An application shall be dealt with by a single judge within three months from the date when the application is filed with the state arbitration court (see: Article 232, Section 1; Article 243, Section 1 of the Arbitration Procedure Code). An application should be in writing. It may also be submitted by completing form placed on the official website of the court (see: Article 242, Section 2 of the Arbitration Procedure Code). A state duty amounting to 2000 rubles should be paid (Article 332.21, Section 11 of the Tax Code). The litigants shall be notified of the time and place of the court hearing, although their absence in the court room (provided they have been duly informed) 136

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does not preclude consideration of the case (see: Article 232, Section 3; Article 243, Section 2 of the Arbitration Procedure Code). It is specifically stated that during course of consideration of the case the court is not entitled to review the award on its merits (see: Article 243, Section 4 of the Arbitration Procedure Code).213 The judge’s ruling shall indicate whether the application is granted or rejected. This ruling may be appealed to the state arbitration court of cassation within one month from the date when the ruling was issued (see: Article 240, Section 5; Ar­ ticle  245, Section 3 of the Arbitration Procedure Code). This means that the filing with a court of appeal is inapplicable here.214 If the application is granted, the state arbitration court issues a writ of execution which may be submitted to the bailiffs’ service for enforcement of the arbitral award within a three year period (see: Article 321, Section 1(1) of the Arbitration Procedure Code). If this time has expired, the state arbitration trial court, upon an appropria­te motion of the applicant, may reinstate it if the court concludes that the deadline was missed for a justified reason (see: Articls 322, 117 of the Arbitration Procedure Code).

3.9. Appeal of an arbitral award 3.9.1. General Provisions The 1958 New York Convention contains an exhaustive list of legal grounds for refusal to enforce an arbitral award. The 1961 Geneva Convention introduces the possibility of setting an arbitral award aside for reasons that are almost identical to those set forth in the New York Convention.215   Strictly speaking, this rule concerns the judgment of a foreign court being enforced in Russia. The same conclusion in relation to an arbitral award is set forth in Article 46 (Section 1) of the Federal Law “On (voluntary) Arbitration Courts in the Russian Federation” and also by the Presidium of the RF Supreme State Arbitration Court in its Information Letter of December 22, 2005 (see: Review of practice of consideration by state arbitration courts of cases on recognition and enforcement of foreign courts judgments, on challenge of arbitral awards and on issuance of writs of execution for enforcement of arbitral awards, Section 12). 214   When an applicant challenged the ruling of the trial state arbitration court concerning enforcement of an arbitral award in the state arbitration court of appeal, the latter returned the complaint referring to Section 5 of Article 240 of the Code. The position of the appellate court was upheld by the court of cassation (see: the Information letter of the Presidium of the Supreme State Arbitration Court of the Russian Federation of December 22, 2005 No 96, Section 19). 215   There is only one distinction between these lists (see infra, Section 3.9.2.7 of this text). 213

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The 1985 UNCITRAL Model Law “On International Commercial Arbitration” was issued later than both these conventions and accordingly combines their rules. For that reason the Model Law provides both for the setting aside of an arbitral award and for a refusal to enforce an award, effectively for the same reasons. Since the Russian Federation is a party to both the 1958 and the 1961 Conventions, the Russian Law “On International Commercial Arbitration” (which is based on the UNCITRAL Model Law) provides for the same two possibilities, both the setting aside of an arbitral award and the refusal to enforce it.216 It is therefore perhaps most useful to consider these two approaches together. All legal bases (as indicated in both Conventions) may be classified into two groups. One group includes circumstances which must be proved by the litigant who lost the case and seeks to have the arbitral award set aside or left unenforced. If he fails to prove the existence of certain circumstances, the arbitral award is subject to enforcement. A second group includes facts which, having been established by a competent state court, require setting an arbitral award aside or refusing to enforce it without regard to whether the losing litigant made reference to any of these facts. The first group includes the following circumstances: 1) the capacity of the parties to an arbitration agreement; 2) the validity of an arbitration agreement; 3) the scope of an arbitration agreement; 4) the procedure for formation of an arbitral panel; 5) the procedure for considering a case in voluntary arbitration; 6) the principle of contentiousness of arbitral proceedings; 7) the legal force of an arbitral award. Each of these circumstances deserves consideration at greater length.

3.9.2. Litigants’ bases for appealing awards 3.9.2.1. Capacity of the parties An arbitral award is not subject to enforcement, or it shall be set aside if the parties to an arbitration agreement (or at least one of them) “..were, under the law applicable

  If, however, an arbitral award is issued in a country which does not participate in the 1961 Geneva Convention, such an award may not be set aside (see: the Review, Section 10), so the only possibility is to challenge its enforcement due to distinctions between appropriate rules of the 1958 New York Convention on the one hand, and 1961 Geneva Convention, on the other. 216

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to them, under some incapacity..” (Article V, Section 1(a) of the 1958 Convention. See also Article IX, Section 1(a) of the 1961 Convention). The restriction with respect to capacity may at first seem strange since incapacity (even partial) is usually attributable to an individual, but such persons may not participate in foreign trade; while legal entities are always capable. However, in certain situation this restriction may apply to legal entities as well. For example, in Soviet times there was a state monopoly of foreign trade and only certain organizations were granted the right to engage in foreign trade. All other legal entities, while enjoying full capacity in the domestic market, were incapable of participating in foreign trade. Currently the vast majority of Russian commercial organizations enjoy general capacity; special (restricted) capacity pertains only to some legal entities, such as state (municipal) unitary enterprises, insurance companies, banks, etc. Should such an organization conclude a transaction beyond its special capacity, there is “some incapacity” which may entail refusal to enforce (or the setting aside) of an arbitral award in a dispute connected with such a transaction. 3.9.2.2. Validity of an Arbitration Agreement An arbitral award shall not be enforced (or may be set aside) if an arbitration agreement “.. is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made;” (see: Article V Section 1 (a) of the 1958 Convention; Article IX, Section  1 (a) of the 1961 Convention). Invalidity of an arbitration agreement may result, inter alia, from fraud or mi­ sunderstanding, etc, in the course of entering into the agreement. Such circumstances will result in the invalidity of civil law transactions (see: Articles 178, 179 of the RF Civil Code). It should be noted that the legal nature of an arbitration agreement is not deemed to be a civil law transaction which would create legal consequences in the realm of substantive civil law. Instead, an arbitration award results in civil procedural rights and duties. By applying analogy of lex it is possible, however, on the basis of the articles of the Civil Code mentioned above, to recognize as invalid an arbitration agreement which was concluded under the influence of misunderstanding or fraud. Analo­ gy of lex (as well as analogy of jus) is expressly permitted by the Civil Procedure Code (see: Article 1, Section 4) and does not conflict with the Arbitration Procedure Code. 139

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Articles 178 and 179 of the Civil Code can be used only to declare the invalidity of an arbitration agreement. The legal consequences of the invalidity of civil law transactions provided by these articles do not apply.217 An arbitration agreement may be recognized as invalid if it violates a fair balance of the litigants’ interests. In an illustrative case there was a contractual dispute between the plaintiff CJSC “Russian Telephone Company” (RTC) and the respondent LLC “Sony Ericsson Mobile Communications Rus (“Sony Ericsson”). The contract included a dispute resolution clause providing that any dispute which arose in connection with the Agreement which could not be resolved through negotiation should finally be resolved in accordance with the Rules of conciliation and arbitration of the International Chamber of Commerce which provided for three (3) arbitrators appointed in accordance with its Rules. The place of arbitration called for was London with the proceedings to be held in the English language. This arbitration clause was to continue to be valid even after dissolution of the Agreement. It did not restrict the Parties’ right to approach courts of competent jurisdiction to take security measures or to seek issuance of a court prohibition in case of breach or threat of breach of provisions of sections “Sony Ericsson Trade Marks,” “Software Licenses,” “Export Control,” “Prevention of circulation of counterfeit production,” or “Confidentiality.” The arbitration clause also did not restrict Sony Ericsson’s right

  If a transaction was concluded under the influence of misunderstanding, each of the parties is obliged to return to the other everything received under the transaction; if it is impossible to return something received in kind (such as the use of property, work fulfilled or service provided), its value must be compensated in money (see: Article 167, Section 2 of the Civil Code). In addition, the party at whose suit the transaction was deemed to be invalid has the right to demand from the other party compensation for actual damages if it is proved that the misunderstanding arose through the fault of the other party. If this is not proved, the party at whose suit the transaction was deemed to be invalid is obliged to compensate the other party at its demand for actual damages even if the misunderstanding arose through circumstances not dependent upon the party who acted under the influence of misunderstanding (see: Article 178, Section 2, Paragraph 2 of the Civil Code). If a transaction was concluded under the influence of fraud, then the other party shall return to the victim everything received by it under the transaction and if it is impossible to return everything received in kind, the value thereof shall be compensated. In addition, the victim shall be compensated by the other party for losses caused to it. (see: Article 179, Section 4 of the Civil Code)/ Previously it was also established that property received under the transaction by the victim from the other party, as well as that due it in compensation transferred to the other party, shall go to the federal treasury (see: Article 179, Section 2 of the Civil Code, original version). Currently there is no such a rule. 217

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to approach a court of competent jurisdiction with a claim to recover amounts of indebtedness for the production delivered. The trial court did not consider the claim based on Article 148, Section 1 (5) of the RF Arbitration Procedure Code according to which a statement of claim shall not be considered if there is an arbitration clause and any of the parties to a dispute, no later than the date of submission of its first statement on the merits of the case, presents an objection unless the state arbitration court holds the arbitration agreement to be invalid, ineffective or unenforceable. This position was upheld by the appellate court and the court of cassation. In summary, the courts based their conclusions on the validity of the arbitration clause in question, that the venue for dispute resolution was duly identified, and that the parties, when including this clause in their agreement. acted in compliance with the principle of freedom of contract. The plaintiff in its supervisional application requested the RF Supreme State Arbitration Court to quash the lower courts’ acts and refer the case to the trial court for consideration on the merits. The Presidium of the RF Supreme State Arbitration Court in its Ruling of June 19, 2012 N 1831/12 stated as follows. First, since the clause provides a possibility to submit disputes both to an arbitral tribunal and to a state court, it effectively includes elements both of an arbitration agreement and of a prorogation agreement. Second, the right to apply to a state court for dispute resolution is granted only to “Sony Rescission.” This puts one of the litigants, “Sony Rescission,” in a privileged position vis a vis that of the other litigant (“RTC”), thereby violating the balance of the litigants’ interests. Such a situation is inconsistent with the legal position of both the Constitutional Court of the Russian Federation and the European Court of Human Rights. Both these Courts take the position that parties to a dispute should be provided with an equal possibility of protecting their interests. The Presidium concluded that a dispute resolution agreement may not grant the right to apply to a state court to one party but deprive another party of the same right. Such an agreement, by violating the balance of the parties’ interests, should be deemed null and void. The party whose interests are violated by such an agreement is also entitled to apply to a competent state court to seek its right to court protection on an equal basis with its counterpart. The Presidium quashed the lower courts’ acts and referred the case to the trial court for consideration on the merits. 141

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3.9.2.3. Scope of an arbitral agreement An arbitral award shall not be subject to enforcement or should be set aside if it “..deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration..” (Article V, Section 1(c) of the 1958 Convention. See also Article IX, Section 1(c) of the 1961 Convention). Such a situation may occur, for example, if an arbitral tribunal grants a counterclaim submitted by a respondent in order to apply a set-off, when the counterclaim arose out of a different contract concluded between the same parties, but not providing for arbitration in the same arbitral forum. However, even should there be such an arbitration clause, international arbitral practice is usually to form a separate arbitral panel to resolve the dispute originating from each contract.218 This idea is in keeping with the 2010 UNCITRAL Arbitration Rule which provides that “the respondent may make a counter-claim or rely on a claim for the purpose of a set-off provided that the arbitral tribunal has jurisdiction over it” (Article 21, Section 3). It should be noted that “if decisions on matters submitted to arbitration can be separated from those not submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced” (Article V, Section 1(c) of the 1961 Convention) and according to which such a part of the award “need not be set aside.” 3.9.2.4. Procedure for formation of an arbitral panel Enforcement of an arbitral award shall be refused if “The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place;” (Article V, Section 1 (d) of the 1958 Convention). The same set of circumstances would result in setting the arbitral award aside under Article IX, Section 1(d) of the 1961 Convention. Assume that, according to the Rules of an arbitration forum agreed to by the litigants, two arbitrators appointed by the parties failed timely to elect the chairing   Exceptions to this provision are possible in the following situations: a) upon agreement of the litigants; b) if both contracts contain cross-references to each other and therefore are legally interconnected; c) if an arbitration clause allows the arbitral tribunal to consider a claim for the purpose of a set-off or a counter-claim based upon the other contract.

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arbitrator in which case the Rules provide that the latter is to be appointed by the chairman of the arbitration court. If in this situation the chairing arbitrator were to be appointed by the executive secretary of the arbitration court (rather than by its chairman), objections of the losing party against the arbitral award should be honored in view of the improper composition of the arbitral tribunal. An arbitral award may also be appealed if the arbitrator fails to meet obligatory requirements. According to the UNCITRAL Model Law “On International Commercial Arbitration” an arbitrator shall be impartial and independent. If it appears that the arbitrator was effectively biased, enforcement of an arbitral award taken with his participation may be refused or the award may be set aside. The Presidium of the RF Supreme State Arbitration Court upheld a trial court’s ruling whereby enforcement of an arbitral award was refused because the arbitrator appointed by the plaintiff (who won the case) was one of its founders and therefore was personally interested in the outcome of the dispute. The respondent’s challenge to this arbitrator had been rejected by the tribunal. The state arbitration court granted the respondent’s application to refuse enforcement of the award since the arbitrator in question was not impartial.219 3.9.2.5. Procedure for considering a case in voluntary arbitration Similar consequences are provided for situations when an arbitral tribunal applies procedure “not in accordance with the agreement of the parties, or, failing such agreement, not in accordance with the law of the country where the arbitration took place” (see: Article V, Section 1(a) of the 1958 Convention; Article IX Section 1 (d) of the 1961 Convention). Assume that the litigants agreed to refer their dispute to ad hoc arbitration under 2010 UNCITRAL Arbitration Rules. The Rules provide: “If at an appropriate stage of the proceedings either party so requests, the arbitral tribunal shall hold hearings for the presentation of evidence by witnesses, including expert witnesses, or for oral argument.” (Article 17, Section 3). If, upon receipt of such a request from a respondent, the arbitral tribunal nevertheless does not hold oral hearings and considers the case on the basis of documents submitted by the parties, the respondent who lost the case is entitled to object to enforcement of the award since the arbitral tribunal failed to follow the procedure which was agreed to by the parties. 3.9.2.6. Contentiousness of arbitral proceedings Violation of the principle of contentiousness of arbitral proceedings is also a basis for challenging an arbitral award. It may be invoked in either of two situations:   See: The Information letter of the Presidium of the Supreme State Arbitration Court of the Russian Federation of December 22, 2005. No 96. Section 24. 219

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a) “The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings...” (Article V, Section 1(b) of the 1958 Convention. See also: Article IX, Section 1 (b) of the 1961 Convention); or 2) this party “…was otherwise unable to present his case;” (id.) Impossibility for the losing party to present its case to the tribunal arose, for example, when a party timely submitted a motion to adjourn the case due to the fact that he expected to receive a document which would be very important for resolution of the dispute, but the tribunal rejected his motion. A similar situation takes place when an arbitral award includes a decision on the issues not considered with participation of the litigants at the hearings. In such case, a losing party, who was deprived of the opportunity to submit his arguments on these issues, is entitled to object to enforcement of the arbitral award (or, in terms of the 1961 Convention, to request that it be set aside), since the award violated the adversarial character of arbitral proceedings. 3.9.2.7. Legal force of an arbitral award An arbitral award shall not be enforced if it “…has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.” (Article V, Section 1 (e) of the 1958 Convention). The Convention does not indicate whether it is referring to substantive or procedural law. The prevailing view, both in Russian and in foreign legal doctrines, is that the quoted rule provided for the rather rare situation in which an arbitral tribunal considers a case on the basis of foreign procedural rules.220 However, there is also another view according to which the rule in question contemplates substantive law regulating the relations between the litigants.221 Having admitted that an arbitral award may be set aside by a state court of a country whose law was applied during the course of arbitration proceedings, the Convention does not provide a criterion for the state court to use. Since the Convention is silent on this point, a court will apparently take into consideration grounds for overruling a judgment as established by lex fori, and these grounds may be different and more numerous than those set forth in the Convention.   See: B.R.Karabelnikov. Enforcement and Challenge of International Commercial Arbitral Awards, p. 278; F.-B.Weigand, Ed. Practitioner’s Handbook on International Arbitration. München, 2002, p. 512. 221   See: Hamid G.Charavi. The International Effectiveness of the Annulment of an Arbitral Award. The Hague, 2002, pp. 71–72. 220

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However, in such a situation the basic idea of the Convention  — to minimize the number of reasons to refuse enforcement of arbitral awards — appears to be somewhat questionable. That is why this rule of the Convention, in practice, is only rarely applied.222 In this connection, it should be noted that the 1961 Convention effectively excludes application of the rule of Article V, Section 1(e) of the 1958 Convention to arbitration proceedings among parties belonging to states that are parties to both Conventions (see: Article IX, Section 2 of the Convention 1961). However, if at least one of the litigants is a resident of a state participating only in the 1958 Convention, the rule mentioned above of this Convention shall apply. For example, it shall apply to resolution of a dispute between Russian and English parties, since both Russia and the UK are parties to the 1958 Convention; while only Russia is also a party to the 1961 Convention. 3.9.3. Appeals independent of a litigant’s motion A second group of appeals to an arbitral award includes two matters a competent state court must check, whether or not the losing party invokes them in objecting to an arbitral award. 3.9.3.1. Subject matter not capable of settlement under the law Recognition and enforcement of an arbitral award shall be refused (or the award shall be set aside) if the competent state court of the country which considers the application finds that “The subject matter of the difference is not capable of settlement by arbitration under the law of that country;” (Article V, Section 2 (a) of the 1958 Convention. See also Articles 34, Section 2 (b) (i), Article 36, Section 1 (e) (i) of the UNCITRAL Model Law “On International Commercial Arbitration.”) As already mentioned above, an arbitration court may only resolve disputes of a civil law nature. This means that any dispute of a public law nature is not subject to arbitration. Assume that there is a dispute between a taxpayer and a tax inspectorate and the parties agreed to refer this dispute to a voluntary arbitration. Since this dispute is of a public law nature, it is therefore beyond the competence of an arbitral forum. If, however, the latter accepted the case and issued 222   See: Karabelnikov B.R. International Commercial Arbitration. Textbook. Moscow, 2012, p. 245; see also: Kurochkin S.A. Государственные суды в третейском разбирательстве и международном коммерческом арбитраже [State courts in Arbitration Proceedings and International Commercial Arbitration]. Moscow, 2008, p. 117.

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an award, a competent state court, having been approached for enforcement of this award, would set it aside because such disputes cannot be resolved by voluntary arbitration. 3.9.3.2. Awards contrary to public policy An objection to enforcement of an arbitral award (as well as a request to set it aside) must be granted if recognition or enforcement of the award would be contrary to the public policy of the country where it is sought (see: Article V, Section 2 (b) of the 1958 Convention; Articles 34, Section 2 (b) (ii), and 36, Section 1 (b) (ii) of the UNCITRAL Model Law “On International Commercial Arbitration”). According to the RF Civil Code, public policy encompasses fundamental principles of the legal order of the Russian Federation (see: Article 1193). The Supreme Court of the Russian Federation, in one of its rulings, emphasized that application of a public policy clause was only possible in those rather rare cases “when application of foreign law could create a result inadmissible from the standpoint of the Russian legal mentality.”223 This idea was further developed in another ruling where the Supreme Court of the Russian Federation noted that “the content of the concept ‘public policy’ does not coincide with the content of national law of the Russian Federation. Public policy of the Russian Federation means fundamental norms relating to the economic and social structure of society, the main foundations of the legal order as established by the state and fixed in the Constitution of the Russian Federation and federal laws of the Russian Federation.”224   Bulletin of the Supreme Court of the Russian Federation, 1999. No 3, p. 13.   Bulletin of the Supreme Court of the Russian Federation, 2009. No 5, p. 3. The RF Supreme State Arbitration Court follows the same approach. Here is a very illustrative example. There was a contractual dispute between a Swedish company and a Russian company. The contract contained an arbitration clause in favour of the Arbitration Institute of the Stockholm Chamber of Commerce. The Swedish company sued the Russian company, and an arbitral tribunal issued an award whereby the claim was granted. Since the respondent refused to execute the award voluntarily, the plaintiff applied to the State Arbitration Court of the subject of the Russian Federation where the defendant was located with a motion on enforcement of the arbitral award. The trial court refused to grant enforcement on the arbitral award on the reason that the contract in dispute did not take effect since, as a largescale transaction, it had to be approved by boards of dicrectors of both parties. Appropriate board minutes of the Russian company were in place, meanwhile the Russian company was not provided with the copy of the board minutes of the Swedish company. 223 224

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Similarly, state arbitration courts assume (as does the RF Supreme State Arbitration Court) that public policy includes fundamental legal principles which are universal, have super mandatory character and extreme public significance, and which form a base for the economic, political, and legal system of the state (see: Information letter of the Presidium of the RF Supreme State Arbitration Court of February 26, 2013 N 156. “Review of the practice of consideration by state arbitration courts applying the public policy clause as a ground for refusal of recognition and enforcement of foreign court judgments and arbitral awards.” Bulletin of the RF Supreme State Arbitration Court, 2013, N 5, p. 154). In other words, an arbitrators’ error in the application of law in an award is not sufficient reason to refuse enforcement of the award. In accordance with the provisions of the Convention, refusal is only possible on public policy grounds if, as a  result of such error, enforcement of the award would lead to consequences inconsistent with the fundamental principles of the legal order of the state in the territory in which enforcement is sought.225 For example, if arbitrators in their award classified a contract between the litigants as a contract for independent work, while in reality it was a contract for the carriage of goods, this error would not be a sufficient reason to refuse enforcement of the award since it does not undermine the fundamental principles of the legal order of the Russian Federation. Therefore such an award, despite the error, is subject to enforcement. However, because of a conflict with public policy in the Russian Federation, arbitral awards may not be executed in situations such as the following: 1) Where an arbitral award entails performance of “a transaction concluded for a purpose knowingly contrary to the fundamental principles of legal order or morality,” (see: Article 169 of the Civil Code) the transaction would be The trial court qualified an absence of this board minutes to be inconsistent with the Russian public policy since it was a violation of basic principles of freedom of contract and equality of its parties. This conclusion was upheld by the court of cassation. The Swedish company applied to the RF Supreme State Arbitration Court with a supervisional complaint. The Presidium of the RF Supreme State Arbitration Court noted in its ruling that the requirements of Russian law concerning formalization of decisions of company’s bodies shall not be extended to Swedish companies. Such requirements may be different in different countries, and such differences do not violate the principle of equality of parties to a foreign trade contract. There is accordingly no ground to qualify the absence of a copy of a board minutes of a Swedish company as a violation of public policy of the Russian Federation. The Presidium quashed the rulings both of the trial court and a court of cassation and ordered the trial court to issue a writ of execution (see: Bulletin of the RF Supreme State Arbitration Court, 2011, No 12. P. 330–336). 225   See: B.R. Karabelnikov. International Commercial Arbitration, p. 358. 147

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void. It is useful to note that this language is almost identical to that of Article 1193 of the RF Civil Code, which defines a conflict with public policy. 2) Where an arbitral award is based on false documents. Fraud is obviously inconsistent with public policy. What is also inconsistent with public policy is bad faith behavior of participants in a civil law relationship.226 3) Where an arbitral award is issued against a person who was not a party to the arbitration agreement and did not participate in its proceedings.227 In such a case the person against whom the arbitral award was issued had no possibility of presenting his position and supporting arguments. This is undoub­ tedly inconsistent with public policy. 4) Where an arbitral award entails performance of actions expressly prohibited by super mandatory norms which override provisions of the RF Civil Code (see: Article 1192) if such actions endanger the sovereignty or security of the state, affect interests of massive social groups, or violate constitutional rights and freedoms of private persons.

  It makes sense to mention in this connection that the importance of good faith behavior in the sphere of relations regulated by civil law rules had been noted in the original version of the RF Civil Code. Its Article 10 (Section 3) stated that when, according to the law, protection of civil law rights should be granted provided those rights were realized in good faith, such good faith was implied. Meanwhile nowadays the legal significance of this rule is substantially increased. The Federal Law of December 30, 2012 N 302 FZ placed this rule into Article 1 of the Civil Code “Basic Principles of the Civil Legislation” whose Sections 3 and 4 read: “3. In the course of establishment, realization and protection of civil law rights and performance of civil law duties participants of civil law relations must act in good faith. 4. Nobody is entitled to gain any privilege out of his illegal or bad faith behavior.” Since these rules are now included in Article 1, they shall be deemed kinds of basic principles of civil legislation which are none other than fundamentals of legal system of the Russian Federation, i.e. elements of its public policy. Therefore if an arbitral award was based upon bad faith behavior of a litigant (who won the case), such an award shall not be subject to enforcement since it would enable the winning litigant to gain a privilege out of his bad faith behavior that would contradict the public policy of Russia. It is useful to note in this connection that the extreme significance of the good faith principle is specifically emphasized in the Unidroit Principles of International Commercial Contract (the last edition – 2010) whose Article 1.7 reads: “1) Each party must act in accordance with good faith and fair dealing in international trade. 2) The parties may not exclude or limit this duty.” 227   The Presidium of the Supreme State Arbitration Court of the Russian Federation emphasizes that in such a situation an arbitral award is not subject to enforcement (see: the Information letter of December 22, 2005 No 96, Sections 11, 26). 226

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It should also be emphasized that the public policy clause should not be used as a substitute for other specific grounds to refuse recognition and enforcement of foreign court judgments or arbitral awards. This thesis may be illustrated by the following example: In the course of proceedings on recognition and enforcement of a foreign arbitral award in a state arbitration court it was established by the trial court that a losing litigant had not been properly informed of the date and place of arbitration. The trial court refused to recognize and enforce the arbitral award citing: 1) Article V Section 1(b) of the New-York Convention (concerning failure to provide a losing party with “proper notice of the appointment of the arbitrator or of the arbitration proceedings” and 2) Section 2 (b) of the same Article (“the recognition or enforcement of the award would be contrary to the public policy” of the country where the recognition and enforcement of the award is sought. The cassation court upheld the position of the trial court but changed its reasoning stating that failure to notify the losing party properly of the time and place of the arbitral tribunal’s consideration of the case provided an independent ground to refuse enforcement of the award citing to Section 1(b) of Article V of the New-York Convention. Thus, in such a case there is no need to refer to the public policy clause (see: Information letter of the Presidium of the RF Supreme State Arbitration Court of February 26, 2013 N 156. Review of the practice of consideration of state arbitration courts of cases on application of public policy clause as a ground for refusal of recognition and enforcement of foreign court judgments and arbitral awards. Bulletin of the RF Supreme State Arbitration Court, 2013, N 5, pp. 154–159). As one can see, legal grounds both for refusal to enforce an arbitral award and for setting it aside are effectively the same. Since satisfaction of a request to set the arbitral award aside precludes its enforcement, such a situation is a reason for joint consideration of an original claim and a counterclaim (see: Article 132, Section 3 (2) of the Arbitration Procedure Code). However, whether it is possible to combine consideration of a request to set an arbitral award aside and an application for its enforcement depends upon matters of jurisdiction. As mentioned above, a request to set an arbitral award aside is within the competence of a state arbitration court of a subject of the Russian Federation in whose territory the arbitral award was issued (see: Article 230, Section 3 of the Arbit­ ration Procedure Code) while application for enforcement of an arbitral award must be filed with a state arbitration court of a subject of the Russian Federation where the debtor (or his property) is located (see: Article 236, Section 3 of the Code). If the competence of the state arbitration courts designated to consider these two matters differs, then there is no possibility to combine them. However, should these courts be the same, then such a possibility would exist. 149

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The Presidium of the Supreme State Arbitration Court of the Russian Federation indicated that a state arbitration court was entitled to combine consideration of a request to set an arbitral award aside and an application on its enforcement if both the request and the application had been filed with the same court.228 Heretofore the discussion has focused on legal grounds to refuse enforcement (or to set aside) an arbitral award based on rules of international law. It is necessary to emphasize that Russian law effectively provides the same legal grounds with respect to purely domestic arbitral awards (see: Arbitration Procedure Code, Articles  233, 239; Federal Law “On [voluntary] Arbitration Courts in the Russian Federation,” Articles 42, 46). Therefore, it is apparent that rules of Russian law regulating enforcement of both international and domestic arbitral awards are based upon generally recognized international standards.

§ 4. Mediation 4.1. General provisions When a legal dispute is resolved by a state court or arbitration, one party usually wins and another loses. The nature of the proceeding, with a contested outcome, often results in the end of further cooperation between a plaintiff and a respondent who had previously been partners. However, sometimes such cooperation can be preserved if a reasonable compromise can be found. The best way to reach a compromise is through negotiation. Still, it may be difficult for the parties whose interests are different and even in opposition, to find compromise through direct negotiations. However, negotiations may become much more effective if a competent and impartial intermediary is able to assist the counterparts in finding a mutually acceptable solution. That is the background for mediation. Mediation as an alternative to court proceedings is gradually becoming known in Russia, although until recently there were no legal rules concerning it. Now basic rules are set forth in the Federal Law of July 27, 2010 No 193-FZ “On Alternative Procedures of Dispute Resolution with Participation of an Intermediary (Mediation Proceedings),” which took effect January 1, 2011. The Law defines mediation proceedings as a way of settling disputes with the assistance of a mediator on the basis of a voluntary agreement of the parties aimed at achieving a mutually acceptable solution (see: Article 2, Item 2).   See: The Information letter of December 22, 2005 № 96, Section 13.

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Civil law disputes, including those connected with business activities, and also labor and family disputes are the kinds of legal disputes which may be settled by mediation (see: Article 1, Section 2). Thus, in practical terms, the realm of mediation coincides with that of voluntary arbitration. Mediation is based upon such principles as voluntariness, confidentiality, coope­ ration and equality of the parties, impartiality and the independence of the mediators (see: Article 3). A mediator is prohibited, without the consent of the parties, to disclose information that he became aware of in the course of the mediation proceeding (see: Article 5, Section 2). Mediation may be conducted on a professional or non-professional basis (see: Article 15, Section 1). In the latter case a mediator’s functions may be assumed by any person who has attained 18 years of age, enjoys full legal capacity and has no criminal record (see: Article 15, Section 2). Professional mediators must meet some specific requirements concerning their age (be at least 25 years old) and education. They are required to: a) have higher education (although not necessarily legal education), and b) to pass a special training course for mediators adopted in the manner prescribed by the RF Government (see: Article 16, Section 2).229 Persons holding state or municipal office, or in the civil service, are prohibited from serving as mediators (see: Article 15, Section 5).

4.2. Mediation proceedings Mediation proceedings are triggered by a mediation agreement (see: Article 2, Item 6 of the Law). This agreement may be initiated by either party to a dispute. If a written offer of mediation is not accepted within 30 days (unless another time period is indicated in the offer), it shall be deemed rejected (see: Article 7, Section 5). Article 8 of the Mediation Proceedings Law requires the mediation agreement to be in writing and to include information on: 1) the subject of the dispute; 2) the mediator(s); 3) the mediation procedure;   According to the Decision of the RF Government of December 3, 2010, No 969 a Programme for preparation of mediators shall be approved by the RF Ministry of Education and Science in coordination with RF Ministry of Justice. Further to this provision the Programme for preparation of mediators has been approved by the Order of the RF Ministry of Education and Science of February 14, 2011, No 187. 229

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4) the participation by the parties in the expenses of the mediation; and 5) the time period for the mediation proceedings. If, by the time the parties are entering into a mediation agreement, a dispute had already been submitted to a state court or a voluntary arbitration forum then a state arbitration court may adjourn the case for a time period not to exceed 60 days (see: Article 158, Section 7 of the Arbitration Procedure Code). In a voluntary arbitration forum this period will be agreed to by the parties (see: Article 61 of the Federal Law “On [voluntary] Arbitration Courts of the Russian Federation”). An existing mediation agreement is not an obstacle to submitting a case to a state court or a voluntary arbitration forum unless federal law so provides (see: Article 7, Section 3 of the Mediation Proceedings Law). Since either party may submit the dispute to a state court or voluntary arbitration forum, this actually means that a mediation agreement, while binding on the parties, may by unilaterally cancelled by either party. In this way a mediation agreement differs from an arbitral agreement which is not subject to unilateral cancellation. The mediation procedure shall be agreed to by the parties (see: Article 11, Sections 1 and 2). In the course of mediation proceedings a mediator may meet and maintain communication with all the parties together and also with each of them separately. He is not entitled to put any party in a privileged position, nor can he diminish the rights and lawful interests of any party (see: Article 11, Section 6 and 7). The mediator is also prohibited from: 1) being a representative of any party; 2) rendering legal, consultative or other services to any party; 3) mediating, if he is personally (directly or indirectly) interested in its result; and 4) making any public statements on the merits of the dispute without the parties’ consent (see; Article 15, Section 6). Mediation proceedings should be completed within a period of time set forth in the agreement; the parties and the mediator should use their best efforts to complete the mediation within sixty days (see: Article 13, Sections 2 and 3). Mediation proceedings may be terminated in different ways depending on their outcome. If the mediation fails, it may be terminated by: a) agreement of the parties to discontinue mediation proceedings; b) the mediator’s written statement to the parties, (after consulting with them) that continuation of mediation proceedings makes no sense; c) written notification to the mediator by all or at least one of the parties refu­ sing to continue mediation proceedings; or 152

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d) expiration of the time period for mediation unless it is extended by agreement among the parties and the mediator (see: Article 14). A successful mediation results in a written meditative agreement which must include information about: 1) the parties; 2) the subject of the dispute; 3) the mediation proceedings which have been held; 4) the mediator; and 5) any mutual obligations, terms and conditions agreed to by the parties (see: Article 12, Section 1). The legal nature of a meditative agreement depends upon whether it was reached without court or arbitral proceedings or after submission of the dispute to a state court or voluntary arbitration forum. A meditative agreement, reached without court or arbitral proceedings, shall be deemed a civil law transaction the purpose of which is to establish, change or terminate the parties’ rights and duties. In case of violation of these rights as a result of non-performance or improper performance of a meditative agreement, an aggrieved party may use remedies provided by civil law (see: Article 12, Section 4). In other words, a meditative agreement is a binding and enforceable transaction which, unlike an agreement to use mediation, is not subject to unilateral cancellation. In the latter situation (when prior to the reaching of a meditative agreement the dispute has already been submitted to a state court or voluntary arbitral forum) a meditative agreement may be approved by a court or arbitral tribunal as an amicable agreement. In such a case it shall be enforceable in that capacity, that is, as a court judgment or an arbitral award (see: Article 12, Section 2).

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Chapter 3 Responsibility under Russian Law1

§ 1. Legal Responsibility: General provisions To understand the nature of “responsibility” in Russian law requires an examination of the different kinds of responsibility, who shall be held responsible, and on what preconditions responsibility may be imposed. The main aim of civil responsibility is to restore the property rights of an aggrieved party. Thus the basic principle of civil responsibility is to equalize the amount of responsibility or liability with the amount of losses sustained by an aggrieved party resulting from a violation of his rights. While the concept of legal responsibility is complicated and subject to dispute, in Russian legal theory responsibility is generally described as a sanction for a breach of law that results in imposition of negative legal consequences on a wrongdoer, such as depriving the wrongdoer of some of his rights or imposing additional duties on him.2 This definition means that not every compulsory measure relating to a debtor is deemed a type of civil law responsibility. For example, according to Article 398 of the Civil Code “in the event of a failure to perform an obligation to transfer an individually specified thing… to a creditor, the latter shall have the right to demand the taking of this thing from the debtor and the transferring of it to the creditor on the conditions set forth in the obligation.” In this situation, a debtor who is reluctant to transfer the thing in question to a creditor voluntarily may be obligated by a court judgment to do so even against his will. In such a case the debtor will be required to perform the duty which he had   The Russian concept “ответственность” includes responsibility both in the area of public law (such as criminal responsibility) and in the area of civil law (which is often called civil liability). That is why the term “responsibility” will be further used mainly as a general concept. 2   See: Academician Y.K. Tolstoy, Ed. Civil Law. Textbook, volume 1. Moscow, 2009, p. 644. 1

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earlier voluntarily assumed; there is no additional penalty imposed on him. In other words, specific performance of an obligation is not considered to be a type of civil law responsibility since the debtor is not (at least initially) subject to any additional negative legal consequences. While the above definition of responsibility is quite typical of civil law doctrine,3 it may also be extended to liability under any branch of Russian law. Of course, different negative legal consequences will flow depending upon the character of the particular branch of law. For example, in civil law both a right (which a wrongdoer may be deprived of) and an additional duty (to be imposed upon the wrongdoer) relate to his property or economic rights; while in the field of public law these rights and duties may also be of a personal nature. The main distinction between responsibility in civil law transactions, and in public law relations (that is, those regulated by administrative law and criminal law), is that civil law responsibility is the responsibility of one participant in a civil law transaction to another participant in the same transaction, that is, it is the responsibi­ lity of a wrongdoer to a victim.4 However, responsibility in the field of public law is that of a wrongdoer to a state.5

  See, e. g. M.I. Braginsky, V.V. Vitryansky. Договорное право. Общие положения [Law of Contract. General Provisions]. Moscow, 1997, p. 492. 4   See: Id. See also: Prof. E.A. Sukhanov, Ed., Civil Law: Volume 2. Moscow, 2000. P. 430. 5   In certain situations a breach of civil law norms may also entail responsibility of the wrongdoer(s) towards the state. E. g., according to Article 169 of the Civil Code (original version) “a transaction concluded for a purpose knowingly contrary to the fundamental principles of the legal order or morality shall be void. When both parties to such a transaction have intent — in the event of performance of the transaction by both parties — everything received by them through the transaction shall be recovered to the treasury of the Russian Federation and in the event of the performance of the transaction by one party, everything received by it and everything due from it to the first party in compensation of that received shall be recovered for the treasury of the Russian Federation. When only one party to such a transaction has intent everything received by it through the transaction must be returned to the other party and everything received by the latter or due to it in compensation of that performed shall be recovered to the treasury of the Russian Federation.” It should be noted here that, first, the quoted rules are none other than an exclusion from the opposite general rule and second, the background of this exclusion is the fact that such a violation of civil law norms at the same time deeply infringes the public interest. See: M.I. Braginsky, V. Vitryansky. Op.cit., p. 492–493). Currently Article 169 of the Civil Code states: “A transaction concluded for a purpose knowlugly contrary to the fundamental principles of the legal order or morality shall be void and entail consequences provided by Article 167 of this Code. [Generally spealing, according to Article 167 both parties to a void transation shall return to each other everything received through the translation. In other words, that means restitutio in integrum] in cases provided by law a court 3

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In addition, as stated in Article 6 of the Civil Code (and as already mentioned in Chapter 1, § 3, Section 3,3 supra), when civil law relations “have not been expressly regulated by legislation or by agreement of the parties and there is no custom applicable to them, civil legislation regulating similar relations (analogy of lex) shall apply to such relations if this is not contrary to the essence thereof.”6 (Section 1).

may recover for the treasury of the Russian Federation everything reseived through such a transaction by the parties who acted intentionally, or apply other cosequences provided by law.” As it appears from the quoted text, the current version of Article 169 is more flexible than the previous one, however, it also provides severe sanctions for intentional conclusion of a transaction incompatible with the fundamental principles of the legal order and morality. 6   The Presidium of the RF Supreme State Arbitration Court specifically emphasized that similarity of relevant relations is a substantial precondition for use of analogy of lex. If those relations are of a different nature, analogy of lex is inapplicable. Here is an illustration of such an approach: A company installed a media complex consisting of a monitor and an acoustic system in a passenger compartment of a bus and used it for advertising purposes. A local department of a Federal Antimonopoly Service issued an Order requiring the company to terminate this kind of activity since auditory advertising in transport vehicles is prohibited by Article 20 (Section 6) of the Federal Law “On Advertising” of March 13, 2006. No 38-FZ. The company appealed the Order to a local state arbitration court. The trial court satisfied the company’s claim with reference to the Federal Law. “On Obligatory Insurance of Transport Vehicles Possessors’ Liability” of April 25, 2002 No 40-FZ (Article 1) according to which use of a transport vehicle means exploitation of a transport vehicle connected with its movement on roads and relevant adjacent territories. The Company argued that exploitation of equipment installed in a transport vehicle but not directly connected with movement of the vehicle should not be deemed use of a transport vehicle. This position was upheld by the court of cassation. The case was reviewed in the course of supervision by the Presidium of the RF Supreme State Arbitration Court upon an application of the Department of the Federal Antimonopoly Service. The Presidium noted in its Ruling that the Law on obligatory insurance of transport vehicles possessors’ liability is aimed at protecting victims’ rights to recover harm caused to their lives, health or property when transport vehicles are used by other persons. However, the purposes of the Law on advertising are development of a market for goods, work and services on the basis of fair competition, prevention of violation of on advertising legislation as well as termination of improper advertising. Therefore these two Laws regulate different (rather than similar) relations. Therefore the concept of use of a transport vehicle as set forth in the Law on obligatory liability insurance shall not be applied by analogy to relations in the sphere of advertising (see: the Ruling No 5848/08 of September 23, 2008. Bulletin of the RF Supreme State Arbitration Court, 2008, No 12, pp. 178– 181. The same approach is manifested in the Ruling N 6327/08 of September 23, 2008, see: id., pp. 182–186). 156

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“When it is impossible to use analogy of lex, the rights and duties of the parties shall be determined proceeding from the general principles and the sense of civil legislation (analogy of jus) and the requirements of good faith, reasonableness and justice.” (Section 2) It should be noted that both analogy of lex and analogy of jus are applicable to civil law relations generally, irrespective of their contractual or non-contractual character. It is useful to consider civil law responsibility in more detail before considering public law responsibility.

1.1. Types of responsibility in civil law Civil responsibility may be contractual or non-contractual. Contractual responsibility results from non-performance or improper performance of an obligation arising out of a contract. Civil rights and duties may arise from contracts (and other transactions) provided for by law, and from contracts (and other transactions) which, although not provided for by law, are not contrary thereto, as well as on other grounds. Breach of an obligation arising out of a non-contractual legal basis, such as causing harm to another person (a tort) or unjust enrichment (see: Article 8 of the Civil Code) will entail non-contractual responsibility, the most typical examples of which are liability for torts or unjust enrichment. The main difference between contractual and non-contractual responsibility is that measures of contractual responsibility may be provided for both by contract, as well as by law, when parties are entitled not only to increase responsibility (as compared with that established by law) or to reduce it (when a measure of responsibility is set forth in an optional rule of law), but also to introduce measures of responsibi­ lity in addition to those provided for by law.7 However, non-contractual responsibility may only arise (and may only be manifested in measures) as provided for by mandatory rules of law.8 1.1.1. Contractual responsibility The Civil Code contains a list of different contracts both of a consumer and commercial nature, but this list is not exhaustive. According to Article 421, Section 2 of the Code “the parties may conclude a contract provided for or not provided for by a statute or other legal acts.” In addition, the Code expressly permits the parties   See: M.I. Braginsky, V.V. Vitransky, op. cit., pp. 503–504.   See: Professor E.A. Sukhanov, Ed., Civil Law. Vol. I. Moscow, 2000, p. 434.

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to enter into a mixed contract that contains elements of various different contracts, in which case “the rules of contracts whose elements are contained in the mixed contract shall be applied to transactions of the parties in the mixed contract unless it otherwise follows from the agreement of the parties or from the nature of the mixed contract.” (Article 421, Section 3 of the Code) Unlike the situation where only specific performance of a contractual duty is imposed, if a duty is imposed on a debtor to recover losses sustained by the creditor due to the debtor’s delay, this additional burden is a type of civil responsibility.9 Similarly, when a borrower repays the amount of a loan to a lender subject to a  court judgment, there is no responsibility; it is, again, just specific performance of a contractual duty and nothing more.10 But if, in addition, the borrower is charged with a penalty for late payment as provided for in the contract, this additional duty is a type of civil responsibility. In some cases, these amounts may deviate from each other (see infra, subsections 1.1.1.1–1.1.1.5 of this text). However, such situations are no more than exceptions that prove the rule.11 1.1.1.1. Recovery of losses Recovery of losses is the most typical form of civil liability. According to Article 15 (Section 2) of the Civil Code, losses mean “the expenses which the person whose right was violated made or will have to make to reinstate the right that was violated, the loss of or damage to his property (actual damages) well as income not received that this person would have received under ordinary conditions of civil turnover if his right had not been violated (lost profit)…” As it appears from this quoted language, in Russian civil law (as based on Roman law) two types of loss may be recognized: actual damage (damnum energens) and lost profit (lucrum cessans). 1.1.1.2. Determining the amount of the losses An important issue is the method to determine the amount of the losses and, in particular, the values to be used in calculating them. Article 393 (Section 3) of the Civil Code deals with the question of prices. It states: “unless provided otherwise by a law, other legal act, or by contract, when determining loss the prices which existed in the place where the obligation was to have been performed on the date of the debtor’s voluntary satisfaction of the creditor’s   See: Academician Y.K.Tolstoy, Ed., Civil Law. Vol. 1, p. 647.   See; Professor E.A. Sukhanov, Ed., Civil Law. Vol. 1. Moscow, 2000, p. 429. 11   See: M.I. Braginsky, V.V. Vitryansky, op. cit., p. 493. 9

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demand shall be taken into account, if the demand was not voluntarily satisfied  — on the day the lawsuit was filed. Proceeding from these circumstances, a court may satisfy a demand to compensate for loss by taking into account the price existing on the day that judgment is rendered.” Such an approach makes it possible to take into account fluctuation of prices resulting from inflation.12 Lost profits are calculated with due consideration to the reasonable expen­ses which a creditor would have incurred had the obligation been performed. For example, if a creditor makes a claim for recovery of lost profits resulting from nondelivery of raw materials, the amount of lost profits should be established on the basis of the sale price of manufactured goods less the value of non-delivered raw materials, transportation expenses and other expenses connected with manufacturing the goods (see: the Joint Ordinance of the Plenum of the RF Supreme Court and of the Plenum of the Supreme State Arbitration Court of July 1, 1996 No 6/8 “On some issues connected with application of Part 1 of the Civil Code of the Russian Federation.”13 (Section 11) Generally speaking, losses resulting from violation of someone’s rights shall be compensated in full “unless compensation of losses in a lesser amount has been provided for by law or contract.” (Article 15, Section 1 of the Civil Code). For example, according to Article 170 (Section 1) of the Merchant Shipping Code where the kind and type as well as the cost of the cargo were not declared by a shipper before loading the cargo and were not entered in the bill of lading, the liability of the carrier for loss of or damage to cargo taken for carriage shall not exceed 666, 67 units of account14 for one package or other unit of shipment or two units of   See: M.I. Braginsky, V.V. Vitryansky, op. cit., p. 518.   This idea is in keeping with the 2010 UNIDROIT Principles of International Commercial Contracts providing that “the aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance. Such harm includes both any loss which is suffered and any gain of which it was deprived taking into account any gain to the aggrieved party resulting from its avoidance of cost or harm.” (Article 7.4.2. Emphasis added). The following example illustrates this rule: “A rents out excavating machinery to B for two years at a monthly rental of EUR 10.000. The contract is terminated after six months for non-payment of the rentals. Six months later, A succeeds in renting out the same machinery at a monthly charge of EUR 11.000. The gain of EUR 12.000 realized by A as a result of the re-letting of the machinery for the reminder of the initial contract, that is one year, is to be deducted from the damages from B to A (Official Comment on Article 7.4.2, Section 5). There is no doubt that such a dispute would be resolved in a similar way in Russia. 14   The unit of account is the unit of Special Drawing Rights as defined by the International Monetary Fund (see: Article 11, Section 1 of the Merchant Shipping Code). 12 13

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account per one kilogram of gross weight of the lost or damaged cargo, whichever is the higher.15 These general rules do not concern the amount of compensation for an individual injury. In such case “the lost wages (or income) which he had or definitely could have had and also supplementary expenses resulting from the injury to his health, including expenses for treatment, supplementary nourishment, obtaining medicines, prosthetics, care, sanitarium-resort treatment, acquiring special means of transport, preparation for another job, etc., shall be subject to compensation if it is established that the victim needs the respective means of assistance and care and does not have the right to receive it free of charge.” (Article 1085, Section 1 of the Civil Code). 1.1.1.3. Recovery for moral harm Without regard to such payments, a citizen16 is also entitled to recover compensatory damages for injuries resulting from violation of his personal non-property rights or infringement of his other non-material values (such as life, health, dignity, business reputation, inviolability of private life, etc.).17 Article 151 of the Civil Code, and the Ordinance of the Plenum of the Supreme Court of the Russian Federation of December 20, 1994 No 10 (as subsequently amended), elucidate the concept of moral harm. Moral harm may, inter alia, be manifested in moral suffering in connection with loss of relatives, the impossibility of continuing active public life, loss of job, disclosure of family or medical secrets, spreading of incorrect information infringing honor, dignity or business reputation, temporary limitation or deprivation of any right, physical pain resulting from injury, etc. (see: Section 2, Paragraph 2 of the Ordinance). Unlike compensation for economic loss, the amount of which may be proved with documentary evidence, moral harm is a rather subtle and vague matter. That is why “the nature of physical and moral suffering shall be evaluated by a court taking into ac  These limits coincide with the figures indicated in the international rules applicable to carriage of goods by sea, i. e. in the 1979 Protocol containing amendments to the 1924 International Convention on Unification of Certain Rules Concerning Bills of Lading with amendments introduced by the 1968 Protocol (see: Professor G.G. Ivanov, Ed. Комментарий к Кодексу торгового мореплавания Российской Федерации [Commentary on the Merchant Shipping Code of the Russian Federation]. Moscow, 2005, p. 538. A.S.Kokin. Международная морская перевозка грузов: право и практика [International Carriage of Goods by Sea. Law and Practice]. Moscow, 2008, p. 538. 16   In this context the concept “citizen” encompasses any natural person irrespective of his/ her nationality. 17   Moral harm resulting from violation of an economic right should be reimbursed if it is so provided by law. Such a provision is set forth, e. g., in Article 15 of the Law “On Protection of Consumers’ Rights” of February 7, 1992). 15

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count the factual circumstances under which moral harm was caused and the individual peculiarities of the victim.” (Article 1101, Section 2, Paragraph 2 of the Civil Code) It is also specifically emphasized that “in determining the measure of compensation for harm, the requirements of reasonableness and justice must be considered.”18 (Article 1101, Section 2, Paragraph 1 of the Civil Code) The Supreme Court of the Russian Federation notes that the court, when calculating the amount of monetary compensation for moral harm, may take into consideration an amount of fair compensation for moral harm as determined by the European Court of Human Rights for similar violations (see: Section 9, Paragraph 2 of the Ordinance of the Plenum of the Supreme Court of the Russian Federation of June 27, 2013 N 21 “On application by courts of general jurisdiction of the Convention for the Protection of Human Rights and Fundamental Freedoms of November 4, 1950, and the Protocols thereto.”) A creditor, when demanding compensation for losses, must prove their amount (except in situations such as provided in Article 170 of the MSC, see: supra, Subsection 1.1.2 of this text), but this may be difficult. However, if he fails to do so, his claim will be rejected (in whole or in part). Moreover, violation of a right is not   A question arises, whether a legal entity is also entitled to demand recovery of moral harm. This is subject to dispute (see: Academician Y.K. Tolstoy, Ed., Civil Law. Textbook Volume 1, p. 386–387). The Plenum of the Supreme Court of the Russian Federation decided that rules for compensation of moral harm sustained by an individual because of spreading incorrect information harming his business reputation should also apply to spreading such information about a legal entity (see: Ordinance of February 24, 2005. No 3, Section 15). The Plenum based this conclusion on the norm of Article 152 (Section 7) of the Civil Code which states: “The rules of the present Article concerning protection of the business reputation of a citizen shall also apply to protection of the business reputation of a legal entity.” State arbitration courts take a similar approach. The Presidium of the RF Supreme State Arbitration Court, when addressing this issue in its Ruling of July 17, 2012 N 17528/11, noted that if a state agency or another illegally interferes in the business activity of any person, and such interference results in harm to the business reputation of this person, in accordance with current legislation the latter shall have the right to receive fair monetary compensation for non-material harm (see: Bulletin of the RF Supreme State Arbitration Court, 2013, N 1, p. 121). This rule is in line with the position of the European Court of Human Rights which expressly indicated that in order effectively to ensure the right provided by Article 6 of the European Convention it is possible to demand monetary compensation for moral harm caused to commercial companies which harm may result from infringement of the company’s reputation, uncertainty in decision making, a split in a company’s management, and nervousness and anxiety among the company’s partners and officials (see: Judgment of April 6, 2000 in the case “Komingersoll S.A. v. Portugal”). The Constitutional Court of the Russian Federation also recognizes the right of a legal entity to demand recovery of moral harm caused by injury to its business reputation (see: the Ruling of December 4, 2003. No 508-0). 18

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always accompanied by a loss, so if recovery of losses was the only kind of civil liability, violation of such a right could go unpunished. 1.1.1.4. Penalties These difficulties may be avoided by application of a penalty established by law19 or by contract. It is specifically indicated in the Civil Code that “with regard to a demand concerning payment of a penalty the creditor shall not be required to prove his losses.” (Article 330, Section 1) Since recovery of losses and penalties are different kinds of civil responsibility and the aim of civil responsibility is to restore the violated rights of a victim, awar­ ding each type of civil responsibility without regard to the other would inevitably result in the victim’s unjust enrichment. Therefore it is very important to deal with the problem of correlating reimbursement of losses and penalties.20 This problem is resolved in Article 394 (Section 1) of the Civil Code which provides: “If a penalty has been established for non-performance or improper performance of an obligation, those losses not covered by the penalty shall be compensated. Instances may be provided for by law or by contract: where recovery is permitted of a penalty but not of losses; when losses may be recovered in full above a penalty; or where either a penalty or losses may be recovered at the choice of the creditor.” As appears from the quoted text, correlation between losses and a penalty may be manifested in four different ways: 1) losses could be reimbursed to the extent not covered by the penalty (a “set off penalty”). This is the most frequent method, and so effectively serves as the general rule; 2) only a penalty is recoverable with no losses to be reimbursed (an “exclusive penalty”);21 3) a penalty is payable in addition to recovery of losses (a “cumulative penalty”);22  E. g., according to Article 116 (Section 1) of the RF Inland Water Transport Code in case of delay in delivery of goods a carrier, upon a demand of a consignee, shall pay a penalty amounting to 9% of freight for each day of delay but not more than 50% of the aggregate amount of freight. 20   See: M.I. Braginsky, V.V. Vitryansky, op. cit., p. 535. 21   E. g., a penalty as established in Article 116, Section 1 of the Inland Water Transport Code for delay in delivery of cargo (see supra) is an exclusive penalty. 22   E. g., according to the RF Railways Transport Regulations (the Federal Law of January 10, 2003. No 18-FZ) if a railway bill as filled by a consignor contains false information with respect to goods or their characteristics resulting in a decrease of value of carriage of the goods or creating circumstances which may have an adverse impact on the safety of railway transport, 19

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4) either a penalty or losses are recovered at the creditor’s option (an “alternative penalty”). Different ways of correlating losses and a penalty (especially in the case of a cumulative penalty) may raise a problem of whether it is possible to reduce the amount of a penalty. There is such a possibility. Article 333 of the Civil Code (original version) provides, “if a penalty subject to payment is clearly incommensurate to the consequences of the violation of an obligation, a court shall be entitled to reduce the penalty.” Circumstances under which a penalty may be reduced by a court are not limi­ ted to a situation where the penalty is too high compared to the amount of losses. A court may also use this power, for example, when a debtor’s delay in performing an obligation is very slight. It effectively means that under the circumstances the amount of penalty is too high. It should be noted that a court is entitled only to decrease the amount of a penalty, not to increase it. It should also be noted that the possibility of reducing a penalty is a right (rather than an obligation) of the court, so a court may sometimes reduce a penalty on its own initiative regardless of whether the debtor requests it. The court may also use this power during consideration of the case in appellate or cassational courts or on supervision, even if this issue was not dealt with by a trial court.23 It should, however, be noted that currently the rules contained in Article 333 of the Civil Code are amended in two aspects. It is provided that a court is only entitled to reduce the penalty “upon the debtor’s application.” In other words, now a court cannot reduce the penalty upon its own initiative. A special reservation is added according to which reduction of a contractual penalty to be paid by a person performing business activity is admitted in exceptional cases when it is proved that payment of the penalty in full amount provided by the contract may lead to receipt of unjust profit by the creditor (see: Article 333, Paragraph 3).

the consignor shall pay the carrier a fine amounting to a fivefold freight charge for carriage of those goods and also compensate losses sustained by the carrier because of this circumstance (see: Article 98). 23   See: M.I. Braginsky, V.V. Vitryansky, op. cit., p. 543–544. Such an approach which had originally been expressed in judicial practice was then confirmed by the Presidium of the Supreme State Arbitration Court of the Russian Federation in the Review of practice of application by state arbitration courts of Article 333 of the Civil Code of the Russian Federation (see: Information letter of July 14, 1997. No 17, Section 1). 163

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1.1.1.5. Payment of interest There is one more rather specific kind of negative consequence for a debtor who has breached a monetary obligation:24 He may be required to pay interest for the illegal use of another’s monetary means. Article 395 of the Civil Code provides: “For the use of another’s monetary means as a consequence of unlawful withholding, avoidance of the return thereof, other delay in the payment thereof or the unjustified receipt or savings thereof at the expense of another person, the amount of these means shall be subject to the payment of interest.”25 (Section 1) The following issues arise in this connection: 1) what is the rate at which the amount of interest should be calculated; 2) what is the period of time within which interest should accrue; 3) what is the correlation between the amount of interest and the amount of losses sustained by a creditor as a result of unlawful use of his monetary means; and 4) whether it is possible to reduce the rate of interest. Dealing with each of these issues in turn: 1. The Interest rate is set forth in Article 395 (Section 1) of the Civil Code as follows. “The amount of interest shall be determined at the rate of bank interest (refinancing rate)26 effective on appropriate periods of time which existed at the place of residence of the creditor, and if the creditor is a legal entity, at the place of its location. These rules shall apply unless another amount of interest has been established by law or by contract.” These provisions apply with regard to the interest rate where the monetary obligation is in Russian rubles. The Supreme Court of the Russian Federation and the 24   The Supreme Court of the Russian Federation and the Supreme State Arbitration Court of the Russian Federation ascertained that a monetary character may be attributed both to the obligation as a whole (a loan contract) and to a duty of one of the parties (payment for goods, work or services) (see: the Ordinance of October 8, 1998 No 13/14 “On the practice of application of provisions of the Civil Code of the Russian Federation on interest for use of another’s monetary means,” Section 1, Paragraph 3). 25   A similar rule is set forth, .e. g., in the UNIDROIT Principle of International Commercial Contracts (Article 7, Section 7.4.9): “If a party does not pay a sum of money when it falls due the aggrieved party is entitled to interest upon the sum from the time when payment is due to the time of payment whether or not the non-payment is executed” (Section 1). As noted in the Official Comment on this Article (Section 1, Paragraph 3), “If the delay is the consequence of force majeure (e.g. the non-performing party is prevented from obtaining the sum due to the introduction of new exchange control regulations), interest will still be due not as damages but as compensation for the enrichment of the debtor as a result of the non-payment, since the debtor continues to receive interest on the sum which it is prevented from paying.” 26   The refinancing rate means the rate upon which the RF Central Bank gives credits to commercial banks.

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Supreme State Arbitration Court of the Russian Federation clarified the problem concerning a monetary obligation in foreign currency in the Ordinance of the Plenum of July 18, 1996 No 6/8 “On certain issues connected with application of Part 1 of the Civil Code of the Russian Federation.” According to these explanations when there is no official bank interest rate on currency credits for the date of performance of the monetary obligation at the place of location of the creditor, the amount of interest shall be established on the basis of official publications on average bank interest rates on short term currency credits available at the place of location of the creditor. If there are no such publications, the amount of interest to be recovered shall be established on the basis of information from one of the leading banks at that place providing such bank’s interest rate for short term currency credits (see: Section 52 of the Ordinance of July 18, 1996. No 8). A question arises whether the interest is due if a contract provides a penalty for non-performance or improper performance of a monetary obligation. According to Section 4 of Article 395 in such situations the interest shall not be payable unless otherwise provided by law or the contract. 2. The term for the interest to be accrued is determined in Article 395 (Section 3) of the Civil Code which provides: “Interest for the use of another’s means shall be recovered as of the day of payment of the amount of these means to the creditor unless a shorter period has been established for calculating interest by a law, other legal acts, or by contract.” When interest shall be paid based upon a court judgment, the interest should also accrue for the period between the date of issuance of the judgment and the day of its actual payment. Accordingly, both the judgment and the writ of execution must set forth the amount on which the interest is to accrue, and the interest rate and the date from which the interest is to be accrued. The actual amount of the interest should be calculated by an appropriate bank on the date of actual transfer of money from the debtor’s bank account to the creditor’s bank account.27 3. Correlation between the amount of interest and that of losses is determined in Article 395 (Section 2) of the Civil Code in the following way: “If a creditor’s losses, due to unlawful use of his monetary means, exceed the amount of interest due to him on the basis of Section 1 of the present Article, he shall have the right to demand compensation of losses from the debtor in that part exceeding this amount.” 4. Reduction of the amount of interest is possible. Section 7 of the Ordinance of October 8, 1998 No 13/14, provides that if the amount (the rate) of interest as   See: M.I. Braginsky, V.V.Vitryansky, op. cit., p. 549.

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established in accordance with Article 395 of the Civil Code is clearly incommensurate due to the consequences of delay in the performance of a monetary obligation, a court, given the compensational nature of the interest, is entitled to apply (by analo­gy) Article 333 of the Civil Code and to reduce the rate of interest. Currently such a possibility is expressly provided by law. According to Section 6 of Article 395 of the Civil Code if the amount of the interest subject to payment is clearly disproportionate to the consequences of breach of the obligation, a court upon the debtor’s application is entitled to reduce the interest provided by the contract but not less the amount determined on the basis of the refinancing rate. Therefore the right of a court to reduce the amount of the interests is limited with two preconditions. 1) A court may only reduce the interest upon an application of a debtor (so a court cannot do it upon its own initiative). 2) The lowest possible amount of the interest is the amount calculated upon the basis of the refinancing rate (so a court cannot reduce it further). 1.1.2. Non-contractual responsibility Non-contractual responsibility is mainly manifested in tort responsibility. Tort responsibility is based upon the general tort principle that harm, once caused, regardless of who the wrongdoer is and who the victim, should be fully compensated unless the law provides otherwise.28 This principle is expressed in Article 1064 (Section 1) of the Civil Code which provides: “Harm caused to the person or property of a citizen,29 as well as harm caused to property of a legal entity, shall be subject to compensation in full by the person who caused the harm.” This general provision is accompanied with specific rules regulating different kinds of tort obligations, such as: responsibility for harm caused to life and health of a citizen (Articles 1084–1094), responsibility for harm caused by minor children and persons lacking legal capacity (Articles 1073–1078), responsibility for harm caused by a source of increased danger (Article 1079), responsibility for harm resulting from defective goods, work or services (Articles 1095–1098); responsibility for moral harm (Articles 1099–1100); and responsibility for harm caused by acts of public bo­dies (Articles 1069–1071).   See: Professor A.P. Sergeev and Professor Y.K. Tolstoy, Eds., Civil Law. Volume 3. Moscow, 2003, p. 24. 29   “Citizen” means any natural person. 28

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1.2. Criminal Responsibility Criminal Responsibility, being a type of public law responsibility, is substantially different from civil law responsibility. 1.2.1. General provisions Civil rights and duties mainly arise out of behavior which is expressly admitted or at least does not contradict the norms of civil law. It is, however, impossible to foresee (and even to imagine) numerous (if not to say endless) variations of lawful behavior. The Civil Code accordingly provides that “civil rights and duties shall arise from the grounds provided for by legislation and other legal acts, and also from actions of citizens and legal entities, which although not provided for by a law or such acts, nevertheless, by virtue of the basic principles and sense of civil legislation, give rise to civil rights and duties.” (Article 8, Section 1) Criminal law deals with actions which are illegal, and, in order to avoid committing such acts, everyone needs to know ahead of time which actions are prohibited. The 1996 Criminal Code therefore contains an exhaustive list of acts (crimes) that are prohibited by the criminal law, and neither analogy of lex, nor analogy of jus can apply.30 In other words, Russian criminal law is based upon the principle “nullum crimen sine lege” (no crime unless specified by law). In keeping with this approach criminal responsibility is defined doctrinally as the legal relationship between the state and a person who has committed a crime, within the framework of which relationship the state (being represented by appropriate bodies) condemns and punishes that person, who is then subject to certain deprivations of a personal or economic nature.31 Since criminal responsibility results from a crime, it is useful to consider the concept and types of crimes, and also of punishment (sentencing) as a measure of criminal responsibility. 1.2.2. Crime A crime is a socially dangerous act prohibited by the Criminal Code and subject to punishment (see: Article 14, Section 1).   Analogy of lex had been known to the 1922 RSFSR Criminal Code (Article 10) and 1926 RSFSR Criminal Code (Article 16) but was abolished by the 1958 Fundamentals of Criminal Legislation of the USSR and Union Republics, in compliance with which the 1960 RSFSR Criminal Code did not contain any rule on analogy, nor is it known to the 1996 Criminal Code which is currently in effect. 31   See: Professor N.M. Kropachev, Ed. Уголовное право. Общая часть [Criminal Law. General Part]. St. Petersburg, 2006, p. 334. 30

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An act may only be deemed a crime provided it presents a high degree of social danger. Acts with lower degrees of social danger, while not classified as crimes, may lead to other types of legal responsibility,32 such as, inter alia, administrative responsibility.33 Crimes may be classified using different criteria. E. g. the following groups of crimes are based on the object of the violation: 1) Crimes against the person (Division VII of the Criminal Code). This group, in its turn, includes several sub-groups, such as: a) crimes against life and health (Chapter 16 of the Code), e. g., homicide (Articles 105–109), causing death through negligence (Article 109), willfully causing harm to health (Articles 111–115), negligently causing grave harm to health (Article 118); b) crimes against liberty, honor and dignity of a person (Chapter 17), e. g., kidnapping (Article 126), illegal deprivation of freedom (Article 127), sale of human beings (Article 127.1), use of slave labor (Article 127.2), illegal placement in a psychiatric hospital (Article 128), slander (Article 129), and insult (Article 130); c) crimes against the sexual inviolability and sexual freedom of a person (Chapter 18), e. g., rape (Article 131), sexual relations and other acts of a sexual character with a person not yet 16 years old (Article 134); d) crimes against the constitutional rights or the freedoms of human beings and citizens (Chapter 19), e. g., violation of the equality of the rights and freedoms of a human being and a citizen (Article 136), violation of the inviolability of private life (137), violation of the confidentiality of correspondence, telephone negotiations, postal, telegraph or other communications (Article 138), violation of the inviolability of residence (Article 139), creation of obstacles to the execution of electoral rights or work of electoral commissions (Article 141), falsification of electoral documents, referendum documents (Article 142), falsification of results of voting (Article 142.1), violation of rules relating to the safety of labor (Article 143), non-payment of wages, pensions, stipends, allowances and other payments (Article 145.1), violation of copyright and contiguous rights (Article 146), and violation of inventors’ patent rights (Article 146);   See: Id., p. 217. See also: Professor F.R. Sundurov and Professor I.A.Tarkhanov, Eds., Уголовное право России. [Criminal Law of Russia]. Kazan, 2009, p. 146. 33   See: B.V. Rossinsky, Y.N. Starilov. Административное право [Administrative Law]. Moscow, 2009, p. 603. 32

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e) crimes against the family and minors (Chapter 20), e. g., involvement of minors in committing a crime (Article 150), false substitution of a child e g., taking the wrong child from a hospital at birth (Article 153), illegal adoption (Article 154); willful evasion from paying for maintenance of children or of parents who are unable to work (Article 157). 2) Economic crimes (Division VIII of the Criminal Code). This group consists of the following sub-groups: a) crimes against property (Chapter 21), e. g., theft (Article 158), swindling (Article 159), robbery (Article 161), willful destruction of or damage to property (Article 168), negligent destruction of or damage to property (Article 167); b) economic activity crimes (Chapter 22), e. g., creation of obstacles to lawful entrepreneurial activity (Article 169), registration of illegal land transactions (Article 169); illegal entrepreneurship (Article 170), manufacturing, acquisition, storage, carriage or alienation of unmarked goods and production (Article 171.1), false entrepreneurship (Article 173), legalization (laundering) of money or other property acquired by another illegally (Article 174), legalization (laundering) of money or other property acquired by a person as a result of committing a crime (Article 174.1), willful evasion of repayment of indebtedness to a creditor (Article 177), prevention, limitation or removal of competition (Article 178), illegal receipt and disclosure of data relating to commercial, tax or bank secrets (Article 183), smuggling (Article 188), illegal acts committed in the course of bankruptcy (Article 195), premeditated bankruptcy (Article 196),34 fictitious bankruptcy (Article 197),35 a physical person’s evasion of payment of taxes or duties (Article 198), an organization’s evasion of payment of taxes or duties (Article 199); c) crimes in commercial and other organizations in the conduct of their service (Chapter 23), i. e. abuse of powers (Article 201), abuse of powers by private notaries and auditors (Article 202), employees of private security or   Premeditated bankruptcy means “the intentional actions or omission of a head or founder (participant) of a legal entity or by an individual entrepreneur knowingly resulting in the inability of the legal entity or the individual entrepreneur fully to satisfy creditors claims in monetary obligations or to perform a duty to pay obligatory payments, if these actions (or omission) caused large-scale damage.” Large-scale damage means damage in excess 250 thousand rubles. Damage exceeding 1 mussion rubles shall be deemed extremely large-scale damage. (see: Note to Article 169 of the Criminal Code) 35   Fictitious bankruptcy means “a knowingly false public declaration by a head or founder (participant) of a legal entity on insolvency of this legal entity, as well as by an individual entrepreneur of his insolvency, if this deed caused large-scale damage.” 34

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detective agencies exceeding their powers (Article 203), commercial bribes (Article 204). 3) Crimes against social safety and social order (Division IX). This group includes the following sub-groups: a) crimes against social safety (Chapter 24), e. g., terrorist act (Article 205), involvement in committing crimes of a terrorist character or providing assistance in their commission (Article 205.1), seizure of a hostage (Article 206), organization of an illegal armed band or participation in one (Article 208), banditry (Article 209), hooliganism (Article 213), illegal acquisition, transfer, alienation, keeping, carriage or taking of a weapon, its main parts, fire-stocks, explosive substances or explosive devices (Article 222), illegal manufacturing of weapons (Article 223), and piracy (Article 227); b) crimes against health of the population and social morality (Chapter 25), e.  g., illegal acquisition, storage, carriage, manufacturing, processing of drugs, psychotropic substances and analogs thereof (Article 228), violation of sanitary-epidemiological rules (Article 236), manufacturing, storage, carriage or alienation of goods and production, performance of works or rendering services which do not meet safety requirements (Article 238), involvement in prostitution (Article 240), destruction of or damage to historical and cultural monuments (Article 243); c) environmental crimes (Chapter 26), e. g., violation of environmental protection rules in the course of performing work (Article 246), the pollution of water (Article 250), pollution of the atmosphere (Article 251), pollution of the marine environment (Article 252), violation of legislation of the Russian Federation relating to the continental shelf and the exclusive economic zone of the Russian Federation (Article 253), damage to land (Article 254); d) crimes against safety of movement and exploitation of transport (Chapter 27), e. g., violation of railway safety rules and of air or water transport (Article 263), failure of a shipmaster to help those in distress (Article 270), violation of rules relating to international flights (Article 271); e) crimes relating to computer information (Chapter 28) i. e. illegal access to computer information (Article 272), creation, use and distribution of harmful programs for ECM36 (Article 273), violation of rules of exploitation of ECM, ECM systems or a network thereof (Article 274). 4) Crimes against state power (Division X). There are the following sub-groups in this Division:

  ECM — electronic calculation machine.

36

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a) crimes against fundamentals of constitutional structure and security of the State (Chapter 29), e. g., state treason (Article 275), espionage (Article 276), forcible seizure of power or forcible withholding of power (Article 278), armed riot (Article 279), organization of extremist society (article 282.1); b) crimes against state power, interests of public service and local government service (Chapter 30), e. g., abuse of official powers (Article 285), exceeding official powers (Article 286), illegal participation in entrepreneurial activity (Article 289), acceptance of a bribe (Article 290), giving of a bribe (Article 291); c) crimes against justice (Chapter 31) e. g., disrespect of a court (Article 297), the illegal detainment, taking into custody or detention in custody (Article 301), falsification of proofs (Article 303), intentional issuance of an illegal sentence, judgment or other judicial act (Article 305), intentionally providing false evidence, expert or specialist opinion or mistranslation (Article 307), non-execution of a sentence, judgment or other judicial act (Article 315); e) crimes against administrative order (Chapter 32), e. g., illegal crossing of the state border of the Russian Federation (Article 323), organization of illegal migration (Article 322.1), imitation, manufacturing or alienation of fake documents, state awards, stamps, seals, and forms (Article 327). 5) Crimes against military service (Division XI), e. g., non-execution of an order (Article 332), resistance to a superior or forcing him to violate duties of military service (Article 333), insult of a military serviceman (Article 336), willful destruction of or damage to military property (Article 346), negligent destruction of or damage to military property (Article 347). 6) Crimes against peace and the safety of mankind (Division XII), e. g., the planning, preparation, initiation and conduct of a war of aggression (Article 353), public appeals to initiate a war of aggression (Article 354), use of prohibited means and methods of conducting warfare (Article 356), genocide (Article 357), ecocide (Article 358), attacking persons or institutions enjoying international protection (Article 360). While the object of a violation certainly reflects the social danger of a crime, another indication of its degree is the type and amount of punishment. Using this gauge, the Criminal Code indicates 4 categories of crimes, including: 1) minor crimes, i. e. willful and negligent acts for which the maximum sentence does not exceed two years deprivation of freedom, e. g. willful evasion of repayment of indebtedness to a creditor (Article 177), negligent destruction of or damage to property (Article 168); 171

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2) crimes of middle gravity, i. e. willful acts the maximum sentence for which does not exceed five years deprivation of freedom e. g. violation of copyright and contiguous rights in some circumstances (Article 146, Part 3), and negligent acts, the sentence for which exceeds two years deprivation of freedom e. g., causing death through negligence to two or more persons (Article 109, Part 3); 3) grave crimes, i. e. willful acts the maximum punishment for which deprivation of liberty is less than ten years (e. g. hooliganism in some circumstances — Article 213, Part 2); 4) extremely grave crimes, i. e. willful acts the maximum punishment for which deprivation of liberty exceeds ten years e. g., murder (Article 105). 1.2.3. Punishment and Sentencing Criminal responsibility leads to punishment. Punishment is defined in Article  43 (Section 1) of the Criminal Code as “a measure of state enforcement provided by a court sentence.” It “shall apply to a person judged guilty of the commission of a crime, and consists in deprivation or restriction of rights and freedoms of this person as provided for by the present Code.” Punishment is aimed at restoring social justice as well as reforming the convicted person and preventing him from committing new crimes (see: Article 43, Section 2). The Criminal Code contains an exhaustive list of types of punishment (see: Articles 44  — 59) without classifying them. Several classifications are suggested doctrinally.37 For example, with due consideration to the specific rights and freedoms which are affected (i. e. of which a convicted person is deprived or restricted), the types of punishment may be categorized in the following groups:38 1) punishment which produces a moral-psychological impact on a convicted person (the deprivation of special, military or honorable titles, official ranks and state awards — Article 48);39 2) punishment which deprives a defendant of property e. g. a fine (Article 46).40 3) punishment which restricts a defendants’ labor or employment activity, 37   See: Professor I.Y. Kozachenko, Ed., Criminal Law. General Part. Moscow, 2008, p. 448–449. 38   See: Professor F.R. Sundurov, Ed., Criminal Law of Russia Kazan, 2007, p. 424–425. 39   It may only be applied by a court as an additional punishment upon conviction for committing a grave or extremely grave crime (see: Article 48). 40   It may be applied both as a principal and as an additional punishment. A fine may be imposed either in a fixed sum (between five thousand rubles and one million rubles) or in the amount of wages or other revenue of a defendant for a period from two weeks to five years or in the amount proportionate to the sum of the bribe. The amount of a fine shall be set by the court with due consideration to the gravity of the crime and the economic situation of the defendant and his family, as well as the possibility of the

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e. g. deprivation of the right to hold certain positions or to perform certain activities (Article 47),41 obligatory work (Article 49),42 correctional work (Article 50),43 restriction in military service (Article 51).44 defendant to receive wages or other revenue. Under such circumstances a court may set a fine using installment payments for a term of up to five years (see: Article 46). 41   Deprivation of the right to occupy certain positions means a prohibition on occupying positions in public service and in local government (Article 47). This prohibition, however, is not extended to occupying positions in commercial, social and other non-public organizations, even if such positions involve performance of management functions (see: Professor F.R. Sundurov, Ed., Criminal Law of Russia, p. 431; Professor F.R. Sundurov, Professor I.A. Tarkhanov, Eds,. Criminal Law of Russia, p. 485–486). Deprivation of the right to perform certain activity means a prohibition to perform certain professional activity (e. g., in medicine or teaching) or other activity regulated by special rules (e. g., motor vehicle driving). This kind of punishment may be applied both as a principal punishment (for the term of one to five years) and as an additional one (for the term of six months to three years, see: Article 47, Section 2). The Plenum of the Supreme Court of the Russian Federation emphasized in its Ordinance of October 29, 2009. No 20 “On some issues of court practice in appointment and execution of criminal punishment “that deprivation of the right to perform certain activity means a prohibition to perform professional or other activity by a person who committed a crime the character of which is connected with this activity e. g. teaching, medical activity, driving a transport vehicle, hunting see: Section 14, Paragraph 2). 42   Obligatory work means performance by a convicted person of non-paid socially useful work when he is free from his employment or educational duties. Such work may be imposed for a term of sixty to four hundred eighty hours and should be performed no more than four hours daily (see: Article 49). Obligatory work shall only be applied as a principal (not an additional) punishment. The kind of obligatory work is to be determined by local governments in coordination with criminal enforcement agencies. Typical examples of such work are loading and discharging goods, cleaning streets, removal of ice from roads etc. (See: V.I.  Radchenko and A.S.  Mikhlin. Eds., Комментарий к Уголовному кодексу Российской Федерации [Commentary on the Criminal Code of the Russian Federation]. Moscow, 2000, p. 93). Such persons as, e. g., invalids of the 1st group, women who are pregnant or have children under 14 years of age shall not be subject to this punishment. 43   Correctional work may be imposed on a convicted person who has a principal place of work as well as on a convicted person who does not have such a place. A convicted person having a principal place of work shall serve this punishment at this place. A convicted person who does not have a principal place of work shall serve this punishment in places determined by local government in coordination with criminal enforcement agencies, provided that the place of performance of such work shall be in the area of the place of residence of the convicted person. The term of correctional work may be from two months up to two years. In between five and twenty per cent of wages due to a convicted person shall be transferred to the federal treasury. Correctional work is only a principal (not an additional) punishment. This punishment shall not be imposed on, e. g., invalids of the 1st group, or on women who are pregnant or have children under 14 years of age. 44   Restriction in military service may only be imposed on a convicted person who is a military serviceman on a contractual basis for a crime against military service. A term of restriction is 173

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4) types of punishment which restrict freedom of movement and choice of place of location, e. g. place of work and residence, restriction of liberty (Article 53),45 detention in a disciplinary military unit (Article 55),46 compulsory work (Article 53-1)47 arrest (Article 54),48 deprivation of liberty for a defined time period (Article 56),49 lifetime deprivation of liberty (Article 57).50 5) Capital punishment (Article 59).51 between three months and two years. Up to twenty per cent of the convicted person’s salary shall be transferred to the federal treasury. During this punishment the convicted person should not be promoted to a higher position or rank. This is only a principal (not an additional) punishment. 45   Restriction of liberty (sometimes called “house arrest”) means that a convicted person is prohibited changing certain places within the territory of a particular municipality; leaving this territory; changing a place of residence, work or education without a permit of a competent state authority; leaving the place of his residence (apartment, house etc.) in certain time of a day (it is none other than some kind of curfew). He must periodically attend a competent state authority for registration. Restriction of liberty may be both a principal punishment (with a tern from two months to four years) and additional one (with a term from six months to two years). There are some persons who shall not be subject to this punishment, i. e. military servicemen, foreign nationals, stateless persons as well as persons who have no place of permanent residence in Russia. 46   This punishment may be imposed on military servicemen for crimes against military service for a term of three months to two years. It is only a principal (not an additional) type of punishment. 47   Compulsory work may be imposed as an alternative to deprivation of liberty for commission of some crimes. This punishment means that a convicted person shall be subject to work in places to be determined by criminal enforcement agencies. The term of compulsory work may be from two months up to five years. A part of the convicted person’s salary (from five up to twenty percent) shall be transferred to the federal treasury. 48   Arrest means holding a convicted person under strict isolation from society for a term of one to six months. It is effectively a kind of a deprivation of liberty. It may only be used as a principal punishment, not as an additional one. This punishment shall not be imposed on persons who have not reached the age of 16 years by the time of a court’s sentencing, nor to pregnant women and women having children whose age is less than 14 years. 49   This means isolation of a convicted person from society by holding him in a settlement colony, nurturing colony, a medical correctional institution, correctional colony of general, strict or special regime or in prison, for a term of two months to twenty years. It is only a principal (not an additional) punishment. 50   This punishment shall be imposed for extremely grave crimes against life or public safety. It shall not be imposed on women, on persons who committed a crime when under 18 years of age, or on men whose age at the time of a court’s sentencing was 65 years or more. 51   Capital punishment, as an exceptional kind of punishment, may be established for extremely grave crimes against life. It shall not be imposed on women or on persons who committed a crime when under 18 years of age, or on men who by the time of the court’s sentencing had reached the age of 65 years. 174

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When imposing punishment, a court must take into consideration the character and degree of social danger of the crime, the personality of the guilty person, the impact of the punishment upon the correction of the convicted person and the living conditions of his family,52 as well as circumstances leading to increasing or decreasing of a sentence (see: Article 60, Section 3 of the Criminal Code). Circumstances warranting increasing sentences are set forth in Article 63 (Section1) of the Criminal Code. This list includes, inter alia: 1) repeated commission of a crime; 2) an extremely active role in commission of a crime; 3) committing a crime with a motive of national, racial, or religious hatred; 4) committing a crime with the use of a weapon, explosive substances, poisonous or radioactive substances; 5) committing a crime in an emergency situation, a natural disaster or other calamity, and also during a massive disorder. Capital punishment may, as a result of pardon, be substituted with lifetime deprivation of freedom or deprivation of freedom for a period of 25 years. According to Article 20 (Section 2) of the Constitution of the Russian Federation, capital punishment, until it is abolished, may be established by federal law as an exceptional kind of punishment for extremely grave crimes against life, providing an accused with the right to consideration of his case by a court with the participation of jury. When the Russian Federation joined the Council of Europe in 1996 it undertook to adapt Russia’s national law to European norms and, inter alia, to introduce a moratorium on capital punishment and then to abolish it. A moratorium on capital punishment was established by the Decree of the President of the Russian Federation of May 16, 1996. Protocol No 13 to the Convention on Protection of Human Rights and Fundamental Freedoms concerning abolishment of capital punishment has not been ratified by the Russian Federation. It should be noted that, as the Constitutional Court of the Russian Federation held in its Ruling of February 2, 1999. No 3-P, until courts with juries are formed in all subjects of the Russian Federation, no Russian court will be entitled to impose capital punishment. As it was stated in this Ruling, Russian courts should refrain from sentencing to capital punishment until proceedings with the participation of jury would be introduced within the entire territory of the Russian Federation. In its Ruling of November 19, 2009. No 1344-O-R the Constitutional Court of the Russian Federation stated that the long-term moratorium upon application of capital punishment had resulted in an irreversible process leading to the abolishment of this kind of punishment, so even after introduction of proceedings with participation of jury within the whole territory of the Russian Federation there is no possibility to appoint capital punishment by sentence based upon a jury verdict. It should be noted that currently the jury system has been introduced throughout the whole territory of the country. 52  E. g. whether there are dependent family members whom a convicted person should maintain, such as minor children and/or other persons incapable of work: spouse, parents, close relatives (see: the Ordinance of the Plenum of the Supreme Court of the Russian Federation of October 29, 2009. No 20, Section 2). 175

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The list of circumstances warranting decreasing sentences is set forth in Article 61 (Section 1) of the Criminal Code and includes, inter alia: 1) commission of a minor crime for the first time as a consequence of a confluence of grave circumstances; 2) active assistance in the discovery of a crime; 3) pregnancy; 4) when a guilty person has minor children; 5) committing a crime as a result of physical or psychological compulsion or in view of material, official or other dependency. This list is not exhaustive; a court may decrease a sentence after taking into consideration certain circumstances not mentioned in the list (see: Article 61, Section 2), such as, for example, lack of professional experience, bad health conditions, etc.53 Under some preconditions, a court may impose a punishment which is even lower than the lowest punishment provided by a relevant Article of the Criminal Code,54 or a lighter punishment than that provided by a relevant Article of the Code;55 or it may refrain from imposing additional punishment even if such punishment is obligatory. These preconditions include: 1) exclusive circumstances connected with the purposes and motives of the crime, the role of the guilty person, his behavior during or after committing the crime; 2) other circumstances that substantially decrease the degree of social danger of the crime; 3) active assistance of a participant of a collective crime in its discovery (see: Article 64 of the Criminal Code). The Code deliberately does not specify these circumstances (except the last one), leaving it to the court’s discretion to assess a specific situation, but when deciding to use such a possibility a court must indicate the relevant circumstances in the sentence.56   See: Professor N.M. Kropachev, Ed., Criminal Law. General Part, p. 782.  E. g. homicide, i. e. willfully causing death to another human being, shall be punished by deprivation of freedom for a term from 6 to 15 year (see: Article 105, Section 1 of the Criminal Code), so the lowest term of punishment is 6 years. However, a court, with due consideration to the specific circumstances, may impose this punishment for a shorter period (e. g. 4 years). 55  E. g. homicide of a new-born baby by the mother during or immediately after birth shall be punished by deprivation of liberty for a term up to 5 years (see: Article 106 of the Criminal Code). Given the circumstances of the case, a court may sentence the mother to restriction of freedom instead of deprivation of freedom. 56   See: the Ordinance of the Plenum of the Supreme Court of the Russian Federation of January 11, 2007. No 2. 53 54

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If certain preconditions are met, a court may impose a conditional sentence. These preconditions are set forth in Article 73 of the Criminal Code: 1) the court may decide to impose a type of punishment to take place away from the convicted person’s place of residence, i. e. correctional work, restriction of liberty or deprivation of liberty for up to eight years, and with respect to military servicemen, detention in military service or in a disciplinary military unit; 2) at the same time the court, with due consideration to the character and degree of social danger of the crime, the personality of the guilty person, and circumstances warranting an increase or decrease in punishment, may conclude that there is a possibility for the convicted person to be rehabilitated without actual execution of the stated punishment. When imposing a conditional punishment the court: a) shall establish a probation period for the convicted person of not less than six months or longer than five years; b) may impose additional punishment57 which is subject to actual execution. On certain preconditions a person may be absolved of criminal responsibility. These preconditions are set forth in Articles 75–78 of the RF Criminal Code and are interpreted in the Ordinance of the Plenum of the RF Supreme Court of June 27, 2013 N 19 “On application by courts of legislation regulating grounds and the procedure of absolution of criminal responsibility.” According to Article 75 of the Criminal Code a person may be absolved from criminal responsibility provided the following factors are in place: 1) the person committed a crime for the first time; 2) the crime is of minor or middle gravity; 3) the person voluntarily gave himself up to the law enforcement bodies; 4) he assisted in discovery and investigation of the crime; 5) he recovered losses resulted from the crime or made amends for harm in other way;58 and

  Such as a fine, deprivation of the right to occupy certain positions or to perform certain activity. With regard to such kinds of additional punishment as deprivation of special, military or honorable title, official rank and state awards, it should be noted that this additional punishment may only be imposed for grave or extremely grave crimes where the maximum principal punishment shall be ten or more years deprivation of liberty, in these cases conditional punishment shall not be imposed. 58   As it is explained in the Ordinance of June 27, 2013 N 19, recovery of losses may be performed either by the person who committed the crime or (upon his request, consent or approval) by other persons if the person in question is unable to do so due to absence of income or property (see: Section 3). 57

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6) the person, due to his active penitence,59 ceased to be socially dangerous. Article 76 of the Criminal Code provides that a person who committed a crime of minor or middle gravity for the first time may be absolved from criminal responsibility in the event of reconciliation with the victim if the victim’s harm has been remedied.60 Article 76-1 of the Criminal Code provides that a person who committed an economic crime for the first time (such as illegal entrepreneurship, illegal banking activity, illegally obtaining credit, illegal use of a trade mark and other crimes listed in this Article) may be absolved from criminal responsibility in the event that he recovered losses sustained by a natural person, an organization or a state.61 In accordance with Article 78 of the Criminal Code a person shall be absolved from criminal responsibility due to expiration of a statute of limitation in a criminal case. Criminal responsibility is excluded if the following periods of time had expired as of the day when a crime was committed:62 1) two years after commitment of a minor crime; 2) six years after commitment of a crime of middle gravity; 3) ten years after commitment of a grave crime; 4) fifteen years after commitment of an extremely grave crime. However, it is specifically emphasized that crimes against the peace and safety of mankind are not subject to statutes of limitation. 59   It is emphasized in the Ordinance if June 9, 2013 N 19 that active penitential may be a ground for absolution of a person from criminal responsibility only if the person ceased to be socially dangerous. In order to establish that it is actually so, it is necessary to take into consideration the person’s behavior after commitment of the crime as well as data on his personality. Confession by the person of his guilt in and of itself shall not be deemed active penitential unless it is accompanied by other acts as listed in Article 75 of the Criminal Code (see: Section 4, Paragraph 2). 60   It is noted in the Ordinance of June 27, 2103 N 19 that the victim’s consent to reconciliation should be of a voluntary character. It is the victim who should determine the amount of compensation for harm. If the victim is a minor child, his legal representatives (such as parents) should be involved in the criminal proceedings (see: Sections 9-11). 61   As it is ascertained in the Ordinance of June 27, 2013 N 19, recovery of losses should be effected prior to appointment by the trial court of the first hearing. If losses are recovered after that, it may be taken into consideration as a circumstance decreasing the punishment (see: Section 14). 62   The statute of limitation shall be ended upon expiration of the last day of the last year of the relevant period (e.g. if a minor crime was committed August 12, 2010 at 6 p.m., the statute of limitation started August 12, 2010; the last day of the statute of limitation is August 11, 2012, after expiration of which, i.e. as of 00 hours 00 minutes August 12, 2012 bringing to criminal responsibility shall be inadmissible. It is irrelevant whether expiration of the statute of limitation falls to working day, day off or holiday (see: Section 18).

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1.3. Responsibility in administrative law This is also a type of public law responsibility. However, if criminal law lies entirely within the jurisdiction of the Russian Federation (see: Article 71 (“o”) of the Constitution), administrative law lies within the joint jurisdiction of the Russian Federation and its subjects (see: Article 72 (“k”) of the Constitution). In line with this approach, the Russian Federation is designated to establish, inter alia: 1) general provisions and principles of legislation with respect to administrative violations; 2) a list of types of administrative punishments and rules for their application; 3) administrative responsibility for violation of norms of federal laws and other federal legal acts (see: Article 1.3 of the Code on Administrative Violations 2001). Types of administrative violations may be established both by federal laws and by laws of subjects of the Russian Federation (see: Article 2.1, Section 1 of the Code on Administrative violations).63 1.3.1. Administrative law violations The Code on Administrative Violations distinguishes the following groups of administrative violations, based upon their objects: 1) administrative violations of citizens’ rights (Chapter 5), such as, non-execution of a decision of an electoral commission or a referendum commission (Article 5.3), violation of legislation relating to assemblies, meetings, demonstrations and picketing (Article 5.38), forgeries of signatures of electors or participants in a referendum (Article 5.46); 2) administrative violations against health, sanitary-epidemiological welfare of the population and social morality (Chapter 6), such as, the illegal perfor63   Although it is provided in this Article that administrative responsibility for administrative violations may be established “by this Code and laws of the subjects of the Russian Federation” (emphasis added), in reality some other federal laws (e. g., the Tax Code) also includes such rules. Sometimes this Code, on the one hand, and other federal laws, on the other, establish different administrative punishments for the same administrative violation. For example, late submission of a tax declaration shall entail a fine on appropriate officials of between three hundred and five hundred rubles as provided in Article 155 of the Code on Administrative Violations. However according to Article 119 of the Tax Code, the fine for this violation shall be calculated as a percentage of the tax which is subject to payment on the basis of a declaration. In such a situation a question arises, which norm shall prevail. Here we should be guided by the principle “lex specialis derogat lex generalis.” There is no doubt that the Tax Code shall be deemed lex specialis when compared with the Code on Administrative Violations. Thus, in case of a discrepancy between the norms of these two Codes, the rule of the Tax Code shall prevail.

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mance of private medical practice (Article 6.2), violation of legislation relating to the provision of sanitary-epidemiological welfare of the population (Article 6.4), the illegal acquisition or storage of drugs or psychotropic substances (Article 6.8), consumption of drugs or psychotropic substances without medical prescription (Article 6.9), prostitution (Article 6.11), distribution of drugs or psychotropic substances (Article 6.13); 3) administrative violations of property rights (Chapter 7), such as, the voluntary occupation of a plot of land without obtaining appropriate title documents (Article 7.1), use of subsoil without a license or in violation of its conditions (Article 7.3), destruction of or damage to the property of another (Article 7.17), violation of copyright and contiguous rights, inventors’ and pa­tent rights (article 7.12), and petty theft (Article 7.27); 4) administrative violations relating to nature and environmental protection (Chapter 8), such as, non-compliance with ecological requirements in the course of planning, preparation of a feasibility study, designing, placement, erecting, reconstruction, putting into operation, exploitation of enterprises, constructions or other objects (Article 8.1), violation of legislation relating to ecological expertise (Article 8.4), violation of requirements relating to the reasonable use of the subsoil (Article 8.10), violation of rules relating to the protection of waters (Article 8.13), violation of rules relating to the protection of the atmosphere (Article 8.21), and violation of requirements to protect the forests (Article 8.31); 5) administrative violations relating to industry, construction, and the po­wer industry (Chapter 9), such as, violation of norms and safety rules relating to hydrostatical constructions (Article 9.2), violation of requirements set forth in normative documents concerning construction (Article 9.4), damage to electrical networks (Article 9.7), violation of rules relating to the protection of elect­rical networks having a tension of more than 1000 volts (Article 98); 6) administrative violations relating to agriculture, veterinarian rules, and land improvement (Chapter 10), such as, violation of animal quarantine rules or other veterinarian-sanitarian rules (Article 10.8), performance of melioration work with violation of the scheme (Article 10.9), violation of rules relating to manufacturing, harvesting, processing, storage, realization, transportation and use of seeds of agricultural plants (Article 10.12), violation of orders relating to the importation of seeds of agricultural plants into the territory of the Russian Federation (Article 10.14); 7) administrative violations relating to transportation (Article 11), such as, actions threatening the safe movement of railways (Article 11.1), actions threatening the safety of flights (Article 11.3), violation of rules relating to the safe exploitation of aircraft (Article 11.5), acts threatening the safe movement of 180

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water transport (Article 11.6), violation of sailing regulations (Ar­ticle 11.7), and violation of fire safety rules in railways, sea, inland waters and air transport (Article 11.16); 8) administrative violations relating to road traffic (Chapter 12), such as, driving a vehicle not properly registered (Article 12.1), exceeding a speed limit (Article 12.9), violation of rules of carriage of goods and towage rules (Article 12.21), violation of rules of carriage of people (Article 12.23), violation of the Road Traffic Rules by a pedestrian or other person involved in road traffic (Article 12.29), non-observance of requirements of compulsory insurance of liability of owners of transport vehicles (Article 12.37); 9) administrative violations relating to telecommunications and information (Chapter 13), such as, violation of rules relating to the design, construction, installation, registration or exploitation of radio-electronic means and highfrequency devices (Article 13.4), violation of rules relating to the protection of information (Article 13.12), abuse of the freedom of mass media information (Article 13.15), and damage to public telephone booths (Article 13.24); 10) administrative violation relating to entrepreneurial activity (Chapter 14), such as, performance of entrepreneurial activity without state registration or without a required special permit (Article 14.1), sale of goods, performance of work or rendering services of poor quality to the population or in violation of sanitary rules (Article 14.4), defrauding consumers (Article 14.7), violation of other consumer rights (Article 14.8), fictitious or premeditated bankruptcy (Article 14.12), illegal acts during the course of bankruptcy (Article 14.13),64 mismanagement of a legal entity65 (Article 14.21), concluding transactions or other acts beyond the powers or management of a legal entity (Article 14.22); 64   It should be noted that illegal acts in the course of bankruptcy, premeditated bankruptcy and fictitious bankruptcy are defined as crimes in the Criminal Code (see, respectively, Articles 195, 196 and 197). It is therefore important to discover a criterion for distinguishing such crimes, on the one hand, from the relevant administrative violations, on the other. Such a criterion is the amount of losses resulting from these acts. Illegal acts committed in the course of bankruptcy, premeditated bankruptcy and fictitious bankruptcy shall be deemed crimes provided the amount of loss caused by the relevant act is large (see: Articles 195, 196 and 197 of the Criminal Code). The amount of loss shall be deemed large if they exceed 250,000.00 rubles, and extremely large if they exceed 1 million rubles (see: the note to Article 169 of the Criminal Code). Given these clarifications one may deduce that illegal acts in the course of bankruptcy, fictitious or premeditated bankruptcy resulting in loss in an amount which does not exceed 250,000.00 Rubles shall be deemed administrative violations. 65   That is to say, “use of managing powers contrary to the organization’s legitimate interests and legitimate interests of its creditor resulted in decrease of the organization’s own capital and/or in loss sustained by the organization or its creditor.

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11) administrative violations relating to finance, taxes and duties, and the securities market (Chapter 15), such as, late application for registration with the tax agency (Article 15.3),66 late submission of a tax declaration (Article 15.5),67 grave violation of book-keeping rules (Article 15.11),68 illegal issuance of securities (Article 15.17), and illegal securities transactions (Article 15.18). 12) violations of customs regulations (Chapter 16), such as, illegal movement of goods and/or transport vehicles through the customs border of the Russian Federation (Article 16.1), non-declaration or incorrect declaration of goods and/or transport vehicles (Article 16.2), non-declaration or incorrect declaration by natural persons of foreign currency or currency of the Russian Federation (Article 16.4), submission of invalid documents at customs clearance (Article 16.7), late submission of a customs declaration or customs documents and information (Article 16.12), performance of cargo and/or other operations without a permit from a customs agency (Article 16.13), non-observance of customs rules (Article 16.19); 13) administrative violations against institutions of state power (Chapter 17), such as, hindering activities of the Authorized Representative on human rights in the Russian Federation (Article 17.2), non-observance of a lawful order of a judge or bailiff (Article 17.3), intentionally providing false testimony as a witness, a specialist’s explanation, an expert opinion, or false translation, in the course of proceedings in a case concerning administrative law violations (Article 17.9);69 14) administrative violations relating to defense of the state border of the Russian Federation and the regime of visits of foreign nationals or stateless persons to the territory of the Russian Federation (Chapter 18), such as, violation of the State border of the Russian Federation (Article 18.1), violation of rules relating to innocent passage of the territorial sea of the Russian Federation or to transit through the air space of the Russian Federation (Article 18.5), violation of rules relating to stays in the Russian Federation by a foreign national or stateless person (Article 18.8), violation of migration rules (Article 18.11), illegal activity relating to the employment of nationals of the Russian Federation abroad (Article 18.13); 15) administrative violations relating to administrative orders (Chapter 19), such as, disobeying a lawful order of a police officer (Article 19.3), non-ob  See, however, Article 116 of the Tax Code which shall prevail due to the principle “lex specialis derogat lex generalis.” 67   See, however, Article 119 of the Tax Code which shall prevail due to the principle “lex specialis derogat lex generalis.” 68   This means falsification of the amount of taxes or duties by at least 10 per cent or falsification of any of bookkeeping records of at least 10 per cent. 69   The same acts in the course of a criminal investigation or court proceedings in civil or criminal cases shall be deemed a crime as provided in Article 307 of the Criminal Code. 66

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servance of state registration procedures concerning transactions and rights to immovable property (Article 19.21), and violation of rules concerning state registration of transport vehicles (Article 19.22); 16) administrative violations concerning the social order and social security (Chapter 20), such as, minor hooliganism (Article 20.1), violation of the established order of organizing or holding an assembly, meeting, demonstration or picketing (Article 20.2), propaganda and public demonstration of nazi attributes or symbols (Article 20.3), violation of fire safety requirements (Ar­ticle 20.4), illegal private detective or guarding activity (Article 20.16); 17) administrative violations relating to military registration (Chapter 21), such as, failure of an appropriate official to notify citizens by a writs of summons to appear before a military commissariat (Article 21.2), non-observance by citizens of military registration duties (Article 21.5), and evasion from medical inspection (Article 21.6). 1.3.2 Administrative punishment Administrative violations incur administrative punishments. Administrative punishment is defined in Article 3.1. of the Code on Administrative Violations as “a measure of responsibility established by the state for the commission of an administrative violation” and “aimed at the prevention of the commission of new violations both by the wrongdoer himself and by other persons.” An exhaustive list of types of administrative punishment is set forth in Ar­ ticle 3.2 of the Code. Administrative punishments, like criminal punishments, may be differentiated depending upon the rights and freedoms which they affect. They include: 1) punishments which produce a moral-psychological impact on a wrongdoer — a warning, to be issued in written form (Article 3.4); 2) punishments which restrict a wrongdoer’s property rights — an administrative fine (Article 3.5),70 a compensated seizure of the means of committing an

administrative violation, or the subject thereof (Article 3.6),71 the con-

  The total amount of an administrative fine shall be calculated in proportion to: a) the value of the subject of administrative violation; b) the amount of unpaid taxes or duties or illegal currency operation; c) the amount of revenue gained by a wrongdoer from realization of goods (work, services) within the year preceding the one when the administrative violation was discovered. The amount of the administrative fine shall be paid to the state treasury. 71   This means seizure of relevant objects with their subsequent sale; the proceeds (less expenses related to sale) are due to the former owner. 70

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fiscation of the means of committing an administrative violation or the subject thereof (Article 3.7);72 3) punishment which restricts labor or employment activity of a wrongdoer (deprivation of a special right granted to a physical person — Article 3.8,73 disqualification — Article 3.11),74 4) punishment restricting freedom of movement and choice of place of location (e. g. place of work) and residence (administrative arrest (Article 3.9),75 — administrative deportation of a foreign national or stateless person outside the Russian Federation (Article 3.10). The type and amount of administrative punishment must be imposed with due consideration to the character of the administrative violation, the economic and financial standing of the guilty person, and as concerns a physical person, his personality, and also circumstances increasing or decreasing administrative punishment (see: Article 4.1 of the Code). An exhaustive list of circumstances increasing administrative punishment is set forth in Article 4.3 of the Code and includes: 1) continuation of illegal behavior despite the demand of authorized persons to terminate it; 2) a repeated violation; 3) involving a minor child in the commission of an administrative violation; 4) the commission of an administrative violation by a group of persons; 5) committing an administrative violation during a natural calamity or under other extraordinary circumstances; 6) committing an administrative violation in a drunken condition.76 This measure shall not apply to hunting weapons or fishery appliances belonging to persons for whom hunting or fishery is the main legal means of living. 72   This measure shall not apply to hunting weapons or fishery appliances belonging to persons for whom hunting or fishery is the main legal source for their means of living. 73   Such as, the right to drive a transport vehicle for a term between one month and two years. However, this measure shall not apply to a person who uses the transport vehicle in connection with a disability unless he drove the transport vehicle in a drunken condition or evaded medical examination concerning his drunken condition or illegally left the place of the traffic accident in which he was a participant. 74   This means deprivation of a physical person of the right to occupy positions in management bodies or a board of directors of a legal entity for between six months and three years. 75   This means holding a wrongdoer in isolation from society for up to 15 days, and in an extraordinary situation or in of performance of anti-terror operation — up to 30 days. This measure shall not apply to pregnant women, to women having children younger than 14 years of age, or to persons under 18 years of age, or to invalids of the 1st and the 2nd groups. 76   Depending on the character of the administrative violation, this circumstance may be recognized as one not increasing responsibility. 184

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A non-exhaustive list of circumstances decreasing administrative punishment (see: Article 4.2 of the Code) includes, inter alia: 1) the sincere regret of the wrongdoer; 2) voluntary notification by a person of the administrative violation which he committed; 3) prevention by the wrongdoer of negative consequences of the violation, vo­ luntary reimbursement of losses or removal of harm; 4) committing an administrative violation when in a strong nervous condition (or affect) or under grave personal or family circumstances; 5) commission of an administrative violation by a minor child; 6) commission of an administrative violation by a pregnant woman or by a woman who has a minor child. In case an administrative violation is of minor significance, a person who committed it may be exempted from administrative punishment, instead receiving just an oral reprimand (see: Article 2.9 of the Code).

1.4. Competence to apply legal responsibility After considering the nature and types of responsibility both in civil and in public law it is worthwhile to clarify questions of competence to impose legal responsibility. This is influenced by peculiarities of the different branches of law. Civil responsibility arises in relationships between private persons and it may be met in a voluntary way (for example, by reimbursement of losses or payment of a penalty)77 and only if a wrongdoer refuses (expressly or by silence) to do so, a victim needs to take the matter to the appropriate state body. However, in matters of public law, a person is responsible for his illegal behavior to the state. Therefore the state, represented by authorized bodies, has jurisdiction to impose responsibility upon a person who has committed a violation. Who are these authorized bodies? In civil law, unless there has been a voluntary execution, punishment may be imposed by a court judgment.78 Criminal punishment may only be imposed by sentence of a court of general jurisdiction.   See: Professor E.R.Sukhanov, Ed., Civil Law. Volume 1. Moscow, 2010, p. 442.   Such a judgment may be issued by a court of general jurisdiction or by a state arbitration court depending upon whether the dispute in question is of a commercial or consumer nature. Civil responsibility may also be imposed by arbitral award when a dispute is referred to a voluntary arbitration forum based upon an agreement concluded by the parties. 77 78

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Cases relating to the application of administrative responsibility may be considered by: 1) courts,79 2) a district commission concerned with minors and the protection of their rights; and 3) appropriate bodies of executive power.80 The bodies above are entitled to inflict administrative punishment as provided by the relevant articles of the Code, however, some types of administrative punishment may only be inflicted by a court, for example, a compensated seizure of the means of an administrative violation (Article 3.6), confiscation of the means of committing an administrative violation or the subject thereof (Article 3.7), deprivation of a special right (Article 3.8), and administrative arrest (Article 3.9). Other kinds of administrative punishment may be inflicted both by courts and by other bodies competent to consider the appropriate cases.

§ 2. Persons who may bear legal responsibility The law defines both who is entitled to impose legal responsibility, and also who may bear legal responsibility Who may bear legal responsibility depends upon the peculiarities of different branches of the law.

2.1. Responsibility for civil law violations Legal entities, as well as natural persons (citizens)81 can be held responsible for civil law violations.   The majority of such cases are within the competence of courts of general jurisdiction, however, cases with respect to several administrative violations (e. g., fictitious or premeditated bankruptcy (Article 14.12), illegal acts in the course of bankruptcy (Article 14.13), mismanagement of a legal entity (Article 14.21) shall be considered by state arbitration courts (see: Article 23.1, Part 3, Paragraph 3 of the Code of Administrative Violations). 80  E. g., internal affairs bodies (police), tax bodies, customs, border guard bodies, bodies of the state sanitary-epidemiological service, etc. 81   In this context the concept “citizen” includes Russian nationals, foreign nationals and stateless persons. 79

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2.1.1. Citizens (natural persons) Citizens enjoy capacity of two types in the realm of civil law: 1) a citizen has the capacity to obtain both civil rights and duties. This will be referred to as “passive legal capacity;” 2) a citizen also has the capacity to acquire and effectuate civil rights by his own actions. This will be referred to as “active (or dispositive) legal capacity.” Passive legal capacity means that a citizen may be a participant in a civil law relationship regardless of his own actions, and those of others. It can also result from certain events. A citizen’s passive legal capacity “shall arise at the moment of his birth and be terminated by death.” (Article 17, Section 2 of the Civil Code) Dispositive legal capacity consists of the following elements: a) a citizen may acquire civil rights and create civil duties through his own acts; b) a citizen may exercise his civil rights and perform his civil duties through his own acts; c) a citizen may bear responsibility for his own violations of civil law. The Civil Code also specifically provides that a citizen is entitled “to engage in entrepreneurial activity without forming a legal entity” (i. e. as a sole proprietorship) “from the moment of state registration as an individual entrepreneur.”82 (Article 23, Section 1 of the Civil Code) In order to enjoy these possibilities a natural person must meet certain requirements concerning his mental condition. For this reason, dispositive legal capacity arises only when a citizen reaches a certain age. It “shall arise in full with the attainment of majority, that is, upon attainment of the age of eighteen.”83 (Article 21, Section 1 of the Civil Code)   In order to protect creditors’ interests there is an exception according to which a citizen acting as a sole proprietor without state registration “shall not have the right to refer with respect to transactions concluded by him to the fact that he is not an entrepreneur” (see: id,. Section 4). 83   There are two exclusions from this general rule when full dispositive legal capacity shall arise at some earlier stage: a) “when by law entry into marriage is permitted before attaining eighteen years of age, a citizen who has not attained eighteen years of age shall acquire dispositive legal capacity in full from the time of entering into marriage.” (Article 21, Section 2 of the Civil Code); b) “a minor who has attained sixteen years of age may be declared to have full dispositive legal capacity if he works under an employment contract or with the consent of parents, adoptive parents or a curator engages in entrepreneurial activity.” (Article 27, Section 1, Paragraph 1 of the Civil Code) This is emancipation. Emancipation may be granted by an agency of guardianship and curatorship (i. e. executive power agency of a subject of the Russian Federation) with the consent of both parents, adoptive 82

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Nevertheless, dispositive legal capacity, to some extent, does arise before majority age. a) “Minor children from six to fourteen years of age shall have the right autonomously to conclude: 1) petty consumer transactions;84 2) transactions directed towards receiving advantages without compensation which do not require notarial certification or state registration;85 3) transactions relating to disposition of assets agreed to by a legal representative86 or, with the consent of the latter, by a third person for a specified purpose or for free disposition. (Article 28, Section 2 of the Civil Code). Other transactions may be entered into on behalf of such minor children only by their legal representatives87 (see: Article 28, Section 1 of the Civil Code), who shall be liable for transactions of the minor children above, including transactions concluded by minors autonomously, unless their legal representatives prove that the obligation was violated not through their fault (see: Article 28, Section 3 of the Civil Code).88 Legal representatives are also responsible for tortious harm caused by a minor child unless they prove that the harm did not arise through their fault (see Ar­ ticle 1073, Section 1 of the Civil Code). b) Minor children between the age of fourteen and eighteen years, in addition to transactions set forth in Article 28 (Section 2) of the Civil Code available to younger minors, may autonomously: — dispose of their earnings, stipends, and other revenue,89 — exercise the rights of an author of a work of science, literature or art, invenparents, or the curator, or, in the absence of such consent, by a court judgment (see: id., Paragraph 2). 84   Such as, purchase of ice-cream, textbooks, etc. 85  E. g., they may accept gifts. 86   Legal representatives of minor children up to 14 years old shall be their parents, adoptive parents or guardians. 87  See supra, preceding footnote. 88   If such a minor “caused harm at the time when he was under the supervision of an educational, nurturing, medical, or other institution obliged to exercise supervision over him, or a person exercising supervision on the basis of a contract, this institution or person shall be responsible for harm unless he proves that the harm arose not through his fault in exercising supervision.” (Article 1073, Section 3 of the Civil Code) 89   “When there are sufficient grounds a court may, upon the petition of parents, adoptive parents, or curator, or the agency of guardianship and curatorship, limit or deprive a minor from fourteen to eighteen years of age of the right autonomously to dispose of his earnings, stipends, or other revenues, except for instances when the minor acquired dispositive legal capacity in full 188

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tion, or other result of his intellectual activity protected by law; — make and withdraw deposits in credit institutions. Other transactions may be concluded by minor children between fourteen and eighteen years of age with the written consent (or with subsequent written approval) of their legal representatives.90 Such minors shall autonomously bear responsibility both for transactions concluded autonomously or with the consent or approval of their legal representatives, and for torts resulting from the minor’s behavior.91 Sound mental condition of a natural person, a prerequisite to his dispositive legal capacity, depends not only on his age but also on his health. A citizen, even if he is an adult, “who as a consequence of mental disturbance is not able to understand the significance of his actions or control them may be declared by a court to lack dispositive legal capacity” (Article 29, Section 1 of the Civil Code) in which case all transactions in the name of such citizen, without exception, “shall be concluded by his guardian.” (Id., Section 2) Harm caused by such a citizen “shall be compensated by his guardian or the organization obliged to supervise him unless they prove that the harm did not arise through their fault.” (Article 1076, Section 1 of the Civil Code) In certain situations, the dispositive legal capacity of an adult person may be restricted. Such a measure may be taken by a court with regard to a person who, as a consequence of addiction to gambling, abuse of alcoholic beverages or narcotic drugs, places his family in a grave economic position, as well as a person who, as a consequence of mental disorder, can understand the meaning of his actions, or control them, only with the assistance of other persons. A curatorship shall be established for such persons Such a person has the right autonomously to conclude petty consumer transactions. He may conclude other transactions with the consent of his curator (as well as with the curator’s subsequent written approval). However, such a person shall autonomously bear economic responsibility for transactions that he has concluded and for any harm which he has caused (see: Article 30 of the Civil Code in the version due to emancipation or entering into marriage before attaining 18 year of age” (see: Article 26, Section 4 of the Civil Code). 90   Legal representatives of minors whose age is between 14 and 18 years are parents, adoptive parents or the curator. 91   If such minor has no income or other property sufficient to compensate harm that arose as a result of a tortious obligation, the harm “must be compensated fully or in the insufficient part by his parents (or adoptive parents) or the curator, unless they prove that the harm arose not through their fault.” (Article 1074, Section 2 of the Civil Code) 189

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introduced by the Federal Law of December 30, 2012 N 302-FZ. See also Article 1077 of the Civil Code). 2.1.2. Legal entities For legal entities (unlike natural persons) passive legal capacity and dispositive legal capacity are inseparable. They arise simultaneously, at the time of state re­gistration when a legal entity is created, and they cease to exist when registration is terminated. Activity of a legal entity is demonstrated in the activities of its employees when they perform their labor duties. That is why “actions of the debtor’s employees rela­ ting to the performance of his obligation shall be deemed actions of the debtor” who “shall be responsible for these actions if they entailed the failure to perform or the improper performance of the obligation.” (Article 402 of the Civil Code) This is a general provision which includes both contractual and non-contractual responsibility. In line with this rule, when tortious behavior occurs, a legal entity “shall compensate harm caused by its employee when performing labor (official) duties.” (Ar­ ticle 1068, Section 1 of the Civil Code) So actions of a legal entity’s employees shall be deemed actions of the legal entity provided its employees acted during the course of performing their labor duties. For example, when a driver operates a truck owned by an automobile company which undertook to deliver goods from a seller to a buyer, the driver’s acts, in terms of labor law, constitute performance of his labor duties arising out of the employment contract between the driver and the company; at the same time, the driver’s acts also constitute performance of the company’s duties in the civil law transaction that arises out of the contract of carriage of goods by road between the company and the consignor of the goods. Therefore, a criterion of whether or not activity of a legal entity’s employee shall be deemed the activity of the legal entity will depend upon whether the employee acted in the course of performing his labor duties. Let us consider two situations under this perspective: 1) In the example above, a company’s truck was operated by an employee who, when carrying goods by road, collided with a vehicle belonging to another company. This collision resulted in a tortious relationship between these two companies. If the driver of the first company is at fault, the company (his employer) shall be deemed to be the wrongdoer responsible to the second company for the damage caused to its vehicle. This conclusion flows from the norms of the Civil Code relating to tortious obligation. 190

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After reimbursing the victim company for the damage, the wrongdoer company is entitled to seek recourse against its employee — the driver. Here the responsibility of the driver to his employer is regulated by norms of the Labor Code. 2) Let us now suppose that the company’s driver, with the permission of the company’s CEO, took the company’s truck in order to deliver some furniture to his country house, and, due to his negligence, a collision occurred with the other company’s vehicle. This collision also entails an obligation in tort. However, unlike the previous si­ tuation, the wrongdoer now is the driver himself, rather than his employer, since the driver exploited the truck for a private purpose and, when operating the truck, acted as a private individual rather than as the company’s employee. Since the company employer had nothing to do with the tort, the victim’s claim for recovery of damage must be submitted against the driver himself.

2.1.3. Civil responsibility of several persons Sometimes civil responsibility for the same obligation may be borne by several persons, in which case it is important to establish how liability should be distributed between them. In doing so, it is important to distinguish: a) subsidiary responsibility; b) joint and several responsibility; and c) shared responsibility. a) subsidiary responsibility provides a creditor with an additional guarantee should a principal debtor not have enough property to satisfy the creditor’s claim. According to the Civil Code, the creditor first submits his claim against the principal debtor. Should the latter refuse to satisfy it or fail to provide an answer within a reasonable time, the claim may be advanced against a person having subsidiary responsibility (see: Article 399). The situation of subsidiary responsibility is provided, inter alia, by Article 115 (Section 5) of the Civil Code according to which an owner of the property of a fiscal enterprise shall bear subsidiary responsibility for obligations of such an enterprise in case of deficiency of its property. Another example of subsidiary responsibility is set forth in Article 861, Section 4, Paragraph 2 of the Civil Code. This rule provides that members of a farmers’ establishment created as a legal entity shall bear subsidiary responsibility for the establishment’s obligations. b) Joint and several responsibility means that “the creditor shall be entitled to demand performance both from all of the debtors jointly or from any of them individually, either for the whole or for part of the debt.” (Article 323, Section 1 of the Civil Code) 191

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Examples include: 1) “In case of non-performance or improper performance by the debtor of the obligation secured by suretyship, the surety and the debtor shall bear joint and several liability to the creditor unless the subsidiary liability of the surety provided by law or contract” (Article 369, Section 1 of the Civil Code); 2) “the duties of several debtors relating to an obligation connected with entrepreneurial activity, and likewise where there are demands of several creditors to such obligation, shall be joint and several unless provided otherwise by a law, other legal acts, or by the conditions of the obligation.” (Article 322, Section 2 of the Civil Code); 3) “persons who have caused harm jointly shall be liable jointly and severally.” (Article 1080, Paragraph 1 of the Civil Code) c) shared responsibility takes place unless subsidiary responsibility or joint and several responsibility is provided for by law or by contract. When shared responsibility is established by law or by contract, each debtor shall be responsible for his established share. For example, if a piece of immovable property (such as a building, construction, etc.) is owned by several persons, in case of its sale they shall be responsible for its defects in accordance with their shares in the right of ownership of that object.92 Unless otherwise provided by law, by other legal acts, or by conditions set forth in the obligation, the debtors shall share responsibility equally (see: Article 321 of the Civil Code).

2.1.4. Responsibility for acts of other persons (vicarious liability) According to the Civil Code the creditor shall be obliged to accept the performance offered by a third person for the debtor unless the duty of the debtor to perform the obligation personally arises from a law, the contract or the essence of the obligation. (see: Article 313, Section 1) In such case a debtor shall be liable for failure to perform or the improper performance of the obligation by third persons on whom performance has been placed. (see: Article 403) For example, a construction company which, as a general contractor, undertook to erect a building for a customer may (and usually does) involve subcontractors for performance of some specific work (such as installation of electrical equipment, a heating system, etc.).   See: Academician Y.K.Tolstoy, Ed., Civil Law, Volume 1, p. 678.

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There are no direct contractual relations between subcontractors and the customer; the customer is a party to the contract with the general contractor, and the latter is the subcontractors’ counterpart. If any of the subcontractors perform their work in an improper way, it is the general contractor who would be responsible to the customer for the poor quality of the subcontractor’s work. After recovery of the customer’s losses, the general contractor would be entitled to seek recourse against the subcontractor on the basis of the relevant subcontract.

2.2. Persons who may bear responsibility in the field of criminal law 2.2.1. General provisions Unlike civil law where responsibility may be borne both by a natural person and by a legal entity, criminal responsibility under Russian law may only be imposed upon a natural person (see: Article 19 of the Criminal Code). Even if some individuals use a legal entity as a “tool” in the course of their criminal activity, only the individuals may be subject to criminal responsibility. Assume that several natural persons founded a limited liability company to construct dwelling houses, and the company invited others to buy and make advance payments for apartments in the houses to be built. However, in reality, the individuals in question had no intention of building them. Rather, their actual purpose was to embezzle the money transferred to the company by its customers, and then to disappear. Under the criminal law this constitutes swindling (see: Article 159 of the Criminal Code). Since the customers entered into contracts with the company and transferred the purchase price of the apartments (which were not built) into the company’s bank account, the customers were entitled to sue the company for return of the money paid, with interest, as provided by Article 395 of the Civil Code. However, criminal prosecution may only be initiated against the individuals, and only they (not the company) may be convicted of swindling.93   The problem of criminal responsibility of legal entities is under discussion in Russian criminal law theory. Some authors support this idea (see, e. g. B.V.Volzhenkin. Уголовная ответственность юридических лиц [Criminal Responsibility of Legal Entities]. St. Petersburg, 1998. Professor F.R.Sundurov, Ed. Criminal Law of Russia, p. 230), while others reject it (see, e. g.: Professor I.Y.Kozachenko, Ed. Criminal Law, p. 249-252). Russia’s Criminal Code is based upon the latter position. 93

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Criminal responsibility is preconditioned on the ability of a human being to understand the social significance of his behavior and to direct it. These mandatory requirements are met when a person: In some foreign countries criminal responsibility of legal entities is possible (e. g., in the USA (see: § 20.20 of the Criminal Code of the State of New York); The Netherlands (see: Article 51 (Section 1) of the Criminal Code); France (see: Article 121.2 of the Criminal Code) while in other countries (e. g., Bulgaria, Germany, Greece, Italy, Sweden) criminal responsibility may only be borne by natural persons. Criminal responsibility of legal entities is permitted by some norms of international law. E. g., the 2000 UN Convention Against Transnational Organized Crime in Article 10 provides: “1. Each State Party shall adopt such measures as may be necessary, consistent with its legal principles, to establish the liability of legal persons for participation in serious crimes involving an organized criminal group and for the offences established in accordance with articles 5, 6, 8 and 23 of this Convention. 2. Subject to the legal principles of the State Party, the liability of legal persons may be criminal, civil or administrative. 3. Such liability shall be without prejudice to the criminal liability of the natural persons who have committed the offense. 4. Each State Party shall, in particular, ensure that legal persons held liable in accordance with this article are subject to effective, proportionate and dissuasive criminal or non-criminal sanctions, including monetary sanctions.” Similar norms are set forth in the 1999 International Convention for the Suppression of the Financing of Terrorism. Its Article 5 provides: “1. Each State Party, in accordance with its domestic legal principles, shall take the necessary measures to enable a legal entity located in its territory or organized under its laws to be held liable when a person responsible for the management or control of that legal entity has, in that capacity, committed an offence set forth in article 2. Such liability may be criminal, civil or administrative. 2. Such liability is incurred without prejudice to the criminal liability of individuals who committed the offence. 3. Each State Party shall ensure, in particular, that legal entities liable in accordance with paragraph 1 above are subject to effective, proportionate and dissuasive criminal, civil or administrative sanctions. Such sanctions may include monetary sanctions.” Both these Conventions have been ratified by the Russian Federation. It should be noted that the Conventions, having admitted different forms of responsibility of legal entities, including criminal responsibility, accompany this rule with an exception providing that imposition of criminal, civil or administrative responsibility upon a legal entity must be introduced by participating States in accordance with principles of their national law. Such an approach makes the Conventions quite flexible and compatible with legal systems of different states, both recognizing criminal responsibility of legal entities and rejecting it. Since the Russian Federation belongs to the latter group of states, in terms of Russian law natural persons should be subject to criminal responsibility for relevant offenses; as for legal entities, their responsibility in those situations lies in the field of civil and administrative law. This concept is consistent with the Conventions. Therefore, there is no contradiction between these Conventions and Russian law. 194

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1) attains a certain age, and 2) is sane. Examining these conditions in more detail: 1) Criminal responsibility may be imposed upon a person who has attained 16 years of age by the time of his commission of a crime (see: Article 20, Section 1 of the Criminal Code).94 However, criminal responsibility for some grave crimes may be borne by minors once they have reached 14 years of age. An exhaustive list of such crimes (e. g., homicide, willful causing of grave harm to health, kidnapping, rape, theft, robbery, assault with intent to rob, extortion, an act of terrorism, seizure of a hostage, etc.) is set forth in Section 2 of Article 20 of the Criminal Code. 2) A person (regardless of his age) is not subject to criminal responsibility if he was insane at the time he committed a violation of a provision in the Criminal Code. A person is deemed to be insane if he could not realize the actual character and social danger of his acts or omissions, or could not control them as a result of a chronic or temporary mental disorder, feeblemindedness, or other mental illness95 (see: of Article 21, Section 1 of the Criminal Code). It should be noted that in order for a person not to be subject to criminal responsibility he must have been completely insane at the time of committing the violation. If at that time he was partially insane, i. e. he could not realize the full actual character and social danger of his act or omission, nor could he control it because of his mental disorder, such a person is subject to criminal responsibility. However, his mental disorder, although not excluding sanity, shall be taken into consideration at sentencing and may serve as a ground for compulsory medical treatment (see: Article 22 of the Criminal Code). In order to establish whether a person was completely or only partially insane, a court shall order a judicial psychiatric expert examination.

  A minor child shall be deemed to have attained the age of criminal responsibility not on his birthday but the day following his birthday (see: Section 7 of the Ordinance of the Plenum of the Supreme Court of the Russian Federation of February 14, 2000 “On judicial practice in cases of minors’ crimes”). If, e. g., a person committed a violation as provided for by the Criminal Code on his 16th birthday, in legal terms it means that he did not yet reach 16 year age when he committed a violation. 95   Such a person may be subject to compulsory medical treatment as imposed by a court (see: of Article 21, Section 2 of the Criminal Code). 94

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2.2.2. Criminal responsibility of several persons When several persons are involved in committing the same crime, there is a conspiracy. Conspiracy is defined in the Criminal Code as “intentional joint participation of two or more persons in committing an intentional crime.” (Article 32) The following indicia of conspiracy appear from this definition: 1) several (two or more) persons participate in committing a crime; 2) they commit the crime jointly; 3) their criminal activity is intentional; 4) they participate in committing an intentional crime.96 Each conspirator must meet both preconditions of criminal responsibility, i. e. each must attain the appropriate age and be sane. Otherwise, for example when such a person uses a minor child or an insane adult as a tool in the course of committing a crime, there is no conspiracy. Only the former person will bear criminal responsibility.97 The Criminal Code (Article 33) distinguishes the following kinds of conspirators: a) performer, i. e. a person who directly committed a crime or directly participated in its commission jointly with other co-performers; also a person who committed a crime through the use of other persons not subject to criminal responsibility,98 b) organizer, i. e. a person who organized the commission of a crime or directed its performance,99 c) instigator, i. e. a person who induced other person(s) to commit a crime by means of bribery, threat or otherwise;   See: Professor F.R.Sundurov, Ed., Criminal Law of Russia, p. 325. A problem of whether a conspiracy is also possible with regard to a negligent crime is debatable. it is worthwhile to note that in the past there was such a possibility. According to Article 17 of the 1958 Fundamentals of Criminal Legislation of the USSR and Union Republics (see also: Article 17 of the 1960 RSFSR Criminal Code) a conspiracy was described as “intentional joint participation of two or more persons in committing a crime.” There is no doubt that the concept “crime” in this context included both intentional and negligent crimes. However, currently Russia’s criminal law is based on the idea that a conspiracy is only possible in relation to an intentional crime. 97   See: Professor Sundurov, Ed., op. cit., p. 325–326. 98   In case a performer commits a crime which was not included by the intent of other conspirators, e. g., when, someone instigated to commit a theft commits homicide (so-called “excess of the performer”), other conspirators shall not be responsible for the crime which he actually committed (see: Article 36 of the Criminal Code). 99   An organizer is the most dangerous criminal since he is an initiator of a crime who selects conspirators, distributes roles among them, prepares plans of criminal activity, etc, (see: Professor F.R.Sundurov. Ed., op. cit, p. 334). 96

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d) accessory, i. e. a person who assisted in the commission of a crime through advice, instructions, providing information, means or tools for the commission of a crime or by removal of obstacles to it, as well as a person who promised beforehand to conceal a criminal or the consequences of a crime. The amount of criminal responsibility that each conspirator shall bear will depend upon the character and extent of his actual participation in the crime and his personal influence upon the character and amount of actual or possible harm (see: Article 67, Section 1 of the Criminal Code). 2.2.3. Territorial Jurisdiction of the RF Criminal Code. Criminal responsibility of foreign nationals in the territory of the Russian Federation and that of Russian nationals outside the Russian Federation 2.2.3.1. Jurisdiction of the RF Criminal Code 2.2.3.1.1. in the territory of the Russian Federation According to Article 11 (Section 1) of the Criminal Code “a person who commits a crime in the territory of the Russian Federation shall be subject to criminal responsibility under this Code.” The territory of the Russian Federation is the area within the state borders of the Russian Federation. It includes land, waters, the subsoil under its land and waters, and the air space above its land and waters. Land includes both the mainland and islands within the state border. Waters consist of internal waters (such as rivers, lakes, etc.) and the territorial sea, that is, coastal sea waters of 12 nautical mile breadth,100 unless another breadth is established by international treaties of the Russian Federation or by generally recognized norms and principles of international law. Subsoil is that part of the earth under the soil and waterbed, descending to the depth available for geological research and use (see: Preamble, Paragraph 1 of the Federal Law “On Subsoil” of March 3, 1995 No 27-FZ). With regard to airspace, no boundary establishes where it ends and outer space begins. To date no international treaty has determined this point. In practical terms the demarcation line is at about the altitude of 60 to 66 miles above sea level.

  See: Article 3 of the 1982 UN Convention “On the Law of the Sea;” see also: Article 2 (Section 1, Paragraph 1) of the Federal Law “On Internal Waters, Territorial Sea and Adjacent Zone of the Russian Federation” of July 31, 1998 No 155-FZ. 100

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The air space below this demarcation line is within the territorial jurisdiction of a particular state. The area above this demarcation line is deemed to be outer space regulated by international law.101 The RF Criminal Code does not address the situation where a crime is committed in the territory of the Russian Federation, while its effects arise in the territory of a foreign state. However, a similar issue concerns the time when a crime is deemed to have been committed. Article 9 (Section 2) of the Criminal Code provides: “The time of committing a crime shall be deemed to be the time of the commission of a socially dangerous act or omission regardless of the time its consequences arise.” It has been suggested to extend this approach to the problem of the place where a crime is deemed to be committed, i. e. if a criminal act occurred in the territory of the Russian Federation, the crime should be deemed to have been committed in Russia regardless of whether the consequences of the crime took place abroad. However, this issue in still under discussion.102 In some situations the criminal jurisdiction of the Russian Federation is extended beyond its territory. Article 11 (Section 2) of the Criminal Code provides that its ope­ration “shall also be extended to crimes committed on the continental shelf and in the exclusive economic zone of the Russian Federation.” The continental shelf includes the seabed and subsoil of underwater areas that extend beyond the territorial sea of the Russian Federation through the natural prolongation of its land territory to the outer line of the continental margin and islands belonging to Russia (see: Article 1 (Paragraph 1) of the Federal Law “On Continental Shelf of the Russian Federation”). The legal regime of a continental shelf is determined by the 1982 UN Convention “On the Law of the Sea,” (Articles 76-85). There is also the Federal Law “On the Continental Shelf of the Russian Federation” of November 30, 1995 No 187-FZ.” With regard to its continental shelf, the Russian Federation enjoys exclusive rights to its exploration and the use of its mineral and biological resources, the carrying out of drilling, establishment and exploitation of artificial islands, installations and constructions. Other states may undertake activities of this kind on Russia’s continental shelf only with a permit from the Russian Federation. Russia has jurisdiction in relation to maritime scientific research, protection of the marine environ  See: Professor I.Y. Kozachenko, Ed., Criminal Law, p. 82. A space ship shall be subject to the jurisdiction of the state where it is registered. This state also has jurisdiction over crew members, although they remain nationals of their countries (see: Professor A.A. Kovalev and Professor S.V. Chernichenko, Eds., International Law. Moscow, 2008, p. 462–463). 102   See: Professor F.R. Sundurov, Ed., Criminal Law of Russia, p. 108. 101

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ment, and the laying and use of underwater cables and pipelines (see: Article 5 of the Law). Russia’s criminal jurisdiction includes certain types of crimes, such as illegal erection of construction on the continental shelf, violation of rules of erection, exploitation, protection and liquidation of construction, and exploration and use of the natural resources of the continental shelf without a required permit (see: Article 253 of the Criminal Code). With regard to artificial islands, installations and construction, the Russian Federation enforces complete jurisdiction, including jurisdiction with respect to customs, fiscal, sanitary and immigration rules, as well as rules concerning security. However, rights of the Russian Federation to its continental shelf do not affect the legal status of the waters covering it and the air space above these waters (see: Article 5 of the Law). The exclusive economic zone. The legal regime of an exclusive economic zone is regulated by the 1982 UN Convention of the Law of the Sea, (Articles 55–75). There is also the Federal Law “On Exclusive Economic Zone of the Russian Federation” of December 17, 1998 No 191-FZ.” The exclusive economic zone is an area of the sea beyond and adjacent to the territorial sea, and is subject to a specific legal regime. The breadth of the exclusive economic zone of the Russian Federation is 200 miles. Within this zone the Russian Federation enforces its sovereign rights with respect to exploration, use and preservation of biological and other resources, both in sea waters, the seabed and its subsoil, as well as the exclusive right to regulate drilling on the seabed and subsoil for any and all purposes, and also the exclusive right to create and to regulate the establishment and exploitation of artificial islands, installations and construction. The Russian Federation has jurisdiction with respect to maritime scientific research, protection of the sea environment against contamination from any and all sources, and the laying and exploitation of underwater cables and pipelines. Criminal jurisdiction of the Russian Federation in the exclusive economic zone is similar to that in the continental shelf and relates to crimes set forth in Article 253 of the Criminal Code. The Russian Federation has complete jurisdiction over artificial islands, installations and construction within the exclusive economic zone, also including jurisdiction with respect to customs, fiscal, sanitary and immigration rules, as well as rules concerning security. In accordance with generally accepted principles and norms of international law, when enforcing its sovereign rights in its exclusive economic zone, the Russian 199

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Fede­ration does not create any obstacles to the navigation, flights and other rights and freedoms of other states (see: Article 5 of the Law “On Exclusive Economic Zone of the Russian Federation”). 2.2.3.1.2. Criminal jurisdiction in relation to sea-going vessels There are some specific provisions concerning criminal jurisdiction with regard to sea-going vessels. These rules differ with respect to warships and other state-owned vessels used for non-commercial purposes, on the one hand, and merchant ships engaged in sea trade (regardless of whether they are state or privately owned), on the other. These provisions are included in the rules of international law. According to the UN Convention “On the Law of the Sea,” warships103 and other state-owned ships used for non-commercial purposes104 enjoy immunity from foreign jurisdiction (see: Article 32). Instead, such ships are subject to the jurisdiction of the state whose flag they fly, even when within the territorial waters of a foreign state. In compliance with this rule, the RF Criminal Code provides that a person who commits a crime on board a Russian warship (regardless of the place of its location) shall bear criminal responsibility under this Code (see: Article 11, Section 3). Merchant ships (including state owned ones) used for commercial purposes, are generally subject to jurisdiction of the state whose flag they fly, whether they are within the territorial waters of their flag state or on the high seas. When they enter the territorial waters of a foreign state, its jurisdiction is extended to them. Such ships, therefore, may be arrested in the territorial waters of a foreign state in connection with a civil law claim against them (see: Article 28 of the Convention). However, criminal jurisdiction of a coastal state in relation to a foreign merchant ship is only possible upon certain preconditions. These are set forth in Article 27 of the Convention which provides: “the criminal jurisdiction of the coastal state should not be exercised on board a foreign ship passing through the territorial sea to arrest any person or to conduct any investigation in connection with any crime committed on board the ship during its passage, except in the following cases: (a) if the consequences of the crime extend to the coastal state;   Warship is defined in the Convention as a ship belonging to armed forces of a state, bearing the external marks distinguishing such ships of its nationality under command of an officer duly commissioned by the government of the state and whose name appears in the appropriate service list or its equivalent, and manned by a crew which is under regular armed forces discipline (see: Article 29). 104  That is, a ship used by customs authorities, police, etc., as well as, e. g., a ship performing an Antarctic voyage under commission of the Academy of Sciences. 103

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(b) if the crime is of a kind to disturb the peace of the country or the good order of the territorial sea; (c) if the assistance of the local authorities has been requested by the master of the ship or by a diplomatic agent or consular officer of the flag state; or (d) if such measures are necessary for suppression of illicit traffic in narcotic drugs or psychotropic substances.” (Article 27, Section 1) The RF Criminal Code provides that a person who commits a crime on board a Russian ship on the high seas beyond the Russian Federation’s border shall be subject to criminal responsibility under this Code (see: Article 11, Section 3). The Code, however, is silent with regard to a situation when a crime is committed on board a Russian ship in territorial waters of a foreign state. In such case the question of criminal jurisdiction must be resolved in accordance with the rules of the UN Convention “On the Law of the Sea” (see: Article 27). Therefore, to summarize, crimes committed on board a foreign merchant ship in Russian territorial waters shall not be subject to the RF Criminal Code unless it is so provided in international treaties to which the Russian Federation is a party. Likewise, crimes committed on board Russian merchant ships in territorial waters of foreign states are not subject to the jurisdiction of the Russian Federation unless international treaties of the Russian Federation so provide.105

2.2.3.1.3. Criminal jurisdiction relating to aircraft International conventions and the RF Criminal Code provide rules relating to aircraft. Different rules apply to nonmilitary and military aircraft. The Criminal Code provides that a person who commits a crime on board a Russian military aircraft (regardless of where it is located) is subject to criminal responsibility under the Code (see: Article 11, Section 3). The Criminal Code does not provide for the situation where a crime is committed on board a Russian non-military aircraft in the air space of a foreign state. However, rules of international law apply to this situation. For example, according to the Convention on Offences and Certain Other Acts Committed on Board Aircraft (Tokyo, 1963) the state of the aircraft’s registration is competent to exercise jurisdiction over offenses committed on board whether the aircraft is in flight, on the surface of the high seas, or outside the territory of any state (see: Article 1, Section 2; Article 3, Section 1).

  See: Professor I.Y. Kozachenko, Ed., Criminal Law, p. 86–87.

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A contracting state other than the state of registration of the aircraft “may not interfere with an aircraft in flight in order to exercise its criminal jurisdiction over an offence committed on board except in the following cases: a. the offence has effect on the territory of such state; b. the offence has been committed by or against a national or permanent resident of such state; c. the offence is against security of such state; d. the offence consists of a breach of any rules or regulations relating to flight or maneuver of aircraft in force in such state; e. the exercise of jurisdiction is necessary to ensure the observance of any obligation of such state under a multilateral international agreement.” (Ar­ticle 4) The meaning of the words “in flight” differs in different international treaties. For example, the 1963 Tokyo Convention provides that “an aircraft is considered to be in flight from the moment when power is applied for the purpose of take-off until the moment when the landing run ends.” (Article 1, Section 3). However, this criterion was later changed. According to the Convention for the Suppression of Unlawful Seizure of Aircraft (the Hague, 1970) “an aircraft is considered to be in flight at any time from the moment when all its external doors are closed following embarkation until the moment when any such door is opened for disembarkation.” (Article 3, Section 1) However, in the event of a forced landing “the flight shall be deemed to continue until the competent authorities take over responsibility for the aircraft and for persons and property on board.” (Id.) The same approach is adopted by the Convention for the Suppression of Unlawful Acts Against the Safety of Civil Aviation (Montreal, 1971) (see: Article 2 (a)). 2.2.3.1.4. Jurisdiction over crimes committed by Russian nationals outside Russia According to Article 12 (Section 1) of the Criminal Code, Russian nationals and stateless persons who are permanent residents of the Russian Federation who commit crimes outside Russia “against interests protected by this Code, shall be subject to criminal responsibility under this Code unless in relation to this person there is a judgment of a foreign state court upon this crime.” Thus, a crime set forth in the RF Criminal Code committed by a Russian national abroad shall be considered by a Russian court under the rules of the RF Criminal Code even it is not recognized as a crime in the state where it was committed.106   See: A.G. Kibalnick. Преступление и ответственность в международном уголовном праве [Crime and Responsibility in International Criminal Law]. Stavropol, 2002, p. 65. 106

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However, if this action is deemed a crime both in Russia and in the foreign state in whose territory it was committed, criminal responsibility for such a crime under the RF Criminal Code is excluded when a foreign state court issued a judgment in relation to the crime.107 This approach is in line with the Constitution of the Russian Federation which provides “no one may be convicted twice for the same crime” (Article 50, Section 1). A similar rule is set forth in Article 6 (Section 2) of the Criminal Code. This is also consistent with norms of international law. For example, the 1972 European Convention on Transfer of Proceedings in Criminal Matters provides that “a person in respect to whom a final and enforceable criminal judgment has been rendered may for the same act neither be prosecuted nor sentenced nor subjected to enforcement of a sanction in another Contracting State: a) if he was acquitted; b) if the sanction imposed: i) has been completely enforced or is being enforced, or ii) has been wholly, or with respect to the part not enforced, the subject of a pardon or an amnesty, or iii) can no longer be enforced because of lapse of time; c) if the court convicted the offender without imposing a sanction.” (Article 35, Section 1). Article 12 (Section 2) of the RF Criminal Code contains a special rule concer­ ning criminal jurisdiction in relation to military servicemen of Russian military units located outside the Russian Federation. If such persons commit crimes in the territory of a foreign state, they “shall bear criminal responsibility under this Code unless an international treaty of the Russian Federation provides otherwise.108 The Constitution of the Russian Federation permits a Russian national to have nationality in a foreign state (double nationality) in accordance with a federal law or international treaty of the Russian Federation (see: Article 62, Section 1). In such case the person shall be deemed to be a Russian national unless it is otherwise established by an international treaty of the Russian Federation or by a federal law (see: Article 6 of the Federal Law “On Nationality of the Russian Federation” of May 31, 2002, No 62-FZ). If a dual national commits a crime outside both the states of his nationality, the question of criminal jurisdiction arises. Assume that a person having nationality both   See: Professor F.R. Sundurov, Ed., Criminal Law of Russia, p. 110.   International treaties usually provide that foreign military servicemen shall bear responsibility for crimes committed outside their military unit or base under the law of the state of their location (see: Professor F.R. Sundurov, Ed., op. cit., p. 111). 107 108

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of the Russian Federation and of Kazakhstan commits a crime in the territory of Uzbekistan and was not charged criminally in Uzbekistan. According to international law, this issue should be resolved on the basis of the principle of “effective nationality,” that is, a person shall be held criminally liable under the law of the state where he and his family have a permanent residence, a job, property, and enjoy political and civil rights.109 2.2.3.1.5. Jurisdiction with regard to crimes committed by foreign nationals within Russian territory A state exercises jurisdiction (including that of its criminal law) over its entire territory. That is why any person (regardless of his nationality or place of permanent residence) who commits a crime in the territory of the Russian Federation is subject to criminal responsibility under the RF Criminal Code (see: Article 1, Section 1). This means that if a foreign national (or a stateless person who is not a permanent resident of the Russian Federation) commits a crime within the Russian territory, he will be held criminally responsible on the same legal basis as if he were a Russian national. There is, however, an exception to this rule with regard to persons who enjoy international immunity. As Article 11 (Section 4) of the Criminal Code provides, diplomatic representatives of foreign states and other persons enjoying immunity who commit crimes within the territory of the Russian Federation shall be dealt with in accordance with norms of international law. These persons are listed in international treaties such as, the 1961 Vienna Convention on Diplomatic Relations, the 1963 Vienna Convention on Consular Relations, the 1964 Convention on Privileges and Immunities of the United Nations, etc. The list includes, inter alia, diplomatic agents (i. e. the head of the mission, or a member of the diplomatic staff of the mission having immunity, heads of governments, heads of ministries of foreign affairs or similar officials). Diplomatic immunity means that persons who enjoy immunity and commit a crime in the territory of the state where they are located shall not be subject to criminal responsibility under the law of that state.110 Instead, such a person is usually declared “persona non grata” and must then leave the receiving state. However, those   See: Professor I.Y. Kosachenko, Ed. Criminal Law, p. 95.   According to Article 31 (Section 1) of the Vienna Convention on Diplomatic Relations: “A diplomatic agent shall enjoy immunity from the criminal jurisdiction of the receiving State. He shall also enjoy immunity from its civil and administrative jurisdiction, except in the case of: 109 110

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enjoying immunity are not exempt from being held responsible by the sending state. For example, a foreign diplomat who commits a crime in Russia may not be brought to criminal responsibility under the RF Criminal Code, but he may bear criminal responsibility under the law of the state which he represented in Russia. Also, according to Article 32 of the Vienna Convention on Diplomatic Relations, a sending state may waive the diplomatic immunity of its diplomatic agents. In such case they may be subject to criminal responsibility under the law of the state where the crime was committed.111 In some circumstances foreign nationals (and stateless persons who are not permanent residents of Russia) may be subject to criminal responsibility under the RF Criminal Code for crimes committed outside Russia if the following conditions set forth in Article 12 (Section 3) of the Code are met: 1) the crime was directed against interests of the Russian Federation, a resident of the Russian Federation, or if provided for by an international treaty of the Russian Federation; 2) the person who committed the crime has not been convicted in a foreign state; and 3) the person is indicted in the Russian Federation. 2.2.3.1.6. Extradition According to the Constitution of the Russian Federation, a Russian national may not be extradited to another state (see: Article 61, Section 1). Similarly, the RF Criminal Code provides that Russian nationals who commit a crime in the territory of a foreign state are not subject to extradition to that state (see: Article 13, Section 1). The Constitution also provides that the Russian Federation may grant political asylum to foreign nationals and stateless persons in accordance with generally re­ cognized norms of international law112 (see: Article 63, Section 1) and it prohibits extradition of persons prosecuted for their political views as well as for actions (or (a) A real action relating to private immovable property situated in the territory of the receiving State, unless he bolds it on behalf of the sending State for the purpose of the mission; (b) An action relating to succession in which the diplomatic agent is involved as executor, administrator, heir or legatee as a private person and not on behalf of the sending State; (c) An action relating to any professional or commercial activity exercised by the diplomatic agent in the receiving State outside his official functions.” 111   See: Professor I.Y. Kozachenko. Ed., op. cit., p. 93. 112   Political asylum may be granted by Decree of the President of the Russian Federation. “Regulations on the procedure of granting political asylum by the Russian Federation” were approved by the Decree of the President of the Russian Federation of July 21, 1997. 205

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omissions) which are not recognized as crimes in the Russian Federation (see: id., Section 2). Foreign nationals and stateless persons who commit a crime outside the Russian Federation and are later in Russian territory may be extradited to a foreign state to face criminal responsibility or punishment in accordance with an international treaty of the Russian Federation (see: Article 13, Section 2 of the Criminal Code).113 E. g. there is a Convention on Transfer of Convicts sentenced to Deprivation of Liberty for further Execution of Punishment as concluded among CIS Countries March 6, 1998. The Convention has been ratified by the Russian Federation by the Federal Law of October 13, 2009 No 235-FZ. According to this Convention, nationals of each Contracting Party (as well as stateless persons who are its permanent residents), sentenced to deprivation of liberty in another Contracting Party, may be transferred to serve their punishment to the Contracting Party in whose territory they have permanent residence (see: Article 2). Such a transfer may occur upon the following preconditions: 1) a sentence had taken affect; 2) the convict, his relatives or his counsel had filed a motion and submitted it to the appropriate state authorities; 3) both Contracting Parties agreed upon transfer and acceptance of the convict; 4) at the time negotiations began between the Parties concerning the transfer of the convict, his remaining term of the deprivation of liberty most be at least six months (see: Articles 4 and 5). Problems related to extradition are addressed in detail in the Ordinance of the Plenum of the RF Supreme Court of June 14. 2012 N 11 “On practice of consideration by courts of issues connected with transfer of persons for criminal prosecution or execution of a sentence, as well as transfer of persons to serve punishment.” It is indicated in this Ordinance that extradition may be based on an international treaty of the Russian Federation or on the principle of reciprocity (see: Section 1) according to which it is possible to expect that a foreign state in a similar situation would extradite a person to the Russian Federation (see: Section 3). A person shall not be subject to extradition if, in accordance with the law of a requesting state, a crime may entail capital punishment, unless the state in ques  See: Professor V.Z.  Lukashevich, Ed. Уголовный процесс [Criminal Procedure]. St. Petersburg, 2005, pp. 650–666. 113

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tion provides convincing guarantees that such a punishment, if imposed, will not be carried out (see: Section 11). Extradition is also excluded when there are serious reasons to believe that a person may be subject to torture or inhuman or degrading treatment or punishment (see: Section 12). In case the European Court of Human Rights issues a ruling whereby the Government of the Russian Federation is required to refrain from transferring a person to a foreign state, such a person shall not be subject to actual transfer until the European Court lifts its security measures (see: Section 27).

2.3. Persons who may be held responsible for administrative law violations According to the Code of Administrative Violations, responsibility, that is liability, may be imposed both on natural persons and on legal entities. The preconditions of the administrative responsibility of natural persons are similar to those provided in the Criminal Code, that is, they must be at least 16 years of age114 and sane.115 Legal entities may also bear administrative responsibility116 (see: Article 2.10 of the Code). However differences between natural persons and legal entities entail

114  There is, however, some difference between these two codes concerning the age of responsibility. Having established 16 years of age as a general rule, the Criminal Code at the same time introduces an exception to this norm by providing that for certain grave crimes criminal responsibility may be borne by minors who are 14, i. e. two years younger (see: Article 20). The Code of Administrative violations does not permit any decrease of the age of administrative responsibility. Moreover, it expressly authorizes local commissions on minors and protection of their rights (which commissions are in charge of considering administrative violations committed by minors — see: Article 23.2 of the Code), given a specific situation, to exempt a minor, whose age is between 16–18 years, from administrative responsibility and to apply some nurturing measures to him (see: Article 2.3, Section 2 of the Code). 115   No administrative responsibility may be imposed upon a person who, when committing illegal actions (or omissions) was insane, i. e. was not able to realize the actual character of the illegality of his actions or control them as a result of chronic mental disturbance, temporary mental disturbance, feeblemindedness, or other condition of mental illness (see: Article 2.8 of the Code). There is no doubt that, in spite of a slight difference in wording, the Code of Administrative Violations defines insanity effectively along the same lines as the Criminal Code. 116   See in detail: B.V. Rossinsky. Административная ответственность [Administrative Responsibility]. Moscow, 2009, pp. 55–67. 207

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certain peculiarities concerning the types of administrative punishment which may be applied to legal entities. This list of administrative punishments is set forth in Article 3.2 (Section 1) of the Code and consists of two groups. One group includes administrative punishments which may only be imposed upon natural persons, that is, deprivation of a special right granted to a natural person (Item 5); administrative arrest (Item 6); also, administrative relocation of a foreign national or stateless person outside the Russian Federation (Item 7); disqualification (Item 8). Another group includes administrative punishments applicable both to natural persons and to legal entities, such as a warning (Item 1); an administrative fine (Item 2); compensated expropriation of a tool used to commit an administrative violation or a subject thereof (Item 3); confiscation of such things (Item 4). Given this different treatment, the Code specifically indicates that, with regard to a legal entity, it is only possible to apply those administrative punishments set forth in Items 1–4 of Section 1 of Article 3.2 (see: Section 2 of this Article). The Code also provides that imposition of administrative punishment on a legal entity does not exempt a natural person who is guilty from administrative liability for the violation, nor will holding a natural person liable for an administrative or criminal violation exempt a legal entity from administrative liability for the same violation (see: Article 2.1, Section 3 of the Code). So, for example, if a company, because of the negligence of its financial director, failed to comply with mandatory requirements concerning the book-keeping of foreign economic transactions, this administrative violation (see: Article 14.20 of the Code) would entail imposition of an administrative fine on the officials117 (of between 1000 and 2000 rubles) and upon legal entities (between 10,000 and 20,000 rubles). In this case both the financial director and the company itself would be subject to administrative responsibility. Now let us suppose that a company does not have a required license but starts to raise money from natural persons to build an apartment house. This is an administrative violation entailing an administrative fine for officials  — from 15,000 to 20,000 rubles, and for legal entities — from 40,000 it 50,000 rubles (see: Article 14. 28, Section 1). If, however, the actual purpose of the company’s chief executive officer was to embezzle the money raised and then to disappear, this constitutes swindling, a crimi  The word “official” in the meaning of the Code includes those who are engaged in public service as well as managers of commercial and other organizations, including private ones (see: Note to Article 2.4). 117

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nal offense (see: Article 159 of the Criminal Code). In this situation, since only a natural person (not a legal entity) may be subject to criminal liability, there will be combined liability: the administrative liability of the company and the criminal liability of its chief executive officer. Foreign nationals, stateless persons and foreign legal entities which commit administrative violations in the territory of the Russian Federation, its continental shelf and its exclusive economic zone will be held administratively responsible on the same grounds as Russian nationals and Russian legal entities. Foreign nationals enjoying jurisdictional immunity will be held responsible for administrative violations that they commit in the territory of the Russian Federation in compliance with the norms of international law (see: Article 2.6 of the Code).

§ 3. Conditions of responsibility 3.1. General provisions Legal responsibility results from a violation of law. Behavior that leads to legal liability is inconsistent with legal norms, and therefore is illegal. Legal liability is imposed on a person who commits, and therefore causes, a rele­ vant violation. Whether or not the person who commits a violation is at fault is also very important. Therefore, the general preconditions of legal responsibility are: 1) illegal beha­ vior; 2) a causal connection between the behavior and a violation; 3) fault. There are certain peculiarities with respect to these preconditions in different branches of law which will be considered in some detail.

3.2. Illegal behavior Behavior may be manifested in either action or inaction, that is, in an act or an omission. An act is deemed illegal when it is prohibited by law or conflicts with it. With respect to the criminal law an act can be illegal only if an article of the Criminal Code so provides. In administrative law an act is deemed illegal only if the Code of Administrative Violations, or laws of subjects of the Russian Federation, establish administrative responsibility for it. From the standpoint of civil law, assessment of the legality of an action is made with due consideration to the fact that behavior of participants in civil law 209

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transactions may be (and very often is) regulated not only by the civil law but, when its rules are optional, by transactions which the parties have the discretion to conclude. In practice this means that a party’s action in a civil law transaction may be deemed illegal if it is inconsistent either with norms of law or with terms and conditions of an obligation established by contract or other transaction. For example, Article 309 of the Civil Code provides: “an obligation must be performed duly in accordance with the conditions of the obligation and the requirements of a law and other legal acts, and in the absence of such conditions and requirements, then in accordance with customs or other usual requirements.” In summary, an action is deemed illegal under the civil law if it is inconsistent with: 1) norms of law (such as rule(s) of the Civil Code); 2) other legal acts regulating civil law transactions between the parties (for example, a decision of an authorized state agency to grant a company a license to perform a certain kind of business activity); 3) customs (for example, Incoterms 2010); 4) usual requirements (if, for example, a sales contract does not specify requirements concerning the quality of goods, “the seller shall be obliged to transfer goods to the purchaser fit for the purposes for which goods of such nature are usually used” (see: Article 469, Section 2 of the Civil Code). An inaction or omission is deemed to be illegal, for which a person may be held responsible, if he is under a legal duty to act, and fails to do so. For example, the 1989 International Convention “On Salvage” requires a shipmaster to assist persons in sea waters to the extent that he can do so without serious danger to his ship, its crew and passengers (see: Article 10). Failure to perform this duty will lead to the shipmaster’s criminal responsibility (see: Article 270 of the Criminal Code). According to Article 124 of the RF Customs Code, an importer or exporter of goods must submit a cargo customs declaration to customs authorities. Article 181 of the Customs Union Customs Code, effective 1th July 2010 provides a similar norm, failure to comply with it will result in administrative liability under Article 16.2 of the Code of Administrative Violations. Article 959 (Section 1) of the Civil Code provides that when a contract for property insurance is in effect, the insured (or beneficiary) must immediately advise the insurer of any significant change in circumstances which may materially influence an increase in the risk insured against. Failure to perform this duty will entitle 210

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the insurer “to demand dissolution of the contract of insurance and compensation of losses caused by dissolution of the contract.” (Article 959, Section 3) When a person’s behavior is legal, that person as a general rule is not subject to legal liability. This is a general approach. However, while criminal law and administrative law do not provide any exceptions to this rule, civil law does. For example, the Criminal Code exempts a person from responsibility for harm caused to another person or persons in the course of necessary defense, unless the limits thereof were exceeded (see: Article 37)118. In a state of extreme necessity, i. e. in order to eliminate danger threatening the harm-doer himself (self defense) or other persons, as well as the legally protected interests of society or the state, a person will be exempted from responsibility if this danger could not be eliminated by other means and if the harm inflicted is less significant than the harm prevented (see: Article 39).119

Similar rules relating to extreme necessity are set forth in the Code of Administ­rative Violations (see: Article 2.7).120   The RF Supreme Court emphasized that a defending person, due to nervousness resulted from an attack, may fail to properly assess the character and the danger of the attack and, therefore, choose proportionate method and means of defense. The defending person’s acts shall not be deemed as those exceeding the limits of necessary defense if, albeit the harm caused to the attacker appeared to be more than the harm prevented, but in the course of inflicting of the harm there was no clear disbalance of means of defense and the danger of the attack (see: the Ordinance of the Plenum of the RF Supreme Court of September 27, 2012 N 19 “On application by courts of legislation on necessary defense and inflicting harm upon detention of a person who committed a crime”, Section 14). 119   The Criminal Code also provides some additional situations where criminal responsibility shall not be imposed for the harm caused: a) in the course of detention of a criminal if necessary measures have not been exceeded (see: Article 38); b) under physical or mental coercion, if as a result of such coercion a person could not control his own behavior (see: Article 40); c) as a result of justified risk in order to achieve a socially useful purpose, if such a purpose could not otherwise be reached and if the person took sufficient measures to prevent the harm (see: Article 41); d) in the course of fulfilling an obligatory order or instruction. Criminal responsibility for such harm shall be borne by a person who issued the order or instruction. However, a person who committed an intentional crime in the course of fulfilling an order, the illegality of which was known to him, shall bear criminal responsibility as a performer, and the person who had issued such an order, as an organizer of the crime (see: Article 42; see also: Professor F.R. Sundurov, Criminal Law of Russia, Ed., p. 399). 120   This Code does not touch on the defense necessary since (when the limits of necessary defense are exceeded) it may be a matter of criminal, rather than administrative, law. 118

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The approach of the Civil Code is more flexible. Its general rule concerning obligations in tort states: “harm caused to the person or property of a citizen, and also harm caused to the property of a legal entity, shall be subject to compensation in full by the person who caused the harm.” (Article 1064, Section 1) This is accompanied by an exception that “harm caused by lawful actions shall be subject to compensation in the instances provided by law.” (Article 1064, Section 3) The Civil Code also deals with harm caused in the course of necessary defense and in a state of extreme necessity. In the former situation, a wrongdoer is completely exempted from recovery (see: Article 1068). Legal consequences of the latter situation provide that such harm shall be reimbursed (see: Article 1067, Paragraph  1). However, “taking into account the circumstances under which such harm was caused, a court may place the duty of compensating it on a third person in whose interests the harm-doer acted, or relieve both this third person and the harm-doer fully or partially from compensation for the harm.” (Article 1067, Paragraph 2) 3.3. Causal connection Causal connection is one of the concepts in Russian legal doctrine most subject to dispute. From a legal standpoint, there are several different views regarding the conditions under which a person’s behavior will be deemed to be a cause of a violation, such as (in a nutshell): 1) the concept of a “necessary and accidental causal connection.” Here, the ne­ cessary connection is deemed to be a causal connection in legal terms, while the accidental one is legally irrelevant;121 2) the concept of “conditio sine qua non.” This describes circumstances leading to a violation without which the violation would not occur;122 3) the concept of “direct and indirect causal connection.” The direct connection is considered to have legal significance, while the indirect one is legally irrelevant,123   See: e. g.: I.B. Novitsky, L.A. Lunts. Общее учение об обязательстве [General Doctrine of Obligation]. Moscow, 1950, pp. 307–319. 122   See: T.V. Tseretely. Причинная связь в уголовном праве [Causal Connection in Criminal Law]. Moscow, 1956, pp. 192–193. 123   See: Academician Y.K. Tolstoy, Ed. Civil Law. Volume 1, pp. 654–657 (the author of Chapter 27 “Civil law responsibility” is Professor N.D. Egorov). 121

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4) the concept of “possibility and reality.” From this perspective, the cause of a violation is a circumstance which turned the possibility of a violation into reality, or created a concrete possibility of such a result. If a circumstance created only an abstract possibility of this result, the circumstance is legally irrelevant.124 In any event, a person may be held legally responsible if it was his own behavior that resulted in the violation. Civil law also provides a possibility, under certain circumstances, for a person to bear responsibility for a violation caused by another. As indicated supra (this Chapter, § 2, Section 2.1, Subsection 2.1.4), “a debtor shall be responsible for failure to perform or for improper performance of an obligation the performance of which has been placed on third persons, unless it has been established by law that responsibility shall be borne by the third person who is the actual performer.” (Article 403 of the Civil Code) Such a situation may arise, for example, in the settlement of accounts by payment order. Generally speaking, in case of non-performance or improper performance of the payment order it is the payer’s bank that shall be liable before the payer (see: Article 866, Section 1 of the Civil Code). Meanwhile when non-performance or improper performance of the payment order occurred in connection with a violation by the bank-intermediary or the payee’s bank of non-cash selltement rules or the contract between banks the liability before the payer may be placed by court on the bank-intermediary or the payee’s bank which in such a case shall be liable jointly and severally with the payer’s bank (see: id,. Section 2). As for criminal and administrative responsibility, it may only be imposed upon a person for a violation caused by his own behavior. It should be noted, however, that criminal responsibility may arise even if a person failed to reach his intended result. In other words, this is the problem of responsibility for an unfinished crime. A crime may not be completed: 1) due to circumstances beyond the control of the person who started it, or 2) due to his own volition. Legal consequents of these two situations differ. The first situation may consist of two stages: (a) preparation for a crime, and (b) the attempted crime. Preparation for a crime means a person’s seeking, manufacturing or adapting the means or tools for commission of a crime, the seeking of accomplices, conspiring to commit a crime or other intentional creation of conditions for committing a crime,   See: O.S. Ioffe. Обязательственное право [Law of Obligation]. Moscow, 1975, pp. 113–128. 124

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when the crime was not completed due to circumstances beyond the person’s control (see: Article 30, Section 1 of the Criminal Code). Criminal responsibility may only be imposed for the preparation of grave and extremely grave crimes (see: id., Section 2). An attempted crime is a person’s intentional actions or omission directly aimed at committing a crime, where the crime was not completed due to circumstances beyond the person’s control (see: id., Section 3).125 Both in the case of preparation for a crime and one of attempted crime the crime is not completed due to circumstances beyond the person’s control. The distinction between these stages is that at the stage of preparation for a crime the person had not yet performed the action whereby he intended to commit the crime, while at the latter stage of attempted crime the person did perform such an action or omission but failed to reach the intended result. According to the Criminal Code, both an attempted crime and preparation for a crime shall be punished as if the crime had actually been committed (see: Article 29, Section 3). The background of this approach is self-explanatory. The main factors to be taken into consideration in determining punishment for a crime are the character and degree of social danger of the relevant behavior. If an offender used all his efforts to carry out a crime but failed due to circumstance beyond his control, both the character and degree of social danger of his behavior are effectively the same as if he had succeeded in turning his intent into reality. The Criminal Code includes some peculiarities concerning punishment for an unfinished crime. The court should take into consideration the circumstances due to which the crime was not completed (see: Article 66, Section 1). The term or amount of punishment for preparation for a crime shall not exceed half of the maximum term or amount of the most severe punishment provided for the completed crime; in case of an attempted crime the term or amount of punishment shall not exceed three fourths of such punishment (see: id., Sections 2 and 3). Preparation for a crime and an attempted crime shall not entail capital punishment126 or lifetime deprivation of freedom (see: id., Section 4). The situation is substantially different when a person changes his mind and terminates his criminal behavior of his own volition (or voluntary refusal). In order to  E. g., somebody fires a revolver at another person with intent to kill him but the bullet misses the target and the victim sustains no harm. 126   With regard to capital punishment see: supra, Chapter 3, paragraph 1, Section 1.2.3 of this book. 125

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encourage such a development, it is provided by law that in case of voluntary refusal a person shall bear no criminal responsibility unless the action which he has already taken constitutes a crime in and of itself. For example, if someone acquires a revolver with the intent to kill another person but then voluntarily abandons the idea, he may only be indicted for illegal possession of a firearm (which is a crime in and of itself, see: Article 222 of the Criminal Code). However, if he voluntarily turns the revolver over to state authorities, he shall be exempted from criminal responsibility for this crime (see: note to Article 222 of the Criminal Code).

3.4. Fault (guilt) 3.4.1. General provisions 3.4.1.1. Forms of fault in criminal law Fault is the mental attitude of a person towards his illegal behavior and its consequences. Fault may arise from intent, which may be: a) direct or d) indirect, or it may arise from negligence, which may be the result of: a) imprudence or b) lightmindedness. Direct intent is that of a person who understands the social danger of his behavior (whether of his actions or omissions), foresees the possibility or inevitability of its socially dangerous consequences and wishes those results (see: Article 25, Section 2 of the Criminal Code). Indirect intent means that a person understands the social danger of his behavior, foresees the possibility of its socially dangerous consequences, does not wish for but accepts their occurrence, or views them indifferently (see: id., Section 3). Imprudence means that a person did not foresee the possibility of the socially dangerous consequences of his behavior, although with necessary attentiveness and prudence he should have and could have foreseen these consequences (see: Ar­ ticle 26, Section 3 of the Criminal Code). Light-mindedness means that a person foresees the possibility of the socially dangerous consequences of his behavior but hoped, without sufficient grounds, to be able to prevent these consequences (see: id., Section 2). Forms of fault are described in the most detailed manner in criminal law since it is fault and its form that clearly indicate the character and degree of a person’s social danger and therefore very substantially influences the kind and amount of punishment for a crime that he has committed. 215

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Criminal law deals with the fault of natural persons since, under Russian law, criminal responsibility may only be borne by individuals. However, liability in administrative and civil law may be imposed both on individuals and on legal entities. 3.4.1.2. Forms of fault in administrative law The Code of Administrative Violations (see: Article 2.2) effectively sets forth the same forms of fault or guilt as those in the Criminal Code but, in addition, defines the fault of a legal entity in the following way: a legal entity shall be deemed guilty of committing an administrative violation if it had the possibility of acting in compliance with relevant rules and norms but failed to take all measures within its powers to comply with them (see: Article 2.1, Section 2). 3.4.1.3. Fault in civil law (general provisions) Unlike the Criminal Code and the Code of Administrative Violations, the Civil Code does not define forms of fault. Instead it indicates when a person shall be deemed not to be at fault. “The person shall be deemed not to be at fault if, with that degree of prudence and attentiveness which is required of him according to the character of the obligation and conditions of turnover, he has taken all measures for proper performance of the obligation.” (Article 401, Section 1, Paragraph 2). This definition is applicable both to natural persons and to legal entities and this formulation is quite compatible with the concept of a legal entity’s fault as defined in Article 2.1 of the Code on Administrative Violations. How is the fault of a legal entity manifested? Since, according to the Civil Code, actions of employees of a legal entity in the course of performing their labor duties are deemed to be actions of the legal entity which shall be held responsible for harm caused by these employees (see: supra, § 2, Section 2.1.2 of this Chapter), we may deduce that such employees’ fault shall be deemed the fault of the legal entity127 in violation of its duties which arise out of its contractual or non-contractual civil law relations.128 The Civil Code (see: e. g., Article 401, Section 1, Article 963, Section 1), follo­ wing Roman law concepts, distinguishes forms of fault such as intent (dolus malus)   See: Professor Y.K. Tolstoy and Professor A.P. Sergeev, Eds., Civil Law. Volume 1. Moscow, 2002, p. 655. 128   A similar approach is reflected in the Tax Code. Its Article 110 (Section 4) provides that “fault of an organization in committing a tax violation shall be determined depending upon the fault of its officials or representatives whose actions or omission preconditioned the committing of this tax violation.” 127

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without further dividing it into direct and indirect, and negligence of two degrees: gross negligence (culpa lata) and simple negligence (culpa levis).129 The approach to the problem of fault is substantially different in civil law, on the one hand, and in criminal and administrative law, on the other. As mentioned above, in criminal and administrative law fault (and its form) directly influences the kind and amount of punishment. However, in civil law, although fault, as a rule, is a precondition of responsibi­ lity, liability is usually predetermined by the amount of losses that resulted from the violation, that is, by a purely objective standard, not dependent upon the form (and extent) of the fault. That is why if a civil law violation results in some losses, those losses are subject to compensation without regard to the form (and degree) of the wrongdoer’s fault; it is sufficient for there to have been fault. One can ask why then does civil law still demarcate several forms (and degrees) of fault, although different from those provided in criminal and administrative law. The background here is that in certain circumstances both the existence and the form (or degree) of fault is of importance and must be taken into consideration in imposing civil liability. 3.4.1.4. Mixed fault When the fault of a debtor is combined with the contributory fault of a creditor, mixed fault results. “If failure to perform or improper performance of an obligation occurred through the fault of both parties, a court should respectively reduce the amount of responsibility of the debtor.”130 (Article 404, Section 1 of the Civil Code). For example, according to the Civil Code, “a  customer shall be obliged in a timely way to tion.” (Article 747, Section 1) Assume, on the negligence failed to provide a plot of land to the

under a contract to build a factory provide a plot of land for construcone hand, that a customer through contractor in time and, on the other,

  Whether negligence shall be deemed gross or simple depends upon the specific situation. If, e. g., a pedestrian crosses a street against a red traffic light during rush hours when the street is full of moving transport vehicles, one of which injured the pedestrian, there is no doubt that the latter sustained the injury due to his own gross negligence. However, if a pedestrian acts the same way in the middle of the night when the street is empty, but a car appeared quite unexpectedly, his fault may be classified as simple negligence. 130   A creditor’s fault may be manifested in a situation when he “intentionally or through negligence facilitated the increase of the amount of losses caused by failure to perform or improper performance, or has not taken reasonable measures to reduce them,” in which cases “a court also shall have the right to reduce the amount of responsibility of the debtor” (id.). See in detail: O.N. Sadikov. Убытки в гражданском праве Российской Федерации [Losses in Civil Law of the Russian Federation]. Moscow, 2009, p. 176–183. 129

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the latter was performing construction work too slowly (also through his negligence) resulting in delay in completing the work. As a result of this delay the customer failed to produce goods under delivery contracts which had been concluded beforehand and therefore had to pay penalties to the buyers of the non-delivered goods. If the customer submits a recourse claim against the contractor, the court appa­ rently will decrease the amount to be recovered with due consideration to the customer’s contributory negligence. This example relates to contractual obligations. Similar rules are provided for obligations in tort. According to Article 1083 of the Civil Code “harm which arose as a consequence of the intent of the victim shall not be subject to compensation.” (Section 1) “If gross negligence of the victim himself furthered the arising or the increasing of the harm, depending on the degree of fault of the victim and the harm-doer, the amount of compensation must be reduced.” (Section 2) Assume that a pedestrian crossed a street against a red traffic light and a car, although moving on a green traffic light exceeded the speed limit and injured him. In this situation the amount of harm sustained by the victim of the accident and to be recovered from the wrongdoer may be decreased due to the victim’s contributory gross negligence.131 Another situation where a form (or degree) of fault shall be taken into consideration concerns responsibility for jointly caused harm. “Persons who have caused harm jointly shall be liable to the victim jointly and severally.” (Article 1080 of the Civil Code). “The harm-doer who has compensated harm jointly caused shall have the right to demand a participatory share of the compensation paid to the victim from each of the other causers of harm in an amount corresponding to the degree of fault of this causer of harm. If it is impossible to determine the degree of fault the participatory shares shall be deemed to be equal.” (Article 1081, Section 2).

  Article 1083 (Section 3) also provides that a court may decrease an amount of compensation of harm caused by a citizen with the consideration of the financial condition of the wrongdoer (except cases when the harm was caused intentionally). The RF Supreme Court emphasized in this regard that this rule is only applicable to natural persons as wrongdoers and cannot be extended to situations when a harm is caused by a legal entity (see: the Ruling of the Civil Cases Collegium of the RF Supreme Court of November 23, 2010. No 11-1310-12). 131

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3.4.1.5. Burden of proof with regard to fault In order to impose responsibility upon a person it is necessary to establish his fault in committing a violation of law. However, a problem of the burden of proof (onus probandi) with regard to fault is resolved in different ways in criminal and administrative law, on the one hand, and in civil law, on the other. According to the Constitution of the Russian Federation any person accused of committing a crime shall be deemed innocent until his guilt is proved in the course of proceedings as regulated by federal law and established by a court sentence which was put into effect (see: Article 49, Section 1). An accused person is not obliged to prove his innocence (see: id., Section 2). Persistent doubts of a person’s guilt shall be resolved in the favor of the accused (see: id., Section 3). In keeping with these rules, Article 14 of the Criminal Procedure Code provides: “1.  The accused shall be regarded as innocent until his guilt of committing the crime has been proved in accordance with the procedure stipulated by this Code, and a court sentence has been put into effect. 2. The suspect or the accused is not obliged to prove his innocence. The burden of proving the charge and of refuting the arguments cited in defense of the suspect or of the accused lies with the prosecution. 3. All doubts concerning guilt of the accused which cannot be eliminated in accordance with the procedure established by this Code, must be interpreted in favor of the accused. 4. The verdict of guilty may not be based on assumptions.” Similar rules are set forth in the Code of Administrative Violations (see: Ar­ ticle 1.5) and in the Tax Code (see: Article 108, Section 6).132 132   The approach of court practice is that an administrative punishment may only be imposed provided the relevant natural person or legal entity is at fault. Tax inspectorate imposed a fine upon a joint stock company for underpayment of VAT. The company challenged the inspectorate’s decision in a state arbitration court. The trial court satisfied the company’s claim. The judgment was upheld by the appellate court. However, the court of cassation quashed these acts and rejected the company’s claim. The company applied to the RF Supreme State Arbitration Court with a motion to review the case in the course of supervision. The Presidium of the RF Supreme State Arbitration Court established that the company had discovered underpayment of VAT upon its own initiative and submitted an ascertained tax declaration; prior to that the additional amount of VAT had been paid to the federal treasury. According to Article 81 of the Tax Code if a verified tax declaration is submitted to tax authorities after expiry of the term for its submission and even after expiry of the term for pay-

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Thus, there is a presumption of innocence with respect to criminal and administrative responsibility. However, in civil law “the absence of fault shall be proved by the person who violated the obligation.” (Article 401, Section 2 of the Civil Code) The same approach is provided for in Article 1064 in relation to obligations in tort: “a person who caused harm shall be relieved from providing compensation for the harm if he proves that the harm was not caused through his fault.” (Section 2) Therefore in civil law a wrongdoer is deemed to be at fault until he proves absence of his fault, that is, there is the presumption of fault of a wrongdoer with respect to civil responsibility.133 The background of this approach is that a victim of a civil law violation is not aware of the measures taken by the wrongdoer to prevent a violation. Nor is the mental condition of the wrongdoer known to the victim.134 3.4.2. Peculiarities of civil responsibility 3.4.2.1. Responsibility for the fault of others In contrast to criminal and administrative law, where one may only bear responsibility for his own fault, in civil law, under certain circumstances, someone may be held liable for the fault of another. As was mentioned earlier (see: supra, Section 3.3 of this text), “a debtor shall be liable for failure to perform or for the improper performance of the obligation by third persons on whom performance has been placed.” (Article 403 of the Civil Code) The application of this general rule can be seen in specific obligations. For example, under a transport forwarding agency contract a forwarding agent undertakes for remuneration and at the expense of a client (a shipper or consignee) to perform or organize the performance of services connected with the carriage of goods (see: Article 801, Section 1, Paragraph 1 of the Civil Code). ment of the tax, the taxpayer shall be exempted from liability if the verified tax declaration was submitted before the tax authorities discovered the underpayment, which was the case. The Presidium emphasized in its Ruling that 1) nobody may be subject to responsibility for a tax violation if he is not at fault (Article 109, Section 2 of the Tax Code);and 2 )the burden of proof of the taxpayer’s fault falls upon the tax authorities who failed to prove it. Given these considerations the Presidium quashed the ruling of the cassation court and upheld the trial court judgment and the appellate court ruling whereby the company’s claim was sustained (see: the Ruling of the Presidium of the RF Supreme State Arbitration Court No 3226/07 of July 24, 2007. Bulletin of the RF Supreme State Arbitration Court, 2007, No 10, pp. 114–116). 133   See: Professor E.A. Sukhanov, Ed., Civil Law. Volume 1. Moscow, 2000, p. 449. 134   See: Academician Y.K. Tolstoy, Ed., Civil Law. Volume 1, p. 661. 220

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The duties of the forwarding agent to organize the carriage of goods may include, inter alia, the agent’s duty “to conclude a contract(s) for the carriage of goods in the name of the client or in his own name.” (Id., Paragraph 2) In the latter case, since there is no contractual relationship between the client and the actual carrier of the goods, it is the forwarding agent who is responsible to the client for preservation of the goods during the course of carriage. However, if the forwarding agent proves that loss of or damage to the goods resul­ted from improper performance of the contracts of carriage, the responsibility of the forwarding agent to the client shall be determined according to the same rules under which the respective carrier is responsible to the forwarding agent.” (Article 803, Paragraph 2 of the Civil Code) As Article 796 (Section 1) of the Civil Code provides, a carrier shall bear res­ ponsibility for failure to preserve goods which occurred after their acceptance for carriage and before delivery to the consignee, unless the carrier proves that the loss (or shortage) of or damage to the goods “occurred as a consequence of circumstances which the carrier could not prevent and the elimination of which was beyond its control.” In other words, the responsibility of a carrier for loss of or damage to the goods is based upon his fault. Therefore in order to avoid liability to the client in such a situation the forwar­ ding agent should prove the absence not only of his own fault but the absence of the carrier’s fault as well. 3.4.2.2. Strict Liability 3.4.2.2.1. Strict liability in business transactions One more distinction between criminal and administrative responsibility, on the one hand, and civil responsibility, on the other, is that in both criminal and administrative law liability without fault is absolutely excluded. However, in civil law a person in some circumstances may bear responsibility, that is, be strictly liable, without regard to fault. For example, according to Article 401 (Section 3) of the Civil Code “unless provided otherwise by law or by contract, the person who has not performed or who has improperly performed an obligation during the course of business activity135 shall bear responsibility unless he proves that proper performance was impossible due to   Business activity is defined in the Civil Code as “autonomous activity effectuated at one’s own risk directed towards the systematic obtaining of profit from the use of property, the sale of goods, the performance of work, or the rendering of services by persons registered in this capacity according to the procedure established by law.” (Article 2, Section 1, paragraph 3) 135

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force majeure, i. e. extraordinary and unavoidable circumstances under the existing conditions.”136 This means that, as a general rule, civil liability for breach of business obligations shall not be limited to situations of the wrongdoer’s fault since it shall also be extended to a so-called “casus” (casualty) when non-performance or improper performance of the obligation results from accidental factors beyond the wrongdoer’s control, that is, in absence of his fault. In other words, this is strict liability. In order to avoid such liability, it will be insufficient for a party to prove that he was not at fault; he needs to prove that breach of the obligation resulted from circumstances of force majeure. 3.4.2.2.2. Force majeure The law provides that a circumstance may be deemed a manifestation of force majeure if it meets two indicia simultaneously: it should be, first, extraordinary and, second, unavoidable. Using this analysis, events such as the change of seasons within a year, while certainly unavoidable, are at the same time, quite usual. So there is nothing extraordinary in this chain of events. That is why it should not be deemed a force majeure. Nor could death of a human being qualified as force majeure since, being unavoidable, it is usual rather than extraordinary.137 Circumstances of force majeure may be both of a natural character and of social origin. Natural manifestations of force majeure include calamities such as earthquakes, volcanic eruptions, floods, tornadoes, hurricanes, etc. It should be noted, however, that in determining whether some event or other would be considered to be a force majeure it is necessary to check whether a person could avoid the negative consequences of the event. If avoidable, then the event should not be considered to be a force majeure. Assume that a shipmaster received a radio message warning of a typhoon in a certain area of the ocean through which the vessel should pass. The warning was received long beforehand, so the shipmaster had enough time to change his course in order to avoid navigating through the dangerous area. Nevertheless he refrained   This norm is optional, so the parties to a business contract may agree that responsibility for its breach shall be based upon the fault of the wrongdoer. With regard to some business obligations such a clause is established by law (see, e. g., Article 796 of the Civil Code concerning responsibility of a carrier for loss (or shortage) of or damage to goods accepted for carriage; Article 777 of the Civil Code with regard to responsibility for violation of a contract for performance of scientific research and experimental-construction design and technological work). 137   See: Academician Y.K. Tolstoy, Ed., Civil Law. Volume 1, p. 667. 136

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from doing so. The vessel was damaged and some of its passengers were injured as a result of the typhoon. In this situation the shipowner’s reference to force majeure would apparently be rejected by a court since the crew had ample opportunity but neglected to avoid the dangerous area. Thus the losses may be attributed to the gross negligence of the crew. The law specifically provides that a circumstance should be deemed a manifestation of force majeure if it is extraordinary and unavoidable under the existing conditions. Two examples illustrate this rule. A farmer lives on an island located several miles from the mainland. In May he entered into a contract to deliver his harvest of vegetables to a buyer in October. His only transport vehicle for communication with the mainland was a motor launch. However, this motor launch had been taken away in high seas and sunk by a typhoon, so the farmer was unable to perform his obligation under the sales contract. If the buyer sues the farmer for non-performance of the contract, the farmer may well make reference to force majeure to be exempted from responsibility. However, if the seller is a collective farm owning several ships, one or two of which had been destroyed by a typhoon but the remaining ones (or at least some of them) were in place and in sufficiently sound condition, a defense of force majeure would hardly be accepted by a court. Heavy ice in the Arctic Ocean will be deemed a force majeure for all vessels except such nuclear-powered ice-breakers as “Arctica,” “Siberia,” “Soviet Union,” and “50 Years of Victory.” These vessels are able to navigate freely to the North Pole, so for them heavy ice conditions will not be deemed to be a force majeure. Force majeure circumstances of social origin include, for example, military operations, large-scale strikes, interference of public authorities, etc. These circumstances should be assessed with due consideration to the facts of a specific case. If, for example, a Russian exporter fails to deliver goods to a foreign buyer because of an embargo by a state agency, this constitutes impossibility of performance resulting from a circumstance, which is indeed a kind of a force majeure. However, in case of state interference such as revocation or suspension of an export license, the possibility to qualify this action as a kind of a force majeure will depend upon the background of the action. If the export license was revoked or suspended as a sanction for some financial violation of the exporter, then such a  sanction was effectively provoked by the exporter himself and should be attributed to his own fault rather than to force majeure. On the other hand, suspension of an import license shall not be deemed to be a  kind of a force majeure since in such a situation the goods may be put under a customs procedure of temporary importation (see: Article 277 of the Customs Un223

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ion Customs Code) for a two year term (see: Article 280, Section 1 of the Customs Union Customs Code) which period is sufficient for the importer to take measures necessary to eliminate obstacles to importation of the goods. Some factors such as “a violation of duties by counterparts of the debtor, the absence in the market of goods necessary for performance, the lack of the debtor’s necessary monetary resources” cannot be deemed manifestations of force majeure due to an express provision of law. (see: Article 401, Section 3 of the Civil Code) 3.4.2.2.3. Strict liability with regard to a source of increased danger In some situations, strict responsibility may also occur in tort obligations. For example, according to Article 1079 of the Civil Code “legal entities and citizens whose activity is connected with increased danger to nearby persons (use of means of transport, machinery, high tension electric power, atomic power, explosive substances, virulent poisons, construction and other activity connected therewith, etc.) shall be required to compensate harm caused by the source of increased danger unless they prove that the harm arose as a consequence of force majeure or the intent of the victim.” (Section 1, Paragraph 1) The possessor of a source of increased danger may also be relieved of responsibility, fully or partially, by a court in the event of the victim’s contributory gross negligence (see: id. See also: Article 1083). A number of questions arise, such as: 1) what is the meaning of the concept: “a source of increased danger;” 2) what is the background for introducing strict liability for harm resulting from its use; 3) who shall bear civil liability for such harm. Considering these questions in turn: 1) It appears that, “a source of increased danger” means an object which, when in use, is not under complete human control and therefore its use creates increased danger for those in its vicinity. 2) Strict liability for harm resulting from operation of a source of increased danger is introduced to create a reasonable balance between two opposing trends: on the one hand, mankind cannot and should not create obstacles for further development of technical progress; on the other hand, potential victims of negative consequences of this progress need a legal mechanism to recover their eventual losses. That is why use of objects creating increased danger is allowed, but those who use such objects must be responsible for harm resulting from their use regardless of their fault. In this way, they are encouraged to use their best efforts to provide maximal possible safety in the course of exploiting such objects. 224

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It should be emphasized that a particular object may only manifest its increased danger when in use. For example, a car shall be deemed to be a source of increased danger when being driven. If it is parked near a pavement and a pedestrian, while passing by, slips, falls upon it and sustains some injury the car owner would not be strictly liable. His liability (if any) will be based on his fault (if, for example, he parked a car at a place where parking is prohibited). Specific rules are provided for compensation of harm resulting from mutual contact of several sources of increased danger. Two different situations can be demarcated: 1) When such a contact causes harm to a third person. For example, a passer-by sustains an injury due to a collision of two cars driven by their owners. In such a case owners of both cars are jointly and severally strictly liable to this person (see: Article 1079, Section 3, Paragraph 1 of the Civil Code). 2) When such a contact results in damage to the sources of increased danger involved. For example, if both cars were damaged due to a collision then “the harm caused as a result of the interaction of the sources of increased danger to their owners shall be compensated on general grounds,” that is, on the basis of fault. (Id. Paragraph 1) There are the following possible situations. a) Only if the owner of one car was at fault while the owner of the other car was innocent, would the former be held responsible for damage caused to the other car. b) If only the owner of a damaged or destroyed car is at fault, no recovery of loss is due to him. c) Owners of all cars are at fault, then the losses to be recovered shall be calculated with due consideration of the degree of fault of each of them. d) None of the car owners is at fault, so no compensation is due to any of them.138 3) Strict liability “shall be borne by a possessor of a source of increased danger, i. e. a legal entity or citizen who possesses the source of increased danger by right of ownership, right of operative management, or other legal basis (right of lease, power of attorney for the right to drive the means of transport…, etc.” (Article 1079, Section 1, Paragraph 2 of the Civil Code) A person who directly operates a source of increased danger on the basis of an employment relationship with its possessor (such as a chauffeur, engine driver, train driver, pilot etc.) shall not be deemed a possessor of a source of increased danger and

  See: Section 25 of the Ordinance of the Plenum of the Supreme Court of the Russian Federation of January 26, 2010. No 1 “On application by courts of civil legislation regulating relations under obligations resulting from causing of injury to life or health of a citizen.” 138

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shall not bear direct responsibility to the victim. Such an employee may only bear recourse responsibility to his employer in terms of the employment relationship.139 To be exempt from strict liability a possessor of a source of increased danger must prove that the harm resulted from the intent of the victim140 (who might, for example, have decided to commit suicide) or from force majeure, some extraordinary and unavoidable circumstance. Let us clarify this matter with regard to a tort obligation. A train is moving at a  speed of about 100 kilometers per hour. About 600-700 meters ahead of the train a pedestrian crosses the rails, he slips, strikes his head against a rail and falls unconscious. Given the speed of the train it will proceed about 2 kilometers before it can stop. So the accident is inevitable and unavoidable. However, there is nothing extraordinary in trains moving on rails in the 21st century and even much earlier. So, although the situation in question is unavoidable and thus meets one indicia of force majeure, but, being usual, it does not meet other indicia (extraordinary character). Therefore there is no force majeure in this case and the railway company will bear strict liability to the victim. Should the company (having paid compensation to the victim) sue the train dri­ ver with a recourse claim, the train driver will easily prove that, in spite of his best endeavors, he could not prevent the accident. Since liability in labor law is always based upon an employee’s fault which was absent here, the driver will be relieved of responsibility to his employer. A railway company will be exempt from civil liability where passengers were injured if it can prove, for example, that the train derailed because of an earthquake. In some situations civil liability may even be extended to harm resulting from interference with circumstances of force majeure. For example, according to Article 101 of the USSR Air Code, an air carrier was responsible for a passenger’s injury caused during an airplane’s take off, flight and landing (as well as during boarding and debarking) even by force majeure. Article 117 of the 1997 RF Air Code (which is currently in effect) with regard to the civil liability of an air carrier for injury caused to a passenger refers to the rules of Chapter 59 of the Civil Code (on Obligations in tort). Thus, an air carrier shall bear strict liability, unless the harm resulted from force majeure.

  See: Professor A.P. Sergeev and Professor Y.K. Tolstoy, Eds., Civil Law. Volume 3, Moscow. 2003, p. 52. See also: Section 19 of the Ordinance of the Supreme Court of the Russian Federation of January 26, 2010. No 1. 140   In case of the victim’s contributory gross negligence the amount of compensation should be reduced (see: Article 1083, Section 2 of the Civil Code). 139

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3.4.2.2.4. Strict liability for nuclear damage There are rules of international law which extend civil liability to harm caused by force majeure. For example, the 1997 Vienna Convention on Civil Liability for Nuclear Damage in Article IV, provides: “1.  Liability of the operator for nuclear damage under this Convention shall be absolute.” “2.  If the operator proves that nuclear damage resulted wholly or partly either from gross negligence of the person suffering the damage or from an act or omission of such person done with intent to cause damage, the competent court may, if its law so provides, relieve the operator wholly or partly from his obligation to pay compensation in respect of the damage suffered by such person.” “3.  No liability under this Convention shall attach to an operator if he proves that the nuclear damage is directly due to an act of armed conflict, hostilities, civil war or insurrection.” This means that if nuclear damage is due to other manifestation of force majeure (such as, natural calamities), the operator will bear civil liability. 3.4.2.2.5. Peculiarities of liability of public agencies Another example of strict liability is provided by Article 1070 of the Civil Code according to which “harm caused to a citizen as a result of an illegal conviction, illegal bringing to criminal responsibility, illegal application of confinement under guard or written undertaking not to leave as a measure of restraint, or illegal imposition of an administrative sanction in the form of arrest or correctional work shall be compensated, at the expense of the treasury of the Russian Federation, and in instances provided for by law, at the expense of the treasury of the subject of the Russian Federation or treasury of the municipality in full irrespective of the fault of the officials of the agencies of inquiry or preliminary investigation, office of public prosecutor and court in the procedure provided for by a law.” (Section 1) There is no reservation in Section 1 of Article 1070 to exempt the state from responsibility in situations of force-majeure. In other words, compensation of harm will be due to an injured person even if some force-majeure circumstance occurs. One more example of strict responsibility of a state is manifested in the Federal Law of April 30, 2010 No 68-FZ “On Compensation for Violation of the Right to have Judicial Proceedings Performed within a reasonable Term or the Right to have Enforcement of a Judicial Act Performed within a Reasonable Term.” It is also necessary to mention the Federal Law of April 30, 2010 No 69-FZ in which relevant amendments have been introduced to the RF Arbitration Procedure Code, the RF Civil Procedure Code, the RF Code on Administrative Violations and some other Codes. 227

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These Federal Laws were effectively preconditioned by the legal position of the European Court of Human Rights which, with reference to Article 6 § 1 of the Convention on Protection of Human Rights and Fundamental Freedoms, repeatedly emphasized that judicial proceedings (including enforcement of court judgments) should be completed within a reasonable period of time. In line with this requirement it is established that Russian nationals, foreign nationals, stateless persons, Russian, foreign and international organizations as litigants are entitled to approach a court with a claim for compensation for unreasonable delay in judicial proceedings141 in which case court’s act should be enforced at the expense of the federal, regional or municipal treasury (see: Article 1, Section 1 of the Federal Law of April 30, 2010 No 68-FZ). However, violation of statutory terms for consideration of a case or enforcement of a judgment shall not in and of itself mean that the right to have judicial proceedings (or enforcement proceedings) performed within a reasonable time has been violated (see: id., Section 2). Given these provisions, one may distinguish four different situations in which the actual period of court proceedings may exceed stated time limits due to 1) a litigant at fault; 2) a state at fault; 3) neither litigant nor state at fault but due to an extremely complicated case; 4) neither litigant nor state at fault but interference from force-majeure circumstances. According to well-established case law on the European Court of Human Fights a state shall be responsible only in the second situation. However, as it appears from the Russian Federal Law of April 30, 2010. No 68-FZ, the state shall be responsille in the third as well as the second situations. Thus the Russian Law in question assumes an even stricter approach than the European Court of Human Rifhts. Upon assessment of whether the term of judicial proceedings may be deemed reasonable a number of circumstances should be taken into consideration, such as the legal and factual complexity of the case, the behavior of the litigants, the effectiveness of relevant actions of the court, and also the general length of the proceedings (see: Article 4, Section 3 of the Federal Law of April 30, 2010 No 69-FZ). An applicant is due compensation regardless of fault of the court or enforcement agencies (see: Article 1, Section 3 of the Federal Law of April 30, 2010). An applicant is entitled to compensation provided delay in judicial (or enforcement)   This right is also granted to suspects, accused, convicted persons and other participants of criminal proceedings. 141

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proceedings resulted from circumstances beyond his control (with an exception for force-majeure) — (see: id., Section 2). The amount of compensation should be calculated by the court with due consi­ deration to the applicant’s claim, the peculiarities of the case, the length of delay and its consequences for the applicant, as well as principles of reasonableness, justice and practice of the European Court of Human Rights (see: Article 2, Section 2 of the Federal Law of April 30, 2010 No 68-FZ).142 An application for compensation should be considered by a cassation state arbitration court and, within the system of courts of general jurisdiction, — by a court of the relevant subject of the Russian Federation (if a delay took place in the course of proceedings before judges of peace or district courts) and by the RF Supreme Court — if a delay took place in the court of a subject of the Russian Federation) — see: Article 3, Section 3 of the Federal Law of April 30, 2010. N 68-FZ). In other instances when harm is caused to a citizen or legal entity “as a result of illegal actions (or omission) of state agencies, agencies of local self-government or officials of these agencies, such harm shall be compensated at the expense, respectively, of the treasury of the Russian Federation, the treasury of the subject of the Russian Federation or treasury of the municipality.” (Article 1069 of the Civil Code)143

  This approach is followed by both state arbitration courts and courts of general jurisdiction. Here is an illustrative case. X had been accused in grave crime. Criminal proceedings against him had been lasted during about 8 years, and he had been confined under arrest within more than four years. In the long run he was convicted for less grave crime and sentenced to a punishment not connected with deprivation of freedom. He applied to a court for compensation for an unreasonable delay in judicial proceedings. His claim amounted to 100 mln rubles. The trial court having established that the time period of the criminal proceedings was too long, obligated the RF Ministry of Finance to pay X 750 thousand rubles from the Federal treasury. The Ministry of Finance appealed the judgment to the RF Supreme Court on the reason that the amount of the compensation was too high. The Civil Case Collegium of the RF Supreme Court noted in its Ruling that this amount is an equivalent of €18 thousand, meanwhile the European Court of Human Rights in similar cases obligated the Russian Federation to pay lesser amounts (€5600 for criminal proceedings during more than 7 years and €6700 for criminal proceedings over 11 years). With due consideration of case law of the European Court of Human Rights the Collegium obligated the RF Ministry of Finance to pay X 200 thousand rubles (see: the Ruling of the Civil Cases Collegium of the RF Supreme Court of January 25, 2011. No 16-Г10-64). 143   E.g. losses caused by illegal refusal state registration of rights to property, evasion of state registration, introducing of illegal or ungrounded data on a right to the State Register or violation of the order of state registration established by law if the state registration body is at 142

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It is specifically indicated in Section 2 of Article 1070 of the Civil Code that the rules as set forth in Article 1069 shall also apply in relation to harm caused to a citizen or legal entity as a result of illegal activity of agencies of inquiry, preliminary investigation or state attorney’s office that have not caused the consequences provided for by Section 1 of Article 1070. (See: supra, Subsection 3.4.2.2.5 of this Chapter. Paragraph 1) There is no reservation in Article 1070 providing that responsibility of these agencies is of a strict character. Therefore such responsibility is based upon general rules, i. e. a public agency shall be held responsible provided it is at fault.144 It should be noted here that the burden of proof of the legality of the action or omission in dispute is imposed upon the relevant public agency (see: Article 249, Section 1 of the Civil Procedure Code, Article 189, Section 3 of the Arbitration Procedure Code). Here is an illustrative case. A company filed a statement of claim with the state arbitration court of the city of Moscow against the Russian Federation whose agencies, such as the General Attorney’s Office, Interior Ministry and Defense Ministry, it claimed to be jointly and severally liable for compensation of about 5 million rubles of losses resulting from their illegal actions and about 5 hundred thousand rubles of losses resulting from defamation of the plaintiff’s business reputation. The merits of the case are, in a nutshell, as follows: Criminal proceedings were initiated by a state attorney’s office whose investigator ordered militia officers to take 8416 boxes with pyrotechnic articles out of the company’s warehouse as tangible evidence, which were deposited at some Defense Ministry’s institution. Later the investigator concluded that no crime had been committed, so he discontinued the criminal proceedings and ordered the abovementioned articles to be returned to the company. In fact the company received back only 3342 boxes. The trial court rejected the company’s claim for recovery of losses; the judgment was upheld by appellate and cassation courts for the reason that there was nothing illegal in acts of state officials who performed their public duties within their competence.

fault shall be recovered at the expense of the treasury of the Russian Federation (see: Article 81, Section 9 of the Civil Code introduced by the Federal Law of December 30, 2012 N 302-FZ). 144   See: Professor A.P. Sergeev and Professor Y.K. Tolstoy, Eds., Civil Law. Volume 3, p. 27. 230

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The company next approached the RF Supreme State Arbitration Court with a supervisional complaint. The position of the Presidium of the RF Supreme State Arbitration Court, as described in its ruling, was as follows. Both the state attorney’s office investigator and militia officers (who acted upon his order) were authorized to take the articles in question out of the company’s warehouse as tangible evidence, so to that extent their acts were legal. However, a state agency upon whose decision the property has been taken shall be responsible for its safety, and according to regulations jointly approved October 18, 1989 by the USSR General Attorney, the Supreme Court of the USSR, the USSR Interior Mini­stry, the USSR Justice Ministry and the USSR State Security Committee (as subsequently amended), storage of such property is the responsibility of the body which decided to take that as tangible evidence, or by other persons with whom this body contracted. This body (or another person) is responsible for loss of or damage to tangible evidence. As it was judicially established and supported by the materials of the case, it was the state attorney’s office which was in charge of the criminal proceedings and upon whose decision the property was taken as tangible evidence. No contract on storage of the property was concluded with the Defense Ministry Institution where the items were deposited. In such a situation the state attorney’s office is responsible for storage of the property in question. Meanwhile the RF Interior Ministry and the RF Defense Ministry are also concerned since their officials put the property in a place which was not suitable for safe storage of the property. Given these circumstances, responsibility for losses sustained by the plaintiff as a result of illegal acts of each of the abovementioned public agencies and their officials, without regard to the degree of their fault, shall be borne by the Russian Federation which should recover the losses from the federal treasury. As it clearly appears from this legend, the degree of fault of the officials is irrelevant, but their fault should be established. The illegality of actions of these officials is manifested in their failure to ensure the safety of the property taken from the company. The amount of losses is supported with relevant documents. Therefore, the lower courts erroneously rejected the claim since they founded their refusal upon the legality of the officials’ acts that were not relevant to procuring the safety of the property. The Presidium required the Russian Federation to compensate the company for the harm resulting from the loss of its property. 231

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As for the company’s claim for compensation for losses for defamation of the company’s business reputation, in order to assess this claim properly, it is necessary to establish exactly how the company’s business reputation was defamed, and what documents may support the amount of this claim. Since these circumstances had not been ascertained by lower courts, the case, as concerns the defamation claim, was referred back to the trial court145. In another case the customs authorities brought a company to responsibility for an administrative violation and took the company’s property (vegetables) as a mea­ sure of security within the time of administrative proceedings. The vegetables were placed at the warehouse for temporary storage. Upon completion of the proceedings the vegetables were returned to the company together with an act of expert examination which evidenced that the quality of the vegetables was decreased as a result of improper storage since the warehouse was not equipped for long term storage of vegetables. The company sold the vegetables upon a low price and sued the Russian Fe­ deration (whose agency the customs authorities have been) for recovery of loss. In the course of the court hearing the customs authorities argued that poor quality of the vegetables resulted from the fault of the warehouse rather than that of the authorities. The trial court granted the company’s claim on the reason that albeit the customs authorities were entitled to take some company’s property in order to secure administrative proceedings, they were obligated to ensure proper storage of this property. As for the warehouse’s fault, it may be a legal ground for the Russian Federation to advance a recourse claim against the warehouse (see: Section 7, of the Review of the practice of consideration by state arbitration courts of cases on compensation of loss, caused by state bodies, local government bodies, as well as officials thereof approved by the Information letter of the Presidium of the RF Supreme State Arbitration Court of May 31, 2011. No 145).

  See: Bulletin of the RF Supreme State Arbitration Court, 2009, No 10, pp. 159–162.

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§ 1. Types of businesses with foreign investment (general overview) Economies of market-oriented countries are closely interconnected and open to each other. Consequently such economies have both domestic and foreign sources of investment. Any investor, before deciding to make an investment in a foreign market, will need to consider, among others, the following principal questions: 1) what are the business opportunities available to him in the country; 2) whether it is possible for him freely to transmit hard currency in and out of the country; 3) whether there is a legal “mechanism” to repatriate profits (derived in that count­ry) abroad. The second and the third questions, relating specifically to currency regulation and control, will be addressed in Chapter 6 (§ 3). When considering the first question, the possibility of conducting business in a foreign country, an investor will first want to clarify to what extent he will be able to control a business that he establishes abroad. The 1999 Law on Foreign Investment (Article 4) provides that the following types of businesses having foreign investment may be established and operated in the Russian Federation: a) joint ventures, that is, commercial organizations whose chartered capital consists of shares held by both domestic and foreign participants; 233

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b) wholly owned foreign subsidiaries, that is, commercial organizations where 100% of the chartered capital is held by foreign investor(s); c)  branch offices of foreign commercial organizations.1 It is quite clear that both in wholly foreign owned subsidiaries and in branch offices of foreign firms full control over their activities rests completely in the hands of their founders, the foreign investors who are the only decision-makers. However, in joint ventures, since decision-making power is distributed among foreign and domestic investors in accordance with their share percentages in the firm’s chartered capital, the situation is quite different. A question naturally arises whether Russian law imposes any limitation with respect to the aggregate foreign share in the chartered capital of a joint venture. This issue has a history of its own. One should bear in mind that a joint venture was the earliest type of business with foreign investments which was permitted in the USSR, beginning in 1987.2 Wholly foreign owned subsidiaries were permitted in Soviet territory only at a later time.3 Originally the share of Soviet partners permitted in a joint venture’s chartered capital could not be less than 51%. Thus the cap for the aggregate foreign share became 49%.4   As is well-known, foreign companies create both branch and representative offices in Russia. However, representative offices are not mentioned in the 1999 Law on Foreign Investments (nor were they mentioned in the 1991 Law). The background of this silence is apparently the following: The law in question regulates the procedure for establishing and operating commercial organizations with foreign involvement (as well as their subdivisions) conducting business activities. A branch office complies with these requirements since, according to Article 55, Section 2, of the RF Civil Code, it performs (wholly or in part) commercial functions of a legal entity of which it is a subdivision. However, the activities of representative offices may only include representation and legal protection of the appropriate legal entities’ interests (Article 55, Section 1 of the RF Civil Code). A representative office may not perform any manufacturing or commercial functions. That is why it is not considered to be a commercial organization with foreign investments within the meaning of the 1999 Law (as well as the 1991 Law). 2   See: the Decree of the Presidium of the Supreme Council of the USSR of January 13, 1987 “On issues related to the setting up and operation on Soviet territory of joint ventures, international associations and organizations with the participation of Soviet and foreign organizations, firms and management bodies.” 3   See: the Decree of the President of the USSR of October, 26 1990 “On Foreign Investments in the USSR.” 4   See: the Decision of the Council of Ministers of the USSR of January 13, 1987. No. 49 “On the establishment in Soviet territory and the functioning of joint ventures with the participation of Soviet organizations and firms from capitalist and developing countries” (Section 5). 1

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Soon, however, a norm appeared according to which “shares of Soviet and fo­ reign participants in a chartered fund of a joint venture shall be determined by agreement among them.”5 In other words, the 49% cap was abolished, and the foreign share in a joint venture’s chartered capital could be as high as 99%. However, neither the 1991 nor the 1999 laws on foreign investment mentioned any particular limitation. This silence led to the conclusion that share percentages of domestic and foreign participants were entirely a matter of discretion. While this became the general rule, some exceptions to it have been introduced by federal laws. Adoption of the 1992 Law “On Insurance” (Российская газета, January 12, 1993), (subsequently amended) was accompanied with a reservation that foreign insurers could only operate in the Russian market within joint ventures in which the aggregate foreign share in the chartered capital of the joint venture did not exceed 49%. The background of this rule was the need to protect the Russian insurance market, which at that time had just started to develop.6 Some years later this norm was substantially amended. Now insurance busines­ ses with foreign shares of more than 49% (also including wholly foreign owned subsidiaries) are allowed to operate in Russia unless a law provides otherwise.7 Such insurance businesses currently are prohibited from entering certain markets including life insurance, compulsory insurance, property insurance related to deliveries or contracting works for public needs as well as insurance of property interests of state and municipal organizations.8 According to the Federal Law “On State Regulation of Development of Aviation” of January 8, 1998 (Российская газета, January 14, 1998), subsequently amended, foreign investment in aviation organizations in Russia which perform designing, manufacturing, testing, repairing and/or utilization of aviation machinery is permissible provided the aggregate foreign share in the organization’s chartered capital is less than 25%.9 The RF Air Code provides that a foreign share in the chartered capital of an aviation enterprise (that is, a company operating aircraft for carriage of passengers,   See: Decision of the Council of Ministers of the USSR December 2, 1988 No. 1405 “On further development of foreign economic activities of state owned, cooperative and other social enterprises, associations and organizations” (Section 31). 6   See: Decision of the Supreme Council of the Russian Federation of November 27, 1992 “On Introduction of the Law “On Insurance.” (Section 5) 7   See: Federal Law of November 20, 1999 “On Introduction of Amendments into the Law of the Russian Federation ‘On Organization of the Business of Insurance in the Russian Federation.” (Article 3) 8   See: Federal Law November 20, 1999 (Article 1). 9   See: Article 12 of the Law. 5

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goods or performance of other aviation work) can not exceed 49% (see: Article 61, Section 2). Joint ventures involved in other types of business currently are not subject to any limitation concerning the percentage of foreign shares in a company’s chartered capital. Since a foreign investor can operate a business using any of various organizational structures in the Russian market (joint ventures, wholly foreign owned subsidiaries, branch or representative offices), he will certainly want to determine which is the most advantageous. Not only legal factors but also commercial aspects will need to be considered, since each organizational form has its own advantages and disadvantages. Let us consider joint ventures. In this form of business organization a foreign investor (if he is lucky with his Russian partners) will enjoy the cooperation and assistance of one or more local individuals and/or firms having good connections both within the business community and with public agencies. These local connections can provide expertise that may be extremely helpful to a joint venture and can be a substantial advantage of this form of business. At the same time, as often happens in real life, disadvantages can often flow from what at first appear to be advantages. This situation effectively occurs in Russia. Due to the fact that there are both foreign and domestic investors in a joint venture, decision-making power is distributed among them, precluding the foreign investor from being the sole decision-maker. If according to the company’s charter (or according to a mandatory rule of law) a matter requires a unanimous vote, in case of disagreement between foreign and domestic investors, domestic investors may block a decision proposed by a foreign investor, even one having an overwhelming majori­ ty of the votes. Thus, the distribution of decision-making capacity in a joint venture can limit the discretion of the foreign investor and thereby disadvantage him. Wholly foreign-owned subsidiaries, not having a domestic partner, ensure that the foreign investor has the entire decision-making power. However, the foreign investor here assumes the entire responsibility for making commercial decisions. Given that he is acting in a foreign market which he does not know in great detail, this organizational form may create some problems for him. While a foreign investor will almost certainly recruit some local staff (including a management team), employees are not likely to be as interested in the successful activities of the business as its partners who participate in the distribution of its profits through dividends. Both joint ventures and wholly foreign-owned subsidiaries are granted the status of legal entities under Russian law. This means that as long as they are organized as joint stock companies or limited liability companies (which are the most typical and 236

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popular forms of business in Russia) their participants, as a general rule, will not be liable for their companies’ debts. Their only risks are those of the eventual losses, to the extent of the value of their shares, which arise out of their companies‘ activities. A branch office is not a legal entity. It is a subdivision of a legal entity which is located outside the principal place of business of the entity. It may be located abroad. A power of attorney issued by the legal entity permits the head of a branch office to act (Article 55 of the RF Civil Code). A branch office acts on behalf of the legal entity which created it which is directly liable for obligations resulting from the branch’s activities in the territory of the Russian Federation.10 In other words, losses which arise out of the branch’s activities must be directly and completely borne by its legal entity. This is evidently a disadvantage for the latter. At the same time, in the past a branch office enjoyed some privileges with res­ pect to currency regulation. According to the Law “On Currency Regulation and Currency Control” of October 9,1992 (Российская газета, November 4, 2003), as subsequently amended, Russian residents were under the statutory obligation to sell on the domestic currency market some part of their foreign currency profits derived from export transactions (see: Article 6, Section 5).11 Both joint ventures and wholly foreign-owned subsidiaries, being Russian resident legal entities, were subject to this rule. However, a branch office of a foreign company, being a non-resident of the Russian Federation, was free from such an obligation. So if a foreign investor preferred to concentrate all currency income derived in Russia in his hands, it might make sense to establish a branch office. The functions of a representative office are even more limited than those of a branch office. Since a rep-office is not entitled to perform commercial activities, it may not derive any profits. Therefore the tax reporting system is substantially simplified for a rep-office. This may also be attractive to a foreign investor. At the end of the day the best possible form of business for a foreign investor in Russia may only be chosen on the basis of a feasibility study (or business plan) for the project. Large foreign companies, as a matter of commercial practice, quite often will establish different types of businesses (joint venture, subsidiary, branch and repoffices), in order to use each of them when appropriate.   See: the 1999 Federal Law “On Foreign Investments in the Russian Federation,” Article 4, Section 3. 11   It should be noted that the Federal Law “On Currency Regulation and Currency Control” of December 10, 2003 No 173-FZ (which is currently in effect) does not provide a similar rule. 10

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According to the 1999 Law “On Foreign Investment,” “establishment and liquidation of a commercial organization with foreign investments shall be made on the conditions and according to the procedure provided for in the Civil Code of the Russian Federation and other federal laws with such exceptions as may be introduced by federal laws in compliance with Section 2 of Article 4 of the present Federal Law.”12 (Article 20, Section 1)

§ 2. Legal entities in Russia (general provisions) 2.1. Concept of a legal entity A legal entity is defined in the RF Civil Code as an organization that has separate property and shall be liable within this property for its obligations, may in its name acquire and realize civil law rights and bear civil law duties, be a plaintiff and a respondent in court (see: Article 48, Section 1). A legal entity acquires civil law rights and assumes civil law duties through its bodies acting in its name in accordance with a law, other legal acts, and a charter (see: Article 53, Section 1 of the RF Civil Code). It may be provided by a constituent document that powers to act in the name of a legal entity are granted to several persons acting jointly or separately of each other (see: Article 53, Section 1, Paragraph 2 of the RF Civil Code). A person who by virtue of law, other legal act or a charter of a legal entity is authorized to act on its behalf, should act in the interests of the legal entity in good faith and reasonably. This duty shall be extended to members of collective bodies of a legal entity such as a supervisory board, a management board, etc. (see: Article 53, Section 3 of the RF Civil Code) In case a legal entity sustains losses resulting from such person’s fault, a legal entity or its founders (participants) may may seek to recover losses from such person. The person in question shall be liable if it is proved that in the course of his/her acti­vity he/she acted in bad faith or unreasonably, inter alia, if his/her acts (omission) did not correspond to usual conditions of civil turnover or usual business risk (see: Ar­ticle 531, Section 1 of the RF Civil Code).

  This Section provides: “Exceptions of a restrictive nature for foreign investors may only be introduced by federal laws to the extent necessary for protection of fundamentals of constitutional structure, moral, health, rights and lawful interests of other persons, providing for national defense and state security.” 12

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This liability shall also be borne by members of collective bodies of a legal entity except those who voted against the decision that resulted in losses for the legal entity or, when acting in good faith, did not participate in voting (see: id., Section 2). This is interpreted in the Ordinance of the Plenum of the Supreme State Arbitration Court of July 30, 2013 N 62 “On certain issues of compensation of losses by persons included in a complement bodies of a legal entity.” It is stated in the Ordinance that good faith and reasonableness in the course of performance of functions of a chief executive officer (CEO) or other persons who are members of the management board or the board of directors or other body of the legal entity means taking measures which are necessary and sufficient for the legal entity to achieve the purposes of its activity (see: Section 4, Paragraph 1). It is also noted that no liability may be imposed upon those persons if losses resulting from their acts or omissions were within the confines of usual business risks (see: Section 1, Paragraph 2). A CEO (or other abovementioned persons) shall be deemed to be acting in bad faith when he (or they), inter alia: 1) acted where his own interests and those of the legal entity were in conflict unless information of the conflict of interests had been discovered beforehand and his acts were approved in due course; 2) concealed information with respect to a transaction from the participants of the legal entity or provided them with incorrect information about it; 3) concluded a transaction without approval of the relevant bodies of the legal entity as required by law or the charter; 4) after termination of his powers retained the documents concerning the circumstances which resulted in losses for the legal entity; 5) was or had to be aware that his acts or omissions were not in keeping with the legal entity’s interests (see: Section 3). A CEO’s actions or inaction shall be deemed unreasonable if he: 1) made a decision without due consideration of important information available to him; 2) before making a decision failed to obtain information in the absence of which a reasonable CEO would postpone making a decision until he had such information; 3) concluded a transaction without following procedures adopted in the legal entity (such as coordination of the transaction with the legal department, the book-keeping department, etc.). The RF Civil Code also provides that a person who has actual possibility to determine activity of a legal entity including a possibility to give instructions to its bodies, 239

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shall act in the interests of the legal entity in good faith and reasonably, and shall bear liability for losses caused to the legal entity by this person’s fault (see: id., Section 3). It is effectively none other than a manifestation of the concept of “piercing the corporate veil.”

2.2. Types of legal entities Legal entities, from the standpoint of purposes of their activity, may be classified into two groups: 1)  Commercial organizations, i. e. those whose main aim is to derive profit, and 2)  Non-commercial organizations, i. e. those which do not have such an aim and do not distribute income (if derived) among their participants (see: Article 50, Section 1 of the RF Civil code). As for organizational structure, legal entities (both commercial and non-commercial) under this angle may again be divided in two groups: corporations and unitary organizations. Corporations are legal entities whose founders (participants) enjoy the right to participate therein and form the supreme body thereof (such as commercial partnerships and companies, economic partnerships, productive and consumer cooperatives, farmers’ establishments, social organizations, associations (unions), partnerships of real estate owners). Unitary organizations are legal entities whose founders do not become their participants (such as state and municipal unitary enterprises,13 foundations, institutions, autonomous non-commercial organizations, as well as religious organizations (see: Article 651, Section 1 of the RF Civil Code). Participants of a corporation (stockholders, members, etc.) are entitled to: — participate in management of corporation’s activity;14 — obtain information on corporation’s activity; — challenge in due course decisions of corporation’s bodies which decisions result in civil law consequences; — require, acting on behalf of the corporation as its representative, compensation of losses caused to the corporation by persons entitled to act in its   Unitary enterprises may only be established by state agencies (that is, by bodies of the Russian Federation or its subjects) or by municipalities (Articles 113–115 of the RF Civil Code). Thus, this organizational form is not available to others, including foreign investors. 14   Unless otherwise provided by law (see: Article 84, Section 2 of the RF Civil Code (see: infra, § 3 of this Chaper). 13

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name and other persons mentioned in Article 531 of this Code, when those persons acted in bad faith or unreasonably; —  challenge, acting on behalf of the corporation as its representative, its transactions concluded contrary to its interests provided that another party to the transaction was aware of that. A participant of a corporation who intends to demand compensation of losses caused to the corporation or invalidation of a transaction concluded by the corporation must take reasonable measures to notify in advance other participants of such an intention and provide them with the relevant information. Participants of the corporation who did not join the claim are not entitled in future to file identical claims with court unless the court admits such filing to be justified (see: Article 52 of the RF Civil Code). Participants of a corporation shall: — participate in formation of the corporation’s property in accordance with this Code, other law, or the charter; —  refrain from disclosure of confidential information on the corporation’s activity; —  take part in adoption of corporate’s decisions necessary for continuation of the corporation’s activity if his/her participation is needed for adoption of such a decision; — refrain from actions detrimental for the corporation’s interests; bear other duties as provided by law or the corporation’s charter (see: Article 652, Section 3 of the RF Civil Code). A supreme body of a corporation is a general meeting of its participants (see: Article 653, Section 1 of the RF Civil Code). Exclusive competence of a general meeting of a corporation’s participants includes: 1) determination of priority lines of the corporation’s activity and principles of formation and use of its property; 2) adoption and amendment of the corporation’s charter; 3) determination of a procedure of admission of new participants to the corporation and expulsion from it (unless such a procedure is provided by law); 4) formation of other corporate bodies and premature termination of their po­wers; 5)  approval of annual reports and book keeping balance sheets of the corporation; 6)  taking decisions on creation of other legal entities by the corporation; 7)  taking decisions on participation of the corporation in other legal entities and on creation of branch and representative offices of the corporation; 241

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8)  taking decisions on reorganization or liquidation of the corporation, on appointment of a liquidation commission and on approval of a liquidation ba­ lance sheet; 9) election of an auditing commission (auditor) and appointment of the corporation’s external auditor. Other issues may be included in the exclusive competence of a general meeting of corporation’s participants by law or by the corporation’s charter (see: Article 653, Section 2 of the RF Civil Code). A corporation should have a chief executive officer (CEO). If a corporation’s charter so provides, powers of a single executive body may be granted to several persons acting jointly or independently of each other. Both a natural person and a legal entity may act as CEO. The Civil Code, other law or the corporation’s charter may provide for formation of a collective managing body (such as management board, directorate, etc). Besides the abovementioned executive bodies a law or the corporation’s charter may provide for formation of a collective controlling body, such as a supervisory board. Persons who perform powers of single executive bodies of a corporation and members of its collective managing bodies may not exceed one fourth of the complement of a collective controlling body, nor may they head this body (see: Article of the RF Civil Code).

2.3. Commercial corporations The main types of commercial corporations recognized under modern Russian civil law include: 1) commercial partnerships: (i) full partnerships; (ii) limited partnerships; 2) companies: (i) limited liability companies;15 (ii) joint stock companies; 3) productive cooperatives;   The original version of the RF Civil Code provided also for additional liability companies. However this kind of a company appeared to be impracticable, so in accordance with the Concept of development of civil legislation of the Russian Federation it was abolished (see: the Concept, Section 4.1.4). 15

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4) farmers’ establishments. Productive cooperatives are voluntary associations of members who are private individuals16 who conduct joint commercial activities (such as manufacturing, processing, sale of industrial, agricultural and other products, performing work, rende­ ring services) based upon their personal labor or other participation, as well as their economic contributions (Article 107 of the RF Civil Code). Productive cooperatives were very much in use at the end of the nineteen eighties and in the beginning of the nineteen nineties (when the USSR Law “On Cooperation” was in effect and until the RF Law “On Businesses and Business Activities” of December 25, 1990 was adopted and entered into force.) 17 Currently productive cooperatives are not popular, although they continue to exist. Since they cannot be considered to be a typical form of a business with fo­ reign investments there is no need to consider this form of business in further detail. As for farmers’ establishments, they (as a specific form of a commercial legal entity) were introduced in the RF Civil Code by the Federal Law of December 30, 2012 N 302-FZ. Such establishments, like productive cooperatives, are voluntary associations whose members are personally involved in joint agricultural activity. As legal entities, such establishments are the owners of their property. A person may be a member of only one farmers’ establishment (see: Article 861 of the Civil Code). Similarly to productive cooperatives, farmers’ establishments are not likely to be particularly attractive for large-scale foreign investment. Accordingly further on materials concerning commercial corporations will be oriented to commercial partnerships and companies. Commercial partnerships and companies are corporations whose chartered capital is divided in shares (contributions) of founders. Property created out of founders’ contributions, as well as produced or acquired by a commercial partnership or company in the course of its activity shall belong to it on the right of ownership (see: Article 66, Section 1 of the RF Civil Code). A contribution of a participant of a commercial partnership or company in its property may be monetary means, things, shares (stocks) in chartered capitals of other commercial partnerships and companies, state and municipal bonds, as well as

  Legal entities may participate in cooperatives if the law and the cooperative’s charter so provide. 17   This Law became invalid December 8, 1994 and was replaced with the relevant norms of the RF Civil Code (Chapter 4). 16

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exclusive and other intellectual rights and rights upon licensing contracts (see: Article 661, Section 1 of the RF Civil Code). A participant of a commercial partnership or company, besides the rights indicated in Article 652 , Section 1 of the RF Civil Code (see: supra, Section 2.2 of this § 2), is entitled to: — take part in distribution of profit of the partnership or company whose participant he is; — obtain a part of the partnership’s or company’s property (or its value) in case of liquidation of the partnership or company (see: Article 67, Section 1 of the RF Civil Code); — require expulsion of another participant from the partnership or the company (except public joint stock companies) by court with payment to him of actual value of his share if such a participant by his acts or omission caused substantial detriment to the partnership or the company or otherwise created substantial difficulties to its activity. A participant of a commercial partnership or a company, besides his duties indicated in Article 652, Section 3 of the RF Civil Code, shall also make its contribution in chartered capital of the partnership or the company whose member he is, in accordance with provisions of the constituent document of the partnership or the company (see: Article 67, Section 2 of the RF Civil Code). A participant of a commercial partnership or a company who lost his share in it beyond his will, is entitled to demand return back his share that passed to other persons, for a fair compensation due to them to be determined by court, as well as to recover losses at the expense of those guilty for loss of his share. A court may refuse to return the share if it will result in clearly disproportionate termination of other persons’ rights with regard to their shares or in extremely negative social consequences. In such a case a person who lost his share beyond his will shall be entitled to obtain a fair compensation at the expense of those guilty in the loss of the share, the amount of the compensation to be determined by court (see: Article 652, Section 2 of the RF Civil Code). There is also a specific right that is only available to participants of a commercial company. All (or some) of them may conclude among themselves so-called “corporative contract”, i. e. a contract whereby they undertake to execute their corporative rights in a certain way or to refrain from execution thereof, inter alia, to vote in a certain way at the general meeting of company’s participants, to coordinate their actions on management of the company, to acquire or alienate their shares in its chartered capital at certain price and/or upon occurrence of certain circumstances or to refrain from alienation of their shares until occurrence of certain circumstances (see: Article 672, Section 1 of the RF Civil Code). 244

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A transaction concluded by a party to a corporative contract in violation of this contract may be declared invalid by court upon a claim of a participant of a corporative contract only provided that another party to the transaction knew or ought to have known of limitations imposed by the corporative contract (see: Article 672, Section 6, Paragraph 3 of the RF Civil Code). Company’s creditors as well as third persons may enter into a contract with participants of a company whereby the latter, in order to secure legitimate interests of such third persons, undertake to perform their corporative rights in a certain manner of refrain (waive) from performance thereof, inter alia, to vote in a certain way at the general meeting of the company’s participants, perform in coordination other acts on management of the company, acquire or alienate shares (stocks) in its chartered capital upon certain price or upon occurrence of certain circumstances or refrain from alienation of shares (stocks) until occurrence of certain circumstances. This contract shall be regulated by the relevant rules concerning the corporative contract (see: Article 672, Section 9 of the RF Civil Code). It is further provided by the RF Civil Code that a company shall be deemed a subsidiary (daughter company) if another (main) commercial partnership or company due to prevailing participation in its chartered capital or in accordance with a contract concluded between them or otherwise has a possibility to determine decisions taken by such a company. A subsidiary shall not be liable for debts of the main commercial partnership or company. A main commercial partnership or company shall be liable jointly or severally with a subsidiary upon transactions concluded by the latter according to directions or with consent of the main commercial partnership or company. In case of insolvency (bankruptcy) of a subsidiary due to the fault of the main commercial partnership or company the latter shall bear subsidiary liability for its debts. Participants (stockholders) of a subsidiary are entitled to demand compensation by the main commercial partnership or company of losses caused by its acts or omission to the subsidiary (see: Article 673 of the RF Civil Code).

§ 3. Full partnership Full partnership is a partnership whose participants are engaged in business activities on behalf of the partnership in accordance with an agreement concluded among them. The partners are liable for the partnership’s obligations to the extent of all their assets (Article 69, Section 1 of the RF Civil Code). A foundation agreement is the only constituent document of a full partnership. 245

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A full partnership has the status of a legal entity. Its participants may be private individuals who are registered as sole businesses and/or commercial organizations. (Article 66, Section 5 of the RF Civil Code) Management of a full partnership is based on the mutual agreement of all the partners, unless a foundation agreement provides that certain matters may be decided by majority vote18 (see: Article 71, Section 2 of the RF Civil Code). A question arises as to who is entitled to conclude transactions on behalf of a full partnership as a legal entity. The Civil Code, Article 72, provides 3 possibilities: 1) each participant; 2) all the participants jointly; or 3) the participant(s) to whom it was entrusted. The first possibility is the most typical and represents the general rule. In this situation each participant may act on behalf of the partnership without a power of attorney and may enter into transactions on behalf of the partnership and represent it in court. This general rule, however, is an optional one. A foundation agreement may replace it with the second or third possibility. If the second possibility is selected, then consent of all the participants is needed in order to conclude any transaction on behalf of the partnership. In the third possibility, the participant(s), who may be called the “authorized” participant(s), may act on behalf of the partnership without a power of attorney. The remaining participants will need a power of attorney issued by the “authorized” participant(s) in order to act. It is necessary to emphasize that the second and the third alternatives are applicable only when a foundation agreement so provides. Otherwise the first alternative will apply. However, it is important to determine to what extent (if any) clauses of a foundation agreement which deviate from the general rule set forth in Article 72 of the RF Civil Code are binding upon third persons. Assume that a limited liability company “Energy” (which manufactures industrial equipment) receives an order to deliver equipment to the full partnership “Ivanov, Petrov and Sidorov” and that the order was typed on the partnership’s letterhead and signed by Mr. Petrov. The “Energy” company then prepared a draft delivery contract signed by its Chief Executive Officer, Mr. Nikitin. Soon thereafter the company received the cont­ ract signed by Mr. Petrov on behalf of the partnership.   Each participant has one vote unless the foundation agreement provides otherwise.

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Assuming that the contract had been entered into in due course, the company manufactured the equipment and notified the partnership that the goods were ready for delivery and would be sent to the partnership as soon as payment was received. The company next received a letter from the partnership signed by Mr. Ivanov, sta­ ting that according to the partnership’s foundation agreement, he, Ivanov, was the only person authorized to act on behalf of the partnership. Since he had not issued a power of attorney to Mr. Petrov, the latter was not entitled to enter into the contract. Therefore the contract was not binding on the partnership, and the partnership could refuse both to receive and to pay for the goods. The company explained that it did not know of the foundation agreement and so believed that each participant was entitled to act on behalf of the partnership. Therefore the company insisted that the contract was entered into in due course, was binding, and the partnership was required to pay for the goods. Whose position is correct? The answer to this question is provided by Article 72, Section 1, Paragraph 4, of the RF Civil Code which states: “In relationships with third persons a partnership is not entitled to refer to provisions of a foundation agreement restricting the rights of participants of the partnership unless the partnership proves that the third person knew or definitely ought to have known at the moment of conclusion of the transaction that the participant of the partnership did not have the right to act on behalf of the partnership.” Ergo: a partnership may only consider itself not bound by a contract concluded by a partner on behalf of the partnership if it is proved that: 1) a foundation agreement endows certain other partner(s) with authority to act on behalf of the partnership; and 2)  a counterpart knew or ought to have known this at the time of entering into the contract (that is, he acted deliberately or negligently). It should also be emphasized that the burden of proof of such circumstances lies with the partnership. In the situation above, if the partnership fails to prove that “Energy” was (or ought to have been) aware of the provision of the foundation agreement according to which Mr. Ivanov was the only person authorized to act on behalf of the partnership, the contract in question should be deemed binding on both parties. Profits and losses resulting from a partnership’s activities are to be distributed among its participants in proportion to the percentage of their shares in the partnership’s capital (Article 74, Section 1 of the RF Civil Code).

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Proceeding to the question of who is liable for a partnership’s obligations, it should be kept in mind that a partnership holds title (that is, the right of ownership) to its property. Therefore a partnership itself is liable for its debts, to the full extent of its assets. If a partnership’s property is insufficient to cover its debts, then its partners must assume additional liability for such debts. In other words, participants become liable for a partnership’s debts only when they exceed the partnership’s assets, in which case the participants are jointly and severally liable (Article 75, Section 1 of the Civil Code). A question arises whether a participant may assign his share in a partnership’s capital to someone else. The answer is: yes, he may assign his share either to another participant or to a third person provided all remaining participants give their consent to the assignment (Article 79 of the Civil Code). Another question: does a participant have a right to withdraw from a partnership? Withdrawal is permissible under some conditions and depends upon the partnership’s term of existence. If a partnership is established for an unlimited term, the withdrawing participant must give six months notice to other participants. If a partnership is established for a limited term, premature withdrawal is permissible only upon justified reasons (Article 77, Section 1 of the Civil Code). It is also important to know whether there is a procedure for expelling a participant from a partnership. Such a decision may be taken only by a court upon a  joint (and unanimous) claim of all remaining participants who must prove that the respondent participant committed a fundamental breach of his obligations or that he was unable to perform business activities properly (Article 76, Section 2 of the Civil Code). A participant who leaves a partnership, whether on his own initiative or due to a court decision, is entitled to receive monetary compensation for his share in the partnership’s capital (Article 78, Section 1 of the Civil Code). Another question is whether a creditor of a participant is entitled to require the partnership to expel the debtor-participant so that his share in the partnership’s capital can be used for recovery of the debt, and if so, under what conditions. Such a possibility does exist, but only where the debtor-participant has insufficient assets to meet his debts (Article 80 of the RF Civil Code). Therefore, a participant may leave a partnership in three situations: 1) voluntarily; 2) upon a court decision initiated by the remaining participants; or 3) upon demand of his creditors. Another question concerns whether, if a participant leaves a partnership, he remains liable for partnership debts which arose prior to the time of his withdrawal from the partnership (and if so, within what time period). 248

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According to Article 75, Section 2, Paragraph 2 of the RF Civil Code, he shall bear liability for a two year period after approval of the report on the partnership’s activities during the year in which he left the partnership. Assume a participant left a partnership on September 15, 1998 and the report of the partnership’s activities during 1998 was approved by the general meeting of the participants on March 20, 1999. The participant in question will remain liable until March 21, 2001 for partnership’s debts that arose prior to September 15, 1998. What are the legal consequences to a participant withdrawing from a partnership? A full partnership is based upon personal links among the participants. That is why withdrawal of any participant results in liquidation of the partnership unless the foundation agreement, or a subsequent agreement of the remaining participants, provides that the partnership shall continue to exist (Article 76, Section 1 of the Civil Code). A close personal relationship among participants also explains the rule of law which provides that in the event of death of a participant his heir may join the partnership only upon consent of all remaining participants. If not granted, an heir can demand to be paid the monetary value of the share which belonged to his predecessor (Article 78, Section 2 of the RF Civil Code). It should be noted that a full partnership is not often used in Russia today. The threat of joint and several liability of participants for a partnership’s debts does not create enthusiasm among participants to conduct their joint business in a full partnership.

§ 4. Limited partnership The limited partnership occupies an intermediate position between a full partnership and a company. As already mentioned, all participants of a full partnership are (on certain conditions, as described supra (see: § 2 of this Chapter)) jointly and severally liable for the partnership’s debts. In contrast, a company’s partners (as will be discussed infra, see: § 4 of this Chapter) are not liable for the company’s debts; partners only bear the risk of losses related to the company’s activities to the extent of their contributions to the company’s chartered capital. However, a limited partnership consists of participants of two kinds: full participants (who can be held jointly and severally liable for the partnership’s debts) 249

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and contributing participants (who only bear the risk of losses related to partnership activities to the extent of their contributions). It is quite clear that the financial position of contributing participants to a limited partnership is much better secured than that of full participants. This sets the background for the different legal status of these two types of participants. A contributing participant is obliged to contribute to the partnership’s capital (Article 85, Section 1 of the Civil Code) as well as to refrain from divulging confidential information related to the partnership’s business (Article 652, Section 3 of the RF Civil Code). He also has certain rights, including the right: 1)  to receive that part of the partnership’s profits due him according to his share in the partnership’s capital; 2) to acquaint himself with the partnership’s annual reports and balance sheets; 3)  to withdraw from the partnership after the end of a financial year and to receive his contribution according to the procedure described in the foundation agreement; and 4) to assign his share in the partnership’s capital wholly or partly to another contributing participant who enjoys a right of first refusal, or to a third person, according to a procedure described in Article 85, Section 2 of the RF Civil Code. As is evident from this list of rights belonging to a contributing participant, the right to take part in management of the partnership’s business is not included. Indeed, contributing partners are expressly prohibited from participating in such management. Nor may they act on behalf of the partnership unless they have been granted a power of attorney (see: Article 84, Section 2 of the RF Civil Code). A number of contributing partners in a limited partnership shall not exceed 20. Otherwise it is subject to transformation into a company within one year, and upon expiration of this term  — liquidation by court unless a number of contributing partners is decreased down to 20 (see: Article 82, Section 3 of the RF Civil Code). The Civil Code mandates that management of a limited partnership’s business can be entrusted only to full participants (Article 84, Section 1 of the RF Civil Code). It also prohibits the contributing participants from challenging the full participants’ management of the partnership’s business. The RF Civil Code provisions relating to participants of a full partnership (Article 82, Section 2 of the Code) also provide norms regulating the legal status of full participants to a limited partnership.

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§ 5. Limited liability company 5.1. General provisions As already mentioned, a full partnership is based upon personal links among participants and its main purpose is to accumulate capital through contributions for the conduct of joint business. A limited liability company (LLC), on the other hand, has a twofold purpose: its purpose is to accumulate capital through contributions towards its business. At the same time it aims to limit the partners’ liability for losses which may result from the company’s activities. In other words, it seeks to limit partners’ business risks.19 Accordingly, the Civil Code provides that partners of a limited liability company shall not be liable for the company’s obligations and shall bear the risk of losses related to the company’s activity only to the extent of the value of their contributions (see: Article 87, Section 1). The limited liability company’s purpose to limit the partners’ business risks includes the legal possibility of extending it as well to a “one man company,” established by a sole founder who shall bear subsidiary liability for the company’s obligations resulted from performance by the company of his instructions (see: Article 66, Section 2 of the RF Civil Code). However, a special reservation in the RF Civil Code provides that a one-man company may not be the sole founder of another limited liability company or of a  joint stock company consisting of one person unless otherwise provided by this Code or other law (Article 66, Section 2, Paragraph 2). This means that while one person may be the founder of several one-man companies, a one-man company may not be a founder of another one-man company. Unlike a company, a partnership (of either type) must consist of at least two persons. So, while a one-man company is permitted, a one-man partnership is inconsistent with Russian civil law. This restriction relates to Russian one-man companies, without regard to whe­ ther such a company is established by a Russian or by a foreign national, since, in both situations, the company has the status of a Russian legal entity. One may ask whether this prohibition also extends to foreign one-man companies which operate in Russia. Assume that a German national established Einmanngesellschaft in Germany. Is Einmanngesellschaft then entitled to create a one-man company in Russia or is such a possibility excluded by the rule set forth in Article 66, Section 2 of the RF Civil Code?   This twofold purpose is also attributable to a limited partnership, but only in relation to contributing partners. 19

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In order to answer this question it is necessary to take into consideration the relevant conflict of laws norms. According to Article 1202, Section 1 of the RF Civil Code, the personal status (lex societatis) of a legal entity shall be governed by the law of the country where the legal entity was founded, and this law shall determine, inter alia, the nature of the legal capacity of the legal entity (see: id., Section 2 (5)). Given this rule, it is necessary to clarify whether Einmanngesellschaft is entitled to create a one one-man company both in Germany and abroad. If such a right does exist, a German Einmanngesellshaft may establish a one-man company in Russia, but the latter, being a Russian legal entity, is subject to the restrictions set forth in Article 66, Section 2 of the RF Civil Code. A partner’s business risk is not the only subject which is limited in limited lia­ bility companies. The number of partners is also limited. Limited liability companies cannot have less than one partner or more than 5020 (see: Article 88, Section 1 of the Civil Code).21

5.2. Constituent documents Contrary to partnerships (both full and limited) where the only constituent document is a foundation agreement, a limited liability company until recently had two constituent documents: a foundation agreement and a charter or articles of association, as was expressly provided in Article 89 of the RF Civil Code, original version. However, this requirement was amended by the Federal Law of December 30, 2008; now the only constituent document of a limited liability company is its charter (see: Article 89, Section 3 of the Civil Code). However, a written foundation agreement is also needed (see: id., Section 1). It is aimed at regulating the relationship among the founders during the course of establishment of the company. The founders shall be jointly and severally liable with respect to obligations connected with the creation of the company that arose before its state registration (see: id., Section 2). The company shall bear liability for these obligations of the founders only in the event of their subsequent approval by the company’s general shareholders meeting (see: id., Section 2).

  A company’s participants may be private individuals and/or legal entities except in the case of public agencies and municipalities (Article 66, Section 5 and 6 of the RF Civil Code. 21   There is a specific rule for a situation when the number of LLC’s partners exceeds 50. In such case the company should be transformed into joint stock company within one year, otherwise it will be subject to a compulsory liquidation by a court unless a number of its participants is decreased down to 50. (see: id.) 20

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The amount of the company’s liability for such obligations may be limited by the Law “On Limited Liability Companies.” According to the Federal Law of 8 February 1998 (as subsequently amended) this amount should not exceed one fifth of the company’s paid in chartered capital (see: Article 11, Section 10). The Law “On Limited Liability Companies” indicates that a foundation agreement shall contain information on the procedure for the participants’ performance of joint activity on creation of the company, the amount of the company’s chartered capital and that of each participant’s share in it, types of contributions (monetary and/or in kind), and the procedure and terms for making contributions. It is specifically provided that the foundation agreement is not a company’s constituent document (see: Article 11, Section 5). The company’s charter, must indicate, inter alia: — the company’s name (both full and shortened); — the place of location of the company; — the composition and competence of the company’s bodies; — the amount of the company’s chartered capital; — the rights and obligations of the participants; —  the procedure and consequences of withdrawal of a participant from the company, if such a right is provided for by the company’s charter; — the procedure for assigning a share (or a portion of it) in the company’s chartered capital to one or more other persons; and — maintaining of a company’s records and providing information to participants and other persons (Article 12, Section 2). Decisions relating to creation of a company, approval of its charter and mone­ tary evaluation of in-kind contributions of the founders in the company’s chartered capital must be taken unanimously (see: Article 11, Section 3 of the Law). Election of the company’s managing bodies, formation of its internal auditing commission and approval of an external auditor must be taken by ¾ of the votes of the entire number of the company’s founders (see: id., Section 4). The main obligations of a company’s participants are: — to pay for their shares in the company’s chartered capital as provided for in the Law and the company’s foundation agreement;22 and —  to refrain from disclosure of confidential information of the company’s activities (see: Article 9, Section 1 of the Law).   At least 75% of the company’s chartered capital shall be paid before state registration of the company as provided by the Civil Code (see: Article 662, Section 4). The remainder shall be paid within a one year of the company’s activity. 22

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The participants enjoy the following principal rights: — to participate in management of the company’s business; — to obtain information concerning the company’s activities; —  to participate in distribution of the company’s profits; — to assign their participant’s share in the chartered capital to one or more other participants, in whole or in part, by sale or otherwise; — to withdraw from the company, provided such a possibility is set forth in the company’s charter; and — in case of liquidation of the company, to receive a part of the company’s property (or its value) which remains after settlements with the company’s creditors (see: Article 8, Section 1 of the Law). A company’s participants may conclude an agreement whereby they undertake to perform their rights in a certain way or to refrain from exercising them, such as voting at the general meeting in a certain way, coordinating their votes with other participants, selling their shares, or a portion thereof, at a price specified in this agreement and/or if certain conditions are met, or to refrain from alienation of their shares until certain conditions are met, as well as to coordinate other actions connected with management of the company, its creation, activities, reorganization and liquidation. Such an agreement must be made in writing in one document signed by the parties (see: id., Section 3).

5.3. Chartered capital A company’s financial base is its chartered capital. Again, in a partnership, there is neither a minimum limit, nor maximum level for the amount of a partnership’s chartered capital. The background for such an approach is self-explanatory: all the partners in a full partnership (and full partners in a limited partnership) are jointly and severally liable for the partnership’s debts in the event that the partnership’s property is insufficient to cover them. However, this differentiates a partnership from a company since, as mentioned above, a company’s participants bear no liability for its obligations and only assume the risk of losses to the extent of their contributions to the company’s chartered capital.23 That is why, in order to create some guarantees for a company’s creditors, the   There is, however, an exception to this rule. If a legal entity (including LLC) assumes an obligation further to instruction of its participants who enjoy a control over the legal entity due to their prevailing share in its chartered capital, these participants shall be liable jointly and severally with the legal entity for such an obligation. (see: Article 534, Section 1(1) of the Civil Code). 23

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law specifies that a company’s chartered capital must be, at a minimum, ten thousand rubles (see: Article 662, Section 2, Paragraph 1 of the RF Civil Code). A participant may pay for his share in the company’s chartered capital in diffe­ rent ways, including in money, securities, movable and immovable property, proprie­ tary rights, that is, rights to intangibles or other rights having monetary value (see: Article 15, Section 1 of the Law). A monetary evaluation of in-kind contributions (including proprietary and other rights) must be made by an independent appraiser (see: Article 662, Section 1 of the RF Civil Code). A company’s chartered capital consists of the nominal value of the participants’ shares and becomes property of the company. However, the chartered capital is not the only company property, which may also (and generally does) include other tan­ gible and intangible assets produced or acquired by the company.24

5.4. Increase of chartered capital A company’s chartered capital, once paid in full, may then be increased. Sources of such an increase may include: a) the company’s property; b) supplementary contributions of participants; and c) calls of third persons who are admitted to the company, unless prohibited by the company’s charter (see: Article 17 of the Law). An increase of chartered capital from company property may occur if the following conditions are met: 1) a majority of at least two thirds of the total number of votes so vote at a ge­ neral meeting of participants; 2) the decision must be based upon data of bookkeeping reports of the company for the previous year; and 3) the amount of increase of the chartered capital shall not exceed the diffe­ rence between the value of the company’s net assets and the amount of the chartered capital together with the company’s reserve fund. Such an increase of chartered capital results in a pro rata increase of the nominal value of all participants’ shares without any change in the percentage of their shares (see: Article 18 of the Law). An application for state registration of an amendment to a company’s charter must be signed by the company’s chief executive officer and submitted to the ap  A company’s charter may require participants to make contributions into the company’s property. Such contributions do not affect the amount and nominal value of the participants’ shares in the company’s chartered capital (see: Article 27 of the Law). 24

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propriate state agency within one month from the date when the decision was taken. The amendment in question becomes effective with respect to third persons from the time of its state registration. The Law “On Limited Liability Companies” in Article 19 distinguishes 3 situa­ tions in which the chartered capital can be increased through supplementary calls: 1) Supplementary contributions can be made by all participants. In this case, the procedure requires: (i) a decision taken by at least two thirds of the entire number of participants at the general meeting of participants; (ii) the supplementary call must be made by each participant within six months from the date of the decision, as determined by section (i) above (unless another term is specified by the company’s charter or the decision); (iii) at the latest, one month after expiration of the time period for making supplementary calls, a general meeting of the participants must be held to approve the results of making the supplementary calls and to introduce the relevant amendments into the company’s charter; and (iv) documents for state registration of these amendments (together with documents confirming the making of the supplementary calls by the partners) must be filed with the registration agency within one month after a decision, as set forth in section (iii) above, is made. The amendments shall become effective for third persons from the time of state registration. 2) Supplementary contributions can be made by one or more participants. In this situation: (i) those participants willing to make a supplementary contribution shall submit an appropriate application25 to the company; (ii) a unanimous decision of the general meeting of participants on this issue is required; (iii) simultaneously with this unanimous decision of the general meeting of participants, a decision is needed to introduce the appropriate amendments into the company’s charter; (iv) the set of documents for state registration of the amendments (together with documents confirming the actual introduction of the supplementary contribution(s) into the company’s chartered capital) must be submitted to the registration authorities within one month from the date when the supplementary call(s) were made in full.   This application shall indicate the amount and the composition of the contribution, the procedure and the time for its introduction as well as the number of shares in the company’s chartered capital which each participant is requesting. 25

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3) Supplementary contribution(s) can be made by a third party or parties. Here the course of actions is similar to that described in Section 2 above, with the following points worthy of note: (i) third party contributions are possible only if there is no prohibition in the company’s charter to admit third persons; (ii) a third party’s application, in addition to issues mentioned above, must include a request to be admitted to the company as a participant; and (iii) a unanimous decision of the general meeting of participants to admit the third party or parties to the company is required. (iv) nominal value of a share acquired by such third person should not exceed the value of his contribution.

5.5. Decrease of chartered capital A company is entitled not only to increase its chartered capital, but also to decrease it (Article 20 of the Law). Such a decrease may be performed either by a decrease in the nominal value of the shares of all participants in the company’s chartered capital or by extinguishing shares belonging to the company26 (Article 20 of the Law). To decrease shares requires: (i) a decision taken at a general meeting of participants by a majority of at least two thirds of all the participants; (ii) within thirty days after the taking of such a decision, creditors must be notified in writing of the decrease of the company’s chartered capital and its new amount;27 and (iii) notice of the decision must be published. The creditors are entitled, within 30 days after notice has been issued to them (or the date of its publication) to require in writing the premature performance or termination of relevant obligations and recovery of losses. Documents needed for state registration of the relevant amendments in the company’s charter must be submitted to the appropriate state agency within one month from the date when the last notice of decrease of the company’s chartered capital was sent to the creditors.

  In some situations a company may (and under certain conditions — must) retain or redeem shares from its participants ( see: infra, Section 4.6 of this paragraph). 27   Such a notification is a precondition for state registration of a decrease in a company’s chartered capital. 26

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The amendments shall become effective for third persons from the time of state registration. A company may take a decision to decrease its chartered capital upon its own initiative, although in some circumstances such a decrease is mandatory. This obligation arises when: (i) the company’s chartered capital has not been paid in full within one year from the date of state registration of the company. In such case the chartered capital must be decreased to the amount which was actually paid in, and such a decrease must be registered in due course; (ii) if, after lapse of the second and each subsequent financial year,28 the value of the company’s net assets is less than the company’s chartered capital, then the amount of the chartered capital must be decreased to be equal to the value of the company’s net assets. In some situations a company is prohibited from decreasing its chartered capital. This occurs if, as a result of such a decrease, the company’s chartered capital would become less than the minimum amount of capital required by law. Should this situation occur, upon lapse of the second and each subsequent financial year, the company would be subject to liquidation.

5.6. Disposal of participant’s share As mentioned above, a company’s chartered capital consists of the nominal value of the participants’ shares. Each participant is entitled to dispose of its share (provided the share has been paid); conditions and the procedure for disposal depend upon the method selected for disposal. According to the Law, there are a number of alternatives. A participant may: 1) assign its share to: (i) one (or several) participant(s) of the same company; (ii) third person(s); 2) pledge its share to persons mentioned in (i) and (ii) above. Now, considering these alternatives in turn. If a participant is willing to assign its share to one or more participants of the same company (whether by sale or by any other transaction, for example, by   In the Russian Federation the financial year is 1st January through 31st December.

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donation29) no consent of the company or of other participants is required unless the company’s charter provides otherwise (see: Article 21, Section 1 of the Law). If a participant wishes to assign its share to a third person, some preconditions must be complied with: a) such a possibility must not be prohibited by the company’s charter; b) if a participant wishes to sell its share, the company’s other participants enjoy a right of first refusal (the right of pre-emption). The procedure to exercise this right is as follows: (i) The selling participant must notify the other participants and the company in writing to indicate the price and other terms and conditions of sale. Such a notice is deemed to be an offer received by all the company’s participants at the time when it is received by the company (see: Article 21, Section 5 of the Law). (ii) The selling participant must then wait a month (unless another waiting period is specified in the company’s charter or agreed to by the participants). The company’s participants, in exercising their right of pre-emption, may buy the share at a price offered to a third person or at a different price as specified earlier in the company’s charter.30 A company’s charter may provide a right of pre-emption for the company in the event other participants do not exercise their right of first refusal. (iii) If, after a lapse of a month from the date of notification, neither the participants nor the company have used their pre-emption rights, the selling participant may sell its share to a third person at the price and on other terms and conditions disclosed to the company and the participants in the offer; the price shall not be lower than that indicated in the offer or than that specified earlier in the company’s charter (see: Article 21, Section 7 of the Law). Such a contract of sale, unless made in writing and verified by a notary, is otherwise null and void (id., Section 11). In case of breach of the pre-emption right (e. g., when the price paid by the third person was less than that provided for by the Law, or if other terms and conditions of the sale contract were different from those indicated to the participants), any   It should be noted, however, that donation between commercial organizations is prohibited by Article 575 (4) of the RF Civil Code. This means that if both the assignor and the assignee are commercial organizations donation is prohibited. However, if at least one of them is a private individual (or a non-commercial organization) donation is legally permissible. 30   This price may be established in the charter as a fixed amount or on the basis of some criterion (such as the value of the company’s net assets, the company’s profit, etc.). The price must be same for all company participants. 29

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participant (or the company, if appropriate) is entitled to apply to a state arbitration court with a motion to acquire the rights and the obligations of the purchaser or, in other words, “to step into the shoes” of the latter. Such a right is valid for 3 months from the time that the participant or the company became (or should have become) aware of such a breach.31 (iv) A share in the company’s chartered capital passes to the person who acqui­red it at the time of verification of the relevant transaction by a notary.32 It should be noted that since an acquirer of a share becomes a company’s shareholder on the date of notarial verification of the relevant transaction, on that very date he acquires all the right connected with shareholding including the right of first refusal. Here is an illustrative case. Z, a sole shareholder of LLC, took a decision on June 26, 2009 to sell 51% of his share to L and 49% to D. A sale contract with L was concluded August 25, 2009 and verifild by a notary on the same date. A sale contract with D was concluded September 2, 2009 and verified by a notary on the same date. L was of opinion that the sale contract between Z and D resulted in violation of L’s right of first refusal since by the time of conclusion of this contract he already became a company’s shareholder and therefore enjoyed the right of first refusal that was ignored by Z and D. L sued Z and D so as to execute this right. The trial court rejected the claim on the following reasons. Both sale contracts were based upon the Z’s decision that was taken June, 26, 2009. On that date L was   Assume a limited liability company consisting of two participants A and B, each having a 50% share of the company’s chartered capital. A decided to sell his share to C and notified B (who was also the company’s chief executive officer) in writing of the terms and conditions of the sale and, inter alia, indicated a price for his share equal to its nominal value (30,000 rubles). The notice was dated June 1, 2002 and was received by B on the same day. Since there was no reply from B within 1 month, A sold his share in the company to C on July, 10 2002. On July, 15 2002 B became aware of the fact that C had actually paid A 10,000 rubles for his share. Within 3 months from that date, i. e. until October 16, 2002, B is entitled to exercise the right noted above. However, B is not entitled to request the court to declare the sale contract between A and C null and void (see: Section 12 (e) of the Ordinance of the Plenum of the Supreme Court of the Russian Federation and the Plenum of the Supreme State Arbitration court of the Russian Federation of December 9, 1999 “On some issues of application of the Federal Law ‘On Limited Liability Companies’”). What B. was entitled to was to require compulsory substitution of the purchaser in that contract. 32   This means that in case of transfer of a share, there is no need to convene a general meeting of participants to decide to admit the assignee as a participant. 31

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not a company’s shareholder and accordingly had no right of first refusal. Both the court of appeal and the court of cassation upheld this judgment. L submitted his supervisory complaint to the RF Supreme State Arbitration Court. The Presidium of the RF Supreme State Arbitration Court noted in its Ruling that a purchaser of a company’s share becomes a shareholder at the moment when the sale contract is verified by a notary. Therefore transfer of the share from the seller to the purchaser occurs at the date of notarial verification of the sale contract rather than at the date when the previous shareholder had taken a decision to dispose of his share. By the date of conclusion of a sale contract between Z and D, L already became a company’s shareholder and was entitled to use the right of first refusal. The Presidium quashed lower courts’ acts and transferred rights and duties of a purchaser of 49% of the company’s chartered capital to L33. The pre-emption right relates only to the sale of a share. If a participant assigns his share free of charge (for example, by donation, when to do so is not prohibited) there is no pre-emption right. A company’s charter may also provide that any assignment of a share to a third person is possible only with the consent of the company or other participants, which consent shall be deemed granted if an eventual assignor has not received a refusal within one month from the date of written notification.34 To pledge a share is possible, provided: (i) the company must consent to the pledge; (ii) the company’s consent must be manifested in a decision of a general mee­ting of participants taken by a majority of all participants (unless a qualified majority of votes is required by the company’s charter); (iii) the eventual pledgor shall not take part in the vote; (iv) a contract to pledge a share must be verified by a notary, otherwise it will be null and void (see: Article 22, Sections 1 and 2).

5.7. Withdrawal of a participant from the company When a participant assigns its share to someone else, the assignor must leave the company. However, a participant may withdraw from the company without   See: Bulletin of the Supreme State Arbitration Court of the Russian Federation. 2011, No 11, pp. 156–159. 34   In case there is such a provision in the company’s charter and consent has been refused, the participant who is willing to assign its share may require the company to buy its share (Article 23, Section 2 of the Law). 33

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assignment of its share; no consent of other participants (or the company) is required if it is so provided by the company’s charter 35 (see: Article 26 of the Law). The procedure for a participant to withdraw from a company is quite simple and includes the following steps: (i) the withdrawing participant must submit a relevant written statement to the company; (ii) when the statement of withdrawal is received by the company the participant’s share passes to the company; (iii) the company shall compensate the withdrawing participant the actual value of its share either in cash or, with the participant’s consent, in kind, within 3 months from the date in the year when the statement was submitted, unless another term or procedure of payment is provided in the company’s charter (see: Article 23, Section 6 (6.1) of the Law).36 35   A question arises, what the legal consequences of a situation would be if all the company’s participants (or, if it is a one-man company, its sole participant) decided to withdraw from the company. As already indicated above, a company must consist of at least one participant or, if originally there were several participants, the number thereof may be decreased to one (see: Article 7, Section 2 of the Law). However, a further decrease of its number, if it were to become equal to zero, would be inconsistent with the mandatory norm of the Law since in such a case the very basis of the company’s existence would be undermined. That is why “withdrawal of the company’s participants from the company, as a result of which no participant would remain in the company, as well as withdrawal of a company’s sole participant from the company, is inadmissible.” (Article 26, Section 2 of the Law) 36   The amount of the actual value of the share may be a subject of dispute. V, a participant of a limited liability company (whose share was 25% of the company’s chartered capital) decided to withdraw and required the company to pay her share. The company’s chief executive officer offered her 146,063 rubles 45 kopecks (the value of her share calculated on the basis of bookkeeping documents). V disagreed with this figure and sued the company to pay her 10,350,000.00 rubles (the amount of her share as valued by an appraiser whom she retained). The trial court appointed an expert who established that the aggregate market value of the company’s net assets was 29,580,000.00 rubles. When calculating V’s share, the trial court applied a decreasing coefficient and came to the conclusion that the amount due to V should be 2,100,000.00 rubles. The judgment was upheld by the appellate court. However, the court of cassation quashed the trial court judgment and the appellate court ruling since application of a decreasing (or increasing) coefficient in calculating the value of the withdrawing participant’s share is inconsistent with the law; the respondent company was obligated to pay V 7,395,000.00 rubles. The respondent sought supervision from the RF Supreme State Arbitration Court. The Presidium of the Supreme State Arbitration Court noted in its Ruling that the actual value of the company participant’s share should be equal to the market value of the company’s net assets proportionate to the amount of the participant’s share. The law does not provide for application of decreasing or increasing coefficients.

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In the situations described above a person ceases to be a participant voluntarily. However, the law also provides a possibility for a participant to be deprived of its share. A participant who commits a fundamental breach of its obligations or whose acts or omissions make the company’s activities impossible or create substantial difficulties for it37 may be expelled from the company according to the following procedure: (i) such a decision may only be taken by a court; The approach of the cassation court was upheld (see: Ruling N 8115/08 of October 14, 2008. Bulletin of the Supreme State Arbitration Court of the Russian Federation, 2008. No 12, pp. 128–131). A similar approach was expressed in the Ruling of the Presidium of the RF Supreme State Arbitration Court № 836/09 of May 26, 2009 where it was indicated that the onus probandi (burden of proof) with regard to the actual value of the company participant’s share should be imposed upon the company (see: Bulletin of the Supreme State Arbitration court of the Russian Federation. 2009, No 8, p. 124). Given that the market value of company’s assets may be subject to fluctuation, the Presidium of the RF Supreme State Arbitration Court ascertained that the actual value of the share shall be determined for the date when the participant submitted his statement on withdrawal to the company (see: the Ruling No 6560/09 of September 29, 2009. Bulletin of the RF Supreme State Arbitration Court, 2010, No 1, pp. 154-157). 37   E. g., if a participant without justified reasons avoids attendance at the general meetings of participants and in such a way blocks decisions on issues where unanimity of all the participants is required (see: Section 17 (b) of the Ordinance of the Plenum of the Supreme Court of the Russian Federation and of the Plenum of the Supreme [State] Arbitration Court of the Russian Federation of December 9, 1999). In order to establish whether a breach is fundamental, it is necessary to take into consideration, inter alia, the degree of the participant’s fault and the occurrence (or possibility) of negative consequences for the company (see: id.). A participant in a limited liability company was expelled by court judgment because he had induced the company to sell 50 railway tanks at a very low price and concealed the fact that the tanks had been encumbered by a pledge as security for a bank loan. The judgment was upheld by the higher courts including the Presidium of the State Supreme Arbitration Court of the Russian Federation (see: Bulletin of the Supreme State Arbitration Court of the Russian Federation, 2003, No 12). It should be noted, however, that a participant of a LLC may be expelled from the company provided he remains its participant at the time of submission of an appropriate statement of claim by other participant(s) to a court. To illustrate: A participant of a LLC (owning 15.9% of the company’s chartered capital) approached a state arbitration court with a claim to expel another participant who, while a company’s CEO, concluded several sale contracts of the company’s fixed capital items upon conditions disadvantageous to the company; no consent of the general shareholders meeting had been obtained. 263

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(ii) a relevant statement of claim may be lodged with a court by participants whose aggregate share amount to at least 10% of the company’s chartered capital (see: Article 10 of the Law); (iii) the share of the former participant must pass to the company; (iv) the company must pay the former participant the actual value of its share which shall be calculated on the basis of the company’s bookkeeping data for the last reporting period preceding the date when the court judgment on expulsion took effect (Article 10, Article 23 Section 4 of the Law).38 A participant may also be deprived of its share if the share will be used to satisfy the participant’s creditors. This is possible if the following conditions are met: (i) other property of the participant is insufficient to meet creditors’ claims; (ii) a court judgment is required; (iii) the company must pay the actual value of the debtor’s share to the creditors;39 (iv) if the amount in question is not paid to creditors by the company (or its participants), the debtor’s share must be sold at auction (see: Article 25 of the Law). A question arises as to what happens to the share of a participant who ceases to exist, for example, in the case of an individual’s death, and in the case of a legal entity, its reorganization or liquidation. According to the Law, if an individual participant dies, his or her share shall pass to his or her heirs; if a corporate participant is reorganized, its share shall pass to its successors; if a corporate participant is liquidated, its share or the remainder of its share after settlement with creditors shall be distributed among all other participants (unless the company’s charter provides otherwise). A company’s charter may provide that passing or distribution of a share As established by the trial court at hearing, some years after those transactions the respondent resigned from the position CEO of the company and transferred his share to a third person free of charge. Consequently, prior to submission of the statement of claim to the court the respondent had ceased to be a participant of the company. With due consideration to this circumstance, the claim to expel the respondent from the company was rejected. The trial court judgment was upheld by the Presidium of the RF Supreme State Arbitration Court in its Ruling of February 10, 2002. No 1197/08 (see: “Экономика и жизнь”, 2009, No 6). 38   With the ex-participant’s consent, a monetary payment may be replaced by transferring property to him of equal value (id.). 39   With a unanimous decision of all the participants at the general meeting of participants this amount may be paid to creditors by other participants on a pro rata basis (unless another procedure of payment is set forth in the company’s charter or by a decision of a general meeting of participants). 264

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as mentioned above is subject to the consent of the remaining participants40 (see: Article 21, Section 8 of the Law). In case of a refusal to grant such consent, the share in question shall pass to the company which is obliged to pay the actual value of the share in question to be calculated on the basis of the company’s book-keeping data for the last reporting period preceding the date of death of the company’s participant, the date of completion of reorganization or liquidation of a legal entity, or the date of acquisition of the share at the tender (see: Article 23 Section 5 of the Law). The actual value of the share shall be paid to heirs of the individual participant, to successors of the reorganized corporate participant or, in case of liquidation of the latter, to its participants.41 A company shall maintain a list of its participants containing, inter alia, information on each participant, the amount of its share in the company’s chartered capital and whether the share is paid for by the participant, as well as on the number of shares belonging to the company, and the dates of their acquisition by the company. The company’s chief executive officer shall be in charge of ensuring that such information corresponds to the data contained in the Unified State Register of Legal Entities (see: id., Section 2). Each company’s participant is obliged timely to inform the company of changes in its name, place of residence or location as well as changes concerning its share in the company’s chartered capital (see: id., Section 3). In case of a dispute concerning a discrepancy between the information contained in the list of the company’s participants, on the one hand, and in the Unified State Register of Legal Entities, on the other, the right to a share in the company’s chartered capital shall be established on the basis of the information set forth in the Register. If this information is challenged, the right to the share shall be established on the basis of relevant contract or other supporting documents (see: id., Section 5). A company’s profits may be distributed among its participants on a quarterly, semi-annual or annual basis according to a decision of a general meeting of participants (see: Article 28 of the Law). The Law prohibits the distribution of company profits in some situations, such as:   Such a consent shall be deemed granted if within 30 days after application to the participants no written refusal from any participant has been received by the applicant (see: Article 21, Section 8 of the Law). 41   With the consent of these participants, a monetary payment may be replaced with a transfer of property of equal value. 40

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(i) if a company’s chartered capital is not paid in full; (ii) if the value of a company’s net assets is less than the amount of the chartered capital and the reserve fund, or will become so after payment of dividends; (iii) if a company may be declared bankrupt (see: Article 29).

5.8. Company’s bodies The company’s activities are governed by the following bodies: 1) the general meeting of participants; 2) its board of directors (if the company’s charter so provides); 3) its chief executive officer; 4) its management board (if the company’s charters so provides); 5) the company’s auditor or auditing commission (if the company’s charter so provides, which for companies having more than 15 participants is a mandatory requirement). 5.8.1. General meeting of participants The supreme body in a company is the general meeting of its participants. The competence of the general meeting of participants includes, inter alia: 1) determining the main directions of the company’s activities, and deciding on its participation in associations and other groups of commercial organizations; 2) amending the company’s charter, including changing the amount of the company’s chartered capital; 3) formation of executive bodies of the company and premature termination of their powers, unless the company’s charter relegates these issues to the competence of the board of directors; 4) electing and prematurely terminating the powers of the company’s auditor or auditing commission; 5) approval of annual reports and annual balance sheets; 6) decision making with respect to distribution of the company’s net profit among the participants; 7) adopting the company’s by-laws; 8) decision making with respect to reorganization or liquidation of the company; 9)  appointing the liquidation commission and approving liquidation balance sheets (see: Article 33, Section 2 of the Law on LLC); and 10) resolution of other issues, as provided by the Law on Limited Liability Companies. 266

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E. g., a transaction in which a company’s official42 or a major participant43 is interested,44 may only be concluded with the approval of the general meeting of participants by a majority of votes; interested persons are prohibited from participating in voting45 (see: Article 40 of the Law).46 If such a transaction has been concluded in violation of these provisions, a court may declare it to be invalid based upon a claim of the company or of one or more of its participants (see: Article 45 of the Law). Approval of the general meeting is also required for the company to enter into a large-scale transaction, for example, a transaction (or several interconnected ones) related to the acquisition, alienation or possibility of alienation by the company (directly or indirectly) of property valued in excess of 25% of the aggregate value of the company’s assets (unless the company’s charter provides for a large-scale transaction of a higher value). A question arises, what the legal status of a decision of a general meeting of a company’s shareholders. This issue can be a matter of dispute, on the one hand, in some situations a general meeting’s approval is needed for the company to enter into certain contracts. In such a case a decision of the general meeting of shareholders aims to establish, change or terminate the company’s civil law rights and/or duties. According to Article 153 of the RF Civil Code acts of natural persons or legal entities aimed at establishing, changing or terminating civil law rights and duties are deemed to be transactions. Thus such a decision of a general meeting of shareholders is similar to a transaction.   That is, member of a board of directors, of a management board, or a chief executive officer. 43   That is, a holder of twenty (or more) per cent of the votes. 44   Persons mentioned above shall be deemed interested in the transaction if they, their spouses, parents, children, brothers, sisters, adoptive parents and adopted children, and/or their affiliated persons (i. e. persons who may influence their activity): (i) are counterparts to a transaction or act on behalf of third persons in their relationship with the company; (ii) own (individually or together) at least 20% of the shares of a legal entity which is a counterpart to the transaction or act on behalf of third persons in their relationship with the company; (iii) are officials of managing bodies of a legal entity which is a counterpart to the transaction or acts on behalf of their persons in their relationship with the company; (iv) in other instances as provided in the company’s charter. 45   Those rules are not applicable, inter alia, to a one-person company where a sole founder simultaneously acts as the company’s chief executive officer, as well as concludes transactions in which all the company’s participants have an interest. 46   A decision to approve such a transaction shall indicate the parties, beneficiaries to the transaction, the subject, the price and other material conditions of the transaction (see: id.). 42

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On the other hand, due to the principle of privity of contract, an obligation cannot create duties for persons who did not participate in it as parties (see: Article 308, Section 3 of the Civil Code). Thus nobody can be bound by a transaction without his consent. However, a decision of a general meeting of shareholders shall be binding upon all persons who were entitled to take part in it including those who were absent from meeting or voted against its decision. In this view, a decision of a general meeting of a company’s shareholders is different from a transaction. In accordance with the Federal Law of May 7, 2013 N 100-FZ, a new Chapter 91 “Decisions of Meetings” has now been included into the RF Civil Code. This chapter is set forth in Subdivision 4 whose initial heading was “Transactions and Representation.” Now this subdivision is headed: “Transactions. Decisions of Meetings. Representation.” This may be interpreted to mean that, from the standpoint of Russian legislators, the legal status of decisions of meetings, shall be deemed phenomena sui generis rather than types of transactions. Chapter 91 contains some rules that relate to the procedure of decisionmaking, their content and invalidity thereof. The Code provides that a decision of a meeting may be taken both by the joint attendance of participants and also by correspondence (see: Article 1812, Section 1, Paragraph 2). In either situation the decision should be set forth in the minutes in writing (see: Article 1812, Sections 3–5). If a decision of a meeting, if it violates requirements of law, it shall be deemed voidable (that is it may be declared invalid by court judgment) or void (when it shall be deemed invalid without regard to whether a court judgement has declared it to be such). A decision shall be deemed voidable if, inter alia: 1) a procedure of convocation, preparation and conduct of the meeting was substantially violated, which violation affected formation of the will of participants of the meeting; 2) a person who made a statement on behalf of a participant of the meeting who was not entitled to do so; 3) there was a violation of equality of rights of participants of the meeting in the course of its conduct; 4) there was a substantial violation of rules concerning preparation of the minutes, such as rules concerning the written form of the minutes (see: Article 181.4, Section 1). A decision of a meeting may be challenged in court by a shareholder who did not attend the meeting or voted against the decision (see: Article 1814, Section 3, Paragraph 1). 268

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A decision shall be deemed void when it: 1) was taken on an issue not included in the agenda, unless all the participants attended the meeting; 2) was taken in the absence of an appropriate quorum; 3) was taken on an issue which is beyond the competence of the meeting; or 4) contradicts fundamentals of the legal system or morality (see: Article 1815). In the event a company has formed a board of directors, a company’s charter may provide the board’s competence to include decisions to conclude large-scale transactions related to acquisition or alienation of property, the value of which is between 25% and 50% of the aggregate value of the company’s assets. In such a case, if a company’s official or major participant has an interest in a large-scale transaction concluded in violation of the provisions above, it may be declared invalid by a court upon a claim of the company or of one or more of its participants (see: Article 46 of the Law). It should be noted that, according to the approach of the RF Supreme State Arbitration Court, absence of appropriate approval of CEO’s decision to enter into a large-scale transaction may result in court’s recognition of invalidity of such a transaction only in conjuction with violation of the claimant’s rights and legitimate interests. Here is an illustrative case. A limited liability company P concluded a contract with a joint stock company R. I who was a P’s shareholder sued both companies with a claim to declare the contract in question to be invalid since the contract was a large-scale transaction, so the approvals of both companies’ general share (stock) holders were needed, meanwhile no such approval were issued. The trial court granted the claim. The judgment was upheld both by the court of appeal and court of cassation. The joint stock company R submitted a supervisory complaint to the RF Supreme State Arbitration Court with a motion to review the case in the course of court supervision. The Presidium of the RF Supreme State Arbitration Court held in its Ruling as follows. The absence of appropriate decision of a company’s competent body on approval of a large-scale transaction is in and of itself insufficient for recognition of the transaction to be invalid upon the company participant’s claim. Such a claim may be granted provided conclusion of the transaction resulted in breach of the claimant’s rights and legitimate interests, and the burden of proof of such circumstance shall be borne by the claimant, however I failed to submit relevant evidence. The Presidium quashed the lower courts’ acts and rejected the claim.47   See: Bulletin of the Supreme State Arbitration Court of the Russian Federation. 2011. No 6, pp. 100–104. 47

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A large-scale transaction may be approved both prior and after its conclusion; the approval may be both direct and indirect, in the latter case the transaction is confirmed by circumstantial evidence. Here is an illustrative case. LLC general meeting of shareholders unanimously approved a purchase by the company of 17 units of equipment for 15 million rubles. Meanwhile the company bought 8 units of equipment for 15 million rubles which transaction was performed by both parties. Two months later the company’s general meeting of shareholders unanimously approved a credit line contract with a bank. Performance of the contract was secured by pledge of the abovementioned equipment whose pledged value was also 15 million rubles. Thereafter one of the company’s shareholders decided that the former transaction on purchase of 8 units of equipment for 15 million rubles was illegal since the relevant decision of the company’s general meeting of shareholders had approved 15 million rubles as a price for 17 (rather than 8) unit of equipment. On this reason he sued the company with a claim to declare the purchase transaction invalid. The trial court judgement whereby the claim had been satisfied was upheld by court of appeal and cassation court. However, the RF Supreme Court came to a conclusion that the company’s participant who alleged that the purchase price of the equipment in the former transaction had been too low and nevertheless approved the latter transaction on pledge of the same equipment for the same value as that indicated in the purchase contract should be deemed as a person who approved both transactions. The judicial acts of lower courts were quashed and the case was referred to the trial court for review (see: the Ruling of the RF Supreme Court of December 29, 2014 in the case № A26-2395/2013). Decisions with respect to reorganization or liquidation of the company above must be made unanimously. Decisions on amendments of the company’s charter, including change of the chartered capital (and other issues as set forth by the company’s charter) shall be made by at least a two thirds majority of the total number of votes, unless the company’s charter provides for a greater number of votes. Other decisions must be made by a simple majority of the total number of votes, unless a greater number of votes for particular decisions is provided for by the Law on LLC or by the company’s charter (see: Article 38, Section 8 of the Law on LLC).48   In a one-person company decisions on issues falling within the competence of the general meeting of participants shall be made by the sole founder and be formalized in writing (see: Article 39 of the Law on LLC). 48

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Each participant of the company shall have a number of votes at the general meeting of participants which is proportionate to his share in the company’s chartered capital unless the company’s charter provides otherwise; such a clause in the charter must be adopted unanimously (see: Article 32, Section 1 of the Law on LLC). General meetings of participants may be regular or extraordinary. Regular meeting(s) shall be held within the time period specified in the company’s charter but at least once a year. A general meeting to approve the annual results of the company’s activities shall be held at the earliest two months and at the latest four months after the end of the financial year (see: Article 34 of the Law on LLC). An extraordinary general meeting may be convened by the company’s management upon its own initiative or if required by the board of directors, the auditing commission or auditor, as well as by participants whose aggregate share is at least 10% of the total number of votes (see: Article 35 of the Law). Each participant must be notified of the place, time and agenda of the general meeting 30 days prior to the date of the meeting (see: Article 36 of the Law). A participant may participate at the meeting in person or via a representative who has been provided with a power of attorney (see: Article 37 of the Law). A general meeting of participants may be held without the participants meeting in person, that is, through voting by correspondence or by written answers to a questionnaire (see: Article 38 Section1of the Law).49 A company’s charter may provide for establishment of the board of directors or a supervisory board, and for regulation of its competence which may include, inter alia, formation of the company’s management bodies and premature termination of their powers, resolution of issues related to entering into large-scale transactions and also those in which the company’s officials or major participant have an interest, as well as issues concerning the preparation, convocation and holding of general meetings of participants (Article 32, Section 2.1 of the Law). 5.8.2. Chief executive officer A company’s chief executive officer shall be elected by the general meeting of participants for the period of time specified in the charter, unless these issues are relegated to the competence of the board of directors by the company’s charter. It is not necessary for the chief executive officer to be a participant in the company. An employment contract between the company and its chief executive officer must be signed on behalf of the company by the person who presided over the general

  However, annual reports and annual balance sheets may not be approved by correspondence (see: id.). 49

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meeting of participants50 which elected the chief executive officer or by the participant authorized by the general meeting. The chief executive officer shall: 1) act on behalf of the company, including representing its interests and entering into transactions, without a power of attorney; 2) issue powers of attorney, including those with a right of substitution, to represent the company; 3) conclude and cancel employment contracts with the company’s staff; 4) exercise other powers which are not included within the competence of other bodies of the company (see: Article 40 of the Law). According to Article 53, Section 3 of the Civil Code a person who is authorized (by law or by charter) to act on behalf of a legal entity (a company’s CEO is just such a person) must act in the interest of the legal entity in good faith and in reaso­nable manner, and shall be liable for loss caused by him to the legal entity. Here is an illustrative case. Thas been elected as a LIC’s CEO and assumed also functions of a company’s chief book-keeper. Later on she was replaced by P. P initiated an independent auditing of the company. The auditors discovered shortage of money due to systematical discrepancies between book-keeping data and amounts of money actually deposited on the company’s bank account. The company sued T for recovery of the shortage of money. The trial court rejected the claim on the reason that the company failed to prove T’s fault in loss sustained by the company. The judgment was upheld by the court of appeal and the court of cassation. The company approached the RF Supreme State Arbitration Court with a supervisional complaint. The Presidium of the RF Supreme State Arbitration Court noted in its Ruling that in case of a claim on recovery of loss caused to a legal entity by its CEO the plaintiff should prove the fact of loss sustained by him, and the existence of causal connection between the CEO’s acts and the loss. Meanwhile it is the CEO (as the respondent) who should prove the absence of his/her fault. In the case in question the loss sustained by the company resulted from improper performance of book-keeping functions by T who did not present any reply to the claim, nor did she appear at the court hearing, so she failed to prove the absence of her fault. The Presidium quashed the lower courts’ acts and referred the case to the trial court for review.51   If this issue is within the competence of the board of directors, the employment contract on behalf of the company shall be signed by the Board Chairman or by the person who is so authorized by the board’s decision. 51   See: Bulletin of the Supreme State Arbitration Court of the Russian Federation, 2011. No 7, pp. 120–124. 50

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Since, as already mentioned above, one person may create a number of oneman companies, he or she may occupy the position of chief executive officer in each of them. It is also possible that the same person may be elected or appointed the chief executive officer in several companies, each having a number of participants. Should such companies enter into a contract with each other, a question may arise as to whether this person is entitled to sign a contract for and on behalf of both parties. The following problem may arise in such a situation: a legal entity may conclude transactions through its bodies (see: Article 53 of the Civil Code) or through its representatives (see: Articles 182, 185 of the Civil Code). It is specifically indicated in Article 182 (Section 3) that “a representative may not conclude transactions in the name of the person represented with respect to himself personally, as well as with respect to another person whose representative he is, except for instances provided by law”, e. g. in case of commercial representation (see: Article 184 of the Civil Code)52 Two limited liability companies concluded a contract which was signed for and on behalf of both sides by Ms. Sh who was the chief executive officer in both companies. Later, an external manager of one of the companies, which at that time was in the course of bankruptcy proceedings, filed a claim with a state arbitration court seeking to declare the contract null and void since it had been entered into contrary to the prohibition set forth in Article 182 Section 3 of the Civil Code. The trial court granted the claim and its judgment was upheld by the appellate court and the court of cassation. Next a bank which had issued a guarantee to secure an obligation that arose out of the contract applied to the RF Supreme State Arbitration Court filing a motion seeking review of the case in the course of supervision. The Presidium of the RF Supreme State Arbitration court concluded that Ms Sh, as a chief executive officer of both companies, was an executive body of both of them, rather than their representative. Therefore the rule contained in Section 3, Article 182 of the Civil Code was inapplicable to the situation.53

  A commercial representative is a person who permanently and autonomously is acting as a representative in the name of entrepreneurs when they conclude contracts relating to entrepreneurial activity. (see: Article 184, Section 1 of the Civil Code) “Simultaneous commercial representation of different parties to a transaction is permitted with the consent of these parties and in other instances provided for by law.” (Id., Section 2). 53   See: the Ruling No 10327/05 of April 11, 2006: Bulletin of the RF Supreme State Arbitration Court 2006. No 7, pp. 144–147. 52

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5.8.3. Management board A Management board shall be elected by the general meeting of participants, if the company’s charter so provides,54 and it should then also specify the number of board members, the terms of their office, and the board’s competence. The Management board shall be headed by the chief executive officer who may also be a member (but may not be the chairman) of the board of directors (see: Articles 32 Section 2, Paragraph 5), Article 41 Section 1, Paragraph 4 of the Law). A company’s participant who is convinced that a decision of the general mee­ ting of participants was taken in violation of federal law or the company’s charter and resulted in infringement of his rights and legitimate interests, may challenge the decision in court provided he voted against it or was not in attendance at the general meeting. Such an application must be filed in court within two months from the date when the applicant became, or ought to have become, aware of this decision. The court may either declare the decision invalid, or leave it as is if the violation was not material and the participant sustained no loss because of the decision (see: Article 43, Sections 1 and 2 of the Law).55   The company’s charter may relegate this matter to the competence of the board of direc-

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  Here is an illustrative case: B and C, stockholders of an open joint stock company, owning in aggregate more that 50% of the company’s voting stocks, sought to convene an extraordinary general meeting of stockholders. The company’s board of directors granted their demand and called the meeting for a certain date, place and time. B and C jointly held the meeting at the same date but at a different place and time; other stockholders did not attend the meeting. N (a minority stockholder) sued the company seeking a declaration that the decision of the general stockholders’ meeting was invalid since her right to participate in the meeting was infringed. The trial court allowed her claim. However, the appellate court quashed the judgment since the decision of the general stockholders’ meeting had been taken by a majority of votes and N’s absence could not have influenced the result of the voting. The ruling of the appellate court was upheld by the cassation court. N applied to the Supreme State Arbitration Court seeking supervisory review of the case. The Presidium held in its Ruling of July 28, 2009 No 3607/09 that the company’s decision in question could only be left standing provided the following conditions were met: 1) the vote of the plaintiff could not have influenced the results of the voting; 2) the violation was not substantial; 3) the decision did not result in any losses for the plaintiff. However, a violation of the procedure for holding a general stockholders’ meeting was held to be substantial notwithstanding the fact that it was committed by majority stockholders. In such a situation the decision of the general stockholders meeting should not be left standing on the sole basis that the plaintiff was a minority stockholder. The Presidium accordingly quashed the rulings of the appellate court and the cassation court and upheld the trial court’s judgment. 55

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Likewise (and within the same time limitation) a company’s participant may approach the court to invalidate a decision of the company’s board of directors, its management board or chief executive officer if, in his view, such a decision was illegal and produced an adverse impact on his rights and lawful interests (see: Ar­ ticle 43, Section 3 of the Law).

§ 6. Joint stock company 6.1. General provisions Like a limited liability company, a joint stock company (JSC) also has a twofold purpose: 1) to raise money and 2) to limit its partners’ business risk. Accordingly, JSC’s stockholders “shall not be liable for the company’s obligations and shall bear the risk of losses connected with its activity to the extent of the value of stocks belonging to them.” (Article 2, Section 1, Paragraph 2 of the Federal Law “On Joint Stock Companies” of December 26, 1995 No 208-FZ, as subsequently amended) A joint stock company (similarly to a limited liability company) may be established by a sole founder or may consist of one person who acquired all the company’s stocks and shall bear subsidiary liability for the company’s obligations resulted from performance by the company of his instructions (see: Article 98, Section 6, Paragraph 1 of the Civil Code).56 The characteristics of a joint stock company that differ from a limited liability company result from the fact that a joint stock company is based on stocks, that is, securities which are negotiable instruments. Given this circumstance the chartered capital of a joint stock company “shall be made up of the nominal value of the company’s stocks acquired by its stockholders.” (Article 25, Section 1, Paragraph 1 of the Law on JSC) There are two types of stocks which may be issued by joint stock companies: ordinary stocks and preferred stocks. The share of preferred stock in the aggregate amount of the company’s chartered capital shall not exceed 25% (see: Article 102, Section 1 of the Civil Code). The main distinctions between ordinary and preferred stocks are as follows: Owners of ordinary stock have the right: This case concerns a joint stock company, however there is no doubt that the same approach would be equally applicable to limited liability companies. 56   A one-man joint stock company may not be established by a sole founder who is also a one-man company unless otherwise provided by this Code or other law (see: Article 66, Section 2, Paragraph 2 of the RF Civil Code). 275

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1)  to take part in general meetings of stockholders and to vote on all matters within their competence; 2)  to enter into stockholders’ agreements;57 3) to receive dividends; 4)  in case the company is liquidated, to receive the value of part of the company’s property (see: Article 31, Section 2 of the Law on JSC). Owners of preferred stock have the right: 1) to receive dividends the amount58 of which (or the procedure of its calculation) is set forth in the company’s charter; 2)  in case the company is liquidated, to receive the value of part of the company’s property (liquidation value). Owners of preferred stock shall not have the right to vote at the general meeting of stockholders unless the Law on JSC so provides. They do enjoy the right to participate in decisions concerning reorganization and liquidation of the company (Article 94 of the Law).59 If a company’s charter so provides, preferred stocks of certain types may be converted into preferred stocks of other types or into ordinary stocks (see: Article 32, Section 3, Paragraph 1 of the Law on JSC). However, conversion of ordinary stocks into preferred stocks is prohibited (see: Article 31, Section 3 of the Law on JSC). Until recently there were two types of joint stock companies: closed and open ones. A closed joint stock company was similar to a limited liability company with respect to:   According to such an agreement its parties undertake to perform, or to refrain from performing, their rights connected with stocks in a certain way. Stockholders’ agreement may, inter alia, provide a duty to vote in a certain way at a general stockholders’ meeting, to coordinate voting with other stockholders, to buy or sell stocks for an agreed price, and to coordinate other actions relating to management of the company (see: Article 32-1, Section 1). A stockholders’ agreement shall be in writing in one document signed by the parties (see: id, Section 2). See in detail: O.A. Makarova. Корпоративное право [Corporate Law]. Moscow, 2010. P. 160–169. 58   This may be a fixed amount of money or a percentage of the nominal value of preferred stocks. 59   A company’s charter may provide for two or more classes of preferred stocks. In such case, if the size of dividend and liquidation value has been determined, then the charter shall also specify the order of priority for payment of dividends and the liquidation value in relation to each class of preferred stocks (see: Article 32, Section 2 of the Law). Owners of a certain class of preferred stocks shall acquire the right to vote in decisions of the general meeting of stockholders concerning amendments to the company’s charter which restrict the rights of the owners of this class of preferred stocks (see: Article 32, Section 4, Paragraph 2 of the Law). 57

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1) the minimum amount of the company’s chartered capital, which is ten thousand rubles both in a JSC and an LLC; 2) the maximum number of participants (50 in companies of either type); 3)  the right of first refusal in the event of a sale of shares (in an LLC) or stocks (in a JSC).60 Due to this similarity it is suggested in the Concept of development of civil legislation of the Russian Federation to abandon such organizational form of business as a closed joint stock company (see: Section 4.1.6). An open joint stock company differed from a closed one principally in the following ways: 1)  the minimum chartered capital required is ten times higher amounting to one hundred thousand Rubles (see: Article 26 of the Law on JSC);61 2)  its number of stockholders is unlimited (see: Article 7, Section 2, Paragraph 2 of the Law);   The procedure for use of this right is described in Article 7, Section 3, of the Law on JSC, and is similar to the relevant procedure for a LLC: a) a stockholder shall notify other stockholders and the company of his intent to sell and shall specify the price and other terms and conditions of sale; b) the stockholder must wait for two months (unless the company’s charter provides for a shorter period, which, however, may not be fewer than 10 days); c) after lapse of the waiting period, stocks may be sold to any third person at the price and on the terms and conditions as communicated to the company and its stockholders; d) if stocks are sold in violation of the right of first refusal, any stockholder is entitled to demand in court within 3 months from the date when he became or should have become aware of this violation, the transfer to him of the buyer’s rights and obligations. A company’s charter may provide for the company to have a right of first refusal should its stockholders refrain from using their rights of first refusal. One should bear in mind that, as it is specifically emphasized by the Supreme State Arbitration Court of the Russian Federation, the right of first refusal is only effective in case of sale of stocks by a closed JSC’s partner (see: Section 14, Subsection 9 of the Ordinance of the Plenum of the Supreme State Arbitration Court of the Russian Federation of November 18, 2003. No 19 “On certain issues of application of the Federal Law ‘On Joint Stock companies.’” See also: Section 1 of the Review of the practice of consideration by state arbitration courts of disputes on the right of first refusal in acquisition of stocks of closed stock companies as approved by the Information letter of the Presidium of the Supreme State Arbitration Court of the Russian Federation of June 25, 2009. No 131). When a partner of a closed JSC had introduced a number of his stocks as his in-kind contribution to the chartered capital of another closed JSC, a state arbitration court decided that a right of first refusal was not applicable in such a situation. This trial court judgment was upheld by the appellate court and the cassation court. 61   Currently one hundred thousand rubles is a minimum chaptered capital for a joint stock company (see: Article 662, Section 1, Paragraph 3 of the Civil Code). 60

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3)  in the event of a sale of stocks there is no right of first refusal and stockhol­ ders of an open joint stock company are prohibited from providing for such a right in the company’s charter (see: Section 14, subsection 11, Paragraph 2 of the Ordinance of the Plenum of the Supreme State Arbitration Court of November 18, 2003. No 19); 4) both individuals and legal entities, including state and municipal unitary enterprises,62 might be founders of both closed and open joint stock companies (see: Article 10, Section 1 of the Law on JSC). However, the Russian Federation, its subjects and municipalities might only be stockholders in open joint stock companies (see: Article 7, Section 4 of the Law on JSC). Currently the Russian Federation, its subjects and municipalities may be participants in commercial companies and contributing partners in limited partnership (see: Article 66, Section 5, Paragraph 2 of the RF Civil Code). Further to the Concept of development of civil legislation of the Russian Federation the RF Civil Code now provides for creation of public joint stock companies whose stocks (and securities convertible into stocks) shall be publicly placed (by open subscription) and publicly circulated upon conditions established by laws on securities (see: Article 663, Section 1). It is prohibited for a public joint stock company to limit the number of stocks belonging to one stockholder, aggregate nominal value thereof, as well as maximum number of votes granted to one stockholder63. Charter of a public joint stock company may not provide for a necessity to obtain anybody’s consent for alienation of stocks of such a company (see: Article 97, Section 5 of the RF Civil Code). Such a company shall make publicly available information as provided by the Law of Joint Stock companies and laws on securities (see: Article 97, Section 6 of the RF Civil Code).

6.2. Stocks and chartered capital When a joint stock company is established, its stocks shall be paid in full by its founders within one year from the company’s foundation agreement; at least 75% of   Such enterprises may participate in other legal entities with the consent of the owner of their property (see: Article 20, Section 1, Subsection 14 of the Federal Law “On State and Municipal Unitarian Enterprises” of November 14, 2002. No 161-FZ, Российская газета, December 3, 2002, (as subsequently amended)). In relation to federal state unitary enterprises, consent of the Federal Agency on Administration of Federal Property is required. 63   With regard to a joint stock company which is not a public one, these limitations may be established by law or the company’s charter (see: Article 99, Section 5 of the RF Civil Code). 62

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these stocks must be paid64 before state registration of the company (see: Article 662, Section 4 of the RF Civil Code). Payment for stocks may be made in monetary form or in-kind, for example, in securities, other things, proprietary rights, or other rights of monetary value. The forms of payment for stocks shall be set forth in the company’s foundation agreement. The monetary valuation of in-kind contributions as a form of payment for stocks shall be agreed to by the founders. An independent appraiser shall establish the market value of such property; valuation of the property as agreed to by the company’s founders shall not exceed the amount of the appraisal made by the appraiser (see: Article 34 of the Law on JSC). In the event some stocks are not paid for by the time due, title to such stocks shall pass to the company by operation of law.65 Such stocks shall not carry voting rights nor shall they accrue dividends. They must be sold by the company within one year from the date when they became the property of the company,66 and their selling price shall be not less than the nominal value of the stocks (see: id.). All the company’s stocks shall be registered in the name of their owners (see: Article 25, Section 2, Paragraph 3 of the Law on JSC); this means that bearer stock are not allowed. A register of a company’s stockholders shall be maintained, containing, inter alia, information on each registered person, and the number and types of stocks assigned to him. The register shall be maintained by a registrar (who is a professional participant in a security market). Refusal to make an entry in a company’s register of stockholders may be appealed to a court (see: Article 45, Section 2, Paragraph 2 of the Law on JSC). 64   Until 75% of stocks distributed among the company’s founders have been paid for, the company is only entitled to enter into transactions related to its establishment (see: Article 2, Section 3, Paragraph 2 of the Law on JSC), such as, contracts for the purchase or lease of premises for the location of the company and equipment for the company’s office, or bank accounts. (see: Section 7, Subsection 1, Paragraph 2 of the Ordinance of the Plenum of the Supreme State Arbitration Court of the Russian Federation of November 18, 2003 No 19) It should be noted that originally this figure was 50%. Currently due to amendment of the RF Civil Code this figure is 75%. 65   A foundation agreement may provide a penalty for non-performance of the obligation to pay for stocks. 66   If the company fails to do so, it shall decrease its chartered capital. In case no such decision is taken by the company within a reasonable time period, an agency responsible for the state registration of legal entities or another appropriate state body, such as a state attorney, may file a claim with a court to liquidate the company (see: Article 34 of the Law on JSC).

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A company’s chartered capital may be increased by raising the nominal value of its stock67 or by issuance of additional stock68 (see: Article 28 of the Law on JSC). Additional stocks issued by a public joint stock company might be distributed by means of a public or closed subscription (see: Article 97 of the RF Civil Code). In the event of distribution of additional stocks by means of a public subscription, stockholders of an issuing company enjoy a right of preemption for additional stocks in an amount proportionate to the amount of stocks they already hold (see: Article 40, Section  1 of the Law on JSC). A joint stock company may also issue other securities, such as bonds, that is, documents certifying the right of the owner to demand payment of nominal value, or the nominal value together with interest, within fixed periods of time (see: Article 33 of the Law on JSC). A company’s chartered capital may be reduced by decreasing: 1) the nominal value of its stock or 2) the number of shares of stock69 (see: Article 29 of the Law on JSC).70 In the latter case a company redeems a number of its shares of stock from the stockholders and then eliminates those shares (see: Article 72, Section 1 of the Law on JSC). A company may redeem some of its shares from stockholders, if its charter so permits, without a requirement to reduce its chartered capital (see: Article 72, Section 2 of the Law on JSC). Such a situation may arise, for example, if the company decides to use its preemption right concerning shares offered by a stockholder for sale. These shares (once purchased by the company) shall not carry a right to vote, nor shall they be taken into account when votes are counted, nor shall dividends accrue to them.   Such a decision shall be made by a general meeting of stockholders.   This decision may be made by a general meeting of stockholders or by a board of directors unanimously (if, according to the company’s charter, this issue is delegated to the board of directors). 69   A company’s decision to reduce its chartered capital shall be communicated within 3 days after the decision was taken to the agency responsible for state registration of legal entities and twice published (with a one month interval) in a special journal. A creditor whose claims arose prior to publication of this information is entitled (within 30  days after the last publication) to require premature performance of relevant obligations, and if premature performance is impossible, then termination of the obligations and recovery of losses. The time limitation period for such claims is 6 months from the date of the last publication (see: Article 30 of the Law). 70   Reduction of chartered capital is, however, prohibited if, as a result, the amount of the chartered capital would become less than the minimum amount of the chartered capital set by law (see: id.). 67 68

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Such stocks shall be sold at their market value no later than one year from the date of their redemption, otherwise the company’s chartered capital shall be reduced by the elimination of those shares (see: Article 72, Section 3 of the Law on JSC). Under certain conditions a company is under a statutory obligation to redeem shares from its stockholders at their demand. This demand must be submitted in writing71 by stockholders who did not participate in the voting, or who voted against decisions of a general stockholders’ meeting on some issues, such as: 1)  reorganization of the company; 2) approval of a large-scale transaction; 3) amendment of the company’s charter restricting their rights (see: Article 75 of the Law on JSC). A company is entitled to pay dividends out of its net profits (that is, its profit after payment of taxes) based on results of its first quarter, half year, nine months, or financial year, provided: 1) the chartered capital has been paid in full; 2)  the company’s statutory obligation to redeem stocks has been met; 3)  there is no basis for initiation of bankruptcy proceedings in relation to the company; and 4) the value of the company’s net assets is (or, after payment of dividends would become) no less than the amount of the company’s chartered capital (see: Articles 42, 43 of the Law on JSC). As in a limited liability company where, while there are both a foundation agreement and a charter but only the latter is the constituent document, the only constituent document of a joint stock company is its charter.72 The charter shall include, inter alia: — the company’s location; — the number, nominal value, types of stock and rights of stockholders; — the amount of the company’s chartered capital; — the structure and competence of the company’s bodies and its decision making procedure; — information concerning its branch and representative offices (see: Ar­ ticle 11, Section 3 of the Law on JSC).   The deadline for such a demand is 45 days after the date when a relevant decision was made by the general meeting of stockholders (see: Article 76, Section 3, Paragraph 2 of the Law on JSC). 72   A company’s founders shall conclude a foundation agreement regulating their joint activities at the time of creation of the company but this agreement shall not be deemed a constituent document (see: Article 9, Section 5 of the Law on JSC). 71

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6.3. Company’s bodies A company’s bodies are: 1) the general meeting of stockholders; 2)  a board of directors (if the number of stockholders is 50 or more, formation of a board of directors is obligatory; if there are fewer than 50 stockholders its charter may provide that functions of the board of directors shall be performed by the general meeting of stockholders); 3) a chief executive officer; 4) a management board (if a company’s charter so provides). Considering each of these in turn: 6.3.1. General meeting of stockholders A company’s supreme body is a general meeting of stockholders.73 Its competence is described in Article 48, Section 1 of the Law on JSC and includes, inter alia, the following matters: 1) introduction of amendments to the company’s charter or approval of its new version; 2) reorganization of the company; 3) liquidation of the company, appointment of the liquidation commission, approval of interim and final liquidation balance sheets; 4) formation of the board of directors and premature termination of its members’ powers; 5) determination of the number, nominal value, types of declared stocks and rights provided by them; 6) increase of the company’s chartered capital by means of raising the nominal value of stock or issuance of additional shares (unless the company’s charter delegates this to the board of directors); 7) reduction of the company’s chartered capital; 8) appointment of the chief executive officer and the management board (if the company’s charter provides for its formation), premature termination of their powers (unless the company’s charter delegates these matters to the board of directors); 9) appointment of the company’s auditor or auditing commission and premature termination of his or its powers; 10) appointment of an external auditor;   If all voting stocks are owned by one person, decisions on issues which are within the competence of a general meeting of stockholders shall be taken by this person in writing (see: Article 47, Section 3 of the Law on JSC). 73

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11) approval of the company’s annual financial and book-keeping reports and distribution of profits including the payment of dividends; 12) approval of transactions in which a company’s official is interested as well as approval of large-scale transactions;74 13)  participation of the company in associations of commercial organizations (such as holding companies, financial-industrial groups, etc.); 14) approval of the company’s by-laws; 15) redemption by the company of its shares. Decisions on issues set forth in subsections 1–3, 5 and 15 above shall be taken by three-quarters of the votes of those stockholders who participate in the general meeting (see: Article 49, Section 4 of the Law on JSC). All remaining matters may be resolved by a simple majority of the votes of those stockholders who are in attendance (see: Article 49, Section 2 of the Law on JSC).75 A company is required to hold a general meeting of stockholders once a year. The annual general meeting shall be held within time periods specified in the company’s charter but no less than two months nor more than six months after the end of its financial year.76 The agenda of the annual general meeting of stockholders shall include such matters as formation of the board of directors, appointment of the company’s auditor or auditing commission, appointment of an external auditor, approval of annual financial and bookkeeping reports, and distribution of profits. In addition, the agenda may also include other matters within the competence of the general meeting of stockholders. Other general meetings of stockholders shall be considered to be extraordinary ones (see: Article 47, Section 1 of the Law on JSC). Such meetings may be convened by the board of directors on its own initiative, at the demand of the company’s auditor or auditing commission or the external auditor, as well as by stockholder(s) 74   Features of transactions with interest and large-scale transactions and the procedure for their approval are set forth in Articles 78-83 and are quite similar to those described relating to limited liability companies. (see: supra, subsection 4,8,1 of this Chapter) 75   A stockholder who did not attend the general meeting or voted against its decision may file a claim with a court to declare the decision invalid if, in his view, the decision violates Russian laws or other legal acts or the company’s charter, as well as his rights or lawful interests. The court, with due consideration of all the circumstances of the case, may reject such a claim if the applicant’s vote could not influence the voting results, the violations committed are not substantial and the decision did not result in losses for the applicant. The statute of limitations for such a claim is 6 months from the date when the stockholder became, or should have become, aware of the decision in question (see: Article 49, Section 7 of the Law on JSC). 76   The financial year coincides with the calendar year, i. e. it begins 1st January and ends st 31 December.

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owning at least 10% of the voting shares (see: Article 55, Section 1 of the Law on JSC). Stockholders owning at least 2% of the voting shares are entitled to propose agenda items for the general meeting as well to suggest candidates for the company’s bodies (see: Article 53, Section 1 of the Law on JSC). Written notice of general meetings must be communicated to stockholders no later than 20 (or if the agenda contains a matter relating to reorganization of the company, then 30) days prior to the date of the meeting (see: Article 52, Section 1 of the Law on JSC). 6.3.2. Board of directors (supervisory council) As mentioned above, the competence of a general meeting of stockholders includes formation of a board of directors or supervisory council which shall provide general guidance of the company’s activities (except for those matters within the competence of the general meeting). If a company has 50 stockholders or more (or if it is a public joint stock company), formation of a board of directors supervisory council is mandatory. If there are fewer than 50 stockholders, the company’s charter may provide that functions of the board shall be carried out by the general meeting of stockholders. The board shall, inter alia: 1) prioritize the company’s lines of business; 2) convene general meetings of stockholders; 3) approve the agendas of general meetings of stockholders; 4) increase the company’s chartered capital by issuing additional shares (provided the company’s charter authorizes the board to do so); 5) appoint the company’s executive body (provided the company’s charter authorizes it to do so); 6)  approve large-scale transactions and those in which an official of the company has an interest; 7) establish the company’s branch and representative offices; 8) redeem the company’s stocks (see: Articles 64, 65 of the Law on JSC). Board members shall be elected for a one year term and may be repeatedly reelected. Their powers may be prematurely terminated by the general meeting of stockholders. The number of board members shall be determined by the company’s charter or by the general meeting of stockholders, but cannot be fewer then 5 persons. If there are more than one thousand stockholders in the company, its board of directors shall consist of at least 7 persons, while if the number of stockholders exceeds ten thousand, the minimum number of board members shall be at least 9 persons (see: Article 66 of the Law on JSC). 284

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A board of directors is headed by a chairman who is elected by members of the board. The chairman of the board shall organize the work of the board, convene its meetings, and preside at board meetings as well as at general meetings of its stockholders (see: Article 67 of the Law on JSC). Board meetings shall be convened by the chairman on his own initiative or at the demand of any board member, the company’s internal or external auditor, or the company’s executive body. A quorum of the meeting is at least half of the board members. Decisions at board meetings shall be taken by a majority of the votes (each member having one vote); a company’s charter may provide that in case of a tie the board chairman shall cast the deciding vote77 (see: Article 68 of the Law on JSC). A question may arise as to whether the general meeting of stockholders may overrule a board decision. To answer this question properly it is necessary to bear in mind that according to a mandatory provision of the Law on JSC “a general meeting of stockholders is not entitled to consider and make decisions on issues not included in its competence by this Federal law.”78 (Article 48, Section 3) This means that if, in a stockholder’s view, a board of directors made a wrong decision on an issue within its competence, the general meeting of stockholders is not in a position to overrule such a decision of the board. The general stockholders’ meeting may decide to terminate the board members’ powers prematurely and substitute them with other persons, and a new board may overrule a decision which was taken by a previous board. This does not mean, however, that a board’s decision may be reconsidered only by the board itself. Such a decision may be appealed to a court by a board member who did not participate in the voting, or voted against it, if, in his view, the decision is inconsistent with the law and violates his rights and lawful interests. The application must be filed in court within one month from the date that the board member became (or should have become) aware of the decision in question (see: Article 68, Section 5 of the Law on JSC). 77   The board decision may be taken by voting by correspondence if a company’s charter or a by-law so provides. 78   If in the course of resolution of any dispute a court comes to the conclusion that a decision of a general stockholders’ meeting, which litigants refer to, was made in violation of the competence of the general meeting, then, regardless of whether or not any litigant appeals this decision, the court shall declare the decision void and resolve the dispute in accordance with rules of law (see: Section 26 of the Ordinance of the Plenum of the RF Supreme State Arbitration Court of November 18, 2003 “On some issues of application of the Federal Law “On Joint Stock Companies”).

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For the same reasons a board decision may be appealed by any stockholder. The defendant in such a case shall be the company (see: Section 27 of the Ordinance of the Plenum of the RF Supreme State Arbitration Court of 18th November 2003. No 19 “On some issues of application of the Federal Law ‘On Joint Stock companies’”). The Law on JSC also provides that a company or its stockholder(s) owning (in aggregate) at least 1% of its ordinary shares may sue members of the board of directors to recover losses sustained by the company due to the fault of one or more board members. If several board members are at fault they shall be jointly and seve­ rally liable (see: Article 71). 6.3.3. Chief executive officer and management board A company’s current activities shall be governed by a chief executive officer (director, or general director). A company’s charter may provide that there will also be a management board or directorate79 headed by the chief executive officer. The chief executive officer and the management board shall be appointed by the general meeting of stockholders unless, according to the company’s charter, this matter is within the competence of the board of directors (see: Article 48, Section 1(8) of the Law on JSC). Once a chief executive officer is appointed, an employment contract shall be concluded between him or her and the company. This contract shall be signed on behalf of the company by the chairman of the board of directors or by another person authorized by the board of directors (see: Article 69, Section 3, Paragraph 2 of the Law on JSC). The chief executive officer shall organize the execution of decisions of the ge­ neral meetings of stockholders and those of the board of directors. The chief executive officer shall act on behalf of the company without a power of attorney, and represent the company’s interests, conclude transactions on behalf of the company, approve the company’s staff roll, and issue mandatory orders and instructions to the company’s employees (see: Article 69, Section 2 of the Law on JSC). The general meeting of stockholders (or, if the company’s charter grants appointment of the chief executive officer to the board of directors  — the latter) may at any time terminate the powers of the chief executive officer and/or those of the members of the management board.80

  In such a case the company’s charter shall determine the management board’s compe-

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  In case appointment of a chief executive officer is within the competence of the general meeting of stockholders, a company’s charter may grant the board of directors the authority 80

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As the Constitutional Court of the Russian Federation explained in its Ruling of 15th March 2005 No 3-P, the background of this rule of law is the concept that an owner of a legal entity’s property (with respect to a joint stock company  — the company itself) needs to have discretion both to employ and to dismiss the head of the organization who is entrusted to run the organization and its property (see: Section 3, Paragraph 3). Since termination of the chief executive officer’s powers, according to Article 69 of the Law on JSC, is not based on his or her fault, the general meeting of stockholders (or, in an appropriate situation, the board of directors) is not required to disclose the reason for such a decision (see: Section 4, Subsection 4.1, Paragraphs 1 and 2). However, in order to create a fair balance between the interests of the company, on the one hand, and those of its chief executive officer, on the other, the latter is entitled to receive compensation, as provided for in Article 279 of the RF Labor Code,81 the amount of which compensation shall be determined by the employment contract or, in case of a dispute, by a court judgment (see: Section 4, Subsections 4.2, 4.3). As mentioned above, members of the board of directors may be sued by the company, or by those of its stockholders owning at least 1% (in aggregate) of its ordinary stocks, for recovery of losses resulting from the director’s fault. This rule is also extended to the chief executive officer and members of the management board (see: Article 71, Section 5 of the Law on JSC). A problem encountered in court practice is whether a transaction signed for and on behalf of a company by its chief executive officer shall be binding on the company if the decision of the company’s general meeting (or board of directors) to appoint the chief executive officer is declared void by a court judgment. This will depend upon whether the transaction was signed by this person before or after the date when the court judgment became effective. A company challenged a contract with another company where the contract was signed for and on behalf of one of its counterparts by Mr. K as a chief executive officer. However, a board decision on his appointment to this position was declared void by a state arbitration court; thus the contract was signed by an unauthorized person. to stay the powers of the chief executive officer. At the same time the board of directors shall convene a general meeting of stockholders in order to terminate his or her powers prematurely. 81   Article 279 of the RF Labor Code provides: “In case of the premature repudiation of an employment contract of a chief executive officer of an organization after a decision of the authorized body of a legal entity or the owner of the organization’s property or of the person (or body) authorized by the owner, if there are no culpable acts or omissions of the chief executive officer, compensation is due him for premature repudiation of his employment contract in an amount as determined by the employment contract.” 287

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A claim was granted by the trial court whose judgment was then quashed by the appellate court. The court of cassation overruled the decision of the appellate court and upheld the trial court judgment. The losing litigant applied to the RF Supreme State Arbitration Court filing a motion to review the case in the course of supervision. As established by the Presidium of the RF Supreme State Arbitration Court, according to the company’s charter, appointment of a chief executive officer was relegated to the board of directors. The board repeatedly had been dealing with this issue, and Mr. K had been appointed as a chief executive officer three times, although each board decision was declared void by the state arbitration court. The last board decision on his appointment was declared void by a court judgment which was issued May 19, 2006 and took effect June 19, 2006. However, the contract in question had been signed by Mr. K. on August 25, 2005, that is, before the board decision on his appointment had been announced void. Given these circumstances, the contract was declared binding on the parties.82

§ 7. Economic partnership 7.1. General provisions Organization forms of businesses as described supra (see: §§ 2-6 of this Chapter) are well-known in Russia for a long time (over two decades), and there is already some experience of application of appropriate norms of law by Russian courts. Meanwhile economic partnership is quite new a phenomenon. It has been introduced by the Federal Law of December 3, 2011 No 380-FZ “On Economic Partnership” which Law is effective as of July 1, 2012 (see: Article 26). It is defined in the Law as a commercial organization created by two or more persons and managed by participants as well as other persons within the limits and to the extent as provided in the agreement on management of the partnership (see: Article 2, Section 1). Its main aim is to facilitate realization of venture and innovations business projects,83 albeit a partnership may be involved in any sphere of business activity since it “may have civil law rights and bear civil law duties needed for performance   See: Ruling of the Presidium of the RF Supreme State Arbitration Court No 3259/07 of July 24, 2007. Bulletin of the RF Supreme State Arbitration Court, 2007. No 10, pp. 77–80. 83   See: Y. Smolyaninov. Хозяйственное партнерство  — новая форма юридического лица [Econimic partnership — a new form of a legal entity]. Экономика и жизнь, 2012. No 3. 82

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of any kinds of activity not prohibited by federal laws provided it does not contradict a subject and aims of activities definitely restricted by the partnership’s charter and the agreement on management of the partnership” (see: Article 2, Section 3). There are also certain restrictions of the economic partnership’s activity established by this Law. The partnership is prohibited: 1) to perform emission of bonds and other securities; 2) to be a founder (or participant) of other legal entities (except unions and associations); 3) to advertise its activities (see: Article 2, Sections 4, 5, 7). Generally speaking, an economic partnership is an intermediate organizational form between a limited partnership and a limited liability company. Its participants may be natural persons and/or legal entities (see: Article 4, Section 1 of the Law). Like a limited partnership, it cannot be created by one person, nor can it reduce a number of its participants down to one (see: Article 4, Section 2 of the Law). However if a limited partnership has only limit with regard to a minimal number of participants (two), but has no limit of a maximal number thereof, an economic partnership has limits both of minimal (two) and maximal number of participants (fifty). As to the latter figure, the same limit is established for LLC. On the other hand, LLC may consist of one participant, but this possibility is excluded for an economic partnership. In case a number of participants of an economic partnership becomes equal to one or exceeds fifty, the partnership shall be subject to transformation into a joint stock company or to liquidation upon the demand of interested persons, or that of state agency that is in charge for state registration of legal entities, or that of other authorized bodies84 (see: Article 4, Sections 2 and 3). Rights and duties of participants of an economic partnership are similar to those of a full partnership (see: infra, § 2 of this Chapter), albeit a participant of an economic partnership is also entitled to sell or otherwise alienate his share in the partnership’s capital to another participant or to a person85 unless otherwise provided in the agreement on management of the partnership (see: Article 5 of the Law). Such a transaction should be notary verified, otherwise it is invalid (see: Article 12, Section 3 of the Law).   Such as a state attorney.   In case a participant decides to sell his share to a third person, other participant(s) shall enjoy a right of first refusal. 84 85

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An economic partnership, being a legal entity, “shall bear liability on its obligations within its whole property” and it “is not liable on obligations of its participants” (see: Article 3, Sections 1 and 2 of the Law). In this respect a legal status of a participant to an economic partnership is similar to that of a contributing participant to a limited partnership. There is, however, a specific rule designated to provide additional means for protection of the partnership’s exclusive rights to results of intellectual activity. If, in case of absence or insufficiency of the partnership’s property for satisfaction of the partnership’s obligations, it will be necessary to levy execution upon the partnership’s exclusive rights to results of intellectual activity, the partnership’s obligations to its creditors may be performed (wholly or partly) on behalf of the partnership by one, several or all of the participants. In these three situations a consent of all the participants is needed. The participants shall notify the creditor(s) in writing on such an intention at the latest 3 days prior to the maturity of the creditor’s claim. The creditor(s) shall not be entitled to refuse to accept such a performance. The procedure of such a performance shall be determined by an agreement between the participant(s) and the creditor(s), and — in case of a dispute — by court judgment. The participant(s) who performed the partnership’s obligations shall have a recourse claim to the partnership (see: Article 3, Section 4 of the Law). A participant of an economic partnership may withdraw from the partnership voluntarily or, in case of fundamental breach of his duties to the partnership, may be expelled from it. To that extent his status is similar to that of a partner of LLC. There is, however, a substantial difference in this aspect between LLC, on the one hand, and an economic partnership, on the other. A partner of LLC may only be expelled from the company upon a court judgment (see: supra, § 5, Section 5.7 of this Chapter). Basically a participant of an economic partnership may be expelled from the partnership by court judgment in case of violation of his duties to the partnership (see: Article 7, Section 1 of the Law). Meanwhile if a participant fails to timely make his contribution into the partnership’s capital, he may be (but only in this situation) expelled from the partnership upon the unanimous decision of all the rest of participants without court proceedings. This decision may be challenged to court by the expelled participant (see: Ar­ ticle 7, Section 2 of the Law).

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7.2. Formation of an economic partnership An economic partnership may be created upon a decision of its founders. It is prohibited to create a partnership by means of reorganization of an existing legal entity (see: Article 8, Section 1). Each participant is obligated to make his contribution into the partnership’s capital which contribution may consist of several instalments. It should be noted that, unlike relevant rules with regard to LLC, the Law on economic partnerships provides neither minimal amount of the partnership’s capital, nor ultimate term for making contributions, as it appears from Article 10, Section 1 of the Law. Failure of a participant to make a contribution into the partnership’s capital may serve as a ground for his expulsion from the partnership (see: Article 10, Section 3 of the Law). Admittance of new participants is only possible upon unanimous decision of all participants (see: Article 11, Section 1 of the Law). A partnership may establish a reserve fund and other funds whose amounts, the procedure of formation and aims of use are provided by an agreement on management of the partnership (see: Article 14 of the Law). The partnership’s constituent document is a charter86 that should contain: 1) a full firm’s name; 2) the partnership’s lines of business; 3) the partnership’s place of location; 4) aggregate amount and complement of the partnership’s capital; 5) a place where the partnership’s documents are deposited; 6) information on existence or absence of an agreement on management of the partnership; 7)  a procedure and a term of election of a chief executive officer (see: Article 9. Section 1 of the Law). Besides a charter there may be (albeit not necessarily) an agreement on management of the partnership concluded by all the participants and (possibly) also other persons. This agreement should be made in writing, notary verified and deposited with a notary at the place where the partnership is located. The agreement shall contain, inter alia, the following information: 1) the partnership’s lines of business;

  In a full partnership and in a limited partnership constituent document is a foundation agreement (see: respectively: Articles 70 and 83 of the RF Civil Code). Therefore in this aspect an economic partnership is similar to LLC. 86

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2) amounts, terms and procedure of introducing of contributions by participants into the partnership’s capital; 3) conditions of liability of participants for breach of their duties on introducing of contributions into the partnership’s capital; 4)  means of ensuring of confidentiality of information on involvement of participants and other persons in the partnership’s activity. as well as liability for violation of confidentiality; 5) procedure of resolution of possible disputes between the parties to the agreement; 6) procedure, terms and conditions of involvement of other legal entities and natural persons in the partnership’s activity (see: Article 6 of the Law).

7.3. Management of an economic partnership According to the law there should be a Chief Executive Officer to be elected out of the complement of the participants by unanimous decision of all of them for the whole term of the partnership’s activity unless otherwise provided by the charter (see: Article 18, Section 3). Chief Executive Officer, inter alia: 1) acts on behalf of the partnership without a power of attorney; 2) issues powers of attorney to represent the partnership; 3) employs personnel of the partnership; 4) maintains the register of participants with information of each of them, the amount of his share in the partnership’s capital. Activity of a Chief Executive Officer and a procedure of taking decisions by him shall be regulated by the partnership’s charter as well as by a contract to be concluded between him and the partnership. An agreement on management of the partnership may provide for additional approval of his decisions in certain situations (see: Article 19, Section 4 of the Law). As for other partnership’s bodies (such as board of directors, management board etc.), creation thereof is not required by the Law but may be provided by an agreement on management of the partnership (see: Article 6, Section 6 (10) of the Law). A decision of the Chief Executive Officer (or other partnership’s body, if any) violating this Law, other legal acts of the Russian Federation, the partnership’s charter, the agreement on management of the partnership and affecting rights and legitimate interests of a participant, may be declared void by court upon the participant’s claim.

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Chapter 5 Legal Capacity of Businesses with Foreign Investment: its Scope, Starting Point and Termination

§ 1. Scope of legal capacity of businesses with foreign investment (general overview) 1.1. Development of modern Russian civil law rules concerning capacity of commercial organizations In the USSR there were different approaches in civil law to the scope of legal capacity of individuals, on the one hand, and that of legal entities, on the other. Individuals enjoyed general capacity, that is, they were entitled to conclude any transaction not in conflict with civil law norms. This principle, however, was not extended to legal entities. The socialist economy had been subject to state planning; each legal entity could only enter into transactions corresponding to the character of its business set forth in its constituent documents (see: Articles 26, 50 of the RSFSR1 Civil Code 1964). In other words, legal entities had special capacity. However, in the twentieth century there was a trend for countries with market economies to provide commercial organizations with general capacity in civil law matters. This trend was manifested most clearly in Article 51 of the Swiss Civil Code which provided that a legal entity could acquire any civil rights and bear any civil obligations except those connected with human features such as age, sex or kinship.   RSFSR — Russian Soviet Federative Socialist Republic, a constituent part of the USSR.

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The background of this trend is self-explanatory and of a purely economic origin. Assume a company engaged in the oil extracting business, where an oil deposit has been exhausted, but there is a large deposit of coal lying nearby close enough to the surface of the earth that there would be no need to build a mine. Whether the company could now shift into the coal extracting business would depend substantially on the scope of the company’s legal capacity, whether it enjoyed special or general capacity. If it had special capacity, the company would first need to amend its constituent documents in order to be able to develop a new line of business. Only then could it purchase coal extracting machinery and, if required by law, obtain an appropriate license. If the company enjoyed general capacity there would be no need to amend its constituent documents. General capacity permits undertaking of any kind of business activity. The company, having made an appropriate decision could apply immediately for a license, if so required, and buy coal extracting equipment. Thus, having general capacity simplifies the movement of capital to more profi­ table economic uses from less profitable ones; this is the main advantage that general capacity provides in comparison with special capacity. Once Russia began its transition from a planned to a market economy it encountered this very problem. While this problem has now been resolved it is helpful to highlight the main steps taken in the course of its solution. The first step in this direction was associated with the Regulations on joint stock companies approved by the Decision of the Council of Ministers of the RSFSR of December 25, 1990 No  601. This contained a provision that “a company’s activity shall not be limited by that specified in its charter. Transactions which are beyond the charter activities but not contrary to current legislation shall be deemed valid.” (Section 5, Paragraph 2) One must recognize that such a provision is none other than a formula providing a company with general capacity in civil law matters. However, on the same day, December 25, 1990, the Russian Parliament (which at the time was the Supreme Council of the RSFSR) adopted a Law “On Businesses and Business Activities” which stated, inter alia, that “a business may perform any kinds of activities provided for in its charter except those prohibited by legislation of the RSFSR and the republics within it.” (Article 21, Section 2) Reference to the kinds of activities set forth in the charter actually meant that any enterprise could undertake only the types of businesses specified. In other words, the law in question was based upon the principle of commercial organizations having special capacity. 294

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Thus there was a clear conflict between these two normative legal acts which were adopted on the same day. The question naturally arose: which one of them would prevail. The correct answer was clear. A Governmental Decision has less legal force than a Law adopted by the Parliament. Therefore, one could conclude that the norm of the Regulations on joint stock companies of December 25, 1990 No 601 proclaiming a general capacity for joint stock companies was now effectively just a declaration, albeit a very important one since it indicated a new trend in the development of Russian civil law. The second step in this same direction resulted from the Regulations on the procedure of state registration of subjects of business activities as approved by the Decree of the President of the Russian Federation of July 8, 1994 No 1482. These Regulations, inter alia, described requirements for the constituent documents of different types of businesses. A company’s charter had to contain information on its organizational form, name, seat of the company, amount of its chartered capital, structure, procedure of formation and competence of its management and controlling bodies, procedure of distribution of profits and formation of the company’s funds, and procedure and conditions of reorganization and liquidation of the company (see: Section 3, Subsection “a”). What was notable here was the fact that there was no requirement to specify the lines of business of the company in its charter.2 From a legal point of view this meant that the scope of a company’s activities was no longer limited by its charter; a company could now be involved in any kinds of business activity except those prohibited by law. Effectively, in this way, the Regulations granted commercial organizations general capacity in matters of civil law. While approval by Presidential Decree and Regulations had the legal force to prevail over Governmental Decisions, they could not overrule federal laws such as the Law “On Businesses and Business Activities,” which had been based upon the principle of special capacity of commercial organizations. That is why the second step, though more significant than the previous one, still could not be the final one. Since the principle of special capacity of legal entities (including commercial ones) had been fixed by federal law, only another federal law could replace this principle with the principle of general capacity of commercial organizations. This was accomplished by Part One of the Civil Code of the Russian Federation which took effect January 1, 1995; its Chapter 4 (“Legal Entities”) had taken   Such a requirement only related to state-owned and municipal enterprises and also to non-commercial organizations entitled to conduct business activities (see: Section 3, Subsecti­on «б»). 2

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effect even earlier, as of December 8, 1994, the date of its official publication in “Российская газета”. On the one hand, the new Civil Code, like the 1964 Code, stated as a general rule that a legal entity “may have civil law rights corresponding to the purposes of the activity provided for in its constituent documents and shall bear the obligations connected with such activity.” (Article 49, Section 1, Paragraph 1) There is no doubt that the quoted language provides a legal entity with special capacity. On the other hand, the new Code introduced a reservation concerning commercial organizations which are entitled to “have civil law rights and bear civil law obligations necessary for performance of any types of activities not prohibited by law.” (Ar­ticle 49, Section 1, Paragraph 2) This is typical wording for general capacity in civil law.3 One may therefore conclude that Russian civil law currently takes the same approach to the legal capacity of commercial organizations as that typical under the civil law of market economy countries.

1.2. Capacity of businesses with foreign investment While Chapter 4 of the RF Civil Code has resolved the problem of the general capacity of Russian private commercial organizations, this solution was extended only to domestic commercial organizations. The situation was more complicated with respect to businesses with foreign investment. As mentioned above, rules of the Civil Code “shall apply to relations with participation of foreign nationals, stateless persons and foreign legal entities unless provided otherwise by a federal law,” that is, norms of a federal law specifically designated to regulate relations involving foreign persons shall prevail over relevant general provisions in the Civil Code. At that time one of the main federal laws in question was the 1991 Law “On Foreign Investments in the RSFSR.” According to that Law, constituent documents of businesses with foreign investments had, inter alia, to indicate “subject and aims of activities of the business.” (Article 15) Consequently any company with foreign participation could perform commercial activities which were in compliance with   There are, however, some commercial organizations which, as mentioned supra (see: Section 1.1 of this text), have special capacity, such as state-owned and municipal unitary enterprises, insurance organizations, banks, etc. 3

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lines of business specified in the company’s charter, which was actually a formula for the special capacity of commercial organizations with foreign investments. Such an approach was quite natural given the fact that the 1991 Law “On Foreign Investments” had been adopted when the principle of special capacity of legal entities had been provided by the 1964 Civil Code, and was confirmed for commercial organizations by the 1990 Law “On Businesses and Business Activities.” The new Civil Code prevailed over both the 1964 Civil Code and the 1990 Law “On Businesses and Business Activities,” but not over the 1991 Law “On Foreign Investments.” That is why even after the norms of the new Civil Code with respect to the general capacity of commercial organizations took effect, those with foreign investments remained subject to the principle of special capacity. The situation was changed by the 1999 Federal Law “On Foreign Investments in the Russian Federation” which states that “the formation and liquidation of a commercial organization with foreign investments shall be effected on the terms and in accordance with the procedure provided by the Civil Code of the Russian Federation and other federal laws.”4 (Article 20, Section 1) However, unlike the 1991 Law, the 1999 Law does not specify requirements relating to the contents of constituent documents of such organizations. In legal terms this means that such requirements are exactly the same as those formulated for purely domestic companies. It should be noted that according to both the Law “On Joint Stock Companies” and the Law “On Limited Liability Companies” there is no requirement that the lines of a company’s business be set forth in its charter. In this way these laws follow the principle of general capacity of commercial organizations as set forth in Article 49 of the Civil Code. Since the 1999 Law “On Foreign Investments” does not touch on this issue and contains no specific rules concerning the scope of capacity of businesses with involvement of foreign persons, one can conclude that, as of July 14, 1999 (the date of official publication when this Law took effect), commercial organizations with foreign investments, like domestic ones, enjoy general capacity in civil law matters.

  A similar norm was set forth in Article 20 of the 1991 Law on Foreign Investments.

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§ 2. On privileges for businesses with foreign investments in Russia 2.1. General overview The problem of privileges for businesses with foreign investments in Russia has its own history. Companies with foreign participation (originally in the form of joint ventures) began to appear on a large-scale basis in the USSR beginning in 1987 after the Decree of the Presidium of the Supreme Council of the USSR of January 13 and Decisions of the Council of Ministers of the USSR (of the same date) was issued. At that time the Soviet economy was based on an administrative-planning system. Joint ventures were then very much like “market islands” in a “boundless ocean” of the planned economy; they needed some special legal status to take into account their peculiarities. Given this situation, the January 13, 1987 Decisions of the USSR Council of Ministers (and also some other USSR normative legal acts) granted joint ventures certain privileges, primarily with respect to taxation. However, later, as the Russian economy changed from a “planning system” to a “market model,” Russian law changed substantially and became quite market-oriented. In this situation it was considered fair to put all businesses operating in the Russian market (those both purely domestic and those with foreign investment) on an equal basis so that all would have similar “starting possibilities.” The 1999 Law on Foreign Investments expressly provides that “the legal treatment of the activities of foreign investors and the use of profits received from investments shall not be less favorable than the legal treatment of the activities and the use of profits received from investments granted to Russian investors, with the exceptions established by federal laws.”5 (Article 4, Section 1)   “Restrictive exemptions for foreign investors may be introduced by federal laws only insofar as it is necessary for the purposes of protecting the constitutional system, morals, health, rights and lawful interests of others, national defense and state security.” (Article 4, Section 2 of the Law) For example, Federal Law of April 29, 2008 N 57-FZ “On the Procedure of Contributing Foreign Investments into Commercial Companies having Strategic Significance for Ensuring Defense of the Country and State Security.” This law provides that foreign states and international organizations as well as organizations under their control including those created in the territory of the Russian Federation are not entitled to conclude transactions resulting in establishment of control over commercial companies having strategic significance for ensuring the defense of the country and state security (see: Article 1, Section 2). 5

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§ 2. On privileges for businesses with foreign investment in Russia

This means, in principle, that foreign investors enjoy national treatment in the Russian Federation. This rule is developed, inter alia, by norms of Article 5, Section 2 of the Law which provides that a foreign investor is entitled to recover losses incurred as a result of unlawful acts or omissions of state agencies, municipalities or officials thereof, in accordance with the civil law of the Russian Federation. In this respect, Article 1069 of the Civil Code must be kept in mind. It provides that a citizen’s or a legal entity’s losses resulting from illegal actions or omissions of state agencies, municipalities, or their officials, shall be compensated including those losses resulting from the act of a state agency or municipality not based on a law or other legal basis. Losses shall be reimbursed at the expense of the treasury of the Russian Federation, the treasury of the subject of the Russian Federation, or the treasury of the municipality. (See: supra, Chapter 3, § 3, Subsection 3.4.2.2.5) Legal possibilities which this Article provides are equally available to domestic and foreign nationals and legal entities. Russian law also contains a number of norms specifically designated to provide legal protection to the property and lawful interests of foreign investors. For example, Article 8 of the 1999 Law on Foreign Investments provides that property of a foreign investor or a commercial organization with foreign investment shall not be subject to compulsory expropriation, including nationalization, or requisition, except in situations and upon grounds established by federal law or an international treaty of the Russian Federation. In the case of requisition, a foreign investor or a business with foreign investment shall be entitled to recover the value of the property in question. Following termination of requisition, a foreign investor (or a business with foreign participation) may file a claim in court for return of the property. However, he should return to the state treasury the amount of his recovery less the loss resulting from any decrease in the value of the property. In the case of nationalization, a foreign investor or a business with foreign investments shall be refunded the value of the property and other losses.

Control of a foreign investor over such a company means the possibility of a foreign investor directly, or via third persons to determine decisions taken by the company by voting at the general meeting of the company’s shareholders, by participation in the company’s board of directors or other managment bodies of the company etc., as well as indirectly to dispose of at least 25% of the voting stocks or shares of the company, or to appoint the company’s Chief Executive Officer and/or at least 25% of the members of the company’s management board or at least 25% of the members of the board of directors (see: Article 3, Section 1 of the Law). 299

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A foreign investor’s dispute connected with his business activities in Russia shall be resolved in a state court or in international arbitration in accordance with international treaties of the Russian Federation and federal laws (see: Article 10 of the Law).

2.2. Specific privileges in the sphere of taxation In addition to these general rules, there are also some specific norms which create certain privileges for foreign investors. First, it should be noted that the 1999 Law on Foreign Investments includes provisions which encourage foreign businesses to make large-scale investments in Russia. It sets a background of norms relating to priority investment projects. Article  2, Paragraph 6 of the Law provides: “a priority investment project is an investment project having an aggregate amount of foreign investments of at least 1 billion rubles (or not less than an equivalent amount in foreign currency…) or an investment project having the minimum share or contribution of foreign investors in the chartered… capital of a commercial organization with foreign investments of at least 100 million rubles (or not less than an equivalent amount in foreign currency…) and which is included in a list to be approved by the Government of the Russian Federation.” As the quoted text indicates, an investment project will be deemed a priority one provided it complies with two requirements, one of which is of a financial character and the other of which is of an administrative nature. The financial requirement relates to the amount of foreign investments to be contributed to the project; this requirement may be manifested in one of two diffe­ rent ways: 1. Here the aggregate amount of foreign investment in the project must be at least 1 billion rubles (or its equivalent in foreign currency), regardless of whether or not any business with foreign investments will be established to develop the project. If so, a foreign share in its chartered capital is irrelevant. Assume that a foreign investor intends to erect a big entertainment complex (like Disney World) in Russia and to contribute a hard currency equivalent of 1 billion rubles to this project. Assume further that a joint venture is created to develop the project. This joint venture is a joint stock company with the minimum possible chartered capital (currently 100,000.00 rubles), and the share percentage between the Russian and foreign stockholders is 50/50. Since the aggregate amount of foreign contribution to the project is 1 billion rubles, the financial requirement for the project to be deemed a priority one is complied with. 300

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The foreign contribution to the chartered capital of the joint venture (which is quite small) does not matter in this situation. 2.  Here a business with large scale foreign investment is created to develop a project. Such a project may be deemed a priority one provided the amount of the foreign share in the chartered capital of the commercial organization is at least 100 million rubles (or its equivalent in foreign currency). The aggregate amount of foreign investments in the project in such a case is irrelevant. The “administrative” requirement for the investment project to be granted “priority” status requires that the project be included in a special list approved by the RF Government. Priority investment status and its privileges are aimed at preventing (for a certain time period) any increase of aggregate tax burden for the foreign investors involved in the development of priority investment projects. The concept of “aggregate tax burden” is defined in Article 2, Paragraph 7 of the 1999 Law as an anticipated aggregate amount of money to be paid in the form of federal taxes6 and contributions to state non-treasury funds7 by a foreign investor and a business with foreign investments which develop an investment project with foreign investments, at the time when financing of the investment project begins. For projects which are granted this priority status, a special privilege, often called a “grandfather clause,” is provided by Article 9 of the 1999 Law. According to this provision, if new federal laws (or amendments to existing ones) result in increasing the aggregate tax burden on a foreign investor and a business with foreign investments which are involved in implementation of priority investment projects, or if any restrictions for foreign investments are introduced (compared with the regime that was effective at the time when financing of the priority investment project out of foreign investments began), the new laws or amendments shall not apply to such foreign investors and businesses with foreign investments within the period of return of capital, but not longer than 7 years from the date the financing of the project out of foreign investments began. This period may be extended by the RF Government with respect to priority investment projects in manufacturing or those creating a transportation infrastructure or other infrastructure with an aggregate amount of foreign investments of at least 1 billion rubles (or its foreign currency equivalent). In other words, the meaning of the “grandfather clause” is to grant a foreign investor (under the conditions above) a temporary immunity from legal norms causing an adverse effect on its legal regime (particularly in the field of taxation).   Except for excise taxes and value added taxes on goods manufactured in the territory of the Russian Federation. 7   Except for contributions to the Pension Fund of the Russian Federation. 6

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It should be noted that the “grandfather clause” is both provided by law and enforced by the Russian courts. An Information letter of the Presidium of the Supreme State Arbitration Court of the Russian Federation provides a practical example: A joint venture was established and its foreign partner invested $40 million in the project. A feasibility study of the joint venture anticipated that the rental fee for use of subsoil would be 10% and the profit tax would be 32%. At the end of the first year of the company’s business activities the tax law was amended and new export customs duties were established. A foreign partner approached the Government of the subject of the Russian Federation where the company was located with a motion to decrease its tax burden in order to maintain it at the level set forth in the feasibility study. The Government issued a decision exemp­ ting the joint venture from payment of export customs duties for a 3 year period, and the royalties were decreased to 5%. A state attorney sued the Government since, in his view, granting such privileges was contrary to the region’s interests. At the court hearing the Government’s counsel explained that when decreasing the tax burden for the joint venture the Government had acted in accordance with the “grandfather clause” which was aimed at protecting foreign investors against adverse amendments of the receiving country’s law, which rule was provided in Article 9 of the 1999 Law “On Foreign Investments in the Russian Federation.” The state arbitration court sustained this argument and rejected the state attorney’s claim.8 Another privilege for foreign investors relates to import customs duties. In case a foreign investor makes an in-kind contribution to the chartered capital of a  commercial organization, relevant goods shall be exempted from payment of import customs duties provided the goods in question: a) are items of fixed capital to be used in manufacturing;9 b) are not subject to excise tax;10 and c) are imported into the terri-

  See: Review of practice of state arbitration courts’ resolution of disputes connected with protection of foreign investors. Information Letter of the Presidium of the Supreme State Arbitration Court of the Russian Federation of January 18, 2001 (Bulletin of the RF Supreme State Arbitration Court, 2001, No 3, pp. 74-75). 9   According to the Regulations on bookkeeping and reporting in the Russian Federation as approved by the Order of the Finance Ministry of the Russian Federation of July 29, 1998 No 34H the fixed capital includes buildings, constructions, machinery, equipment, transport vehicles, computers and other items which are in use for longer than 12 months (see: Section 46). 10   An excise tax shall be imposed upon goods such as cars and motorcycles with an engine power exceeding 112.5 kw (see: Article 181, Part 1, Section 6 of the Tax Code). 8

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tory of the Russian Federation within the period of time indicated for the formation of the chartered capital (see: Decision of the RF Government of July 23, 1996 No 883). In addition, the Tax Code of the Russian Federation grants an exemption from value added tax with regard to technological equipment and its spare parts being imported into the territory of the Russian Federation as an in-kind contribution to the chartered capital of organizations (see: Article 150, Section 7). No reservation provides that this rule applies only to foreign in-kind contributions; thus the norm is extended to any in-kind contribution without regard to whe­ ther a foreign investor or a domestic one is making the contribution. This brings legal regimes of foreign and domestic investments closer to each other.

§ 3. State registration of businesses with foreign investments 3.1. Historical overview State registration of any legal entity (including businesses with foreign investments) is an act of great legal significance: a legal entity is deemed to be created (see: Article 51, Section 8 of the Civil Code) and acquire legal capacity at the time of registration id est the date when the relevant entry is made into the Unified State Register of Legal Entities (see: Article 49, Section 3 of the Civil Code)11. An overview of the history of the procedure for state registration of businesses with foreign investments highlights the trend governing the development of legislation in this field. Originally both the conditions of (and the bodies responsible for) state registration of businesses with foreign investments differed from those governing state re­ gistration of domestic businesses. As mentioned earlier, large-scale establishment of joint ventures began in 1987, at which time such businesses were then registered with the Finance Ministry of the USSR (see: Section 9 of the Decision of the USSR Council of Ministers of January 13, 1987 No 48 “On the procedure of creation in the territory of the USSR and activities of joint ventures, international associations and organizations of the USSR   A person who in good faith relies upon data of the Unified State Register of Legal Entities is entitled to assume that this data is correct. A legal entity is not entitled, in its relations with such a person, to refer to data not included in this register, as well as to incorrectness of data contained in it, with exception of cases when the relevant data was introduced in this register as a result of illegal acts of third persons or otherwise beyond the legal entity’s will (see: Article 51, Section 2, Paragraph 2 of the RF Civil Code). 11

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and other countries  — members of the CMEA”,12 Section 9 of the Decision of the USSR Council of Ministers of January 13, 1987 No 49 “On the procedure of creation in the territory of the USSR and activities of joint ventures with participation of Soviet organizations and firms of capitalist and developing countries”). Later state registration of businesses with foreign investments was shifted to the Finance Ministry of the Russian Federation or another authorized state agency (see: Article 16, Paragraph 1 of the Law “On Foreign Investments in the RSFSR” 1991), such agency to be named by the RSFSR Government (see: the ruling of the Supreme Council of the RSFSR of July 4, 1991 “On Introduction of the RSFSR Law On Fo­ reign Investments in the RSFSR”). According to the Decision of the RSFSR Government of November 28, 1991 No 26 “On registration of businesses with foreign investments,” state registration of businesses with foreign investments was entrusted to Administrations of subjects of the Russian Federation.13 This rule did not, however, include large-scale businesses with foreign investment (that is, those where the amount of foreign investment in the company’s chartered capital exceeded 100 million rubles) or businesses with foreign investment in coal, oil and gas extracting and processing industries (without regard to the volume of foreign investment in the company’s chartered capital). Such businesses with fo­ reign investment were to be registered with the State Registration Chamber at the RF Ministry of Economics that was created in compliance with the Decision of the RF Government of July 6, 1994 No 655.14 However, purely domestic businesses for a long time had been required to be registered with district, that is local, administrations (see: Articles 34, 35 of the 1990 Law “On Businesses and Business Activities” and Preamble of the Decree of the President of the Russian Federation of July 8, 1994 “On improvement of state registration of businesses and businessmen in the territory of the Russian Federation” whereby the President approved the Regulations of the procedure for state registration of subjects of business activities. Later (at the end of the nineteen nineties and in the beginning of the 21st century) one could observe a clear trend to unify (and at the same time to simplify)   CMEA — Council of Mutual Economic Assistance.   In St. Petersburg such registration was within the competence of the Foreign Liaisons Committee of the Office of the Mayor (see: the Decree of the Mayor of St. Petersburg of September 16, 1991. No 417-p) and later, in 1995, it was transferred to the Registration Chamber of St. Petersburg (see: Section 3 of the Rules on the Registration Chamber of St. Petersburg as approved by the Decree of the Mayor of St. Petersburg of July 5, 1995 3 692-p). 14   Later (as of 1998) the State Registration Chamber was made subordinate to the RF Ministry of Justice (see: Decision of the RF Government of September 5, 1998. No 1034). 12 13

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the procedure for state registration of all commercial legal entities without regard to whether or not there was a foreign share in a company’s chartered capital. To begin, the 1999 Law on Foreign Investments contained a provision according to which creation and liquidation of commercial organizations with foreign investments were to be conducted in compliance with the conditions and the procedure provided by the Civil Code of the Russian Federation and other federal laws, with exceptions established by federal laws (see: Article 20, Section 1). Such exceptions were introduced by the same Law. They related to the time limit for the state agency to register such businesses (30 days from the date of submission of the relevant documents to the registration agency)15 and set forth the documents needed for state registration (see: Article 20, Section 2 of the Law). However, the Law did not indicate the particular agency responsible for state registration of businesses with foreign investments. This silence was additional evidence of law-makers’ approach to entrust the state registration of domestic businesses and those with foreign investments to the same agencies.

3.2. Current situation Further movement in this direction could be seen in the Federal Law of August, 8 2001 No129-FZ “On State Registration of Legal Entities and Sole Businesses.” The main features of this Law are: 1. This Law unified the set of documents required for state registration. They include: a) application form approved by the RF Government;16 b) decision to create the legal entity (such as the minutes of a shareholders’ meeting, the foundation agreement, etc.); c) constituent documents of the legal entity (either the original documents or notarized copies); d) abstract from a register of foreign legal entities or another similar document evidencing the legal status of a foreign company-founder; and e) document evidencing payment of state duty (see: Article 12).17   For purely domestic businesses, this period of time was 3 days (see: Section 5 of the Regulations of the procedure for state registration of subjects of business activities approved by the Decree of the President of the Russian Federation of July 8, 1994). 16   The form of the application was approved by the Decision of the RF Government of June 19, 2002 No 439. 17   The amount of state duty is 4,000.00 rubles (see: Article 333_33, Part 1, of the Tax Code). 15

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2. The law also refers to an agency responsible for registration of legal entities and sole businesses. There is a general provision in Article 3 that state registration shall be provided by a Federal executive power body as authorized in compliance with the Constitution of the Russian Federation and the Federal Constitutional Law “On the Government of the Russian Federation.” Further to this rule, the RF Government issued the Decision of May 17, 2002 No 319 whereby functions of such a body were imposed upon the tax inspectorate where the permanent executive body of a new legal entity was located.18 Neither the Law of August 8, 2001, nor the Governmental Decision of 17th May 2002, contain any reservation expressly or implicitly restricting application of these norms to the registration of purely domestic legal entities and sole businesses. This means that local tax authorities are now in charge of registering businesses with foreign investments as well as purely domestic entities. 3. The Law unified the time period for state registration of legal entities and sole businesses without regard to foreign participation. This time period is 5 days from the date of submission of the documents to the registration body (see: Article 8, Section 1). 4. The law also provided for the place of registration of a legal entity. According to Article 8, Section 2 of the Law, a legal entity shall be registered at the place where the permanent executive body of the legal entity is located. Because the place of the permanent executive body is usually also the place where the chief executive officer is located, as a general rule, a legal entity is registered at the place of its CEO’s office. A question arose in practice whether a legal entity could be registered where its CEO’s house or apartment is situated. This issue can be quite important for small companies whose staffs consist of just a few people. Tax authorities have not been very enthusiastic with this idea and several approaches have been manifested in court judgments. The different positions on this   It should be noted that tax inspectorates are in charge of state registration of commercial organizations. Non-commercial legal entities (such as institutions, social organizations. foundations, etc.) shall be registered with an authorized federal executive body (see: Article 13‑1, Section 2 of the Federal Law “On Non-Commercial Organizations” of January 12, 1996. No 7-FZ). Currently this body is the RF Ministry of Justice (see: Section 7, Subsections 3–7 of the Regulations of the Ministry of Justice of the Russian Federation approved by Decree of the President of the Russian Federation of October 13, 2004). In the future this Ministry will apparently become responsible for state registration of all kinds of legal entities. It will lead to the concentration of state registration of all legal entities unified electronic register of legal entities (see: the Concept of development of civil legislation of the Russian Federation, Section 2.7). 18

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issue originate from differences in norms of the Civil Code on the one hand, and the Housing Code, on the other. The Civil Code states that “dwelling premises are intended for the residence of citizens.” (Article 288, Section 2) This rule is followed by a provision that “the use by the owner of a dwelling premise for enterprises, institutions, and organizations shall be permitted only after transfer of such premises to non-residential ones.” (Id., Section 3) On this ground the tax authorities require that the place of location of the permanent executive body of a legal entity, and the place of residence of the relevant natural person, be differentiated. However, the Housing Code includes a general provision that while “a dwelling premise is intended for the residence of citizens” (Article 17, Section 1) a proviso permits use of a dwelling premise for the performance of professional activity and individual entrepreneurial activity by citizens who live legally on the premises if such activity does not violate the rights and lawful interests of other citizens as well as the requirements that a dwelling premise must meet (see: id., Section 2). This rule appears less restrictive than that contained in Article 288, Section 3 of the Civil Code so it becomes necessary to clarify which norm has prevailing legal force. Both the Civil Code and the Housing Code are federal laws, that is, normative legal acts of the same hierarchical level. However, the Housing Code, in contrast to the Civil Code, is a special law. Also, the Housing Code was adopted in 2004 while Part One of the Civil Code had been adopted in 1994. Given the well known axioms “lex posterior derogat prior” and “lex specialis derogat lex generalis” it was concluded that the provision of Article 17, Section 2 of the Housing Code prevails over that of Article 288, Section 3 of the Civil Code. This analysis has led the majority of courts now to support the position that registration of a legal entity at the place of its CEO’s residence is permissible.19 A similar view was shared by the RF Ministry of Finance in its letter of December 3, 2008. No 03-01-11/5-159. This approach was supported by the RF Supreme State Arbitration Court with a reservation that such a registration is permissible provided the owner of the relevant immovable object has consented; such consent shall be deemed granted if the address given is the address of residence of the founder of the legal entity or of a person entitled to act on behalf of the legal entity without a power of attorney (see: Section 4 of the Ordinance of the Plenum of July 30, 2013 N 61 “On some issues   See: Экономика и жизнь, 2009, No 1, Book keeping addendum. P. 7.

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of practice of resolution of disputes connected with correctness of address of a legal entity”). 5. The Law specifies a scope of information on a legal entity that is to be ref­ lected in the state register, such as, inter alia: 1) its name, 2) its type, 3) its address,20 4) its founders, 5) copies of its constituent documents, 6) a name and a position of a person entitled to act on behalf of the legal entity without a power of attorney (CEO) — see Article 5, Section 1. In case of amendments to the constituent documents or changes in other information as contained in the state register, relevant amendments shall be introduced into the register (see: Articles 17–19). In this connection both commercial and judicial practice encountered the following issue: If a company’s CEO is substituted with another person in due course (by the general meeting of shareholders) some period of time will inevitably be needed for submission of the relevant information to the registration agency to be reflected in the state register of legal entities. Assume that A (who had been a company’s CEO) was dismissed by the decision of the general meeting of shareholders June 1, and simultaneously B was appointed as the company’s CEO. Meanwhile relevant information was submitted to the registration agency June 10, and appropriate entry in the register was made June 15. A question arises: from what date B will be able to act as the company’s CEO (and, in particular, to conclude transactions on behalf of the company without a power of attorney — from the June 1 (when a decision on his appointment was taken) or from the June 15 (when this information was reflected in the register)? As indicated in the Ruling of the RF Supreme State Arbitration Court of May 29, 2006 No 2817/06, corporate law views the rights and duties of a company’s CEO to arise with a decision of an authorized body of the legal entity (to be recorded in

  A legal entity shall bear a risk of consequences of non-receipt of correspondence delivered at the address indicated in the register, as well as the risk of absence of its body or representative at this address. Correspondence delivered at the address indicated in the register shall be deemed received by the legal entity even if it is not located at this address (see: Article 54, Section 3, Paragraph 2 of the RF Civil Code). If there is a representative of a foreign legal entity in the territory of the Russian Federation, correspondence delivered at the address of such a representative shall be deemed received by the foreign legal entity (see: id., Paragraph 3). 20

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minutes of the general shareholders’ meeting or in the decision of the sole founder), rather than with the entry of such information into the state register (see also: the Rulings of the Presidium of February 14, 2006 No 12049/05, 12580/05, 14310/05). There are, however, certain peculiarities concerning registration of branch and representative offices of foreign companies. According to the 1999 Law on Foreign Investments, a branch office of a foreign company must be accredited by the federal executive body responsible for coordination of direct foreign investments in the economy of the Russian Federation, which body shall be designated by the Russian Federation (see: Article 21, 24). Currently this body is the Ministry of Economic Development of the Russian Federation (see: Subsection 5.3.7 of the Regulations on the Ministry of Economic Development of the Russian Federation as approved by the Decision of the Government of the Russian Federation of June 5, 2008 No 437). A draft decision on accreditation of branch offices of foreign companies shall be prepared by the State Registration Chamber at the Ministry of Justice of the Russian Federation (see: Section 9 (3) of the Charter of the Federal State Institution “State Registration Chamber at the Ministry of Justice of the Russian Federation” as approved by the Order of the RF Ministry of Justice of November 16, 2005 No 220). A final decision is within the competence of the Ministry of Economic Development. The Chamber is also in charge of accrediting representative offices of foreign companies as well as the state registration of foreign branch and representative offices in Russia and Russian investments abroad (see: Section 9, Subsections 1, 2, 54, 56 of the Chamber’s Charter).

§ 4. Reorganization of businesses with foreign investments Creation of newly-established companies has been discussed. However, companies may also result from the split up of an existing company. Some companies may also serve as the basis for creating a larger one. Thus, companies may appear or disappear due to reorganization. In such situations the problem of succession arises. A number of issues need to be touched on concerning reorganization, including: 1) forms of reorganization; 2) stages of reorganization; and 3) legal consequences of reorganization, each of which will be considered in turn. 309

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4.1. Forms of reorganization According to Russian civil law, legal entities may be reorganized in any one of five different ways, through: a) merger; b) accession; c) division; d) separation; or e) transformation (see: Article 57, Section 1 of the RF Civil Code; Article 15, Section 2 of the Law on JSC; Article 51, Section 2 of the Law on LLC). Merger results in the appearance of a new company after the transfer to it of all rights and duties of two or more companies which are dissolved (see: Article 16, Section 2 of the Law on JSC; Article 52, Section 1 of the Law on LLC). In other words, in a merger two (or more) companies unite to form a new company and the previous ones disappear. Accession means dissolution of one or more companies with the transfer of all of their rights and duties to another company (see: Article 17, Section 1 of the Law on JSC; Article 53, Section 1 of the Law on LLC). In cases of accession, one or more companies join another company which continues to exist (although it becomes enlarged) while the companies which join the (enlarged) company then cease to exist. Division means dissolution of the company with the transfer of all of its rights and duties to the newly created companies (see: Article 18, Section 1 of the Law on JSC; Article 54, Section 1 of the Law on LLC). In case of division, a split of one company into two (or more) other companies results in the appearance of new companies and the disappearance of the first one. Separation means the creation of one or more companies with the transfer to them of part of the rights and duties of the reorganized company without the dissolution of the latter (see: Article 19, Section 1 of the law on JSC; Article 55, Section 1 of the Law on LLC). In a case of separation, one or more parts of one company become one or more independent companies, but the former company remains in existence, although dec­ reased in size. Transformation means the change of the company’s organizational form. For example, a joint stock company could be transformed into a limited liability company or a productive cooperative (see: Article 20, Section 1, Paragraph 1 of the Law on JSC, while a limited liability company could be transformed into a company of another type, a full partnership or limited partnership or a productive cooperative (see: Article 56, Section 1 of the Law on LLC). An economic partnership could be transformed only into a joint stock company (see: Article 24, Section 1 of the Law “On economic partnerships”).

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In the event of transformation, the company continues to exist although in a different organizational form, so in this case the rights and duties of the reorganized legal entity towards third persons are not changed. (see: Article 58, Section 5 of the RF Civil Code).

4.2. Stages of reorganization Stages of reorganization of a company to a very substantial extent depend upon the form of reorganization. The simplest form of reorganization is transformation since, at any stage, only one company is involved. a) The first step to be taken in the course of transformation is for a general mee­ting of share- or stockholders to make the necessary decision. If the company has a board of directors, it shall submit the issue to the general meeting which shall consider a draft decision on transformation and on the procedure to convert stocks into shares (or vice versa), as well as a draft transfer act containing information on the company’s assets, its rights and duties (see: Article 20, Sections 2 and 3 of the law on JSC; Article 56, Section 2 of the Law on LLC)21. b) The participants of the new legal entity being created during the course of transformation shall approve: (i) the new legal entity’s constituent documents; and (ii) formation (election or appointment) of its management bodies. c) The next stage of transformation is submission of the required documents to the registration agency. The set of documents to be submitted shall include: (i) an application for state registration of the new legal entity resulting from transformation; (ii) its constituent documents (either originals or notarized copies); (iii) the decision on transformation; (iv) the act of transfer; and (v) a document evidencing payment of state duty (see: Article 14, Section 1 of the Law on State Registration of Legal Entities and Sole Businesses). d) The last step of transformation is state registration of the newly created legal entity at which time the previous legal entity shall be deemed to be dissolved (see: Article 16, Section 1 of the Law above).   If there is no board of directors, this preparatory work shall be undertaken by the chief executive officer (and the management board, if any). 21

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All other forms of reorganization involve at least two (and sometimes more) companies. A greater number of companies produces a specific impact on the procedure and stages of reorganization. For example, a merger of companies in which two or more companies are replaced by a new one. Since more than one company participates in the merger, each of them must reach an agreement to be reorganized in such a way. Therefore the first step in a merger is the signing of a contract of merger by all the participants. The contract shall be accompanied with the draft decisions of each company on merger, drafts of the constituent documents of the new company and the draft act of transfer. These documents must be considered by the board of directors of each company (provided the company has such a body) and then submitted for approval to each company’s general meeting. The next stage of merger is notification to (i) the registration agency and (ii)  each company’s creditors, of the commencement of reorganization, as well as (iii) the required publications in the mass media. The company’s creditors whose claims arose prior to the first publication are entitled to require in writing premature performance of the relevant obligations of the company, or termination of those obligations and recovery of losses, unless otherwise provided by law or agreement between the creditor and the legal entity being reorganized or if the creditor is provided with the appropriate security (see: Article 60, Section 2 of the RF Civil Code).22 Currently the Law has taken the latter position, providing that notification and publication may be performed by the legal entity which was the last to act on the decision to reorganize, unless a different legal entity was selected by agreement (see: Article 60, Section 1 of the Civil Code).

 Security shall be deemed appropriate if: 1) the creditor agreed to accept it; 2) an independent irrevocable guarantee is issued to the creditor by a credit organization whose capacity does not create reasonable doubts, the period of validity of the guarantee should exceed the period of performance of the secured obligation for not less than 3 months (see: Article 60, Section 4 of the RF Civil Code). It is also stated in this Article that if such a creditor received neither premature performance of the obligation, nor recovery of losses, nor appropriate security, then joint and several liability to the creditor shall be borne, together with the newly created legal entities, also by persons having actual possibility to determine the reorganized legal entity’s actions, members of its collective management bodies and a person authorized to act on behalf of the reorganized legal entity if their acts (omission) facilitated negative consequences (see: Section 3). 22

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In the meantime, a joint general meeting of stock or shareholders of all companies participating in the merger must be convened in order to form the bodies of the new company. The documents to be submitted to the registration agency in a merger shall also include, in addition to those described above, the contract of merger (see: Article 14, Section 1 («D») of the Law on State Registration of Legal Entities and Sole Businesses). A merger is deemed to be completed at the time of state registration of the newly-created company; at that time all companies that participated in the merger simultaneously cease to exist (see: Article 16, Section 2 of the above law). Accession is quite similar to merger since in both situations two or more companies join their assets. The starting point in an accession (as in a merger) is the signing of a contract of accession by all companies participating in it and also the drafting of the required documents by each company whose general meeting must take a decision with respect to accession, approve the accession contract, and also notify creditors. However, there is a difference between accession and merger since merger results in the disappearance of the previous companies which are replaced by a new one, while in an accession one or more companies join another company which continues to exist (although enlarged) while the company or companies which joined it cease to exist. Therefore: 1) a transfer act shall only be approved by the general meeting of the company or companies which are joining another company; 2)  a joint general meeting of stock or shareholders of all participating companies shall decide on amendments to the constituent documents of the existing (enlarged) company: accession does not result in the appearance of a new company. A set of documents needed to be presented to the registration agency shall include, inter alia, a contract of accession and the amended versions of the existing (enlarged) company’s constituent documents. Accession as a form of reorganization shall be deemed completed on the date when information on the termination of activities of the accessed company (or, if there were several such companies  — the last of them) is entered into the Unified State Register of Legal Entities (see: Article 16, Section 5 of the Law on State Re­ gistration of Legal Entities and Sole Businesses). Now consider the form of reorganization of division. Unlike merger where there are two or more companies in the beginning of reorganization and only one at the 313

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end of it, in division one company is replaced by two or more companies as a result of reorganization. 1.  Since prior to division there is only one company, the first stage of division is a convocation of a general meeting of stock or shareholders by the board of directors (if the company has such a board). The company’s general meeting shall decide whether to approve: a) reorganization of the company in the form of division; b) creation of new companies; and c) the division transfer act (see: Article 18, Sections 2 and 3 of the Law on JSC; Article 56, Section 2 of the Law on LLC). 2.  Notification to the registration agency and to creditors,23 as well as publications in the mass media, must be arranged. 3. A general meeting of participants of each new company being created must approve its constituent documents and form its bodies. 4. The set of documents to be submitted to the registration agency shall include, inter alia, the constituent documents of each newly-created company and the division transfer act. Division shall be deemed completed at the time of state registration of the last newly-created company at which time the original company shall be deemed dissolved (see: Article 16, Section 3 of the Law on State Registration of Legal Entities and Sole Businesses).24

  The creditors are entitled to require premature performance of obligations and, should this be impossible, to require termination of the obligations and recovery of losses (see: Article 60, Section 2 of the Civil Code). This norm is stricter than the relevant provision in the case of transformation, merger and accession. The background is self-explanatory: upon transformation, merger, and accession the volume of property of the reorganized legal entity remains the same (in transformation) or even increases (in merger and accession). Therefore the creditors’ risks in these forms of reorganization are substantially fewer than in cases of division or separation (see: F. Lipayev. Реорганизация АО: новый поворот [Reorganization of a JSC: a new turn]. Экономика и жизнь, 2009. No 1). 24   A question arises whether division as a form of reorganization is applicable to a oneman company. It should be noted that according to mandatory norms of law a one man company may not be a sole founder of another one-man company (see: Article 88, Section 2, Article 98, Section 6, Paragraph 2 of the Civil Code). However, in case of division of such a company, a oneman company would create two (or more) other one-man companies which would be manifestly inconsistent with the above prohibition. That is why a one-man company may not be subject to division. 23

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The remaining form of reorganization is separation. Like division, separation also starts with one company and results in two or more companies. However, unlike division (where the original company disappears and is replaced by the new ones) in the case of separation the original company remains in existence, although it becomes diminished in size as a result of reorganization. Stages of separation are quite similar to those of division except when the only participant of a newly-created company is an original company. In this case the general meeting of the latter shall: a) make a decision on separation; b) approve the newly-created company’s charter; c) approve the separation transfer act; and d) form the newly-created company’s bodies (see: Article 19, Section 3, Paragraph 2 of the Law on JSC; Article 55, Section 2, Paragraph 3 of the Law on LLC). Separation shall be deemed completed at the time of state registration of the last newly-created company (see: Article 16, Section 4 of the Law on State Registration of Legal Entities and Sole Businesses).25 The discussion above has dealt with reorganization based upon voluntary decisions of companies. However, in some situations reorganization may be initiated by state agencies or require their approval. According to the Federal Law “On Protection of Competition” of July 26, 2006 No 135-FZ (as subsequently amended) a court, upon a claim of a federal antimonopoly body,26 may issue a judgment to require compulsory division of a company, or to require separation of one or more companies out of it if the company in question occupies a predominant position in the market of certain goods or services and repeatedly performs monopolistic activity. Such a judgment is aimed at facilitating competition, provided: a)  there is a possibility of organizational and territorial separation of the company’s units; b) there is no close technological connection between relevant units of the company; c)  after reorganization the companies will be in a position to operate independently in the market of certain goods (see: Article 38, Sections 1 and 2).   Nor may a one-man company be reorganized through separation for the reasons above whereby division of a one-man company is excluded . 26   Currently it is the Federal Antimonopoly Service. 25

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The judgment in question should indicate a period of time within which division or separation should occur and this period should not be less than 6 months (see: Article 19, Section 3). If the company fails to perform division or separation in accordance with the court’s judgment, the court shall appoint an external administrator of the company and charge him to perform division or separation. The external administrator shall substitute for the chief executive officer of the company. He shall act on behalf of the company in court, prepare the division or separation transfer act and submit it to the court together with the constituent docu­ ments of the companies being created as a result of division or separation. Approval by the court of the documents above shall be a legal basis for state registration of the newly-created companies (see: Article 57, Section 2 of the RF Civil Code). The Law “On Protection of Competition” also provides that merger and accession of businesses may only occur with the preliminary consent of the Federal Antimonopoly Service if the aggregate balance value of their assets, according to the last balance sheet, exceeds 3 billion rubles (see: Article 26). A commercial organization which is created without such a preliminary consent is subject to liquidation or reorganization by court judgment upon the claim of the Federal Antimonopoly Service if creation of the organization led or may lead to the restriction of competition (see: Article 34, Section 1).

4.3. Legal consequences of reorganization Legal consequences of reorganization (in its different forms) are set forth in Article 58 of the RF Civil Code. a) In the case of a merger of two (or more) companies, the rights and duties of each of them pass to a newly created company in accordance with the transfer act (see: Section 1). b) In the case of accession of one company to another company, the rights and duties of the former, pass to the latter in accordance with the transfer act (see: Section 2). c) In the case of division of a company, its rights and duties pass to the newly-created companies in accordance with the division transfer act (see: Section 3). d) In the case of separation, the newly-created company assumes part of the rights and duties of the original company in accordance with the separation transfer act (see: Section 4). 316

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e) In the case of transformation, the newly-created company assumes the rights and duties of the earlier one in accordance with the transfer act (see: Section 5). As these rules indicate, in any form of reorganization substantial roles are played by the act of transfer. The legal significance of this document results from the fact that the Civil Code provides that the act “shall contain provisions upon legal succession regarding all obligations of the reorganized legal entity with respect to all creditors and debtors thereof including obligations being contested by the parties.” (Article 59, Section 1 of the RF Civil Code) Given the importance of the document, the law obligates the companies involved in a reorganization to prepare an appropriate transfer act in the most cautious and thorough way. It also introduces specific legal consequences for violation of such a duty: “Failure to submit, together with the constituent documents, the transfer act as well as the absence therein of provisions concerning legal succession with regard to obligations of the reorganized legal entity, shall entail a refusal for state registration of the newly-created legal entities.” (Article 59, Section 2, Paragraph 2 of the RF Civil Code) If, however, a transfer act (in case of transformation) is in place then, due to the fact that a transformation results in a universal succession, a newly-organized company shall assume all the original company’s rights and duties including those not indicated in the transfer act. Here is an illustrative case. In February 2007 an unitary state enterprise “Vodokanal” and a limited liability company “Bilmart” concluded a contract whereby “Vodokanal” undertook to provide “Bilmart” with water. In 2010 “Vodokanal” (which by that time had been transformed into an open joint stock company) sued “Bilmart” to recover indebtedness arisen out of underpayment for water delivered in September, November and December 2007. The claim was rejected by the trial court on the reason that the indebtedness in question had not been indicated in the transfer act issued in the course of reorganization of “Vodokanal.” The trial court judgment was upheld both by the court of appeal and the court of cassation. “Vodokanal” submitted a supervisory complaint to the RF Supreme State Arbitraion Court. The Presidium of the RF Supreme State Arbitration Court noted in its Ruling that due to a universal character of succession in the case of transformation of a legal entity, a newly-organized one shall acquire the whole complex of rights 317

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and duties of the original legal entity (including rights to recover indebtedness), even if these rights have not been mentioned in the transfer act accompanying the reorganization. The Presidium quashed the lower courts’ acts and referred the case back to the trial court for review.27 Until recently it was provided that “if the division balance sheet does not make it possible to identify the legal successor to the reorganized legal entity, the newlycreated legal entities shall bear joint and several liability for the obligations of the reorganized legal entity to its creditors.” (Article 60, Section 3 of the RF Civil Code) This rule was, however, abolished by the Federal Law of December 30 2008, albeit, further to the Concept of development of civil legislation of the Russian Federation,28 it was actually restored. According to Article 60 of the RF Civil Code (as amended): If a transfer act makes it impossible to determine a successor in the legal entity’s obligations, as well as if it appears from the transfer act or other circumstances that in the course of reorganization the assets and obligations of the reorganized legal entities were distributed in bad faith that resulted in substantial violation of the creditors’ interests, both the reorganized legal entity and those created as a result of reorganization shall be jointly and severally liable upon such obligations (see: Section 4, Paragraph 2). The material as narrated above may be summarized in the following tables. N

1

Documents to be submitted to the registration agency

Legal consequences of reorganization Time of completion of reorganization

1) Decision of the company’s general stock or shareholders’ meeting on transformation

1)  Application for state registration of the newlycreated company

2) Notification to the registration agency

2) Charter of the newlycreated company

3) Written notification to creditors

3) Decision on transformation

The newly-created company shall be a successor to the original company in accordance with the transfer act Time of state registration of the newly-created company The original company shall be deemed terminated as of that date

Forms of reorganization

Stages of reorganization

Transformation

  See: Bulletin of the Supreme State Arbitration Court of the Russian Federation, 2011, No 11, pp. 172–175. 28   See: Bulletin of the Supreme State Arbitration Court of the Russian Federation, 2009, No 11, p. 31–32 27

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N

2

3

Forms of reorganization

Merger

Accession

Stages of reorganization

Documents to be submitted to the registration agency

4) Publications of the decision on transformation 5) Decision of the general meeting of participants of the new company on approval of its constituent documents and on formation of its bodies, as well as on approval of the transfer act 6) State registration of the newly-created company

4) Transfer act

1)  Signing of a merger agreement

1)  Application for state re­gi­stration of the newlycreated company

2) Drafting a transfer act

2) Charter of the newlycreated company

3) Decision of each company’s general meeting of participants on merger, on approval of the merger agreement, new company’s charter and the transfer act 4) Written notification to creditors 5) Publication of the decision on merger 6) Formation of the new company’s bodies 7) State registration of the new company

3) Decisions of all companies on merger

1) Signing of an accession agreement

1)  Application on introduction in the State Register of legal entities of a note on termination of activity of the acceded company

2) Notification to the registration agency

2) Decisions of all companies on accession

Legal consequences of reorganization Time of completion of reorganization

5) Receipt for payment of the state duty

Newly-created company shall be a successor to the companies which participated in the merger, in accordance with the transfer act Time of state registration of the newly-created company From that time the companies which participated in the merger shall be deemed terminated

4) Merger agreement 5) Transfer act 6) Receipt for payment of the state duty

The company shall be a successor to the acceded company in accordance with the transfer act Time of introduction in the State Register of Legal Entities of a note on termination of activity of the acceded company

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N

Forms of reorganization

Stages of reorganization

3) Written notification to creditors 4) Publications of the decision on accession 5) Drafting a transfer act 6) Decision of each company’s general stock or share holders’ meeting on accession, on approval of the accession agreement, and approval of the transfer act by the company which is being accessed 7) State registration of termination of the accessed company 4

Division

Legal consequences of reorganization Time of completion of reorganization

3) Accession agreement 4) Transfer act 5) Receipt for payment of the state duty

1) Decision of the compa­ ny’s general stock or share­ holders’ meeting on divisi­ on, on creation of new com­ panies and on approval of the division transfer act 2) Notification to the regi­ stration agency

1)  Application on state re­gistration of each newly-created company

Newly-created companies shall be successors to the original company in accordance with the division transfer act

2) Charter of each newlycreated com­pany

3) Written notification to creditors

3) Decision of the original company on its division 4) Division transfer act

Time of the state registration of the last newlycreated company The original company shall be deemed terminated as of that date

4) Publications of a decision on division 5) Drafting and approval of the division transfer act 6) Decision of each newly-created company’s gene­ral stock or share holders’ meeting on approval of its charter and on formation of its bodies 7) State registration of the newly-created companies

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Documents to be submitted to the registration agency

5) Receipt for payment of the state duty

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N

Forms of reorganization

5

Separation

Stages of reorganization

1) Decision of the company’s general stock or shareholders’ meeting on separation, on creation of a new company 2) Notification to the re­ gistration agency 3) Written notification to creditors 4) Publications of a decision on separation 5) Drafting and approval of the separation transfer act 6) Decision of the newly-created company’s gene­ral stock or shareholders’ meeting on approval of its charter and on formation of its bodies 7)  State registration of a newly-created company

Documents to be submitted to the registration agency

Legal consequences of reorganization Time of completion of reorganization

1) Application on state reg- Separated company shall istration of a newly-created be a successor to the original company in accordance company with the separation transfer act 2) Charter of a newly-created Time of state registration of company the newly-created company 3) Decision on separation 4) Separation transfer act 5) Receipt for payment of the state duty

4.4. Invalidity of reorganization Article 602 of the RF Civil Code provides that in certain circumstances (as described in it) reorganization of a corporation may be recognized non-occurred by a court. Such a judgement may be taken by a court upon a claim of a corporation’s participant who voted against the decision of reorganization of the corporation or did not take part in voting on this issue. The claim may be satisfied in case the newly-created legal entities were registered on the basis of documents containing knowingly incorrect data of registration, as well as when participants of the corporation did not take a decision on its reorganization (see: Section 1).29 A court judgement whereby reorganization of a corporation is recognized nonoccurred leads to the following legal consequences. 1) Legal entities existed prior to reorganization shall be restored, and simultaneously the newly-created legal entities shall be terminated; the relevant entries shall be introduced into the Unified State Register of Legal Entities.   This rule apparently means a situation when such a decision was taken by an authorized state body. 29

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2) As for transactions concluded by the newly-created legal entities with third persons, legal consequences thereof may be twofold depending upon whether the latter were (or were not) aware of the fact that reorganization was unlawful. In the former situation such transactions shall be invalid. In the latter situation (when third persons relied on succession in good faith) the transactions shall remain valid with regard to the restored legal entities which shall be deemed joint and several debtors (or, respectively, joint and several creditors) under such transactions. 3) Transfer of rights and duties as a result of reorganization shall be deemed non-occurred. If some performance (such as payment, service etc) was delivered to a newly-created legal entity by third persons, its legal consequences depend upon whether those persons (debtors) relied in good faith (or not) upon succession on the part of the creditor. In the former situation the performance shall be deemed delivered to the authorized person (i.e. the restored legal entity). In the latter situation there will be an unjust enrichment obligation. 4) Participants of a legal entity existed prior to reorganization shall resume their shares in its chartered capital in amounts belonged to them prior to reorganization.

§ 5. Liquidation of businesses with foreign investments 5.1. General provisions During reorganization, some legal entities disappear and are substituted by others as a result of succession. However, liquidation of a legal entity “shall entail dissolution thereof without transfer of rights and duties by universal succession to other persons.” (Article 61, Section 1 of the RF Civil Code) Liquidation of a legal entity may be voluntary or compulsory. When voluntary, a decision to liquidate the legal entity is taken by its founders (or participants) or the organ of the legal entity empowered by its constituent document, inter alia, in connection with expiration of the time period for which the legal entity is created or with attainment of the goal for which it is created (Article 61, Section 2 of the RF Civil Code). According to the Federal Laws “On Joint Stock Companies” and “On Limited Liability Companies” such a decision is within the exclusive competence of a gene­ 322

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ral meeting of the stock or shareholders30 and shall be taken respectively by a three fourth majority of votes31 or unanimously.32 When compulsory, a decision to liquidate a legal entity shall be taken by a court upon the demand of the authorized state or municipal agency when — state registration of a legal entity is recognized invalid, inter alia, because of grave violations of law in the course of creation of the legal entity if the violations were of incurable character, — a legal entity effectuates activity without proper authorization (or licence) or activity prohibited by law or other legal acts33 (see: Article 61, Section 3 of the RF Civil Code) A court shall issue a judgment on liquidation of a legal entity after due consi­ deration of all circumstances of the case, including assessment of the character of the violations committed by the legal entity and their consequences. A tax inspectorate filed an application with a state arbitration court to li­quidate a legal entity which repeatedly violated a mandatory requirement of the Law “On the Use of Cash-Controlling Machines.” Article 6 of the Law obligated tax autho­rities in such a situation to ask a court to liquidate the legal entity. The court, upon perusal of the materials of the case and assessment of the violations committed by the legal entity, found no sound reasons to liquidate it and rejec­ ted the claim of the tax inspectorate. In doing so, the court took into consideration that the legal entity in question was the only retail shop in the community and its liquidation could result in negative consequences for inhabitants of the community. The Presidium of the Supreme State Arbitration Court of the Russian Federation supported this approach indicating that “the judgment in this case was issued by the   See: Article 48, Section 1, Subsection 3 of the Federal Law “On Joint Stock Companies,” and Article 33, Section 2, Subsection 11 of the Federal law “On Limited Liability Companies.” 31   See: Article 49, Section 4 of the Federal Law “On Joint Stock Companies.” 32   See: Article 37, Section 8, Paragraph 2 of the Federal Law “On Limited Liability Companies.” 33   E. g., the Central Bank of the Russian Federation may revoke a license granted to a credit organization if the latter violated the law, and then applied to a state arbitration court to liquidate the organization in question (see: Articles 20 and 23.1 of the Law “On Banks and Banking Activity”). A registration agency may submit an application to a court with a demand to liquidate a legal entity in case flagrant violations of law or other legal acts have been committed by the legal entity, if such violations can not be rectified, as well as repeated or flagrant violations of laws or other normative legal acts with respect to state registration of legal entities (see: Article 25, Section 2 of the Federal Law “On State Registration of Legal Entities and Sole-Businesses”). A tax agency is entitled to apply to a court to demand liquidation of a legal entity in case of repeated violations of laws related to taxation (see: Article 31, Section 16 of the RF Tax Code). 30

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court within its competence and in keeping with Article 61, Section 2 of the Civil Code according to which, in the course of consideration of a case on liquidation of a legal entity in connection with repeated violations of law, a court is entitled but not obligated to issue a judgment ordering compulsory liquidation of the legal entity. In  the case in question, the court gave a correct assessment of the factual circumstances in which the violation was committed as well as the possible consequences of satisfaction of the claim.”34 A court may also issue a judgement on liquidation of a legal entity upon a claim of its founder (participant) in case attainment of the goal for which the legal entity is created appears to be impossible (see: Article 61, Section 3 of the RF Civil Code).

5.2. Stages of liquidation The procedure for liquidation of a legal entity passes through the following stages (see: Article 63 and 64 of the RF Civil Code): 1. A decision to liquidate the company. Once such a decision is made, it shall be communicated immediately35 in wri­ ting to a registration agency which shall make a note in the Unified State Register of Legal Entities that the legal entity in question is in the course of liquidation.36 2. Formation of a liquidation commission.

  Section 3 of the Review of the practice of resolution of disputes connected with liquidation of legal entities (commercial organizations). Information letter of the Presidium of the Supreme State Arbitration Court of the Russian Federation of January 13, 2000. No 50. 35   The Federal Law “On State Registration of Legal Entities and Sole Businesses” provides that a written notice to liquidate a legal entity shall be sent to the registration agency within 3 days after issuance of the decision to liquidate (Article 20, Section 1). This time period is mandatory with respect to a decision for voluntary liquidation taken by founder(s) or an authorized body of the legal entity. The time period is not binding on a court which issued a judgment on compulsory liquidation of a legal entity. However, in order to observe rights and lawful interests of third persons and to provide state control over the liquidation of a legal entity pursuant to a court judgment, the Presidium of the Supreme State Arbitration Court of the Russian Federation has recommended that courts send copies to registration agencies of their judgments relating to liquidation of legal entities (see: Section 11 of the Review of January 13, 2000). 36   From that time on it is prohibited to perform state registration of any amendments in the constituent documents of the legal entity, as well as state registration of legal entities whose founder is the legal entity mentioned above, or state registration of legal entities created as a result of reorganization of the legal entity in question (see: Article 20, Section 2 of the Federal Law “On State Registration of Legal Entities and Sole Businesses”). 34

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A commission shall be appointed by an authorized body of the legal entity (that is, by a general meeting of the share or stockholders).37 The registration agency shall be notified as soon as the commission has been formed (see: Article 20, Section 3 of the Federal Law “On State Registration of Legal Entities and Sole Businesses”). From the time of appointment of the liquidation commission, the powers relating to management of affairs of the legal entity shall pass to it. The liquidation commission shall act in court in the name of the legal entity being liquidated. Liquidation commission shall act in good faith and reasonably in the interests of the legal entity being liquidated as well as its creditors. (see: Article 62, Section 4 of the RF Civil Code) The Presidium of the Supreme State Arbitration Court of the Russian Federation has indicated that the chairman of the liquidation commission is entitled to sign statements of claim for and on behalf of the legal entity as well as to issue powers of attorney to persons authorized to represent the legal entity in court (see: Section  12 of the Review). 3. Publication in a special journal on liquidation of the legal entity. This publication (arranged by the liquidation commission) shall indicate the address to which claims of creditors should be sent and the period of time for submission of such claims, which time period shall be not less than 2 months. In addition, each creditor shall be notified in person. The liquidation commission shall also find the debtors of the legal entity and require them to make the payments which they owe it. 4. Preparation of an interim liquidation balance sheet by the liquidation commission after lapse of the two month period of time mentioned above. This balance sheet shall contain information on the complement of the legal entity’s property, the list of claims submitted by creditors as well as the results of their consideration by the liquidation commission. The liquidation commission shall notify the registration agency of the interim balance sheet. This document shall be approved by the general meeting of the share or stockholders.38 5. Final settlement of accounts with creditors. 37   See: Article 33, Section 2, Subsection 12 of the Federal Law “On Limited Liability Companies,” Article 48, Section 1, Subsection 3 of the Federal Law “On Joint Stock companies.” These bodies are obliged to form a liquidation commission both in the case of voluntary liquidation and where a court has issued a judgment of compulsory liquidation of a legal entity. An obligation to liquidate a legal entity may not be imposed by a court upon a state agency on whose demand the court issued the judgment above (see: Section 9 of the Review of January 13, 2000). 38   See: Article 33, Section 2, Subsection 12 of the Federal Law “On Limited Liability Companies,” Article 48, Section 1, Subsection 3 of the Federal Law “On Joint Stock Companies.”

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The liquidation commission shall pay the claims which it accepted or were sa­ tisfied by the court. If the legal entity’s money is insufficient to satisfy all approved claims, the liquidation commission shall sell the legal entity’s property at public auction (except items whose value does not exceed one hundred thousand Roubles. There is no need to arrange public auction for sale of such items – see: Article 63, Section 4 of the RF Civil Code). Payment of claims shall be made according to the following list of priorities: 1) Tortious claims resulting from causing harm to life or health (with respective periodic payments to be capitalized), as well as claims on compensation of moral harm as well as compensation of losses caused as a result of destruction of or damage to the object of capital construction, violation of safety requirements in the course of capital construction and safety requirements with regard to exploitation of buildings and constructions; 2) payments pursuant to employment and author contracts; 3) compulsory payments to the treasury and non-treasury funds; 4) payment to other creditors.39 Claims of creditors of each priority shall be satisfied after full satisfaction of claims of creditors of previous priority except claim secured by pledge (see: Article 64 of the RF Civil Code). 6. Preparation of the final liquidation balance sheet after completion of the settlement of accounts with creditors. The liquidation balance sheet shall be approved by the general meeting of share or stockholders40 or by the body issued a decision on liquidation of a legal entity (see: Article 63, Section 6 of the RF Civil Code). 7. State registration of liquidation of a legal entity. The liquidation commission shall provide the registration agency with the following documents: a) an application to be prepared on a special form approved by the Government of the Russian Federation; b) the final liquidation balance sheet; and c) a document evidencing payment of the state duty (see: Article 21, Section 10 of the Federal Law “On State Registration of Legal Entities and Sole Businesses”).

  In case the legal entity’s property is insufficient, the claims of respective priorities shall be satisfied on a pro rata basis (see: Article 64, Section 3 of the RF Civil Code). Claims not satisfied because of the legal entity’s insufficient property shall be terminated (Article 64, Section 6 of the RF Civil Code). 40   See: Article 33, Section 2 (12) of the Federal Law “On Limited Liability Companie,» and Article 48, Section 1 (3) of the Federal Law “On Joint Stock Companies.” 39

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A legal entity’s liquidation shall be deemed completed and the legal entity shall be deemed to have ceased to exist after entries to that effect are made in the Unified State Register of Legal Entities (see: Article 63, Section 9 of the RF Civil Code). The registration agency shall publish information on liquidation of the legal entity (see: Article 22, Section 6 of the Federal Law “On State Registration of Legal Entities and Sole Businesses”). In case property of a liquidated legal entity is discovered after the entry of its termination is introduced into the Unified State Register of Legal Entities, an interested person or an authorized state body is entitled to approach a court with an appeal to appoint a procedure for distribution of this property among the entitled persons. Such an appeal may be filed with a court within five years from the date of introduction of the entry on termination of the legal entity in the Register (see: Article 64, Section 52 of the RF Civil Code). It should be noted that a decision to liquidate a legal entity may be taken by the registration agency on some preconditions without a court judgment being required. Such a simplified procedure of liquidation may be applied to a so-called “dormant” legal entity, that is, one which within 12 months has not submitted reporting documents as required by tax legislation and has not utilized its bank account(s). Such a legal entity may be deemed actually to have terminated its activity. If all the preconditions have been met, the registration agency may make a decision to exclude the legal entity from the Unified State Register of Legal Entities. This decision shall be officially published; including information on the procedure, time periods, and address for submission of claims by the legal entity in question; the list of its creditors and other persons whose interests may be affected by liquidation of the legal entity shall be published simultaneously. The ultimate time period for submission of such claims is 3 months from the date of such publication. In case claims are submitted, a simplified procedure of liquidation shall not be applied and the liquidation may only be performed in accordance with the general rules (see: Article 21.1 of the Federal Law “On State Registration of Legal Entities and Sole Businesses”). If no claims are filed within a 3 month period, the registration agency shall exclude the legal entity from the Unified State Register of Legal Entities by making an entry to that effect. Such an exclusion may be appealed by creditors or other interested persons to a state arbitration court within one year from the date when they became or should have become aware of the violation of their rights (see: Article 22 of the Federal Law “On State Registration of Legal Entities and Sole Businesses”).

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§ 6. Bankruptcy of businesses with foreign investments 6.1. General provisions Liquidation of a legal entity (including one with foreign investments) may result from its bankruptcy. Bankruptcy means the inability of a debtor to satisfy in full creditors’ claims by monetary obligations and/or the payment of taxes and other compulsory duties, which inability is recognized by a state arbitration court (see: Article 2, Paragraph 2 of the Federal Law “On Insolvency (Bankruptcy)” of 26th October 2002, as subsequently amended).41 A case of bankruptcy may be initiated by a state arbitration court upon two preconditions: 1) the aggregate amount of claims against a legal entity must be at least 100,000.00 rubles; and 2) the legal entity must have failed to meet its payment obligations within 3 months from the date of their maturity. An application with a motion to initiate bankruptcy proceedings may be filed with a state arbitration court by a debtor,42 bankruptcy creditors43 or authorized bo­   This Law shall apply to individuals (including sole businesses) and legal entities, except for fiscal enterprises, institutions, political parties and religious organizations. There are also laws concerning bankruptcy of certain kinds of legal entities, e. g. the Federal Law of February 25, 1999 “On Insolvency (Bankruptcy) of Credit Organizations.” 42   A debtor is entitled to apply for bankruptcy proceedings if he foresees that he will not be able to meet his monetary obligations in time (see: Article 8 of the Law). On the other hand, a debtor is obliged to apply for bankruptcy proceedings when satisfaction of claims of one creditor (or several creditors) will result in the impossibility for the debtor to pay his monetary obligations to other creditors in full or if compulsory sale of the debtor’s property will create complications or make impossible the debtor’s commercial activity (see: Article 9, Section 1 of the Law). If in the course of liquidation a debtor-legal entity becomes insolvent, its liquidation commission is obligated to submit an application for bankruptcy proceedings to a state arbitration court within a ten day period from the time when this situation is discovered (see: Article 9, Section 3 of the Law). 43   Bankruptcy creditors are creditors whose claims arose out of civil law relationships except: a) individuals to whom payments are due for personal injury or death, moral harm, or based on copyright law. Such creditors are privileged ones since their claims take priority over other creditors; b) debtor’s founders or participants whose claims result from obligations related to such participation (since these creditors have no right to require any payments from the debtor in the course of its bankruptcy); c) authorized bodies whose claims result from public law relations, e. g., payment of taxes or other compulsory duties (Article 2, Paragraph 8 of the Law). See: Professor V.F. Po41

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dies.44 The application shall be submitted to the court at the place where the debtor is located.

6.2. Supervisory Proceedings Upon perusal of the application, the court, if it concludes that the application is wellfounded, shall issue a ruling on introduction of supervisory proceedings and appointment of a temporary manager (see: Article 48, Section 3, and Article 49, Sections 1 and 2 of the Law). The period of time for supervisory proceedings shall not exceed 7 months (see: Article 51, Article 62, Section 3 of the Law). The legal consequences of supervisory proceedings are based on the possible bankruptcy of the debtor, in which case compulsory settlement of creditors’ claims is required. Given this goal, it is necessary to gather information on the debtor’s financial situation and to prevent uncontrolled disposal of its property.45 The legal consequences accordingly relate to: a) creditors’ claims (see: Article 63 of the Law); b) the competence of the debtor’s management (see: Article 64 of the Law); and c) the powers of a temporary manager (see: Articles 66-67 of the Law). I. Creditors claims: 1) monetary claims may only be made on a debtor pursuant to a special procedure established by the Law on Bankruptcy;46 2) enforcement of writs of execution on property claims shall be stayed47 and arrests imposed on the debtor’s property shall be lifted; pondopulo, Ed., Комментарий к Федеральному закону «О несостоятельности (банкротстве)” [Commentary on the Federal Law “On Insolvency (Bankruptcy”)]. Moscow, 2002. P. 13. See also: V.F. Popondopulo, Коммерческое (предпринимательское) право [Commercial (Business) Law], Moscow, 2006. P. 176–177. 44   Authorized bodies are public agencies entitled to require the debtor to pay taxes and other compulsory duties (see: Article 2, Paragraph 9 of the Law). 45   See: Commentary on the Federal Law “On Insolvency (Bankruptcy),” p. 123. 46   This special procedure provides that the creditors should submit their claims to the debtor, to the court and to the temporary manager within 30 days from the date of publication of information on the introduction of supervisory proceedings (see: Article 71, Section 1 of the Law). 47   Except writs of execution issued according to court judgments in effect relating to recovery of indebtedness on wages or salaries, payments due according to copyright law, personal injuries, moral harm and to return property illegally possessed. 329

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3) it is prohibited to satisfy claims of the debtor’s founder or participant for payment of the value of his share in the case of his withdrawal, 4) it is prohibited to pay dividends on securities; 5) it is prohibited to terminate a debtor’s monetary claims by set off. II. Competence of the debtor’s management: 1)  it is prohibited for the debtor’s bodies to make decisions on issues such as: (i) reorganization or liquidation of the debtor; (ii) participation of the debtor in other legal entities; (iii) creation of branch and representative offices; (iv) issuance of bonds and other securities (except stocks) by the debtor; (v) redemption of the debtor’s stocks from stockholders; (vi) withdrawal from the complement of the founders (or participants) of the debtor; (vii) participation in any kinds of associations of legal entities; and (viii) conclusion of a contract for joint activity (see: Article 64, Section 3 of the Law). 2) It is provided that some transactions may only be concluded by the debtor with the written consent of the temporary manager, for example, transactions related to: (i) acquisition or alienation of the debtor’s property where the balance value exceeds 5 per cent of the balance value of the debtor’s assets; and (ii) obtaining and giving loans or credits, issuance of suretyship and guarantees, assignment of rights, transfer of a debt, as well as establishment of trust management of the debtor’s property (see: Article 64, Section 2 of the Law). III (A). From the time of introduction of supervisory proceedings, the debtor shall act under the control of the temporary manager. The latter is obliged to: 1) publish information on introduction of supervisory proceedings over the debtor; 2) take measures to secure the safety of the debtor’s property; 3) analyze the debtor’s financial condition; 4) find the debtor’s creditors; 5) maintain a register of the creditors’ claims; 6) notify the creditors of the introduction of supervisory proceedings; 7) convene and hold the first meeting of creditors; and 8) submit to the state arbitration court, on expiry of supervisory proceedings, a report of his activities, information on the debtor’s financial condition, proposals on the possibility or impossibility of restoring the creditor’s solvency, and minutes of the first meeting of creditors (see: Article 67 of the Law).

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III (B). The temporary manager is entitled to: 1) submit a claim on his own behalf to a state arbitration court to declare null and void transactions and decisions made by the debtor setting forth a violation of requirements as set forth in Articles 63 and 64 of the Law; 2) object to creditors’ claims; 3) participate in court hearings concerning assessment of the debtor’s objections to creditors’ claims; 4) apply to a state arbitration court with a motion to take additional measures to secure safety of the debtor’s property; 5) apply to a state arbitration court with a motion to discharge the debtor’s chief executive officer of the office;48 and 6) obtain any information and documents relating to the debtor’s activity (see: Article 66 of the Law). The first meeting of creditors shall take place at the latest ten days prior to the end of supervisory proceedings. The participants of this meeting with voting rights shall be creditors and authorized bodies whose claims have been submitted to the state arbitration court, to the debtor and to the temporary manager within 30 days from the date of publication on the introduction of supervisory proceedings (see: Articles 71, Section 1, and Article 72 of the Law).49 The meeting may decide 1) to apply to the court with a motion to introduce further bankruptcy proceedings, such as: a) a financial recovery plan; b) appointment of external management; c) recognition of the debtor to be a bankrupt; 2) to form a creditors’ committee; 3) to resolve other relevant issues (see: Article 73 of the Law). It should be noted that the aim of bankruptcy proceedings is not only to persuade a debtor to pay his debts but also to create an opportunity for a debtor to restore his ability to conduct business activities. That is why a court may only issue a judgment to declare the debtor to be a bankrupt provided there are no reasons to introduce a financial recovery plan, external management or approve an amicable agreement between the debtor and his creditors. This is possible at any stage of the bankruptcy case (see: Article 53, Section 1, and Article 150, Section 1 of the Law).

  In case this motion is complied with, a state arbitration court shall appoint an acting chief executive officer whose candidature is nominated by the representative of the debtor’s founders (or participants) (see: Article 69, Section 4 of the Law). 49   Participants of the meeting without voting rights are the debtor’s chief executive officer, a representative of the debtor’s founders or partners, and a representative of the debtor’s employees (see: Article 72, Section 3 of the Law). 48

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6.3. Financial recovery Accordingly, a typical situation would be that supervisory proceedings (if there had been no court approved amicable agreement, which would result in bankruptcy proceedings being terminated) would usually be followed by a financial recovery plan which would be introduced by a court ruling upon a motion of the creditors’ meeting.50 This motion, inter alia, should include a suggested time period for the financial recovery plan51 and a schedule for the payment of debts (see: Article 74, Section 1 of the Law). Simultaneously, the court would appoint an administrative manager (see: Article 80, Sections 1 and 2). Legal consequences of the introduction of a financial recovery plan are to some extent similar, although not identical, to those of supervisory proceedings. With respect to creditors’ claims, the limitations set forth supra (see I (1–5)) remain valid but, in addition, it is provided that the claims which have been included in the claims’ register prior to introduction of the financial recovery plan shall be satisfied in compliance with the schedule for payment of debts. Interest on the amount of these claims shall accrue at the refinancing rate established by the RF Central Bank for the date of introduction of the financial recovery plan. Interest shall accrue from that date until the recovery of claims or — if the claims have not been paid — until the date of issuance of a court ruling whereby the debtor is declared to be a bankrupt. Subsequent claims submitted during the course of the financial recovery plan and included in the claims’ register shall be satisfied within one month after completion of the settlement of those claims which were included in the schedule of payment of debts. With respect to the competence of the debtor’s management, some prohibitions mentioned supra (see: II (1)) are established for the period of supervisory proceedings; these prohibitions remain valid during the time period of the financial recovery plan. There is also a list of transactions, such as a pledge or mortgage, a bank guarantee, a state or municipal guarantee, a suretyship, etc. (see: Articles 77–79 of the Law), which, during the course of supervisory proceedings, may only be concluded

  Such a motion may also be submitted by the debtor’s founders or participants and third persons, in which case security measures of performance of a debtor’s obligations should be produced prior to introduction of a financial recovery plan. 51   The ultimate period of time for financial recovery is two years (see: Article 80, Section 6 of the Law). 50

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by the debtor’s management with the consent of a temporary manager (see supra p. II (2). However, at the stage of the financial recovery plan, the controlling functions over the debtor’s management (which functions are concentrated during the course of supervisory proceedings in the hands of a temporary manager) are distributed between the creditors’ meeting or creditors’ committee, on the one hand, and the administrative manager, on the other. Accordingly, one group of transactions may be concluded by the debtor’s management with the consent of the creditors’ meeting or committee,52 and another group of transactions — with the consent of the administrative mana­ger.53 During the course of a financial recovery plan a temporary manager shall be replaced by an administrative manager who is obliged, inter alia, to: 1) maintain the creditors’ claims register; 2) convene creditors’ meetings; 3) control the performance of the debtor in the financial recovery plan and the schedule of payment of debts and submit relevant information to the creditors’ meeting or committee; and   This group includes transactions which: a) are connected with acquisition or alienation of the debtor’s property if its value exceeds 5 per cent of the balance value of the debtor’s assets; b) result in giving loans or credits, issuance of suretyship or guarantees, as well as establishment of trust management of the debtor’s property. There is also a special provision concerning reorganization of the debtor. As mentioned above, during supervisory proceedings reorganization and liquidation of the debtor are expressly prohibited. However, in the course of financial recovery, reorganization of a debtor is allowed with the consent of the creditors’ meeting or creditors’ committee and the person(s) who granted security measures (see: Article 82, Section 3, Paragraph 4 of the Law). It is further provided that if the aggregate amount of the debtor’s monetary obligations that arose after the introduction of financial recovery exceeds 20 per cent of the aggregate amount of the creditors’ claims as set forth in the claims register, further transactions resulting in new obligations of the debtor may only be concluded with the consent of the creditors’ meeting or committee (see: Article 82, Section 3, Paragraph 5 of the Law). 53   The second group includes such transactions as: a) those resulting in an increase of indebtedness of more than 5 per cent of the amount of the creditors’ claims as included in the claims register at the date of introduction of the financial recovery plan; b) those connected with acquisition or alienation of the debtor’s property except for the production of goods and services of the debtor in the course of his usual commercial activity; c) those resulting in transfer of a right or debt; d) those resulting in obtaining loans or credits. 52

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4) require persons who granted security measures to perform their obligations resulting from such measures in the event of the debtor’s failure to perform his obligations in accordance with the schedule of debt payments (see: Ar­ ticle 83, Section 3 of the Law). An administrative manager is also entitled to: 1) require the debtor’s chief executive officer to submit information on current activities of the debtor; 2) give his consent to transactions and decisions of the debtor if the law so provides; 3) file a motion with the court to discharge the debtor’s chief executive officer in case he violates the law; 4) file a motion with the court to take additional measures to secure safety of the debtor’s property; and 5) apply to the court on his own behalf with a claim to declare null and void transactions and decisions made by the debtor which violate the Law (see: Article 83, Section 4 of the Law).

6.4. External management If, by the end of the time period for financial recovery, the debtor, or persons who provided security measures,54 have paid the creditors’ claims and there remains no unpaid indebtedness, the court shall terminate the bankruptcy proceedings. If, on the other hand, there remains unpaid indebtedness with a possibility of restoring the debtor’s solvency, the court shall introduce external management55 for a period of up to 18 months (see: Article 88, Section 6, and Article 93, Section 2 of the Law). Legal consequences of the introduction of external management include: Creditors’ claims are subject to a moratorium56 (see: Article 95 of the Law). Debtor’s management is imposed on the external manager. Powers of the debtor’s chief executive officer shall be terminated. Powers of other debtor’s bodies are also terminated except for those relating to increasing the debtor’s chartered capital and obtaining money for payment of creditors’ claims (see: Article 94 of the Law).

  These persons obtain claims against the debtor to recover their related expenses (see: Article 90 of the Law). 55   In case there is no such possibility, the court issues a judgment whereby the debtor is declared to be bankrupt. 56   A moratorium shall not be extended to claims related to wages, authors’ fees, compensation for personal injury and moral harm (see: Article 95, Section 5 of the Law). 54

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The external manager is required, inter alia, to: 1) prepare the plan of external management and to submit it to the creditors’ meeting for approval, and thereafter to the court; 2)  realize measures provided by the plan of external management and keep the creditors’ committee informed on the realization of those measures; 3) maintain the creditors’ claims register, and 4) recover money due the debtor. The external manager is entitled to: 1) dispose of the debtor’s property in accordance with the plan of external management and in compliance with limitations as established by the Law;57 2) conclude an amicable agreement on behalf of the debtor; and 3)  file a motion with the court to declare invalid the debtor’s transactions and decisions made in violation of this Law (see: Article 99 of the Law). At the end of the period of external management, the external manager shall submit his report for approval to the creditors’ meeting and then to the court, which may issue a ruling: 1) terminating external management, provided: (a) all creditors’ claims included in the register have been satisfied, or (b) an amicable agreement has been approved by the court; 2) settling creditors’ claims, if the debtor’s solvency has been restored; 3) extending the time period for external management;58 4) if there is no possibility of restoring the debtor’s solvency, the court may issue a judgment whereby the debtor is declared to be a bankrupt and final bankruptcy proceedings shall be opened (see: Article 119 of the Law).

6.5. Final bankruptcy proceedings Legal consequences of the opening of final bankruptcy proceedings with respect to creditors’ claims include:

  Large-scale transactions and also those resulting in obtaining or giving loans, issuance of guarantees, transfer of rights or debts, alienation or acquisition of stocks or shares, and introduction of trust management may only be concluded by an external manager with the consent of the creditors meeting or creditors’ committee, unless such transactions are provided for in the external management plan (see: Article 101, Sections 1-4 of the Law). 58   This time period may be extended for a period not exceeding 6 months (see: Article 93, Section 2 of the Law). 57

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1)  all obligations which arose prior to the opening of final bankruptcy procee­ dings shall be deemed matured; 2) enforcement proceedings shall be terminated and writs of execution shall be transferred by bailiffs to the bankruptcy manager; 3) arrests and other encumbrances of the debtor’s property shall be lifted; and 4)  information of the financial condition of the debtor ceases to be deemed confidential (see: Article 126, Section 1 of the Law). Legal consequences of the opening of final bankruptcy proceedings with respect to the debtor’s management, include: termination of the powers of the debtor’s bo­ dies except those related to the making of decisions with respect to the conclusion of large-scale transactions and the entering into agreements to obtain the monetary means from third person(s) to carry out the debtor’s obligations (see: Article 126, Section 2 of the Law). Management of the debtor shall be imposed upon the bankruptcy manager who, inter alia, is obliged to: 1)  make an inventory of the debtor’s property and evaluate it with the participation of an independent appraiser; 2) notify the debtor’s employees of their upcoming dismissal; and 3)  take measure to secure the safety of the debtor’s property (see: Article 129, Section 2 of the Law). A bankruptcy manager, inter alia, is entitled to: 1) dispose of the debtor’s property in accordance with this Law; 2) dismiss the debtor’s employees; and 3) submit claims against third persons who bear subsidiary liability for the debtor’s obligations due to their having driven the debtor into bankruptcy (see: Article 129, Sections 3-5 of the Law). The debtor’s property existing at the date of the opening of final bankruptcy proceedings shall be deemed a bankruptcy mass59 (see: Article 131, Section 1 of the Law). The bankruptcy manager shall settle with creditors whose claims have been included in the register in compliance with the list of priorities set forth in Article 134 of the Law. Some expenses are to be paid before any priority, such as: a) legal expenses of the debtor;   Bankruptcy mass does not include res extra commercium and proprietary rights connected with the personality of the debtor, such as those based upon a license to perform certain kinds of business activities (see: Article 131, Section 2 of the Law). 59

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b) the fee due to the bankruptcy manager; c) current payments for public utilities60 rendered to the debtor in the course of his activities; d) creditors’ claims that arose between the date of acceptance by the court of the application to declare the debtor to be a bankrupt and the date of declaration of the debtor to be a bankrupt, as well as creditors’ claims that arose during the course of final bankruptcy proceedings; and e) wages due the debtor’s employees that arose after acceptance by the court of the application to declare the debtor to be a bankrupt (see: Article 134, Section 1 of the Law). With respect to the remaining claims, there are three priorities for their satisfaction: The first priority consists of claims of individuals to whom the debtor is liable for personal injury61 and moral harm. The second priority includes payments due to the debtor’s employees and those due to persons based on copyright law. The third priority includes other claims. Claims of creditors of each priority shall be satisfied after full satisfaction of claims of the creditors of the prior priority (see: Article 142, Section 2 of the Law).62 Upon completion of settlements with creditors, the bankruptcy manager shall submit his report on the results of the final bankruptcy proceedings to the court. The following documents shall be submitted with the report: — those providing evidence of sale of the debtor’s property; — the creditors’ claims register with an indication of the amount of paid claims; and — documents evidencing payment of creditors’ claims (see: Article 147 of the Law). The court, having considered the bankruptcy manager’s report, then issues a ru­ ling the contents of which depend upon whether the creditors’ claims have been sett­led or not.   Public utilities mean services rendered to the debtor by providers of electricity, gas, water, heating, etc. 61   Calculation of the amount of such claims shall be made by capitalization of the periodic payments due to individuals until they reach seventy years of age, but at least for a minimum of ten years. If the individual’s age exceeds seventy years, the period of capitalization shall be ten years (see: Article 135, Section 1 of the Law). 62   See in detail: Professor V.F. Popondopulo. Банкроство [Bankruptcy]. Moscow, 2012, pp. 292–307. 60

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If they have been settled, the court issues a ruling on termination of bankruptcy proceedings. In this case the debtor will continue to exist and is not subject to li­ quidation. If they have not been settled, the court issues a ruling on completion of final bankruptcy proceedings. This ruling shall be submitted by the bankruptcy manager to the state agency responsible for state registration of legal entities. This ruling is a basis for introducing information in the Unified State Register of Legal Entities pertaining to the liquidation of the debtor (see: Article 149 of the Law).

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Chapter 6 Taxation, Customs and Currency Rules with Specific Reference to Businesses with Foreign Investments

§ 1. Taxation rules 1.1. General provisions The main law in the field of taxation is the RF Tax Code which consists of two parts: The first deals with general provisions relating to the procedure for payment of taxes1 and duties,2 while the second contains detailed regulations governing the calculation and payment of different taxes and duties.3

  Tax is defined in the Code as a compulsory non-recoverable payment to be made by legal entities and individuals in order to provide financial security of state and municipal activities (see: Article 8, Section 1). 2   Duty means a compulsory payment to be made by legal entities and individuals as a  precondition for performance by state agencies and officials of some acts with legal consequences, such as granting certain rights or issuance of licenses or permits (see: Article 8, Section 2). 3   The first part was adopted July 31, 1998, the second part August 5, 2000; both parts subsequently were repeatedly amended. Some norms relating to taxation are set forth in other federal laws, such as the Federal Law on July 22, 2005. No 166-FZ “On Special Economic Zones in the Russian Federation” and the Federal Law of December 30, 1995. No 225-FZ “On Production-Sharing Agreements.” Relevant norms are also set forh in the Customs Union Customs Code effective in the Russian Federation as of July 1, 2010. 1

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The Code provides, inter alia, that all unavoidable doubts, conflicts and uncertainties in the interpretation of tax legislation should be construed in favor of the taxpayer (see: Article 3, Section 7). It specifically prohibits the establishment of different tax and duty rates and the granting of tax privileges based upon the form of ownership, the nationality of individuals or the place of origin of capital (see: Article 3, Section 2, Paragraph 2).4 Some rules in the Code concern the retroactive effect of tax legislative norms. Rules which: 1) introduce or increase new tax rates or duties, establish or increase responsibi­lity for violation of tax laws, declare new obligations or worsen the position of taxpayers in any way, shall not have retroactive effect (see: Article 5, Section 2);5 2) withdraw or decrease responsibility of taxpayers or provide them with additional guarantees of protection of their rights, shall have retroactive effect (see: Article 5, Section 3); 3) abolish taxes or duties, decrease their rates, or withdraw taxpayers’ obligations may have retroactive effect if expressly so provided (see: Article 5, Section 4). There are specific provisions in the Tax Code concerning the time when an obligation to pay a tax shall be deemed to have been met by a taxpayer. According to the Civil Code, unless otherwise established by law, other legal rules, or contracts, or appears from a custom, a non-cash monetary obligation shall be paid at the place of location of the bank (its branch, subdivision) in which the creditor holds its bank account (see: Article 316, Paragraph  6). This rule actually determines the time of performance of a monetary obligation as well: an obligation shall be deemed met when the money arrives at the creditor’s bank account. However, the situation is substantially different with respect to when an obligation to pay a tax is deemed met. Article 45, Section 3, Subsection 1 of the Tax Code mandates that this obligation shall be deemed met a when an order to pay money to

  It does not mean, however, that all privileges in the field of taxation are absolutely prohibited. E. g. in order to encourage large-scale foreign investments in the Russian economy a so-called “grandfather clause” was introduced whereby foreign investors (under certain conditions) could be granted temporary immunity from increasing their tax burden (see: supra, Chapter 5, § 2). Also (under some conditions) an in-kind contribution of a foreign investor to the chartered capital of a Russian commercial organization shall be exempt from payment of import customs duty (see: id). 5   This rule is in compliance with Article 57 of the Constitution. See in detail: Professor Y.A. Krokhina, Ed. Налоговое право России [Tax Law of Russia] Moscow, 2008, pp. 101–103; 137–141. 4

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the treasury is submitted to the bank where the taxpayer holds its account, provided there is sufficient money in the account. This approach emanated from the position of the RF Constitutional Court which, at an earlier time, when this issue had become a matter of dispute, had ruled that, on the one hand, a taxpayer’s obligation to pay taxes is of a public law nature; on the other hand, banks are under a statutory obligation to ensure remittance of required payments to the treasury, and this obligation is also of a public law nature. Article 57 of the Constitution, according to which everyone must pay taxes and duties as established by law, does not mean that a taxpayer shall be responsible for activities of all organizations involved in the multi-stage procedure of payment and remittance of taxes to the treasury (see: the Ruling of the Constitutional Court of the Russian Federation of October 12, 1998 No 24). That is why rules of the Civil Code indicating a place and time of meeting monetary obligations of a private law character are inapplicable to the public law obligation to pay taxes. It is also important strictly to observe the procedure of compulsory payment of taxes in case this duty is not performed by a taxpayer voluntarily. Here is an illustrative case. A tax inspectorate required a taxpayer (a municipal unitary enterprise) to pay taxes and granted a grace period. Since the taxpayer failed to pay taxes voluntarily within the grace period, the tax inspectorate issued an order to recover the amount of taxes out of the property belonging to the taxpayer. The latter challenged this order to a state arbitration court on the reason that recovery of amount of taxes out of the taxpayer’s property is only permissible provided there is no monetary means in the taxpayer’s bank accounts. The trial court, court of appeal and court of cassation took different views in the matter, and the taxpayer approached the RF Supreme State Arbitration Court with a supervisory complaint. The Presidium of the RF Supreme State Arbitration Court came to the following conclusion. As it appears from Articles 46 and 47 of the Tax Code, the procedure of compulsory payment of taxes consists of two consecutive stages: 1) recovery of the taxes out of the taxpayer’s monetary means; and 2) in case of lack of monetary means the amount of taxes may be recovered out of the taxpayer’s property. Since the tax inspectorate applied the second stage avoiding the first one, the procedure of recovery of taxes as provided by the Tax Code was violated.6   See: Bulletin of the Supreme State Arbitration Court of the Russian Federation, 2012. No 3, pp. 276–280. 6

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If an international treaty in the field of taxation includes norms different from those of the RF Tax Code and other tax laws, the norms of the international treaty shall prevail (see: Article 7 of the Tax Code). Taxpayers shall be registered with the tax authorities, individuals at the place of their residence, and legal entities at the place of their location. If an organization has separate subdivisions outside its principal location, such as branch or representative offices, the organization shall be registered with the tax authorities at the place of location of each subdivision (see: Article 83, Section 1 of the Code) since each subdivision must meet the legal entity’s obligation to pay taxes or duties at the place of its location (see: Article 19, Paragraph 2). Foreign organizations are entitled to be registered as taxpayers at the location of their subdivisions in the Russian Federation. A foreign organization having several subdivisions in Russia may select, in its discretion, the place of tax registration of a subdivision where it will submit tax declarations and pay taxes with respect to all its subdivisions in Russia (see: Article 144, Sections 2 and 3). Taxes shall be paid in rubles (see: Article 45, Section 5). Each taxpayer shall be granted an individual taxpayer’s identification number (see: Article 84, Section 7). There are three kinds of taxes and duties in the Russian Federation: 1) federal taxes and duties which are established by the Tax Code and shall be paid throughout the entire territory of the Russian Federation; 2) regional taxes and duties which are established by the Code, and laws of subjects of the Russian Federation which shall be paid within the territory of the relevant subject of the Russian Federation;7 3) local taxes and duties which are established by the Code, and normative legal acts of representative municipal bodies which shall be paid within the territory of the appropriate municipality.8 These bodies may, within the limits provided in the Code, specify tax rates, procedures and terms of payment of taxes, as well as tax privileges (see: Article 12, Section 4. Paragraphs 5 and 6). alia:

The list of federal taxes is set forth in Article 13 of the Code and includes, inter

  Legislative bodies of subjects of the Russian Federation are entitled, within the limits provided for in the Code, to set tax rates, procedures and terms of payment of taxes as well as tax privileges. All other elements of taxation with respect to regional taxes shall be regulated by the Code (see: Article 12, Section 3, Paragraphs 3 and 4). 8   In Moscow and St. Petersburg (which are cities of the federal level) local taxes shall be established by the Code and the laws of these cities and shall be paid within their territories (see: Article 12, Section 4, paragraph 4). 7

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1) value added tax (VAT); 2) excise tax; 3) natural persons’ revenue tax; 4)  unified social tax which was abolished as of January 1, 2010 (see: infta, subsection 1.2.5); 5) organizations’ profit tax; and 6) state duty. Regional taxes are set forth in Article 14 if the Code and include: 1) organizations’ property tax; and 2) transport tax. Local taxes are set forth in Article 15 of the Code and include: 1) land tax; and 2) a natural persons property tax. The amount of taxes to be paid depends upon a number of factors, such as: a) the object of taxation; b) its taxable base; c) the taxation period; and d) the tax rate. These factors will now be considered in relation to each of the different types of taxes.

1.2. Federal Taxes 1.2.1. Value added tax (VAT) A. The Object of taxation with respect to VAT refers to the alienation of goods (also including work and services)9 in the territory of the Russian Federation, including 9   Alienation of goods (work and services) is described in Article 39, Section 1 of the Code as the transfer for consideration (including barter) of the title of ownership to goods, the results of work performed by one person for another, the rendering of paid services by one person to another and, in cases specifically provided for in this Code, the transfer of ownership title to goods, results of work or rendering of services by one person to another free of payment. It should be noted that, in terms of the Code, “goods” means any property which is produced or destined for production (see: Article 38, Section 3). “Work” means activity, the results of which have a material manifestation, to meet demands of organizations or individuals (see: Article 38, Section 4). E. g., work may result in construction (or repair) of a building. “Service” means activity the results of which have no material manifestation and is completed and consumed in the course of such activity (see: Article 38, Section 5). Typical examples of services include management, consultancy, marketing, etc.

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their transfer free of charge, inter alia, for the taxpayer’s own needs, construction work for his own needs, and also the importation of goods into the customs territory of the Russian Federation (see: Article 146, Section 1 of the Code). Given the above, it is very important to clarify whether the place of alienation of goods, work and services is located within or outside Russia. According to Ar­ ticle 147 of the Code, the location of goods shall be deemed to be the territory of the Russian Federation if the goods are in the territory of the Russian Federation and are not subject to transportation (see: Paragraph 2). This rule applies, first of all, to immovable items such as plots of land, buil­ dings, construction, etc. It also includes the production of movables which are not subject to transportation (such as installed equipment)10 and other fixtures. An additional rule in this Article relates to goods which are subject to transportation abroad. The place of alienation of such goods shall be deemed the territory of the Russian Federation provided the goods in question were in Russian territory at the time transportation began (see: Paragraph 3). If the goods were located outside Russia and then came into Russian territory VAT must be paid, since the goods crossed the customs border of the Russian Fede­ ration.11 The place of production of work and services shall be deemed the territory of the Russian Federation if: (i) the work or services are directly connected with immovables such as plots of land, buildings and construction, located in the territory of the Russian Federation or if such work or services relate to erection of real estate, its repair, restoration, rental services, etc. (see: Article 148, Section 1, Subsection 1 of the Code); (ii) the work or services are directly connected with movables as well as aircraft, sea-going and river-going vessels12 located in the territory of the Russian Federation. Such work includes, inter alia, installation, assemb­ ling, processing, repair and maintenance (see: Article 148, Section 1, Subsection 2);”   See: N.R. Vilchure, A.V. Zimin, Eds., Комментарий к Налоговому кодексу Российской Федерации. Часть вторая [Commentary on the Tax Code of the Russian Federation. Part Two]. Moscow, 2003, p. 38. 11   Id., p. 38. 12   According to the RF Civil Code (Article 130) the concept of immovables includes not only plots of land, buildings, constructions “and all that is firmly connected with the land, i. e. objects whose movement without incommensurate damage to the designation thereof is impossible,” but this concept is also extended to aircraft, sea-going and river-going vessels and space objects since all these items are subject to state registration. However, in terms of taxation they are subject to the tax rules of movables. 10

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(iii) services in the fields of culture, the arts, education, physical culture, tourism, leisure and sport, actually rendered in Russian territory (see: Ar­ ticle 148, Section 1, Subsection 3); (iv) a purchaser of work or services performs its activities in the Russian territory on the basis of state registration or if its permanent representation (such as a branch or representative office) is located in Russia, provided work or services have been performed or rendered via such permanent representation. This rule shall apply in the following situations: — transfer of patents, licenses, copyrights and contiguous rights; —  preparation of software and databases, adaptation or modification thereof; —  rendering of consultancy, legal, book-keeping, engineering, advertising, marketing services, as well as performance of scientific research and experimental construction design work; — providing personnel, if they work at the place of the purchaser’s activity; — rental of movables, except road vehicles; — transportation services rendered by Russian residents if the point of shipment and/or destination is located in Russian territory (see: Article 148, Section 1 of the Code). B. The taxable base shall be the value of goods, work, and services as calculated by their prices not including VAT (see: Article 154, Section 1, Paragraph 1 of the Code). There are also rules in the Code for the determination of the taxable base of different kinds of goods, work, and services. For example, for goods imported into the territory of the Russian Federation, the taxable base shall be an amount that includes: (i) the customs value of the goods; (ii) import customs duty to be paid; (iii) excise tax (in relation to goods subject to this tax). (See: Article 160, Section 1 of the Code) C. The taxation period shall be a quarter (see: Article 163 of the Code). D. Tax rates It should be noted that some goods, work and services are not subject to VAT. Such exemptions include, inter alia: — rental of premises which are located in Russian territory and are rented by foreign individuals and organizations, if, according to the laws of the relevant foreign states, similar exemptions are granted to Russian natio­ nals and organizations;13   The list of such foreign states shall be determined by the RF Ministry for Foreign Affairs jointly with RF Ministry of Finance. 13

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— production of very important and vitally necessary medical equipment; — medical services; — services relating to the carriage of passengers by city and suburban communal transport upon terms and tariffs established by municipal authorities; — shares in chartered capital of organizations (see: Article 149 of the Code). The list of imported goods which are exempted from VAT is set forth in Ar­ ticle 150 of the Code and includes, for example: — goods (except those subject to excise tax) being imported free of charge as assistance to the Russian Federation, according to the procedure established by the RF Government; —  technological equipment (and its spare parts) being imported as a contribution to the chartered capital of organizations;14 — goods designated for the official use of foreign diplomatic agencies and the personal use of their staff; — fishery products obtained and/or processed by Russian fishery enterprises; and — vessels to be registered in the Russian International Ships Register.15 The tax rates differ depending upon the character of the goods, work, or services. (i) For some, the tax rate is 0%. According to Article 164, Section 1 of the Code, this rate shall apply to goods, work, and services, such as: — exported goods,16 as well as goods subject to the customs procedure of a free customs zone; 14   The list of technological equipment and the procedure of its customs clearance are established by the Order of the State Customs Committee of February 7, 2001ю No 131 “On approval of the Ordinance on the procedure of application by Customs bodies of the Russian Federation of value added tax in relation to goods being imported into the territory of the Russian Federation.” 15   The Russian International Ships Register is designated for registration of vessels which are used for international carriage of goods, passengers and their luggage (see: Article 33, Section 7 of the RF Merchant Shipping Code). 16   Export of goods should be evidenced by supporting documents listed in Article 165 of the Code, such as: — export contract; — bank’s receipt confirming actual arrival of the money paid for the goods at the taxpayer’s account in the Russia bank; — customs declaration with stamps of the customs office; — transport documents with stamps of border customs office confirming actual export of the goods outside the territory of the Russian Federation.

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— services on international carriage of goods; —  services rendered by pipeline transport organizations on international transportation of oil and oil products; Sometimes disputes arise between taxpayers and tax authorities as to whether these requirements have been complied with. Here is an illustrative example: An individual entrepreneur (who was registered as a sole business) exported some goods which were transported by truck from Voronezh (where the goods had been put through customs clearance for export) to Novorossiysk and then the trucks with the goods were delivered aboard a ferry boat to a foreign destination port. The entrepreneur provided a tax inspectorate with supporting documents including copies of a customs declaration and copies of CMR with stamps of Voronezh customs office “export is permitted” and that of Novorossiysk customs office “the goods have been exported.” The tax inspectorate refused to recognize the entrepreneurs’ right to apply VAT rate of zero since no copy of a bill of lading was submitted, meanwhile the goods had been delivered abroad by sea. This approach had been accepted by the trial court whose judgment was upheld by the appellate court and the court of cassation. The Presidium of the RF Supreme State Arbitration Court, having reviewed the case in the course of supervision upon the entrepreneur’s complaint, quashed the lower courts’ acts for the following reasons. CMR with customs offices’ stamps confirming customs clearance of the goods for export and actual export thereof shows that a contract of international carriage of goods by road was entered into. This contract is regulated by the 1956 Convention on the Contract for the International Carriage of Goods by Road norms which are binding on the Russian Federation. According to Article 2 (Section 1) of the Convention when a transport vehicle with goods has been carried part of its way by sea, inland water transport, railway, or by air, without reloading the goods, the Convention shall apply to the entire carriage. That is why CMR with relevant stamps of customs offices was a sufficient document to confirm the fact that the goods in question have actually been exported from the Russian Federation. Presentation of a bill of lading to the tax authorities would be necessary if a separate contract on carriage of goods by sea has been concluded, in which case the goods would have been discharged from trucks and then loaded on board a ship, which was not the case. Therefore the entrepreneur was entitled to apply a VAT rate of zero (see: the Ruling of the Presidium of the RF Supreme State Arbitration Court or October 20, 2009 No 8263/09, Bulletin of the Supreme State Arbitration Court of the Russian Federation, 2010, No 1, pp. 237–241). There are also specific requirements in the Tax Code with respect to documents evidencing payment for exported goods. Payment may be effected both by the buyer of the goods and by a third person; in the latter situation a bank’s receipt should be accompanied by a copy of a representative agency contract between the foreign buyer of the goods and the payee (see: Article 165, Section 1, (2), Paragraph 5 of the Code). A question arose whether this very contract should be deemed the only admissible evidence of payment effected by a third person. The RF Constitutional Court, having considered this issue upon the application of the RF Supreme State Arbitration Court, held that such a narrow interpretation of this rule is inconsistent with the Constitution since , inter alia, its Article 34 grants everyone broad discretion in the course of business activities. Given that according to the RF Civil Code, performance of an obligation may be placed by the debtor on a third person in different ways, the RF Constitutional Court concluded that such a payment may be evidenced by other civil law instruments, e. g. by a relevant clause in contract of international sale of goods (see: the Ruling of the RF Constitutional Court of December 23, 2009. No 20-П). 347

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— services on pipeline transportation of natural gas from (into) the territory of the Russian Federation; — international transfer of electric energy through unified national Russian electric network; — services with respect to the carriage of passengers and luggage, provided a point of departure or destination is located abroad; — work and services performed or rendered directly in outer space; — goods, work and services for the official use of foreign diplomatic agencies or for the personal use of diplomatic and administrative-technical personnel and their family members; — newly built vessels to be registered in the Russian International Ships Register. (ii) For some other goods, works, and services, the tax rate is 10 %, for example: — Meat and meat products (except delicacies, such as, veal, tongue, smoked sausages, etc.); — milk and milk products; — eggs and egg products; — vegetable oil; — sugar; — salt; — sea products; — food stuffs for children and people who are ill with diabetes; — vegetables (including potatoes); — some goods for children; — some medical goods (see: Article 164, Section 2 of the Code). The tax rate for remaining goods, work, and services is 18% (see: Article 164, Section 3 of the Code). The amount of VAT shall be set forth specifically in payment documents, such as bills, invoices, etc. (see: Article 168, Section 4). When calculating the amount of VAT due to federal authorities, a taxpayer is entitled to deduct the sum of VAT which he has already paid to a seller of goods, work, and services, at the time of their purchase or at the time of importing the goods into the customs territory of the Russian Federation (see: Article 171, Section 2 of the Code). Evidence for tax deductions shall include supporting documents such as invoices issued by sellers of goods, work, and services, and other documents confirming actual payment of VAT by the buyer to the seller (see: Article 172, Section 1 of the Code). VAT, based upon the actual production of goods, work, and services, including those used by the taxpayer for his own needs, shall be paid to the federal authorities after the end of each tax period and no later than the 20th day of the following month (see: Article 174, Section 1 of the Code). 348

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Should the amount of tax deductions exceed the aggregate amount of the tax at the end of a tax period, the tax authority shall compensate the taxpayer, whether by set off or by a return of funds, within three months from the date of submission of the tax declaration by the taxpayer. During this time period the tax authority shall check whether the taxpayer’s calculation is well grounded and decide either the amount of compensation, or whether to refuse compensation in full or in part (see: Article 176, Section 1 of the Code). The Presidium of the Supreme State Arbitration Court of the Russian Federation rejected a taxpayer’s claim for recovery of VAT from the treasury when it was established that goods set forth in customs declarations as exported in reality had not been manufactured by the seller and accordingly could not be exported.17 This approach is in line with the position of the European Court of Human Rights as manifested, inter alia, in its judgment in “Interslav v. Ukraine” decided January 9, 2007. The essence of this case involved an applicant who was engaged in manufacturing goods using recycled scrap metal bought in Ukraine, and subject to a 20% VAT rate. The production, for the most part, was exported from Ukraine at a 0% VAT rate. According to Ukraine VAT law, the manufacturer was entitled to a  refund of the VAT due on the price of the scrap metal. The European Court established that since April 1998 VAT refunds to the applicant had been systematically delayed because the tax authorities, not disputing the amounts of VAT refunds due the applicant, constantly failed to confirm these amounts, which failure prevented the applicant from recovering the claimed amounts in due time. The Court concluded that, having met the requirements established by domestic legislation, the applicant could reasonably expect the refund of the VAT it had paid during the course of its business activities. Therefore the applicant had a property interest recognized by Ukrainian law, which was protected by Article 1 of Protocol 1 to the Convention on the Protection of Human Rights and Fundamental Freedoms. 1.2.2. Excise tax A. The object of taxation, with respect to excise tax, means the alienation of certain goods by manufacturers in the territory of the Russian Federation. This includes the transfer of such goods free of charge and for the taxpayer’s own needs, as well as the transfer of goods as manufacturers’ in-kind contributions into the chartered capital of organizations, and also their contributions upon a contract of simple partnership or joint activities in Russian territory, and the importation of such goods into the customs territory of the Russian Federation (see: Article 182 of the Tax Code).   See: Ruling of the Presidium of the Supreme State Arbitration Court of the Russian Federation No 5395/06 of September 12, 2006 (Bulletin of the Supreme State Arbitration Court of the Russian Federation, 2007, No 1, pp. 125–129). 17

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The list of goods which are subject to excise tax is set forth in Article 181 of the Code and includes: — alcohol products (such as vodka, liquors, cognacs, wines, etc.); — beer; and — oil products (such as petrol, diesel oil, lubricants, etc.). Sale of exported goods, which are otherwise subject to excise tax, shall be exempt from excise tax (see: Article 183, Section 4 of the Code) provided the actual export of such goods is evidenced by the following documents: — a copy of a contract between the taxpayer and a counterpart with respect to the export sale of the goods in question. If the goods are exported via an agency contract, then copies of both the agency contract and the export sales contract between the agent and the buyer are needed; — payment documents and the bank’s receipt evidencing actual arrival of proceeds from the sale of goods to the taxpayer’s account in a Russian bank; — customs declaration with a stamp of a Russian customs agency on actual export of goods out of the Russian customs territory; — transport documents with Russian customs agencies’ stamps evidencing actual movement of the goods out of the customs territory of the Russian Federation (see: Article 198 of the Code). B. The taxable base is the monetary value of sold or transferred goods which will be subject to excise tax based on the tax rates established for each type of goods subject to excise tax (see: Article 187 of the Code). C. The taxable period with respect to an excise tax is a calendar month (see: Article 192 of the Code). D. Tax rates depend upon the kind of goods and are shown mainly as a certain monetary amount for a particular measurement unit, for example, by the liter for li­quid goods starting with no tax for 1 liter of spirits containing perfume and low alcoholic beer and going up to 300 rubles for 1 liter of alcoholic products (except wines, including champaign and sparkling wine the rate for which is 22 rubles for 1 liter), by the kilogram for tobacco (610 rubles for 1 kilogram), by the ton for oil products (for diesel oil — 4098 rubles for 1 ton), by the number of items (for cigars — 36 rubles for 1 cigar, for cigarillas — 530 rubles for 1,000 items), by horse power for cars (zero tax for cars with engine power up to 90 h.p., 29 rubles for 1 horsepower for cars with engine power between 90 and 150 h.p., 285 h.p. for cars with engine power over 150 h.p.). A combined tax rate is established for certain goods. This rate will consist of some amount for a number of items plus some percentage of their value, e. g. for cigarettes the tax rate is 360 rubles for 1,000 items plus 7,5% of their maximum retail price but not less than 460 rubles for 1,000 items (see: Article 193 of the Code). 350

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The amount of the excise tax shall be set forth on a separate line in the payment documents (see: Article 199 of the Code). A taxpayer is entitled to decrease the total excise tax by deducting the amount of excise tax paid at the time of purchase of the goods or when they were imported into the customs territory of the Russian Federation (see: Article 200, Section 1 and 2 of the Code). Amounts deducted must be supported with payment documents and invoices (see: Article 201, Section 1 of the Code). If the amount of the deductions in a tax period exceeds the amount of the excise tax, the difference shall be compensated by set-off or by return of funds within 3 months from the date of submission of the supporting documents (see: Article 203 of the Code). 1.2.3. Organizations’18 profit tax A. The object of taxation shall be the profit received by a taxpayer. For Russian organizations, profit means their income less some expenses which are well-grounded19 and supported with documents.20 For foreign organizations, the 18   The term “organizations” in the meaning of the Tax Code includes Russian legal entities, foreign legal entities and other organizations having civil law capacity, international organizations, and their branch and representative offices in the territory of the Russian Federation (see: Article 11, Section 2 of the Code). 19  Expenses shall be deemed well-grounded if they are economically justified (see: Article 252, Section 1, Paragraph 3 of the Code). Having established that a company had paid over 16 million rubles to a law firm for legal services, the tax inspectorate refused to acknowledge these expenses to be economically justified since the company had its own legal department whose personnel was sufficiently experienced and imposed a fine upon the company for underpayment of the organization profit tax. The company challenged the inspectorate’s decision to the state arbitration court. The application was rejected and the trial court judgment was upheld by the appellate court and by the court of cassation. The company’s complaint in the case was reviewed in the course of supervision by the Presidium of the RF Supreme State Arbitration Court which noted in its ruling that both the fact of rendering legal services to the company and the amount of legal fees were supported with appropriate documents. The tax inspectorate failed to prove that the company, when retaining external legal services, acted in bad faith. According to the legal position of the Constitutional Court of the Russian Federation there is no need for courts to check the economic reasonableness of decisions taken by businesses which enjoy broad discretion in economic activities. The Presidium quashed the acts of lower courts and declared the tax inspectorate’s decision null and void (see: Bulletin of the RF Supreme State Arbitration Court, 2008, No 6, pp. 110-114). 20   Expenses shall be deemed supported with documents if expenses are confirmed by documents formalized in accordance with Russian Law or by documents formalized in accordance

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concept of profit differs depending upon whether a foreign organization carries out its activities in Russia via a permanent representative office21 or without one. In the former situation, profit shall be calculated in the same manner as for Russian legal entities. In the latter situation, profit shall mean income received from sources in the Russian Federation (see: Article 247 of the Code). There are two kinds of profit: 1) sales profit, that is, profit from the sale of goods, work, services and proprietary rights; and 2) non-sales profit (see: Article 248 of the Code). Sales profit includes any income resulting from the sale of goods, work, services and proprietary rights22 and manifested both in monetary, in form and in kind (see: Article 249 of the Code). Non-sales profit includes, inter alia: 1) dividends from share participation in other organizations; 2) a positive (or negative) difference in the currency’s exchange rates; 3) rental fees due to the taxpayer; with usages applied in a foreign country in the territory of which the relevant expenses were incurred (see: Article 252, Section 1, Paragraph 4 of the Code). 21   A permanent representative office of a foreign organization includes its branch, representative office, division, bureau, agency and any other similar establishment through which the foreign organization regularly conducts business activities in the territory of the Russian Federation related to: — the use of natural resources; — the construction, installation and maintenance of equipment; — the sale of goods from warehouses located in Russia and owned or rented by the foreign organization, — the performance of other work and rendering services, except those related to: — use of constructions solely for storage, demonstration and/or delivery of goods belonging to the foreign organization (prior to commencement of such a delivery); — maintenance of a stock of goods belonging to the foreign organization solely for storage, demonstration and/or delivery thereof (prior to commencement of such a delivery); — maintenance of a permanent place of activities solely for the purchase of goods by the foreign organization; — maintenance of the permanent place of activities solely for collection, processing and/or dissemination of information, bookkeeping, marketing, advertising or market research, including research relating to goods, work, and services being conducted by the foreign organization, provided such activities are not the main or usual activities of the organization (see: Article 306, Section 2 of the Code). 22   The concept “proprietary rights” includes both the ownership title and other rights connected in some way with property, including intangibles, such as, rights arising out of rental contracts, contracts of carriage of goods, etc. 352

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4) interest received under loan contracts and securities; 5) fines, penalties, and recovery of losses due the taxpayer if such amounts have been acknowledged by the debtor or must be paid once a court judgment becomes effective. There are, however, some kinds of profit which are not taken into account in calculation of the taxable base, such as: 1) advance payments for goods, work, and services; 2) property and proprietary rights received by a taxpayer as a pledge, or a deposit received as security for performance of an obligation; 3) contributions into a taxpayer’s chartered fund; 4) money or other property received by a taxpayer under a loan contract; 5) property received by a Russian organization without compensation a) from another organization whose chartered capital consists of more than 50% of the contribution or share of the recipient organization; b)  from another organization provided the chartered capital of the organization recipient consists of more than 50% of the contribution or share of the transferring organization; c) from an individual, provided the chartered capital of the recipient consists of more than 50% of the contribution or share of that individual;23 6)  property received by a taxpayer from foreign investors for the financing of fixed capital designated for manufacturing provided those investments will be used within one calendar year of their receipt (see: Article 251 of the Code). It should be noted that a payment of compensational character shall not be deemed a kind of profit and therefore is not subject to taxation. A plot of land owned by a limited liability company was taken for a public purpose upon a decision of relevant state authorities. According to Article 57, Section 1 of the RF Land Code in such a situation a landlord’s losses should be recovered in full (including lost profit). The amount of recovery was determined by court judgment and paid to the company by state authorities. The tax inspectorate recognized this amount to be a kind of non-sales profit and required the company to pay organization profit tax on it. The company applied to a state arbitration court to declare the tax inspectorate’s decision null and void. The trial court issued a judgment in favor of the tax inspectorate. This judgment was upheld by the appellate court and by the cassation court. The Presidium of the RF Supreme State Arbitration Court, having reviewed the case upon the company’s complaint, noted in its ruling that the amount in question,   A precondition is that such property shall not be transferred to third persons within one year from the date of their receipt. 23

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being compensation for losses resulting from the taking of the plot of land from the owner for a public purpose, should not be deemed a kind of profit and therefore should not be taxed. The lower courts’ acts were quashed and the tax inspectorate’s decision was declared null and void (see: the Ruling of the Presidium of the RF Supreme State Arbitration Court of June 23, 2009 No 2019/09).24 Expenses that can be deducted from profits for taxation purposes include: 1)  expenses connected with manufacturing and the sale of products;25 and 2) non-sales expenses.26 However, there are some expenses that cannot be taken into account for taxation purposes and so cannot be deducted from profits. These expenses include, inter alia: 1)  dividends to be paid by the taxpayer; 2)  fines and other penalties due to the treasury from the taxpayer; 3) a taxpayer’s contribution into the chartered funds of other organizations; and 4) loans granted by the taxpayer to other persons. B. The taxable base shall be deemed the monetary value of profits calculated in accordance with the above rules. In kind profit (that is, that resulting from barter ope­rations) is calculated on the basis of the price of the transaction27 (see: Article 274 of the Code).   See: Bulletin of the RF Supreme State Arbitration Court, 2009. No 10, pp. 214–218.  These expenses include, inter alia, payments for: 1) purchase of raw material, machinery, tools, appliances, fuel, energy, water, etc. needed for manufacturing goods, performing work, and rendering services; 2) labor payments, including wages, compensation payments for secondments, etc.; 3) depreciation of the taxpayer’s property; 4) repair of fixed capital; 5) scientific research and experimental construction works; 6) compulsory and voluntary property insurance (such as insurance of transport vehicles, cargo, and harvest); 7) fire safety; 8) legal, information and consultancy services, etc. (see: Articles 253–264 of the Code). 26  These expenses include expenses: 1) for maintenance of rented property (including its depreciation), 2) for issuance of securities, 3) resulting from differences in exchange rates of different currencies, 4) for legal expenses related to court and arbitration proceedings (see: Article 265 of the Code). 27   For taxation purposes the price of the transaction shall be taken into account, provided this price corresponds to the market price. The price of the transaction shall be deemed to be the market price unless it is otherwise established, e. g., as long as the price of the transaction is within 20% of the price used by the taxpayer in relation to similar goods, work, and services within a short period of time (see: Article 40 of the Code). 24 25

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C. The taxable period is a calendar year. D. Tax rates differ depending on a number of factors. According to the general rule, the tax rate is 24% (see: Article 284, Part 1 of the Tax Code).28 The amount of the tax calculated using this rate shall be distributed in the following proportions between the federal treasury, 6.5%, and the treasury of the rele­ vant subject of the Russian Federation, 17.5%.29 This tax rate shall apply to Russian organizations and also to foreign organizations operating in Russia through permanent representation (see: Articles 284, Section 1; 307, Section 6 of the Code).30 The tax rate for foreign organizations that derive profits in Russia, but have no permanent representation in Russia, will depend upon the kind of business activities from which they derive profits. For example, profits derived from the use, maintenance and rental of vessels, aircraft, other transport vehicles, and containers are taxed at the rate of 10%; while other profits will be taxed at 20% (see: Article 284, Section 2 of the Code). There are special tax rates for dividends which are based upon who the payers and payees are. If dividends are paid by Russian organizations to Russian organizations and individuals who are tax residents of the Russian Federation the tax rate is 9%. If dividends are paid by Russian organizations to foreign organizations or by foreign organizations to Russian organizations, the tax rate is 15% (see: Article 284, Section 3 of the Code). If a Russian organization derives profits from sources outside the Russian Fede­ ration these profits, from which expenses (whether paid inside or outside Russia) are deducted, are taxable in the Russian Federation (see: Article 311, Sections 1 and 2 of the Code). The amount of taxes paid abroad by the Russian organization on its profits shall offset the amount of the tax to which it will be subject in Russia. Such a setoff shall be made provided the taxpayer submits a document duly verified by a foreign tax agency confirming actual payment of the foreign tax (see: Article 311, Section 3 of the Code).   As of 2009 the tax rate has been decreased to 20%: due to the federal treasury, and 18% to the treasury of a subject of the Russian Federation (see: Article 284, Part 1 of the Tax Code in the version approved by the Federal Law of November 20, 2008. No 224-FZ). 29   The amount of the tax due to the treasury of a subject of the Russian Federation may be decreased to 13.5% by the law of the subject of the Russian Federation. 30   It is specifically indicated in Article 7, Section 6 of the Code that foreign organizations which conduct their activities in Russia via a permanent representative office shall pay taxes based on rates established in Article 284 of the Code. 28

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Specific rules may be established by an international treaty on avoidance of double taxation. For example, according to the Convention between the United States of America and the Russian Federation for the Avoidance of Double Taxation and Prevention of Fiscal Evasion of Taxation with Respect to Taxes on Income and Capital of June 17, 1992 the profits of a person with permanent residence in one Contracting State shall be taxed only in that State unless this person conducts business in another Contracting State via permanent representation (see: Article 6, Section 1). This means, inter alia, that profits of a Russian resident organization which include business profits that it derived from sources in the United States where it had no permanent representation will be taxed only in Russia; there will be no need also to pay tax on its profits in the USA. 1.2.4. Natural persons’ revenue tax A. The object of taxation shall be the revenue received by individuals (see: Article 209, Paragraph 1 of the Code). The amount of revenue to be taxed will depend upon whether or not individuals are tax residents of the Russian Federation. Tax residents are individuals who are physically located in Russia for at least 183 calendar days during a 12 months consecutive period31 (see: Article 207, Section 2 of the Code). This is the only fact to be taken into consideration to qualify an individual as a tax resident or non-resident of Russia. The nationality or citizenship of an individual is irrelevant. Thus, a Russian national who lives mainly abroad is deemed to be a tax nonresident of Russia while a foreign national or a stateless person who lives mainly in Russia is deemed to be a Russian tax resident. For Russian tax residents, the object of taxation will include their revenue received from sources both in Russia and abroad, while non-residents will be taxed only on their revenue derived from sources within Russia (see: Article 209, Sections 1 and 2 of the Code).32

  An individual’s stay in Russia will not be considered interrupted as a result of an absence of less then 6 months from the Russian Federation for medical treatment or education (see: id.). There are also some people who shall be deemed tax residents of the Russian Federation regardless of the length of their actual duration in Russia. This group of people includes military servicemen who serve abroad and governmental (as well as municipal) employees who are seconded for work aboard (see: Article 207, Section 3 of the Code). 32   Revenue of some individual non-residents shall not be subject to this tax, i. e. that of: 1) the head and staff of representatives of a foreign state having diplomatic and consular status and family members who live together with them, provided the family members are not Russian nationals. (This exemption is not extended to revenue from sources 31

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Revenue from sources within Russia shall include, inter alia: — salary or wages pursuant to an employment contract as well as fees for work or services rendered in Russia under civil law contracts or another legal basis, such as remuneration of members of a board of directors or other similar body;33 — revenue from the use of copyright or contiguous rights within Russia; — revenue from the sale, leasing or other use of property located in Russia; —  revenue from the sale in Russia of stocks, other securities or shares in a company’s chartered capital; —  dividends and interest received from a Russian organization or from a foreign organization in connection with activity of its permanent representation in Russia (see: Article 208, Section 1 of the Code); — salary and wages for performance of employment contracts as well as fees for work or services rendered abroad under a civil law contract or another legal basis, such as remuneration of members of a board of directors or other similar body;34 — revenue from the use of copyright or contiguous rights outside Russia; — revenue from the sale, leasing or other use of property located outside Russia; —  revenue from the sale outside Russia of stocks, other securities or shares in the chartered capital of foreign companies; within Russia not connected with diplomatic and consular service of the individuals is question); 2) administrative-technical personnel of representatives of a foreign state and family members who live together with them, provided their family members are not Russian nationals or do not live permanently in Russia (except that revenue from sources within Russia not connected with the work of such persons in the representation of a foreign state shall be taxable); 3) subordinate employees (such a chauffeurs , cooks, cleaning ladies, etc.) of a foreign state’s representative office who are not Russian nationals and do not live permanently in Russia with respect to revenue received for their service in the representative office; 4) employees of international organizations, according to their charters. These rules shall apply provided similar exemptions are granted to Russian personnel of Russian representative offices abroad or if similar rules are set forth in an international treaty to which the Russian Federation is a party (see: Article 215 of the Code). 33   It is specifically provided that such remuneration for board members (or similar officials of an organization) who are tax residents of Russia shall be deemed revenue received from sources within Russia regardless of the place (whether within or outside Russia) where they actually performed their functions or received remuneration (see: Article 208, Section 1(6) of the Code). 34   Remuneration of board members (or similar officials) of a foreign organization shall be deemed revenue from sources outside Russia regardless of the place (whether within or outside Russia) where they actually performed their functions (see: Article 208, Section 3(6) of the Code). 357

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— dividends and interest received from a foreign organization, except those resulting from the activity of a foreign organization’s permanent representation in Russia (see: Article 208, Section 3 of the Code). B. The taxable base shall include all kinds of taxpayer revenue whether received in money or in kind, as well as profits in the form of material benefits (see: Article 210, Section 1 of the Code). When a taxpayer receives revenue in kind, whether in the form of goods, work, or services, the taxable base of such revenue shall be the value of the goods, work, or services, based on their market prices, including VAT and excise tax (see: Article 211, Section 1 of the Code). There are specific rules on establishment of a material benefit resulting from loan contracts. In such a situation a taxable base shall be the difference between the amount of interest calculated on three quarters of the refinancing rate35 established by the RF Central Bank for the date of obtaining the loan, on the one hand, and the amount of interest calculated at the rate agreed to in the contract, on the other (see: Article 212, Section 2(1) of the Code). Assume that the actual interest for the loan was 3% per annum, and the refinan­ cing rate was 12% per annum. Then the difference (9% – 3% = 6 % per annum) is the material benefit for the lender. One should also bear in mind that some kinds of revenue are exempt from taxation, such as, inter alia: — pensions; — state allowances for unemployment, pregnancy and childbirth; — compensation for personal injuries; — alimony; — per diem and travel expenses paid in connection with business trips (within a limit established by legislation); — scholarships awarded to students and post graduates; —  prizes awarded for distinguished achievements in science, technology, culture, literature, the arts, etc. (see: Article 217 of the Code). There are also some deductions from taxable revenue. These may be classified in several groups, such as: 1. Standard tax deduction granted in accordance with Article 218 of the Code to certain persons with poor health conditions resulting from disease or wounds connected to specific events, such as:   The refinancing rate is the rate at which the RF Central Bank gives credit to commercial banks. 35

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1.1. deduction of 3,000.00 Rubles per month of a taxable period to: — persons who suffered disease resulting from the Chernobyl disaster and some similar events; — invalids of the Great Patriotic War,36 and — military servicemen who became invalids in the course of their military service; 1.2. deduction of 500 Rubles per month of a taxable period to: — participants of the Great Patriotic War (who did not become invalids); — those who were in Leningrad during the siege37 (regardless of the term of their stay); — invalids from childhood; and — parents and spouses of military servicemen who lost their lives due to wounds or injury in the course of their military service. 2. Social tax deductions were provided to some individuals for social purposes within a tax period, as set forth in Article 219 of the Code, such as: — tuition paid by a taxpayer for his education in educational institutions;38 —  revenue given by a taxpayer as a charitable donation to scientific, cultural, educational, healthcare and social protection organizations financed (wholly or in part) by federal, regional or municipal agencies;39 — fees paid by a taxpayer for medical services rendered by medical institutions in the Russian Federation to the taxpayer, his spouse or his children (less than 18 years of age).40 3. Property tax deductions granted to a taxpayer in connection with the sale or purchase of dwelling houses, apartments, rooms, garden houses, plots of land or shares thereof. In the event of sale of property, the amount to be deducted from the proceeds depends upon the period of time during which the taxpayer owned the piece of real estate. If this period was less than 3 years, then the cap of the deduction is one million rubles. If this period was longer than 3 years, than the deduction is equal to the amount of the proceeds received from sale of the property.   Great Patriotic War is the Russian name for World War II.   The siege of Leningrad lasted 900 days in 1941–1944. 38   The cap of such a payment is 50,000.00 Rubles (see: Article 219, Section 1(2) of the Code). 39   Such donations shall not (in the aggregate) exceed 25% of the revenue received within a tax period (see: Article 219, Section 1(1) of the Code). 40   The aggregate amount of such fees shall not exceed 50,000.00 Rubles (see: Article 219, Section 1(3) of the Code). 36 37

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The same privilege shall be granted to a taxpayer in the event of the sale of other (personal) property (including securities). If the taxpayer owned the property for fewer than 3 years the deduction is capped at 250,000.00 rubles; if this period was longer than 3 years, there is no cap. A taxpayer is also entitled to deduct his expenses for the purchase, construction or repair of a dwelling house or apartment (see: Article 220 of the Code). 4. Professional tax deductions are granted to some individual taxpayers, such as: — individuals who are duly registered as sole businesses; — notaries, lawyers and other persons who have a private practice, —  individuals who derive revenue from the performance of work or services based on civil law contracts, — persons who received fees for use of their copyright and patent law rights. The persons listed above are entitled to deduct taxes for expenses actually paid and for which there is documentary confirmation that the expenses (which have been paid) are directly connected with the derivation of revenue (see: Article 221 of the Code). C. The tax rates depend upon whether or not the taxpayer is a Russian tax resident and, for those who are, the kind of revenue. Generally speaking, the tax rate for Russian taxpayers is 13% (see: Article 224, Section 1 of the Code). However, as concerns revenue resulting, inter alia, from participation in games aimed at advertising goods, works and services the tax rate is 35% for revenue exceeding 4,000.00 rubles (see: Article 224, Section 2 of the Code). On the other hand, the tax rate for dividends is 9% (see: Article 224, Section 4 of the Code). If a taxpayer is not a Russian tax resident, his entire revenue is taxed at 30% (see: Article 224, Section 3 of the Code). 1.2.5. A unified social tax A unified social tax was paid both by legal entities and private persons who engage individuals under employment or civil law contracts to perform work or render services.41 A. The object of taxation was the wages and other remuneration due to individuals from the taxpayer (see: Article 236 of the Code). B. The taxable base was the amount of any payments due to individuals from the taxpayer within the tax period (which is a calendar year) (see: Articles 237 and 240 of the Code).   Civil law contracts such as buy sell and lease contracts were not subject to this tax.

41

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There were, however, some kinds of payments exempted from taxation, such as: — state allowances (those allowances paid in connection with illness, unemployment, etc.); — compensation for personal injuries; — monetary aid provided by a taxpayer to his employees for compensation for personal injury or loss of or damage to property in the event of a natural calamity or other extraordinary event; — allowance provided by a taxpayer to family members of a deceased employee, or to an employee in the event of the death of a member of his family (see: Article 238 of the Code). C. Tax rates differed depending on the amount of the taxable base. If the taxable base for an individual was no more than 280,000 rubles within a calendar year, the tax rate was 26%. If the taxable base for an individual was between 280,001 rubles and 600,000 rubles, the tax rate was 72,800 rubles plus 10% of the amount exceeding 28,001 rubles. If the taxable base for an individual was more than 600,000 rubles, the tax rate was 88,000 rubles plus 2% of the amount exceeding 600,000 rubles (see: Article 241 of the Code). It should, be noted, however, that according to the Federal Law of July 24, 2009 No 213-FZ the unified social tax was abolished as of January 1, 2010 and replaced with contributions into the Pension Fund of the Russian Federation, the Social Insu­ rance Fund of the Russian Federation, and Federal and Territorial Funds of Obligatory Medical Insurance.42 The rates of contributions into these funds are as follows: The Fund

The rate (%)

Pension Fund of the Russian Federation

26

Social Insurance Fund of the Russian Federation

2,9

Federal Fund of Obligatory Medical Insurance

5,1

1.2.6. State duty State duty is a payment paid by legal entities and individuals when filing papers with courts, notaries and other public agencies and officials who are authorized to perform acts of a legal character (see: Articles 333_16, 333_17 of the Code).   See in detail: infra, Chapter 9, § 4, Section 4.2.

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In practical terms the problem of state duty is the most acute in relation to court proceedings. This was dealt with earlier in Chapter 2, Section 2 dealing specifically with litigation matters. There are also some other federal taxes, such as duties for the use of objects of the animal world (i. e. different kinds of animals) and for the use of objects of water biologic resources (i. e. different kinds of fish, crabs, shrimps, whales, etc.), a water tax, and extraction of fossils tax. These taxes are applicable in specific situations and need not be dealt with further here.

1.3. Regional taxes 1.3.1. A transport tax A transport tax is paid by legal entities and individuals who own cars, trucks and other road vehicles and machinery, airplanes, helicopters, sea and river-going vessels including sailboats and other vessels, whether or not self-propelled, with the exception of: a) cars specifically designated for handicapped people; b) fishing vessels; c) passenger and cargo sea-going and river-going ships and aircraft which are owned by legal entities whose main line of business is the carriage of goods and/or passengers; d) tractors, harvesters and other vehicles owned by agricultural enterprises used in the course of agricultural work; e) transport vehicles belonging to federal agencies involved in military or similar service; f)  stolen vehicles (provided the fact of theft is confirmed by a document issued by the appropriate authority); g) aircraft belonging to medical services (see: Article 358 of the Code). The object of taxation shall be vehicles which are subject to this tax (see above); The taxable base shall be the power of the vehicle’s engine; The taxable period is a calendar year; Tax rates depend upon the power of the vehicle’s engine (the more horse po­ wer — the higher the ruble rate), e. g.: 362

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Object of taxation

Tax rate (in rubles)

Cars with engine horse power up to 100

2,5

over 100 up to 150

3,5

over 150 up to 200

5

over 200 up to 250

7,5

over 250

15

Trucks with engine horse power up to 100 over 100 up to 150

2,5 4

over 150 up to 200

5

over 200 up to 250

6,5

over 250

8,5

Laws of subjects of the Russian Federation may increase or decrease these rates but not by more than tenfold. 1.3.2. Organizations’ property tax This tax shall be paid by: 1) Russian organizations; and 2) foreign organizations which: a) perform activity in the Russian Federation via permanent representation and/or b) own immovable property in the territory of the Russian Federation, on its continental shelf or in its exclusive economic zone (see: Article 373, Section 1 of the Code). A. The object of taxation depends upon the type of taxpayer, and includes: (i) for a Russian organization — movable and immovable property (inclu­ ding property obtained for temporary possession, use, disposal, or trust management)43 which property is listed in its balance sheet as fixed capital,44   Property transferred for trust management as well as property acquired in the context of `a trust management contract shall be taxed to the settlor of trust management (see: Article 378 of the Code). 44   The concept “fixed capital” includes such things as buildings, construction , machinery and equipment, measuring and regulating devices, computers, transport vehicles, etc. (see: Section 46 of the Regulations on maintenance of bookkeeping and financial reporting in the Russian Federation as approved by the Order of the RF Finance Ministry of July 29, 1998. No 34н). 43

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(ii) for a foreign organization acting in Russia through permanent representation — movable and immovable property which shall be deemed fixed capital; (iii) for foreign organizations which do not act in Russia through permanent representation  — immovable property owned by the organization (see: Article 374 of the Code). Objects of taxation do not include items such as plots of land and other natural objects (bodies of water and other natural resources) since those objects are subject to special taxes. B. The taxable base shall be the value of the property deemed to be an object of taxation (see: Article 375 of the Code). C. The taxable period is a calendar year (see: Article 379 of the Code). D. The tax rate shall be established by laws of subjects of the Russian Federation. The rate, however, is capped at 2.2 % (see: Article 380 of the Code). Another regional tax is a gambling business tax which is quite specific and needs no discussion here.

1.4. Local taxes 1.4.1. A land tax A land tax shall be paid by organizations and individuals who own plots of land or enjoy the right of permanent, that is unlimited in time, use or the right of lifetime hereditary possession of such plots (see: Article 388 of the Code). A. The object of taxation includes the plots of land located within the territory of a municipality or within the federal cities of Moscow and St. Petersburg (see: Article 389, Section 1 of the Code). B. The taxable base is the cadastre value of the above plots of land (see: Ar­ ticle 390 of the Code). C. The taxable period is a calendar year. D. The tax rate shall be established by municipal representative bodies (and in Moscow and St. Petersburg, by city legislative bodies) but shall not exceed 0.3% with respect to plots of land designated for agriculture, dwelling houses and their infrastructure, as well as for gardening, or construction and maintenance of country houses. For other plots of land the tax rate is capped at 1.5% (see: Article 394 of the Code). 1.4.2. Natural persons’ property tax This tax, being mentioned in the Tax Code (see: Article 15 (2)), is regulated by the Law “On Natural Persons’ Property Tax” of 9 December 1991 (as subsequently amended). 364

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§ 1. Taxation rules

Taxpayers are natural persons owning immovable property. A. The objects of taxation are 1) dwelling houses; 2) apartments; 3) rooms; 4) dachas (country houses); 5) garages; 6) other buildings, premises and construction; 7) shares in the right of ownership to the property listed above. B. The taxable base is the inventory value of the objects listed above. C. The taxable period is a calendar year. D. The tax rates shall be established by municipal representative bodies (in Moscow and St. Petersburg — by city legislative bodies) within the following limits: Aggregate inventory value of the objects of taxation

Tax rate

Up to 300 000 rubles

Up to 0,1 %

More than 300 000 rubles up to 500 000 rubles

More than 0,1 % up to 0,3 %

More than 500 000 rubles

More than 0,3 % up to 2 %

As of January 1, 2011 the rates are as follows: Aggregate inventory value of the objects of taxation

Tax rate

Dwelling houses, apartments rooms, dachas, other dwelling premises up to 300 000 rubles

0,1%

more than 30 000 up to 500 000 rubles

0,2%

more than 500 000 rubles

0,31%

Garages, other non-dwelling premises up to 300 000 rubles

0,1%

more than 300 000 up to 500 000 rubles

0,3%

more than 500 000 rubles

2%

Some people are exempted from this tax, such as, participants of the Great Patriotic War, invalids of 1st and 2nd groups, victims of the Chernobyl disaster, etc. 365

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§ 2. Customs Rules 2.1. General provisions Legislative provisions relating to customs activities are mainly concentrated in the RF Customs Code of May 28, 2003 (as subsequently amended). However due to formation of the Customs Union of the Euro-Asian Economic Commonwealth including the Republic of Belarus, the Republic of Kazakhstan and the Russian Federation (hereinafter referred to as “Customs Union” or “the CU”) these rules are currently contained in the Customs Union Customs Code that is the Appendix to international treaty adopted by the Decision of the Inter-State Council of the Euro-Asian Economic Commonwealth of November 27, 2009 which took effect July 1, 2010. Since the rules of this Code are none other than the rules of an international treaty, they prevail over the rules of the RF Customs Code 2003. There is a Federal Law of November 27, 2010 No 311-FZ “On Customs Regulation in the Russian Federation”, this Law is harmonized with the CU Customs Code and contains express reference to it (e. g. with regard to customs procedures) and ascertains some rules of the CU Customs Code (see: e. g. infra, Section 2.3 of this Chapter). In case of a conflict between the Federal Law of November 27, 2010, on the one hand, and the CU Customs Code, on the other, the latter shall apply since it is an integral part of an international treaty (see: Section 1 of the Ordinance of the Plenum of the RF Supreme State Arbitration Court of November 8, 2013 No 79 “On some issues of application of customs legislation.” It should be noted that May 29, 2014 an International Treaty on Creation of the Euro-Asian Economic Union (hereinafter referred to as “the EAEU Treaty or “the Treaty”) was concluded among the Republic of Belarus, Republic of Kazakhstan and the Russian Federation (the Treaty is open for other countries). According to this Treaty Member States should maintain s Customs Union in frames of which there should be: 1) internal commodity market; 2) unified regime of trade of goods in relationship with third countries; 3) unified customs regulations; 4) free movement of goods among territories of the Member States without customs declarations and state control unless otherwise provided by the Treaty (see: article 25, Section 1). Unified customs regime within the Union shall be provided by the EAEU Customs Code (see: Article 32 of the Treaty). Until the EAEU Customs Code becomes effective, customs regulations within the Union shall be governed by the CU Customs Code (see: Article 101, Section 1 of the EAEU Treaty). 366

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§ 2. Customs Rules

All goods and transport vehicles which cross the CU customs border45 are subject to customs control and customs operations (i. e. customs clearance) - see: Articles 96, Section 1 and 341, Section 4 of the CU Customs Code). All goods involved in international trade are delivered to the customs border by one mode of transportation or another. Therefore the first person to contact customs authorities will be a carrier. After crossing the customs border a carrier delivers goods to an entry point and produces the goods to customs authorities (see: Article 156, Section 2 of the CU Customs Code.46 A carrier should also provide the customs authorities with the documents the set of which depends on the mode of transport (see: Article 159 of the CU Customs Code). With respect to the international carriage of goods by road, the set of required documents includes, inter alia: 1) the transport vehicle’s documents; 2) transportation documents (such as an international waybill); 3) commercial documents relating to the goods carried. A carrier is also obliged to submit information concerning: — the state registration of the transport vehicle; — the name and address of the carrier; — the countries of shipment and destination; — the name and address of the shipper and the consignee of the goods; — the number of cargo units; — the name and codes of the goods; — the gross weight of the goods (in kilograms) or volume thereof (in cubic meters), except for large sized goods. With respect to the international carriage of goods by sea- or river-going vessels, the set of required documents includes:

  CU Customs border means the limits of the CU customs territory (see: Article 2, Section 2 of the CU Customs Code). The CU Customs territory includes the territories of the Republic of Belarus, Republic of Kazakhstan and the Russian Federation as well as artificial islands, installations, structures and other objects located outside the territories of the Statesmembers of the Customs Union which objects are subject to the exclusive jurisdiction of these States (see: Article 2, Section 1 of the CU Customs Code). 46   This rule shall not apply to goods being carried by sea – or river going ships or aircraft crossing the CU customs border without a call to a port (or airport) that is located in the CU customs territory as well as to goods being transported by pipelines and by electricity transmission lines (see: Article 156, Section 4 of the CU Customs Code). 45

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— a general declaration;47 — a declaration of goods; — the ship’s stock48 declaration; — the declaration of crew members’ personal belongings; — the ship’s roll; — the list of passengers; — a document prescribed by the World Postal Convention; and — the transportation documents (such as bills of lading, sea way bills, etc.); — the commercial documents relating to the goods carried. A carrier should also submit information concerning: — the shipmaster’s name; — the ship agent’s name and address; — the number and names of passengers; — the ports of shipment and call; — the name, quantity and description of goods; — the cargo plan. In case of international carriage of goods by air, the set of documents required includes: — a standard carrier’s documents, as set forth in international civil aviation treaties (a general declaration); — a document (the cargo manifest) containing information on the goods being carried on board the aircraft; — a document containing information on the aircraft’s stock; — transport documents (such as airway bills); — commercial documents relating to the goods carried; — the passenger manifest, containing information on the passengers on board and their luggage; and — a document prescribed by the World Postal Convention A carrier should also submit information concerning, inter alia: — the nationality of the aircraft and its registration; — the name of the operator of the aircraft; — the number of crew numbers; — the number of goods; — the names of ports of loading and discharge of the goods.   A “general declaration” includes a ship’s information (its name, point of registration, nationality, dimensions, etc.). 48   “Ship’s stock” means items needed for maintenance of the ship (such as food, fuel, spare parts, etc.). 47

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In case of international carriage of goods by railway, the set of documents required includes, inter alia: — transportation documents (such as railway bills); — transfer certificate on railway vehicles; — a document containing information on stock; — a document prescribed by the World Postal Convention; — commercial documents relating to the goods carried. A carrier should also submit information concerning, inter alia: — the names and addresses of the shipper and the consignee; — the names of railway stations of departure and destination of the goods; — the number of cargo units; — the name and codes of the goods; — the gross weight of the goods (in kilograms); — the identification numbers of containers. Goods must be declared to customs authorities when crossing the customs border. The customs declaration for goods should contain information on the transport vehicles and the goods carried and, inter alia, their destination and description, their classification code under the Goods Nomenclature of Foreign Economic Activities,49 the countries of origin of the goods, their shipment and destination, the number of cargo units or packages, the quantity of goods in net and gross weight or other mea­ surement units, the customs value, and the main terms and conditions of the foreign economic transaction, etc. (see: Article 181 of the CU Customs Code). The customs declaration, together with supporting documents, must be presented to customs authorities with respect to goods taken into the customs territory of the Customs Union — prior to expiry of the term for temporary storage of the goods50 (see: Article 185, Section 1 of the CU Customs Code). For goods taken out of the customs territory of the Customs Union, the customs declaration should be submitted before they leave this territory (see: is., Section 2). Customs declaration should be submitted in writing or in electronic version (see: Article 179, Section 3 of the CU Customs Code) and is subject to registration with the customs authorities (see: Article 190 of the CU Customs Code).   The Goods Nomenclature of Foreign Economic Activities is a systematic list of designations, descriptions and codes of goods to be applied for performance of customs – tariff and non-tariff regulation of foreign trade activity and for the keeping at customs statistics (see: Article50 of the CU Customs Code). It shall be approved by he customs Union Commission (see: Article 51 Section 2 of the CU Customs Code). This Commission is a permanent regulatory body of the Customs Union (see: Article 4, Section 1 (11) of the CU Customs Code). 50   This term is 2 months (see: Article 170, Section 1 of the CU Customs Code). It may be extended by customs authorities upon written application of the titleholder of the goods or his agent (see: id., Section 2). 49

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Customs declaration should be submitted to customs authorities by a declarant or by a customs agent acting on behalf and upon instruction of a declarant (see: Article 179, Section 2 of the CU Customs Code). “Declarant” is a person51 of a State-member of the Customs Union who entered into a foreign economic transaction (or on whose behalf and upon whose instruction the transaction was concluded), or who has the right to possess, use and/or dispose of the goods (if there is no foreign economic transaction) (see: Article 186 (1) of the CU Customs Code). If, e. g., a Russian person52 had entered into a contract of international sale of goods, it is this person who shall be the declarant.53 Customs agent is a legal entity of a State-member of the Customs Union who is included in this capacity in the appropriate register and is entitled to perform customs operations on behalf and upon instruction of a declarant within the territory of a particular State-member of the Customs Union (see: Article 12, Sections 1 and 2 of the CU Customs Code). Goods shall be released by customs authorities provided the following conditions have been met: 1)  licenses, certificates, permits and/or other documents needed for release of have been submitted to customs authorities; 2)  requirements for putting the goods under the customs procedure selected by the declarant have been observed; 3) customs duties and taxes on the goods have been paid or security payment provided (see: Article 196 of the CU Customs Code).

  According to the CU Customs Code a peron means a natural person and/or a legal entity as well as an organization that is not a legal entity unless otherwise follows from this Code (see: Article 4(13) of the Code). 52   A Russian person means a legal entity located in the Russian Federation, created in accordance with Russian law, and/or natural person registered as a sole business and having permanent residence in the Russian Federation unless otherwise follows from this Federal Law (see: Article 5, Section 1(5) of the Federal Law of November 27, 201 No 31-FZ “On Customs Regulation in the Russian Federation”). 53   As concerns foreign pseron the status of declarant is available to: individuals who take goods into or out of the customs territory of the customs Union for personal needs; diplomatic agencies, consular institutions or official delegations; foreign organizations having their representative offices created in due course in the territory of a State-member of the Customs Union, with respect to goods designated for their representative office’s own needs (see: Article 186 (2) of the CU Customs Code). 51

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When an administrative violation or a crime is discovered, the goods may be released prior to completion of administrative or criminal proceedings if such goods have not been confiscated or arrested in accordance with the law of States-members of the Сustoms Union.54

2.2. Customs procedures The CU Customs Code introduces a number of customs procedures; it is up to a declarant to choose among them. There are more than twenty customs procedures. Those most actively in use are indicated below. — Release for internal consumption means that foreign goods are located and used within the customs territory of the Customs Union without restriction as to their use and disposal (see: Article 209 of the CU Customs Code; see also: Article 228 of   Even if a violation occurred, it should not entail responsibility of a person not at fault. A customs broker submitted goods for customs clearance. As customs officials discovered, the weight of the goods stated in the documents did not correspond to the actual weight, and a fine was imposed upon the customs broker. However, the Presidium of the RF Supreme State Arbitration court noted in its supervisional ruling that loading of the goods had been conducted by the shipper without involvement of the customs broker. In addition, the customs value of the goods was calculated on the basis of the quantity of cargo units, the number of which as indicated in the customs declaration coincided with the actual number of units as established by the customs office. The decision of the customs office in this case was declared null and void (see: “Экономика и жизнь”, 2009, No 2). A similar approach was taken by the Presidium of the RF Supreme State Arbitration Court when it was established that a company which owned a warehouse for temporary storage of goods, when accepting empty steel balloons for chemical products, had indicated gross weight of the goods with pallets as 20537 kg. Later on, in the course of customs clearance of the goods the buyer indicated their net weight (without pallets) as 19318 kg in the customs declaration. After filing the customs declaration the owner of the warehouse released the goods and indicated in the report gross weight of the goods with pallets ad 20537 kg. The customs office issued an order whereby the owner of the warehouse was fined for submission of a report containing wrong information with respect to the weight of the goods. The company challenged the order to state arbitration court. The trial court issued a judgment in favor of the customs office, which judgment was upheld by the appellate court and by the court of cassation. The company submitted a supervisory complaint to the Presidium of the RF Supreme State Arbitration Court. The Presidium held that the customs office has been provided with documents evidencing both gross and net weight of the goods, so there was no reason to allege that the company misinformed the customs office. The lower courts’ acts were quashed and the order of the customs office to fine the company was declared illegal and rejected (see: Bulletin of the Supreme State Arbitration Court of the Russian Federation. 2010. No 1, pp. 307–310). 54

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the Federal Law of November 27, 2010 No 311-FZ “On Customs Regulation in the Russian Federation”). This customs procedure may be used provided the following conditions have been met: 1)  import customs duties and taxes (VAT and excuse tax) have been paid; 2) prohibitions and restrictions have been observed; 3)  documents confirming observance of restrictions connected with application of special protection, antidumping and compensation measures have been submitted. Once these conditions are met, the goods obtain the status of Customs Union goods (see: Article 210 of the CU Customs Code). —  Export means that Customs Union goods are taken out of the customs territory of the Customs Union and designated for permanent location outside this territory (see: Article 212, Section 1 of the CU Customs Code; see also: Article 230 of the Federal Law of November 27, 2010 No 311-FZ). Goods may be put under this customs procedure provided the following conditions are complied with: 1) export customs duties have been paid; 2) prohibitions and restrictions have been observed; 3)  a certificate of origin of the goods has been submitted. Once such goods are actually taken out of the territory of the Customs Union, they lose the status of Customs Union goods (see: Article 213 of the CU Customs Code). — Customs transit means that goods are carried under customs control through the customs territory of the Customs Union (and also through the territory of a State that is not a member of the customs Union) from the departure customs point to the destination customs point without payment of customs duties and taxes but with application of prohibitions and restrictions except measures of non-tariff55 and technical regulation (see: Article 215, Section 1 of the CU Customs Code; see also: Article 233 of the Federal Law of November 27, 2010 No 311-FZ). This customs procedure may be used provided the following conditions are met: 1) the goods have not been prohibited from entering or leaving the customs territory of the Customs Union; 2)  documents confirming observance of restrictions on movement of the goods through the customs border have been submitted;   Measures of non-tariff regulation means observing prohibitions and restrictions with regard to quantity of goods, or otherwise, in accordance with international treaties of the Statesmembers of the customs Union (see: Article 4, Section 1(17) of the CU Customs Code). 55

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3) border control with regard to the goods has been passed; 4) a transit declaration has been submitted; 5)  security measures concerning observance of customs transit have been taken; 6)  identification of the goods has been procured; 7)  the transport vehicle is properly equipped (see: Article 216 of the CU Customs Code). — Temporary importation (admission) means that foreign goods may be used during a specified term within the customs territory of the Customs Union with conditional exemption (in whole on in part) from payment of customs duties and taxes and without application of non-tariff regulation measures; the goods must subsequently be put under the re-export customs procedure (see: Article 277 of the CU Customs Code; see also: Article 274 of the Federal Law of November 27, 2010. No 311-FZ). Goods may be put under this customs procedure provided there is a possibility of identification (see: Article 278, Section 1) of the CU CUSTMS Code. This customs procedure is inapplicable to: 1) foodstuff, beverages (including spirits), tobacco, etc.; 2) waste products; 3)  goods prohibited from being taken into the customs territory of the Customs Union (see: id,. Section 2). The goods which are put under this customs procedure should be in the actual possession and use of the declarant. He may transfer these goods to another person for temporary possession and use: 1)  for technical maintenance, repair (except capital repair and/or modernization), storage or transportation thereof — without a permit of customs authorities; 2) in other cases — with such a permit (see: Article 279 (Sections 2 and 3) of the CU Customs Code). The maximum time period of temporary importation is 2 years unless another (shorter or longer) period is established by the Customs Union Commission (see: Article 280, Sections 1 and 2 of the CU Customs Code). Temporarily imported goods with complete exemption of payment of customs duties and taxes may be used within the territory of the State-member of the Customs Union whose customs authorities have put these goods under this customs procedure (see: Article 282, Section 2 of the CU Customs Code). As for goods partly exempt from payment of customs duties and taxes, 3% of the amount of the customs duties and taxes well be payable each month until the full amount is paid (see: id., Sections 3 and 5).

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— Temporary exportation means that goods of the Customs Union are taken out of the customs territory of the Customs Union and are used outside this territory during specified period of time with full exemption from payment of export customs duties and without application of measures of non-tariff regulation with subsequent re-imposition of the re-import customs procedure (see: Article 285 of the CU Customs Code; see also: Article 281 of the Federal Law of November 27, 2010. No 311-FZ). Conditions to be complied with for putting goods under the customs procedure of temporary exportation are similar to those for temporary importation (see: Article 286 of the CU Customs Code). The time period of temporary exportation of goods shall be specified by customs authorities on the basis of the declarant’s application with due consideration to the purposes and circumstances of such exportation (see: Article 288, Section 1 of the CU Customs Code). If the right of ownership to temporarily exported goods is transferred to a foreign person (and provided there is no obligation to return these goods according to the law of the State-member of the Customs Union), such goods should be put under the export customs procedure (see: id., Section 3). In such case export customs duties should be paid (see: Article 291 of the CU Customs Code). — Re-import means that goods which have been previously taken out of the customs territory of the Customs Union, are taken back into this territory without payment of import customs duties and taxes and without measures of non-tariff regulation (see: Article 292 of the CU Customs Code; see also: Article 285 of the Federal Law of November 27, 2010 No 311-FZ). In order to put goods under this customs procedure a declarant should provide the customs authority with information concerning the goods that are being taken out of the territory of the customs territory of the Customs Union as well as any repair of goods to be performed outside this territory. This information should be confirmed by presentation of the customs declaration that was submitted upon exportation of the goods and also the documents evidencing the date the goods crossed the customs border at the time of their export. (see: Article 294 of the CU Customs Code) —  Re-export means that goods which were delivered to the customs territory of the Customs Union are taken out of its territory without payment and/or with return of import customs duties and taxes and without application of measures of non-tariff regulation (see: Article 296 of the CU Customs Code; see also: Article 289 of the Federal Law of November 27, 2010 No 311-FZ). This customs procedure may be applied to: 1) foreign goods located in the customs territory of the Customs Union; 374

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2) goods put under the customs procedure of release for internal consumption if these goods are returned due to non-performance of a foreign economic transaction. These circumstances need to be confirmed by supporting documents. (see: Articles 297, 299 of the CU Customs Code) — Duty free trade means that goods are subject to retail sale in duty free shops to natural persons leaving the customs territory of the customs Union or to foreign diplomatic or consular agencies or those of international organizations without payment of customs duties and taxes and without application of measures of non-tariff regulation (see: Article 302 of the CU Customs Code; see also: Article 292 of the Federal Law of November 27, 2010 Nom 311-FZ). This customs procedure may be applied to any goods except those prohibited from entering or leaving the customs territory of the Customs Union as well as those whose turnover in the territory of the States-members of the Customs Union is prohibited. Only the owner of a duty free shop may be a declarant of such goods (see: Article 303 of the CU Customs Code).

2.3. Customs payments During customs clearance, customs payments must be made. These payments include: 1) import customs duty; 2) export customs duty; 3) value added tax (VAT) due upon importation of goods into the customs territory of the Customs Union; 4) excise tax due upon importation of goods into the customs territory of the Customs Union (see: Article 70, Section 1 of the CU Customs Code); 5) customs dues. Conditions of payment of VAT and excise tax have already been described supra (see: Sections 1.2.1 and 1.2.2 § 1 of this Chapter); here the focus is on customs duties and dues. A person who is obliged to pay customs duties is a declarant (see: Article 79 of the CU Customs Code). The base for calculation of customs duties is the customs value of goods and their quantity (see: Article 75 of the CU Customs Code). The Code provides three kinds of customs duty rates: 1) ad valorem rates, to be calculated as some percentage of the customs value of the goods;56   Customs value of goods taken into the customs territory of the customs Union shall be determined in accordance with the international treaty of States-members of the customs 56

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2)  specific rates, depending on physical characteristic of the goods, such as quantity, mass, volume, etc.; 3)  combined rates, consisting of both ad valorem and specific rates (see: Ar­ ticle 71 of the CU Customs Code. Similar rule is contained in Article 43 (Section 3) of the EAEU Treaty). Customs duties should be paid in currency of the State-member of the Customs Union where payment is due (see: Article 84, Section 3 of the CU Customs Code). Customs dues are compulsory payments due to customs authorities for actions related to release of goods and other customs operations. Kinds and rates of customs dues shall be established by the laws of States-members of the Customs Union. The amount of customs dues should not exceed the approximate cost of the expenses that customs authorities incur for the performance of required duties (see: Article 72 of the CU Customs Code). It is very important to define a moment when an obligation on customs payments shall be deemed performed. According to the CU Customs Code such a moment is to be established by the law of the State-CU member where the customs payments shall be made (see: Article 81, Section 4). Further to this rule the RF Federal Law “On Customs Regulation in the Russian Federation” provides that this obligation shall be deemed performed at the moment when the amount or payment has been written off the payer’s bank account (see: Article 117, Section 1(1) of the Law).

§ 3. Currency rules 3.1. General provisions Currently legislative norms relating to currency rules are primarily set forth in the Law on Currency Regulation and Currency Control of December 10, 2003 (which replaced the previous Law of October 9, 1992).

Union. The customs value of goods taken out of the customs territory of the Customs Union shall be determined in accordance with laws of the State-member of the Customs Union to which customs authorities goods are declared. The customs value of goods shall be calculated by a declarant or a customs agent acting on behalf and upon instruction of the declarant; it is subject to control on the part of customs authorities (see: Article 64 of the CU Customs Code). There are Rules of determination of the customs value of goods taken out of the Russian Federation approved by the Decision of the RF Government of March 6, 2012 No 191. 376

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The historical development of Russian currency regulations was characterized by a trend to simplify legal mechanisms and eliminate unnecessary formalities in order to facilitate activities of foreign businesses in Russia and Russian businesses abroad. First, it should be noted that, with respect to currency regulation, both current and previous laws classified all persons on the basis of their legal status either as residents or non-residents. The term “resident” includes both individuals and organizations which meet certain requirements established by law. According to the Law of December 10, 2003 (Article 1, Section 1, Subsection 6, “a” & “b”) individual residents include: 1)  nationals (citizens) of the Russian Federation, except those permanently living abroad during at least one year including those having a residence permit issued by an authorized public body of the relevant foreign state, or those temporarily living in a foreign state during at least one year on the ground of a work visa or educational visa with a term of validity at least one year or on the ground of combination of such visas with an aggregate term of validity at least one year; and 2) foreign nationals and stateless persons who live permanently in Russia on the ground of the residence permit as provided by law of the Russian Federation. It appears from these provisions that the main criterion for an individual to be deemed a resident is his or her permanent residence in Russia. If this condition is met, an individual will be deemed a resident in terms of the Law on Currency Regulation and Currency Control without regard to his or her nationality. Individuals (including Russian nationals) living abroad permanently as well as Russian nationals temporarily living abroad during at least one year on the ground of a work visa or educational visa (see above) will be deemed non-residents (Article 6, Section 1, Subsection 7, “a” of the Law). As it appears from these rules, Russian nationals temporarily living abroad during one year or even longer on other grounds (such as secondment or medical cure) shall retain a status of Russian residents. With respect to organizations, residents include: 1) those legal entities established under Russian law (see: Article 1, Section 1, Subsection 6, “b” of the Law); and 2) their branch and representative offices, as well as other subdivisions of these legal entities located abroad (see: Article 1, Section 1, Subsection 6, “2” of the Law). On the other hand, foreign legal entities (and organizations which do not have the status of legal entities) as well as their subdivisions (such as branch or representative offices) located in Russia will be deemed to be non-residents (see: Article  6, Section 1, Subsection 6, “d” of the Law). 377

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Russian residents also include the Russian Federation, subjects of the Russian Federation and municipalities (see: Article 1, Section 1, Subsection 6, “e” of the Law). Foreign diplomatic agencies and consular institutions accredited in Russia, as well as international organizations, their branch and representative offices located in Russia, shall be deemed non-residents (see: Article 1, Section 1, Subsection 7, “d” & “e” of the Law). Residents and non-residents enjoy a similar but not identical legal status. The differences relate to matters such as, first, the place of remittance of money (both in foreign currency and in rubles) due residents in connection with foreign trade contracts, and, second, question of settlement in foreign currency between residents and non-residents, on the one hand, and between residents, on the other. Considering each of these matters in turn: Residents are under a statutory obligation to ensure remittance of money due them under export contracts (whether in foreign currency or in rubles) to residents’ bank accounts in the territory of the Russian Federation. In the case of non-performance of import contracts by non-residents, the money shall be returned to residents (see: Article 19, Section 1 of the Law of December 10, 2003). A similar rule was also included in the prior Law of October 9, 1992 (see: Article 5, Section 1).57   The approach of Russian state arbitration courts during the period of application of the prior Law was based on the idea that such a remittance was one of the obligatory conditions of the export customs regime. Therefore, an exporter had to use his best endeavors to receive currency payments due him from a foreign buyer. If the exporter did take appropriate legal steps he could then be exempted from responsibility for violation of the export customs regime. The Presidium of the RF Supreme State Arbitration Court established that by the time a customs office imposed a penalty on a Russian exporter for violation of the export customs regime the exporter had sued a foreign buyer in a voluntary arbitration forum which issued an award in favor of the plaintiff, and the amount of the price for the goods had already been deposited in the exporter’s bank account in Russia. Given this situation, the Presidium of the Supreme State Arbitration Court concluded that there was no violation of customs rules and upheld the trial court judgment whereby the order of the customs office had been declared invalid (see: Bulletin of the Supreme State Arbitration Court of the Russian Federation, 2000, No 4, pp. 23–24). However, in another case the Presidium established that the exporter failed to produce evidence of his attempts to obtain the price for the goods purchased by the foreign buyer. Imposition by a customs office of a penalty for violation of the export customs regime upon the exporter was deemed legal (see the Bulletin, 2004, No 4, pp. 24–25). Later, when addressing this issue once again, the Presidium of the RF Supreme State Arbitration Court noted that the above rule as set forth in Article 19, Section 1 of the Law on Currency Regulation and Currency Control should be interpreted in conjunction with Article 15.25, Section 5 of the Code on Administrative Violations according to which failure to ensure remittance of the required amount to the resident’s account at the Russian bank shall be punished by an administrative fine for company officials and for the company between three quarter and the whole amount of the respective sum. 57

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It should be noted that this rule does have some impact on application of certain general provisions of Russian civil law. According to Article 313 of the RF Civil Code the debtor may place performance of the obligation on a third person, and “the creditor is obliged to accept the performance offered by a theird person for the debtor unless the debtor’s duty to perform the obligation in person follow from a law, contract, or the essense of the obligation.” (Section 3) While these rules shall not apply to obligations related to payment of foreign or Russian currency due residents in connection with foreign trade contracts, the abovementioned norm of currency law, albeit mandatory, is not absolute. According to the prior Law of October 9, 1992, a resident could be exempted from the obligation to deposit payments due him at his bank account(s) in Russia if he had a permit of the Central Bank of the Russian Federation which could be granted on a case by case basis. The Law of December 10, 2003 expressly prohibits issuance of individual permits with respect to currency regulations (see: Article 5, Section 3). At the same time, the Law provides conditions for exemption of residents from this obligation. Residents are entitled, inter alia, to use foreign currency income which is due them, abroad: 1)  for settlements of loan or credit contracts with non-resident organizations which are agents of the governments of foreign countries and also with resi­ dents of country members of the Organization for Economic Cooperation and Development (OECD) and of the Financial Action Task Force on Money Laundering (FATF); 2) for payment of expenses in connection with the performance of exhibitions, sport, cultural and similar activities; 3) for payment of expenses related to the maintenance abroad of transport vehicles (including river and sea-going vessels, aircraft, etc.) belonging to Russian resident transport organizations (see: Article 19, Section 2 of the Law).

At the same time the Presidium emphasized that if a resident who failed to ensure such remittance did not commit illegal acts or omission and took all measures within his powers to receive the money, he should not be subject to administrative punishment. As it was established, the Russian company, when sending a price for the goods to the foreign seller, did not know that the goods had already been transferred to another buyer, since the seller who had instructed the carrier to deliver the goods to another consignee did not notify the buyer of that. In order to receive money back the company retained a foreign law firm and sent an official claim to the seller. Moreover, the company approached the Embassy of the relevant foreign state with a request to assist to settle the dispute with the seller, and then sued the latter. In such a situation the Presidium concluded that there was no reason to punish the company (see: the Bulletin, 2009. No 12, pp. 304–308). 379

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The rule of Article 19, Section 1 of the Law (obligating residents to repatriate export income due them into Russia) also substantially limits the possibility to use set-offs with respect to the payment of duties connected with foreign trade. According to a general rule set forth in Article 410 of the RF Civil Code “an obligation shall be terminated wholly or in part by the set-off of a counter claim of the same type, the period for which has matured or the period for which has not been specified or is determined at the time of demand. The statement of one party is sufficient for a set-off.” As it appears from this norm, a set-off is permissible provided that: 1) there are counterclaims between the same parties (that is, a creditor in one claim is a debtor in another and vice versa); 2) both claims are of the same character (for example, monetary claims); and 3) both claims have matured. Here is a typical example: Assume that A owes B 100,000 rubles as the purchase price for goods. B owes A the same amount of money which he borrowed from A for a period of one month. Once this period of time has expired either A or B may make a unilateral statement of set-off which will result in the termination of both claims. Assume further that A is a Russian company and B is a foreign company. Both norms of Article 5, Section 1 of the 1992 Law and of Article 19, Section 1 of the 2003 Law effectively prohibit a set-off. While, according to the 1992 Law a permit to sue for a set-off could be granted to a Russian resident by the RF Central Bank,58 the 2003 Law expressly sets forth the following three situations when a set-off is permissible: 1) when there are obligations between resident fishing companies, operating outside the customs territory of the Russian federation, and non-resident companies rendering agency services to the resident companies; 2) when there are contractual relationships between resident transport companies operating abroad and non-resident transport companies; and   The Presidium of the RF Supreme State Arbitration Court discovered (while reviewing a case in the course of court supervision) that mutual payment obligations between a Russian joint stock company and a foreign firm had been terminated by a set-off. The Presidium emphasized in its Ruling that according to Article 5 of the 1992 Law “On Currency Regulation and Currency Control” the joint stock company as a Russian resident was under the statutory obligation to remit the foreign currency due it to its bank account in Russia. The money did not come to the company’s account in the Russian bank, and the company did not have a license for a set-off from the Central Bank of the Russian Federation. The Presidium held that in such circumstances a set-off conflicted with the Russian currency rules (see: Bulletin of the Supreme State Arbitration court of the Russian Federation. 2000. No 5, pp. 49–51). 58

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3) when there are reinsurance relationships between non-residents and residents which are insurance organizations or insurance brokers (Article 19, Section 2, subsection 5). The 2003 Law thus provided some exceptions from the norm prohibiting set-offs in currency operations between residents and non-residents. However, as a general rule this prohibition remains in effect. One more distinction between the legal status of residents and non-residents with respect to currency regulations relates to payments in foreign currency. Such payments between residents and non-residents are allowed without limitations (see: Article 6 of the 2003 Law). However, payments in foreign currency between residents are only permissible in situations set forth in an exhaustive list in Article 9 of the Law. This list includes, inter alia: 1) payments for goods bought in duty free shops or on board transport vehicles (trains, sea and river-going vessels, airplanes, etc.) in the course of international travel; 2) payments for transportation of exported and imported goods, agency forwarding services and insurance thereof; and 3) payments in connection with the secondment of an employee outside Russia.

3.2. Currency operations and payments Currency operations are listed in Article 1, Section 1, Subsection 9 of the Law and include: 1) currency payments between residents; 2) currency payments between a resident and a non-resident; 3) currency payments between non-residents; 4) transfer of currency from a resident’s (or non-resident’s) bank account abroad to the same resident’s (or non-resident’s) bank account in Russia and vice versa; 5) transfer of Russian currency from a non-resident’s bank account in Russia to another bank account of the same non-resident in Russia; 6) taking cash into or out of Russia; 7) transfer of Russian currency from a resident’s bank account opened outside the territory of the Russian Federation to another resident’s bank account opened in the territory of the Russian Federation, and from a resident’s bank account opened in the territory of the Russian Federation to another resident’s bank account opened outside the territory of the Russian Federation; 381

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8) transfer of Russian currency from a resident’s bank account opened outside the territory of the Russian Federation to another resident’s bank account opened outside the territory of the Russian Federation; 9) transfer of Russian currency from a resident’s bank account opened outside the territory of the Russian Federation to the same resident’s bank account opened outside the territory of the Russian Federation.59 These kinds of currency operations may be classified into two groups. One group includes operations resulting in transfer of rights to currency (i. e. those operations in items 1, 2, 3, 7, 8 above). Another group includes operations in which the titleholder to currency remains the same but currency crosses the border of the Russian Federation in cash (item 6) or in an intangible form (items 4, 9). Rules relating to currency operations set forth in the 2003 Law are substantially different from those of the 1992 Law. The 1992 Law (see: Article 1, Section 8) differentiated between current currency operations (as indicated in the exhaustive list) and currency operations related to the movement of capital (a non-exhaustive list). Residents were entitled to conduct current currency operations independently and without restriction (see: Article 6, Section 1). However currency operations related to movement of capital were conducted by residents according to a procedure established by the Central Bank of the Russian Federation (see: Article 6, Section 2). Originally this procedure was very strict requiring a resident to obtain a license from the Central Bank for each currency operation related to movement of capital. However, later the Central Bank instituted different procedures for several kinds of currency operations. In a nutshell, these were as follows: 1)  Some operations required a license from the Central Bank, which could be granted by the Central Bank’s office in Moscow, 2)  For some operations, a license from the Central Bank could be granted by its territorial departments. 3) Residents were given discretion to conduct some operations provided that the relevant territorial department of the Central Bank was notified ahead of time.

59   Natural persons (both resident and non-resident) are entitled to take foreign and/or Russian currency out of the Russian Federation in cash in an amount up to $10,000.00 for each trip; no documents are required to show that this amount of currency was previously taken into, transferred into, or acquired in the Russian Federation (see: Article 15, Part 3 of the Law).

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4) A number of operations could be conducted without a Central Bank license (and even without notification to the Bank), and the list of such operations has gradually been expanded. The 2003 Law introduced a substantially different general rule providing that “currency operations between residents and non-residents may be performed without any restrictions.” (Article 6) However, some restrictions were established for a few operations, such as reserving relevant amounts of money (as a measure of security of performance of certain monetary obligations with deferred payment) or using special bank accounts. Those restrictions were of a temporary nature and were gradually abolished; the last of them ceased to have effect as of January 1, 2007.60 Nevertheless, the 2003 Law provides for preparation of a passport of transactions between residents, and also with respect to loans and credits between residents and non-residents (see: Article 20, Section 1). The purpose of the passport of transactions is to enable Russian banks to control the compliance of residents with the mandatory norm that they shall repatriate payments due them at their bank accounts in Russia (Article 19, Section 1, Subsections 1 and 2 of the Law). No passport of transactions is required in some situations, such as if the amount of the transaction does not exceed $50,00061. According to a mandatory norm of the 2003 Law, currency may only be transferred via banks. The Law provides for just a few situations where foreign currency may be given by or to a natural person in cash, such as: A donation between spouses and close relatives; — through inheritance;   Foreign Currency operations between residents are prohibited except in situations set forth in an exhaustive list contained in Article 9, Part 1 of the Law, e. g.: — operations between agents and principals connected with entering into and carrying out foreign trade contracts; — operations concerning contracts for forwarding and carriage of export, import and transit goods to, from or via Russian territory, as well as contracts for insurance of such goods; — operations related to secondments of natural persons outside the territory of the Russian Federation; and — operations related to obtaining and repayment of credits from authorized banks, and some others. 61   See: Ordinance of the RF Central Bank of June 4, 2012 N 138-B “On the order of submission by residents and non-residents to authorized banks of documents and information connected with performance of currency operations, order of formalizations of passports of transactions, as well as order of accounting by authorized banks of currency operations and control over performance thereof, Section 5.2. 60

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— the purchase of foreign currency from an authorized bank; and — payment for goods bought in tax free shops, and some others (see: Ar­ ticle 14, Part 3). This means that cash payments in foreign currency (except for those set forth in this exhaustive list) are prohibited within the territory of the Russian Federation. Mr. S who is a sole business, while on a business trip aboard, bought a semitrailer and paid for it in cash. A territorial department of the Federal Finance Control Service issued an order imposing a fine upon Mr. S for making a cash payment which was prohibited by the 2003 Law. Mr. S challenged this order in a state arbitration court. The trial court rejected his claim. The judgment was upheld by the appellate court and by the court of cassation. Mr. S filed a motion with the RF Supreme State Arbitration Court to review the courts’ acts in the course of supervision. The Presidium of the RF Supreme State Arbitration Court established that Mr. S had taken an amount of foreign currency in cash equivalent to $10,000 out of the Russian Federation and that he was entitled to do so according to Article 15, Part 3 of the 2003 Law. This foreign currency was taken out of the territory of the Russian Federation legally and therefore could be freely used abroad for lawful purposes. The prohibition for natural persons concerning cash currency payments (as set forth in Article 14, Part 3 of the 2003 Law) is not extended to currency operations conducted by such persons outside the Russian Federation with the use of foreign currency which was legally taken out of Russia. Thus, the currency operation performed by Mr. S could not be deemed illegal, and he therefore committed no administrative violation. Decisions issued by lower courts were quashed and the order of the territorial department of the Federal Finance Control Service was declared illegal and abo­ lished (see: the Ruling of the Presidium of the RF Supreme State Arbitration Court No 12938/05 of March 27, 2006).62 The 1992 Law had required residents to sell some portion of their foreign currency income to Russian banks. The 2003 Law substantially decreased the proportion of foreign currency income required to be sold, and as of January 1, 2007, this requirement was abolished. Nowadays purchase and sale of foreign currency in the internal currency market of the Russian Federation occurs only on a voluntary basis.

  Bulletin of the Supreme State Arbitration Court of the Russian Federation, 2006. No 7, pp. 128–131. 62

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3.3. Residents’ currency accounts in foreign banks Residents are entitled to have foreign currency accounts both in Russian and in foreign banks. Such a possibility was provided for by the 1992 and 2003 Laws. However the approaches of these two laws were different. According to the 1992 Law, in order to have an account opened in a foreign bank, a Russian resident had to obtain a special license from the Central Bank. The 2003 Law made the situation much simpler. Now residents may open accounts in foreign banks without restrictions but they are under a statutory obligation to inform the relevant tax agency within one month of the opening or closing of such an account (see: Article 12, Section 2).

3.4. Non-residents’ accounts in Russian banks Non-residents may have both foreign currency and ruble accounts in Russian banks. The procedures for establishing foreign currency accounts for residents and non-residents have been similar even when the 1992 Law was in effect. As for non-residents’ ruble accounts, their types and legal regimes were rather unusual and evolved during the period that the 1992 Law was in effect. The 2003 Law changed the situation fundamentally. According to Article 13, Section 2 of the Law, the procedure for arranging and maintaining non-residents’ accounts in Russian banks shall now, as earlier, be regulated by the Central Bank. However, the Central Bank’s Ordinance of September 14, 2006 “On opening and closing of bank accounts”63 unified the requirements for opening bank accounts for residents and non-residents. Some differences concern the documents to be submitted to banks. The following documents are needed to open a bank account for an individual: 1) his or her passport; 2) a card with the signatures of those entitled to withdraw money deposited in the account; 3) documents confirming the authority of such persons; 4) a certificate of registration with the tax agency. A non-resident (who is not a Russian national) must also submit a migration card and a residence permit (see: Section 3.2 of the Ordinance).   This Ordinance is currently replaced with the Ordinance of 30 May 2014 “On opening and closing of bank accounts, contributions accounts, deposit accounts”. 63

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In order to open a bank account for a resident legal entity the following documents are needed: 1) the state registration certificate of the legal entity; 2) its constituent documents; 3) a card with the signatures of those entitled to withdraw money deposited in the account; 4) documents confirming the authority of such persons; 5) documents confirming the powers of its Chief Executive Officer; 6) a certificate of registration with the tax agency (see: Section 4.1). A non-resident legal entity shall also submit documents confirming its legal status and state registration in its country (see: Section 4.2). To summarize, the legal norms relating to currency regulation are based upon the following principles set forth in Article 3 of the 2003 Law: “1) the priority of economic means in the conduct of state policy relating to currency regulation; 2) the elimination of unjustified interference of the state and its agencies in currency operations of residents and non-residents; 3) the uniformity of external and internal currency policy of the Russian Federation; 4) the uniformity of currency regulation and the currency control system; 5) state protection of the rights and economic interests of residents and nonresidents with respect to currency operations.”

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§ 1. Special economic zones 1.1. General provisions According to the Federal Law “On Special Economic Zones in the Russian Federation” of July 22, 2005 No 166-FZ (Российская газета, July 27, 2005), as subsequently amended, a special economic zone is a part of the territory of the Russian Federation with special rules for the conduct of business activities (see: Article 2). The Law provides for the establishment of the following types of special economic zones: 1) industrial-manufacturing zones; 2) technical-implementation zones; 3) tourism-recreational zones; 4) port zones (see: Article 4, Section 1). Special economic zones are created for development of manufacturing industry, high-technologic branches of economy, development of tourism, sanatorium-resort sphere, port and transport infrastructures, elaboration of technologies and commercialization of their results, manufacturing of new kinds of products (see: Article 3). In order to ensure achievement of these goals special economic zones of the same type or those of different types may be united into a cluster upon a decision of the RF Government (see: Article 4, Section 1-1 of the Law). Industrial-manufacturing special economic zones aim at facilitating the manufacture and/or processing of goods. 387

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Technical-implementation special economic zones aim at facilitating the creation of scientific-technical production, improvement of products for industrial use, as well as the creation of software products, data collection systems, and providing services for the implementation and maintenance of such products. Tourism-recreational special economic zones aim at facilitating the development, redevelopment and operation of tourism and recreational facilities including resorts, medical rehabilitation and leisure facilities. Port special economic zones aim at facilitating activities such as the following in seaports, river ports and airports: — the storage of goods and other services usually available in sea, river and air ports in accordance with international treaties and laws of the Russian Federation; — providing sea and river-going vessels and aircraft with necessary supplies; — construction, repairs, technical maintenance, and modernization of sea and river-going vessels and aircraft; — the processing of water biological resources; — preparing goods for sale and transport (packaging, sorting, marking etc,); — commodity exchange sales; — wholesale goods sales; — maintenance of the infrastructure of a port’s special economic zone (see: Article 10). Management of special economic zones is the responsibility of a federal body authorized by the RF Government (see: Article 7).1 It is in charge, inter alia, of maintaining a register of residents of the special economic zone (see: Article 8). This authorized body is entitled to involve a managing company, i. e. a joint stock company specifically created to ensure achievement of goals of special economic zones, all the company’s stocks are owned by the Russian Federation; or a company created with participation of the abovementioned JSC for those purposes; or other company which entered into an agreement with the authorized body on management of a special economic zone (see: Article 2(2) of the Law). A managing company’s main functions are: 1) To ensure creation and use of the zone’s infrastructure objects; 2) To involve investors into the zone; 3) To elaborate draft planning of the zone and submission thereof to the authorized body for approval (see: Article 8-1 of the Law).

  Currently it is the RF Ministry on Economic Development (see: the Decree of the President of the Russian Federation of October 5, 2009. No 1107). 1

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A special economic zone is established for a time period of 20 years, except for port economic zones which are established for a 49 year period, this period is not subject to extension (see: Article 6, Section 6). Premature termination of a special economic zone may be ordered by the RF Government only if such a measure is needed to protect the people’s life and health, environmental protection, to ensure defense of the country and state security and, in addition, if within 3 consecutive years no business activities for which the zone was established were conducted (see: Article 6, Section 7).

1.2. Residents of special economic zones Business activities in special economic zones may be conducted by those granted the status of a special economic zone resident. In order to obtain this status, a number of requirements must be met: 1) An applicant must be a Russian business, that is, either a Russian commercial organization, except for unitary enterprises2 or also a sole business, that is an individual entrepreneur (with respect to technical-implementation and tourism — recreational special economic zones). It should be noted that a “Russian commercial organization” does not necessarily mean a purely domestic company or partnership. It may also be a commercial organization with foreign investments, such as a joint venture (regardless of the shares percentage of Russian and foreign participants in its chartered capital), as well as a wholly foreign-owned subsidiary of a foreign firm. As explained earlier, both joint ventures and wholly foreign-owned subsidiaries enjoy the status of Russian legal entities based on their being located in the territory of the Russian Federation. 2) A Russian business (whether a commercial organization or an individual entre­preneur) must be registered with the tax authorities in the territory of the municipality in which the special economic zone is located. 3) A Russian business must enter into an agreement with the management body of the special economic zone with respect to the conduct of its business activities within the territory of the zone. 4) The status of resident of a special economic zone is deemed granted as of the date when the required information is listed in the register of residents of the special economic zone (see: Article 9).

  That is, state — or municipality owned enterprises.

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The Law of July 22, 2005 contains some rules relating to the conduct of business activities in special economic zones as well as rules relating to the terms and conditions of the agreement with the management body of the special economic zone. Such an agreement must be in writing and be set forth in a single document signed by both parties (Article 15);3 its validity must not exceed the period of existence of the special economic zone (see: Article 16). A resident of a special economic zone is prohibited from agreeing to assign his rights and duties to another person (see: Article 12, Section 10). A resident is not entitled to have branch and representative officer outside the territory of the zone.

1.3. Residents’ investment commitments Residents of some special economic zones (industrial-manufacturing and port economic zones) have a statutory obligation to make monetary investments under the agreement. A resident of an industrial-manufacturing special economic zone shall invest a  ruble amount equal to at least 120 million rubles provided at least 40 million rubles should be invested within 3 years after conclusion of the agreement (see: Article 12, Section 3). With respect to port special economic zones, the ruble amount to be invested by a resident depends upon a number of factors, such as the kinds of ports and port activities. 1)  If an agreement to conduct business activities in a port special economic zone provides for construction of the infrastructure of a new port, the minimum amount of ruble investment must be at last 400 million rubles for a port (be it a seaport, river port or airport) provided at least 40 million rubles should be invested within 3 years after conclusion of the agreement.   This agreement’s legal status is that of a type of civil law contract. According to a general rule in the RF Civil Code “a contract in writing may be concluded by the drawing up of a single document signed by the parties and also by means of an exchange of letters, telegrams, telexes, telefaxes and other documents including electronic documents (transmitted) by telecommunication chanales enabling it to establish reliably that the document emanates from a party to the contract.” (Article 434, Section 2). Given Article 15 of the Law of July 22, 2005, it should be noted that the second type of written contract set forth in Article 434, Section 2 of the RF Civil Code, does not apply to the type of agreement in question. 3

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2) If the agreement provides for reconstruction of the infrastructure of an existing port, 120 million rubles is required, without regard to whether it is a seaport, river port or airport provided at least 40 million rubles should be invested within 3 years after conclusion of the agreement. 3) In order to obtain a right to conduct port activities connected with storage, commodity exchange, sale and wholesale of goods, a resident of a port special economic zone must deposit a security payment of customs duties and taxes with customs authorities amounting to: a) thirty million rubles with respect to mineral raw materials or goods subject to excise tax; b) ten million rubles with respect to other goods; c) two and a half million rubles with respect to other kinds of port activities (see: Article 12, Section 3). There are also some rules in the Law of July 22, 2005 with respect to plots of land in the territory of a special economic zone and the legal aspects of their use. These rules, in brief, are as follows. 1.  Special economic zones (except port zones) may only be established on plots of land owned by the state (the Russian Federation or its subjects) and/or by municipalities as well as on plots of land owned by natural persons or legal entities (see: Article 5, Section 1). 2.  Plots of land within a special economic zone may only be made available for possession and use based upon rental contracts (see: Article 32, Section 2). 3. A resident of a special economic zone as a lessee of a state or municipal­lyowned plot of land has no right to sublet it, assign it to another person, grant its use free of charge, or pledge rental rights as a contribution to the chartered capital of companies or partnerships (see: Article 35). 4. The maximum level of rental fees for such plots of land shall be established by the federal body authorized by the RF Government (see: Article 34, Section 1).4 5. A lessee of a plot of land who constructed and became the owner of immo­ vable objects (such as buildings, structures, etc.) is entitled to buy out the land located under such objects (see: Article 32, Section 3). It is also possible to establish servitudes for certain purposes, such as: 1) construction of lines for transfer of electric energy, telecommunication lines, pipelines, aquidacts; 2)  walking, riding, carriage through a plot of land of construction materials for creation and/or exploitation of objects of the zone’s infrastructure;   Currently it is the RF Ministry on Economic Development.

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3) construction of temporary or auxiliary objects, storage of construction or other materials for creation and/or exploitation of objects of the zone’s infrastructure; 4) performance of research and other work for construction and/or exploitation of objects of the zone’s infrastructure; 5) performance of work for protection of the zone’s territory from floods (see: Article 32-1, Section 2 and 3 of the Law). A servitude may be established on the basis of an agreement between an organization in whose interests the servitude is to be established, on the one hand, and the owner (or, if the plot of land is rented — the lessee), on the other hand (see: Article 32-1, Section 5). A servitude may be temporary or permanent (see: Article 32-1 Section 6).

1.4. Residents’ privileges Residents of special economic zones enjoy some privileges related mainly to matters such as taxation and customs clearance. Work performed and services rendered by residents of a port special economic zone shall be exempt, within the zone, from payment of VAT (see: Article 149, Section 3, Subsection 27 of the Tax Code). Goods otherwise subject to excise tax shall be exempt from this tax when they are located within a port special economic zone (see: Article 183, Section 1, Subsection 4 and Article 184, Section 1 of the Tax Code). Organizations — residents of special economic zones, with regard to their property specifically created or acquired for performance of activity within the territory of the zone, shall be exempt from organizations’ property tax during ten years from the month next to the month of entry of the property into the organization’s balance sheet (see: Article 381 (17) of the Tax Code). The Law of July 22, 2005 provides for a customs procedure of free customs zone in the territories of industrial-manufacturing, technical-implementation and port special economic zones.5 This means that foreign goods located and used in a special economic zone shall not be subject to customs duties and VAT. Russian goods shall be located and used on conditions applicable to the export customs procedure with payment of excise tax (except goods located witin a port special   This customs procedure shall not apply within tourist recreational special economic zones (see: Article 36, Section 2). 5

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economic zone) and without payment of export customs duties (see: Article  37, Section 1). Goods may be placed by residents of a special economic zone under a customs procedure of free customs zone for performance by residents of industrial-manufacturing, technical-implementation or port activity in accordance with an agreement on performance of activity in the territory of the zone (see: Article 37, Section 8). This agreement determines the contents of this custom’s procedure and conditions of placement of goods under this customs procedure (see: Article 37, Section 1). There is also a rule (known as a “grandfather clause”) according to which residents of special economic zones shall enjoy immunity from any increase of fede­ ral, regional or local taxes (except excise taxes) within the period of validity of the agreement to conduct business activities (Article 38).

1.5. “Skolkovo” innovation Centre and some peculiarities of its legal regime The “Skolkovo” Innovation Centre is specifically designated to facilitate further modernization of the Russian economy. It is expected to create advanced technologies which may be used in both domestic and foreign markets to enrich Russia’s export potential. The Centre’s activities will be based upon cooperation between State and business entities. Accordingly, they should be financed both from the state treasury and from private sources. Both Russian and foreign scientists are expected to be attracted to work in the Centre. In keeping with these ideas, the Federal Law of September 28, 2010. No 244-FZ “On Skolkovo” Innovation Centre” provides, inter alia, that scientific-research activities of the Centre will be focused on the following principal areas: 1) energy effectiveness and energy saving, including elaboration of innovative energy technologies; 2) cosmic technologies, primarily in the areas of telecommunication and navigational systems, including the creation of related land-based infrastructure; 3) medical technologies, leading to the creation of equipment and medicines; 4) strategic and computer technologies and related software support (see: Ar­ ticle 10, Section 8). In order to provide scientists engaged in the Centre’s activities with ample opportunity to concentrate on their professional functions, a special management company is being formed. This company, a Russian legal entity, is charged with ensuring 393

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the functioning of the Centre. It will be financed both from its own resources and from the federal treasury (see: Article 5). The Centre’s projects will be carried out by project participants, Russian legal entities specifically created to carry out scientific activities in the Centre. It should be noted that “Russian legal entities” include both purely domestic companies and also those with foreign investments, since the latter, once established in the territory of the Russian Federation, will enjoy the status of Russian legal entities. Russian project participants may also involve foreign businesses on a contractual basis. In order to create favorable financial conditions to encourage scientific activities of project participants, participants are exempt from the payment of some taxes, such as VAT, organizations’ profit tax, organizations’ property tax and land tax (see: Article 9 of the Federal Law of September 28, 2010 No 243-FZ “On introducing amendments in some legislative acts of the Russian Federation in connection with adoption of the Federal Law “On Skolkovo’ Innovation Centre.” In addition, the project participants are granted some privileges concerning customs duties. First, payment of such duties will be handled by the management company as a customs broker, and second, amounts of these duties will be reimbursed to the management company out of the treasury (see: Article 11 of the Federal Law No 244-FZ). In order to stimulate involvement of foreign nationals in the Centre’s activities, the Law No 243-FZ (Article 16) provides that: 1)  an employer will not be required to obtain a permit from the Federal migration service to recruit foreign employees (although, as a general rule, such a permit is required; see infra, Chapter 9 of this book); 2) while foreign nationals are generally employed in Russia within quotas established by the RF government, this restriction is not applicable to those wor­king at “the “Skolkovo” Innovation Centre”; and 3) invitations to foreign nationals to work in “Skolkovo” will be sent via the management company, thereby relieving project participants from direct involvement in procedural requirements.

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§ 2. Production-Sharing agreements 2.1. Entering into the agreement Relationships concerning investments in this area are regulated by the Federal Law “On Production-Sharing Agreements” of December 30, 1995 No 225-FZ (Российская газета, January 11, 1996), as subsequently amended. According to this Law, such an agreement is a contract whereby the Russian Federation grants an investor, for consideration, an exclusive right to search, explore, dig mineral raw materials and work on a plot of subsoil at the investor’s expense and risk for a certain period of time as set forth in the agreement (see: Article 2, Section 1). The conclusion of such an agreement requires certain preconditions to have been met: 1) Lists of plots of subsoil that may be granted for use under production-sharing agreements shall be set forth in federal laws, drafted with due consideration of opi­nions of the RF Government and decisions of legislative bodies of subjects of the Russian Federation in the territories in which these plots of subsoil are located; 2) A plot of subsoil may be included in this list if it is impossible to conduct a geological examination and explore and extract its mineral resources based on conditions of use of the subsoil set by Russian law except through production-sharing agreements. Such an impossibility should be evidenced in the following way: a) by announcing an auction to grant the right to use a plot of subsoil on conditions other than through production-sharing; b) by the failure of such an auction due to the absence of bidders (see: Ar­ ticle 2); and 3) by announcing a new auction to grant the right to use the plot of subsoil on the basis of production-sharing. A production-sharing agreement shall be concluded with the winner of such an auction (see: Article 6, Section 1).

2.2. Parties to the agreement The parties to the agreement will be: 1) the Russian Federation, as represented by the RF Government or an agency authorized by it; 2) investors, legal entities and associations, created contractually to carry out joint activities. Such associations will not have the status of legal entities. Their participants shall have joint and several rights and liabilities based 395

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upon the agreement (see: Article 3).6 As it appears from this norm, investors may be both Russian and foreign legal entities. According to a mandatory provision of the Law, an investor shall have the status of a legal entity. This means that a sole business (that is, an individual registered as an entrepreneur) may not be an investor as a party to a production-sharing agreement, although an investor may involve such an individual on a contractual basis, e.  g. a manufacturer of technological equipment (or parts thereof) to be used in carrying out work under the agreement (see Article 7, Section 2, paragraph 4). However, Article 16 of the Law expressly provides that an investor is entitled to transfer his rights and obligations under the agreement (in whole or in part) to a legal entity or to an individual (whether Russian or foreign) with the consent of the Russian Federation, provided that such persons have sufficient financial and technical resources and management experience to perform the work under the agreement. Such a transfer of rights and obligations shall be made in writing and be accompanied with a redrafting of the license with respect to use of the subsoil. A production-sharing agreement shall contain some terms and conditions set by mandatory norms of the Law, such as: 1) Russian legal entities shall be granted a priority right to be involved in work under the agreement as contractors, suppliers, carriers, etc., based on contracts with investors; 2) Russian employees shall constitute at least 80% of the workforce;7 3)  at least 70% of the technological equipment, appliances and materials needed for geological examination, extraction, transportation and processing of mineral resources shall be of Russian origin, that is they shall be manufactured by Russian legal entities or sole businesses in Russian territory from components produced in Russia by Russian manufacturers, the aggregate value of those components, shall be at least 50% of the entire value of such components used in the performance of the agreement;8   This provision is in line with norms relating to a simple partnership as set forth in the RF Civil Code. According to Article 1041 “under the contract of simple partnership (a contract of joint activity) two or several persons (partners) undertake to combine their contributions and jointly operate without formation of a legal entity in order to derive profit or achieve another purpose which is not contrary to law.” (Section 1) It is further provided that “if the contract of simple partnership is linked to the conduct of business activity by its participants, the partners shall be jointly and severally liable for all common obligations without regard to the basis on which they arose.” (Article 1047, Section 2) 7   See in detail: J. Rat. Соглашения о разделе продукции [Production  —Sharing Agreements]. Moscow, 2008, pp. 116–119. 8   Since the Russian Federation joined the World Trade Organization (WTO), rules of the Law which conflict with WTO principles shall become invalid until brought into compliance with its principles (see: Article 7, Section 2, Paragraph 11 of the Law). 6

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4)  investors shall take measures to prevent detrimental effects of the work upon the environment and to compensate for consequences of such effects, inclu­ ding through providing liability insurance for losses; 5)  organization of work under the agreement shall be undertaken by the investor or, on his commission, by an operator under agreement, whether by a Russian or foreign legal entity for whose activities the investor shall be as liable as for his own activities (see: Article 7).

2.3. Use of subsoil and distribution of mineral resources There are special rules concerning use of subsoil plots under a production-sha­ring agreement. An investor’s right to use a subsoil plot shall be evidenced by a license issued in accordance with Russian legislation on the subsoil (see: Article 4, Section 2 of the Law “On Share Production Agreements”).9 According to the Law “On Subsoil” of February 21, 1992 (as subsequently amended), a license shall specify, inter alia: a) information on the use of the subsoil and the body which issued the license;10 b) boundaries of the subsoil plot granted for use; c)  boundaries of the plot of land or water area designated for carrying out work related to use of the subsoil; d)  measures to comply with statutory requirements on the subsoil and environmental protection and workers’ safety (see: Article 12 of the Law on Subsoil). Mineral resources extracted during performance of the agreement shall be distributed between the state and the investor in accordance with Article 8 of the Law of 30th December 1995. This Article provides for alternative methods of distribution. The first alternative requires that the entire volume of extracted mineral resour­ ces be divided into two parts:   In case a simple partnership (i. e. an association of legal entities which association itself does not enjoy the status of a legal entity) acts as an investor, a license shall be granted to one of the participants of such a partnership with a notation in the license that this participant acts on behalf of the partnership and all the partners shall be named in the license (see: Article 4, Section 2). 10   Currently, given the structure of federal bodies of executive power approved by the Decree of the President of the Russian Federation of May 12, 2008 No 72, these functions are within the competence of the Federal Agency on use of the subsoil (which is subordinated to the RF Ministry of Natural Resources). A plot of subsoil shall be granted as a geometrized block of subsoil (see: the Law on Subsoil, Article 7). 9

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1) compensatory production is that part of production which the investor will own. It is 75% of the entire volume of production, except that it is 90% with respect to mineral resources extracted from the continental shelf of the Russian Federation, and 2)  profit bearing production, which consists of two parts: a) a share of the production, the value of which shall be paid by the investor as a federal tax on extraction of mineral resources; b) the residue (or its monetary equivalent, as may be set forth in the agreement), to be divided between the investor and the state, according to the production-sharing agreement (see: Article 8, Section 1). The part of the production which is due the state is then distributed between the Russian Federation and the subject in the territory of which the plot of the subsoil is located. However, profits derived from mineral resources extracted from the seabed shall be transferred to the federal treasury (see: Article 10, Section 1 of the Law). The second alternative differs to the extent that the investor’s share shall not exceed 68% of the entire volume of the extracted mineral resources; the remainder (whether in money or in kind will depend upon the terms and conditions of the agreement) will be transferred to the state (see: Article 8, Section 2). The agreement may provide for either (but only one) of these alternatives; no change of one alternative to another is permitted (see: Article 8, Section 3). Regardless of which alternative of production-sharing is selected, an investor shall pay the state: 1) a bonus (that is, a single payment for use of the subsoil); 2) a fee for geological information on the subsoil; 3) an annual fee for the agreed water area and seabed plots; 4) a duty for participation in an auction; 5) a duty for issuance of the license; 6) rental payments (that is, regular payments for use of the subsoil); 7) compensation for state expenses for search and exploration of mineral resources; 8)  compensation for losses caused by work conducted under the agreement to local population at the places of their traditional residence and economic activities. 9) the amounts and terms of payments shall be set forth in the agreement (see: Article 13, Section 2).

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2.4. Taxation issues The investor11 shall also pay taxes in accordance with the RF Tax Code. The Code contains a special Chapter 26-4 “System of Taxation with Respect to Performance of Production-Sharing Agreements.” This chapter sets forth two types of taxes to be paid by the investor depending upon the system of distribution of production between the state and the investor which they have selected. If the production-sharing agreement provides for the alternative specified in Section 1 of Article 8 of the Law of December 30, 1995 (see supra, Section 2.3 of this § 2), the following taxes must be paid: — value added tax; —  organizations’ profit tax; — uniform social tax,12 — tax on extraction of mineral resources; — payments for use of natural resources; — payment for a negative impact on the environment; — water tax; — state duty; — customs duties; — land tax; and — excise tax, excepting the tax on mineral raw materials (see: Article 346_35, Section 7, Paragraphs 1 and 2 of the Tax Code).13 The investor shall be exempt from payment of regional and local taxes and duties based on a decision of a representative body of a subject of the Russian Federation or municipality (see: Article 346_35, Section 7, Paragraph 3 of the Tax Code).14 The investor shall also be exempt from payment of transport tax with respect to transport vehicles (except limousines) which he owns and uses solely for performance of the production-sharing agreement (see: Article 346_35, Section 7, Paragraph 7 of the Tax Code).   Or, upon his commission, the agreement operator, whose commission shall be evidenced by a notarized power of attorney (see: Article 346_36, Section 2 of the Tax Code). 12   This tax has been abolished as of January 1, 2010 (see: the Federal Law of July 24, 2009 213-FZ). 13   Amounts paid by the investor for VAT, payments for use of natural resources, water tax, state duty, customs duties, land tax, excise tax as well as payment for a negative impact on the environment are subject to return (see: Article 346_35 (Section 7, Paragraph 4) of the Tax Code). 14   If there is no such decision at the regional or local level, the investor’s expenses for payment of such taxes and duties shall be compensated by a decrease of the share of profit bearing production due the state with respect to that part to be transferred to the relevant subject of the Russian Federation (see: Article 346_35, Section 14 of the Tax Code). 11

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If the parties to the production-sharing agreement have chosen the alternative described in Section 2 of Article 8 of the Law of 30th December 1995, the taxes to be paid are: — uniform social tax;15 — state duty; — customs duties,16 — value added tax; — payment for negative impact on the environment (see: Article 346_35, Section 8, Paragraphs 1 and 2 of the Tax Code). The investor shall be exempt from payment of regional and local taxes based on a decision of the relevant regional (or local) representative body (see: Article 346_35, Section 8, Paragraph 3 of the Tax Code).

2.5. Measures to ensure stability of the agreement The Law of December 30, 1995 contains some rules specifically intended to ensure the stability of the terms and conditions of a production-sharing agreement and to secure the investor’s rights and commercial results of his activities, such as: 1) an investor shall enjoy immunity from application of federal, regional and local normative legal acts introducing restrictions on the investor’s rights under the agreement except for orders issued by supervisory agencies to provide safe working conditions, protection of the subsoil and environment, and the health of the population, as well as state security (see: Article 18, Section 2); 2) in the event of new federal or regional laws or local legal acts which decrease the commercial results of the investor’s activities under the agreement, amendments shall be introduced into the agreement to ensure the originally expected commercial results of the investor’s activities (see: Article 17, section 2). A production-sharing agreement is a mixed civil law contract that includes elements both of independent work and (to some extent) of a lease.17 Elements of   This tax has been abolished as of January 1, 2010 (see supra, Chapter 6, § 1, Section 1.2, Subsection 1.2.5). 16   Goods imported into the customs territory of the Russian Federation for the carrying out of work under the production-sharing agreement, as well as mineral resources extracted under the agreement and exported from the customs territory of the Russian Federation shall be exempt from customs duties (see: Article 346_35, Section 9 of the Tax Code). 17   As mentioned supra (see: Chapter 3, § 1, Section 1.2, Subsection 1.1), the RF Civil Code states that the parties may conclude a contract which contains elements of various contracts provided for by a law or other legal act (mixed contracts). The rules of contracts, the elements of 15

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independent work include the investor’s obligation to carry out work, at its own risk, related to search, exploration and extraction of mineral resources at the subsoil plot. An investor’s right to use subsoil plots, without holding ownership title to them, and requiring return of the plots of territory which were given to him to use, are characteristic of a lease. The fact that the state is a party to an agreement with an investor does not eliminate the civil law nature of the contractual relationship. The state is entitled to participate in civil law relationships. According to Article 124 of the RF Civil Code, the Russian Federation, its subjects and municipalities “shall act in relationships regulated by civil legislation on an equal basis with other participants  — citizens and legal entities” in these relationships (see: Section 1). Unless it arises otherwise from a law or the nature of such subjects, the norms determining the participation of legal entities in relationships regulated by civil legislation shall apply to the Russian Federation, its subjects and municipalities (see: Section 2). In line with these rules, the Law of December 30, 1995 provides that the conditions of the production-sharing agreement shall remain valid for the entire period of the agreement which may be amended either upon the mutual consent of both parties or — upon a demand of one of them — in case of a fundamental change of circumstances in accordance with norms of the Civil Code of the Russian Federation (see: Article 17, Section 1). While the Law of December 30, 1995 does not explain the meaning of the phrase “fundamental change of circumstances,” the Civil Code does. “A change of circumstances shall be deemed to be fundamental when they have changed so that if the parties could reasonably have foreseen it, they would not have entered into the contract or it would have been concluded on significantly different terms.” (Article 451, Section 1, Paragraph 2) It is also specifically provided in the Law of December 30, 1995 that liability of the parties to the production-sharing agreement for breach of their contractual obligations shall be based on civil law norms (see: Article 20, Section 1). In the event a dispute arises between the state and an investor, the dispute may be submitted to a court of law or, if the parties so agreed, to an arbitral tribunal. This may be either a Russian or a foreign tribunal (see: Article 22).

which are contained in a mixed contract, shall apply to the relations of the parties under a mixed contract, unless an agreement of the parties or the character of the mixed contract indicates otherwise. (See: Article 421, Section 3) 401

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§ 3. Foreigners’ rights to property located in Russia 3.1. Movable and immovable property The RF Civil Code distinguishes two types of property: movable and immovable property. What is not defined as immovable property is considered to be movable property. The main differences between movable and immovable property relate to the procedure of acquiring and disposing of them. Movables are freely available in the market (except those subject to special restrictions, such as weapons and certain medicines). The circulation of immovables in the market, while permissible, is more complicated, so it is worthwhile to examine this in some detail. One group of immovable property includes property which is physically immovable, that is, “property whose movement is impossible without incommensurate damage to its purpose,” such as plots of land, subsoil plots, solitary water objects (such as lakes and ponds), buildings, and structures (see: Article 130, Section 1, paragraph 1). Another group originally includes sea and river-going vessels, aircraft, and space objects, such as satellites and space ships (see: id., Paragraph 2 in original version).18 These two groups of things which the law declares to be immovables are substantially different one from another. Indeed, if the first group consists of property which cannot be moved physically (at least without substantial damage), the second group, on the contrary, includes property specifically designed for movement. The only explanation for relegating both groups to the category of immovables apparently is the fact that property included in both groups is subject to state re­ gistration. However, the public agencies in charge of registration and its procedures differ for each of the two groups (see infra, Section 3.2 of this § 3). The same Article also provides that “other property also may be relegated by law to immovable things.”   It is useful to note that, in light of the Concept of development of civil legislation of the Russian Federation it was suggested that these items apparently will be excluded from the list of immovables (see: the Concept, Section 3.3). Meanwhile currently (in accordance with the amended version of the RF Civil Code) rules on immovables shall appy to aircraft, sea and river-going vessels, and space objects unless otherwise provided by law and does not follow from the essence of those civil rights objects (see: Article 130, Section 3). Therefore above-mentioned objects effectively remain in the list of immovables. 18

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According to Section 2, Paragraph 1 of this Article a status of an immovable thing is attributed to a complex of buildings, constructions and other similar objects inseparably connected physically or technologically (such as liner objects — railways, lines of electric transmission, pipelines, etc.). Paragraph 2 of this Section provides that a plot of land and a building located on it, owned by the same person, shall be deemed a single immovable object.

3.2. State registration of immovables Rights in rem19 (such as, inter alia, ownership title and servitudes),20 the right of operative administration of property,21 encumbrances to these rights,22 and their origin, transfer and termination are subject to state registration (see: Article 131, Section 1 of the Civil Code). “Physical immovables,” such as plots of land and subsoil, solitary water objects, buildings, structures, etc., their related rights and encumbrances, must be registered with the Federal Registration Service and its local agencies.23 The procedure for state registration and its legal consequences are briefly described in the Civil Code and   The concept “rights in rem” (вещные права in Russian, Sachenrecht in German) means the most stable rights (such as ownership title, servitudes, etc.). A right in rem provides its holder with a direct command over a thing. A right in rem encumbers a piece of property and survives when the ownership title to it passes to another person (see: Article 221 of the Civil Code). 20   A servitude is a right of limited use of a neighbor’s plot of land. It may be established by contract between the person requiring establishment of the servitude and the owner of the neighboring plot of land or by a court judgment (see: Article 301, Section 4 of the Civil Code). A servitude may be established in order to ensure passage through a neighbor’s plot of land, the laying and operation of transmission and communication lines and pipelines, ensuring a water supply and land improvement by drainage, and other needs of the owner of the immovable property which cannot be met without establishing a servitude (see: Articles 3016-30110 of the Civil Code). More details concerning servitudes are contained in the Land Code (see: Article 23). 21   The right of operative administration belongs to a state or municipal unitary enterprise which may possess, use and dispose of the property within the limits established by law, in accordance with goals of its activity, instructions of the owner of this property and designation of this property (see: Articles 133, 306 of the Civil Code). An enterprise is not entitled to dispose of immovable property without the consent of the owner (see: Article 3063, Section 1 of the Civil Code). The right of operative administration also belongs to an institution, i. e. a non-commercial organization which may be both state and privately owned, whose owner shall bear subsidiary liability for the obligations of the institution (see: Articles 120, 1201, 1202,306 of the Civil Code). 22   Such as, lease, mortgage, arrest, etc. 23   See: Regulations of the Federal Registration Service approved by the Decision of the Government of the Russian Federation of June 12, 2008. No 451. 19

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in more detail in the Federal Law “On State Registration of Rights to Immovable Property and Transactions therewith” of July 21, 1997 No 122-FZ. According to the Civil Code, “the right of ownership to an immovable thing shall arise at the time of state registration unless otherwise provided by law.” (Ar­ticle 243, Section 1)24 And (as concerns related transactions): “A contract subject to state registration shall be considered to be concluded at the time of its registration, unless otherwise provided by law.”25 (Article 433, Section 3). These provisions are further developed in the Federal Law “On State Registration of Rights to Immovable Property and Transactions therewith.” This Law provides, inter alia, that “state registration shall be the only evidence of existence of the registered right. The registered right to immovable property may only be challenged in court.” (Article 2, Section 1, Paragraph 2) According to the Decree of the President of the Russian Federation of December 25, 2008. No 1847, this Service was renamed the Federal State Registration, Cadastre and Cartography Service. It is now subordinated to the Ministry of Economic Development of the Russian Federation. 24   This is none other than a manifestation of a general rule stating that in the instances provided by law, civil law rights, restrictions thereof and encumbrances of property shall be subject to state registration (see: Article 81, Section 1 of the Civil Code introduced by the Federal Law of December 30, 2012 N 302-FZ) and such rights shall be deemed arisen, changed or terminated from the moment of introducing of relevant entry into the State Register unless otherwise established by law (see: Article 81, Section 2 of the Civil Code). It is also ascertained that entry in the State Register shall be introduced provided the relevant applications of all persons concluded the transaction are in place. However, if a transaction is notarized, entry in the State Register may be introduced upon application of any party to the transaction. In such a situation the entry may also be introduced in the State Register via a notary (see: Article 81, Section 4, Paragraph 2). A registered right may be challenged only in court. A person indicated as a right holder in the State Register shall be deemed as such until other entry is introduced in the State Register (see: Article 81, Section 6 of the Civil Code). A previous registered right holder may initiate introducing an entry on his objection in the State Register. If this person refrains from challenging the registered right in court within 3 month period from the date of introduction of the entry in the State Register the entry on his objection shall be nullified; repeated introduction of such entry is prohibited to him. A person challenging a registered right in court may require introducing of entry on existence of legal dispute with regard to this right (see: Article 81, Section 7 of the Civil Code). 25   State registration is required by law with respect to contracts such as, a contract for sale of residential real estate (i. e. a dwelling house, or part of it, or an apartment), an enterprise as a property complex (see: Articles 558, Section 2 and Article 560, Section 3 of the Civil Code), and a contract for lease of a building or installation concluded for a period of not less than one year (see: Article 651, Section 2 of the Civil Code). 404

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Rights to immovable property, and transactions with respect to it, shall be re­ gistered in the Unified State Register of Rights. The Register shall be maintained by the Federal State Registration, Cadastre and Cartography Service and shall contain information on existing and terminated rights to immovable property, data concer­ ning it and information on titleholders (see: Article 12, Sections 1 and 2). State registration of the origin and transfer of rights to immovable property shall be verified by a certificate of state registration of rights. State registration of cont­ racts and other transactions shall be verified by special notation on the documents indicating the contents of the transaction (see: Article 14, Section 1).26 State registration of rights to immovables, their encumbrances and relevant transactions are subject to payment of a state duty (see: Article 11, Section 1 of the Law).27 State registration of rights, as well as of contracts with respect to alienation of immovable property, shall occur within one month from the date of submission of an application together with the required documents (see: Article 13, Section 3).28 State registration of rights to immovable objects may be refused in some circumstances, such as: — if the application for state registration is submitted by an unauthorized person; — if the relevant documents are not in compliance with current law; or — if there are inconsistencies between the rights applied for and those already registered.29 (See: Article 20 of the Law of July 21,1997. No 122-FZ.) 26   If a party to the contract fails to register transfer of the ownership title, such a transfer must be registered in accordance with a court judgment issued upon a claim of another party (see: Article 165, Section 3 of the Civil Code; Article 16, Section 1, Paragraph 3 of the Law of July 21, 1997 No 122-FZ). 27   The amount of state duty is 1,000 rubles for individuals and 15,000 rubles for organizations. With respect to rights to an enterprise as a property complex, encumbrances thereof, and related transactions, state duty will be 0.1% of the value of the relevant property but not more than 60,000 rubles (see: Article 333_33, Section 1 (21, 22) of the Tax Code). 28   State registration may be suspended by the state registrar: — upon his own initiative if he has doubts concerning the reasons for state registration of rights or the genuineness of the required documents or the truthfulness of information contained therein. In such a case the ultimate period for suspension is one month; — upon a written request of the titleholder, the party or parties to the contract, in which case the term of suspension is not more than 3 months (see: Article 19, Sections 1-3). 29   See in detail: V.A. Alexeev. Недвижимое имущество. Государственная регистрация и проблемы правового регулирования [Immovable Property. State Registration and Problems of Legal Regulation]. Moscow, 2007, pp. 240-272.

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A refusal of state registration may be challenged in court (see: Article 2, Section 5 of the Law). The Law of July 21, 1997 No 122-FZ shall not apply to state registration of rights in rem, encumbrances and related transactions concerning sea-going vessels, vessels of inland navigation, aircraft and space objects (see: Article 4, Section 1). With regard to sea-going vessels, state registration is within the competence of a harbor master (see: Articles 35, 76 of the Merchant Shipping Code) who is in charge, inter alia, of maintaining a State Ships Register, Ships book, Bare-Boat Charter Re­ gister and Russian International Register of Ships.30 It is specifically stated in the Merchant Shipping Code that state registration of the ownership title and other rights in rem to a vessel, as well as encumbrances of those rights, shall be deemed the only evidence of the existence of registered rights and may be challenged only in court (see: Article 33, Section 3). Vessels of inland navigation, ownership title and other rights in rem as well as encumbrances and related transactions must be registered in the State Ship’s Register of the Russian Federation which is maintained by state river basin navigation inspectorates and, in relation to vessels of mixed (river-sea) navigation, by river estuary or sea-harbor masters (see: Articles 17-19 of the RF Inland Water Transport Code). A  bare-boat chartered foreign vessel granted the temporary right to fly the Russian flag shall be registered in the Register of rented vessels (see: Article 19, Section 11 and Article 23, Section 8 of the Code). Civil aircraft and rights in rem, encumbrances as well as related transactions, shall be registered in the State Civil Aircraft Register (see: Article 33 of the RF Air Code).31

3.3. Foreigners rights to immovable property in Russia Rights to real estate located in Russia (including ownership title and other rights in rem) are available, generally speaking, both to foreign and Russian individuals and legal entities, as well as to stateless persons. The Law of July 21, 1997 No  122‑FZ expressly provides that ownership title and other rights to immovables which are subject to state registration may belong to “nationals of the Russian Federation, fo­   Distribution of state registration among these Registers depends upon the designation of vessels, their main engine power, and, in relation to non-self propelled vessels, their gross tonnage (see: Article 23, Section 2 and Article 33, Sections 5-7 of the Merchant Shipping Code). 31   There is also the Federal Law of March 14, 2009 No 31-FZ “On State Registration of Rights to Aircraft and Transactions therewith” (Российская газета, March 17, 2009). 30

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reign nationals and stateless persons,32 Russian and foreign legal entities, international organizations, foreign states, the Russian Federation, and subjects of the Russian Fe­deration and municipalities.” (Article 5) There are, however, some specific regulations concerning rights of foreign nationals, stateless persons and foreign legal entities to plots of land. For example, they may not obtain ownership title to plots of land located close to the state border or in other territories with special regimes established by federal law (see: Article 15, Section 3 of the Land Code).33 It should also he noted that foreign nationals, stateless persons, and foreign legal entities, as well as Russian legal entities in which the foreign share of the chartered capital exceeds 50%, may not own plots of agricultural lands; they may only rent such plots (see: Article 3 of the Federal Law “On Turnover of Lands of Agricultural Designation” of July 24, 2002 № 101-FZ, Российская газета, July 27, 2002) (as subsequently amended). This Law also establishes certain rules for a situation where for some legal reason or other (for example, as a result of a change of share percentages in the legal entity’s chartered capital in favor of foreign investors) a Russian legal entity becomes the owner of (or, more precisely, retains the ownership title to) a plot of agricultural land. This plot of land is then subject to alienation within one year from the date of origin of the situation in question.

  There are Methodical recommendations on peculiarities of state registration of rights of foreign nationals, stateless persons and foreign legal entities to immovable property and transactions as approved by the Order of the Federal Registration Service of May 16, 2007 No 82. It provides, inter alia, that when an application for state registration is submitted by a foreign national or stateless person, it is recommended that the registration agency establish that the applicant legally entered the territory of the Russian Federation, which may be confirmed with a valid residence permit, a temporary residence permit or a visa (see: Section 7). Norms of both the Law and Methodical recommendations are only applicable to real estate which is physically immovable. With respect to, e. g., sea-going vessels, there is no prohibition for their alienation to foreign nationals, stateless persons or foreign legal entities. However in such a situation the vessel shall lose the right to fly the Russian flag since this right may only belong to vessels owned by Russian nationals, Russian legal entities, the Russian Federation, and subjects of the Russian Federation and municipalities (see: Article 15 of the Merchant Shipping Code). However, if a vessel (after its acquisition by a foreign or stateless person) is bare-boat chartered to a Russian person, such a vessel may be granted a temporary right to fly the Russian flag (see: Article 15, Section 2 and 3 of the Code). 33   The list of such territories is approved by the Decree of the President of the Russian Federation of January 9, 2011, No 26. 32

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If the plot of agricultural land is alienated to a subject of the Russian Federation or to a municipality, the ex-owner enjoys a priority right to rent this plot of land. If the plot of agricultural land has not been alienated within a year, the relevant agency of the Federal Registration Service shall notify the state body of the subject of the Russian Federation in writing within 10 days. Within one month the latter shall then sue the owner in court for compulsory public sale of the plot of land. If no one is willing to buy the plot of land, it shall be bought by the subject of the Russian Federation, or, when provided for by its law, by the relevant municipality, for the market value of the land as established in the locality (see: Article 5).

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The typical foreign trade transaction is an international sale of goods which, in the course of its performance, is usually accompanied by a number of other transactions aimed, inter alia, to ensure transportation of the goods from a seller to a buyer (such as shipment, delivery, and carriage contracts), protection of a seller and a buyer against risk of damage to the goods or their accidental loss (including insurance contracts), and payment for the goods through, for example, credit contracts and currency operations. Attention will later be focused principally on issues relating to conclusion and performance of a contract for the international sale of goods including some materials, as needed, concerning other obligations arising in the course of international trade. The procedure of entering into a contract for the international sale of goods, rights and liabilities of the parties, as well as the legal means of protecting the interests of the parties are set forth in detail in the 1980 United Nations Convention “On Contracts for the International Sale of Goods” (CSIG).

§ 1. An offer 1.1. General indicia In order to conclude any contract, including a sale-purchase contract (in both domestic and foreign markets), both an offer and an acceptance are needed. The requirements that an offer must meet are set forth in Article 14 of the Convention which states: “(1) A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of 409

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the offeror to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price. (2) A proposal other than one addressed to one or more specific persons shall be considered merely as an invitation to make offers, unless the contrary is clearly indicated by the person making the proposal.” The following features of an offer appear from the quoted text: 1. As a general rule, a proposal must be directed to a specific addressee. 2. If it is addressed to an indefinite group of persons (such as an advertisement published in the mass media), a proposal in principle shall be deemed an invitation to make an offer, and it may qualify as an offer only if there is an express provision in the proposal to that effect. Such a qualification was apparently included in the Convention under the influence of Anglo-American case law. In a British case, a court considered a newspaper advertisement of a medicine against influenza to be an offer. This advertisement was accompanied with a promise of the manufacturer to pay £ 100 to anyone who fell ill with influenza within two weeks in spite of taking the medicine according to the instructions. The publication also included a reference to the bank where £ 1000 had been deposited to meet eventual payments. In the opinion of the judge, it was the latter detail that gave the proposal the character of an offer which the customer, who strictly followed the conditions des­ cribed in the publication, had accepted. The court granted the customer’s claim for payment of £100.1   See: G. Bowden, A. Morris. An Introduction to the Law of Contract and Tort. London, 1978. P. 14–15. It is useful to note that the RF Civil Code makes a distinction between an invitation to make an offer, on the one hand, and a public offer, on the other (see: Article 437). The background of this approach is as follows: If a proposal (not being to a specific addressee) is made in such a way that an indefinite number of positive answers may come at the same time (the typical example is an advertisement published in a newspaper), it should be deemed an invitation to make offers rather than an offer in the strict meaning of the concept. If, however, a proposal is made in such a way that it may only be accepted by one person such as an auction where there are numerous participants but only the highest bidder can become the winner (and, accordingly, the buyer) then it should be deemed a public offer. However, currently a newspaper advertisement, under some conditions, may be recognized as an offer. Section 1 of Article 437 of the RF Civil Code provides: “An advertisement and other 1

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3. A proposal must contain the material conditions of a sale-purchase contract, that is, a subject (the goods) and a price. The Convention provides three methods of determining both the quantity and the price of goods; these conditions may be stated directly, indirectly, or by indicating the procedure to establish them.

1.2. Quantity of goods With respect to the goods, the first method (direct fixation) means that the quantity of the goods is indicated by some number of measurement units (tons, bags, boxes, etc.). The second method (indirect determination) may include a condition such as a buyer seeking to purchase the entire stock of goods available at the seller’s warehouse. The third method (a description of the procedure of specifying the quantity of goods) may be used where the criteria for the exact quantity of goods will be specified at a later time. For example: a buyer undertakes to purchase not less than 10,000 tons and not more than 20,000 tons; the exact quantity of the goods to be delivered will be indicated within one month from the date of entering into the contract. While the first method is the most definite, there are still a number of factors to be considered in order to avoid potential misunderstandings and disputes. For example, one and the same measurement unit may be different in different countries: the weight of a bag of coffee in Brazil is 60 kg, while in Haiti it is 84 kg. So if the quantity of goods is provided in a unit such as a sack, box, or bale, both the gross and net weight of the unit will need to be specified. proposals addressed to an indefinite group of persons shall be regarded as invitations to make offers unless expressly specified otherwise in the proposal” (emphasis added). A general description of an offer as set forth in Article 435, Section 1 of the RF Civil Code states: “a proposal addressed to one or several specific persons, which is sufficiently definite and expresses the intention of the person who made the proposal to consider himself to have concluded a contract with the addressee who will accept the proposal, shall be deemed to be an offer.” This provision, in conjunction with that of Section 1 of Article 437 of the RF Civil Code clearly shows that the concept of an offer as set forth in the RF Civil Code is quite similar to that of Article 14 of the 1980 Convention. It is strong evidence both: 1) that the 1980 Convention plainly shows a compromise between different legal systems and that it was drafted under the influence of both Continental-European statutory law and Anglo-American case law, and 2) that the Convention, in turn, produced a substantial influence on the further development of national legal systems, including that of Russian civil law. 411

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Even such a well-known unit of measurement as a ton requires greater specificity. A metric ton is 1,000 kg, an American (short) ton is 907 kg, and an English (long) ton is 1,016 kg. Given these differences, it would seem to make sense to agree to interpret “ton” to be a metric ton. It may (and from time to time does) happen that a quantity of goods is stated to be “about” a certain number of measurement units. This means that the actual quantity of the goods to be delivered may deviate to some extent from the figure set forth in the contract. In such a situation two steps may be recommended to prevent a  future dispute: 1) fixing limits of deviation in the contract (for example, ±1,5%);2 and 2) agreeing whether the seller or the buyer shall enjoy the right of final determination of the quantity of goods to be delivered.3

1.3. Quality of goods The quality of goods, as well as their quantity, is also a matter of substance. General provisions with respect to quality of goods are set forth in Article 35 of the Convention: “(1) The seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract.   If for some reason the parties fail to specify such limits, in the event of a dispute a court will determine them with due consideration to the average level of such limits with respect to the particular kind of goods; such information may be obtained, for example, from a national chamber of commerce. 3   In case the contract does not provide who will have this right, then, if the contract is governed by Russian law, the following rule shall apply: Russian civil law contains a special rule relating to so-called alternative obligations, i. e. those whose performance contemplates an option of two or several pieces of property (or actions) to be delivered (or executed) by the debtor to (or for) the creditor. Article 320 Paragraph 1 of the RF Civil Code provides: “the right of choice, unless it arises otherwise from the law, other legal acts or the conditions of the obligation shall belong to the debtor who is obliged to transfer to the creditor one property or another or to perform one of two or more actions.” With respect to the situation in question, the goods are the same; what is different (and subject to an option) is the exact quantity of goods to be delivered. To the extent that the situation above may be deemed an alternative obligation, and since neither the law nor another legal act makes provision for this point, nor does the contract indicate to whom the option should belong, then the debtor should enjoy this right. The debtor with respect to a delivery of goods is the seller; ergo, the right of choice in such a situation belongs to the seller. 2

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(2) Except where the parties have agreed otherwise, the goods do not conform with the contract unless they: (a)  are fit for the purposes for which goods of the same description would ordinarily be used; (b)  are fit for any particular purpose expressly or implicitly made known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller’s skill and judgment; (c)  possess the qualities of goods which the seller has held out to the buyer as a sample or model; (d)  are contained or packaged in the manner usual for such goods or, where there is no such manner, in a manner adequate to preserve and protect the goods. (3) The seller is not liable under subparagraphs (a) to (d) of the preceding paragraph for any lack of conformity of the goods if at the time of the conclusion of the contract the buyer knew or could not have been unaware of such lack of conformity.” As the quoted text makes clear, the Convention provides for three methods of determining the quality that the goods to be delivered must meet: 1. The buyer may expressly stipulate specific requirements for the quality of the goods, for example by including a condition that the equipment shall be made in a tropical or northern variation (see: Article 35, Section 2, Paragraph (b)). 2. In case the goods are sold based on samples or models the goods shall conform with the quality of the goods as produced by the seller to the buyer as a sample or model (see: Article 35, Section 2, Paragraph (c)).4 3.  If there are no specific requirements concerning the quality of the goods the latter shall be deemed to be of appropriate quality when the goods “are fit for the purposes for which goods of the same description would ordinarily be used” (see: Article 35, Section 2, Subsection (9)). In other words, what may be called “fair average quality.” It should be kept in mind, however, that levels of “fair average quality” of the same (or similar) goods may not be the same in the country of the seller as in the country of the buyer. In such a case it will be necessary to establish whether the average requirements to apply should be the quality of the goods typical of the country of the seller or the buyer. Theoretically either choice is possible. However, since the goods to be delivered under an international sales contract are designated   In such a situation there should be three samples (or models): one for the buyer, another for the seller and the third to be held by some neutral organization as agreed to in the contract (such as a chamber of commerce of the country of the seller or the buyer). 4

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for use in the country of the buyer, average quality requirements acceptable in that country should be complied with. That was the position of the drafters of the 1980 Convention.5 This is also the position followed by the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (ICAC) in its arbitral practice. An Ecuadorian buyer sued a Russian seller for losses resulting from poor qua­ lity of equipment. There were no requirements concerning the quality of the equipment set forth in the contract. The seller’s line of defense was that breakdown of the equipment resulted from specific conditions of its exploitation unusual for Russia. The arbitral tribunal rejected this argument and noted in the award that when entering into a contract for delivery of goods in Ecuador the seller had to know the climate conditions for use of the goods in Ecuador. The claim of the buyer was granted.6 In this case it was quite clear to both parties to the contract that the equipment in question at least implicitly had to be capable of working in tropical weather conditions. If, however, differences in conditions of use of the goods in the countries of the seller and the buyer are neither well known nor obvious, interpretation of the fair average quality of goods may become more complicated. A seller who should certainly be aware of average quality standards accepted in his own country may not be informed of the details concerning such standards in the country of the buyer. That is why it would make sense for the buyer to indicate a  specific requirement for the quality of the goods. If there is no such condition in the contract, the issue whether or not a fundamental breach of contract occurred with respect to the quality of goods may be resolved based on relevant norms of governing law. If the contract is subject to Russian law, Article 475, Section 2 of the RF Civil Code provides that a fundamental breach of a sales contract concerning quality of goods means “discovery of unremovable defects, defects which cannot be eliminated without incommensurate expenses or expenditures of time or are elicited repeatedly, or manifest themselves anew after their elimination, and other similar defects.”   See: Text of the Draft Convention on Contracts for the International Sale of Goods approved by the United Nations Commission on the International Trade Law together with the Commentary prepared by the Secretariat (doc. UNO A/Conf. 97/5, March 14, 1979. P. 98–99). 6   See: Professor M.G. Rosenberg, Ed., International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation. Arbitral Practice 1996–1997. Moscow. 1998, pp. 44–45. 5

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The ICAC established during the course of hearing the case that the machine had been repaired four times (in March 2001, January 2003, April 2003 and December 2003), but the defects appeared again after the repairs and the seller failed to ensure normal operation of the machine. Given these considerations, and in accordance with Articles 307 and 35 of the Convention and Article 475 of the RF Civil Code, the ICAC granted the claim of the buyer to cancel the contract because of the poor quality of the goods.8 The burden of proof with respect to nonconformity of the quality of goods with contractual requirements must be borne by the party who alleges that the quality of the goods is inappropriate. It was noted in one of the ICAC awards that the buyer had not accompanied his claim with an expert report on the quality of the goods. His allegations with respect to the poor quality of the goods had only been supported with his own written notes to his partners on the impossibility of using the goods due to their poor quality. No other documents evidencing inappropriate quality of the goods had been provided by the buyer to the seller. Given these circumstances, the ICAC obligated the buyer to pay the price of the goods.9 Here is one more case very illustrative in this aspect. A dispute arose out of the sale contract between an English seller and a Russian buyer of equipment. The contract was governed by Russian substantive law and contained a clause according to which the quality of goods should comply with Russian state standards for the equipment in question. The buyer sued the seller to recover expenses for repair of defects of the goods. The seller alleged in his statement of defense that he could not be liable for poor quality of the goods since the contents of relevant Russian state standards were unknown to him and no such standards were appended to the contract. It was indicated in the ICAC’s award that the contract did not obligate the buyer to provide the seller with relevant documents. As for the seller, he, as a reasonable and prudent person, ought to request the buyer to submit those documents (there was no such a request), of buy them since they are publicly available in Russia.10   Article 30 of the Conventions provides in general terms that “the seller must deliver the goods, hand over any documents relating to them and transfer the property in the goods as required by the contract and this Convention.” 8   See: Professor M.G.Rosenberg, Ed., Practice of the International Commercial Arbitration Court of the RF Chamber of Commerce and Industry in 2005. Moscow, 2006, pp. 296-299. 9   See: id., p. 331. 10   See: Professor M.G. Rosenberg. Ed. Practice of the International Commercial Arbitration Court of the RF Chamber of Commerce and Industry in 2007–2008. Moscow, 2010, pp. 172–174. 7

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Proper performance of a sale contract means, inter alia, that the goods should have no defects both of physical and of legal nature. In other words, a buyer should be protected against any claims of third persons in relation to the goods. The Convention provides a general rule on this issue in Article 41 and then ascertains it with regard to claims based upon intellectual property rights (see: Article 42). According to Article 41 “The seller must deliver goods which are free from any right or claim of a third party, unless the buyer agreed to take the goods subject to that right or claim.”11 This rule is aimed to prevent eviction or other obstacles for the buyer to possess, use or dispose of the goods which obstacles were created by third persons on the bases arisen prior to conclusion of the contract. It should be noted that Article 41 embraces both third persons’ rights with regard to the sold goods and claims of third persons regardless of whether or not such claims are based upon some legal title. Needless to say that a claim of a third person, even unfounded, will apparently result in expense of time and money, as well as may create problems in use and disposal of the goods in question. That is why the Convention obligates a seller to prevent such satiations. As it appears from the rule of Article 41, a seller should not only inform a buyer on rights and/or claims of third persons, but also ensure their removal by the moment of delivery of the goods to the buyer. Such an outcome may be achieved, inter alia, when a seller wins legal procee­ dings against a third person. However legal proceedings may last for a long time, and a buyer will hardly be very happy with such a perspective. Alternatively a seller may replace the goods with those not encumbered with any rights and/or claims, or induce the third person to withdraw his claim, or provide a seller with a guarantee ensuring the latter from potential losses connected with the claim.12 For the seller, in order to be exempted from this obligation, it is insufficient merely to inform the buyer on existence of third persons’ rights or claims concer­ ning the goods. The seller needs to obtain the buyer’s consent to acquire the goods with those encumbrances. Such consent, as a rule, should be expressly manifested, although it may be implied on the basis of concrete circumstances.13   Similar rule is contained in Article 460 (Section 1, Paragraph 1) of the RF Civil Code: “A seller must deliver to a buyer the goods free from any rights of third persons, except for the case when the buyer agreed to take the goods encumbered with rights of third persons.” It is further stated that the seller’s failure to perform this duty shall entitle the seller to demand reduction of the price of the goods or cancellation of the sale contract unless it is proved that the buyer was aware or should have been aware of third persons’ rights to the goods (see: id., Paragraph 2). 12   See: doc. UNO A/Conf, 97/5, March 14, 1979. P. 114. 13   See: id. P. 113. 11

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As for the rules aimed to protect a buyer from third persons’ rights and claims in the sphere of intellectual property, they are substantially different. Article 42 of the Convention states: “(1) The seller must deliver goods which are free from any right or claim of a third party based on industrial property or other intellectual property, of which at the time of the conclusion of the contract the seller knew or could not have been unaware, provided that the right or claim is based on industrial property or other intellectual property: (a) under the law of the State where the goods will be resold or otherwise used, if it was contemplated by the parties at the time of the conclusion of the contract that the goods would be resold or otherwise used in that State; or (b) in any other case, under the law of the State where the buyer has his place of business. (2) The obligation of the seller under the preceding paragraph does not extend to cases where: (a)  at the time of the conclusion of the contract the buyer knew or could not have been unaware of the right or claim; or (b) the right or claim results from the seller’s compliance with technical drawings, designs, formulae or other such specifications furnished by the buyer.” Differences between Articles 41 and 42 are, inter alia, as follows. The rule of Article 41, whereby a seller is obligated to deliver goods free from any rights or claims of third persons, is not accompanied with a reservation that these rights (claims) should be known to the seller. The question arises on legal consequences of a situation when a seller is not aware of such rights (claims), e. g. if the seller acquired in good faith some items which had been stolen from the owner. In such case, since the Convention does not deal with this situation, legal relationship between the buyer of the goods and third persons should be regulated by the substantive law to be established on the basis of conflict of laws rules.14 E. g. if a sale contract is governed by Russian law, origin and termination of the ownership title or other rights in rem shall be regulated by the law of rei sitae (see: Article 1206, Section 1 of the RF Civil Code).15   See: Professor A.S. Komarov, Ed. Венская конвенция о договорах международной купли-продажи товаров. Комментарий. [Vienna Convention on Contracts for the International Sale of Goods. Commentary]. Moscow, 1994, p. 113. 15   If the items in question are located in the Russian territory, then the owner is entitled to recover property from the good faith acquirer if the property was lost by the owner or by the 14

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It is also very important to identify a moment from which the goods should be free from third parties’ rights or claims. As it appears from Article 41, it is a moment of delivery of the goods to the buyer, rather than the moment of entering into a contract. If, e. g., at the moment of the conclusion of the contract there had been no such rights (claims), however they arouse at some later stage prior to delivery of the goods to the buyer, the seller shall be deemed failed to comply with Article 41 of the Convention. Meanwhile if such rights (claims) arouse after delivery of the goods to the buyer, the seller should be not liable for that.16 As for Article 42 (dealing with third persons’ rights or claims in the sphere of industrial or other intellectual property), it is expressly indicated there that the seller’s duty to deliver goods free from such rights (claims) is preconditioned with his knowledge of those rights (claims) “at the time of the conclusion of the contract.” It means that if third persons’ rights (claims) arise in between the moment of the conclusion of the contract and the moment of delivery of the goods, the seller shall not be liable for that.17 Legal regime of intellectual property is different in different countries. It is apparently impossible to expect from a seller to have worldwide knowledge of relevant rules. That is why a number of states whose intellectual property laws and relevant rights (claims) should be known to a seller shall be established depending upon two situations. 1) The sale contract specifies countries where the goods will be used or resold. In such a case the seller should be aware of the law of those countries. 2) The contract does not contain such specification. Then the seller should take into consideration the law of the country where the buyer’s place of business is located. If a seller fails to comply with this duty, a buyer is entitled to reduce the price on pro rata basis (see: Article 50) or “claim damages, except for loss of profit” (Article 44) provided he gave” notice to the seller specifying the nature of the right or claim of the third party within a reasonable time after he has become aware or ought to have become aware of the right or claim” (Article 43, Section 1).

person to whom the property was given by the owner for possession or was stolen from either of them, or escaped their possession in another manner beyond their will. This rule was contained in the original version of Article 302, Section 1 of the Civil Code. Now similar norm is provided in Article 228, Section 1 of the Code. 16   See: Professor A.S. Komarov, Ed., op. cit., p. 114. 17   See: Id., p. 119. 418

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In case a buyer did not give the notice in question, he would lose the right to reduce the price or claim damages unless he proves that “he has a reasonable excuse for his failure to give the required notice” (Article 44). There are two preconditions under which a seller shall be exempted from his duty to deliver goods free from third parties’ rights or claims. First, it is a situation when a buyer enters into a contract with a knowledge of such encumbrances. Second, it is a situation when such rights (claims) result from technical documents provided by the buyer. The background of this rule is the fact that in such case it is the buyer, rather than the seller, who initiated manufacturing the goods violating third persons’ rights, therefore it is quite reasonable and fair to impose relevant liability upon the buyer.18 Still, given that a seller is supposed to be more competent than the buyer in the issues connected with manufacturing of the goods, he may well discover, that technical documents furnished by the buyer contain some violations of third persons’ rights in the sphere of intellectual property which violations had been overlooked by the buyer. In such a case a seller should apparently use his best endeavors to prevent manufacturing of goods with violations of those rights. That is why Article 43 (Section 2) of the Convention states that “the seller is not entitled to rely on the provisions of the preceding paragraph in he knew of the right or claim of the third party and the nature of it.”

1.4. Price of goods With respect to the pricing of goods, the situation is similar to that of the quantity of goods: that is, the pricing of goods may be established expressly, implicitly or by indicating the procedure for its determination (see: Article 14, Section 1 of the Convention).19 Accordingly, the following ways of pricing goods are used in international trade: (i) Firm prices, which are not subject to any change within the period of validity of the sales contract. In this case both the seller and the buyer bear the risk of losses resulting from an eventual deviation of the contract price from market prices for similar goods by the time the payment obligation   See: doc. UNO A/Conf., 97/5, March 14, 1979, p. 119.   Similar rules of establishing the price of the goods are provided by Article 485 of the RF Civil Code (see also: Academician Y.K. Tolstoy. Professor N.Y. Rasskasova. Eds. Civil Law, Volume 2. Moscow, 2012, p. 17). 18 19

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matures. If, by that time, market prices rise above the contract price, the seller will be “underpaid,” while if market prices drop below the contract price, the buyer will pay more than he would pay if the contract price coincided with the market one. For this reason parties to international trade contracts often prefer to agree on prices which are flexible enough to react to a change in market conditions (see Paragraphs 2 and 3 below). (ii) Slipping prices, that is, those based on a certain amount of money which may, however, deviate (within some limits) from the original level following fluctuation of specified factors (such as the cost of manpower, raw materials, equipment, etc.). In such case it makes sense to agree on limits of deviation (such as ±15%). (iii) Prices to be set at a later time. The contract may contain a condition that the goods shall be paid for in an amount corresponding to the price of such goods at a specified commodity exchange on an agreed date. This type of pricing is typical of contracts for the sale of products of a future harvest. (iv) In order to provide some protection against the fluctuation of different currencies, the parties to an international trade contract may agree on currency and multi-currency clauses. A currency clause means that the price for the goods is to be paid at a currency exchange rate established in connection with another currency; if the exchange rate of the latter currency is changed by the time of payment, the price should then be accordingly corrected.20 A multi-currency clause means that the currency of payment shall be coordinated with a “basket” of other currencies.

1.5. Offeror’s intention to be bound In order to be deemed an offer, the proposal should also make clear “the intention of the offeror to be bound in case of acceptance” (Article 14, Section 2 of the Convention). The Convention does not formulate any specific language to express such an intention. However, there is a general indication that “In determining the intent of a   It should be noted that a kind of a currency clause is included in the RF Civil Code and it is used in domestic trade. Article 317, Section 2 states: “ It may be provided in a monetary obligation that it shall be subject to payment in rubles in an amount equivalent to a determined amount in foreign currency or in prearranged monetary units (ecu, special drawing rights, and others). In this event the amount subject to payment in rubles shall be determined according to the official exchange rate of the respective currency or prearranged monetary units on the day of payment unless another exchange rate or another date for determining it has been established by law or by agreement of the parties.” 20

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party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.” (Article 8, Section 3) The practical application of this rule may be explained by two illustrative cases (one decided in the UK, the other in the USA). In the English case a court considered correspondence between the parties through an exchange of three telegrams. In the first telegram the sender asked the add­ressee whether the latter would agree to sell an item and at what price. The second telegram specified the price for the item. The third telegram notified the addressee of the sen­ der’s consent to buy the item at the price set forth in the second telegram. The English court came to the conclusion that the first telegram was no more than an invitation to start negotiations while the second telegram was of purely an informational character. While the third telegram was an offer, no acceptance followed, and therefore no contract was concluded.21 In the American case the starting point of negotiations between the parties was also an enquiry concerning the price for the goods. In the reply the information concerning the price was accompanied with a warning that an acceptance needed to be made immediately. The addressee promptly sent a telegram confirming an order to buy the goods at the price requested. The American court held that the letter was an offer, the telegram with confirmation of an order was an acceptance, and therefore a contract was concluded.22

1.6. Effectiveness of an offer and its binding effect “An offer becomes effective when it reaches the offeree.” (Article 15, Section 1 of the Convention) Two ideas emanate from this rule: 1) an offer, until it is received by the offeree, creates no legal consequences and therefore cannot be accepted by the offeree even if the latter somehow becomes aware of it (for example, he obtains information of it from a third person); 2)  since such an offer is not binding on the offeror he may withdraw it “if the withdrawal reaches the offeree before or at the same time as the offer.” (Article 15, Section 2)   See: G.Bowden, A. Morris, op. cit., p. 16.   See: G.Lask. Гражданское право США. Право торгового оборота. [Commercial Law of the USA]. Moscow, 1961, pp. 70-72. 21 22

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An offer, with respect to its legal nature, is a kind of unilateral transaction aimed at concluding a contract. An offer in combination with another unilateral trans­ action — that of an acceptance — will result in a contractual obligation between the offeror and the offeree. Between the time when 1) the offeree receives an offer and 2) he accepts it, the offeror is bound with the possibility that a contractual obligation will be created. Whether a contract will result depends upon the offeree’s discretion. Since a contract is not deemed entered into prior to acceptance of the offer, a question arises whether the offeror may revoke the offer prior to expiration of the period of time for its acceptance. The answer to this question depends upon whether the offer is a firm or a conditional one. A firm offer is irrevocable. However, a conditional offer may be revoked “...if the revocation reaches the offeree before he has dispatched an acceptance.”23 (Ar­ ticle 16, Section 1 of the Convention) A comparison of provisions relating to an offer as set forth in the 1980 Convention with the rules of the RF Civil Code (Articles 435-438) clearly shows their similarity, which confirms that the Code was drafted with due consideration to the norms of international law. However, while similar, Russian and international rules are not identical. Norms under the Convention are based upon the assumption that an offer, generally speaking, is a conditional one unless there are some indications in its contents that it is of a firm nature.24 However, the Code views an offer to be a fixed proposal unless it is otherwise expressly so provided or implicitly entailed.25

  According to the Convention, a contract shall be deemed concluded at the time when an acceptance is received by the offeror (see: Article 18, Section 2, Article 23). Therefore the offeror’s right to revoke a conditional offer shall be terminated prior to the time when the offeror becomes aware of the acceptance. Such an approach may create some difficulties for the offeror who may not know whether he is still in a position to revoke his offer. However, this approach is justified given the lawful interest of the offeree in shortening the time period within which the offer may be revoked (see: UNIDROIT Principles 2010, Section 2.1.4. Official Comment). Such an indication may be made, for example, by setting a fixed time for acceptance (see: Article 16, Section 2 (a) of the Convention). 24   Such an indication may be made, for example, by setting a fixed time for acceptance (see: Article 16, Section 2 (a) of the Convention). 25   Article 436 provides: “an offer received by the addressee may not be revoked within the period established for its acceptance unless otherwise so stipulated in the offer itself or it follows from the essence of the proposal or the situation in which it was made.” 23

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§ 2. An acceptance 2.1. General requirements A contract is deemed entered into when the offer is accepted. An appropriate statement (as in a letter, telegram, etc.) or other conduct of the offeree indicating assent (such as shipment of goods) is an acceptance within the meaning of the Convention (Article 18). “Silence or inactivity does not in itself amount to acceptance” (Article 18, Section 1), unless the parties agreed between themselves that silence will mean an acceptance, or if it so appears from existing commercial practice or usage.26 An acceptance should comply with two requirements: 1. It should be unconditional, that is, an assent to an offer should not depend upon any further actions of the parties. Thus, there is no acceptance in the following statement: “we hereby accept the terms and conditions of the contract as stipulated in your memorandum and we undertake to submit the contract to our board of directors for approval within the next two weeks.”27 2. To be complete, the acceptance must meet the terms and conditions of the offer. Having established this provision as a general rule, the Convention permits an exception from it for situations where the acceptance “contains additional or different terms which do not materially alter the terms of the offer.” (Article 19, Section 2)

2.2. Discrepancy between an offer and an acceptance It should be kept in mind, however, that an offeror and an offeree may assess the same conditions in different (and even opposing) ways with respect to their material significance. The Convention contains a non-exhaustive list of discrepancies between an offer and an acceptance which will be deemed to be material. According to Article 19 (Section 3): “Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially.”28  See: Official Comment on Article 4.1.6. of the UNIDROIT Principles of International Commercial Contracts, Section 3. 27   See, id., p. 48. 28   Unlike the Convention, the RF Civil Code does not allow any deviation of an acceptance from the offer. Article 438 (Section 1, Paragraph 2) provides that “an acceptance must be full and unconditional.” This rule, which is stricter than the relevant norm of the Convention, applies to contracts between Russian nationals. With respect to a contract of international sale of goods regulated by the 1980 Convention, its norms shall govern the relationship of the parties since 26

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Whether additional or different terms set forth in the acceptance are material depend on whether they are habitually used in the particular business and therefore cannot be unexpected to the offeror. The following examples illustrate this approach: 1. A sends an offer to B concerning delivery of some equipment to be tested in premises owned by A. B accepts this offer with a condition that he would like to attend the test of the equipment. This additional term would not be deemed a material alteration of the offer, therefore the condition will become a part of the contract unless A promptly objects to it. 2. To a set of facts otherwise the same as those set forth in paragraph 1 above, B adds an arbitration clause. Such a clause would be deemed a material alteration of the offer. The answer that purported to be an acceptance thus effectively becomes a counteroffer. 3. A orders a quantity of wheat from B. The latter accompanies his acceptance with an arbitration clause typical in the trade of this kind of goods. Since A is involved in this kind of business, this clause will not be unexpected. Therefore this clause will not be deemed a material alteration of the offer. It will become part of the contract unless A. promptly objects to it.29

2.3. Effectiveness of an acceptance It is very important to establish the time when an acceptance (as well as an offer) becomes effective. With respect to an offer, it is the time when the offeree receives the offer (and this is an approach typical of different countries). With respect to when an acceptance becomes effective, there are different views in continental European countries, on the one hand, and in the UK and USA, on the other. In European states an acceptance takes effect when it is received by an offeror. However in the UK and the US, an acceptance occurs at the time when (in case negotiations are carried out by correspondence) the acceptance is mailed to the offeror. The legal consequence of the inception of an acceptance is that the contract is deemed to be entered into at the time when the acceptance takes effect. “if other rules have been established by an international treaty of the Russian Federation than those which have been provided for by civil legislation, the rules of the international treaty shall apply.” (Article 7, Section 2, Paragraph 2 of the Code) It is useful to note that according to the Concept of development of Russian civil legislation the approach as fixed in Article 19, Section 3 of the Convention may be admitted in Russia with regard to contracts in the sphere of business activities (see: the Concept, Chapter V, Sec­ tion 7.11). However so far (in the new version of the RF Civil Code as adopted in 2012) the previous approach is left unamended. 29   See: UNIDROIT Principles of International Commercial Contracts, Section 2.1.11. Official Comment, Section 3. 424

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Thus, in countries belonging to the European continental law family a contract is deemed concluded at the time of receipt of the acceptance by the offeror; in countries belonging to the Anglo-American law family a contract is deemed concluded at the time of the mailing of the acceptance by the offeree. As explained above, in relation to an offer one must distinguish withdrawal of an offer (before it becomes effective), on the one hand, and revocation of a conditional effective offer (which is possible between the time when the offeree receives it and when he accepts it), on the other. Let us now consider problems concerning acceptance of a contract. Revocation of an acceptance after the time when it became effective would mean none other than unilateral cancellation of the contract. As a general rule, this is prohibited.30 Therefore such a revocation is not possible. Withdrawal of an acceptance prior to its inception is possible provided there is a gap in time between mailing of the acceptance by the offeree and its receipt by the offeror. Such a gap does exist in continental European legal systems but it is unknown in the Anglo-American legal system.31 The 1980 Convention adopted the approach of the countries belonging to the continental European law family with respect to this issue. It expressly provides that “An acceptance becomes effective at the moment when the indication of assent reaches the offeror.”32 (Article 18, Section 2) A contract is deemed to be concluded at that very moment (see: Article 23).

2.4. Late acceptance The Convention contains some rules for a late acceptance. It provides for two different situations, one in which late receipt of the acceptance results from delay in its sending, and the other where delay was due to its delivery.   There are some contracts which may be unilaterally cancelled (such as an agency contract). 31   It is indicated in English legal doctrine that since an acceptance becomes effective when a letter is delivered to the post office, a telegram with notice of revocation of an acceptance shall be deemed invalid regardless of the fact that it reached the addressee before the letter of acceptance (see: Ch. Fried, Contract as Promise, London, 1981. P. 32). 32   In line with this approach the Convention provides that prior to this moment “An acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as the acceptance would have become effective.” (Article 22) Similar approach is reflected in Article 439 of the RF Civil Code. 30

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In the first situation, an acceptance is sent but its receipt by the offeror within the appropriate time period (as indicated in the offer or as may reasonably be expected) is impossible; expiration of this time period means that the offer has lost its validity, and so cannot be accepted. Thus an acceptance sent too late, strictly spea­ king, is a counteroffer. In the second situation, an acceptance is sent to reach the offeror on time, but its delivery is delayed due to events beyond the offeree’s control (such as an error of the postal service, force majeure, etc.). However, since the acceptance is late, the offer becomes invalid upon expiration of the time set. Meanwhile, if in the previous situation both parties are aware of this, in this second case it is known only to the offeror. The offeree believes in good faith that the contract is entered into. That is why the offeror should immediately notify the offeree to clarify any misunderstanding. Otherwise, despite the late acceptance, the contract will be deemed to have been concluded. On the basis of this approach the Convention provides that in the second situation “If a letter or other writing containing a late acceptance shows that it has been sent in such circumstances that if its transmission had been normal it would have reached the offeror in due time, the late acceptance is effective as an acceptance unless, without delay, the offeror orally informs the offeree that he considers his offer as having lapsed or dispatches a notice to that effect.” (Article 21, Section 2) With respect to the first situation (when the late receipt of the acceptance was caused by its late sending), in which a late acceptance shall be deemed a counteroffer, the Convention softens it by providing that “A late acceptance is nevertheless effective as an acceptance if without delay the offeror orally so informs the offeree or dispatches a notice to that effect.” (Article 21, Section 1) In other words, in such a situation the offer may be “reanimated” by a statement of the offeror in which case the contract shall be deemed concluded at the time when the late acceptance reached the offeror. Similar rules are set forth in Article 442 of the RF Civil Code which provides: “When a notification of acceptance sent in good time has been received late, the acceptance shall not be considered to be late if the party who sent the offer does not immediately inform the other party of the late receipt of the acceptance. If a party who has sent an offer immediately communicates to the other party the accepting of its acceptance which was received late, the contract shall be considered to be concluded.”

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2.5. Legal consequences of failure to conclude a contract In case negotiations were not successful and the parties failed to reach an agreement, generally speaking, they cannot advance any monetary claims against each other. International commercial practice is based upon the idea that the parties are free to decide whether it makes sense for them to continue negotiations.33 There is an assumption that “each party must act in accordance with good faith and fair dealing in international trade” (see: Article 1.7, Section 1 of the Principles of International Commercial Contracts). A party’s neglect of this principle will result in negative consequences: “a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party” (see: id, Article 2.1.15, Section 2). The meaning of the concept “bad faith” is clarified in the next section (Article 2.1.5, Section 3): “it is bad faith, in particular, for a party to enter into or continue negotiations when intending not to reach an agreement with the other party.” For example, A, during negotiations with B to purchase some equipment, obtains information that B will not receive an export license, a fact of which B is not yet aware. A conceals this information from B, continues to negotiate and enters into a contract which cannot be performed due to the absence of the export license. In such a case A is liable to reimburse B for losses sustained by the latter after the time that A became aware of B’s impossibility of obtaining the export license.34 Since there is no contractual relationship between the parties in such a situation, compensation of losses will be based on rules regulating obligations in tort. It is useful to note that currently similar rules are contained in the RF Civil Code. According to Article 4341 unless otherwise provided by law or contract natural persons and legal entities are free in conducting negotiations on entering into a contract and shall bear no liability if they failed to reach an agreement. A party that conducts or terminates negotiations on entering into a contract in bad faith shall be obligated to reimburse the other party for losses caused by it. Bad faith acts in the course of conducting or terminating of negotiations on entering into a contract shall be deemed, inter alia, starting negotiations or continuation thereof with the absence of actual intention to reach an agreement, putting the other party into misapprehension with regard to character or conditions of suggested contract by communication of false information or withholding circumstances which, due to the character of the contract, should be communicated to the other party, as well as instantaneous and ungrounded interruption of negotiations without beforehand notification of the other party.   See: UNIDROIT Principles of International Commercial Contracts, Section 2.1.15.   See: Id.,Section 2.1.15. Official Comment, Section 2.

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Losses to be recovered by the party that acted in bad faith shall be deemed expenses incurred by the other party in connection with negotiations and also with loss of a possibility to conclude a contract with a third person. If in the course of negotiations one party receives a confidential information from the other party, the receiving party is prohibited to disclose this information and use it for personal purposes regardless of whether the contract will be entered into. In case of breach of this duty the party shall reimburse the other party for losses resulted from disclosure of the confidential information or its use for personal purposes. These rules show quite clearly that Russian civil law is being developed under the influence of lex mercatoria.

2.6. Form of a foreign trade contract With respect to any transaction, including a foreign trade contract, a very important issue is the method of determining its terms and conditions, that is, the form of the transaction. In this respect the 1980 Convention takes quite a liberal and compromising position. Article 11 provides: “A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may by proved by any means, including witnesses.” However, there are different approaches to this problem in different countries and some national laws make mandatory a written form of an international trade contract. The Convention provides a possibility for such a country to make a statement excluding an oral form of a contract of international sale of goods if one of the parties to the contract has its place of business in such a country. According to Article 12: “Any provision of Article 11, Article 2935 or Part II of this Convention36 that allows a contract of sale or its modification or termination by agreement or any offer, acceptance or other indication of intention to be made in any form other than in writing does not apply where any party has his place of business in a Contracting State which has made a declaration under Article 96 of this Convention. The parties may not derogate from or vary the effect of this Article.” This provision is the only mandatory norm of the Convention. All its remaining rules are optional.   Article 29 (Section 1) provides that “a contract may be modified or terminated by the mere agreement of the parties.” 36   Part II (Articles 14-24) of the Convention deals with the procedure of formation of a contract. 35

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Article 96 of the Convention contains the following rule: “A Contracting State whose legislation requires contracts of sale to be concluded in or evidenced by wri­ ting may at any time make a declaration in accordance with Article 12 that any provision of Article 11, Article 29, or Part II of this Convention, that allows a contract of sale or its modification or termination by agreement or any offer, acceptance or other indication of intention to be made in any form other than in writing, does not apply where any party has his place of business in that State.” Such a declaration has been made by a number of countries, including the USSR, upon ratification of the Convention. This declaration remains valid for the Russian Federation, as a successor state to the USSR. Current Russian law requires the written form for a foreign economic transaction;37 this rule until recently was accompanied with a reservation providing that failure to comply with this requirement “shall entail the invalidity of the transaction.” (Article 162, Section 3 of the RF Civil Code the original version)38 37   See: M.G.Rosenberg. Международная купля-продажа товаров. Комментарий к правовому регулированию и практике разрешения споров. [International Sale of Goods, Commentary on Legal Regulation and Practice of Dispute Resolution], Moscow, 2006, p. 65. 38   It should be noted that legal consequences of nonobservance of written form of a  foreign economic transaction were stricter than those concerning a “domestic” transaction. Generally speaking, failure to observe a written form of a transaction (as provided for by law or by agreement of the parties) shall result in a prohibition for them, in case of a dispute, to rely for confirmation of the transaction and its terms upon the testimony of witnesses, albeit written or other evidence are admissible (see: Article 162, Section 1 of the RF Civil Code). Nonobservance of a written form of a transaction shall entail its invalidity only if it is expressly so stipulated by law or agreed by the parties (see: id., Section 2). Section 3 of the same Article contained such express indication with regard to a foreign economic transaction. This strict approach has apparently a historical background since in Soviet times there was a state monopoly of foreign trade. After transition of the Russian economy to a market model this state monopoly was abolished. It is worthwhile to note that according to the Concept of development of Russian civil legislation legal consequences of failure to observe a written form of a foreign trade transaction should apparently be subject to the general rule mentioned above (see: Section 4.1.4). In line with this approach Section 3 of Article 162 of the Civil Code is declared void. It means that now in case of a dispute concerning the existence and conditions of a foreign trade transaction it is possible to use written or other evidence with the sole exception the testimony of witnesses. A question arises whether prohibition of witnesses’ testimony effectively means prohibition of any oral evidence. The answer should be negative. Witness testimony is not the only kind of oral evidence. Both the Arbitration Procedure Code (see: Article 81) and the Civil Procedure Code (see: Article 68) admit as evidence as explanations of persons participating in the case (such as a plaintiff, a respondent etc.). These explanations may be given orally in the courtroom. However,

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Under Russian law “a contract in a written form may be concluded by drawing up single document signed by the parties, and also by the exchange of letters, telegrams, telexes, telefaxes, and other documents, including electronic documents transmitted by telecommunication channels, enabling it to be reliably established that the documents emanate from a party to the contract. (See: Article 434, Section 2 of the Civil Code)39 It is also expressly indicated in Section 3 of this Article that the written form of the contract shall be deemed complied with if the written offer has been accepted by means of the performance by the offeree of actions relating to the fulfillment of the conditions of the contract specified in the offer, for example, shipment of goods, rendering of services, fulfillment of work, payment of respective amount (see: Ar­ ticle 438, Section 3 of the Civil Code).40

§ 3. Basic conditions 3.1. General provisions Basic conditions regulate the relationship between a seller and a buyer in connection with a delivery such as transportation and transfer of goods, transfer of title to goods, transfer of the risk of accidental loss of or damage to goods, and, accor­dingly, cargo under Russian civil procedure law and doctrine, such explanations differ from witness testimony (see in detail: Professor V.V. Yarkov, Ed. Комментарий к Арбитражному процессуальному кодексу Российской Федерации [Commentary on the Arbitration Procedure Code of the Russian Federation]. Moscow, 2011, pp. 294-296). The explanations shall be considered and assessed by a court. The Arbitration Procedure Code provides that if one litigant in his explanations refers to circumstances which are not contested by another litigant, such circumstances shall be deemed acknowledged by the other litigant (see: Article 70, Section 3-1). 39   In line with this norm, the RF Arbitration Procedure Code provides that documents received by means of facsimile, electronic or other communications shall be admitted as written evidence in the instances and according to the procedure as established by a federal law, other normative legal act or a contract (see: Article 75, Part 3). The RF Civil Code and, in particular, its Article 434, is one of such federal laws. 40   This rule is apparently based upon the norm of the Convention providing that by virtue of the offer, or as a result of practices which the parties have established between themselves or of usage, the offeree may accept the offer “..by performing an act, such as one relating to the dispatch of the goods or payment of the price, without notice to the offeror.” (Article 18, Section 3) A similar provision is set forth in Article 2.16 (Section 3) of the UNIDROIT Principles of International Commercial Contracts. 430

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insurance. These conditions are called basic since they produce substantial influence on the price of the goods. Basic conditions of international sale of goods are briefly touched on in the Convention and in more detail — in Incoterms.41 With respect to transportation of goods, the Convention provides only the ge­ neral indication that “If the seller is bound to arrange for carriage of the goods, he must make such contracts as are necessary for carriage to the place fixed by means of transportation appropriate in the circumstances and according to the usual terms for such transportation.” (Article 32, Section 2) When entering into such contracts, the seller must meet his own obligation before the buyer. That is why upon concluding a transportation contract the seller acts in his own name and at his own expense, including the cost of transportation in the price of the goods. On the other hand, it appears from this norm that if, according to the terms and conditions of the sales contract, the seller is not in charge of arranging transportation of the goods, the relevant contracts should be concluded by the buyer. However, it sometimes happens that in such a situation the buyer asks the seller to arrange for transportation of the goods. If the seller accepts such an instruction, when ente­ ring into a transportation contract he is acting as the buyer’s agent. In this case the seller is entitled to require both compensation of expenses for transportation (which expenses are not included in the price of the goods) and payment of an agency commission.

3.2. Transfer of goods Norms of the Convention relating to transfer of goods provide for several different variations as described in Article 31. 1. A seller undertook to deliver the goods to a certain point (for example, to the place where the buyer was located, or to the frontier railway station, etc.). In this situation the obligation of the seller is deemed performed at the moment when the goods are made available to the buyer at the agreed point. The seller is in charge of arranging for transportation of the goods to the agreed point; handing the goods over to the carrier does not constitute transfer of the goods to the buyer.

  Incoterms is a collection of usages of international trade which are systematized and repeatedly amended by the International Chamber of Commerce. The current version of Incoterms was edited in 2010. It became effective as of Janeuary 1, 2011. 41

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2. A sales contract provides for carriage of goods, although the seller has no obligation to deliver the goods to a certain point (for example, an English company sells goods to a Japanese firm, and according to the transportation conditions of the contract there should be a combined carriage of goods: by sea from London to St. Petersburg, then by railway from St. Petersburg to Nakhodka, and again by sea from Nakhodka to Osaka). In such case the seller is deemed to have performed his obligation to deliver the goods at the time of “handing the goods over to the first carrier for transportation to the buyer.” (In the example above it is when the goods are handed over to the shipping company in London.) 3. A sales contract does not contain any transport conditions, nor does it obligate the seller to deliver the goods to a certain point. In this case the seller is deemed to have performed his obligation to deliver the goods at the time when the goods are made available to the buyer: (a) at the place where the goods are located or are to be manufactured, provided this place was known to the parties when they entered into the contract (see: Ar­ticle 31, Section “b”); or (b)  “...at the place where the seller had his place of business at the time of the conclusion of the contract.” (see: Article 31, Section “c”) This applies if at that time the buyer was not aware of the place of location or manufacture of the goods. The Convention repeatedly mentions the concept of “placing the goods at the buyer’s disposal” (which effectively means making the goods available to the buyer) but there is no indication in the Convention how to interpret this phrase. Article 7, Section 2 helps to clarify. It states: “Questions concerning matters governed by the Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.” If a contract of international sale of goods is governed by Russian law, Ar­ ticle  458, Section 1 of the RF Civil Code applies. It provides that “the goods shall be considered to be placed at the disposition of the purchaser when within the period provided for by the contract the goods are ready for transfer at the proper place and the purchaser in accordance with the conditions of the contract has knowledge of the readiness of the goods for transfer. The goods shall not be deemed to be ready for transfer if they are not identified for the purposes of the contract by a means of marking or in another form.”42   See: N.G.Vilkova. Правила толкования международных торговых терминов. Правовое регулирование и практика применения [Rules of Interpretation of International Trade Terms. Legal Regulation and Practice of Application]. Moscow, 2008, p. 89. 42

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It is quite clear that this rule corresponds completely both to general principles upon which the Convention is based and also to norms of the Convention regulating some issues connected with this concept.43 For example, under Russian civil law “the right of ownership of the acquirer to a movable thing under transaction shall arise from the moment of transfer thereof unless provided otherwise by a law or conditions of the transaction.” (Article 259, Section 1 of the Civil Code). Transfer of a thing means “the handing over of the thing to the acquirer and also submission to a carrier for dispatch to the acquirer.” (Article 260, Section 1). It specifically provides that “the transfer of a bill of lading or another goodsdisposing document of there shall be equated to the transfer of a thing.” (Article 260, Section 4). If a thing being acquired under a transaction is in possession of a third person the right of ownership to it shall pass to the acquirer from the moment of conclusion of the transaction unless other moment of passing of the right of ownership provided by conditions of the transaction (see: Article 260, Section 3).

3.3. Passing or risk With respect to transferring the risk of accidental loss of or damage to the goods, the Convention regulates these issues in some detail. First, Article 66 provides: “Loss of or damage to the goods after the risk has passed to the buyer does not discharge him from his obligation to pay the price, unless the loss or damage is due to an act or omission of the seller.” The moment of transfer of the risk, generally speaking, coincides with that of performance of the seller’s obligation to deliver the goods, and occurs at the time when the goods are made available to the buyer (see: Article 69) or, in case the sales contract provides for carriage of the goods without the seller’s obligation to hand the goods over to the buyer at a certain place, at the time when the goods are handed over to the first carrier for transmission to the buyer (see: Article 67). The Convention contains specific rules on transfer of risks in relation to goods which have been sold during the course of their carriage. According to Article 68: “The risk in respect of goods sold in transit passes to the buyer from the time of   E. g., the Convention provides that “If the contract relates to goods not then identified, the goods are considered not to be placed at disposal of the buyer until they are clearly identified to the contract.” (Article 69, Section 3) One cannot but note that the meaning of this norm and that of the last sentence of the rule of the RF Civil Code above are effectively identical. 43

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the conclusion of the contract. However, if the circumstances so indicate, the risk is assumed by the buyer from the time the goods were handed over to the carrier who issued the documents embodying the contract of carriage. Nevertheless, if at the time of the conclusion of the contract of sale the seller knew or ought to have known that the goods had been lost or damaged and did not disclose this to the buyer, the loss or damage is at the risk of the seller.” In other words, these rules mean that as concerns the transfer of risk, the contract of sale of goods in transit acts with retroactive effect and refers such a transfer to the time preceding not only transfer of title but even the conclusion of the very contract of sale. This norm may apparently be explained by the fact that it may be very difficult (if at all possible) to establish the time of loss of or damage to the goods in the course of their transportation. Also some documents related to the goods are needed to bring a claim against the carrier or the insurer of the goods, and these documents are now with the buyer rather than with his predecessors. A similar approach (written apparently under the influence of the Convention) is reflected in Article 459 of the RF Civil Code. It provides: “The risk of accidental loss of or accidental damage to goods sold while en route shall pass to the purchaser from the moment of the conclusion of the contract of sale unless provided otherwise by such contract or the customs of business turnover. The condition of the contract that the risk of accidental loss of or accidental damage to goods passes to the purchaser from the moment of handing over the goods to the first carrier may, at the demand of the purchaser, be deemed by a court to be invalid if at the moment of concluding the contract the seller knew or should have known that the goods had been lost or damaged and did not communicate this to the purchaser.” (Section 2) In relation to insurance matters, the Convention provides only that “If the seller is not bound to effect insurance in respect of the carriage of the goods, he must, at the buyer’s request, provide him with all available information necessary to enable him to effect such insurance.” (Article 32, Section 3)

3.4. Variations of basic conditions It should be noted that basic conditions of a contract of international sale of goods are reflected in the Convention rather laconically. In such a way the Convention enables the parties to regulate their rights and obligations on the basis of usages of international commercial practice. 434

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With respect to a contract of international sale of goods, these usages are concentrated in Incoterms. The current version of Incoterms 2010 contains 11 variations of basic conditions which are classified into 2 groups depending upon the distribution of obligations between a seller and a buyer (see the table below). As it appears from this table, all 11 variations as provided by Incoterms 2010 are allocated between two classes. One class includes 7 variations that can be used regardless of the mode (or maybe several modes) of transport employed for carriage of goods. Maritime (or inland water) transport is not involved at all or it may only be used for part of the carriage. These are EXW, FCA, CPT, CIP, DAT, DAP, DDP. Another class includes 4 variations (FAS, FOB, CFR, CIF) and each of them means carriage of goods by sea or inland water transport to an agreed point, if any, at the named place of delivery, not loaded on any collecting vehicle. Let us now consider different variations of basic conditions as summarized in the table. Classes

Rules for any mode or modes of transport

Rules for sea and inland water transport

Variant N

Abbreviated name

Full name

1

EXW

EX Works

2

FCA

Free carrier

3

CPT

Carriage paid to

4

CIP

Carriage and insurance paid to

5

DAT

Delivered at terminal

6

DAP

Delivered at place

7

DDP

Delivered duty paid

8

FAS

Free alongside ship

9

FOB

Free on board

10

CFR

Cost and freight

11

CIF

Cost instance and freight

3.4.1. EXW According to this variation the seller’s obligation to deliver the goods shall be deemed performed when the seller makes the goods available to the buyer at the agreed point not loaded on any collecting vehicle. The seller is in charge of inspec­ting the quantity and quality of the goods, their proper packing, and provision of documents confirming that the goods comply with the requirements set forth in the contract. 435

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All else (carriage of the goods, insurance, and even receipt of documents needed to export the goods from the seller’s country, such as a certificate of origin, an export license, etc.) is in the buyer’s care. At the buyer’s request (and at his expense) the seller shall assist him in obtai­ ning the documents needed to export, import and insure the goods. The time of transfer of risks in relation to the goods coincides with the time when the goods are made available to the buyer. The time of transfer of the seller’s right of ownership to the buyer shall be resolved on the basis of norms of applicable substantive civil law.44 Thus, under the EXW variation the seller’s obligations are minimal, while the buyer’s obligations are very broad. 3.4.2. FCA Under this variation the seller shall be deemed to have performed his obligation to deliver the goods at the time of handing them over to a carrier nominated by the buyer. At the same time the risk of accidental loss of or damage to the goods passes from the seller to the buyer, and the buyer acquires the insurable interest in the goods at that time. The seller is obliged at his expense to obtain any export license or other relevant documents and obtain export customs clearance of the goods. At the buyer’s request, risk and expense, the seller should assist the buyer in obtaining any documents and information that may be needed by the buyer to import the goods as well as for their transportation. 3.4.3. CPT Under this variation the seller is obliged at his expense to conclude (or procure) a contract for carriage of the goods on usual terms and in a customary manner. The seller’s obligation to deliver the goods shall be deemed performed when the goods are given to the carrier. At the same time the risks of loss of or damage to the goods shall pass from the seller to the buyer. The seller must obtain at his expense an export license (if required) and other documents needed for export customs clearance of the goods. He also should assist the buyer, at the latter’s expense, in obtaining any documents and information that may be required for export and transportation of the goods.

  See: J.Ramberg. ICC Guide to Incoterms 2010. Paris, 2011, p. 18.

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3.4.4. CIP Under this variation the seller’s obligation to conclude a contract of carriage of goods as well as the time when his obligation to deliver the goods shall be deemed performed and also the time of passing the risks of losses of or damage to the goods from the seller to the buyer are similar to those under CPT. However, in addition to that, the seller is also obligated to obtain at his expense insurance cove­rage for the goods at least at the minimum level as provided by Clause (C) of the Institute Cargo Clauses.45 The insurance coverage shall amount to the contractual price of the goods plus 10% (110%) and shall be in the currency of the contract. The insurance shall cover the goods from the point of delivery to at least the place of destination as provided by the sales contract. The seller’s obligations with regard to obtaining documents required for export of the goods and assisting the buyer to obtain documents needed for their import and transportation are similar to those provided by the CPT variation. 3.4.5. DAT Unlike previous variations that were known to Incoterms 2000, this variation is a new one. First of all it should be noted that the notion “Terminal” means “any place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal” (Guidance note to DAT variation). The seller is obligated to conclude a contract of carriage of the goods to the terminal as defined above. He also should unload the goods from the arriving transport vehicles and then make them available to the buyer at this terminal, at which time the seller’s obligation to deliver the goods shall be deemed met. Simultaneously the risks of loss of or damage to the goods shall pass from the seller to the buyer. The seller has no obligation for insurance coverage for the goods although he should provide the buyer (at the expense of the latter) with information needed for the buyer to obtain insurance. 3.4.6. DAP This variation is also new.   Institute of London Underwriters. Additional risks (such as those related to war, strikes, civil commotions, etc.) may be covered on the basis of a special instruction of the buyer. See: A.S. Kokin. Международная морская перевозка грузов. Право и практика. [International Maritime Carriage of Goods. Law and Practice], Moscow, 2008, p. 73. 45

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The seller should at his own expense conclude a contract of carriage of goods to the place of destination as agreed in the sales contract. His obligation to deliver the goods shall be deemed performed when he makes the goods available to the buyer at this place on the arriving transport vehicles ready for unloading.46 At that very moment the risks of loss of or damage to the goods shall pass from the seller to the buyer. Like under the DAT variation the seller under DAP variation is not obliged to obtain insurance coverage for the goods, it is up to the buyer to deal with this matter. However the seller should, at the buyer’s request and expense, provide the latter with relevant information that may be necessary for entering into an insurance contract. 3.4.7. DDP This variation means that the seller shall deliver the goods to the buyer cleared for import, and not discharged from the means of transport at the named place of destination, at which time the risks of losses of or damage to the goods shall pass from the seller to the buyer. The seller has to bear all costs and risk of the carrying out of customs formalities and payment of customs duties, taxes and other charges for importation into the country of destination.47 Carriage of goods to the place of destination is also to be borne by the seller. However, he has no obligation to insure the goods, although he should, at the buyer’s request and expense, provide the buyer with information that may be needed for obtaining insurance coverage for the goods. 3.4.8. FAS This variation may only be used in case of carriage of goods by sea or inland waterway transport. Under this variation the seller shall be deemed to have met his obliga  The difference between DAP and DAT variations concerning this point is that under DAT the seller shall be deemed to have met his obligation to deliver the goods after their unloading, however under the DAP this seller’s obligation shall be deemed met when the goods on the arriving transport are ready for unloading, i. e. at some earlier stage. 47   As mentioned supra (see: Chapter 6, § 2), customs clearance of goods exported/imported under a foreign trade contract concluded by a Russian person is within the responsibility of the latter (see: Article 186 of the CU Customs Code). It is therefore this person who must deal with Russian customs authorities and is in charge of actual payment of customs duties, import VAT, etc. As for a foreign seller of goods sold under DDP terms, he in practical terms is obligated to furnish the Russian buyer with all documents needed for proper customs clearance and to reimburse the import taxes and duties paid by the buyer (since the price of the goods was calculated with due consideration of those amounts), and if the seller fails to comply with these obligations he may be sued by the buyer for improper performance of the sales contract. 46

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tion to deliver the goods when they are placed alongside the ship (e. g. on a  quay or a barge) selected by the buyer at the port of loading as agreed in the sales contract. At that time the risks of loss of or damage to the goods shall pass from the seller to the buyer. The seller is obliged at his expense to obtain any export license and other documents and perform export customs clearance of the goods. He also should assist the buyer, at the request and expense of the latter, to obtain all documents required for import and transportation of the goods. 3.4.9. FOB This variation is also applicable when the goods are carried aboard a sea- or rivergoing vessel. Performance of the seller’s obligation to deliver the goods is attributed to the time when the goods are placed on board the vessel nominated by the buyer at the port of shipment. At this time the risks of loss of or damage to the goods shall pass from the seller to the buyer. This time is now substantially different from that in previous versions of Incoterms, where it coincided with the time when the goods passed the ship’s rail in the agreed port of shipment. As it is noted in a doctrine, “Through the centuries the ship’s rail has assumed an inordinate importance as an imaginary border between the seller’s and the buyer’s territory. But using the ship’s rail as a point for the division of functions, costs and risks between the parties is not, and never had been, quite appropriate. To divide the functions between the parties while the goods are swinging across the sip’s rail seems impracticable. In the words of an often-cited English court decision: “Only the most enthusiastic lawyer could watch with satisfaction the spectacle of liabilities shifting uneasy as the cargo sways at the end of a derrick across a notional perpendicular projecting from the ship’s rail.”48 Currently this fictious construction is abandoned. Now “all mention of the ship’s rail as the point of delivery has been omitted in preference for the goods being delivered when they are “on board” the vessel. This more closely reflects modern commercial reality and avoids the rather dated image of the risks swinging to and from across the imaginary perpendicular line.”49 The seller has no obligation to conclude a contract of carriage the goods, nor is he obligated to obtain insurance coverage for the goods, but he should provide the

  Ramberg, op. cit., p. 173.   INCOTERMS 2010, ICC Rules for the use of domestic and international trade terms, ICC Publication No 715E, Paris, 2010, p. 7. 48 49

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buyer, at his request and expense, with information that may be needed for entering into an insurance contract. The seller should at his own expense obtain any export license and other documents required for export of the goods. He is also obliged to provide the buyer, at the buyer’s request and expense, with any documents needed for the importation and transportation of the goods. 3.4.10. CFR This variation is also available when the goods are carried by sea or inland water transport. The moments when the seller shall be deemed to have performed his obligation to deliver goods and when the risks of loss of or damage to the goods shall pass from the seller to the buyer are the same as those in the FOB variation. However the seller is obligated at his expense to conclude a contract of carriage of the goods aboard a vessel on usual terms from the port of shipment to the port of destination as provided in the sale contract. The seller is not obliged to insure the goods, however he should provide the buyer, at the request and expense of the latter, with the information needed to obtain insurance coverage for the goods. 3.4.11. CIF This variation is different from the CFR terms due to the fact that, in addition to a contract for carriage of goods by sea- or river-going vessel, the seller is required to purchase cargo insurance. The insured value of the goods should correspond to their price plus 10% and the volume of insurance coverage should be minimal under the Institute50 Cargo Clauses (currently it is C-variation).51 The seller’s obligation to insure the goods is a very substantial one; failure to perform it is a fundamental breach of the sale of goods contract. In such case the buyer is entitled to refuse to accept receipt of the goods even if they have been safely delivered to the port of destination.52   Institute of London Underwriters.   See: A.S. Kokin, op. cit., p. 72. Additional risks (such as those relating to war, strikes, civil commotions, etc.) may be covered by special instruction of the buyer (see: id., p. 73). 52   See: D. Sassoon. CIF and FOB Contracts, London, 1968, p. 138. A similar rule in the RF Civil Code with respect to goods which are sold within a domestic market provides: “When a party obliged to insure the goods does not effectuare insurance in accordance with the conditions of the contract, the other party shall have the right to insure the goods and require from the obliged party compensation of expenses for the insurance or to refuse performance of the contract.” (Article 490, Paragraph 2) 50 51

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Such a strict approach is quite understandable: if the goods have no insurance coverage, the buyer loses the possibility of receiving compensation for accidental losses. Moreover, he would be unable to obtain bank credit for purchase of the goods. A bank usually requires a lien to be imposed on the goods as security for the credit. If the pledged goods are not insured, in the event of loss the bank’s credit will not be secured. That is why a bank which did not receive an insurance policy on the goods would apparently refuse to open a documentary credit for payment of the price for such goods. Therefore a buyer of uninsured goods will encounter substantial difficulties both in paying for such goods and subsequently reselling them.

§ 4. Legal consequences of a contract breach 4.1. Remedies available to the aggrieved party According to the 1980 Convention, in case of breach of the conditions of the contract by one of the parties, another party may take the following measures to protect its interests: 1. It may require the violating party to perform its obligations and in particular, grant it an additional period of time of reasonable length to perform (see: Article 46, Section 1, Article 47, Section 1, Article 62, Article 63, Section 1). However, in such a case “…a court is not bound to enter a judgment for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by this Convention.” (Article 28) It thus appears that the Convention accepts the principle of specific performance to the extent that this principle is provided by lex fori in relation to similar sales contracts which are not subject to the Convention (e. g., those concluded by residents of the country where the court is located). If the lex fori is Russian Law, Article 396 of the Civil Code will apply. This Article introduces different (albeit optional) rules for two situations: 1) improper performance of an obligation, and 2) complete non-performance of it. In the former situation the payment of a penalty and compensation of losses does not relieve the debtor from specific performance of the obligation unless a law or contract so provides (see: Section 1). However, in the latter situation a debtor who paid the penalties and compensated losses sustained by the creditor is exempted from specific performance of the obligation unless provided otherwise by a law or contract (see: Section 2). 2. The aggrieved party “…may suspend the performance of his obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his obligations as a result of: 441

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(a) a serious deficiency in his ability to perform or in his creditworthiness; or (b) his conduct in preparing to perform or in performing the contract.” (Ar­ ticle 71, Section 1 of the Convention) (emphasis added) The seller who becomes aware of the above circumstances after he has already dispatched the goods “…may prevent the handing over of the goods to the buyer even though the buyer holds a document which entitles him to obtain them.” (Ar­ ticle 71, Section 2) Assume that the buyer, who for some reason or other failed to pay for the goods shipped to him aboard a sea-going vessel, is already in receipt of the original bill of lading which document entitles him to receive the goods from the carrier (see: Ar­ ticle 158, Section 1 of the RF Merchant Shipping Code). The quoted norm of the 1980 Convention enables the seller to instruct the carrier to refrain from handing the goods over to the buyer despite the fact that the latter holds the original bill of lading. However, the norms of the 1980 Convention (including those set forth in Article 71) are binding only on the parties to the contract of an international sale of goods. A bill of lading is a document which is issued by a carrier within the context of a contract of carriage of goods by sea. In this contract the seller is usually a shipper of goods. A carrier must only follow the above instruction of the seller provided it is in keeping with norms of law relating to a contract of carriage of goods by sea. According to Article 149 of the RF Merchant Shipping Code a shipper has the right to dispose of cargo prior to handing it over to a consignee53 (see: Section 1) and may, inter alia, require a carrier to hand the cargo over to a consignee other than the one named in the bill of lading provided all the originals of the bill of lading will be produced to the carrier or appropriate security will be arranged by the shipper (see: Section 2). The latter condition only applies when all the originals of the bill of lading are held by the consignee, in which case the carrier needs some security in the event the consignee advances a claim arising out of non-delivery of the goods. In practical terms the typical security is a guarantee issued by a bank or an insurance organization.54

  See: A.S. Kokin, op. cit., p. 463.   See: Professor G.G. Ivanov, Ed. Комментарий к Кодексу торгового мореплавания Российской Федерации. [Commentary on the Merchant Shipping Code of the Russian Federation] Moscow, 2005, p. 304. 53 54

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However, a bill of lading is a kind of a goods-disposition document, and its transfer equates to a transfer of title to the goods. If a bill of lading on unpaid goods has been transferred by the original buyer to another person and the latter has not received the goods from the carrier due to the shipper’s prohibiting instruction, then the reliability of a bill of lading as a goods-disposition document will be undermined. That is why the rule of Article 71 (Section 2) of the Convention “...relates only to the rights in the goods as between the buyer and the seller.” 3. The aggrieved party is also entitled to repudiate the contract, albeit exercise of this right is preconditioned on the following circumstances: (a) “if the failure of the other party to perform any of his obligations under the contract amounts to a fundamental breach of contract” (Article 49, Section 1, Subsection (a); Article 64, Section 1, Subsection (a) of the Convention); (b) if the other party failed to perform its obligation within the additional time period granted by the aggrieved party (see: Article 49, Section 1, Subsection (b); Article 64, Section 1, Subsection (b) of the Convention),55 (c) if the party seeking to repudiate the contract notifies the other party in wri­ ting of such an intent (see: Article 26 of the Convention). A question arises whether such a notice is sufficient to terminate the contract or whether a court decision is also needed. When addressing this issue, the ICAC stated in an award: “Since non-delivery of the goods at the point of destination by the respondent is a fundamental breach of contract, the arbitral tribunal finds that the plaintiff, being guided by Section 9.4 of the contract, was entitled unilaterally to cancel the contract, which he did by letter of September 10, 2004. The arbitral tribunal finds unconvincing the respondent’s arguments that the above mentioned letter should only be considered as a demand to the respondent on repudiation of the contract rather than a plaintiff’s notice on cancellation of the contract, so the plaintiff ought to file a relevant application with a court. The plaintiff acted in strict compliance with Sections 9.4–9.5 of the contract, and his letter, as it appears from its contents, was none other than the written notice to the respondent on cancellation of the contract.”56

55   In a case when the seller who had received an advance payment for the goods, failed to deliver the goods either within the time period provided by the contract, or within the additional time period set by the buyer, the ICAC held in its award that the buyer was entitled unilaterally to cancel the contract (see: Practice of the International Commercial Court at the Chamber of Commerce and Industry of the Russian Federation in 2004, p. 310–313). 56   Practice of the International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation in 2005, p. 286.

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It should be noted that the RF Civil Code uses a similar approach. Article 310 of the Code, on the one hand, contains a general rule prohibiting unilateral refusal to perform an obligation or unilaterally to change its conditions, unless a law provides otherwise. On the other hand, there is an exception from this rule concerning obligations connected with business activities. A unilateral refusal to perform such an obligation and a unilateral change of its conditions “shall also be permitted in the instances provided for by the contract unless it follows otherwise from a law or the essence of the obligation.” This rule is, however, accompanied with a reservation according to which such rigat, while provided by a contract, may be preconditioned with a payment of a certain amoust of money to the other party (see: id., Paragraph 2). According to the Convention: “A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.” (Article 25) The text of this norm indicates two features of a fundamental breach of contract within the meaning of the Convention. One feature has an objective nature and is manifested in substantial detriment to the other party resulting in an impossibility of attaining the expected purpose of the contract. The second feature is of a subjective character and refers to foresight of such a result by the party in breach. Each of these features may now be considered in turn. With respect to substantial detriment to the other party, the ICAC noted in one of its awards that Article 25 of the Convention contains a general norm and does not establish exactly how a fundamental breach of contract in relation to quality of goods may be manifested. If the contractual relationship of the parties is governed by Russian law it is nec­ essary to clarify the matter by applying Article 475 of the RF Civil Code. It provides that there is a breach when there is a “discovery of unremovable defects, defects which cannot be eliminated without incommensurate expenses or expenditures of time and are elicited repeatedly, or manifest themselves anew after their elimination, and other similar defects.” (Section 2) Foresight by a party of the detrimental consequences of his behavior is effectively an element of fault. If there is no such foresight (i. e. no fault) then breach of the contract shall not be deemed fundamental within the meaning of the Convention, and the other (injured) party is not entitled to repudiate the contract. The ICAC recognized in one of its awards that at the time of entering into a contract a foreign buyer could not foresee losses which could result from an administrative penalty imposed upon the Russian seller by a currency control agency 444

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for non-observance of the term of payment for the goods since the seller had not informed the buyer of applicable norms of Russian currency law.57 4. The aggrieved party has the right to require the other party to compensate for losses. Losses include both damnum emergens (actual damages) and lucrum cessans (loss of profit) (see: Article 74 of the Convention).58 It is expressly stated in the Convention that: “Avoidance of the contract releases both parties from their obligations under it, subject to any damages which may be due.” (Article 81 (1)).59 The ICAC follows this rule in its practice. As emphasized in one of its arbitral awards, “repudiation of a contract (or termination of its validity), since the parties did not provide otherwise, shall terminate its validity for the future, but it does not terminate rights and obligations of the parties that arose out of the contract. Likewise, termination of the validity of a contract shall not exempt the parties from liability for violations committed within the period of validity of the contract.”60

4.2. Preconditions for recovery of losses The party which incurred losses should comply with the following requirements: 1) It needs to prove that the losses resulted from the debtor’s behavior rather than from any other factors. The ICAC noted in one of its awards that the buyer’s statement with respect to expenses incurred to repair equipment of poor quality was not supported by any document either with respect to the very fact of the expenses or concerning proof of their amount. Moreover, the buyer failed even approximately to indicate the amount of expenses which he allegedly incurred. Given these circumstances the arbitral tribunal required the buyer to pay the seller the price of the goods.61 2) The aggrieved party must also prove that it took reasonable measures to prevent or mitigate the losses, otherwise “..the party in breach may claim a re  See: Practice of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation in 2001–2002, pp. 233–237. 58   It should be noted that a similar approach concerning the concept of losses is reflected in Article 15 of the RF Civil Code. 59   A similar provision is set forth in Article 453 (Section 5) of the RF Civil Code: “if a material violation of a contract by one of the parties has served as the ground for change or the repudiation of the contract, the other party shall have the right to demand compensation for losses caused by the change of or the repudiation of the contract.” 60   See: Practice of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation in 2005, p. 281. 61   See: id., pp. 357–358. 57

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duction in the damages in the amount by which the loss should have been mitigated.” (Article 77 of the Convention) For example, a seller delivered timber materials to the seaport of shipment, placing them on the quay for a few days to await the arrival of the vessel chartered for their carriage. By failing to cover the materials with canvas to protect them against humidity, the goods were damaged by rain. Under these circumstances the seller must bear liability for any decrease in the quality of the goods. 3) Last but not least — the aggrieved party must prove the amount of the losses which it seeks to recover. As the ICAC established, the amount of expenses actually sustained by the plaintiff was calculated on the basis of recognition of the poor quality of 600 units of goods. This fact was supported with invoices, payment orders and other documents which the plaintiff submitted to the tribunal, which held this amount to be subject to compensation. However, another part of the claim, relating to recovery of overhead and general factory expenses, was rejected because, while the amount of such expenses was dec­ lared by the plaintiff to be 543% and 236% respectively, the plaintiff had failed to provide the tribunal with any supporting documents.62 Expenses for legal services may also be recoverable if the amount is sufficiently supported. In its award, when addressing this issue, the ICAC noted that the amount of the payment to counsel was evidenced by documents, and the amount was found to be reasonable given the complexity of the case.63 However, the ICAC refused to satisfy a claim of a buyer to recover expenses from the seller in connection with the secondment of buyer’s representatives to negotiate with the seller in an attempt to achieve an amicable agreement. It noted in the award that unless the parties had agreed otherwise, each party to the negotiations should bear its own risk of their failure.64 Lost profits may also be recoverable if a claimant succeeds in proving that his calculation was reasonable and fair. In one of the cases considered by the ICAC the plaintiff demanded recovery of lost profits since, due to non-delivery of the goods by the respondent, it was impossible for the plaintiff timely to perform a contract with a third person who then cancelled it. The plaintiff submitted the calculation of lost profits to the tribunal and

  See: Id., pp. 127–128.   See: Id., pp. 348–350. 64   See: M.G. Rosenberg. International Sale of Goods. Commentary on Legal Regulation and Practice of Dispute Resolution, p. 325. 62 63

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gave convincing explanations. The ICAC recognized the plaintiff’s claim to be wellgrounded and granted it.65

4.3. Calculation of losses The method of calculating losses depends upon whether or not a statement repudiating the contract accompanies the claim for recovery of losses.66 In the latter instance (if the breach of contract is not deemed to be a fundamental one) the losses to be recovered “…may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.”67 (Article 74 of the Convention) In the former instance (when a claim to recover losses is advanced in connection with cancellation of the contract) there are two different situations: a) The contract was cancelled. Thereafter the aggrieved party succeeded in concluding a substitute transaction (that is, the buyer bought the goods from a different person or the seller resold the goods). In this situation, according to Article 75 of the Convention, the injured party may require the party in breach to pay the difference between the contract price and the price of the substitute transaction and, in addition, any further damages recoverable under Article 74.68 65   See: Practice of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation in 2005, p. 183. 66   See: Professor A.S. Komarov, Ed., Венская Конвенция о договорах международной купли-продажи товаров. Комментарий [Vienna Convention on Contracts of International Sale of Goods. Commentary]. Moscow. 1994, pp. 173–178. 67   When the respondent contested the plaintiff’s claim to recover losses due to a strike that the respondent could not foresee, the ICAC rejected the argument. Since the strike had already begun at the time of entering into the contract, the respondent ought to have taken it into consideration (see: M.G.Rosenberg, Ed., Practice of the International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation in 1998. Moscow, 1999, pp. 76–78). 68   The party, whose claim is based on Article 75 of the Convention, must prove that another contract was entered into after cancellation of the original one, and that this contract was intended to replace the original one. Failure to prove this will lead to rejection of the claim. When addressing this issue in one of its awards, the ICAC indicated that, as it appeared from the materials of the case, the contract of June 4, 2003, with respect to which contract the dispute arose, had not been cancelled in due course. The ICAC also noted that the contracts referred to by the plaintiff as substitute ones, had been concluded between the plaintiff and the third person prior to August 1, 2003, i. e. prior to commencement of the time for the respondent’s performance of the contract of June 4, 2003. The plaintiff failed to prove that these contracts had been entered into instead of the contract of June 4, 2003 and they had been substitute transactions, nor did he submit any evidence confirming receipt of the goods from the third party

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b) The contract was cancelled but the injured party failed to conclude a substitute transaction. Here the aggrieved party is entitled to “...recover the difference between the price fixed by the contract and the current price at the time of avoidance as well as any further damages recoverable under Article 74.” (see: Article 76) It should be noted that currently similar rules are conatined in Article 3931 of the Civil Code. 5. The aggrieved party may also require the party in breach to pay interest in case of delay in the payment of the price or other sum due under the contract (see: Article 78). The Convention gives no further details concerning this provision; therefore the amount of interest shall be calculated on the basis of norms of governing law. The governing norms may be set forth not only in national law of the relevant state but also in an international treaty since the 1980 Convention “..does not prevail over any international agreement which has already been or may be entered into and which contains provisions concerning the matters governed by this Convention, provided that the parties have their places of business in States parties to such agreement.” (Article 90) In the course of considering a dispute between a Russian seller and a Chinese buyer the ICAC noted that the contract did not specify the governing law. Nor did the parties agree on this law at a later time. In this situation the ICAC established the governing law on the basis of international treaties regulating the international sale of goods. Being guided by Article 90 of the 1980 Convention (to which both Russia and China are parties), the ICAC noted that General Delivery Conditions USSR-ChPR was an international treaty valid between Russia and China and that it prevailed over the 1980 Convention. Since according to §55 (Section 1) of General Delivery Conditions the interest rate in the event of delay in payment is 6% per annum, calculated from the date of commencement of the delay, the ICAC obligated the respondent to make payment for the delay to the plaintiff.69 Should relations between the seller and the buyer be governed by Russian law, Article 395 of the RF Civil Code will apply. It provides: “The amount of interest shall be based on the bank interest rate (refinancing rate) effective during appropriate periods of time, at the place of residence of the creditor, and if the creditor is a legal entity, at its place of location.” (Section 1) It is also necessary to bear in mind the interpretation of this norm as set forth in the Ordinance of the Plenum of the RF Supreme Court and the Plenum of the RF and payment for them. Given these circumstances, the ICAC rejected the claim (see: Practice of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation in 2005, p. 133). 69   See: id. P. 39–44. 448

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Supreme State Arbitration Court of July 1, 1996 No 6/8 “On some issues connected with application of Part one of the Civil Code of the Russian Federation.” It states, inter alia, that when, in accordance with legislation on currency regulation and currency control, a monetary obligation is manifested in foreign currency, and there is no official bank interest rate for currency credits on the date of performance of the monetary obligation at the place of location of the creditor, then the amount of interest shall be determined on the basis of an official publication of information on average bank interest rates on short term currency credits provided at the place of location of the creditor. If there are no such publications, the amount of interest to be paid shall be based on information from one of the leading banks at the place of location of the creditor confirming its rate on short term credits, such information to be provided by the plaintiff (see: Section 52). Conditions for exemption of liability for breach of a contract of international sale of goods are set forth in Article 79, Section 1 of the Convention: “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.” Thus there would be no liability for breach of a contract if the breach resulted from a circumstance which the party in breach could not (1) foresee and (2) prevent or avoid. The quoted language does not note the extraordinary character of the circumstance which (at least in terms of Russian law) is required to qualify the circumstance as a kind of force majeure. Therefore this norm of the Convention includes both force majeure and casual breach of contract. It means that liability for breach of contract under the Convention is based upon the principle of fault. This rule (like almost all other provisions of the Convention) is an optional one, so the parties are at liberty to change conditions of liability for breach of contract. Thus they may agree upon a clause according to which liability will only be excluded in the event of force majeure. It should be noted that the ICAC is very cautious in qualifying a situation as a manifestation of force majeure. It has rejected references to events such as a crisis in the financial market in the country of the buyer and a substantial decrease of demand in relation to goods. Lack of money and a worsening economic situation are matters of usual economic risk which should be taken into consideration by those entering into international business contracts.70

  See: M.G. Rosenberg. International Sale of Goods, Commentary to Legal Regulations and Practice of Dispute Resolution, pp. 341–342. 70

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§ 5. Statutes of limitation 5.1. General provisions A statute of limitation establishes the limitation on the time period within which a person whose right has been violated may seek court protection of that right. Under Russian law the general statute of limitation is 3 years but in any case cannot exceed 10 years from the date of violation of the right (see: Article 196 of the RF Civil Code). This time period applies to the majority of rights including those arising out of a contract for the sale of goods both in domestic and, when an international contract is governed by Russian law, in foreign markets. There are some claims for which special limitation periods have been established. For example, a 2 year statute of limitations has been established for claims arising out of property insurance obligations (see: Article 966 of the Civil Code), and a 1 year period for claims arising out of a contract for the carriage of goods (see: Article 797, Section 3 of the Civil Code).71 In order to properly define a time limitation period it is necessary to establish the legal nature of the obligation in question. Here is an illustrative case. There was a contract between two companies under which one party (the performer) undertook to render services to another company (the client) to organize and accompany railway transportation of the client’s goods in carriages belonging to the performer. The performer sued the client for a delay in using the carriages and demanded he pay a fine in accordance with the contract. A trial court granted the claim in part since some demands included in the claim were time barred. This judgment was upheld by the appellate court and the court of cassation. These courts assumed that the contract in question was a contract for the carriage of goods by rail, for which the limitation period was 1 year. Meanwhile the Presidium of the RF Supreme State Arbitration Court, having reviewed the case in the course of court supervision upon the complaint of the performer, noted in its Ruling that the lower courts erroneously classified the contract in dispute as one for the carriage of goods by rail. However, this was actually a contract for the rendering of services in the organization and accompaniment of transportation of goods, a type of contract should be regulated by Chapter 39 of the RF Civil Code “Compensated Rendering of Services.”   Certain claims are not subject to a time bar, such as, claims concerning protection of personal non-property rights; claims of depositors against a bank with respect to release of deposits; claims concerning compensation for harm caused to the life or health of a citizen; claims of an owner concerning the elimination of any violation of his right if these violations were not connected with a deprivation of possession (see: Article 208 of the Civil Code). 71

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Therefore the 1 year time limitation period (established for claims arising out of contracts for the carriage of goods) was not be applicable to this contract. And for the general time limitation period (3 years), had not expired. The Presidium quashed the acts of lower courts and referred the case back to the trial court for review72.

5.2. Starting point of the time limitation period (general rules) In order to establish whether or not a statute of limitations has run, it is first necessary to clarify the date from which the statute of limitations begins to run. Theoretically, there are three possible ways whereby it might be determined. Since the statute of limitation sets the time during which a court will protect a right which has been violated, until a violation has occurred the right does not need protection. The starting point of the running of the statute of limitations may be based on the date when the violation of the right occurred. However, in order to initiate court proceedings the holder of the right should at least be aware that his right has been violated. Also it is quite clear that a claim to protect the violated right must be brought against the person who committed the violation. Until this person is identified, there is no defendant. Therefore the starting point of the running of the time limitation period could be the date when: — the right was violated; or — the holder of the right became (or should have become) aware of the violation; or — the holder of the right became (or should have become) aware both of the violation and who committed it. Looking at different legal systems, it is possible to see that each of these possible starting points is reflected in one system or another. For example, in Bulgaria the statute of limitations begins running on the date when the claim arose, that is, when the right was violated (see: Article 114 of the 1950 Law of Obligations and Contracts). This is actually the first variation above. According to the RF Civil Code “the running of the time limitation period shall begin on the day when the person knew or should have known about the violation of his right.” (see: Article 200, Section 1, original version) This is none other than the second variation above.

  See: Bulletin of the RF Supreme State Arbitration Court. 2013, N 5, pp. 199–202.

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When establishing this date, the ICAC takes into consideration the circumstan­ ces of the case. Here is an example. A defendant (seller) believed that the statute of limitations began to run on August 15, 2002, when the defendant, in accordance with the cont­ ract, was required to send the goods to the plaintiff (buyer) but failed to do so. Therefore the time limitation period lapsed on August 15, 2005. However, from the plaintiff’s (buyer’s) point of view the statute of limitations began to run August 8, 2004, 10 days after the date of the defendant’s (seller’s) letter (July 28, 2004) in which he stated that, given the lapse of time, the defendant (seller) would consider the contract to be cancelled. In the plaintiff’s view, the time limitation period had not elapsed by the date of filing of the statement of claim with the ICAC (May 12, 2006). The ICAC concluded that the plaintiff (buyer) became aware that the goods would not be delivered to him only upon receipt of the defendant’s letter of July 28, 2004, in which the defendant (seller) required, inter alia, the plaintiff to provide him with additional documents needed in order to obtain an export license (which requirement was not set forth in the contract) and warned the plaintiff (buyer) that if he failed to comply with this requirement within ten days the defendant would consider the contract cancelled. Given these circumstances, the statute of limitations began to run August 8, 2004 (see: Practice of the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation in 2006, pp. 335–336). In another case, when a defendant insisted upon calculating the time limitation period from the date of the actual payment for goods, the ICAC rejected this position since the plaintiff only became aware of the payment at a later time after he had received information from the bank of his country. After due consideration of this fact the claim was held not to be time-barred.73 Currently Section 1 of Article 200 of the Civil Code is amended and reads as follows: “Unless otherwise provided by law the running of the time limitation period starts from the day when a person became or should have become aware of violation of his right and who is a proper respondent in the claim on protection of this right.” Therefore now the RF Civil Code assumed the third variation above.

  See: M.G. Rosenberg. International Sale of Goods. Commentary on Legal Regulation and Practice of Dispute Resolution, p. 370. 73

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5.3. Specific rules for certain obligations Having established the general rule, the Code then considers it in relation to different types of obligations. “With regard to obligations with a specified period of performance, the running of the time limitation period shall begin at the end of the period of performance.” (Article 200, Section 2, Paragraph 1) Having ascertained that the contract provided a fixed time for payment of the purchase price after the date of receipt of the payment order by the bank of the defendant, the ICAC concluded that the starting point for the running of the statute of limitations was the date of expiration of the time for payment rather than the date when the payment order was received by the bank.74 “With regard to obligations the period for the performance of which has not been determined, or was determined at the time of demand, the running of the time limitation period shall begin from the day of presentation of a demand of performance of the obligation by a creditor, and if a debtor is granted a grace period for performance of such a demand, calculation of the time limitation shall start upon expiration of a grace period. In any case a time limitation period cannot exceed ten years from the day when the obligation arose (see: Article 200, Section 2, Paragraph 2).75 There is also a special rule concerning the recourse obligations with regard to which “the running of the statute of limitations shall begin at the time of performance of the principal obligation.” (Section 3).76   See: id., p. 369.   When an obligation does not provide for the period of its performance and does not contain conditions enabling this period to be determined and likewise an obligation whose period of performance was determined by the time of demand, the obligation must be performed within a seven day period from the date of presentation by the creditor of the demand concerning the performance thereof, unless the duty to perform within another period or immediately after presentation of a demand provided by law, other legal acts, conditions of the obligation or follows from customs or the essence of the obligation. In case a creditor fails to present a demand on performance of such an obligation within a reasonable time the debtor is entitled to require the creditor to accept performance unless otherwise provided by law, other legal acts, conditions of the obligation or follows from customs or the essence of the obligation (see: Article 314, Section 2 of the Civil Code). There are specific rules with respect to grace period concerning a lease contract. “If the period of lease has not been determined in the contract, the contract of lease shall be considered to be concluded for an indefinite period. In this event each of the parties shall have the right at any time to repudiate the contract, having notified the other party of it one month in advance, and in the event of a lease of immovable property, three months. Another period may be established by a law or by contract for notifying termination of a contract of lease concluded for an indefinite period.” (Article 610, Section 2 of the Civil Code) 76   As it was established during a hearing, the dispute arose in connection with a recourse claim filed by the plaintiff with the ICAC May 31, 2004 to recover losses resulting from a contract of July 8, 1996 whose performance was completed December 31, 1997. 74 75

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With respect to the third variation of the starting point of time limitation period (see: supra, Section 5.2 of this § 5), it is also reflected in legal norms related to certain specific kinds of claims. The 1963 Vienna Convention on Civil Liability for Nuclear Damage (Article VI) provides for a ten year statute of limitations to begin running from the date when a nuclear incident occurs, but Participating States are entitled to introduce a rule providing that the statute of limitations should begin from the date when the victim became or should have become aware both of the incident and the identity of the nuclear operator responsible for it, in which case the length of the statute of limitations should be at least three years (within a 10 year period from the date of the nuclear incident). The Convention on Time Limitation in International Sale of Goods of 1974, New York, as amended by the Protocol of 1980, Vienna77 sets a 4 years statute of limitations (see: Article 8) to run from the date when a breach of contract occurred (see: Article 10, Section 1).78 The length of a statute of limitation may be extended due to its suspension or interruption.

5.4. Final day of the time limitation period The RF Civil Code contains some rules regarding calculation of terms which rules shall apply to any period of time including a time limitation period. According to Article 192, a term of years shall expire on the relevant day of the month of the last year of the term. Written statements and notifications delivered to a post office within 24 hours of the last day of the term shall be deemed to have been delivered on time (see: Article 194, Section 2). Given this situation the ICAC held in its award that the starting point of the time limitation period was December 31, 1997, so this period had expired December 31, 2000, i. e. several years prior to May 31, 2004 when the statement of claim was filed with the ICAC. Therefore the claim was time-barred (see: Practice of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation in 2005, pp. 187–188). 77   Russia is not a party to this Convention. 78   This general rule is accompanied with two reservations. The starting point for the running of the statute of limitations in relation to claims arising out of a defect or other nonconformity of goods with the conditions of the contract is the date of actual delivery of the goods to the buyer or his refusal to accept the goods (see: Article 10, Section 2). If a claim results from fraud committed prior to or in the course of entering into the contract or during its performance, the time limitation period will run from the date when the fraud was (or reasonably could have been) discovered (see: Article 10, Section 3). 454

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If the final day of a term falls on a day off (e.g. Saturday, Sunday or a public holiday), the final day of the term shall be shifted to the nearest working day (see: Article 193). It should be noted, however, that the European Court of Human Rights has its own approach to this issue. The Convention for the Protection of Human Rights and Fundamental Freedoms provides in Article 35 (Section 1): “The European Court may only deal with the matter after all domestic remedies have been exhausted, according to the generally recognized rules of international law, within a period of six months from the date on which the final decision was taken.” The European Court is very strict in checking whether a complaint is submitted within this 6 month period and without delay. In its Judgment in Sabri Gunes v. Turkey of June 29, 2012, the Grand Chamber of the European Court considered whether a 6 month term should be extended to the first working day if the day in question (“dies ad quem”) falls on a Saturday, Sunday or public holiday. On the basis of a literal interpretation of the rule set forth in Article 35 Section 1 of the Convention, the European Court concluded that if the last day of the 6 month term fell on a Sunday, where the national law of participating countries would extend a period of time to the nearest working day, this nevertheless cannot effect determination of the dies ad quem. In the case in question the final judgment of the Supreme Military Administrative Court of November 16, 2005 was handed down on November 28, 2005. The time period established under Section 1 of Article 35 of the Convention started to run the next day, November 29, and expired at midnight Sunday May 28, 2006. The complaint was submitted May 29, 2006, i.e. after the term had expired. The European Court therefore could not consider the case on the merits. The European Court has explained its strict approach noting that if it were to take national law and practice into its determination of the dies ad quem it would need to maintain a schedule of public holidays of the 47 countries participating in the Convention. However, given the numerous means of communication currently available to potential applicants (such as postal services, facsimile, electronic communication, and the Internet) a 6 month time period is more than sufficient within which to submit a claim and consider its contents. It should be noted that in accordance with the Protocol N 15 to the Convention this period shall be 4 months (i. e. two months shorter).

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5.5. Suspension of the time limitation period According to Article 202, Section 4 and 3 of the RF Civil Code, the running of a statute of limitation shall be suspended: (a) if the bringing of suit has been hindered by force majeure;79 (b) by virtue of a moratorium, that is, a deferral for the performance of obligations established on the basis of a law by the Government of the Russian Federation; (c) by virtue of the suspension of the operation of a law or other legal act regulating the respective relationship; (d) if the parties entered into an agreement to conduct mediation proceedings in accordance with the Federal Law “On Alternative Procedure of Settlement of Disputes with Participation of an Intermediary (Mediation Proceedings)”, or to use pre-trial administrative proceedings as provided by law; (e) if the plaintiff or respondent is in the Armed Forces which are transferred to a place of combat.80 Article 202 also provides that “the running of the time limitation period shall be suspended provided the circumstances specified in Section 1 of this Article arose or have continued to exist during the last six months of the period of limitation, and if this period is equal to six months or less than six months, during the period of limitation.” (Section 2) The effect of suspension of the time limitation period is described in Section 4 of Article 202, as follows: “the running of the period shall continue from the date of termination of the circumstance serving as the grounds for suspension of the limitation. The remaining part of the period shall be extended up to six months, and if the period of limitation is equal to six months or less than six months, up to the period of limitation.”81 In case the parties agreed to use mediation or other pre-trial procedure of a dispute resolution as provided by law, the running of the time limitation period shall be suspended for a term established by law, and if there is no such a term — for six months from the day of commencement of an appropriate procedure (see: Ar­ ticle 202, Section 3 of the Civil Code).   For the meaning of force majeure see: supra, Chapter 3, § 3, Section 3.4.2.2.   This ground for suspension of the running of the statute of limitations shall only be applicable if the plaintiff or defendant is an individual; all the remaining grounds are available both for individuals and for legal entities. 81   Similar (albeit not identical) rules are set forth in Article 21 of the 1974 Convention. This Article provides that if a creditor cannot bring a claim due to circumstances beyond his control and he can neither avoid nor overcome these circumstances, the statute of limitations shall not be deemed to have expired until the lapse of one year from the time when such circumstances ceased to operate. 79

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5.6. Interruption of the time limitation period Until recently interruption of the time limitation period resulted from: 1) bringing a suit in due course, and 2) performance of actions by the obliged person which testify to recognition of the debt (see: Article 203, Paragraph 1).82 Let us now consider these situations in turn. 1.  Bringing a suit in due course means that the following conditions must be complied with: (a) A statement of claim must be filed with a court of appropriate jurisdiction. If a plaintiff in a commercial dispute files suit in a court of general jurisdiction (instead of in a state arbitration court), the running of the statute of limitations will not be interrupted. Likewise, if a statement of claim arising out of a contract with an arbitration clause is filed with a state arbitration court (rather than with the arbitral forum agreed to in the arbitration clause) the statute of limitations will not be interrupted as long as the other party objects to resolution of the dispute by the state arbitration court prior to (or at least no later than) the date set for his reply to the merits of the case. If he objects timely, the state arbitration court will not consider the statement of the claim (see: Article 148, Section 5 of the RF Arbitration Procedure Code).83 It should also be noted that in filing a statement of claim, the territorial competence of the relevant court must be observed. For example, according to a general rule stated in Article 35 of the Arbitration Procedure Code “a suit shall be brought to a state arbitration court of the subject of the Russian Federation at the place of location or place of residence of the defendant.” If, in violation of this rule, a plaintiff files his statement of claim with a state arbitration court of the subject of the Russian Federation where the plaintiff has his own place of business, the running of the time limitation period will not be interrupted, since the case is beyond the competence of the court. In such a situation, the court will return the statement of claim to the plaintiff (see: Article 129, Section 1, Subsection 1 of the Arbitration Procedure Code).   Similar rules are set forth in Articles 13 and 20 of the 1974 Convention.   As it is expressly stated in Article 204 of the Civil Code “if a suit has been left without consideration by a court, then the running of the period of time limitation which commenced before bringing suit shall continue in the general procedure...” (Paragraph 1). 82 83

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(b) If, according to a law84 or contract, a “letter before action” should be sent to a defendant prior to filing a statement of claim with a court, a plaintiff should follow this requirement, otherwise the statement of claim will not be consi­ dered (see: Article 148, Section 2 of the Arbitration Procedure Code), and no interruption of the running of the statute of limitation will occur. 2. Acknowledgement of the debt by the debtor may be proved by acts such as his letter to the creditor with information concerning his efforts to arrange payment via a bank, or the debtor’s letter to the creditor attaching a copy of the debtor’s application to relevant state bodies requesting an allocation of money for payment of the debt.85 The debtor’s intention to acknowledge his duty to the creditor must appear clearly from relevant document(s). For example, the ICAC held that the defendant’s letter to the plaintiff containing schedules of payment for the goods did confirm the defendant’s indebtedness (see: Practice of the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation in 2006, p. 301). On the other hand, the mere fact that the defendant did not contest receipt of the goods could not in and of itself be deemed acknowledgement of his duty to pay for the goods on the basis of the contract since the defendant in his letters to the plaintiff denied the existence of any reasons for payment for the goods (see: id., pp. 249-250). Similarly, a defendant’s request that he be provided with documents supporting the plaintiff’s claim was not recognized by the ICAC as an act resulting in interruption of the statute of limitations. Nor did the ICAC find the limitation period interrupted by a bilateral statement confirming the debt since this statement was signed on behalf of the defendant by a person who had no authority to do so.86 It is self-evident that an act of acknowledgement of the debt must be made by the debtor within the time limitation period because if it has already expired, there is nothing to interrupt.87   Article 797, Section 1 provides that filing of the statement of claim resulting from a contract of carriage of goods shall be preceded with a letter before action in compliance with appropriate transport charter or code. E. g. according to the RF Merchant Shipping Code such a letter before action in case of carriage of goods by sea in cabotage should be presented within the time limitation period and it should be considered by the carrier wihin 30 days from the date of its receipt. Time limitation period sall be suspended from the date of submission of the letter to the carrier until receipt of a reply or expiration of a term for it (see: Articles 403, 406, 407). 85   See: M.G. Rosenberg, op. cit., pp. 371–372. 86   See: id., p. 372. See also: Practice of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation in 2006, pp. 306–307. 87   If, on the other hand, a person performed his obligation after expiration of the time limitation period, he shall not have the right to demand back that which has been performed, even 84

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On the same reasons unilateral acts aimed to exercise of a right (such as set off) may only be performed within the time limitation period (see: Article 199, Section 3 of the Civil Code). Legal consequences of interruption of a time limitation period are as follows. After the interruption, the running of the period of limitation shall commence anew; the time which lapsed before interruption shall not be calculated in the new period (see: Article 203, Paragraph 2). There are also specific rules concerning time limitation period in case a victim seeks a court protection of a violated right. According to Article 204 of the Civil Code a time limitation period shall not run from the day of application to a court in due course for protection of a violated right during the whole time period of court protection of this right (see: Section 1). If a suit has been left without consideration by a court, then the running of the time limitation period which commenced before bringing suit shall continue in the general procedure unless otherwise follows from grounds upon which court proceedings on protection of the right have been terminated (see: Section 2, Paragraph 1). If after leaving the suit without consideration non-expired part of the time limitation period is less six month, it shall be expended up to six months except cases when the grounds for leaving the suit without consideration were acts (omission) of the plaintiff (see: Section 3). The expiration of the time limitation period shall be a basis for the court to render judgment rejecting the claim (see: Article 199, Section 2, Paragraph 2 of the Civil Code). However “limitations shall be applied by a court only upon an application of the party to the dispute made before the rendering of judgment by the court.”88 (Section 2, Paragraph 1) Such an application shall be granted provided the court established that the time limitation period did expire. Here is an illustrative case. A trial court rejected the claim given that the starting point of the time limitation period was December 13, 2006, so this period expired December 13, 2009, meanwhile the statement of claim was received by court December 16, 2009. The judgment was upheld both by court of appeal and the court of cassation. However the Presidium of the RF Supreme State Arbitration Court, having reviewed the case upon supervisory complaint of the plaintiff, established the follo­ wing. though at the time of performance he did not know that the limitation period had expired. (See: Article 206 of the Civil Code. A similar rule is set forth in Article 26 of the 1974 Convention). 88   A similar rule is provided in Article 24 of the 1974 Convention. 459

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The statement of claim was sent by the plaintiff to a trial court by post and it was submitted to the post office December 14, 2009. According to Article 194, Section 2 of the Civil Code written documents submitted to a post office before 12 p.m. of the last day of the time period shall be deemed submitted in due time. It should also be noted that in case the last day of a time period falls on a nonwork day, the last day of the time period shall be deemed the next workday (see: Article 193 of the Civil Code). In the case in question the last day of the time limitation period was December 13, 2009, Sunday, i. e. non-work day. Therefore the last day of the time limitation period was the next day, i. e. December 14, 2009. The Presidium came to a conclusion that the statement of claim was sent by post within the time limitation period; lower courts’ acts were quashed.89 3. Recent legal consequences of time limitations concerning filing a suit and acknowledgement of a debt. Traditionally both these situations entailed interruption of the time limitation period after which the period would begin to run anew; the time period that had lapsed before interruption was not to be included in the new term (see: Article 51 of the Civil Code 1922, Article 86 of the Civil Code 1964, Article 203 of the Civil Code 1995, original version). However, the consequences of this rule had a different impact in the two situations: Where the debtor acknowledged the debt, thereby interrupting the time limitation period, the creditor could apply for court protection of his right at any time within the new time limitation period. However, if the creditor brought suit, his position appeared to be more vulnerable. The new time limitation period, once begun, would run until its expiration (usually 3 years) without regard to how long judicial proceedings might last before a final court judgment (or arbitral award) took effect. Since such proceedings could be delayed (such as when a case might repeatedly pass through several courts), the new time limitation period could well expire before complete resolution of the dispute.90   See: Bulletin of the Supreme State Arbitration Court of the Russian Federation, 2011. No 11, pp. 188–191. 90   Here is an illustrative case considered by the ICAC. A statement of claim was filed with the ICAC January 16, 2001. On May 29, 2002 the ICAC issued an arbitral award granting the claim in part. The respondent filed a motion with the State Arbitration Court of the City of Moscow with a motion to set the award aside. This motion was rejected by the ruling of the State Arbitration Court of the City of Moscow on January 21, 2003. The respondent challenged this ruling in the Federal State Arbitration Court of the Moscow Circuit. Its ruling of April 17, 2003 quashed the ruling of the State Arbitration Court of the City 89

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Apparently due to such a perilous possibility the Civil Code was amended to differentiate acknowledgement of the debt by the debtor, on the one hand, and the bringing of suit by the creditor, on the other. Interruption of the time limitation period is now provided only for an acknowledgement of debt (see: Article 203, the new version). However, if a new suit is filed, the time limitation period shall not run from the date of application to a court for protection of the violated right through the entire time of judicial consideration of such protection (see: Article 204, the new version). In other words, the time limitation period is suspended. It is useful to note that a similar approach is set forth in Unidroit Principles of International Commercial Contracts 2010. According to Article 10.4 (1): “Where the obligor before the expiration of the general limitation period acknowledges the right of the obligee, a new general limitation period begins on the day after the day of the acknowledgement.” This it is none other than an interruption of the time limitation period. The following illustration is given in the Official Comment on this rule: “B discovers defects in the construction work of A only 9 years after completion of the work. The defects could not have been discovered earlier. B threatens to initiate legal action, and A acknowledges the defects. The new general limitation period begins to run from the acknowledgment, so the limitation period amounts altogether to twelve years.” of Moscow and referred the case back to that Court for review. The Court again rejected the respondent’s motion to set aside the ICAC’s award. The respondent repeated his cassation appeal to the Federal State Arbitration Court of the Moscow Circuit whose ruling of August 15, 2003 granted the respondent’s appeal and quashed the ICAC’s award. As a result of it the statement of claim was not considered. The plaintiff filed a new statement of claim in the same case with the ICAC February 8, 2005. The respondent contested the claim citing expiration of the time limitation period that ended January 16, 2004. The ICAC came to the following conclusion. The time limitation period was interrupted by submission of the original statement of claim of January 16, 2001, so this period started to run anew from the next day (i.e. January 17, 2001). The last day of this period was January 17, 2004. The ruling of the Federal State Arbitration Court of the Moscow Circuit (whereby the ICAC’s award of May 29, 2002 was quashed and therefore the original statement of claim filed with the ICAC was left without consideration) was taken August 15, 2003. The time gap between this date and the final date of the time limitation period (January 17, 2004) was 5 months. Within this time period the plaintiff had an ample opportunity to file a second statement of claim with ICAC but he failed to do so. The second statement of claim was submitted February 8, 2005 after the time limitation period had already expired. This circumstance (in conjunction with relevant reference of the respondent) led to rejection of the claim (see: M.G.  Rosenberg, Ed. Practice of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation in 2007-2008. Moscow, 2010, pp. 150–158). 461

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But if suit is brought, the situation is different. Article 10.5 provides: “(1) The running of the limitation period is suspended (a) when the obligee performs any act, by commencing judicial proceedings or in judicial proceedings already instituted, that is recognized by the law of the court as asserting the obligee’s right against the obligor; … (2) Suspension lasts until a final decision has been issued or until the proceedings have been otherwise terminated.” Article 10.6 contains similar provisions concerning the initiation of arbitral proceedings. Ergo: currently Civil Code rules concerning the legal consequences for the time limitation period of acknowledgement of the debt by the debtor and the bringing of suit have been harmonized with the relevant rules of the Unidroit Principles. (In terms of their legal status, these Principles are lex mercatoria, i.e. rules having been formed in the course of commercial practice). This will contribute to further improvement in the effectiveness of judicial protection of violated rights.

5.7. The problem of reinstatement of the time limitation period A question may arise whether in some circumstances a creditor is entitled to obtain court protection of his right despite expiration of the time limitation period, that is, whether a reinstatement of the time limitation period is possible. This was possible in the past. The 1964 Civil Code provided that if a court found that the time limitation period had been missed by a creditor for a justified reason, the right that was violated should be protected (see: Article 87). Currently such a possibility is only available to individuals under certain strict conditions. According to Article 205 of the effective Civil Code: “in exceptional instances, when the court deems the reason for the lapse of the time limitation period to be justifiable with regard to circumstances connected with the person of a plaintiff (grave illness, helpless state, illiteracy, etc.), the violated right of the citizen shall be subject to protection. The reasons for lapse of the time limitation period may be deemed justifiable if they occurred in the last six months, within the period of limitation.” If, however, a plaintiff is a legal entity, reinstatement of the time limitation period is excluded even if it was missed for a justified reason. Court practice is quite definite on this point.91

  See: M.G. Rosenberg, op. cit., p. 366.

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When dealing with issues related to time limitation periods in international trade contracts, a court shall apply norms of governing law established by a court on the basis of conflict of laws rules. In one case considered by the ICAC, the respondent objected to the claim referring to expiration of the 3 year statute of limitations provided by Russian law. However, the ICAC clarified during the course of the hearing that at some later time the parties had agreed to apply Swedish substantive law to the contract. Since, under Swedish law, the statute of limitations is 10 years, the ICAC held in its award that the time had not expired by the date of submission of the statement of claim.92 Likewise, when the ICAC concluded that a contractual relationship between parties should be governed by Belgian substantive civil law in which the statute of limitations is 30 years, the ICAC rejected the respondent’s argument based on the 3 year statute of limitations of Russian law.93 It should also be noted that, in spite of the fact that Russia is not a party to the 1974 Convention, under certain conditions its norms will apply to relationships involving Russian businesses.94 Article 3 of the Convention, as amended by the 1980 Protocol, provides that the Convention shall apply if: a) at the time of entering into a contract of international sale of goods, places of businesses of the parties to the contract are in Contracting States and b) according to the rules of private international law, the contract of sale shall be governed by the law of a Contracting State.

§ 6. Establishment of governing law 6.1. General provisions First of all, one should bear in mind that if an issue in dispute is regulated in sufficient detail by norms of international law, there is no need also to apply the legal rules of one country or another. Having established that the plaintiff sought only return of an advance payment for goods and recovery of damages and made no other demands, the ICAC took the position that provisions of the 1980 Convention, as set forth in Chapter II, Sections I and II “Obligations of the Seller” (Articles 30–44) and Chapter V, Section II “Damages” (Articles 74–77), regulated the subject of the dispute in an exhaustive manner,   See: Id., p. 376.   See: Id., p. 379. 94   See: Id., p. 380. 92 93

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so there was no need to apply national law. The ICAC therefore rejected the plaintiff’s suggestion to apply relevant norms of the RF Civil Code.95 The necessity to determine governing national law arises when the rules of the Convention lack sufficient detail. As Article 7 (Section 2) of the Convention specifically provides, “Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general princip­ les on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.” Moreover, Article 6 provides that “The parties may exclude the application of this Convention” in which case a dispute shall be resolved on the basis of national law. Substantive provisions of civil law applicable to the relationship of the parties to international trade contracts shall be established based on the conflict of laws rules set forth in international treaties of the Russian Federation, the RF Civil Code, and other laws96 and customs which are recognized in the Russian Federation (see: Artic­ le 1186, Section 1, Paragraph 1 of the Civil Code). Conflict of laws rules in effect in Russia are mandatory for Russian state courts. With respect to international commercial arbitration (both institutional and ad hoc) it is expressly indicated in Article 1186, Section 1, Paragraph 2 that the peculia­ rities of establishing applicable law in international commercial arbitration shall be provided by a law on international commercial arbitration. Article 28 of the Law “On International Commercial Arbitration” provides that if governing law is not agreed to by the parties to a dispute, “the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable.” (Section 2) In other words, unlike a state court, international commercial arbitration is not bound by conflict of laws rules of the country where the arbitral proceedings take place.97 Therefore an international arbitral tribunal, when considering a case in Russia, is not obliged to determine the governing substantive civil law on the basis of Russian conflict of laws norms,98 although, in practical terms, international commercial arbitration usually applies relevant local rules.   See: Practice of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation in 2005, p. 132. 96   E. g., with respect to civil law relations in merchant shipping, the conflict of laws norms are concentrated in Articles 414–427 of the Merchant Shipping Code. 97   See: Professor A.L. Makovsky and Professor E.A. Sukhanov, Eds., Комментарий к части третьей Гражданского кодекса Российской Федерации [Commentary on Part Three of the Civil Code of the Russian Federation]. Moscow, 2002, p. 314. 98   See: Id., p. 316. 95

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It is useful to note in this connection that the 73rd Conference of the International Law Association held in Rio de Janeiro, Brazil, August 17-21, 2008 specifically emphasized in its Resolution No 6/2008, Section 4: “Arbitrators attempting to ascertain the contents of applicable law should bear in mind that the rules governing the ascertainment of the contents of law by national courts are not necessarily suitable for arbitration, given the fundamental differences between international arbitration and litigation before national courts. In particular, arbitrators should not rely on unexpressed presumptions as to the contents of the applicable law, including any presumption that it is the same as the law best known to the tribunal or to any of its members. Or even that is the same as the law of the seat of the arbitration.”

6.2. Lex voluntatis principle With respect to obligations arising out of an international trade contract, the Russian conflict of laws norms are based upon the principle of lex voluntatis according to which the parties to a contract may choose, by agreement between them, the law to govern their contractual relationship. This approach is similar to that of the Convention on the Law Applicable to Contractual Obligations, Rome, 1980 (see: Article 3, Section 1). Such a choice may be made upon conclusion of negotiation of the contract99 or at some later stage100 (see: Article 1210, Section 1 of the Civil Code).   In certain situations a court, when determining the governing law, should be guided by other conflict of laws norms. As established by the ICAC in one of its cases, a contract was entered into by a Russian company and a firm from the USA, and the parties agreed that their contractual relationship would be governed by Russian law. However, the ICAC received information from the USA that the American firm was in bankruptcy proceedings and in the course of liquidation. According to Article 362 of the USA Bankruptcy Code, unless a plaintiff is granted an exemption, any proceedings against such a firm shall be stayed and no exemption had been granted. According to Article 1202, Section 2, Subsection 4 of the RF Civil Code, issues related to liquidation of a legal entity should be resolved on the basis of the personal law of a legal entity which is the law of the country where the legal entity was founded. The firm in question was founded and registered in the State of Texas, USA. Therefore the bankruptcy proceedings were to be regulated by the law of the USA, and since no exemption of stay of those proceedings had been granted to the plaintiff, the ICAC held that the arbitral proceedings should be terminated (see: Practice of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation, pp. 218–221). 100   As the ICAC established, the international sale of goods contract contained no clause on governing law, but later, during the course of an arbitral hearing, the parties agreed to subject their contractual relationship to Russian law. The ICAC acknowledged this agreement to be 99

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The chosen law need not necessarily be that of one of the parties; they are at liberty to subject their relationship to the law of a third country. Having established that a German seller and a Cypriot buyer agreed to subject their contract to Russian substantive law, the ICAC noted that, although Cyprus was not a party to the 1980 Convention, Russia was, so the Convention should be deemed an integral part of Russian law. As Article 1 of the Convention indicates, its rules apply not only when the count­ries of the seller and the buyer are the Contracting States (Section 1, Subsection “a”), but also when the rules of private international law lead to the application of the law of a Contracting State.” (Section 1, Subsection “b”) Since Russia was a Contracting State, the ICAC held that the relationship bet­ ween the German seller and the Cypriot buyer would be regulated by the norms of the Convention, and the RF Civil Code would apply with regard to issues not resolved by the Convention.101 However, the lex voluntatis principle does not go so far as to allow the parties to subject their contractual relationship to legal systems of several countries simultaneously. This is unsurprising since different legal systems may resolve one and the same issue in different ways. In such a case it would be impossible to decide which law to apply. The ICAC is of the opinion that a contractual clause whereby the relationship of the parties shall be governed by the laws of two countries is invalid. However, it was established that, although a contract provided for regulation of the parties’ relationship by the laws of Mongolia and Russia, both the seller and the buyer during the course of the hearing referred only to Russian law. The ICAC concluded that in course of the hearing the litigants had actually agreed to apply Russian law.102 According to Russian conflict of laws norms “the parties may choose the applicable law both for the contract as a whole as well as for individual parts thereof.” (Article 1210, Section 4 of the Civil Code) However, if different legal systems are incompatible with each other, in practical terms such a possibility may create problems for the parties.103

binding on the parties (see: Practice of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation in 2006, pp. 37). 101   See: Id. 102   See: Id., pp. 19; 66. 103   See: Commentary on the Part Three of the Civil Code of the Russian Federation, pp. 424–426. 466

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6.3. Exclusions from lex voluntatis principle The Russian conflict of laws norms provide for some exclusions from the lex voluntatis principle. These exclusions are contained in Articles 1213 and 1214 of the Civil Code. According to Article 1213, Section 2: “Russian law shall be applied to contracts with respect to plots of land, plots of subsoil, separate water objects and other immovable property located in the territory of the Russian Federation.” Article 1218 provides that grounds of payment, procedure of calculation and an amount of interest upon monetary obligations shall be determined under the law of the country applicable to appropriate obligation. According to Article 1207 the right of ownership and other rights in rem to aircraft, sea-goving and river-goving vessels, cosmic objects which are subject to state registration shall be determined under the law of the country where these vessels and objects have been registered. These rules are not accompanied with a reservation such as “unless otherwise agreed to by the parties” (or similar wording to that effect); therefore the parties are not allowed to deviate from the quoted rules. Thus, subject to a few exceptions, the choice of law governing the contractual relationship of the parties depends upon their agreement, and the law agreed to shall be binding on a court resolving a dispute. If this law is a foreign law, both optional and mandatory norms of lex fori shall be replaced with those of the governing fo­ reign law.104 At the same time there are certain limits to this approach. “If at the time of the choice of applicable law by the parties to a contract all circumstances relevant to the essence of the relationship of the parties are connected only with only one country, then the choice by the parties of the law of another country may not affect the operation of the mandatory norms of the country with which all circumstances relevant to the essence of the relationship of the parties are connected” (Article 1210, Section 5 of the RF Civil Code).105 Assume that a Finnish builder undertook to perform some construction work for a Russian customer in Vyborg (Leningrad Region) and it was agreed by the parties that both the materials and manpower would be Russian; the governing law would be German. It is evident in this situation that although the parties to the contract are from different countries (Russia and Finland) the contract itself is actually connected mainly with Russia. Given this circumstance, German governing law will not replace the relevant mandatory norms of Russian law, such as those contained in Articles 741 (allocation of risk between the parties), 743 (technical documentation and   See: Id., p. 348.  See: Bulletin of the RF Supreme State Arbitration Court. 2013, N 5, pp. 199–202.

104 105

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budget), 748 (supervision and inspection by the customer of performance of work under the construction contract), 749 (participation of an engineer (or an engineering organization) in the exercise of the rights and in fulfillment of the duties of the customer), 751 (duties of the contractor for protection of the environment and for ensuring safety of construction work), and 752 (consequences of shutting down the construction).

6.4. Establishment of governing law in the absence of agreement of the litigants If for some reason or other the parties did not use their right to agree to the go­ verning law for their contractual relationship, that law shall be determined by a court in compliance with conflict of laws rules of lex fori.106 In Russia these are found mainly in Article 1211 of the Civil Code. However, there are some conflict of laws rules in the Merchant Shipping Code (Articles 414–427) and in the Family Code (Articles 156–167). The basic idea of these rules is that, unless otherwise provided by this Code or other law, in the absence of agreement of the parties, their contractual relationship should be governed by the law of the country where at the time of entering into a contract the party whose performance is of decisive significance for the content of the contract has its place of residence (if it is a natural person) or its principal place of business (if it is a legal entity (see: Section 1)). The next section of Article 211, Section 2, provides, with regard to a number of contracts, which party shall be deemed the one who conducts the performance having the decisive significance for the content of the contract. In particular, it is: “1) the seller — in a contract of purchase and sale,107 2) the donor — in a contract of gift,108 3) the lessor — in a contract of lease;   As noted supra (see: Section 6.1 of this § 6), the position of an international commercial arbitration court with respect to this point is more liberal (see: Article 28, Section 2 of the Law “On International Commercial Arbitration”). 107   Having established that the parties to the contract of international sale of goods did not agree to the governing law, the ICAC held that their relationship should be regulated by the law of the country of the seller (see: Practice of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation in 2005, pp. 136, 294, 329). 108   It should be noted that in relations between commercial organizations a contract of gift is prohibited (see: Article 575, Section 4, of the RF Civil Code). However, if this contract is governed by a foreign law which allows it, then this norm of Russian law will be replaced with that of the foreign law, and such a norm will be honored by a Russian court. 106

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4) the lender — in a contract of uncompensated use; 5) the contractor — in a work contract; 6) the carrier — in a contract of carriage; 7) the freight forwarder — in a contract of freight forwarding; 8) the lender (creditor) — in a contract of loan (or credit contract); 9)  the finance agent  — in a contract of financing with assignment of the mo­ netary claim; 10) the bank — in a contract of bank deposit and a contract of bank account; 11) the bailee — in a contract of storage; 12) the insurer — in a contract of insurance; 13) the attorney — in a contract of delegation; 14) the commission agent — in a contract of commission agency; 15) the agent — in an agency contract; 16) the performer in a contract of rendering paid services; 17) the pledgor — in a contract of pledge; 18) the surety — in a contract of suretyship.109 Moreover, a different criterion is expressly introduced for certain contracts. This criterion is the place of performance of the relevant acts regardless of whether or not this place coincides with the principal place of the party who performs those acts. According to Sections 3–8 of the same Article the governing law shall be: 1)  with respect to a contract for construction work and a work contract for the performance of design and exploratory work — the law of the country where the results provided by the respective contract are mainly created; 2) with respect to a contract of simple partnership — the law of the country where the activity of this partnership is mainly realized; 3) with respect to a contract concluded at an auction by bidding, at a competition, or at an exchange — the law of the country where the auction by bidding or the competition takes place or where the exchange is located. 4) with respect to a contract of franchise — the law of the country in whose territory a user is permitted to use a complex of exclusive rights belonging to a rightholder, and if such use is permitted in the territory of several countries simultaneously — the law of the country where the place of residence or principal place of activity of the rightholder is located; 5) with respect to a contract on alienation of the exclusive right to a result of intellectual activity or means of individualization — the right of the country in whose territory the exclusive right, that is being transferred to the acquirer, is   Similar provisions are contained in Article 4 of the Regulation (EC) No 593/2008 of the European Parliament and the Council of June 17, 2008 on the law applicable to contractual obligations (Rome I). 109

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effective, and if it is effective in the territory of several countries simultaneously — the law of the country where the place of resident of principal place of activity of the right holder is located; 6) with respect to a license contract — the law of the country in whose territory a licensee is permitted to use the result of intellectual activity or means of individualization, and if such use is permitted in the territory of several countries simultaneously — the law of the country where the place of residence or principal place of activity of the licensor is located. There is also a provision that if it clearly follows from a statute, the terms and the essence of the contract that the contract is more closely connected with the law of another country than that indicated above, then the law of such country shall apply (see: Article 1211, Section 9). The conflict of laws norms described above are set forth in the RF Civil Code. However “if an international treaty of the Russian Federation establishes rules other than those that are provided by civil legislation the rules of the international treaty shall apply.” (Article 7, Section 2, Paragraph 2 of the Code) For example, the Agreement on the Procedure of Resolution of Disputes connected with Performance of Economic Activity (Kiev, 1992) provides that “rights and duties of parties to a transaction shall be determined under the law of the place of its conclusion, unless otherwise provided for by agreement of the parties.” (Article 11, Section “e”) The Convention on Legal Assistance and Legal Relations in Civil, Family and Criminal Cases (Minsk, 1993, Article 41) contains a similar norm. Having established that a contract between an Uzbek company and a Georgian firm (Uzbekistan and Georgia are participants in the 1993 Minsk Convention) did not contain a condition on governing law, and given that the contract was concluded in Tashkent (the capital of Uzbekistan), the ICAC applied the Civil Code of the Republic of Uzbekistan.110 In another case the countries of both litigants (a Russian plaintiff and a defendant from Kazakhstan) were parties to the 1992 Kiev Agreement; the governing law was not specified in the contract. With due consideration to the fact that the contract was entered into in the territory of Kazakhstan, the ICAC resolved the dispute on the basis of the norms of the Civil Code of the Republic of Kazakhstan.111 It should be emphasized that conflict of laws norms aiming to establish governing law to be applied by Russian courts relate only to the rules of substantive civil law. With respect to measures of state control over importation of goods into the   See: Practice of the International Arbitration Court of the Chamber of Commerce of Industry of the Russian Federation in 2005, p. 187. 111   See: id., p. 338. 110

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territory of the Russian Federation, these relations, which are of a public law nature, will be regulated by norms of Russian law.112

6.5. Application of foreign law rules by Russian courts When, by virtue of conflict of laws rules, Russian courts should apply foreign law, the contents of foreign law norms should be ascertained by a court “in accordance with their official interpretation, practice of application and doctrinal opinion in the respective foreign state.” (Article 1191, Section 1 of the Civil Code) This means that a Russian court is under a statutory obligation to establish the contents of foreign law to be applied, that is, the Russian court shall apply norms of foreign governing law ex officio.113 The Civil Code (Article 1191, Section 2) also indicates ways which may assist a court to clarify the official interpretation of foreign law: 1)  application to the Ministry of Justice of the Russian Federation or other competent bodies or organizations in Russia and abroad (for example, a court may require explanations from scientific research institutions, such as the Institute of State and Law of the Russian Academy of Sciences, and universities); 2) involvement of expert witnesses (both domestic and foreign); 3) use of materials submitted by persons participating in a case who may provide the court with texts of relevant laws, their interpretation in court judgments, scientific analyses in monographs, textbooks, etc.; such persons may also suggest candidatures of expert witnesses; 4)  if a dispute is connected with business activities, “the duty to present information of the content of the norms of foreign law may be placed by the court upon the parties.” (Article 1191, Section 2, Paragraph 3).   See: Practice of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation in 2006, p. 49. 113   See: Commentary on Part Three of the Civil Code of the Russian Federation, p. 342. Russian court practice follows this rule. To illustrate: A trial court established that a dispute of the parties with respect to a credit contract was subject to German law. The court accordingly was guided by the norms of the Bürgerliches Gezetzbuch (BGB). The judgment was upheld by the appellate court. However, the cassation court (the Federal State Arbitration court of the Moscow Circuit) quashed both the trial court judgment and the ruling of the appellate court since the lower courts had failed to clarify the interpretation and application of relevant norms of the BGB in Germany. The cassation court noted that, as it appeared from the materials provided by the plaintiff, the interpretation of the rules of the BGB both by the trial court and by the appellate court was different from the interpretation and application of those norms in Germany (see: the ruling of the Federal State Arbitration Court of Moscow Circuit of October 16, 2001. No KGA 40/5711-01). 112

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In the event that, despite these measures, a court fails to establish the contents of foreign governing law, the dispute shall be resolved on the basis of Russian law (see: Article 1191, Section 3). On the other hand, if, in the long run, the court succeeds in clarifying the contents of foreign governing law, its norms should apply in the same manner as a national court would apply them, and they would replace both optional and mandatory norms of Russian substantive civil law.

6.6. Super-mandatory norms (norms of direct application) There are, however, so-called super-mandatory norms or norms of direct application (that is, overriding mandatory rules) of Russian law to be applied regardless of what law would otherwise govern the relationship of the parties to a dispute. Neither choice of the governing law by the parties, nor operation of conflict of laws norms of lex fori may eliminate their application. The super-mandatory character of such norms results from their special significance for the state, which considers it impossible to subject certain relationships to foreign law.114 The general provision relating to this issue is set forth in Article 1192 (Section 1) of the Civil Code: “The rules of this Division115 do not affect the operation of those mandatory norms of the legislation of the Russian Federation that, in view of an indication in the mandatory norms themselves or in view of their special significance, including for ensuring the right and legally protected interests of participants in civil commerce, regulate the respective relations regardless of the applicable law.” For example, until recently there was a rule according to which the form of a foreign economic transaction in which at least one of the parties is a Russian person (whether a legal entity or an individual) “shall be subject, regardless of the place where the transaction was concluded, to Russian law.” (Article 1209, Section  2, ori­ ginal version). In one of the cases considered by the ICAC, the issue in dispute between Russian and Belgian companies was whether the foreign trade contract had been amen­ ded by a subsequent agreement of the parties. The contract was governed by Belgian law according to which failure to observe a form of contract of international sale of goods should not result in its invalidity. Nevertheless, given the super-mandatory norm of Russian law with respect to the form of a foreign trade transaction, the

  See: Commentary on Part Three of the civil Code of the Russian Federation, p. 348.   Division VI. Private International Law.

114 115

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ICAC held that non-compliance with this requirement entailed non-conclusion of the agreement in question.116 Now the abovementioned rule is replaced with another one that provides: “If a transaction or origin, transfer, restriction or termination of rights hereupon is subject to a mandatory state registration, the form of such a transaction shall be subject to Russian law.” Another example of a norm of direct application is a rule contained in Artic­ le 414, Section 2 of the RF Merchant Shipping Code which states that the existence of an agreement of the parties on choice of the governing law cannot result in elimination or decrease of liability of a carrier for harm caused to life or health of a passenger, loss or damage to baggage or delay in its delivery. Super-mandatory norms (norms of direct application) are known in foreign117 and in international law.118 The super-mandatory character of these norms is indicated in their very text. Article 10 of the Civil Code contains a norm the super-mandatory character of which emanates from its meaning. It prohibits “actions of citizens and legal entities taken exclusively with the intention to cause harm to another person” as well as “abuse of rights in other forms.”   See: M.G. Rosenberg. International Sale of Goods, Commentary on Legal Regulation and Practice of Dispute Resolution, p. 68. It should be noted that this super mandatory norm was not applicable to situations where Russian law governed obligations that arose out of an international trade contract where neither party was a Russian person, e.g. where an agency contract governed by Russian law was concluded between a company from the British Virgin Islands and a German national. The ICAC refrained here from applying Article 1209 of the Civil Code since it applies only if at least one of parties to a foreign trade transaction is a Russian legal entity or a sole business (see: M.G. Rosenberg, Some actual issues of dispute resolution practice of the ICAC of the RF CCI, “Arbitration Court,” 2012, N 5. pp. 122–123). 117   See, e. g., Introductory Law to Bürgerliches Gosetzbuch (Article 340); Statutes of International Private law of Switzerland, (Article 18), Italy (Article 17). 118   See: e. g., Convention on Law Applicable to Contracts of International Sale of Goods, the Hague, 1986; Regulation (EC) No 593/2008 of the European Parliament and of the Council of Europe June 17, 2008 “On the Law applicable to contractual Obligations (Rome I).” It is useful to note that the Regulation defines overriding mandatory provisions along the same lines as those contained in Article 1192, Section 1 of the RF Civil Code. According to Article 9 (Section 1) of the Regulation “overriding mandatory provisions are provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as the political, social or economic organization. To such an extent that they are applicable to any situation falling with their scope, irrespective of the law otherwise applicable to the contract under the Regulation.” 116

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Another such norm is set forth in Article 169 of the Civil Code which declares null and void “a transaction made with a purpose knowingly contrary to the fundamentals of the legal order or morality.” Operation of these rules may not be eliminated. It should be noted that Article 1192, Section 2 of the RF Civil Code enables a Russian court to honor foreign super-mandatory norms. It states: “In the application of the law of any country according to the rules of this Division the court may take into account the mandatory norms of the law of another country having a close connection with the relation if according to the law of that country such norms shall be the norms of direct application. In this case, the court must consider the purpose and nature of such norms as well as the consequences of their application or nonapplication.”119 Thus, super-mandatory norms are those norms of national law which may not be replaced with norms of foreign law. Here are also two illustrative cases concerning differentiation between super mandatory rules, on the one hand, and mandatory rules, on the other. In one case the situation was as follows. Several foreign companies concluded an agreement to create of a joint venture. Under this agreement its participants undertook to form a joint venture’s chartered capital by contributing stocks of a Russian telecommunication operator which stocks were owned by the participants of the joint venture. The joint venture foundation agreement was governed by English law. A Russian company sued the participants of the joint venture in a Russian state arbitration court with a claim to declare the joint venture foundation agreement void in part since the agreement was aimed at establishing of the joint venture’s control over the Russian telecommunications operator whose activity was of strategic significance for ensuring the defense of the country and state security. The respondents were foreign companies under control of foreign states. The trial court granted the claim referring to the Federal Law of April 29, 2008 N 57-FZ “On the Procedure of Contributing Foreign Investments in Commercial   A similar rule is set forth in Article 9, Section 3 of the Regulation (EC) No 593/2008 of the European Parliament and of the Council of June 17, 2008 “On the Law applicable to Contractual Obligations (Rome I). It states: “Effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful. In considering whether to give effect to those provisions, regard shall be paid to their nature and purpose and to the consequences of their application or non-application.” 119

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Companies having Strategic Significance for Ensuring Defense of the Country and State Security.” This law expressly prohibits transactions resulting in establishment of direct or indirect control of foreign states over Russian companies of strategic significance. The super mandatory rules of this law cannot be replaced with the rules of English law. At the same time the court noted that the rest of the agreement, since it did not contradict Russian super-mandatory rules, was valid and governed by English law. The judgment was upheld by the appellate court and the court of cassation. Another case concerned a contractual dispute between a foreign sole business (the plaintiff) and a Russian company (the respondent). The contract was governed by English law. The respondent alleged that the rules of the RF Civil Code concerning the length of a time limitation period (see: Article 196) are of a super-mandatory character since, according to Article 198, a time limitation period and an order of its calculation cannot be changed by agreement of the parties. However, the state arbitration court rejected this position because Article 1208 provides that a time limitation period shall be determined based on the national law applicable to the relevant legal relationship. This means that Russian conflict of laws rules permit application of a foreign law to an issue of a time limitation period. Therefore provisions of Articles 196 and 198 of the RF Civil Code shall not be deemed to be super-mandatory ones (see: Information Letter of the Presidium of the RF Supreme State Arbitration Court of July 9, 2013 N 158, Section 16).

6.7. Public policy Application of foreign governing law may also be excluded for public policy reasons (see: Article 1193 of the Civil Code).120 The text of this Article leads to the following conclusions: 1) first, it defines the notion of public policy as the fundamentals of the country’s legal order. This means that the public policy of Russia is not identical to Russian legislation; the latter concept is broader. The Presidium of the Supreme   Article 1193 provides: “a norm of foreign law applicable in accordance with the rules of this Division in exceptional cases shall not be applied when the consequences of its application would manifestly contradict the fundamentals of the legal order (public policy) of the Russian Federation with due consideration of the character of the relations encumbered with a foreign element. In such a case, if necessary, the respective norm of Russian law shall be applied.” 120

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Court of the Russian Federation emphasized in its Ruling of June  2, 1999 that public policy includes basic principles of the Constitution of the Russian Federation and the laws of the Russian Federation121 which principles reflect fundamental economic, legal and moral cornerstones of the society. 2)  in other words, the mere fact that a norm of foreign law deviates from or even contradicts a relevant norm of Russian law does not necessarily (and does not always) create a problem of Russian public policy.122 Such a problem may only arise when application of a certain norm of foreign law is absolutely unacceptable for Russia. 3)  refusal to apply a norm of foreign law should occur only “in exceptional cases”, that is, the operation of this clause is explicitly very narrow. 4)  elimination of a foreign law norm which is applicable according to conflict of laws rules will result in a gap in legal regulation of the rights and duties of the litigants. A way to fill such a gap is set forth in Article 1193 (Paragraph  1) of the Civil Code providing the possibility to apply “the respective norm of the Russian law.” This clause, however, is accompanied with the reservation “if necessary” which means that application of Russian law norms shall only be permissible if it is impossible to fill the gap by applying a similar norm of a foreign governing law.123

  See: Bulletin of the Supreme Court of the Russian Federation, 1999, No 11, pp. 7–8.   It is expressly stated in the Civil Code that “a refusal to apply a norm of foreign law may not be based merely on the difference in legal, political or economic system of the respective foreign state from the legal, political or economic system of the Russian Federation.” (Article 1193, Paragraph 2) 123   See: Commentary on Part Three of the Civil Code of the Russian Federation, pp. 361– 362. 121 122

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§ 1. General provisions 1.1. Types of Intellectual Property Intellectual property is defined in the RF Civil Code as “the results of intellectual activity and processes which distinguish legal entities, goods, work, services, and enterprises which are given legal protection” (Article 1225, Section 1, Paragraph 1). “Intellectual activity” in turn means creative activity producing results which were not known earlier. Intellectual, that is, creative, activity may be carried out in different fields such as science, literature, the arts, techniques and technologies, and in commercial organizations that create products that are distinctive. An exhaustive list of such results that will be given legal protection is set forth in Article 1225, and includes: “1) scientific and literary works and the arts; 2) computer programs; 3) databases; 4) performances; 5) phonograms; 6) radio or television transmissions (whether over the air or by cable) ; 7) inventions; 8) utility models; 9) industrial designs; 10) results of plant and animal breeding; 11) integrated circuit layouts; 477

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12) 13) 14) 15) 16)

manufacturing secrets (know-how); trade names; trademarks and service marks; appellations of origin; commercial names”

Creative results in different fields of human activity have specific features of their own. Thus, Part Four of the RF Civil Code (Division VII  — “Rights to the Results of Intellectual Activity and the Processes that render them Distinctive”) consists of a number of chapters, each dealing with legal protection of certain types of intellectual property. For example, Chapter 70 “Copyright” regulates intellectual property rights to works of science, literature, and the arts, as well as to computer programs, which are protected as literary works (see: Article 1259). Chapter 71 “Rights Related to Copyright” includes rights to the results of performances of actors and conductors, phonograms, over-the air and cable broadcasts, and the content of databases (see: Article 1303). Chapter 72 “Patent Law” characterizes intellectual property rights to inventions, utility models, and industrial designs. Other chapters include Chapter 73 “Rights to Results of Plant and Animal Breeding”, Chapter 74 “Rights to Lay-Out Designs of Integrated Circuit”, Chapter 75 “Rights to Manufacturing Secrets (Know-How),” Chapter 76 “Rights to Processes Distinguishing Legal Entities, Goods, Work, Services, and Enterprises,” and Chapter 77 “Rights to Use Results of Intellectual Activity in the System of Unified Techno­ lo­gy.” It should be noted initially that the rules of Chapter 69 “General Provisions” define an author as a natural person whose creative labor has led to a result of intellectual activity1 (see: Article 1228, Section 1, Paragraph 1). This means, inter alia, that a legal entity cannot be deemed to be an author2 even if the result was created by its employee in the course of carrying out his employment duties. The rules of Chapter 69 also provide that the author enjoys certain rights which are classified into two groups:

  If such a result has been produced jointly by the creative labor of two or more persons, as co-authors they jointly enjoy the rights to this result (see: Article 1228, Section 4). 2   See: Professor T.E. Abova, Professor M. M. Boguslavsky, Professor A. G. Svetlanov, Eds., Commentary on the Civil Code of the Russian Federation, vol. 2. Moscow, 2009, p. 209. 1

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The first group includes rights confirming that the result of intellectual activity is a consequence of a person’s creative labor. This is the right of authorship and — depending upon the nature of the result — certain other related rights. These are personal, non-proprietary, rights. Since these rights are very closely connected with the personality of the author, they are inalienable, non-transferable and are provided with legal protection unlimited in time (see: Article 1228, Section 2). The second group consists of rights entitling the holder to derive profits from them. These are proprietary rights and having initially been created by the author are: (a) transferable, and (b) limited in time3 (see: Articles 1229, 1230). The most important among them is the exclusive right of the holder: 1) to use the result of creative activity at his discretion in any manner not prohibited by law;4 and 2) to dispose of this result5 (subject to limitations set forth in this Code),6 that is, (i) to alienate it; and (ii) to license it to others.7

  Duration of the time limit depends upon the type of intellectual property. The limit for the exclusive right to an invention is 20 years, to a utility model 10 years, and for an industrial design 5 years. These limits begin running as of the date the application to issue a patent is initially submitted to the appropriate public agency (see: Article 1363, Section 1). If certain preconditions are met, the validity of the exclusive right to an invention relating to a therapeutic method, a pesticide, or an agrochemical may be extended for up to 5 years (see: Article 1363, Section 2). The validity of the exclusive right to an industrial design may be extended repeatedly for 5 years, but in the aggregate no longer than 25 years (see: Article 1363, Section 3). When the time periods of validity set forth above expire, an invention, a utility model or an industrial design passes into the public domain permitting its use without permission or payment of any fee (see: Article 1364). 4   If the exclusive right belongs jointly to several persons (co-authors), each of them has discretion to use the result of intellectual activity unless otherwise provided by law or by agreement between them. The relationship between them shall be determined by their agreement. Income from joint use of the result shall be distributed between them equally unless they provide otherwise by agreement (see: Article 1229, Section 3). 5   In a co-authorship such disposition shall be made jointly by the rightholders unless otherwise provided by the Code. 6   E. g. use and disposition of secret inventions must comply with state secrecy laws. 7   Other persons are prohibited from using results of intellectual activity without a licence, unless this Code so provides (see: infra, § 2 of this Chapter). 3

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1.2. Alienation of an exclusive right The holder of an exclusive right may transfer, or attempt to transfer, his exclusive right to a result of intellectual activity to another party (“the acquirer”) by cont­ract. The acquirer will pay him a fee, unless the contract provides that no fee shall be paid (see: Article 1234). The contract must be in writing and is subject to state registration if the Code so provides.8 Failure to comply with the statutory requirement of a contract in writing and its state registration shall result in the contract being null and void (see: Article 1234, Section 2). Alienation of the exclusive right to a result of intellectual activity may be by a sales contract or by other legal means, such as a contribution into the chartered capital of a commercial organization. In the latter case, in addition to a clause in the company’s foundation agreement, a special contract on alienation of the exclusive right (or a licensing contract) should be concluded (see: the Ordinance of the Plenum of the RF Supreme Court and the Plenum of the RF Supreme State Arbitration Court of March 26, 2009 No 5/29 “On some issues arising in connection with putting the Fourth Part of the Civil Code of the Russian Federation into effect,” Section 11, Paragraph 2).9 The exclusive right shall pass from the rightholder to the acquirer at the time the alienation contract is concluded, unless otherwise provided by agreement of the parties. If the contract is subject to state registration, transfer of the exclusive right shall coincide with the time of state registration of the contract (see: Article 1234, Section 5). Transfer of the exclusive right without a contract from the rightholder may occur in situations provided by law, as in the case of universal legal succession (such as inheritance, or reorganization of a legal entity) and upon sale of the rightholder’s property in the course of enforcement proceedings (see: Article 1241).

1.3. Licensing contract of an exclusive right A licensor (who is the holder of an exclusive right to a result of intellectual activity) may give or undertake to give a licensee the right to use a specified result within

  E. g. a contract alienating a patent to an invention, utility model or industrial design is subject to state registration (see: Article 1369). 9   Hereinafter referred to as the Ordinance of the Plenum of March 26, 2009 No 5/29. 8

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limits established by a licensing contract (see: Article 1235, Section 1). The licensing contract is the legal basis on which a licensor issues a licence to a licensee. The licensing contract should provide, inter alia: 1) identification of the result of intellectual activity that is the subject of the contract; 2) ways the licensee may use the result of intellectual activity; 3) the geographical area within which the licence may be used;10 4) the time period of validity of the licence, which cannot exceed the period of the exclusive right itself. If a licensing contract is concluded for a time period exceeding its term, the contract shall be deemed concluded for the time period of the exclusive right (see: Ordinance of the Plenum of March 26, 2009 No 5/29, Section 13, Subsection 13.5, Paragraph 2). Should the licensing contract not specify the time period of its validity, the contract shall be deemed concluded for a five year term; 5) the charge for the licence fee or the procedure for its calculation, unless it is expressly stated in the contract that the licensor shall not receive a fee (see: Article 1235). In other words, a licensing contract shall be deemed a contract with consideration unless the contract provides otherwise.11 The licensing contract must be in writing and is subject to state registration if the Code so provides.12 If these requirements are not complied with, the contract shall be null and void. If the exclusive right to a result of intellectual activity passes to a new rightholder, a license contract concluded by the previous rightholder will remain in effect (see: Article 1235, Section 7). The licensor does not need a licensee’s consent to transfer the exclusive right by contract (encumbered with a licence)

  Unless the contract provides otherwise, the licensee is entitled to use such a result throughout the entire territory of the Russian Federation. 11   A fee is due to the licensor for granting the licensee the right to use a result of intellectual activity. To use or not to use the result in question will be the choice of the licensee. The fee is due to the licensor whether the licensee does or does not use the result in question. If the parties to the licensing contract agreed to a fee based upon a percentage of income, and the result was not used, the amount of the fee shall be calculated based upon the usual price for the lawful use of similar results (see: Ordinance of March 26, 2009 No 5/29, Subsection 13.7, Paragraph 2). 12   According to Article 1369, state registration is obligatory for contracts licensing inventions, utility models and industrial designs. 10

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to another person (see: the Ordinance of March 26, 2009 No 5/29, Subsection 13.8). A licence may be simple that is, non-exclusive, or exclusive. A simple licence entitles the licensor to issue licences to other persons, while the licensor holding an exclusive licence may not do so (see: Article 1236). Licences of either type do not prohibit the licensor from using the result of intellectual activity himself. However, a contract for an exclusive licence may provide that the licensor does not have such a right (see: Ordinance of the Plenum of March 26, 2009 No 5/29, Section 14). With the licensor’s written consent, a licensee may enter into a sub-licensing contract (see: Article 1238). The licensor’s written consent may be part of the licensing contract or it may be set forth in a separate document. If in a separate document, the consent may be withdrawn by the licensor prior to conclusion of the sublicensing contract as long as the separate document is unilateral and does not include a reservation providing that the document is to be deemed an integral part of the licensing contract. In an exclusive contract (as well as if a separate document containing such a consent is agreed to be an integral part of the licensing contract) the consent, being an element of a bilateral transaction, cannot be revoked by a unilateral statement of the licensor. In such a case the consent may only be withdrawn by amendment of the licensing contract.13 The Civil Code provides that in some situations a compulsory licence may be granted by court judgment to an interested person (see: Article 1239). As noted in the literature, preconditions for such action may occur in any of three situations: 1) when a result of intellectual activity (such as an invention, a utility model or an industrial design) is not used or is not used sufficiently for several years without justified reasons (see: Article 1362); 2) when such a result was achieved in the course of carrying out a state or municipal contract (see: Article 1373); 3)  when the result in question was achieved by an employee in the course of his employment, carrying out a specific task set by the employer (see: Article 1370).14

  See: Professor T.E. Abova, Professor M.M. Boguslavsky, Professor A.G. Svetlanov, Eds., Commentary on the Civil Code of the Russian Federation, vol. 2, Moscow, 2009, p. 240. 14   See: id. 13

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What is described above are general rules of the RF Civil Code applicable to most results of intellectual activity. However, given the purpose of this book, its focus will be on legal issues relating primarily to intellectual property in technical areas such as inventions, utility models and industrial designs, areas which are regulated by patent law (Chapter 72 of the Code). Issues concerning distinctiveness, so important in trademark law, are governed by rules set forth in Chapter 76 of the Code and will be considered in § 3 below.

§ 2. Some issues of patent law 2.1. Patent rights and their objects (general overview) Patent rights are so called because their legal protection is connected with the issuance of patents which are special documents that certify these rights. Patent rights protect the results of intellectual activity in scientific and technical fields and in those fields of artistic design that meet certain requirements established by the RF Civil Code (see: Article 1349, Section 1).15 These results of intellectual activity are classified into 3 groups: 1) inventions, 2) utility models, and 3) industrial designs. Inventions. An “invention” is defined in Article 1350 of the RF Civil Code as a technical solution in any field related to a product16 or a process.17 An invention shall be provided with legal protection if it is novel, not obvious and industrially applicable.   The Code also sets forth a list of scientific and technical results that may not be patentable, such as: The process of cloning a human being, and the clone; The process of modifying the genetic integrity of a human being’s embryonic cells; Use of human embryos for industrial and commercial purposes; Other results of intellectual activity set forth in Section 1 of this Article if they conflict with social interests, or with humanitarian or moral principles (see: id., Section 4). 16   A “product” in the meaning of this Article is any material object resulting from human labor (see: Commentary on the Civil Code of the Russian Federation. Vol. 2, Moscow, 2009, p. 404), such as a structure, substance, microorganism strain, or a culture of plant or animal cells (see: Article 1350, Section 1. See in detail: O. A. Gorodov. Право промышленной собственности [Law on Industrial Property]. Moscow, 2011, p. 105–108). 17   Such as a process of performing actions on a material object using material means (see: Article 1350, Section 1, see: in detail: O.A. Gorodov, id., p. 109). 15

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An invention is deemed “novel” if its technology is not known, based on any information publicly available worldwide, before the priority date of the invention. It is “not obvious” if the technical solution in question, based on the present level of technology, is not obvious to a specialist (see: Article 1350, Section 2). An invention meets the “industrial applicability” requirement if it can be used in industry, agriculture, health care, other fields of the economy, or in the social sphere (see: Article 1350, Section 4). Utility models. A utility model is a technical solution relating to a device and is provided with legal protection if it is new and industrially applicable (see: Article 1351, Section 1). Unlike an invention, it need not be nonobvious. Like an invention, a utility model must be new worldwide before its priority date. However this requirement is not identical to that applied to an invention. While all the features of an invention must be new, only the substantial features of a utility model must be new (see: Article 1351, Section 2), that is, those features producing a relevant technical result.18 The requirement of industrial applicability of a utility model is the same as for an invention, i.e. a utility model must be available for use in industry, agriculture, health care, other fields of the economy, or in the social sphere (see: Article 1351, Section 4). Industrial designs. An industrial design is an artistic design of a product of handicraft or industrial manufacture which defines the external appearance of the product. It is provided with legal protection if it is novel and original in its essential features (see: Article 1352, Section 1).19 An industrial design is deemed novel if its essential features are not known worldwide before its priority date (see: Article 1352, Section 2). It is considered original provided its essential features are determined by the creative character of the product’s distinctive characteristics (see: Article 1352, Section 3). Types of Patent Rights. Article 1345 provides a non-exclusive list of patent rights. These include: 1) the right of authorship; 2) the right of exclusivity; 3) the right to receive a patent;   See: Commentary, p. 409; O.A. Gorodov, id., p. 225.   Essential features of an industrial design are those determining the esthetic and/or ergonomic characteristics of the product’s external form, inter alia, its form, configuration, ornamentation and combination of colors, lines of the products, or structure of the material of the product (see: id.). 18 19

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4) other rights, such as the right to receive a fee for use of an invention deve­ loped under an employment contract, a utility model, or an industrial design. Rights of authorship and exclusivity discussed above have been illustrated primarily by examples related to inventions, utility models and industrial designs.20 The right to receive a patent and other rights must also be considered.

2.2. Right to receive a patent Inventions, utility models and industrial designs are subject to state registration prior to the issuance of patents certifying the priority, authorship and exclusive right to exploit the results of the described intellectual activity (see: Articles 1353, 1354). 2.2.1. Rightholders The right to receive a patent belongs originally to the author of the invention, utility model or industrial design (see: Article 1357, Section 1). The patent may be transferred to another person, the legal successor, by contract or by operation of law. A transfer by operation of law will occur in the event of universal legal succession (see: Article 1357, Section 2). The right to receive a patent may be transferred by contract in two ways: 1) a contract may specifically set forth the right of transfer,21 2) a transfer may be a condition of a contract, such as in an employment cont­ ract. If an invention, utility model or industrial design has been created by an employee in the course of carrying out his employment duties, it is deemed to be an employment invention, employment utility model, or employment industrial design. The right to receive a patent (as well as the exclusive right) shall then belong to the employer, unless the employment contract (or some other contract between the employer and the employee) provides otherwise (see: Article 1370, Section 3). Should an employer receive a patent for an employment invention, employment utility model, or employment industrial design, under some conditions the employee shall

 See supra, § 1 of this Chapter.   Such a contract must be in writing, otherwise it shall be null and void (see: Article 1357, Section 3). 20 21

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have the right to a fee. The conditions and the procedure for its payment by the employer22 shall be established by contract between the employer and the employee, and, should they disagree, by a court. This can occur if the employer keeps the result of such intellectual activity secret and lets the employee know about this, or transfers the right to receive the patent to another person, or fails to receive a patent due to circumstances for which he is responsible. (see: Article 1370, Section 4, Paragraph 3) If an invention, utility model or industrial design has been created under the terms of a civil law contract (such as by an independent contractor or under a contract for scientific research, experimental design, or technological work) which does not expressly provide for its creation, the right to obtain a patent (and the exclusive right to it) shall belong to the contractor carrying out the work unless a contract between him and a customer provides otherwise. (see: Article 1371, Section 1, Paragraph 1)23 2.2.2. Procedure to receive a patent This procedure consists of four stages: 1.  First, to receive a patent the rightholder must file an application for issuance of a patent (whether for an invention, a utility model or industrial design) with the federal executive agency for intellectual property, which is currently the Federal Service for Intellectual Property, Patents and Trademarks (Rospatent).24 This application should provide, inter alia: (a) the name of the author of the invention, utility model or industrial design, on the one hand, and of the person in whose name the patent is being requested, on the other; (b) a description of the invention, utility model or industrial design; (c) a formula (for an invention or a utility model), or a set of depictions of the product (for an industrial design); and (d) drawings and other materials if needed.   As the RF Supreme Court and the RF Supreme State Arbitration Court have specifically emphasized, the duty to pay this fee to the employee remains with the employer, even if he transfers his right to the result of intellectual activity to someone else. This duty may pass to another only in the event of universal legal succession (see: the Ordinance of March 26, 2009 No 5/29, Section 51). 23   In such a situation, unless otherwise provided by the contract, the other party to the civil law contract is entitled to use these results (an invention, utility model, or industrial design) for the purpose of the contract on condition of a simple (non-exclusive) licence provided free of fee (see: Article 1371, Section 1, Paragraph 2). 24   See: the Decree of the President of the Russian Federation of May 24, 2011 No 673. 22

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An application must be accompanied with a document confirming payment of the patent fee.25 The application is deemed submitted on the date of its receipt by Rospatent (see: Articles 1374–1377). This date is important, since it establishes the priority of the invention, utility model, or industrial design (see: Article 1381). 2.  Having received an application for an invention, Rospatent formally examines it to check whether all documents required are in place and comply with the statutory requirements. If the result of the formal examination is satisfactory,26 Rospatent so notifies the applicant and publishes the information concerning the application in its official bulletin (see: Articles 1384, 1385). An invention that is the subject of the application shall be granted interim legal protection as of the date of its publication (see: Article 1392) and is effective until the patent is issued. Such protection is aimed at protecting the applicant’s interests and to prevent free use of the invention by third persons prior to issuance of the patent. Such persons shall pay monetary remuneration to the patent holder after he receives the pa­ tent (see: Article 1392, Section 3). However the applicant is not entitled to prohibit use of the invention by third persons during this period. So this interim legal protection is of limited use.27 3. The next stage is the substantive examination of the application for an invention. Rospatent will make such an examination on a motion of the applicant or of third parties. This motion may be submitted with the filing of the application for an invention, or within three years after the filing of the application, provided that the formal examination has had a satisfactory result (see: Article 1386, Section 1). If the substantive examination establishes that the invention meets the requirements set forth in Article 1350, Rospatent will issue a decision that a patent shall

  The various patent fees and the methods of their calculation are established by the Regulations “On patent and other duties for performance of legal acts connected with a patent for an invention, utility model, industrial design, with state registration of a trade mark and a service mark, with state registration and granting the exclusive right to name a place of origin of goods, as well as with state registration of the transfer of exclusive rights to other persons and contracts on disposition of these rights” approved by Decision of the RF Government of December 10, 2008 No 941 (as subsequently amended). 26   If an application for an invention does not meet statutory requirements with respect to supporting documents, Rospatent shall propose that the applicant submit corrected or missing documents within two months. Should the applicant fail to do so, the application shall be deemed withdrawn (see: Article 1384, Section 4). 27   See: Commentary on the Civil Code of the Russian Federation, vol. 2, Moscow, 2009, p. 492. 25

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issue (see: Article 1387, Section 1). If, however, it establishes that the invention does not meet these requirements, Rospatent’s decision will refuse issuance of the patent.28 Both formal and substantive examinations are also required with respect to utility models and industrial designs (see: Articles 1390, 1391). If Rospatent’s decision is that a patent should issue, it shall enter the invention, utility model, or industrial design into the respective state register29 and issue the patent (see: Article 1393, Section 1). State registration of the results of intellectual activity and issuance of patents is preconditioned on payment of required patent duties. If an applicant fails to submit a document confirming such payment, neither state registration nor issuance of a patent shall occur, and the application shall be deemed withdrawn (see: Article 1393, Section 2). Information on issuance of a patent for an invention, a utility model or an industrial design shall be published by Rospatent in its official bulletin (see: Article 1394). Duties must also be paid on an annual basis to maintain the validity of patents, whether for inventions, utility models, or industrial designs. Failure to pay such duties timely shall result in a patent’s premature termination (see: Article 1399). The validity of a patent’s premature termination may be reinstated by Rospatent upon a motion of the patent holder. This motion must be submitted to Rospatent within three years after the date payment of the duty was due but before expiration of the patent’s validity. The motion must be accompanied with a document confirming payment of the duty required to reinstate the validity of the patent (see: Article 1400, Section 1). Information concerning reinstatement of the validity of a patent shall be published by Rospatent in its official bulletin (see: Article 1400, Section 2). However, a person who, between the date of termination of a patent and the date of official publication of its reinstatement, has started to use the invention, utility model or industrial design, or made the preparations necessary to do so, shall retain the right to continue to do so freely. Expansion of such use, however, is not permitted. (For the right of later use — see: Article 1400, Section 3).   Prior to making a decision to issue or refuse to issue a patent, Rospatent shall notify the applicant of the results of its check on the patentability of the invention. This notice shall include Rospatent’s reasons in support of its conclusions. The applicant may then offer counter arguments for Rospatent to consider in making its decision, provided the applicant submits them within 6 months of the applicant’s date of receipt of the notice (see: Article 1387, Section 1, Paragraph 3). 29   These are the State Register of Inventions of the Russian Federation, the State Register of Utility Models of the Russian Federation, and the State Register of Industrial Designs of the Russian Federation. 28

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2.2.3. Legal consequences of issuance of a patent A patent holder enjoys the exclusive right to use an invention, utility model, or industrial design and to dispose of it (see: Article 1358). Third persons may use the results of such intellectual activity only on the basis of a licence voluntarily granted by the patent holder within the context of a licensing agreement or as a result of a court judgment or other form of compulsory licence.30 Under certain conditions the Government of the Russian Federation may permit use of an invention, utility model, or industrial design without the consent of the patent holder. This is possible when use of an invention, utility model, or industrial design is needed in the interests of defense or national security. In such case the patent holder must be notified as soon as possible, and he is due reasonable compensation (see: Article 1360). Article 1359 lists some uses that are not deemed a violation of the exclusive right to an invention, utility model, or industrial design. They include: 1) use of a product incorporating an invention or utility model, or use of a device that incorporates an industrial design, used in the structure, auxiliary equipment or exploitation of water, air, road and railway transportation vehicles and spacecraft of foreign countries, provided that such transportation vehicles or spacecraft are located temporarily or accidentally in the territory of the Russian Federation and the product or device in question is used only for the needs of transportation vehicles or spacecraft;31 2)  scientific research relating to a product in which the invention, utility model or industrial design is used for experimental purposes; 3) use of an invention, utility model, or industrial design, in emergency situations such as natural calamities, catastrophes, and accidents;32 4) use of an invention, utility model, or industrial design for personal, family, domestic or other needs not connected with business activity, provided such use is not intended to be profit making; 5) the occasional use of an invention for preparation of medications in pharmacies based on doctors’ prescriptions; 6) the importation into the territory of the Russian Federation and introduction into civil commerce (by sale or otherwise) or storage of a product in which  See: supra, § 1, Section 1.3 of this Chapter.   This rule applies to transport vehicles or spacecraft of those foreign countries which grant similar privileges to transport or spacecraft registered in the Russian Federation (see: Article 1359, Section 1). 32   In such situations the patent holder should be notified immediately. He is due proportional compensation (see: Article 1359, Section 3). 30 31

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the invention, utility model or industrial design is used, provided this product was introduced into civil commerce in the territory of the Russian Federation at an earlier time by the patent holder or by another person with the patent holder’s consent. The RF Civil Code also provides for the right of prior use of an invention, utility model, or industrial design (see: Article 1361). Thus, a person who before the priority date of the results of intellectual activity used the identical solution in the territory of the Russian Federation in good faith, created independently of the author, or made preparations necessary for its use, retains the right to continue its free use. A holder of such a right may be either a natural person or a legal entity.33 No fee is due to the patent holder from such a person. However, the right of prior use is limited in two aspects: First, its holder may use this right only “without expanding the scope of such use” (Article 1361, Section 1). Second, this right may be transferred to another person only together with the enterprise34 where the identical solution was used or where necessary preparations were made (see: Article 1361, Section 2).

§ 3. Trademark rights 3.1. General provisions Unlike inventions, utility models, or industrial designs where creative activity results in new products or processes, trademarks are granted to goods that are distinctive as a result of their verbal, pictorial, three dimensional, and other features, whether alone or in combination (see: Article 1482, Section 1). Since such features originate from creative labor they are included in the concept of “intellectual property” (see: Article 1225). A trademark, once registered with Rospatent, is equated to other results of intellectual activity and protected with an exclusive proprietary right.35 Personal nonproprietary rights, however, such as the right of authorship, do not arise with respect to the methods of distinguishing products, including trademarks.36   See: Commentary on the Civil Code of the Russian Federation, vol. 2, Moscow, 2009, p. 427. A natural person need not necessarily be the author of the solution in question (see: id.). 34   The enterprise in this context means a property complex used to carry out business activity (see: Article 132 of the RF Civil Code). 35   See: Commentary on the Civil Code of the Russian Federation, vol. 2, Moscow, 2009, p. 601. 36   See: id., p. 207. 33

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Goods may be manufactured both by organizations and by natural persons. Therefore “the holder of the exclusive right to a trademark may be a legal entity or an individual entrepreneur“(Article 1478). The exclusive right to a trademark provides its holder with the possibility of using the trademark in any way not prohibited by law, such as by its placement on goods, labels and packaging of goods, whether manufactured, offered for sale, sold, displayed at exhibitions or otherwise introduced into civil commerce in the territory of the Russian Federation, for example in documents and advertisements, as well as on the Internet (see: Article 1484). A holder of the right to a trademark is entitled to dispose of this right under a contract of alienation or under a licensing contract.37 In the former situation the exclusive right passes to the acquirer in its entirety (see: Article 1488, Section 1). In the latter situation a licensee may use the trademark within the limits established by the contract with or without an indication of the geographical territory permitted for its use (see: Article 1489, Section 1). Both alienation and licensing contracts concerning an exclusive right to a trademark must be in writing and are subject to state registration with Rospatent (see: Article 1490). A licensee is under a statutory obligation to maintain the quality of the goods which he manufactures or sells with the use of the trademark and to comply with those requirements established by the licensor which the licensor is entitled to control. If claims are successfully advanced against a licensee as a manufacturer of the goods, both the licensee and the licensor shall be jointly and severally liable (see: Article 1489, Section 2). The exclusive right to a trademark shall be valid for ten years from the date of filing an application for state registration of a trademark with Rospatent (see: Article 1491, Section 1). This period may be repeatedly extended for ten years as long as the request of the rightholder is submitted within the last year of the right’s validity (see: Article 1491, Section 2). Nevertheless, the exclusive right to a trademark may be prematurely terminated during the three year period after its state registration if there has been uninterrupted nonuse of the trademark without justified reasons (see: Article 1486, Sections 1 & 3).

  With regard to an invention, utility model, or industrial design, a compulsory licence to use the results of intellectual activity may be granted by a court judgment on certain preconditions (see: Article 1362). It should be noted that a compulsory licence may be granted by a court in cases expressly provided by the Civil Code (see: Article 1239). Since there is no similar provision in the Code with regard to a trademark, a licence to use it may only be acquired on a voluntary basis. 37

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3.2. State registration of a trademark State registration consists of the three following stages: 1. Filing an application with Rospatent. An application should contain, inter alia: (a) the name of the applicant; (b)  the distinctive features of the trademark applied for; (c)  a list of the goods for which registration of the trademark is sought; (d)  a description of the trademark (see: Article 1492, Section 3). An application should be accompanied with a document confirming payment of the registration fee (see: Article 1492, Section 5). The date of filing of the application shall be deemed the date of its receipt by Rospatent (see: Article 1492, Section 8). The legal effect of this date is that it establishes the priority of a trademark (see: Article 1494, Section 1). 2. Formal examination of an application to establish whether all documents required are in place and comply with all stated requirements (see: Article 1498). 3. Substantive examination (provided the result of the formal examination was satisfactory) aimed to establish whether the distinctive features described meet stated requirements, and there are no reasons to refuse registration as a trademark. There is a list of distinctive features which are prohibited for state registration as trademarks, such as: (a) those that have fallen into the public domain with respect to goods of a certain kind; (b) those that are generally accepted symbols and terms; (c) those that consist only of such elements as: (i) state official crests, flags or other state symbols and marks, (ii) official seals and awards, (d) those containing false information; (e) those not in keeping with social interests, humanitarian or ethical principles; (f) those identical or sufficiently similar to be confused with trademarks having earlier priority38 (see: Article 1483).   Here is an illustrative case: A factory “Red October” had been producing chocolate under the name “Alenka” using a trademark consisting of a colored portrayal of a girl’s head in a speckled headband. This trademark was duly registered in 1999. In 2006 a factory “Slavyanka” started to produce chocolate under the name “Alina.” Its package was decorated with a colored portrayal of a girl’s head in a speckled headband. A trial court in its judgment held that the latter picture was similar to the extent of confusion with the trademark that had been registered earlier. 38

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Depending on the results of its examination, Rospatent will either register or refuse to register the trademark (see: Article 1499, Section 2).39 State registration of the trademark in the State Register of Trademarks of the Russian Federation and issuance of the certificate is preconditioned on the payment of required duties (see: Article 1503, Section 1).40 The court prohibited use of the picture in question. This approach was upheld by courts of appeal and cassation. The Presidium of the RF Supreme State Arbitration Court shared this approach. The case was, however, referred to the trial court, but only in order to ascertain the amount of compensation due to the rightsholder (see: Bulletin of the Supreme State Arbitration Court of the Russian Federation, 2012, No 1, p. 231–257). The same approach was followed in the Ruling of the Presidium of the RF Supreme State Arbitration Court of June 26, 2012. The essence of the dispute between LLC “Intel” (the plaintiff) and LLC Trade House “Grape wines” (the respondent) was as follows: The plaintiff had trade marks “Chantale Шанталь” and “CHANTAL” duly registered in Russia with regard to alcoholic drinks (except beer). The respondent imported 2324 bottles of wine labeled with the trade mark “Pierre et Chantal” into the territory of the Russian Federation. The plaintiff sued the respondent to prohibit use of the trade mark which it argued to be similar to the point of confusion with the trade mark registered in the plaintiff’s name. The trial court satisfied the claim. The judgment was upheld by the appellate court and the court of cassation. The plaintiff submitted a supervisional complaint to the RF Supreme State Arbitration Court stating that the bottles of wine were libeled with a trade mark belonging to the company “Bartex” (the manufacturer) which trade mark had been duly registered in the name of that company in Poland. The wine was bought by the respondent from the company “Bartex,” so it was the latter (as a manufacturer) which should be held liable for the claim. The Presidium of the RF Supreme State Arbitration Court supported the lower courts’ conclusions that the indication “CHANTAL” used by the respondent was identical to the trade mark “CHANTAL” belonging to the plaintiff. And the wording “Pierre et Chantal” was similar to the point of confusion with the plaintiff’s trade mark “Chantale Шанталь” considering phonetic, graphic and semantic indicia. The respondent also failed to prove that the trade mark of the company “Bartex” had been granted legal protection in the territory of the Russian Federation. So the lower court quite rightly prohibited the respondent from using the trade mark that was similar to that belonging to the plaintiff. The case was then referred to the trial court to ascertain the amount of compensation due the plaintiff. 39   Prior to taking a decision on the results of the examination, Rospatent may send a notice to the applicant with respect to such results and propose to submit the applicant’s arguments concerning its reasons indicated in the notice. The applicant’s arguments shall be taken into consideration with respect to making a decision provided they are submitted within 6 months from the date of sending the notice to the applicant (see: Article 1499, Section 3). 40   If an applicant fails to submit a document confirming such payment, there will be no registration of the trademark, and the application shall be deemed withdrawn (see: Article 1503, Section 2). 493

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Information concerning state registration of a trademark shall be published by Rospatent in its official bulletin (see: Article 1506).

§ 4. Legal protection of certain intellectual property rights 4.1. General Provisions Intellectual property rights are of different types which substantially influence the method of their legal protection. Given the focus of this book, principal attention has been given to patent rights, and also to trademark rights. It is thus appropriate to focus on the legal protection of these rights. Since these rights are closely connected with fields of natural science and technology, expert technical and scientific knowledge may be needed to resolve certain disputes related to such rights. That is why traditionally (earlier in the Soviet Union and now in the Russian Federation) some types of disputes related to intellectual property rights were and are resolved by special administrative agencies. Although such administrative decisions become effective immediately on the day they are adopted, they may be challenged in court. It is first necessary to differentiate those disputes to be resolved by administrative agencies (with the prospect of later court review) from those which will initially be resolved directly by a court. Second, since there are various court systems in Russia (including courts of general jurisdiction, state arbitration courts and, within this system, the Court for Intellectual Property Rights that was established in accordance with the Federal Law of 8th December 2011 No 422-FZ), it is also necessary to allocate the resolution of disputes among these various courts.

4.2. Disputes to be resolved by administrative agencies The Chamber for Patent Disputes and, in certain situations, Rospatent, are the administrative agencies entitled to resolve disputes concerning inventions, utility models, industrial designs and trademarks. The kinds of disputes to be resolved by the Chamber for Patent Disputes are, inter alia: 1) disputes concerning Rospatent’s decisions to issue, or to refuse to issue patents for inventions, utility models or industrial designs, as well as disputes 494

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concerning state registration of trademarks. Such proceedings may be initiated by an applicant (see: Article 1387, Section 3; Articles 1390, 1391, and Article 1500, Section 1); 2) disputes concerning invalidation of a patent due to the inconsistency of an invention, utility model, or industrial design with technical statutory requirements. Such proceedings may be initiated by any person who becomes aware of the inconsistency (see: Article 1398, Section 2, Paragraph 1); 3)  disputes concerning invalidation of the right to a trademark for reasons related to the inconsistency of the trademark with statutory requirements. Such proceedings may be initiated by any interested person. A decision of the Chamber for Patent Disputes, or respectively, that of Rospatent, may be challenged in a court (see: Article 1513, Section 4). Since such disputes arise mainly (and with respect to trademarks  — entirely) in the course of business activity, the court whose jurisdiction includes such disputes as a rule is a state arbit­ ration court, or to be more specific, the Court for Intellectual Property Disputes (see: Article 34, Section 4(2) of the RF Arbitration Procedure Code).

4.3. Disputes to be resolved by courts A non-exhaustive list of disputes to be resolved by courts is set forth in Article 1406, Section 1 and includes disputes concerning: 1) authorship of an invention, utility model, or industrial design; 2) identification of a patent holder; 3) violation of the exclusive right to an invention, utility model, or industrial design; 4) entering into, performing, amending, and terminating contracts to transfer an exclusive right (that is, alienation of a patent) and licensing contracts for the use of an invention, utility model, or industrial design; 5) the right of prior use; 6) the right of later use; 7) the amount, time period and procedure for payment of the fee to the author of an invention, utility model, or industrial design; and 8) the amount, time period and procedure for payment of compensation. Criteria for distribution of these disputes between the competence of courts of general jurisdiction on the one hand, and that of state arbitration courts, on the other, are set forth in the Ordinance of March 26, 2009 No 5/29 (Section 1) according to which: 495

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Disputes as to the authorship of a result of intellectual activity, since they are not connected with business or other economic activity, are within the competence of courts of general jurisdiction (see: Paragraph 1). The court that will hear disputes connected with business and other economic activity will depend upon whether the litigants are legal entities and/or sole proprietorships, or at least one of them is a natural person not registered as a sole proprietorship. In the former situation a dispute is within the competence of a state arbitration court; in the latter situation it should be referred to a court of general jurisdiction (see: Paragraph 2). Thus a dispute between an employer (or his universal legal successor) and an employee concerning the fee that the employee is due for an employment invention, employment utility model or employment industrial design is within the competence of a court of general jurisdiction (see: the Ordinance, Section 51, Paragraph 5). With regard to disputes concerning intellectual property rights to be resolved by state arbitration courts, such courts shall consider these disputes at the trial and appellate court level; at the level of the courts of cassation, these functions are imposed upon the Court for Intellectual Property Disputes (see: Article 274, Section 3 (2) of the RF Arbitration Procedure Code). There are also certain disputes to be considered by the Court for Intellectual Property Rights acting as a trial court, such as, inter alia, identification of a patent holder;41 and the premature termination of a trademark due to its nonuse.42

  As indicated in the Ordinance of March 26, 2009. No 5/29, the exclusive right to an invention, utility model, or industrial design shall be recognized and protected, provided state registration of the invention, utility model, or industrial design is in place, and a patent has been issued. Therefore, disputes concerning identification of a patent holder may only be considered by a court after issuance of the patent. A court judgment with respect to such a dispute shall be grounds for introducing relevant amendments by Rospatent to the State Register of Inventions of the Russian Federation, the State Register of Utility Models of the Russian Federation, and the State Register of Industrial Designs of the Russian Federation (see: the Ordinance of March 26, 2009. No 5/29. Section 48). 42   This Court, acting as a trial court, also considers cases contesting normative legal acts of federal executive agencies affecting rights and legitimate interests of an applicant concerning legal protection of the results of intellectual activity and its distinctiveness, as well as cases contesting decisions of the Federal Antimonopoly Service whereby acts connected with acquisition of exclusive rights to distinctive aspects of legal entities, goods, work, services and enterprises are declared to constitute unfair competition. 41

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§ 1. General provisions 1.1. Introduction The Constitution of the Russian Federation states that “everybody has the right to freely use his abilities and property for entrepreneurial and any other economic activity not prohibited by law.” (Article 34, Section 1) It further provides: “Labor shall be free. Everyone shall have the right to make free use of his abilities to work and to choose his occupation or profession.” (Article 37, Section 1) These rights, as well as others set forth in Chapter 2 of the Constitution “Rights and Freedoms of the Human Being and Citizen,” apply to all individuals in the territory of the Russian Federation without regard to nationality. According to the Federal Law “On The Legal Status of Foreign Nationals in the Russian Federation” of July 25, 2002 No 115-FZ (Российская газета, July 31, 2002), as subsequently amended, “foreign nationals enjoy rights and bear duties in the Russian Federation on an equal basis with nationals of the Russian Federation, except in situations provided for by a federal law.” (Article 4) With respect to the legal status of foreign nationals and labor relations the law specifically provides that “foreign nationals enjoy the right freely to dispose of their abilities and property for entrepreneurial and other economic activity not prohibited by law, subject to the restrictions provided by federal law.” (Article 13, Section 1 of the Law of July 25, 2002 No 115-FZ) 497

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In keeping with these general norms, the RF Labor Code (the Federal Law of December 30, 2001 No 197-FZ, Российская газета, December 31, 2001), as subsequently amended, expressly prohibits: 1) compulsory work, except in certain specific situations, such as a) in state of emergency or military conditions in accordance with federal laws; b) in emergency situations, including actual or threatened natural calamities (such as fires, floods, starvation, earthquakes, epidemics, etc.) and other events creating a threat to the life or normal living conditions of the population in whole or in part; c) pursuant to an effective court sentence in a criminal case (see: Article 4); 2) any restrictions or privileges in employment based on sex, race, nationality, language, social background, family status, membership in social organizations and other circumstances not connected with the employee’s occupation.1 It is useful to highlight basic Russian employment rules with specific reference to unusual characteristics applicable to labor relations with foreign employees. The RF Labor Code, effective February 1, 2002, is the principal Russian law in which norms regulating employment are set forth. It should be noted that Russia is a party to many ILO2 Conventions whose norms shall (in case of discrepancy) prevail over those of the Labor Code. There are also rules in some federal laws which pertain to specific kinds of business or other activities, such as the RF Merchant Shipping Code, the RF Air Code, the Federal Laws on Education, etc.

1.2. Social partnership With respect to labor relations it is very important to establish and maintain a fair and reasonable balance between the interests of employers and employees. Given this approach, the Labor Code contains a special Division II: “Social Partnership in the Field of Labor.” Social partnership is defined as a system of relationships among employees (or their representatives), employers (or their representatives), state agencies and municipalities aimed at ensuring reconciliation of the interests of employees and employers concerning regulation of employment relationships and other related issues (see: Article 23). The social partnership may be achieved in different ways, such as, through:   There are certain distinctions, exceptions, preferences and restrictions to this Article which result from requirements of certain kinds of labor, as provided for by federal law. 2   International Labor Organization. 1

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— collective bargaining, negotiations and mutual consultations on regulation of the employment relationship, guarantees of employees’ rights and improvement of labor law and other legal normative acts containing related rules, participation of employees or their representatives in the mana­gement of companies and other organizations, and participation of representatives of employees and employers in labor dispute resolution (see: Article 27). Trade unions and associations act as representatives of employees in social partnership (see: Article 29).3 The interests of employers in collective bargaining and in the resolution of collective labor disputes may be represented by the company’s chief executive officer or persons authorized by him, or by employers’ associations having the status of noncommercial organizations (see: Article 33). According to the Constitution of the Russian Federation, everyone is entitled to create associations including trade unions, to protect their rights and lawful interests (see: Article 30). This right is also protected by the 1950 Convention for the Protection of Human Rights and Fundamental Freedoms (see: Article 11), to which Russia is a Party, and also by some ILO Conventions, such as, the 1948 Freedom of Association and Protection of the Right to Organize Convention (ILOC87), the 1949 ILO Right to Organize and Collective Bargaining Convention (ILOC98), which were ratified by the USSR and became binding on Russia as a successor state to the Soviet Union. In addition, there is the Federal Law “On Social Associations” of March 19, 1995 No 82-FZ (Российская газета, May 25, 1995), as subsequently amended, which is a framework law applicable to all social non-commercial associations, and the Federal Law “On Trade Unions, their Rights and Guarantees for Performance of their Activities” of January 12, 1996 N 10-FZ (Российская газета, January 20, 1996), as subsequently amended, — hereinafter the Trade Union Law). The Trade Union Law guarantees the right to create trade associations (see: Article 2), introduces guarantees of employees’ activities in trade unions (see: Articles 5; 24–26), provides that trade unions are entitled to represent and protect employees’ social and labor rights and interests (see: Articles 11–23), establishes liability of trade unions for breaches of the law and also regulates issues of responsibility for violation of trade unions’ rights (see: Article 30). According to the Trade Union Law, a trade union has the discretion to decide whether or not to obtain the status of a legal entity. If a trade union obtains such a status, it may own different kinds of property (both real and personal) needed to   If there is no trade union organization that include the company’s employees or those employees who are not members of a trade union, their representatives for social partnership purposes may be elected at a general meeting (or conference) of employees (see: Article 31). 3

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carry out its activities. In order to become a legal entity, a trade union (as a social organization) must be registered with the RF Ministry of Justice. The social partnership is maintained at various levels, including the federal level,4 the inter-regional level,5 the regional level,6 the branch level,7 the territorial level8 and the local level9 (see: Article 26 of the Labor Code). The social partnership is carried out through commissions for the regulation of social-labor relations. At the federal level, for example, there is a permanent Russian Trilateral Commission whose members are representatives of all–Russian trade union associations, all–Russian employers’ associations, and the Government of the Russian Federation. This Commission on a periodic basis prepares and adopts General Agreements between the all-Russian Associations of Trade Unions, the all-Russian Associations of Employers and the Government of the Russian Federation. At this time the General Agreement for 2014–2016 is in effect.10 The Parties of the Commission are convinced that the economic policy of the state within this period should be oriented to the promotion of the stability of economic development and to increase investments in human capital. Further to this approach, the Parties are of the opinion that the main priorities of the state policy with respect to economic development are, inter alia: — promotion and maintenance of Russia’s competitive possibilities, the creation of competitive economics of knowledge and high technologies, an increase of global competitive priorities in traditional sectors of the economy; — recognition of innovation as a leading factor of economic growth in all sectors of the economy, transition to the formation of a new technological foundation of the social-economic development of Russia based upon innovations; — modernization of traditional sectors of the economy; — provision of structural diversification of the economy;   At this level the social partnership establishes basic rules for the regulation of employment within the entire territory of the Russian Federation. 5   The purpose of the social partnership at this level is to agree to relevant basic rules for two or more subjects of the Russian Federation. 6   This level of social partnership aims at reaching agreement concerning the rules above within the territory of a subject of the Russian Federation. 7   Where the rules in question should be agreed to for a specific field of activity (e. g., different kinds of transport, the mining industry, etc,). 8   That is, the rules above within a municipality. 9   In order to establish mutual obligations of employees and a specific employer. 10   See: Российская газета, December 30, 2013. 4

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— creation of conditions for the freedom of business and competition, development of mechanisms of self-regulation of the business community, promotion of protection of ownership rights. In order to achieve those aims the Parties undertake to assist: — improvement of the investment and business climate; — consideration of the Parties’ interests in integration procedures within the Commonwealth of Independent States in connection with the functioning of the Customs Union and the Unified Economic Area as well as with the formation of the Euro-Asian Economic Union; — adaptation of economics to conditions of accession to the World Trade Organization, diversification of instruments of support of domestic business in foreign markets and technological exchange, monitoring of the realization of measures to support vulnerable sectors of the economy and correction of such measures when necessary. The Parties will also maintain cooperation so as to assist: — creation of new employment positions with high productivity, safe labor conditions and decent wages; — improvement of new information systems in the labor market; — improvement of the quality of manpower and development of its professional mobility; — improvement of the legal regulation of the labor market; and — optimization of recruitment of foreign manpower. Trilateral commissions may be formed in subjects of the Russian Federation, and in municipal territories as well as at branch levels (see: Article 35 of the Labor Code). At the local level a bilateral commission may be organized for collective bargaining in order to conclude a collective bargaining agreement (see: id.). A collective bargaining agreement is defined in the Labor Code as “a legal act regulating social-employment relations within an organization or with an individual entrepreneur and concluded by employees and the employer, as represented by their representatives” (Article 40, Paragraph 1). A collective bargaining agreement may include obligations of employees and employers on issues such as: — forms, systems and payments for labor; — payment of allowances and compensation; — a mechanism for regulation of payment for labor with due consideration to levels of inflation, price increases, etc; —  working hours and rest time including leaves; —  improvement of working conditions and protection of labor; 501

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— protection of employees’ interests in the course of privatization of state owned and municipal property; — environmental protection and health care for employees (see: Article 41). Collective bargaining should be completed within a 3 month time period. Should the parties fail to reach agreement, then the agreed terms should be signed and the list of differences should be executed for further negotiations (see: Article 40, Paragraph 2). A collective bargaining agreement is concluded for up to 3 years and may then be extended for a further 3 year period. The agreement survives an employer’s reorganization, a change in its top management or a change of ownership. However, if there is a change of ownership the validity of the collective bargaining contract will continue only for another three month period (see: Article 43 of the Labor Code). A collective bargaining agreement may provide privileges and preferences for employees and conditions of labor more favorable than those established by laws and other normative legal acts (see: Article 41).

§ 2. Pre-employment issues 2.1. Age requirements An employment contract may be concluded with a natural person who has attained the age of 16 (see: Article 63 of the Labor Code, paragraph 1). There are, however, 3 exceptions to this general rule: a) under certain conditions an employment contract may be concluded with a person who is 15 years old, provided: (i) he or she had received a basic general education, or was enrolled in such a program or in a form of education other than a day form, or left school in accordance with federal law; and (ii) such persons are hired only to perform light labor not injurious to their health (see: Article 63, Paragraph 2); (b) school children of 14 years of age may conclude an employment contract: (i) subject to the consent of a parent (or curator) and agencies of guardianship and curatorship,11 and   Agencies of guardianship and curatorship are in charge of appointing guardians and curators and supervising their activities. Currently these functions are imposed on execultive power agencies of subjects of the Russian Federation (see: Article 34, Section 1 of the RF Civil Code). A guardian shall be appointed to protect the interests of a child under the age of 14 who has no parents. Once a child attains the age of 14 years, a curator shall protect the child’s interests (see: Article 31 of the Civil Code). 11

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(ii) such employees may only perform light labor not injurious to their health, and such labor should not violate educational requirements (see: Article 63, Paragraph 3). c) cinematography organizations, theaters, theatrical and concert organizations, and circuses may conclude employment contracts with persons under the age of 14: (i) if consent of a parent (or guardian) and permission of an agency of guardianship and curatorship have been secured,12 the employment contract shall be signed by one of the parents or the guardian on behalf of the employee (see: Article 63, Paragraph 4); and (ii) employment of such employees must not affect their health and moral development (see: Article 63, Paragraph 3).

These norms of the RF Labor Code are in compliance with the ILO Minimum Age Convention No 138 (1973).13

2.2. Other specific requirements In some fields of professional activity, entering into an employment contract is preconditioned on employees meeting statutory requirements with respect to their health,14 education and special training,15 etc.16 12   This permit should specify the maximum daily hours of work and other labor conditions (see: Article 63, Section 4). 13   See: Professor E.B. Khokhlov, Ed., Курс российского трудового права. Том  3. Трудовой договор. [Course of Russian Labor Law. Volume 3. Employment Contract]. St.Petersburg, 2007, pp. 132–134. 14   E. g., employees whose work is directly connected with the movement of transport vehicles may only be employed after a preliminary medical examination (see: Article 328, Paragraph 2 of the Labor Code). This general provision is developed further in the laws regulating different modes of transport. As expressly indicated in Article 55 of the Merchant Shipping Code, work aboard a sea-going vessel shall only be undertaken by persons who have medical certificates confirming that their health meets the eligibility requirements for such work. Similar norms are contained in the Code of Inland Water Transport (see: Article 27, Section 2), the Air Code (see: Article 53), Federal Law “On Railway Transport in the Russian Federation” (Российская газета, January 18, 2003), as subsequently amended (see: Article 25, Section 3). 15   See: Article 328 (Paragraph 1) of the Labor Code which provides that persons who are employed in work directly connected with the movement of transport vehicles must meet professional selection standards and obtain professional training. The relevant provisions concerning crew members of seagoing vessels are set forth in Article 54 of the Merchant Shipping Code according to which crew member positions may only be occupied by persons having appropriate diplomas and qualification certificates. Article 27, Section 1 of the Code of Inland Water Transport provides similar requirements. See also Article 53 of the Air Code. 16   E. g., “no member of a vessel’s crew may be employed on the vessel without the consent of the ship’s Master.” (Article 57, Section 2 of the Merchant Shipping Code)

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There are also specific rules concerning employment of women which rules are aimed at protecting women’s health. The Labor Code (Article 253) prohibits the employment of women in work requiring the lifting and shifting of heavy objects by hand. Maximum admissible limits of such loading shall be established by the RF Government. Currently these limits are approved by the Decision of the RF Government of February 1993 No 105. If such lifting and shifting takes place 1 or 2 times within an hour, then the limit is 10 kg; if this kind of labor is required on a permanent basis throughout the work day, then the limit is 7 kg. The Labor Code (see: Article 253) also authorized the RF Government to approve the list of jobs that women are not permitted to hold. Currently a list was approved by the Decision of the RF Government of February 22, 2000 N0 162 that includes over 450 jobs in different fields, such as, underground work, metal processing, smelting work, work with lead, some construction and repair work, and mining work.

2.3. Special Characteristics of pre-employment issues concerning foreign manpower Legal regulation of issues relating to recruitment of foreign manpower is developed under the influence of two opposite, albeit interconnected, factors. On the one hand, due to a complicated demographical situation, Russia is interested in making work in Russia available to foreign employees. On the other hand, given unemployment in Russia, both law-making bodies and governmental agencies need to create a legal mechanism whereby recruitment of foreign employees will not affect domestic employment in the Russian labor market. In keeping with these considerations, foreign nationals (and stateless persons) may be employed in the Russian Federation subject to certain requirements. 1. There is a quota limiting the number of foreign nationals who can receive invitations to work in Russia. This quota is set annually by the RF Government on the basis of proposals of executive bodies of subjects of the Russian Federation. Consideration is due the demographic situation in a relevant subject of the Russian Federation and its possibilities to accommodate foreign nationals (see: Article 18, Section 1 of the Federal Law “On Legal Status of Foreign Nationals in the Russian Federation).”17   This quota shall not be applied to highly-qualified specialists, i. e. foreign nationals having experience, skill or achievements in specific types of activities if the annual salary of such a person in Russia will be at least two million rubles (see: Article 13-2, Section 1, Subsection 3 of the Law). For some categories of high-qualified specialists the amounts of their minimal annual salaries are decreased, such as: 17

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Both an employer and a foreign employee must have required permits (see: Article 13, Section 4 of the Law).18 Now to consider these general provisions in more detail. The Federal law “On Legal Status of Foreign Nationals in the Russian Federation,” having stated that foreign nationals enjoy the right freely to dispose of their ability to work (see: Article 13, Section 1) provides some preconditions for employment of foreign manpower. Any employer (who may be a natural person whether or not registered as an individual entrepreneur,19 or a legal entity), is entitled to enter into an employment contract with a foreign national if the employer in due course obtains a permit to recruit and employ foreign employees (see: Article 13, Section 2). This procedure is set forth in the “Rules on issuance of permitting documents for performance by foreign nationals of temporary labor activity in the Russian Federation” as approved by the Decision of the Government of the Russian Federation of November 15, 2006 No  681 (effective January 15, 2007). These rules are applicable both to foreign nationals and to stateless persons20 (see: Section 1). The state body in charge of issuing such permits is the Federal Migration Service (and its local agencies) which until recently was subordinated to the Ministry of For scientific-research workers and teachers invited by higher education institutions having State accreditation or state academies of sciences — one million rubles (see: Article 13-2, Section 1, Subsection 1 of the Law). For foreign nationals who participate in realization of “Scolkovo” project in accordance with the Federal Law “On Scolkovo” Innovation Centre “the amounts of their salaries are legally irrelevant (see: Article 13-2, Section 1, Subsection 2 of the Law). The level of qualification of such a specialist shall be assessed by the employer who shall bear any related risk (see: Article 13-2, Section 3 of the Law). In order to assess the level of qualification of a specialist an employer may use the relevant documents and information, such as references of other employers (including foreign ones), information of the results of the specialist’s intellectual activity, information on his professional awards and other forms of recognition of his professional achievements (see: id., Section 4). 18   A foreign national who is entitled to arrive in the Russian Federation without a visa may be employed for labour activity provided he obtained a patent from a local agency of the Federal Migration Service (see: Article 13_3, Section 1 of the Law). Neither a work permit nor a patent are required from a national of a Member State of the Euro-Asian Economic Union for labour activity in another Member State of the Union (see: Article 97, Section 1 of the Treaty on Euro-Asian Economic Union of May 29, 2014). 19   An unregistered natural person might employ, for example, a housekeeper or a chauffeur. 20   A stateless person is an individual who is not a citizen of the Russian Federation and who does not have evidence confirming that he is a citizen (or subject) of a foreign state (see: Article 2, Section 1, Paragraph 3 of the Law). 505

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Internal Affairs of the Russian Federation; now it is a autonomous body within the RF Government.21 In order to obtain a permit to recruit and hire foreign employees, an employer must submit an application22 to the local agency of the Migration Service, together with the following documents summarized in the table below.

Documents to be submitted based upon the type of employer

Documents to be submitted without regard to the type of employer

Individual entrepreneur Draft employment contract or other document evidencing a preliminary agreement Copy of a certificate Copy of a registration verifying an entry in the certificate of a legal en­ Unified State Re­gister tity of Legal Entities Russian legal entity

Foreign legal entity

Copy of a certificate of registration for tax reporting at the place of state registration

Copy of a certificate of Copy of a certificate registration for tax re- making an entry in the porting at the place of unified state register of state registration in the individual entrepreneurs Russian Federation Copy of a certificate to create a branch office and a copy of a certificate of its accreditation

Document evidencing payment of a state duty for issuance of a permit to recruit and use foreign employees the amount of a state duty is 6000 rubles (see: Article 333-28 of the Tax Code)

Copy of a document identifying the person and the place of registration of an individual entrepreneur

Copy of a permit to cre- Copy of a certificate ate a representative office for tax reporting at the and a copy of a certificate place of registration of its accreditation

Documents issued abroad shall be legalized or apostilled in due course. If these documents are prepared in a foreign language they must be accompanied with a notarized translation into Russian. If copies are submitted without originals, such copies must be notarized (see: Sections 6, 7 of the Rules).

  See: Regulations on the Federal Migration Service approved by the Decision of the RF Government of July 13, 2012 N 711, Section 4. 22   Application forms for employers to seek issuance of permits to recruit and employ foreign employees and also forms of the permit to recruit and hire foreign employeers have been approved by the Order of the Federal Migration Service of December 25, 2006. No 369. 21

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The appropriate agency of the Federal Migration Service must decide whether to issue a permit to recruit and employ foreign employees within 30 days from the date of submission of the required documents (see the table above). In case expert examination of the documents is needed, this decision should be made within 15 days after receipt of an expert opinion, but at the latest 45 days after the date of submission of the documents (see: Section 8 of the Rules). Reasons must be given for a refusal to grant a permit (see: Section 12 of the Rules). A permit to recruit and employ foreign employees shall be granted as long as the appropriate agency of the State Employment Service of the subject of the Russian Federation has provided a favorable opinion23 (see: Article 18, Section 3, Paragraph 1 of the Law). Such an opinion shall be effective for a one year period (see: id., Paragraph 2). Upon receipt of this permit an employer will need to file a motion with the local agency of the Federal Migration Service requesting that it issue an invitation to a foreign national to enter the Russian Federation for the purpose of labor activity. Such a motion must be accompanied by: а) the permit to recruit and employ foreign employees; b) guarantees of material, medical and housing accommodations for the foreign national for the period of his stay in Russia; and c) documents needed for issuance of a work permit for each foreign employee24 (see: Article 16, Section 4, Subsections 2 and 3, Section 5; Article 18, Section 2 of the Law).25 The Federal Migration Service is the agency which issues work permits, within an annual quota, for invitations to foreign nationals to enter the Russian Federation   A permit to recruit and employ foreign employees as crew members of Russian seagoing vessels shall be granted by the Federal Migration Service on the basis of an opinion of the RF Transport Ministry (see: Article 18, Section 4 of the Law). 24   A set of those documents includes: — a copy of a document certifying the identity of the foreign national; — a color photograph 30x40 mm; — a copy of a document stating the professional education of the foreign national; — a document evidencing payment of state duty for issuance of a work permit (see: Sections 22, 23 of the Rules). Documents issued abroad must be legalized or apostilled, and if they are in a foreign language, they must be accompanied by a notarized translation into Russian (see: Section 24 of the Rules). 25   In order to obtain a work permit a foreign national should confirm his command of the Russian language, knowledge of the Russian history and basic knowledge of the Russian legislation (see: Article 15_1, Section 1 of the Law). 23

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for purposes of work (see: Section 28 of the Rules). In order to maintain the optimal balance of labor resources, the RF Government may introduce quotas on issuance of work permits to foreign nationals with respect to their employment both in the territory of one or several subjects of the Russian Federation as well as in the entire territory of Russia (see: Article 18-1, Section 3 of the Law). A decision concerning issuance of a work permit must be taken within 30 days from the date of the employer’s submission of documents. If an expert examination of the documents is needed, the decision must be made within 15 days from the date of receipt of the expert opinion, but at the latest 45 days from the date of submission of the documents (see: Section 29 of the Rules). A refusal to grant a work permit must be grounded (see: Section 30 of the Rules). A work permit shall be granted, provided: a) the foreign national has attained 18 years of age; b)  his or her employment is within the number of foreign employees specified in the employer’s permit to recruit and employ foreign employees. The permit to recruit and employ foreign employees may not be transferred to another employer (see: Section 14 of the Rules); and c) there is no false information in the documents submitted, nor are there circumstances preventing issuance of a work permit26 (see: Section 31 of the Rules). The employer must receive a work permit for each foreign employee27 (see: Section 34 of the rules), and it shall be his responsibility to hand the work permit over to the foreign employee (see: Section 36 of the Rules). As soon as the employer has received a permit to recruit and employ foreign employees and has concluded employment contracts with them he must, within one month, send required information: a) to the local agency of the State Employment Service of the subject of the Russian Federation; and b) to the agency of State Labor Inspection of the subject of the Russian Federation. It should be noted that an employer is only entitled to enter into a labor   The list of such circumstances is set forth in Article 18, Section 9 of the Law and includes, inter alia, situations where a foreign national: — supports forcible change of the fundamentals of the constitutional structure of the Russian Federation or otherwise creates a threat to the security of the Russian Federation or its nationals; — finances, plans, commits or assists terrorist (or extremist) acts; — is sentenced for a felony, etc. 27   The form for a work permit has been approved by the Order of the Federal Migration Service of December 25, 2006. No 370. 26

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contract with the foreign employee whose work permit expressly provides its holder with the right to work for this particular employer. The Presidium of the Supreme State Arbitration Court, having touched on this issue in the course of supervisional proceedings in a dispute between the Federal Migration Service and a Russian company which employed a foreign employee who had a permit to work for another company, held that the Federal Migration Service quite correctly imposed a fine on the employer for violation of relevant mandatory rules (see: Bulletin of the RF supreme State Arbitration Court, 2009, No 8. P. 252–256). An employer is only entitled to employ foreign employees in accordance with their professional qualifications and within the territory of the subject of the Russian Federation specified in the permit (see: Article 13, Section 5 of the Law; Section 15 of the Rules). Exceptions to these provisions may be introduced by the RF Government (see: Article 13, Section 6 of the Law). Usually such exceptions are granted, inter alia, to foreign nationals whose employment is directly connected with the movement of transport vehicles, such as, crew members of sea-going or river-going vessels, chauffeurs, engine-drivers, etc. Also, a foreign employee may be sent on secondment outside a subject of the Russian Federation (see: Decision of the RF Government of February 17, 2007 No 97, Section 1). There are, however, some foreign nationals who do not require work permits in Russia, such as: 1) permanent residents of the Russian Federation,28 2) participants in the State program to assist in resettlement in the Russian Fede­ ration of compatriots and their families living abroad; 3) staff members of diplomatic agencies or consular institutions of foreign countries in the Russian Federation, and staff members of international organizations, as well as private employees of such persons; 4) employees of foreign legal entities (manufacturers or suppliers) performing assembly work, services and guarantee work, as well as post guarantee repairs of technological equipment delivered to the Russian Federation; 5) journalists accredited in the Russian Federation; 6)  students of Russian professional educational institutions working or rendering services during their vacations;   A document evidencing the right to reside permanently in the Russian Federation is a residence permit granted by a local agency of the Federal Migration Service for a 5 year period. After expiration of this time period it may be extended repeatedly for additional 5 year periods (see: Article 8, Section 3 of the Law). 28

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7)  students of Russian professional educational institutions working during their free time to assist personnel in the same institutions; 8) visiting teachers invited to the Russian Federation to lecture and teach classes in educational institutions, except those who enter the Russian Federation to teach in religious professional educational institutions; 9)  employees of foreign legal entities’ representative offices duly accredited and registered in the Russian Federation, on the basis of the principle of recipro­ city, in accordance with international treaties of the Russian Federation (see: Article 13, Section 4 of the Law). It should be noted that there are some restrictions for foreign nationals with respect to certain employment positions. For example, a foreign national may not be a captain of a civil aviation aircraft (see: Article 14, Section 1, Subsection 4 of the Law),29 nor may a foreign national hold the position of master, chief officer, chief engineer or radio operator of a sea-going vessel flying the Russian flag. Other crew members positions in such vessels are available to foreign nationals (see: Article 56, Section 1 of the Merchant Shipping Code). Article 27, Section 3 of the Code of Inland Water Transport includes similar provisions.

§ 3. Contract of employment 3.1. General provisions A contract of employment is defined in the Labor Code as an agreement between an employer and an employee whereby the employer undertakes to provide the employee with an agreed job description, to ensure labor conditions as established under the rules of labor law, the collective bargaining agreement and the contract of employment and timely and fully to pay wages. The employee undertakes to perform his job as described in the labor contract and to observe the internal labor regulations established by the employer (see: Article 56). The conditions of an employment contract may be classified in two groups: obligatory conditions and additional ones. The first group consists, inter alia, of conditions relating to: — the place of work, — the labor duties, i. e. the employment position according to profession, qualification, etc.;

  According to the RF Air Code, a chief executive officer of an aviation enterprise created in Russia with participation of foreign capital must be a Russian national, and the number of foreign nationals on its management board shall not exceed 1/3 (see: Article 61, Section 2). 29

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—  the starting day of work and its duration;30 — wages; — obligatory social insurance. The second group may include different conditions, such as those concerning: — a probationary period,31 —  an employee’s duty to work during a certain time period for an employer who paid for the employee’s education; — additional insurance arrangements for the employee (see: Article 57). An employment contract should be in writing. However, even if it is not in written form, an employment contract is nevertheless deemed to be concluded when an employee actually has begun to work at the instruction of the employer or his representative or at least with their awareness (see: Article 67). An employment contract shall begin from the date of its signing by the employee and the employer, or from the date when the employee has actually begun work upon the instruction (or with the knowledge) of the employer or his representative (see: Article 61, Paragraph 1).32 Should the employee fail to begin work at his job on the date specified in the employment contract, the employer is entitled to nullify the employment contract, in which case the contract will be deemed not to have been concluded (see: Article 61, Paragraph 4).

3.2. Duration of work Generally speaking, the RF Labor Code regulates the number of working hours both: a) within a week; and b) within a day. The normal work week is 40 hours (see: Article 91, Paragraph 2 of the Labor Code). In some situations the work week will be   According to the general rule, an employment contract shall be concluded for an indefinite period of time (see: Article 58). A contract may be concluded for a definite time period if it is so provided by law, for example, to perform temporary (up to 2 months) work or seasonal work; and with persons to be sent abroad to work for diplomatic agencies or consular institutions. 31   A probation period shall not exceed 3 months, and for chief executive officers, their deputies, chief bookkeepers and their deputies, heads of branch and representative offices 6 months (see: Article 70). 32   The question of whether an employee is entitled, in addition to his or her employment contract, to take a part time job under an employment contract with another employer has been answered, in general, positively (see: Article 60.1 of the Labor Code), although subject to preconditions in certain situations, for example an employee who is an organization’s chief executive officer is allowed to have a part time job with the consent of the appropriate body of the legal entity (such as the general meeting of shareholders or board of directors) or the owner of the company’s property (see: Article 276 of the Labor Code). 30

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shortened,33 based upon: 1) the age of the employee34 2) his or her health condition35 or 3) the nature of the job36 (see: Article 92 of the Labor Code). A shorter work week may also be agreed to between an employee and an employer. Moreover, there are situations where a request of an employee is binding on an employer. For example, an employer shall establish a shortened work week or work day at the request of: a) a pregnant woman; b) one of the parents (or a guardian or curator) of a child under the age of 14 years (or of an invalid child under the age of 18 years); c) a person who cares for an ill family member, in accordance with a medical opinion (see: Article 93 of the Labor Code).37 The normal work day is 8 hours subject to some exceptions, such as: 1) for under-age employees, a) between 15-16 years old, 5 hours; b) between 16-18 years old, 7 hours; c) between 14-16 years old who combine education with work, 2.5 hours, and those between 16-18 years, 4 hours; 2) for invalids, in compliance with a medical opinion; 3) for employees who are working in harmful or dangerous conditions, 8 hours (in a 36 hour work week) and 6 hours (in a 30-hour work week) (see: Article 94 of the Labor Code). The Labor Code contains some rules concerning night work, defined as work between 10 p.m. and 6 a.m. These rules relate to 1) the duration of night work and 2) the employees who may (or may not) be involved in it.   See: S.P.Mavrin, M.V. Filippova, E.B.Khokhlov. Трудовое право России [Labor Law of Russia]. St. Petersburg, 2005, pp. 239-240. 34   The work week for employees whose age is younger than 16 years shall not exceed 24 hours. For those who are between 16-18 years of age, the maximum is 35 hours. 35   For invalids of group I or II the ultimate duration of the work week shall be 35 hours (see: Article 92 of the Labour Code). Invalids of group I are those who are unable to move without external help (e. g. when, as a result of an accident, a person was deprived of both legs and both hands). A typical example of an invalid of group II is a person whose foot was amputated and it was impossible to equip him with a prosthetic device. 36   For employees engaged in work in harmful or dangerous conditions the maximum work week is 36 hours. By federal law, a shortened work week may also be established for other kinds of employees. For example, the work week for teachers in educational institutions shall not exceed 36 hours (see: Federal Law of Education of July 10, 1992, Article 55, Section 5). 37   In case of shortened working time, wages shall be calculated on a pro rata basis or based on the amount of work actually performed (id.). 33

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1)  Night work is shortened by 1 hour. This means that standard night work is 7 hours. This rule, however, does not apply to employees to whom shortened work hours apply or to those who are specifically employed for night work, unless a collective bargaining contract so provides (see: Article 96, Paragraphs 1-3). 2) With respect to employees who may (or may not) be employed in night work there are certain rules: a)  some employees are prohibited from working at night, such as: (i) pregnant women and (ii) youngsters under the age of 18 years (except those participating in cinema, theatrical, television or similar performances). b) certain employees may only work at night with written consent, such as: (i) women with children aged 3 years or less; (ii) invalids; (iii) employees having invalid children; (iv) caretakers of family members who are ill, in compliance with a me­ dical opinion; (v) a single mother, single father, or guardian nurturing children up to 5 years of age.

If manufacturing is of a kind that cannot be interrupted, or is needed for more effective use of equipment to increase the volume of production of goods or services, work may be scheduled in two, three or four shifts (see: Article 103 of the Labor Code). In certain situations work beyond normal working hours (overtime work) is permitted. These situations fall into two groups. The first group includes situations where an employer may impose overtime work upon employees only with their written consent: 1)  in case of necessity, where due to some unforeseen delay, work could not be completed within the normal work time and non-completion of the work could result in loss of or damage to property belonging to the employer or to third persons (should the employer be liable for the safety of their property), to state-owned or municipally-owned property, or could create a threat to the life or health of human beings; 2) to repair or restore defective machinery or construction which could otherwise lead to termination of work for a substantial number of employees; 3)  to continue work where the work is of a nature that cannot be interrupted, an employee is absent and no substitute is available (see: Article 99, Paragraph 2 of the Labor Code).

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The second group includes situations where employees may be required to work overtime even without their consent: 1)  where such work is needed to prevent or remedy consequences of a catastrophe, an industrial disaster or a natural calamity; 2)  to perform necessary work to remove unforeseen circumstances affecting the normal functioning of water or gas supplies, heating, lighting, sewage, transport, or communication systems; 3)  to perform work preconditioned by an emergency or military situation, or in other situations which create a threat to life and normal living conditions of the population in whole or in part (see: Article 99, Paragraph 3 of the Labor Code). Overtime work for each employee shall not exceed 4 hours within two consecutive days and 120 hours within a year (see: id., Paragraph 6). Some employees may not undertake overtime work, i. e. pregnant women and youngsters under 18 years of age (id., Paragraph 5). The Labor Code provides that unscheduled working days may be established for certain employees (such as top officials of organizations, in-house legal counsels, personal chauffeurs, etc.). If necessary, these employees shall perform their jobs beyond the normal duration of their working hours (see: Article 101).38

3.3. Rest time Rest time is time which an employee, free from the performance of labor duties, may use at his or her discretion (see: Article 106 of the Labor Code). Russian law distinguishes the following kinds of rest time: 1) breaks within the working day (or shift); 2) daily rest; 3) weekly uninterrupted rest (days off); 4) public holidays; and 5) leaves (see: Article 107 of the Labor Code). 1. An employee must be granted a break within the work day (or shift) for rest and a meal. The length of this break must be at least 30 minutes and not more than 2 hours.39 This break time shall not be included in working time40 (see: Article 108, Paragraphs 1 and 2 of the Code).

  Such employees enjoy the right to have additional leave time. See: S.P. Mavrin, M.V. Filippova, E.B. Khokhlov, op. cit., p. 245). 39   The details shall be specified in the internal labor regulations or by agreement between the employee and the employer. 40   If due to the uninterruptible character of the manufacturing process it is impossible to grant the above break, the employer is obligated to ensure the possibility for an employee to have a rest and a meal within his working time (see: Article 108, paragraph 3 of the Code). 38

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Employees who work in the open air during cold times of the year or in closed unheated premises (stevedores engaged in loading and unloading vessels, and other employees) shall, if necessary, be granted special breaks to warm themselves and rest, such breaks to be included in their working time. The employer must provide employees with the necessary premises (see: Article 109 of the Code). 2.  Daily rest (i. e. rest between two working days or shifts) must be at least 12 hours.41 3. Weekly uninterrupted rest shall be at least 42 hours (see: Article 110 of the Code). This consists of day(s) off. The number of days off depends upon the duration of the work week which may be 5 or 6 days. In the former situation employees shall be granted 2 days off, in the latter, one day off.42 The common day off is Sunday. The second day off is established by the collective bargaining agreement or by internal labor regulations. Usually both days off should be consecutive ones (see: Article 111 of the Code). 4. Public holidays in Russia are currently: —  New Year’s Vacation, January 1, 2, 3, 4, and 5; —  Christmas, January 7; —  Fatherland Defender’s Day, February 23; —  International Women’s Day, March 8; —  Spring and Labor Holiday, May 1; — Victory Day, May 9; — Day of Russia, June 12; — People’s Unity Day, November 4, (see: Article 112, Paragraph 1 of the Code). In the event a public holiday coincides with a day off, the day off will be shifted to the working day next to the holiday43 (see: id., Paragraph 2). Work on days off and public holidays is prohibited, subject to exceptions set forth in the Labor Code. The Code differentiates situations when such work may be performed: 1) with the written consent of the employees and 2) without their consent. Written consent is required when it is necessary to perform unforeseen work, the prompt completion of which is a precondition of further normal work of the organization or its subdivisions.

  See: S.P. Mavrin, M.V. Filippova, E.B. Khokhlov, op. cit., p. 251.   If a work week consists of 6 days, the number of work hours within the last work day should be shortened so as to provide 42 hours of uninterrupted rest. 43   The RF Government is entitled to shift days off to other days (see: id., Paragraph 5). 41 42

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Consent is not needed when such work is intended: a)  to prevent or repair consequences of a catastrophe, industrial disaster or natural calamity; b) to prevent accidents, loss of or damage to property belonging to the employer, the state or the municipality; c)  to perform work necessary due to an emergency or military situation as well as in other cases where there is a threat to life or normal living conditions of the population in whole or in part (see: Article 113). 5. Annual paid leaves. The duration of such leave is 28 calendar days (see: Article 115, Paragraph 1 of the Code). Certain employees are entitled to leaves of a longer period, for example: — invalids, at least 30 days; — youngsters up to 18 years of age, at least 31 days (see: Article 267 of the Code). Leaves of a longer period are also granted to teachers of educational institutions, researchers of scientific institutions, etc. Certain employees have the right to receive additional leave time given the specific nature of their jobs or their labor conditions, for example: 1)  those engaged in work in harmful or dangerous conditions; 2)  those with an unscheduled working day (such as top officials, personal chauffeurs, etc.); 3)  those working in the Far North (see: Articles 116–119 of the Code). Given a family situation or other justified reasons, an employee may ask his employer for an unpaid leave, the duration of which must be agreed to by the parties. In certain circumstances an employer is under a statutory obligation to grant such a leave, for example: — to participants of the Great Patriotic War, up to 35 calendar days within a year; — to old pensioners, up to 14 days; — to parents and spouses of military servicemen who lost their lives due to a wound or injury received during military service or due to illness connected with military service, up to 14 days; — to invalids, up to 60 days; — to an employee in the event of birth of a child, registration of marriage, death of close relatives, up to 5 days (see: Article 128 of the Code). In certain situations special leaves must be granted to employees. For example, a pregnant woman has the right to a leave of 70 days (and if she is pregnant with more than one child, 84 days) prior to birth and 70 days (in case of the birth of two and more children, 110 days) after birth. 516

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In these cases a women will receive a social insurance allowance from the state. At a woman’s request, she shall be granted a leave for childcare until the child reaches 3 years of age. During this time she will be entitled to receive a state social insurance allowance and to retain her employment position (see: Article 256 of the Code).44 In order to encourage employees to improve their professional qualifications, the Labor Code provides for special paid leaves for employees who combine their work with studies in state accredited institutions of higher education, to take exams45 and to prepare graduate qualification work.46 In addition, once a year the employer must pay the employee’s transportation to and from the place where the educational institution is located (see: Article 173). For employees who are students of state accredited secondary educational institutions the duration of paid leave is 30 days, with 40 days to take exams during the first and following years (in case of education by correspondence), 10 days (for a day course program), and 2 months for preparation of graduate qualification work without regard to the system of education (see: Article 174 of the Code).

3.4. Wages An employee’s remuneration for performing his or her work is usually set out in collective bargaining agreements and individual employment contracts provided that wages may not be lower than those guaranteed by the Labor Code and other legislation (see: Article 135 of the Labor Code). Although issues concerning wages in non-state organizations are to a significant extent dependent upon agreement between an employer and an employee, they are subject to state regulation, inter alia, in two main aspects: 1) establishment of the minimum wage; 2) procurement of increased wages for employees engaged in work under difficult conditions or in certain specific situations (for example, in overtime night work, on days off and on holidays).47

  Such a leave is also available to the father of the child, the grandmother, grandfather or other relative or guardian who actually cares for the child (see: id.). 45   The duration of this leave for those studying by correspondence is 40 calendar days in the first and second year and 50 days in each additional year; for those studying in a day course program it is 15 days. 46   The duration of this leave is 4 months. 47   See: S.P. Mavrin, M.V. Filippova, E.B. Khokhlov, op. cit., p. 278. 44

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Considering each of these aspects in turn: 1) minimum wages are set by federal law48 and are periodically reviewed and indexed. According to the Labor Code, the minimum wages shall not be less than the living minimum49 of a person who is able of work (see: Article 133, Paragraph 1). It should be noted that the minimum wages rate as established by federal law is used mainly for book-keeping purposes; actual minimum wages are substantially higher. 2) Increased wages shall be paid to employees, inter alia, under the following circumstances: a) for overtime work, at least 1.5 times the amount of the usual wage for the first 2 hours and at least double the amount for additional hours (see: Article 152 of the Labor Code); b) for work on days off or on holidays, at least double the amount (see: Article 153 of the Labor Code); c) for night work, not less than the amount provided for by the RF Government (see: Article 154 of the Labor Code); d) for work in hard, harmful or dangerous conditions as well as for work in areas with special climate conditions (for example, in the Far North), not less than the amounts provided by law and other normative legal acts (see: Articles 147 and 148 of the Labor Code); e) collective bargaining agreements and individual employment contracts may establish higher levels of payment for work in the circumstances above than those required by law. Wages shall be paid at least each half month50 (see: Article 136, Paragraph 6 of the Labor Code) in rubles51 (see: Article 131, Paragraph 1 of the Labor Code).

  In a subject of the Russian Federation the minimum wage may be established for employees working in its territory except employees of organizations financed from the federal treasury. The amount of the minimum wage in a subject of the Russian Federation may not be less than the amount of the minimum wage established by a federal law (see: Article 133.1 of the Labour Code). 49   The living minimum is a monetary evaluation of a so-called “consumer basket,” i. e. a minimum set of foods, other goods and services needed to maintain health and living conditions of an individual (see: Federal Law of October 24, 1997. No 134 FZ “On Living Minimum in the Russian Federation,” Российская газета, October 29, 1997 (as subsequently amended)). 50   Unless federal law provides otherwise (see: id.). 51   Wages may be paid in foreign currency abroad to officials and other employees of Russian diplomatic agencies, consular institutions and other official representative offices located outside Russia, as well as to employees of branch or representative offices of Russian 48

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In case of a delay of more than 15 days in the payment of wages, an employee is entitled, upon written notice to an employer, to stay his work within the entire period of delay until actual payment of the outstanding wages (see: Article 142 of the Labor Code).52 When work is stayed, the employee may be absent from his or her work place (see: ibid). An employee is allowed to stay his work even if delay in the payment of wages was not due to the employer’s fault (see: Section 57 of the Ordinance of the Plenum of the RF Supreme Court of March 17, 2004 No 2). Deductions from wages are restricted to 20% and in certain situations provided by federal law to 50%. The amount of deductions related to payment of alimony for minor children, compensation of harm resulting from injury or death, as well as compensation for losses caused by a crime, shall not exceed 70% (see: Article 138 of the Labor Code).

3.5. Amendment of an employment contract Amendment of an employment contract involves a change of employment conditions, whether to an employee’s job, place of work or wages and may lead to an employee’s transfer to another job or a suspension from work. 1. Transfer of an employee to another job may be temporary or permanent. A temporary transfer changes the conditions of the employment with the same employer53 and, as a general rule, with the employee’s consent (see: Article 72.1,

legal entities located abroad (see: Article 12, Part 6 of the Federal Law of December 10, 2003 No 173-FZ “On Currency Regulation and Currency Control”). 52   Stay of work is prohibited: — within periods of military or emergency situations; — in armed forces and other organizations responsible for state defense and security, rescue work, fire-fighting agencies, and in law-protecting bodies; — for public servants; — in organizations directly maintaining dangerous industries and equipment; — for employees who are in charge of work directly connected with providing heating, energy, water or gas supplies, communications, and urgent medical aid stations (see: id.). 53   Inter alia, in order to substitute for an absent employee. In some circumstances an employer is under a statutory obligation to transfer an employee to another job. Such an obligation arises if an employee should be transferred to another job based upon a medical opinion. The employee’s written consent is required for such a transfer (see: Article 73, Paragraph 1 of the Labor Code). If wages for a new job are lower than for the prior one, an employee will retain his prior average wage for one month, and if the transfer was due to industrial injury or professional 519

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Paragraph 1 of the Labour Code). However, in certain situations a temporary transfer may not require this consent, such as in case of an industrial disaster, a natural calamity (an earthquake, flood, etc.), an epidemic, starvation or other exceptional circumstances that create a threat to life and normal living conditions of all or part of the population. In such situations a temporary transfer without an employee’s consent is permitted for up to one month (see: Article 72.2, Paragraph 2 of the Labor Code.) In these situations, when an employee has been transferred, wages will be paid for work actually performed but at not less than the employee’s average wage at his or her previous job54 (see: Article 72.2, Paragraph 4 of the Labor Code). a) A permanent transfer is only permitted with the employee’s written consent. It may include both a change in the nature of work or the structural subdivision of the employer’s organization and relocation of the employee, together with the employer, to another area55 (see: Article 72.1, Paragraph 1 of the Labor Code). b) Another kind of permanent transfer is when an employee consents in writing to be transferred to permanent work with another employer. In this case the employment contract with the prior employer is terminated (see: Article 72.1, Paragraph 2 of the Labor Code) and a trilateral agreement is concluded among the participants including the previous employer, the new employer and the employee. 2. Suspension from work. An employer is required to suspend an employee from work if the employee: —  arrives at work intoxicated by alcohol, drugs or similar substances; —  fails to pass required professional training and also a test of his or her knowledge and skill in the field of safety regulations; — fails to pass the obligatory medical examination; —  is prohibited by medical opinion to perform work as agreed to in the employment contract; — is deprived for up to 2 months of some special right needed to perform his or her job (such as a driver’s license) if there is no possibility of transferring the employee, with his or her written consent, to another job. disease until the employee has recovered. Should a professional disability become permanent then the employee will receive a pension as an invalid (see: Article 182 of the Labor Code). 54   The average wages shall be calculated in accordance with the “Regulations on characteristics of calculation of an average wage” as approved by the Decision of the Government of the Russian Federation of December 24, 2007 No 992. 55   Another area means an area outside the administrative-territorial borders of a relevant locality (see: Ordinance of the Plenum of the Supreme Court of the Russian Federation of March 17, 2004. No 2 “On application of the Labor Code of the Russian Federation by courts of the Russian Federation,” Section 16, Paragraph 3). 520

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If an employee is suspended from work, he or she is not entitled to any wages (see: Article 76 of the Labor Code).

3.6. Termination of an employment contract Termination of an employment contract may occur as a result of different legal grounds which, generally speaking, may be classified in two groups. One group includes situations where an employment contract is terminated based on someone’s willful action; the second one includes situations where the contract is terminated due to the occurrence of certain events. This latter group may, in turn, be further divided into two sub-groups, one where the occurrence of certain events entails termination of an employment contract without regard to anyone’s willful action, while termination of the contract in the other subgroup results from the combination of a certain event together with some willful action. The first sub-group may be illustrated by the occurrence of events such as: a) the death of an employee56 or an individual employer, or if there has been a declaration that one or the other of them is missing or deceased57 (see: Article 83, Section 6 of the Labor Code); b) recognition, based on a medical opinion, that an employee is completely incapable of work (see: Article 83, section 5 of the Labor Code); c) the sentencing of an employee to punishment which excludes the possibility of the employee continuing his or her previous work (see: ibid., Section 4); d)  disqualification58 or other administrative punishment precluding an employee from performing his or her duties under the employment contract (see: ibid., Section 8);

  “A citizen may, upon the application of interested persons, be deemed by a court to be missing if by the end of one year there is no information at his place of residence concerning his whereabouts.” (Article 42, Paragraph 1 of the Civil Code). 57   A court may declare a citizen to be deceased if there is no information at his place of residence concerning his whereabouts within five years. This is a general time period which will be shortened to six months if the citizen was missing under circumstances threatening death or there were grounds to believe he perished from a specific accident” (see: Article 45, Section 1 of the Civil Code). There is a special rule with regard to a military serviceman or other citizen missing in connection with military action. A court may declare such an individual “to be deceased no sooner than after expiration of two years from the date the military action ended” (id., Section 2). 58   Disqualification means depriving an individual of the right to occupy top positions in the management bodies of a legal entity, or to be a member of a board of directors (or supervisory 56

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e) the expiry or stay for more than a two month period, or deprivation of a special right (for example, a driver’s license), if it makes it impossible for the employee to perform his or her employment duties (see: ibid., Section 9). The second sub-group may be illustrated by a procedure relating to termination of an employment contract concluded for a definite period of time. Expiration of this time period is insufficient to terminate the contract; termination of the contract will occur only if the employer notifies the employee of its termination or the employee so notifies the employer. The employer must give notice to the employee at least 3 days prior to expiration of the contract (see: Article 79, Paragraph 1 of the Labor Code) while the employee may give notice to the employer as late as the last day of the contract.59 If upon expiration of the contract neither party has sought to repudiate it and the employee continues to work, the contract will be deemed to be extended for an indefinite period of time (see: Article 58, Paragraph 4 of the Labor Code). The first group (where termination of an employment contract is based on someone’s willful action) may in turn be divided into the following sub-groups:

I) upon agreement between the employee and the employer; II) at the initiative of the employee; III) at the initiative of the employer; IV) at the initiative of one or more third persons. Let us now consider these different situations in more detail:



I) An employment contract may be repudiated by joint initiative of both parties once they have reached agreement (see: Article 78 of the Labor Code). II) Termination of an employment contract at the initiative of the employee is permissible by giving 2 week written notice to the employer (see: Article 80, Paragraph 1 of the Labor Code).60

board). Such punishment may be imposed by a judge for a period of time between 6 months and 3 years (see: article 3.11 of the Code of Administrative Violations). 59   See: S.P.Mavrin, M.V.Filippova, E.B.Khokhlov, op. cit., p. 181. 60  There are two exceptions to the rule concerning the time period of the notice. On the one hand, it may be shortened if the employee and the employer so agree (see: Article 80, Paragraph 2 of the Labor Code); On the other hand, under certain circumstances the employee may have the discretion to select the time period, and it will be binding on the employer, for example when the employee has enrolled in an educational institution or has decided to retire on an old age pension, etc. (see: id., Paragraph 3). 522

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Prior to expiration of the two week notice period the employee may revoke this notice. In this case his or her employment shall continue unless another employee has been invited in writing to occupy this position61 (see: Article 80, Paragraph 4 of the Labor Code). Upon expiration of the two week notice period the employee is entitled to terminate his or her work. On the last day of work the employer is obligated to give the employee his or her labor book62 and to settle final payment with the employee (see: Article 80, Paragraph 5 of the Labor Code). If, after expiration of the notice period, the employment contract has not been repudiated and the employee does not insist upon retirement, the employment cont­ ract shall continue (see: Article 80, Paragraph 6 of the Labor Code).63 An employee is not required to disclose a reason for his retirement, but needs only refer to it as his or her own desire. However, the Supreme Court of the Russian Federation emphasizes that termination of an employment contract at an employee’s initiative is only permissible if the application for retirement was submitted of his or her own volition. If the employee alleges that he was actually compelled by the employer to apply for termination of the employment contract, this circumstance should be checked and it is the employee who will be required to prove this (see: Section 22 (a) of the Ordinance of the Plenum of the Supreme Court of the Russian Federation of March 17, 2004. No 2). III) Termination of an employment contract at the initiative of the employer. Unlike an employee who is entitled to terminate an employment contract at his discretion, an employer is restricted in his right to do so. An employer may terminate an employment contract on his own initiative only under circumstances set forth in an exhaustive list provided by law.64 These circumstances fall into three categories:   According to Article 64 (Paragraph 4) of the Labor Code it is prohibited to refuse employment to a person who was invited in writing within one month after having left his or her previous employment. 62   In case of delay returning a labor book to the employee, the employer is obliged to compensate the employee for remuneration that the latter failed to receive because of such a delay (see: Article 234, Paragraph 4 of the Labor Code). 63   Meanwhile if the employee quits work prior to expiration of the time period of the notice, the employer may dismiss the employee for shirking in accordance with Article 81, Section 6 (a) of the Labor Code (see: S.P. Mavrin, M.V. Filippova, E.B. Khokhlov, op. cit., p. 184). 64   There are also some statutory guarantees for certain kinds of employees, for example the Labor Code expressly prohibits dismissal of an employee who is ill or on leave, as well as dismissal of a pregnant woman, except in case of liquidation of the organization or termination of a sole business activity (see: Article 81, Paragraph 6; Article 261, Paragraph 1). 61

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(i) those based on the employee’s fault; (ii) those related to the personality of the employee and not connected with fault; (iii) those not connected with the employee’s personality.65 The first category (i) includes, inter alia, the following circumstances: — an employee’s repeated (or, in certain circumstances, even a single) failure to perform labor duties without justifiable reasons (see: Article 81, Section 5 of the Labor Code). Typical examples of such circumstances are: — the absence of an employee from the office without justified reasons; — the unjustified refusal of an employee to pass a medical examination or to take special training as required by law for some occupations.

However, it should be kept in mind that for an employer to dismiss an employee in this situation two preconditions must be met: 1) There must be a repeated unjustified failure to perform employment duties. (“repeated” means that such a failure must take place at least twice). 2) By the time of a new violation the employee should already be subject to disciplinary punishment (such as a reprimand, etc.) that remains in effect.66 Even a repeated violation, if the previous one was not accompanied with disciplinary punishment, may not entail dismissal of the employee according to Section 5 of Article 81 of the Labor Code. A single fundamental violation of labor duties by an employee may also result in his/her dismissal (see: Article 81, Section 6 of the Labor Code). There is an exhaustive list of such violations set forth in this Section of the Code: 1)  shirking work, i. e. an unjustified absence from the office during the entire work day (or shift) as well as an unjustified absence in the office during more than four consecutive hours in a work day or shift;67 it may make sense In some instances (see below) an employee who is a member of a trade union may be dismissed at the employer’s initiative after due consideration of the trade union’s opinion (see: Article 373 of the Labor Code). 65   See: S.P. Mavrin, M.V. Filippova, E.B. Khokholv, op. cit., pp. 185–186. 66   If during one year after imposition of a disciplinary punishment there has been no new disciplinary punishment, the employee shall be deemed to have had no disciplinary punishment. Disciplinary punishment may also be prematurely withdrawn by the employer (see: Article 194 of the Labor Code). 67   These two circumstances are expressly set forth in Article 81 (Section 6, Subsection “a”) of the Labor Code. The RF Supreme Court also considers situations as kinds of shirking work when an employee voluntarily terminates his or her work without notice or prior to expiration of the two week notice period or voluntarily (without the employer’s consent) withdraws for paid or unpaid leave (see: Section 39 of the Ordinance of the Plenum of March 17, 2004 No 2). 524

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to note that originally shirking had meant unjustified absence in the office for the whole work day. However, at a later time in the 1980’s this rule was amended to include an absence of several hours. Currently both variations are mentioned in the code apparently due to historical tradition; 2)  the appearance of an employee at the workplace in a condition of alcoholic or narcotic intoxication; 3) the disclosure of secret information protected by law (whether state, commercial or other secret information, including personal data of another employee) that became known to the employee in connection with his position; 4) an employee’s theft, waste, willful destruction of or damage to another’s property at the workplace, provided this fact is established by a court, another body or official authorized to consider violations of law; 5) violation of rules relating to labor safety resulting in an industrial accident, catastrophe, etc., or creating a real threat of such consequences, provided this fact is officially confirmed; 6) submission of false documents by an employee to an employer.68 The second category (ii) includes situations when an employee fails to meet requirements related to his or her position or work because of a lack of qualifications, a fact that must be confirmed by attestation69 (see: Article 81, Section 3 of the Labor Code). The Supreme Court of the Russian Federation has emphasized that an employer is not entitled to cancel an employment contract for lack of qualifications if there was no attestation in relation to the employee, or if the attestation commission came to the conclusion that the employee met the requirements. However, the opinion of the commission must be assessed in conjunction with other proofs (see: Section 31, Paragraph 1 of the Ordinance of the Plenum of the RF Supreme Court of March 17, 2004. No 2).   These circumstances are of a general character and are applicable to any employee regardless of his or her occupation or position. There are, however, some specific kinds of fundamental violations which may be reasons for dismissal of certain kinds of employees (see infra, Section 3.8 of this text). 69   Attestation means a specific form of examination and assessment of the level of qualification of some kinds of employees (see: A.M. Kurennoy, S.P. Mavrin, E.B. Khokhlov, Eds. Комментарий к Трудовому кодексу Российской Федерации. [Commentary on the Labour Code of the Russian Federation]. Moscow, 2005, pp. 329-330). There are, e. g., Regulations on performance of attestation of state public servants of the Russian Federation approved by the Decree of the President of the Russian Federation of February 1, 2005, No 110. According to these Regulations attestation shall be performed in order to determine whether a public servant corresponds to his position (see: Section 2). It should be performed once in three years (see: Section 4) by an attestation commission appointed by the head of an appropriate state body (see: Section 7). 68

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It is further sets forth in the Code (see: Article 81, Paragraph 3) and in the Ordinance that in order to dismiss an employee for this reason the employer must also prove that the employee refused to transfer to another job which was offered to him by the employer, or that the latter could not offer such a transfer, for example, due to a lack of vacant positions (see: id., Paragraph 2). An employee who completely meets all professional requirements may nevertheless be prohibited from continuing in his or her current job due to a medical opinion. In such a case the employer is obligated to transfer the employee to another job permissible for him or her with due consideration to the health condition. Such a transfer is only possible with the employee’s consent. In case of refusal70 the employee is subject to dismissal under Article 77 (Section 8) of the Labor Code.71 There are also some specific circumstances within this category, but since they relate only to certain kinds of employees, they will be considered below.



The third category (iii) consists of two situations: 1)  Liquidation of an organization or termination of business activity by an individual entrepreneur (see: Article 81, Paragraph 1, Section 1 of the Labor Code). There are, however, some mandatory preconditions, such as: a) a two month written notice (see: Article 180, Paragraph 2 of the Labor Code); b) an employee is entitled to a payment of three months average wages (see: Article 178, Paragraph 1 of the Labor Code). 2)  Decrease of the number of personnel. There are also some preconditions here. In addition to those indicated above, two other requirements are added: c) a new job must be offered to the employee, who may only be dismissed in the event of his refusal to be transferred to a new position, or if the employer has no vacant positions for which the employee is qualified (see: Article 81, Paragraph 3 of the Labor Code); d) some employees enjoy a priority right to retain their jobs (provided their qualifications and skills are equal to those of others). These include: (i) employees having two or more dependents; (ii) those who suffered an industrial injury or professional illness while working for this employer; (iii) invalids of the Great Patriotic War or those of other military actions in defense of the Fatherland;

  Or if the employer has no alternative jobs for such an employee.   In such case a dismissed employee is entitled to an allowance of two weeks average wages (see: Article 178, Paragraph 4 of the Labor Code). 70 71

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(iv) employees improving their qualification at the employer’s instruction during the course of employment (see: Article 179, Paragraph 2 of the Labor Code). IV) Termination of an employment contract at the initiative of a third person, such as: 1) the state, when an employee is summoned for military service or for alternative civil service (see: Article 83, Section 1 of the Labor Code); 2) a previous employee who had performed the same job, then was dismissed but later was reinstated by the state labor inspectorate or by a court (see: id., Section 2).

In certain situations an employer prior to taking a decision to terminate an employment contract must consider someone’s view. According to Article 82 of the Code his dismissing a trade union member in case of decreasing the number of personnel, the employee’s lack of qualification, or repeated failure to perform labor duties without justified reasons, may be done taking due consideration the view of a  trade union organization. Article 373 of the Code describes the procedure for ta­ king consideration of the trade union’s view.

3.7. Labor law principles of financial responsibility Generally speaking, both employers and employees bear financial responsibility for losses that they cause to another party. Responsibility is based on the fault of the wrongdoer, unless the Labor Code or another federal law provides otherwise (see: Article 233 of the Labor Code). 1) An employer’s responsibility to an employee may result in: a) compensation for unpaid wages; b) reimbursement for loss of or damage to the employee’s property;72 c) recovery for moral harm.



Considering in turn each of these types of liability: 1) An employer is under a statutory obligation to compensate an employee for unpaid wages if the employee was illegally deprived of the possibility of working, for example if: (i) the employee was illegally suspended from work, dismissed or transferred to another job;

  A personal injury sustained by an employee in the course of his employment shall be repaid in accordance with the civil law norms relating to obligations in tort (see infra, § 5, Section 5.2 of this Chapter). 72

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(ii) the employer refused to obey a court judgment or a state labor inspector’s order to reinstate the employee to a prior employment position; (iii) the employer delayed release of the labor book to the employee or inserted an incorrect or illegal reason for the employee’s dismissal in the labor book (see: Article 234 of the Labor Code); (iv) the employer delayed payment of wages and other amounts due to the employee (see: Article 236 of the Labor Code).73 2) Loss of or damage to an employee’s property resulting from an employer’s act or omission must be reimbursed in full at market prices in effect in the relevant geographical area on the day for reimbursement of losses. With the employee’s consent, losses may be compensated in kind (see: Article 235 of the Labor Code). 3) Moral harm74 sustained by an employee as a result of an employer’s act or omission shall be compensated in monetary amounts to be agreed to by the parties or, in case of dispute, by a court without regard to compensation for property loss (see: Article 237 of the Labor Code). Responsibility of an employee to an employer: 1) must always be based upon the employee’s fault (there is no exception to this rule); 2) is limited to the employer’s direct actual losses;75 lost profits are not subject to recovery from an employee (see: Article 238, Paragraph 1 of the Labor Code); 3) as a general rule, is limited to the employee’s average monthly wages unless liability in full is provided by the Labor Code or other federal laws, such as when: (i) losses resulted from the employee’s willful misconduct; (ii) the employee caused losses as a result of intoxication by alcoholic, narcotic or another substance; (iii) losses resulted from an employee’s crime as established by a court sentence or from an administrative violation as established by the relevant public agency;

  In the latter situation the employer shall also pay interest calculated on the basis of 1/300 of the RF Central Bank’s refinancing rate for each day of delay unless a higher rate is provided in the collective bargaining agreement or employment contract. The interest shall be paid without regard to the employer’s fault (see: Article 236 of the Labor Code). 74   Moral harm means “physical or moral suffering” (see: Article 151 of the RF Civil Code). 75   Direct actual losses are defined in the Labor Code as “a real diminishing of the employer’s property or worsening its condition (including a person’s property located with the employer if the latter bears liability for its safety) as well as the necessity for the employer to pay expenses or extra payments to acquire or restore property or to recover losses caused by the employee to third persons.” (Article 238, Paragraph 2) 73

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(iv) full liability is based on a special written contract;76 (v) losses were caused by an employee other than in the course of performing his employment duties (see: Article 243 of the Code).

3.8. Unusual aspects of employment contracts with certain kinds of employees Heretofore the general terms and conditions of employment contracts have been considered. However, there are some specific terms and conditions of employment contracts with certain kinds of employees which, to some extent, deviate from gene­ral provisions of the Labor Code. These deviating terms and conditions relate, inter alia, to: (i) the procedure for entering into an employment contract, (ii) the time period of its effectiveness, (iii) the legal grounds for its termination, and (iv) the employee’s liability to the employer. A. Unusual aspects of an employment contract with a chief executive officer (CEO) of an organization. (i) As provided in Article 275, Paragraph 2 of the Labor Code, unusual procedures for concluding an employment contract with a CEO may be established by law and by constituent documents of an organization.77 (ii) An employment contract with an organization’s CEO (as well as his deputy and chief bookkeeper) may be concluded for a definite time period (see: Article 59, Paragraph 21 of the Labor Code) in which case this period shall be set forth in the organization’s constituent documents or by agreement of the parties (see: Article 275, Paragraph 1 of the Labor Code). A probationary period for a CEO (and his or her deputies, chief bookkeeper and deputies, heads of a branch or representative office) may be up to 6 months (Article 70 of the Labor Code). (iii) In addition to lawful general grounds for termination of an employment contract, a contract with a CEO may also be terminated at an employer’s initiative: 76   Such contracts should be concluded with employees who directly handle or use money, goods or other property (see: Article 244 of the Labor Code), for example with cashiers, shopassistants, warehouse managers, etc. (see: Decision of the RF Ministry of Labor and Social Development of December 31, 2002 No 85). 77   For example, according to the Federal Law “On Limited Liability Companies,” a company’s CEO “shall be elected by the general meeting of participants,” not necessarily “from among its participants.” (Article 40, Section 1, Paragraph 1). An employment contract between the company and its CEO “shall be signed for and on behalf of the company by the person who presided over the relevant general meeting or by the company participant empowered by decision of the general meeting” (id., Paragraph 2).

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1)  upon a decision of an authorized body of a legal entity or the owner of its property (see: Article 278, Paragraph 2 of the Labor Code). In practical terms, this means that “a relevant body may dismiss a CEO for any reason and at any time.”78 In case the CEO is not at fault he or she is entitled to compensation in an amount specified in the employment contract but no less than 3 months average wages (see: Article 279 of the Labor Code). 2)  In case of a change in the ownership of the organization’s property, the new owner is entitled to cancel the employment contract with the CEO, and his or her deputies and chief bookkeeper (see: Article 81, Section 4 of the Labor Code). This owner’s right is effective for 3 months from the date when the owner acquired title to the organization’s property (see: Article 75, paragraph 1 of the Civil Code). The RF Supreme Court has ruled that change of the owner of an organization’s property means the transfer of title to the organization’s property from one person to one or more others, for example in the case of privatization of state or municipal property. This can also mean transfer of state enterprises to municipalities and vice versa, and transfer of federal state property to a subject of the Russian Federation and vice versa (see: Section 32, Paragraph 2 of the Ordinance of the Plenum of the RF Supreme Court of March 17, 2004 No 2). Since the owner of the property of a joint stock company and a limited liability company is the company itself rather than its participants who have only obligation (i. e. contractual) rights in relation to the company,79 a change in the complement of stock (or share) holders of the company may not be a reason to terminate employment contracts with the company’s CEO, his or her deputies and chief bookkeeper, since in such a situation the company itself remains the owner of its property and no change of ownership occurs (see: id., Paragraph 3). 3) If the CEO of an organization (or the head of its branch or representative office), his deputies or chief bookkeeper made an arbitrary decision which led to violation of the safety of the organization’s property, its misuse or other proprietary losses to the organization. 4) If a CEO has been suspended from work in accordance with the law on insolvency or bankruptcy (see: Article 278, Section 1 of the Labor Code). (iv) A CEO bears full financial liability for direct actual losses of the organization which he or she has caused (see: Article 277, Paragraph 1 of the Labor Code).

  S.P. Mavrin, M.V. Filippova, E.B. Khokhlov, op. cit., p. 344.   Such as the right to take part in management of the company’s business and in distribution of its profits. 78 79

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In other words, the general rule providing that an employees’ liability to an employer shall be limited to the employee’s one month average wage (see: Article 241 of the Labor Code) does not apply to a CEO. It should also be noted that the CEO of an organization may only enter into an employment contract with another employer for a part time job with the consent of an authorized body of the legal entity or the owner of the organization’s property (see: Article 276, Paragraph 1 of the Labor Code).80 B. Characteristics of employment contracts with persons whose work is directly connected with the movement of transport vehicles. Concluding employment contracts with such persons is conditional on observing some requirements relating to their health, special training and also, with respect to certain positions, their nationality (see supra, Section 2.3 of § 2 of this Chapter). There are disciplinary regulations applicable to employees engaged in different types of transportation. For example, disciplinary regulations were approved for maritime transport employees by Decision of the RF Government of May 23, 2000 No 395. Article 57 of the RF Merchant Shipping Code provides that such regulations shall be approved by the government of the Russian Federation. However, according to Article 330 of the Labor Code, disciplinary regulations for employees whose work is directly connected to the movement of transport vehicles must be approved by federal law. The Merchant Shipping Code was adopted in 1999 and the Labor Code in 2002. Given that the Labor Code was adopted later than the Merchant Shipping Code, the level of approval of such regulations will apparently be increased. The Merchant Shipping Code provides specific measures of protection of the interests of crew members of sea-going vessels such as their repatriation, in the following situations: “1)  expiration, outside the Russian Federation, of their contract of employment agreed to for a specific period of time or for a specific voyage; 2) cancellation of the employment contract at the initiative of a shipowner or a vessel’s crew member on expiration of the time period set forth in the notice issued in accordance with the employment contract; 3)  shipwreck; 4)  illness or injury requiring treatment off the vessel;   For example, a CEO of a joint stock company may take a part time job in management bodies of other organizations with the consent of the board of directors of the company (see: Article 69, Section 3, Paragraph 4 of the Federal Law “On Joint Stock Companies”). 80

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5)  the inability of the shipowner to fulfill his obligations with regard to the vessel’s crew members, as set forth in laws or other legal acts of the Russian Federation or employment contracts, due to bankruptcy, sale of the vessel or a change in the state where the vessel is registered; 6) if the vessel is directed, without the agreement of the vessel’s crew, into a zone of military operations or a zone where there is a dangerous epidemic; 7) expiry of the maximum period of time, as set forth in the collective bargaining agreement, of a crew member’s work on board the vessel.” (Article 58, Section 1) The crew member must be repatriated to the country of his or her residence or to the port where he or she was employed or to another place provided in the employment contract. Expenses related to repatriation shall be borne by the shipowner who is under a statutory obligation to obtain insurance coverage for such expenses. These expenses include fare of air transportation to the place of repatriation; meals and living accommodation; medical care (if required); carriage of 30 kg of luggage; and wages and allowances according to the collective bargaining agreement (see: Article 58, Sections 2–4, Article 60, Section 2 of the Merchant Shipping Code).

3.9. Governing law The Labor Code does not contain conflict of laws rules. The Code is based upon the assumption that labor relations in Russia between any employer regardless of nationality (whether a legal entity, a sole business or a private individual) and its employees, also regardless of their nationality, shall be regulated by rules of Russian labor law. There are, however, some unusual characteristics with regard to a certain specific field of labor relations: the employment of crew members of sea-going ships. The Merchant Shipping Code, whose norms prevail over general rules of the Labor Code due to the principle “lex specialis derogat lex generalis,” takes these characteristics into account. According to Article 416 of the Merchant Shipping Code: “1.The legal status of a ship’s crew and the relationship between the crew members in relation to the operation of the ship shall be governed by the law of the country whose flag the ship flies. 2. The relationship between a shipowner and the ship’s crew shall be governed by the law of the country whose flag the ship flies, unless a contract regulating the relationship between the shipowner and crew members who are foreign nationals provides otherwise. 532

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The choice of law in the employment contract between the shipowner and the crew members shall not make the labor conditions of the crew members worse than would be required by the laws of the country which would govern the relationship in the absence of agreement of the parties as to the law to be applied.” As it appears from the quoted text, there is a distinction between the law go­ verning the relationship between the crew members during operation of the ship (for example, regulations of service onboard seagoing vessels or disciplinary regulations for maritime transport employees), on the one hand, and the law governing the relationship between the shipowner and each crew member, on the other. The former is governed by the law of the country whose flag the ship flies, regardless of whether there are foreign nationals among the crew members. However, in the latter situation, the conflict of laws rule is more flexible, since it permits an agreement according to which the relationship between the shipowner and the crew members who are fo­ reign nationals may be governed by the law of a foreign country. It is also specifically provided that the labor conditions of a foreign natural who is employed as a crew member on a Russian vessel may not be worse than those set forth in the RF Labor Code.

§ 4. Occupational health and safety; social security 4.1. Health and safety According to the Constitution of the Russian Federation: “Everyone shall have the right to health care and medical assistance. Medical assistance shall be made available in state and municipal health care institutions to citizens free of charge.” (Article 41, Section 1) This rule is further developed in the rules of labor law. The Labor Code provides, inter alia, that an employer shall, at its expense, provide certified protective clothing, special footwear and other means of individual protection, washing and counter-contaminating means to employees who are engaged in work in harmful and/or dangerous labor conditions, as well as in work to be performed in specific temperature conditions or connected with contamination (see: Article 212, Paragraph 7). An employer is also under a statutory obligation to procure sanitary and medical-prophylactic services for employees, as well as transportation of employees who fell ill at the workplace to a medical institution, should immediate medical aid be needed (see: Article 212, Paragraph 18 of the Labor Code). Supervision in the field of labor safety in Russia is provided by special public agencies: The Federal Labor Inspectorate is headed by the Chief State Labor Inspec533

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tor of the Russian Federation who is appointed by the RF Government (see: Ar­ ticle 354 of the Labor Code). State labor inspectors have the right, inter alia: — to require employers and their representatives, as well as bodies of executive authority and municipalities, to furnish those documents, explanations and information free of charge needed by inspectors to perform their supervisional and controlling functions in the field of labor safety; — to investigate industrial accidents; — to charge employers and their representatives with binding directives pertaining to elimination of infringements of the Labor Code and other legal acts, as well as to restore infringed labor rights of employees; — and to suspend work of organizations, separate production units and to suspend the use of equipment for the purpose of disclosing infringements of labor safety regulations that threaten the life and health of employees, until such infringements have been eliminated (see: Article 357 of the Labor Code). Decisions of state labor inspectors may be appealed to the Chief State Labor Inspector of the Russian Federation or to a court (see: Article 361 of the Labor Code). Some violations in the field of labor safety may result in an employer’s criminal responsibility. For example, poor quality repair of transport vehicles, signals, communications and other transportation equipment, issuing permits to exploit transport vehicles in inappropriate condition by a person responsible for their technical condition, may all entail criminal responsibility. Such acts or omissions, if they result in personal injury or death shall be deemed a crime that may be punished by imprisonment up to three years (in the case of injury) or five years (in the case of death) or up to ten years (in the case of death of two or more persons) (see: Article 266 of the RF Criminal Code).

4.2. Social security The Constitution of the Russian Federation guarantees social security in the event of old age, illness, disability, and other situations provided for by federal law (see: Article 39).81 In total, there are more than a dozen different allowances and pensions provided by Russian law. In order to raise money needed for social insurance payments, the Tax Code provided a unified social tax to be paid by each employer monthly, on the basis of the wages due to each employee (see: supra, subsection 1.2.5 of § 1 of Chapter 6 of this book).   These basic provisions are further developed in the Federal Law “On Labor Pensions in the Russian Federation” of December 17, 2001 No 173-FZ (Российская газета, December 20, 2001), as subsequently amended. 81

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This money is then distributed among a number of funds, such as the Compulsory Medical Insurance Fund (which provides free of charge medical treatment to insured persons on the terms described in medical insurance policies)82 and the Pension Fund (which is the source for payment of old age pensions, disability pensions and survivor’s pensions). Currently (as of January 1, 2010) the unified social tax has been abolished and substituted with contributions from each employer directly to the Compulsory Medical Insurance Fund and to the Pension Fund. The old age pension is available to men once they reach the age of 60 and to women at the age of 55, provided they have worked as employees for at least five years. Disability pensions shall be paid to employees who have lost their ability to work, in whole or in part, as a result of an industrial accident or occupational disease, regardless of their age or period of previous employment. The amount of the monthly payment is equal to the average wages of the employee. If the accident or disease results in a permanent disability, the employee is entitled to a lump sum allowance in addition to monthly payments. The amount of the lump sum shall take into consideration the extent of the disability. A survivor’s pension is paid to disabled family members of a deceased employee provided they were his dependents. Social insurance is available for Russian nationals, foreign nationals and stateless persons employed by Russian employers, and also by foreign employers having their branch or representative offices in the territory of the Russian Federation. Such employers are required to pay contributions into the Compulsory Medical Insurance Fund and the Pension Fund.

§ 5. Investigation of industrial accidents. Compensation for injury and death 5.1. Investigation of industrial accidents An employer is under a statutory obligation to investigate industrial accidents in which its employees and other persons participating in its business activities are involved83 if the accidents resulted in bodily injury requiring transfer of the employee

  See: the Law “On Medical Insurance of Citizens in the Russian Federation” of June 28, 1991 No 1499-1 (Gazette of the Congress of People’s Deputies of RSFSR and the Supreme Council of RSFSR, No 27, July 04, 1991, Art. 920,921), as subsequently amended. 83   Such as, inter alia, students and pupils of educational institutions of any type who receive practical training at the employer’s enterprise (or office). 82

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to another job, or led to his or her temporary or permanent labor disability, or death (see: Article 227 of the Labor Code). In case of such an industrial accident, an employer must: 1) immediately arrange for medical aid for the victim and for his or her transportation to a medical institution, if necessary; 2)  take urgent measures to prevent further development of the dangerous situation; 3) preserve, if possible, the scene as it was at the time of the accident or, if that is not possible, to record the scene by preparing drawings, photographs, video recordings, etc.; 4)  promptly inform the relevant agencies and organizations,84 and also the victim’s relatives in case of a serious accident or one with a lethal outcome (see: Article 228 of the Labor Code); 5) immediately form an investigative commission consisting of at least three persons including: a) a person who is responsible for labor protection in the organization; b) an employer’s representative; and c) a trade union representative (see: Article 229 of the Labor Code).85 d)  if an accident involved two or more persons or is of a serious nature or entailed a lethal outcome, the commission must also include a state labor inspector, representatives of an executive authority agency of the relevant subject of the Russian Federation or the municipality and the territorial association of trade unions (see: Article 229 of the Labor Code).

  If an accident involves two or more persons or in case of a serious accident or one with a lethal outcome, the employer must immediately notify, inter alia: — the relevant state labor inspectorate; — the local state attorney’s office; — the executive authority agency of the subject of the Russian Federation where the employer is registered as a legal entity or sole business; — the local agency of the federal body responsible for control in the field of a particular activity, provided the organization or place where the accident occurred is subject to such supervision (see: Article 228.1 of the Labor Code). If an accident occurred aboard of a vessel in navigation, a shipmaster must immediately notify the shipowner, and if the vessel is abroad — also the appropriate consulate of the Russian Federation. (see: id.) 85   See: Regulations on unusual characteristics of investigations of industrial accidents in different fields and organizations as approved by the Decision of the RF Government of August 31, 2002 No 653. There are also Regulations on investigation and recording of professional diseases as approved by the Decision of the RF Government of December 15, 2000. No 967. 84

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Results of the investigation shall be recorded in a special statement indicating the circumstances and causes of the accident and persons who committed violations of labor protection requirements. In case of contributory negligence of the victim86 the statement shall also specify the percentage of such negligence. The statement shall be signed by all commission members, approved by the employer and stamped with a seal (see: Article 230 of the Labor Code). Any disagreements concerning issues related to investigation, formalization and reporting of accidents shall be considered by the State Labor Inspectorate or its local agencies whose decisions may be appealed to court (see: Article 231 of the Labor Code).

5.2. Compensation for injury and death If an industrial accident leads to the injury or death of an employee losses are recoverable pursuant to the Civil Code’s provisions relating to obligations in tort. Article 1085 of the Code provides that “when a citizen suffers an injury or other impairment of his health, the earnings (or revenue) lost by the victim, which he had or definitely could have had, and also additional expenses incurred which were caused by impairment of health, including expenses for medical treatment, additional nourishment, acquisition of medicines, prosthetics, outside care, sanatorium-resort treatment, the acquisition of special means of transport, and training for another profession, shall be subject to compensation if it is established that the victim needs these types of assistance and care and does not have the right to receive them free of charge.” Generally speaking, a wrongdoer will be exempt from liability if he proves that he was not at fault (see: Article 1064, Section 2 of the Civil Code). However, if inju­ ry or death was caused by a source of increased danger (such as transport vehicles, machinery, high tension electric power, atomic power, explosive substances, etc.), its owner (or other possessor, such as a lessee) shall bear strict liability (see: Ar­ ticle 1079 of the Civil Code). In any case “harm which arose as a consequence of intentional acts of the victim shall not be subject to compensation.” (Article 1083, Section 1 of the Civil Code)   With due consideration to specific circumstances an accident may be considered not connected with employment if: — death resulted from a disease which is not connected with the employee’s occupation, or suicide, as confirmed by a medical organization, state investigative body or a court; — the only cause of death or injury was alcoholic, narcotic, or other similar intoxication, as confirmed by a medical organization; — the accident occurred during the course of a crime committed by the victim, if confirmed by law enforcement bodies (see: Article 229.2 of the Labor Code). 86

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Also, “if the victim’s gross negligence furthered the creation or increase of injury, the amount of compensation shall be reduced depending on the degrees of fault of the victim and the wrongdoer” (Article 1083, Section 2). A victim’s level of compensation will depend on whether he completely or partially lost the ability to practice his profession. In the former situation, the victim’s average monthly earnings will be recoverable in full. In the latter case, the amount of reimbursement will be calculated as a percentage of the victim’s average monthly earnings before the injury, with the percentage to be based on the degree of loss of his professional labor capacity,87 or if professional labor capacity is lost completely, to the degree of loss of general labor capacity88 (see: Article 1086, Section 1 of the Civil Code). Compensation for harm resulting from a victim’s reduction of labor capacity, or for the death of a victim, must be made in monthly payments (see: Article 1092, Section 1 of the Civil Code). In the event of reorganization of a legal entity responsible for the injury or death of its employee, the obligation to make the required payments shall pass to its legal successor (see: Article 1093, Section 1 of the Civil Code). If such a legal entity is liquidated so that there are no legal successors, then the payments “must be capitalized for payment thereof to the victim according to rules established by a law or other legal act” (Article 1093, Section 2).89 There is no time limit in relation to claims for personal injury and death. Ho­ wever, the Civil Code provides that “claims presented after the expiration of three years from when the right to compensation for such harm arose shall be satisfied for no more than three years prior to the time of bringing suit” (Article 208, Paragraph 4).

§ 6. Labor dispute resolution The Labor Code distinguishes collective labor disputes, on the one hand, and individual labor disputes, on the other. It establishes procedures to settle labor disputes of each type. These procedures will be considered separately.   Professional labor capacity means capacity to perform labor activity which requires special education, training or skill (e. g. a capacity to work as a doctor, engineer, lawyer, etc.). 88   General labor capacity means the ability to perform unskilled labor. 89   There are relevant Regulations approved by the Decision of the RF Government of November 17, 2000 No 863. 87

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6.1. Resolution of collective labor disputes A collective labor dispute is defined in the Labor Code as unsettled disagreements between employees and employers concerning the establishment and change of labor conditions, including wages (see: Article 398, Paragraph 1). Demands of the employees must be approved by their meeting (or conference) and submitted to the employer in writing (see: Article 399, Paragraph 2 of the Labor Code). The employer, in turn, is obligated: a) to provide the employees (or their representatives) with premises to hold such a meeting (or conference); b)  to consider the employees’ demands, as submitted, within 3 working days from the date of their receipt (see: Article 399, Paragraph 4, Article 400, Paragraph 1 of the Labor Code). As the ultimate means of protecting their interests, the employees enjoy the right to strike which is protected by Article 37 of the Constitution of the Russian Federation. The Labor Code provides that a strike is “a temporary voluntary refusal of employees to perform their labor duties (in whole or in part) for the purpose of settling a collective labor dispute” (Article 398, Paragraph 4). It should be noted, however, that exercise of the right to strike is preconditioned on certain legal steps being taken, such as: 1) consideration of the collective labor dispute by a reconciliation commission consisting of an equal number of representatives of the employer and the employees (see: Article 402 of the Labor Code). In case the commission fails to reach a settlement of the dispute, the parties may: a) invite a mediator, or b) refer the dispute to labor arbitration In the former situation the second stage of the resolution of the collective labor dispute will be: 2) consideration of the dispute by a mediator mutually agreed to by the parties to the dispute. If the mediator succeeds, the dispute will be settled by a joint decision of the parties to agreed conditions; if the mediator fails, then a statement of points on which the parties disagree should be prepared. In this situation (as well as if the parties to the dispute fail to reach agreement concerning selection of the mediator) the parties should begin to negotiate referral of the dispute to labor arbitration (see: Article 403 of the Labor Code). In such a case there will be one more stage of dispute settlement, namely: 3) referral of the dispute to labor arbitration (see: Article 404 of the Labor Code).

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If the employer fails to agree to labor arbitration or to execute an arbitral award, the employees may organize a strike (see: Article 406, Paragraph 2 of the Labor Code).90 A strike begun to attempt to settle the collective labor dispute without observing the requirements above will be deemed to be illegal (see: Article 413, Paragraph 3 of the Labor Code). There are certain situations where strikes are prohibited by law: a) when military or emergency conditions are declared, and b) by organizations directly connected with providing services in the fields of energy, heating, water and gas supply, air, railway and water transportation, telecommunications and hospitals, if a strike would create a threat to the defense of the country, or the lives and health of the people (see: Article 413, Paragraph 1 of the Labor Code). Declaring a strike to be illegal is within the jurisdiction of a court of general jurisdiction of a subject of the Russian Federation (see: article 413, Paragraph 4 of the Labor Code).91

6.2. Resolution of individual labor disputes An individual labor dispute is defined in the Labor Code as an unsettled disagreement between an employer and an employee concerning issues of application of labor legislation and other legal acts containing norms of labor law, the collective bargaining agreement, the labor contract (including issues related to establishment or change of individual labor conditions) which disagreements are referred to a body for the resolution of individual labor disputes (see: Article 381, Paragraph 1).92 Given a proper venue, labor disputes may be considered in two groups. The first group includes labor disputes which should be resolved by a court judgment,93 such as:

  In attempting to settle a collective legal dispute (including when there is a strike) an employer is prohibited from using a lockout, that is dismissal of employees at the employer’s initiative in connection with employees’ participation in a collective labor dispute or in a strike (see: Article 415 of the Labor Code). 91   E. g. in Moscow and St. Petersburg a strike may be declared illegal by the City Court, in the Moscow and Leningrad regions, by a Regional Court. 92   A dispute between an employer and an earlier employee of this employer, as well as someone willing to conclude a labor contract with the employer where the employer refused to enter into such a contract, are also types of individual labor disputes (see : id., Paragraph 2). 93   Labor disputes are subject to consideration by courts of general jurisdiction (see: Article 22, Part 1 (1) of the RF Civil Procedure Code). 90

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— an employee’s claims for job reinstatement (regardless of the reason for termination of the labor contract), for change of the date and the reason given for dismissal or retirement, for transfer to another job, for payment for shirking work, for illegal actions (or omissions) of an employer in the course of processing and protecting an employee’s personal data; — an employer’s claims for compensation from the employee for losses he caused the employer; — disputes resulting from the refusal to conclude a labor contract; — disputes between an employee and an employer who is a private individual not registered as a sole business; —  disputes between religious organizations and their employees; — disputes between an employer and a person who considers himself to have suffered from discrimination (see: Article 391, paragraph 2 of the Labor Code). The remaining labor disputes may (although they are not required to) be subject to pre-trial settlement by a labor disputes commission. Such a commission may be formed at the initiative of employees or an employer (whether an organization or a  sole business) and shall consist of an equal number of employee and employer representatives (see: Article 384 of the Labor Code). An employee may apply to the Commission within a 3 month period of time from the date when he became, or should have become, aware of a violation of his rights. In case this deadline is missed for a justified reason, the Commission may reinstate it (see: Article 386 of the Labor Code). The Commission shall consider the employee’s application within 10 days and issue a decision to be taken by secret ballot by a majority of the votes of those present at the hearing (see: Article 388, Paragraph 1 of the Labor Code). The Commission’s decision may be appealed to a court by the employee or the employer within 10 days from the date of handing a copy of the decision to the rele­ vant party to the dispute. This deadline, if missed for a justifiable reason, may be reinstated by a court (see: Article 390 of the Labor Code). A decision that has not been appealed is subject to enforcement. If the decision is not executed voluntarily by the employer, the Commission shall issue a certificate at the employee’s request (to be submitted within one month). This is an enforcement document, that is, it has the same legal effect as a writ of execution (see: Article 389 of the Labor Code). After submission of the certificate to a bailiffs’ service it should be enforced in the same manner as a court judgment. With respect to court proceedings in labor dispute resolution, an employee is entitled to apply to the court within 3 months from the date when he became, or ought to have become aware of violation of his rights, and, with respect to disputes 541

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concerning dismissal, within one month from the date when he received a copy of a relevant order or his labor book.94 An employer has the right to apply to a court with a claim for reimbursement of his losses caused by the employee, within one year from the date of discovery of the losses. The court may reinstate these deadlines if missed for justified reasons95 (see: Article 392 of the Labor Code). Labor disputes, except those relating to collective labor disputes such as the declaration of a strike to be illegal,96 are within the competence of district courts of general jurisdiction (see: Articles 22 and 24 of the Civil Procedure Code). A court judgment reinstating a dismissed or illegally transferred employee to his previous position is subject to immediate enforcement. Should the employer delay, the employee is entitled to receive average wages (or the difference in wages between the new and the previous position) for the entire period of delay (see: Ar­ ticle 396 of the Labor Code). In case such a judgment is quashed in the course of court supervision, amounts paid to an employee may only be reclaimed if the quashed judgment was based on fraudulent information communicated by the employee or on a false document which he submitted (see: Article 397 of the Labor Code).

  An employee is exempt from payment of state duty and court expenses (see: Article 393 of the Labor Code). 95   The following circumstances may be deemed justified reasons, for example, illness of the plaintiff, his secondment, the necessity to care for ill family members, the impossibility to apply to the court because of force majeur, etc. (see: Section 5, Paragraph 5 of the Ordinance of the Plenum of the RF Supreme Court of March 17, 2004 No 2). 96   Such disputes are to be resolved by a court of general jurisdiction of a subject of the Russian Federation (see: Article 413, Paragraph 4 of the Labor Code). 94

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APPENDICES

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Copyright ОАО «ЦКБ «БИБКОМ» & ООО «Aгентство Kнига-Cервис»

CONSTITUTION OF THE RUSSIAN FEDERATION (1993) (extract) Article 17 1. In the Russian Federation rights and freedoms of human being shall be recognized and guaranteed in compliance with the generally recognized principles and norms of international law and this Constitution. 2. Basic rights and freedoms of human being shall be inalienable and shall be enjoyed by everyone from birth. 3. The exercise of rights and freedoms of human being and citizen must not violate the rights and freedoms of other persons. Article 19 1. All persons shall be equal before the law and the court. 2. The State shall guarantee the equality of rights and freedoms of human being and citizen regardless of sex, race, nationality, language, origin, material and official status, place of residence, attitude to religion, convictions, membership of public associations, as well as of other circumstances. Any limitations of human rights on social, racial, national, language or religious grounds shall be prohibited. 3. Men and women shall enjoy equal rights and freedoms and equal opportunities to exercise thereof. Article 34 1. Everyone shall have the right to use freely his abilities and property for business and other economic activity not prohibited by law. 2. Economic activity aimed at monopolization and unfair competition shall not be permitted. Article 35 1. The right of private property shall be protected by law. 2. Everyone shall be entitled to own property and to possess, use and dispose of it both individually and jointly with other persons. 3. Nobody may be deprived of his property except under a court judgment. Compulsory alienation of property for State needs may take place only subject to prior and equal compensation. 4. The right of inheritance shall be guaranteed. Article 36 1. Citizens and their associations shall be entitled to have land in private property. 2. Possession, use and disposal of land and other natural resources shall be exercised by the owners freely provided that this is not detrimental to the environment and does not violate the rights and legitimate interests of other persons. 545

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3. The conditions and procedure for the use of land shall be determined on the basis of federal law.

Article 46 1. Everyone shall be guaranteed protection in court of his rights and freedoms. 2. Decisions and actions (or omission) of State authorities, local self-government bodies, public organizations and officials may be appealed in court. 3. Everyone shall be entitled in accordance with international treaties of the Russian Federation to apply to interstate bodies for the protection of human rights and freedoms if all available domestic state means of legal protection have been exhausted. Article 49 1. Any person accused of committing a crime shall be deemed innocent until his guilt is proven in accordance with the procedure as provided by federal law and is confirmed by effective court sentence. 2. The accused shall not be obliged to prove his innocence. 3. Irremovable doubts about the guilt of a person shall be construed in favour of the accused. Article 53 Everyone shall have the right to compensation by State for harm caused by illegal actions (or omission) of State authorities or their officials. Article 54 1. A law, which introduces or increases responsibility, shall not have retroactive effect. 2. Nobody may bear liability for an action, which was not regarded as a violation of law when it was committed. If, after violation of law has been committed, the responsibility for it is lifted or reduced, the new law shall be applied. Article 62 1. A citizen of the Russian Federation may have citizenship of a foreign state (dual citizenship) in accordance with federal law or an international treaty of the Russian Federation. 2. The possession of foreign citizenship by a citizen of the Russian Federation shall not diminish his rights and freedoms and shall not release him from obligations resulted from Russian citizenship, unless otherwise provided by federal law or an international treaty of the Russian Federation. 3. Foreign citizens and stateless persons shall enjoy rights and bear obligations in the Russian Federation equally with citizens of the Russian Federation, except in those cases provided by federal law or by an international treaty of the Russian Federation. Translated into English by Valery Musin. 546

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Civil Code of the Russian Federation (Part 1) (adopted by the Federal Law of November 30, 1994 № 51-FZ) (extract), version effective as of September 1, 2014 ARTICLE 1. FUNDAMENTAL BASES OF CIVIL LEGISLATION 1. Civil legislation is based upon recognition of equality of participants of relations regulated thereby, inviolability of ownership, freedom of contract, inadmissibility of anybody’s arbitrary interference in private affairs, uninterrupted realization of civil law rights, procurement of restoration of violated rights, judicial protection thereof. 2. Citizens (natural persons) and legal entities acquire and realize their civil law rights upon their will and in their interests. They are free in establishment of their rights and duties on the basis of a contract and in formulation of any terms and conditions of a contract not contradicting to legislation. Civil law rights may be restricted on the basis of a federal law and only to the extent necessary for protection of the fundamentals of constitutional structure, morality, health, rights and legitimate interests of other persons, procurement of defense of the country and state security. 3. In the course of establishment, realization and protection of civil law rights and in the course of performance of civil law duties, participants of civil law relations must act in good faith. 4. Nobody is entitled to gain any priviledge from his illegal or bad faith behavior. 5. Goods, services and financial means shall freely circulate throughout the whole territory of the Russian Federation. 6. Restrictions on circulation of goods and services may be introduced in accordance with a federal law if it is necessary for procurement of security, protection of life and health of people, protection of nature and cultural values. ARTICLE 4. THE EFFECT OF CIVIL LEGISLATION IN TIME 1. Acts of civil legislation do not have retroactive effect and shall be applied to relations that have arisen after introduction thereof. The effect of a law shall extend to relations that arose before it was put into effect only in the cases when this is expressly provided by a law. 2. With respect to relations that arose before introduction of an act of civil legislation, the act shall be applied to rights and duties that arose after its introduction . Relations of parties under a contract concluded before introduction of an act of civil legislation shall be regulated in accordance with Article 422 of this Code. ARTICLE 5. CUSTOMS 1. A custom is a rule of conduct that has taken form and is widely applied in any area of business or other activity and is not provided by legislation, regardless of whether or not is has been fixed in any document. 547

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2. Customs contradicting provisions of legislation or a contract either of which is obligatory for participants in the respective relation shall not be applied.

ARTICLE 6. APPLICATION OF CIVIL LEGISLATION BY ANALOGY 1. In cases when the relations provided by Sections 1 and 2 of Article 2 of this Code are not directly regulated by legislation or agreement of the parties and there is no custom applicable to them, then civil legislation regulating similar relations (analogy of lex) shall be applied to such relations, unless it contradicts their nature. 2. In case of impossibility of use of analogy of lex, the rights and duties of the parties shall be determined proceeding from the general principles and sense of civil legislation (analogy of jus) and the requirements of good faith, reasonableness, and justice.

ARTICLE 7. CIVIL LEGISLATION AND THE NORMS OF INTERNATIONAL LAW 1. Generally recognized principles and norms of international law and the international treaties of the Russian Federation are, in accordance with the Constitution of the Russian Federation, an integral part of the legal system of the Russian Federation. 2. International treaties of the Russian Federation shall be applied to relations indicated in Sections 1 and 2 of Article 2 of this Code directly, unless it appears, from the international treaty, that the adoption of a domestic state act is required for its application. If an international treaty of the Russian Federation establishes rules other than those provided by civil legislation, the rules of the international treaty shall be applied.

ARTICLE 81. STATE REGISTRATION OF RIGHTS TO PROPERTY 1. In cases provided by law, rights which fix belonging of an object of civil law rights to a certain person, restrictions of such rights and encumbrances of property (rights to property) shall be subject to state registration. State registration of rights to property shall be performed by a body authorized by law on the basis of principles of inspection of legality of the grounds of registration, publicity and reliability of the State Register. The State Register should contain data creating a possibility to definitely identify the object with regard to which the right is established, the entitled person, the content of the right, the ground of its origin. 2. Rights to property which are subject to state registration shall arise, change and terminate from the moment of introduction of the relevant entry in the State Register unless otherwise provided by law. 3. In cases provided by law or agreement of the parties, a transaction resulting in origin, change or termination of rights to property which are subject to state registration must be attested and certified by a notary. 548

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Entry in the State Register shall be introduced provided applications to that effect from all persons who concluded the transaction are in place, unless otherwise provided by law. If a transaction is concluded in notarial form, entry in the State Register may be introduced upon application of any party to the transaction, as well as via a notary. 4. If a right to property arises, changes or terminates due to occurrence of circumstances indicated in law, entry on origin, change or termination of such a right shall be introduced in the State Register upon application of a person for whom such legal consequences occur. Law may provide also a right of other persons to apply for introduction of relevant entry in the State Register. 5. A body authorized by law to perform state registration of rights to property shall check powers of a person who applied for state registration of the right, legality of grounds for registration, other circumstances and documents provided by law, and in cases indicated in Section 3 of this Article, also occurrence of the relevant circumstance. If a right to property arises, changes or terminates on the basis of a notarized transaction, a body authorized by law is entitled to check legality of the relevant transaction in cases and in order provided by law. 6. A registered right may be challenged only in court. A person indicated in the State Register as a right holder, shall be deemed as such unless other entry is introduced into the Register in due course. In case of a dispute with regard of a registered right, a person who knew or ought to have known on non-reliability of the State Register’s data is not entitled to refer to relevant data. 7. With regard to a registered right, entry on objection of a person whose relevant right was registered earlier may be introduced in the State Register in the order provided by law. If within three months from the date of introduction in the State Register of entry on objection with regard to the registered right, the person on whose application the entry was introduced did not challenge the registered right in court, the entry on objection shall be nullified. In such a case repeated introduction of entry on objection of this person is not allowed. A person who challenges a registered right in court is entitled to demand introduction in the State Register of entry on judicial dispute with regard to this right. 8. Refusal of state registration of rights to property or evasion of state registration may be challenged in court. 9. Losses caused by illegal refusal of state registration of rights to property, evasion of state registration, introduction in the State Register of illegal or unreliable data on a right or violation of the order of the state registration of rights to property provided by law, upon fault of the body performing the state registration of rights to property, shall be subject to compensation at the expense of the treasury of the Russian Federation. 10. Rules provided by this Article shall be applied unless otherwise established by this Code. 549

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ARTICLE 15. COMPENSATION FOR LOSSES 1. A person whose right has been violated may demand full compensation for the losses caused to him unless compensation for losses in a lesser amount is provided by law or a contract. 2. Losses mean the expenses that the person whose right was violated made or must make to reinstate the right that was violated, the loss of or damage to his property (actual damage), as well as income not received that this person would have received under the usual conditions of civil turnover if his right had not been violated (lost profit). If the person who has violated a right has received income thereby, the person whose right has been violated shall have the right to demand — along with other losses — compensation for lost profit in the amount not less than such income. ARTICLE 16. COMPENSATION FOR THE LOSSES CAUSED BY STATE BODIES AND BODIES OF LOCAL SELF-GOVERNMENT Losses caused to a citizen or legal entity as the result of illegal actions (omission) of state bodies, bodies of local self-government, or officials of these bodies, including issuance of an act of a state body or a body of local self-government that does not correspond to a law or other legal act, shall be subject to compensation by the Russian Federation, the respective subject of the Russian Federation, or the municipality. ARTICLE 161. COMPENSATION FOR THE LOSSES CAUSED BY LAWFUL ACTIONS OF STATE BODIES AND BODIES OF LOCAL SELF-GOVERNMENT In cases and in the order provided by law, losses caused to a personality or property of a citizen or property of a legal entity by lawful acts of state bodies, bodies of local self-government or officials thereof, as well as other persons to whom the state delegated public powers, shall be subject to compensation. ARTICLE 49. LEGAL CAPACITY OF A LEGAL ENTITY 1. A legal entity may have civil law rights corresponding to the purposes of activity provided in its constituent document and bear the duties connected with this activity. Commercial organizations, with the exception of unitary enterprises and other types of organizations provided by a law, may have civil law rights and bear civil-law duties necessary for conducting any types of activity not prohibited by a law. In cases established by law a legal entity may be engaged in certain types of activity, only on the basis of special permission (licence), membership in a self-regulated organization or a certificate on admission to certain kind of works issued by a selfregulated organization. 2. A legal entity may be limited in rights only in cases and in the order provided by a law. A decision on limitation of rights may be challenged by the legal person to a court. 550

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3. The legal capacity of a legal entity shall arise at the time of its creation and shall terminate at the time of entry of its exclusion from the unified State Register of legal entities. The right of a legal entity to conduct activity, engaging in which requires obtaining a licence or membership in a self-regulated organization or obtaining a certificate on admission to certain kind of activity issued by a self-regulated organization shall arise from the time of obtaining such a license or within the time period specified in it or from the time of admission of a legal entity in a self-regulated organization or issuance by a self-regulated organization of certificate on admission to certain kinds of works and shall terminate on the termination of validity of permission (license), membership in a self-regulated or the certificate on admission to certain kinds of works. 4. Civil law status of legal entities and order of their participation in civil turnover (Article 2) shall be regulated by this Code. Peculiarities of civil law status of legal entities of some organization-legal forms, kinds and types as well as legal entities created for effectuation of activity in certain spheres shall be determined in accordance with this Code, other laws and other legal acts.

ARTICLE 53. BODIES OF A LEGAL ENTITY 1. A legal entity acquires civil law rights and assumes civil law duties through its bodies acting in its name (Section 1 of Article 182) in accordance with a law, other legal acts and the constituent document. The procedure for formation and competence of bodies of a legal entity shall be determined by a law and the constituent document. It may be provided by a constituent document that powers to act in the name of a legal entity are granted to several persons acting jointly or independently of each other. 2. In cases provided by a law a legal entity may acquire civil law rights and assume civil law duties through its participants. 3. A person who, by virtue of a law, other legal act or the constituent document of a legal entity, is authorized to acts in its name must act in the interests of the legal entity represented by him in good faith and reasonably. The same duty shall be borne by members of collective bodies of a legal entity (supervisory board, board of management, etc.). 4. Relations between a legal entity and persons who are members of its bodies shall be regulated by this Code and other legislation on legal entities.

ARTICLE 531. LIABILITY OF A PERSON AUTHORIZED TO ACT IN THE NAME OF A LEGAL ENTITY, MEMBERS OF COLLECTIVE BODIES OF A LEGAL ENTITY AND PERSONS DETERMINING ACTS OF A LEGAL ENTITY 1. A person who by virtue of law, other legal act or the constituent document of a legal entity is authorized to act in its name (Section 3 of Article 53) is obliged upon 551

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a demand of the legal entity, its founders (participants) acting in the interests of the legal entity, to compensate losses caused by his fault to the legal entity. A person who by virtue of law, other legal act or the constituent document of a legal entity is authorized to act in its name. This person shall be liable if it is proved that in the course of execution of his rights and performance of his duties he acted in bad faith or unreasonably, including if his acts (omission) did not correspond to usual conditions of civil turnover or usual business risk. 2. Liability provided by Section 1 of this Article shall also be borne by members of collective bodies of a legal entity except those who voted against the decision that resulted in causing losses to the legal entity or, when acting in good faith, did not take part in voting. 3. A person having an actual possibility to determine acts of a legal entity including a possibility to give instructions to persons mentioned in Sections 1 and 2 of this Article is obliged to act in the interests of the legal entity in good faith and reasonably and shall bear liability for losses caused by his fault to the legal entity. 4. In case of joint causing of losses the persons mentioned in Section 1-3 of this Article are obliged to compensate them jointly and severally, 5. An agreement on elimination or limitation of liability of the persons mentioned in sections 1 and 2 of this Article for commitment of acts in bad faith, and in a public company — for commitment of act in bad faith and unreasonably (Section 3 of Article 53) shall be null and void. An agreement on elimination or limitation of liability of a person mentioned in Section 3 of this Article is null and void.

ARTICLE 55. REPRESENTATIVE OFFICES AND BRANCH OFFICES OF A LEGAL ENTITY 1. A representative office is a separate subdivision of a legal entity located outside the place of its location, which represents the interests of the legal entity and performs protection thereof. 2. A branch office is a separate subdivision of a legal entity located outside the place of its location conducting all its functions or part of them, including the function of representative office. 3. Representative and branch offices are not legal entities. They are provided with property by the legal entity that has created them and act on the basis of regulations approved by it. The heads of representative and branch offices shall be appointed by the legal entity and act on the basis of a power of attorney from it. Representative and branch offices must be indicated in the Unified State Register of Legal Entities. ARTICLE 651. CORPORATE AND UNITARY LEGAL ENTITIES 1. Legal entities whose founders (participants) enjoy the right of participation (membership) therein and form the supreme body thereof in accordance with Section 1 552

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of Article 653 of this Code are corporate legal entities (corporations). They include business partnerships and companies, farmer’s establishments, economic partnerships, productive and consumer cooperatives, social organizations, associations (unions), partnerships of real estate owners, Cossack’ societies included in the State register of Cossack societies in the Russian Federation, as well as communities of indigenous scanty peoples of the Russian Federation. Legal entities whose founders do not become their participants and do nor acquire the right of membership therein are unitary legal entities. They include state and municipal unitary enterprises, foundations, institutions, autonomous non-commercial organizations, religious organizations, public law companies. 2. In connections with participation in a corporate organization its participants acquire corporate (membership) rights and duties with regard to the legal entity created by them unless this Code provides otherwise.

ARTICLE 66. BASIC PROVISIONS ON BUSINESS PARTNERSHIPS AND COMPANIES 1. Business partnerships and companies are commercial organizations with charter (contributed) capital divided into shares (contributions) of the founders (participants). Property created at the expense of the contributions of the founders (participants) as well as that produced and acquired by business partnership or company in the process of its activity shall belong to commercial partnership or company by right of ownership. Volume of rights of participants of business company shall be determined proportionately to their shares in the charter capital of the company. Other volume of rights of participants of a non-public business company may be provided in the company’s charter as well as in a corporate contract if information of existence of such a contract and on volume of rights of the company’s participants provided by it is introduced in to the Unified state register of legal entities. 2. In cases provided by this Code, a business company may be created by one person who shall become its single participant. A business company may not have as its single participant other business company consisting of one person unless otherwise provided by this Code or other law. 3. Business partnerships may be created in the organization  —legal form of a full partnership or a limited partnership (a commandite partnership). 4. Business companies may be created in the organization-legal form of a joint stock company or a limited liability company. 5. Individual entrepreneurs and/or commercial organizations may be participants in full partnerships and full partners in limited partnerships. Citizens and legal entities as well as public law formations (Article 125) may be participants in business companies and contributors to limited partnerships. 6. State bodies and bodies of local self-government are not entitled to participate in their names in business companies and partnerships. Institutions may be participants in business companies and contributors to limited partnerships with the permit of the owner, unless otherwise established by law. 553

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Participation of certain types of persons in business partnerships and companies may be prohibited or limited by law. Business partnerships and companies may be founders (participants) of other business partnership and companies unless otherwise established by law. 7. Peculiarities of legal status of credit organizations, clearing organizations, specialized financial companies, specialized project financing companies, professional participants of security market, stockholding investment funds, managing companies of investment funds, those of share investment funds and non-governmental pension funds, non-governmental pension funds and other non-credit financial organizations, employees’ joint stock companies (people enterprises), as well as rights and duties of their participants shall be determined by laws regulating activity of such organizations.

ARTICLE 124. THE RUSSIAN FEDERATION, SUBJECTS OF THE RUSSIAN FEDERATION AND MUNICIPAL FORMATIONS ARE SUBJECTS OF CIVIL LAW 1. The Russian Federation, the subjects of the Russian Federation: republics, krays, regions, cities of federal significance, the autonomous region, autonomous circuits as well as urban and rural settlements and other municipal formations enter into relations regulated by civil legislation on equal bases with other participants in these relations — citizens and legal entities. 2. Norms determining participation of legal entities in relations regulated by the civil legislation shall be applied to the subjects of civil law indicated in Section 1 of this Article, unless otherwise appears from a law or the peculiarities of these subjects. ARTICLE 422. CONTRACT AND LAW 1. A contract must comply with rules obligatory for the parties which rules are established by a law or other legal act (mandatory norms) effective at the time of its concluding. 2. If after concluding a contract a law is adopted establishing other rules obligatory for the parties than those effective upon concluding of the contract, then the conditions of the concluded contract shall remain effective unless the law provides that its operation shall extend to relations arisen out of contracts concluded earlier. ARTICLE 433. TIME OF CONCLUSION OF A CONTRACT 1. A contract shall be deemed concluded from the time when the person, who had sent an offer, received its acceptance. 2. If, in accordance with a law, the delivery of property is also necessary for the conclusion of a contract, the contract shall be deemed concluded from the time of delivery of the relevant property (Article 224). 3. A contract subject to state registration shall be deemed concluded from the time of its registration unless otherwise provided by a law. 554

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ARTICLE 434. FORM OF A CONTRACT (draft version) 1. A contract may be concluded in any form provided for the making of transactions unless a specified form has been established by a law for contracts of certain type. If the parties have agreed to conclude a contract in a certain form, it shall be deemed concluded after drawing it in the agreed form, even though this form was not required by a law for contracts of this type. 2. A contract in a written form may be concluded by the preparation of single document signed by the parties as well as by the exchange of letters, telegrams, telexes, telefaxes and other documents including electronic documents transmittable over telecommunication channels that allow reliable establishment that the document proceeds from a party to the contract. As an electronic document transmittable over telecommunication channels shall be deemed information prepared, transmitted, received or deposited by use of electronic, magnetic, optical or similar means including electronic data exchange and electronic mail. 3. The written form of a contract shall be deemed observed if a written proposal to conclude a contract has been accepted in the procedure provided by Section 3 of Article 438 of this Code. 4. In cases provided by law or agreement by the parties. a contract in written form may only be concluded by preparation of single document signed by the parties to the contract. ARTICLE 435. OFFER 1. An offer is a proposal addressed to one or several concrete persons that is sufficiently definite and expresses the intent of the person who has made the proposal to deem himself having concluded a contract with the addressee by whom the proposal will be accepted. The offer must contain the essential terms of the contract. 2. The offer shall bind the person who sent it from the time of its receipt by the addressee. 3. If a notice on the withdrawal of the offer has arrived earlier than or simultaneously with the offer, the offer shall be deemed as not having been received. ARTICLE 436. IRREVOCABILITY OF AN OFFER An offer received by an addressee may not be withdrawn during the time period established for its acceptance, unless otherwise indicated in the offer itself or appears from the essence of the proposal or the situation in which it was made. ARTICLE 437. INVITATION TO MAKE OFFERS. PUBLIC OFFER 1. Advertising and other proposals addressed to an indefinite group of persons shall be deemed as an invitation to make offers unless otherwise expressly indicated in the proposal. 555

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2. A proposal containing all essential terms of the contract that manifests the will of the person making the proposal, to conclude a contract upon the terms as indicated in the proposal, with anyone who responds, shall be deemed an offer (a public offer).

ARTICLE 438. ACCEPTANCE (draft version) 1. An acceptance is the response of a person to whom an offer is addressed on its acceptance. An acceptance must be complete and unconditional. 2. Silence is not acceptance, unless otherwise appears from a law, agreement by the parties, custom or from previous business relations of the parties. 3. The committing by a person who has received an offer, within the time period established for its acceptance, of actions in the performance of the terms of a contract indicated in it (shipment of goods, rendering of services, doing of work, payment of the relevant sum, etc) shall be deemed an acceptance, unless otherwise is provided by a law, other legal acts or indicated in the offer. ARTICLE 439. REVOCATION OF AN ACCEPTANCE If a notice on the revocation of an acceptance has reached the person who has made the offer prior to the acceptance or simultaneously with it, the acceptance shall be deemed as not having been received. ARTICLE 440. CONCLUSION OF A CONTRACT ON THE BASIS OF AN OFFER SPECIFYING A TIME PERIOD FOR ACCEPTANCE When a time period for acceptance is specified in an offer, the contract shall be deemed concluded provided the acceptance is received by the person who has sent the offer within the limits of the time period indicated in it. ARTICLE 441. CONCLUSION OF A CONTRACT ON THE BASIS OF AN OFFER NOT SPECIFYING A TIME PERIOD FOR ACCEPTANCE 1. When a time period for acceptance is not specified in a written offer, the contract shall be deemed concluded provided the acceptance is received by the person who has sent the offer prior to expiration of the time period established by a law or other legal acts, or if such a time period has not been established — within the time normally necessary for this. 2. When an offer has been made orally without an indication of the time period for acceptance, the contract shall be deemed concluded if the other party has immediately stated its acceptance. ARTICLE 442. A LATE ACCEPTANCE In cases when a timely dispatched notification of acceptance has been received late, the acceptance shall not be deemed late unless the party that has sent the offer has immediately notified the other party of the late receipt of the acceptance. 556

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If the party that has sent the offer immediately notifies the other party on assent with its acceptance that has been received late, the contract shall be deemed concluded.

ARTICLE 443. ACCEPTANCE ON OTHER TERMS A reply on consent to conclude a contract on terms other than those proposed in the offer shall not be deemed an acceptance. Such reply shall be deemed as refusal to accept and, at the same time, a new offer. ARTICLE 444. PLACE OF CONCLUSION OF A CONTRACT If the contract does not indicate the place of its conclusion the contract shall be deemed concluded at the place of residence of the citizen or the place of location of the legal entity who sent the offer. ARTICLE 1226. INTELLECTUAL RIGHTS With regard to results of intellectual activity and means of individualization equated to them (results of intellectual activity and means of individualization) there shall be recognized intellectual rights which include an exclusive right that is a proprietary right and, in cases provided by this Code, also personal non-proprietary rights and other rights (the right of survival, the right of acsess, and others). ARTICLE 1227. INTELLECTUAL RIGHTS AND RIGHTS IN REM (draft version) 1. Intellectual rights do not depend upon the right of ownership and other rights in rem to the tangible carrier (thing) in which the respective result of intellectual activity or means of individualization are manifested. 2. The transfer of the right of ownership to a thing shall not result in passing or granting of the intellectual rights to the result of intellectual activity or to the means of individualization manifested in the thing with the exception of the case provided by Section 2 of Article 1291 of this Code. 3. Provisions of Division II of this Code shall not be applied to intellectual rights unless otherwise established by the rules of this Division. ARTICLE 1228. AUTHOR OF A RESULT OF INTELLECTUAL ACTIVITY 1. The author of a result of intellectual activity is the citizen by whose creative labor such a result has been produced. Citizens who have not made a personal creative contribution in the producing of such a result including those who have provided only technical, consulting, organizational or financial support or assistance to the author or who only assisted in the formalization of rights to such a result or its use, as well as citizens who executed supervision of the performance of relevant work, shall not be deemed authors of the result of intellectual activity. 557

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2. The author of a result of intellectual activity enjoys the right of authorship, and in the cases provided by this Code, the right to the name and other personal nonproprietary rights. The right of authorship, the right to the name, and other personal non-proprietary rights of the author are inalienable and non-transferable; waiver of these rights shall be null and void. Authorship and the name of the author shall be provided with timeless protection. After the death of the author protection of his authorship and name may be effected by any interested person, with the exception of the cases provided by Section 2 of Article 1267 and Section 2 of Article 1316 of this Code. 3. The exclusive right to a result of intellectual activity produced by creative labor shall initially arise in its author. This right may be transferred by the author to another person by contract as well as may pass to other persons on other grounds established by law. 4. The rights to a result of intellectual activity produced by the joint creative labor of two or more citizens (coathorship) shall belong to coauthors jointly.

ARTICLE 1229. EXCLUSIVE RIGHT (draft version) 1. The citizen or legal entity having the exclusive right to a result of intellectual activity or to a means of individualization (the rightholder) is entitled to use such a result or the means at his discretion in any manner not contrary to law. The rightholder may dispose of the exclusive right to a result of intellectual activity or to a means of individualization (Article 1233) unless provided otherwise by this Code. The rightholder may at his discretion permit or prohibit other persons to use the result of intellectual activity or means of individualization. Absence of a prohibition shall not be deemed consent (permit). Other persons may not use the relevant result of intellectual activity or means of individualization without the rightholder’s consent except the cases provided by this Code. The use of a result of intellectual activity or means of individualization (including their use in ways provided by this Code) if such use is performed without the rightholder’s consent, shall be illegal and entail responsibility established by this Code, other laws, except the cases when the use of a result of intellectual activity or means of individualization by persons other than the rightholder without his consent is allowed by this Code. 2. The exclusive right to a result of intellectual activity or to a means of individualization (except the exclusive right to a firm name) may belong to one person or to several persons jointly. 3. In the case when the exclusive right to a result of intellectual activity or means of individualization belongs to several persons jointly each of the rightholders may use such a result or means at his discretions unless provided otherwise by this Code or agreement between the rightholders. Relations of the persons to whom the exclusive right belongs jointly shall be regulated by an agreement between them. Disposal of the exclusive right to a result of intellectual activity or means of individualization shall be performed by the rightholders jointly unless otherwise provided by this Code or agreement between the rightholders.

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Civil Code of the Russian Federation (Part 1)

Income from the joint use of a result of intellectual activity or means of individualization or joint disposal of the exclusive right to such a result or means shall be distributed among all the rightholders equally, unless otherwise provided by an agreement among them. Each of the rightholders is entitled to transfer (for or without consideration) his share in the exclusive right to all persons jointly with whom he enjoys this right, in equal shares. Alienation by the author-rightholder of his share in the exclusive right to third persons is not allowed unless otherwise provided by this Division. The share in the exclusive right belonging not to the author himself may be alienated to a third person with the consent of all the rest of the rightholders. The rightholder is entitled to leave his share in the exclusive right by will. 4. In the cases provided by Section 3 of Article 1454, Section 2 of Article 1466 and Section 2 of Article 1518 of this Code, independent exclusive rights to one and the same result of intellectual activity or one and the same mans of individualization may belong simultaneously to different persons. 5. Restrictions of exclusive rights to results of intellectual activity and means of individualization including in the case when use of results of intellectual activity is allowed without regithholders’ consent, but with retention for them of the right of remuneration shall be established by this Code. Restrictions of exclusive rights to works of science, literature and fine arts, objects of contiguous rights shall be established in certain specific cases provided such restrictions do not contradict conventional use of the works or objects of contiguous rights and do not unreasonably affect legitimate interests of rightholders. Restrictions of exclusive rights to inventions or industrial designs shall be established in some cases provided such restrictions do not unreasonably affect legitimate interests of rightholders. Restrictions of exclusive rights to inventions or industrial designs shall be established in some cases provided such restrictions do not unreasonably contradict conventional use of inventions or industrial designs and, with die consideration of third persons’ interests, do not unreasonably affect legitimate interests of rightholders. Restrictions of exclusive rights to trade marks shall be established in some cases provided such restrictions give due consideration to legitimate interests of rightholders and third persons.

Translated into English by Valery Musin. 559

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ARBITRATION PROCEDURAL CODE OF THE RUSSIAN FEDERATION (Adopted by the Federal Law of July 24, 2002 № 95-FZ) (extract) Article 9. Contentiousness 1. Proceeding in state arbitration courts shall be administered on the basis of contentiousness. 2. Persons participating in the case shall be entitled to know about each other’s arguments prior to the commencement of the proceedings. Each person participating in the case shall be guaranteed the right to submit evidence to the state arbitration court and to the other party in the case, provided with the right to present motions, state their arguments and considerations, give explanations with regard to all questions arising in the course of consideration of the case and connected with presentation of evidence. Persons participating in the case shall bear the risk of consequences of their performing or non-performing procedural actions. 3. State arbitration court, maintaining independence, objectiveness and impartiality shall administer the proceedings, clarify to the persons participating in the case their rights and duties, warn about consequences of their performing or non-performing procedural actions, render assistance in realization of their rights, create conditions for comprehensive and complete examination of evidence, establishment of actual circumstances and correct application of laws and other normative legal acts in the course of consideration of the case. Article 12. Language of court proceedings 1. Proceedings in state arbitration courts shall be performed in Russian language — the state language of the Russian Federation. 2. Persons participating in the case and not having command of the Russian language shall be explained and provided by the state arbitration court with the right to get acquainted with materials of the case, take part in the judicial actions, speak in court in their native language or the language freely chosen for communication and use services of an interpreter. Article 27. Cases within jurisdiction of state arbitration courts 1. Cases relating to economic disputes and other cases connected with performance of business and other economic activity are under jurisdiction of a state arbitration court. 2. State arbitration courts shall resolve economic disputes and consider other cases with participation of organizations-legal entities, citizens who carry out business activity without formation of a legal entity and enjoy status of an sole business acquired in the order established by law (hereinafter — sole business), and in the 560

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cases provided by this Code and other federal laws — with participation of the Russian Federation, subjects of the Russian Federation, municipalities, state bodies, local self-government bodies, other bodies, officials, formations without status of a legal entity and citizens without status of sole business (hereinafter — organizations and citizens). 3. Other cases may be referred to jurisdiction of state arbitration courts. 4. An application accepted by a state arbitration court for consideration in compliance with rules of jurisdiction shall be considered by the court on the merits, even if further on a citizen without status of sole business is brought into the proceedings as a third party which does not advance separate claims with regard to the subject to the dispute. 5. State arbitration courts shall consider cases falling within their jurisdiction with participation of Russian organizations, nationals of the Russian Federation and also foreign organizations, international organizations, foreign nationals, stateless persons performing business activity, organizations with foreign investments, unless otherwise provided by an international treaty of the Russian Federation.

Article 247. Competence of state arbitration courts of the Russian Federation in relation to cases with participation of foreign persons 1. State arbitration courts in the Russian Federation shall consider cases relating to economic disputes and other cases connected with performance of business and other economic activity, with participation of foreign organizations, international organizations, foreign nationals, stateless persons, carrying out business and other economic activity (hereinafter — foreign persons), provided: 1) the respondent stays or resides in the territory of the Russian Federation or the respondent’s property is located in the territory of the Russian Federation; 2) management body, branch or representative office of the foreign person is located in the territory of the Russian Federation; 3) the dispute has arisen out of the contract whose performance shall take place or took place in the territory of the Russian Federation; 4) the claim has arisen from causing harm to property by action or by other circumstance taken place in the territory of the Russian Federation or if harm has occurred in the territory of the Russian Federation; 5) the dispute has arisen out of unjust enrichment occurred in the territory of the Russian Federation; 6) the plaintiff by the case for protection of business reputation stays in the Russian Federation; 7) the dispute has arisen out of relations connected to the circulation of securities issued in the territory of the Russian Federation; 8) the applicant by the case for establishment of the fact having legal significance refers to existence of this fact in the territory of the Russian Federation; 9) the dispute has arisen from relations connected with the state registration of names and other objects and rendering services in the international association of information — telecommunication networks «Internet» in the territory of the Russian Federation; 561

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10) in other cases provided there is close connection of legal relationship in dispute with the territory of the Russian Federation. 2. State arbitration courts in the Russian Federation shall consider also economic disputes and other cases connected with business and other economic activity with participation of foreign persons and referred to their exclusive competence in accordance with Article 248 of this Code. 3. State arbitration courts in the Russian Federation shall consider also the cases in accordance with agreement of the parties concluded under the rules established by Article 249 of this Code. 4. The case accepted by the state arbitration court for consideration in compliance with rules provided by this article shall be considered by the court on the merits, even if in the course of the proceedings due to change of the place of location or place of residence of persons participating in the case or other circumstances it falls within jurisdiction of a foreign court.

Article 248. Exclusive competence of state arbitration courts of the Russian Federation with regard to cases with participation of foreign persons 1. The following cases with participation of foreign persons shall be referred to exclusive jurisdiction of the state arbitration courts of the Russian Federation: 1) by disputes concerning property owned by the Russian Federation, including disputes connected with privatization of state owned property and compulsory alienation of property for the public needs; 2) by disputes whose subject is immovable property provided this property is located in the territory of the Russian Federation, or the rights thereto; 3) by disputes connected with registration or issuance of patents, registration and issuance of certificates of trade marks, industrial designs, utility models or with registration of other rights to results of intellectual activity which require registration or issue of a patent or a certificate in the Russian Federation; 4) by disputes for declaring null and void entries in the state registries (registers, cadastres) made by a competent body of the Russian Federation that is in charge for maintenance of such a registry (register, cadastre); 5) by disputes connected with creation, liquidation or registration of legal entities and sole businesses in the territory of the Russian Federation, as well as with contest of decisions of the bodies of these legal entities. 2. Exclusive competence of state arbitration courts of the Russian Federation also includes cases with participation of foreign persons, arising out of administrative and others public legal relationships provided in Division III of this Code. Article 249. Agreement on determination of competence of state arbitration courts in the Russian Federation 1. In case the parties, at least one of which is a foreign person, have concluded the agreement whereby the state arbitration court in the Russian Federation should have the competence with regard to consideration of an existing or potential dispute 562

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connected with their performance of business and other economic activity the state arbitration court in the Russian Federation shall have the exclusive competence with regard to consideration of this dispute provided that such agreement does not affect the exclusive competence of a foreign court. 2. The agreement on determination of competence shall be concluded in written form.

Article 250. Competence of state arbitration courts of the Russian Federation with regard to application of security measures by the cases with participation of foreign persons In cases with participation of foreign persons referred to competence of state arbitration courts in the Russian Federation in accordance with Chapter 32 of this Code a state arbitration court in the Russian Federation may provide security measures according to the rules of Chapter 8 of this Code. Article 251. Judicial immunity 1. A foreign state acting as a holder of a public power shall enjoy judicial immunity in relation to a suit brought against it in a state arbitration court in the Russian Federation, to involvement thereof in participation in the case as a third party, to imposition of arrest on property which belongs to the foreign state and is located in the territory of the Russian Federation, and to taking measures against it by the court for securing the claim and proprietary interests. Levying of execution on this property by way of enforcement of the judicial act of the state arbitration court shall be allowed only upon consent of competent authorities of the relevant state unless otherwise provided by an international treaty of the Russian Federation or by a federal law. 2. Judicial immunity of international organizations shall be determined by the international treaty of the Russian Federation and the federal law. 3. Waiver of judicial immunity shall be made in the order provided by the law of the foreign state or by the rules of the international organization. In this case the state arbitration court shall consider the case in the course of proceedings established by this Code. Article 252. Procedural consequences of consideration of the case by the dispute between the same persons, with regard to the same subject and on the same grounds by a foreign court 1. State arbitration court in the Russian Federation shall leave the claim without consideration in accordance with the rules of Chapter 17 of this Code if there is a dispute under consideration in a foreign court between the same persons, with regard to the same subject and on the same grounds provided that consideration of this case does not fall within the exclusive competence of the state arbitration court of the Russian Federation in accordance with Article 248 of this Code. 563

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2. State arbitration court in the Russian Federation shall discontinue proceedings by the case in accordance with the rules of Chapter 18 of this Code if there is an effective judgment of the foreign court issued by the dispute between the same persons, with regard to the same subject and on the same grounds provided that consideration of this case does not fall within the exclusive competence of the state arbitration court of the Russian Federation or this judgment is not subject to recognition and enforcement in accordance with Article 244 of this Code.

Article 254. Procedural rights and duties of foreign persons 1. Foreign persons shall enjoy procedural rights and bear procedural duties equally with the Russian organizations and nationals. Procedural privileges shall be granted foreign persons if they are provided by an international treaty of the Russian Federation. 2. Foreign persons shall have the right to apply to state arbitration courts in the Russian Federation in accordance with the rules of jurisdiction and competence established by this Code for protection of violated or disputed rights and legitimate interests in the sphere of business and other economic activity. 3. Foreign persons participating in a case shall provide the state arbitration court with evidence confirming their legal status and the right to be engaged in business and other economic activity. In case of failure to submit such evidence the state arbitration court shall be entitled to require them under its own initiative. 4. The Government of the Russian Federation may impose reciprocal restrictions (retortions) in relation to foreign persons of those foreign states in which restrictions have been imposed in relation to Russian organizations and nationals. Article 255. Requirements concerning documents of a foreign origin 1. Documents issued, drawn or certified in the established form by competent bodies of foreign states outside the Russian Federation in accordance with norms of the foreign law in relation to Russian organizations and nationals or foreign persons shall be accepted by state arbitration courts in the Russian Federation provided they have been legalized or apostilled unless an international treaty of the Russian Federation provides otherwise. 2. Documents drawn in a foreign language shall, when submitted to the state arbitration court in the Russian Federation, be accompanied by a duly certified translation into Russian language.

Translated into English by Valery Musin. 564

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LAW ON INTERNATIONAL COMMERCIAL ARBITRATION July 7, 1993 No 5338-1

This Law: – proceeds from recognition of arbitration (voluntary tribunal) as a widely used method of resolution of disputes arising in the sphere of international trade, and necessity of a complex regulation of international commercial arbitration by means of legislation; – gives due consideration to the provisions on such arbitration contained in international treaties of the Russian Federation as well as in the Model Law adopted in 1985 by the United Nations Commission on International Trade Law and approved by the United Nations General Assembly for its possible use by states in their legislation.

Chapter I. — GENERAL PROVISIONS

Article 1. Scope of Application 1. This Law shall apply to international commercial arbitration if the place of arbitration is located in the territory of the Russian Federation. However, the provisions of Articles 8, 9, 35 and 36 shall apply also if the place of arbitration is located abroad. 2. The parties may by their agreement refer to international commercial arbitration: – disputes resulting from contractual and other civil law relationships arising in the course of foreign trade and other kinds of international economic liaisons, if the place of business of at least one of the parties is situated abroad; as well as – disputes arising between businesses with foreign investments, international associations and organizations created in the territory of the Russian Federation; disputes between their participants; as well as disputes between such entities and other subjects of the law of the Russian Federation. 3. For the purposes of paragraph 2 of this article: – if a party has more than one place of business, the place of business is that which has the closest relationship to the arbitration agreement; – if a party does not have a place of business, reference is to be made to his permanent residence. 4. This Law does not affect any other law of the Russian Federation by virtue of which certain disputes may not be submitted to arbitration or may be submitted to arbitration only according to provisions other than those contained in this Law. 565

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5. If an international treaty of the Russian Federation provides rules other than those which are contained in the Russian legislation relating to arbitration (voluntary tribunal), the rules of the international treaty shall be applied.

Article 2. Definitions and Rules of Interpretation For the purposes of this Law: – “arbitration” means any arbitration (voluntary tribunal) regardless of whether conducted by a tribunal created specifically for consideration of a certain case or administered by a permanent arbitral institution, in particular the Court of International Commercial Arbitration or the Maritime Arbitration Commission of the Chamber of Commerce and Industry of the Russian Federation (Appendices I and II to this Law); – “voluntary tribunal” means a sole arbitrator or a panel of arbitrators (voluntary judges); – “court” means a relevant body of the judicial system of a state; – where a provision of this Law, except Article 28, leaves the parties free to determine a certain issue, such freedom includes the right of the parties to authorize a third party, including an institution, to make that determination; – where a provision of the this Law refers to the fact that the parties have agreed or that they may agree or in any other way refers to an agreement of the parties, such agreement includes any arbitration rules referred to in that agreement; – where a provision of this Law, except Articles 25(1) and 32(2), refers to a claim, it also applies to a counter-claim, and where it refers to a defense, it also applies to a defense to such counter-claim. Article 3. Receipt of Written Communications 1. Unless otherwise agreed by the parties: – any written communication is deemed to have been received if it is delivered to the addressee personally or if it is delivered at his place of business, habitual residence or mailing address; if none of these can be found after making a reasonable inquiry, a written communication is deemed to have been received if it is sent to the addressee’s last-known place of business, habitual residence or mailing address by registered letter or any other means which provides a record of the attempt to deliver it; – the communication is deemed to have been received on the day it is so delivered. 2. The provisions of this Article do not apply to communications in court proceedings.

Article 4. Waiver of Right to Object A party who knows that any provision of this Law from which the parties may derogate or any requirement under the arbitration agreement has not been complied with and yet proceeds with the arbitration without stating his objection to such noncompliance without undue delay or, if a time-limit is provided therefor, within such period of time, shall be deemed to have waived his right to object. 566

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Article 5. Extent of Court Intervention In matters governed by this Law, no court shall intervene except where so provided in this Law. Article 6. Authorities for Certain Functions of Arbitration Assistance and supervision 1. The functions referred to in Articles 11(3), 11(4), 13(3) and 14 shall be performed by the President of the Chamber of Commerce and Industry of the Russian Federation. 2. The functions referred to in Articles 16(3) and 34(2) shall be performed by the Supreme Court of a republic within the Russian Federation, the krai, regional or city court, the court of the autonomous region and the court of autonomous circuit where the arbitration takes place.

Chapter II. — ARBITRATION AGREEMENT

Article 7. Definition and Form of Arbitration Agreement 1. Arbitration agreement is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. 2. The arbitration agreement shall be in writing. An agreement is in writing if it is contained in a document signed by the parties or in an exchange of letters, telex, telegrams or other means of electric telecommunication which provide a record of the agreement, or in an exchange of statements of claim and defense in which the existence of an agreement is alleged by one party and not denied by another. The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement provided that the contract is in writing and the reference is such as to make that clause part of the contract. Article 8. Arbitration Agreement and Substantive Claim before Court 1. A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if any of the parties so requests not later than when submitting his first statement on the substance of the dispute, discontinue its proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed. 2. Where an action referred to in Section 1 of this Article has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue of jurisdiction is pending before the court. 567

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Article 9. Arbitration Agreement and Interim Measures by Court It is not incompatible with an arbitration agreement for a party to request, before or during arbitral proceedings, a court to order interim measures of protection and for a court to take a ruling granting such measures.

Chapter III. COMPOSITION OF ARBITRAL TRIBUNAL

Article 10. Number of Arbitrators 1. The parties are free to determine the number of arbitrators. 2. If the parties failed to determine such number, three arbitrators shall be appointed. Article 11. Appointment of Arbitrators 1. No person shall be precluded from acting as an arbitrator by reason of his nationality, unless otherwise agreed by the parties. 2. The parties are free to agree on a procedure of appointing the arbitrator or arbitrators, subject to the provisions of Sections 4 and 5 of this article. 3. Failing such agreement, – in an arbitration with three arbitrators, each party shall appoint one arbitrator, and the two arbitrators thus appointed shall appoint the third arbitrator; if a party fails to appoint the arbitrator within 30 days of receipt of a request to do so from the other party, or if the two arbitrators fail to agree on the third arbitrator within 30 days of their appointment, the appointment shall be made, upon request of a party, by the authority specified in Article 6(1); – in an arbitration with a sole arbitrator, if the parties are unable to agree on the arbitrator, he shall be appointed, upon request of a party, by the authority specified in Article 6(1). 4. Where, under an appointment procedure agreed upon by the parties, – a party fails to act as required under such procedure, or – the parties, or two arbitrators, are unable to reach an agreement expected of them under such procedure; or – a third party, including an institution, fails to perform any function entrusted to it under such procedure, any party may request the authority specified in Article 6(1) to take the necessary measures, unless the agreement on the appointment procedure provides other means for securing the appointment. 5. A decision on any matter entrusted by Section 3 or 4 of this Article to the authority specified in Article 6(1) shall be subject to no appeal. The authority, in appointing an arbitrator, shall have due regard to any qualifications required of the arbitrator by the agreement of the parties and to such considerations as are likely to secure the appointment of an independent and impartial arbitrator and, in the case of a sole or third arbitrator, shall take into account as well the advisability of appointing an arbitrator of a nationality other than those of the parties. 568

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Article 12. Grounds for Challenge of Arbitrator 1. When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose any circumstances which may give rise to justifiable doubts as to his impartiality or independence. An arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall without delay disclose any such circumstances to the parties, unless they have already been informed of them by him. 2. An arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his impartiality or independence, or if he does not possess qualifications agreed to by the parties. A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made. Article 13. Arbitrator Challenge Procedure 1. The parties are free to agree on a procedure for challenging an arbitrator, subject to the provisions of Section 3 of this article. 2. Failing such agreement, a party who intends to challenge an arbitrator shall, within 15 days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstances referred to in Article 12(2), send a written statement of the reasons for the challenge in writing to the arbitral tribunal. Unless the challenged arbitrator withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge. 3. If a challenge under any procedure agreed upon by the parties or under the procedure of Section 2 of this Article is not successful, the challenging party may request, within 30 days after having received notice of the decision rejecting the challenge, the authority specified in Article 6(1) to decide on the challenge, which decision shall be subject to no appeal. While such a request is pending, the arbitral tribunal, including the challenged arbitrator, may continue the arbitral proceedings and make an award. Article 14. Termination of Arbitrator’s Authority (Mandate) 1. If an arbitrator becomes de jure or de facto unable to perform his functions or for other reasons fails to act without undue delay, his authority (mandate) terminates if he withdraws from his office or if the parties agree on the termination. Otherwise, if a controversy remains concerning any of these grounds, any party may request the authority specified in Article 6(1) to decide on the termination of the mandate; which decision shall be subject to no appeal. 2. If, under this Article or article 13(2), an arbitrator withdraws from his office or a party agrees to the termination of the mandate of an arbitrator, this does not imply acceptance of the validity of any ground referred to in this Article or article 12(2). Article 15. Appointment of Substitute Arbitrator Where the mandate of an arbitrator terminates under Article 13 or 14 or because of his withdrawal from office for any other reason or because of the revocation of 569

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his mandate by agreement of the parties or in any other case of termination of his mandate, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.

Chapter IV. JURISDICTION OF ARBITRAL TRIBUNAL

Article 16. Competence of Arbitral Tribunal to Rule on Its Jurisdiction 1. The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. 2. A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defense. A party is not precluded from raising such a plea by the fact that he has appointed, or participated in the appointment of, an arbitrator. A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. The arbitral tribunal may, in either case, admit a later plea if it considers the delay justified. 3. The arbitral tribunal may rule on a plea referred to in Section 2 of this article either as a preliminary question or in an award on the merits. If the tribunal rules as a preliminary question that it has jurisdiction, any party may request, within 30 days after having received notice of that ruling, the court specified in Article 6(2) to decide the matter; such a decision shall be subject to no appeal. While such a request is pending, the arbitral tribunal may continue the arbitral proceedings and make an award. Article 17. Power of Arbitral Tribunal to Order Interim Measures Unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, order any party to take such interim measures of protection as the arbitral tribunal may consider necessary in respect of the subject-matter of the dispute. The arbitral tribunal may require any party to provide appropriate security in connection with such measures. Chapter V. CONDUCT OF ARBITRAL PROCEEDINGS

Article 18. Equal Treatment of Parties The parties shall be treated with equality and each party shall be given a full opportunity of presenting his case. 570

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Article 19. Determination of Rules of Procedure 1. Subject to the provisions of this Law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings. 2. Failing such agreement, the arbitral tribunal may, subject to the provisions of this Law, conduct the arbitration in such manner as it considers appropriate. The power conferred upon the arbitral tribunal includes the power to determine the admissibility, relevance, materiality and weight of any evidence. Article 20. Place of Arbitration 1. The parties are free to agree on the place of arbitration. Failing such agreement, the place of arbitration shall be determined by the arbitral tribunal having regard to the circumstances of the case, including the convenience of the parties. 2. Notwithstanding the provisions of Section 1 of this article, the arbitral tribunal may, unless otherwise agreed by the parties, meet at any other place it considers appropriate for consultation among the arbitrators, for hearing witnesses, experts or the parties, or for inspection of goods, other property or documents. Article 21. Commencement of Arbitral Proceedings Unless otherwise agreed by the parties, the arbitral proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent. Article 22. Language 1. The parties are free to agree on the language or languages to be used in the arbitral proceedings. Failing such agreement, the arbitral tribunal shall determine the language or languages to be used in the proceedings. This agreement or determination, unless otherwise specified therein, shall apply to any written statement by a party, any hearing and any award, decision or other communication by the arbitral tribunal. 2. The arbitral tribunal may order that any documentary evidence shall be accompanied by a translation into the language or languages agreed upon by the parties or determined by the arbitral tribunal. Article 23. Statements of Claim and Defense 1. Within the period of time agreed by the parties or determined by the arbitral tribunal, the claimant shall state the facts supporting his claim, the points at issue and the relief or remedy sought, and the respondent shall state his defense in respect of these particulars, unless the parties have otherwise agreed as to the required elements of such statements. The parties may submit with their statements all documents they consider to be relevant or may add a reference to the documents or other evidence they will submit. 2. Unless otherwise agreed by the parties, either party may amend or supplement his claim or defense during the course of the arbitral proceedings, unless the arbitral tribunal considers it inappropriate to allow such amendment having regard to the delay in making it. 571

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Article 24. Hearings and Written Proceedings 1. Subject to any contrary agreement by the parties, the arbitral tribunal shall decide whether to hold oral hearings for the presentation of evidence or for oral argument, or whether the proceedings shall be conducted on the basis of documents and other materials. However, unless the parties have agreed that no hearings shall be held, the arbitral tribunal shall hold such hearings at an appropriate stage of the proceedings, if so requested by a party. 2. The parties shall be given sufficient advance notice of any hearing and of any meeting of the arbitral tribunal for the purposes of inspection of goods, other property or documents. 3. All statements, documents or other information supplied to the arbitral tribunal by one party shall be communicated to the other party. Also any expert report or evidentiary document on which the arbitral tribunal may rely in making its decision shall be communicated to the parties. Article 25. Failure to Submit Documents or to Attend Hearing Unless otherwise agreed by the parties, if, without showing sufficient cause, – the claimant fails to communicate his statement of claim in accordance with Article 23(1), the arbitral tribunal shall terminate the proceedings; – the respondent fails to communicate his statement of defense in accordance with Article 23(1), the arbitral tribunal shall continue the proceedings without treating such failure in itself as an admission of the claimant’s allegations; – any party fails to appear at a hearing or to produce documentary evidence, the arbitral tribunal may continue the proceedings and make the award on the evidence before it. Article 26. Expert Appointed by Arbitral Tribunal 1. Unless otherwise agreed by the parties, the arbitral tribunal – may appoint one or more experts to report to it on specific issues to be determined by the arbitral tribunal; – may require a party to give the expert any relevant information or to produce, or to provide access to, any relevant documents, goods or other property for his inspection. 2. Unless otherwise agreed by the parties, if a party so requests or if the arbitral tribunal considers it necessary, the expert shall, after delivery of his written or oral report, participate in a hearing where the parties have the opportunity to put questions to him and to present expert witnesses in order to testify on the points at issue. Article 27. Court Assistance in Taking Evidence The arbitral tribunal or a party with the approval of the arbitral tribunal may request from a competent court of the Russian Federation assistance in taking evidence. The court may execute the request, being guided by the rules on taking evidence, including those on rogatory letters . 572

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LAW ON INTERNATIONAL COMMERCIAL ARBITRATION

Chapter VI. MAKING OF AWARD AND TERMINATION OF PROCEEDINGS

Article 28. Rules Applicable to Substance of Dispute 1. The arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute. Any designation of the law or legal system of a given State shall be construed as directly referring to the substantive law of that State and not to its conflict of laws rules. 2. Failing any designation by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable. 3. In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction. Article 29. Decision Making by Panel of Arbitrators In arbitral proceedings with more than one arbitrator, any decision of the arbitral tribunal shall be made, unless otherwise agreed by the parties, by a majority of all its members. However, questions of procedure may be decided by a presiding arbitrator, if so authorized by the parties or all members of the arbitral tribunal. Article 30. Settlement 1. If, during arbitral proceedings, the parties settle the dispute, the arbitral tribunal shall terminate the proceedings and, if requested by the parties and not objected to by the arbitral tribunal, record the settlement in the form of an arbitral award on agreed terms. 2. An award on agreed terms shall be made in accordance with the provisions of Article 31 and shall state that it is an award. Such an award has the same status and effect as any other award on the merits of the case. Article 31. Form and Contents of Award 1. The award shall be made in writing and shall be signed by the arbitrator or arbitrators. In arbitral proceedings with more than one arbitrator, the signatures of the majority of all members of the arbitral tribunal shall suffice, provided that the reason for any omitted signature is stated. 2. The award shall state the reasons upon which it is based, a resolution regarding satisfaction or rejection of the claim, the amount of the arbitration fee and costs relating to the case, and distribution thereof between the parties. 3. The award shall state its date and the place of arbitration as determined in accordance with Article 20(1). The award shall be deemed to have been made at that place. 4. After the award is made, a copy signed by the arbitrators in accordance with Section (1) of this article shall be delivered to each party. Article 32. Termination of Arbitral Proceedings 1. The arbitral proceedings are terminated by the final award or by an order of the arbitral tribunal in accordance with Section (2) of this article. 573

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2. The arbitral tribunal shall issue an order for the termination of the arbitral proceedings when: – the claimant withdraws his claim, unless the respondent objects thereto and the arbitral tribunal recognizes a legitimate interest on his part in obtaining a final settlement of the dispute; – the parties agree on the termination of the proceedings; – the arbitral tribunal finds that the continuation of the proceedings has for any other reason become unnecessary or impossible. 3. The mandate of the arbitral tribunal terminates with the termination of the arbitral proceedings, subject to the provisions of Articles 33 and 34(4).

Article 33. Correction and Interpretation of Award; Additional Award 1. Within 30 days of receipt of the award, unless another period of time has been agreed upon by the parties: – any of the parties, with notice to the other party, may request the arbitral tribunal to correct in the award any errors in computation, any clerical or typographical errors or any errors of similar nature; – if so agreed by the parties, a party, with notice to the other party, may request the arbitral tribunal to give an interpretation of a specific point or part of the award. If the arbitral tribunal considers the request to be justified, it shall make the correction or give the interpretation within 30 days of receipt of the request. Such interpretation shall form part of the award. 2. The arbitral tribunal may correct any error of the type referred to in the second paragraph of Section 1 of this Article on its own initiative within 30 days of the date of the award. 3. Unless otherwise agreed by the parties, a party, with notice to the other party, may request, within 30 days of receipt of the award, the arbitral tribunal to make an additional award as to claims presented in the arbitral proceedings but omitted from the award. If the arbitral tribunal considers the request to be justified, it shall make the additional award within 60 days. 4. The arbitral tribunal may extend, if necessary, the period of time within which it shall make a correction, interpretation or an additional award under Section 1 or 3 of this article. 5. The provisions of Article 31 shall apply to a correction or interpretation of the award or to an additional award. Chapter VII. RECOURSE AGAINST AWARD

Article 34. Application for Setting Aside as Exclusive Recourse against Arbitral Award 1. Recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with Sections 2 and 3 of this article. 574

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LAW ON INTERNATIONAL COMMERCIAL ARBITRATION

2. An arbitral award may be set aside by the court specified in Article 6(2) only if: (1) the party making the application for setting aside furnishes proof that: – a party to the arbitration agreement referred to in Article 7 was under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the Russian Federation; or – he was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or – the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside; or – the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law; or (2) the court finds that: – the subject-matter of the dispute is not capable of settlement by arbitration under the law of the Russian Federation; or – the award is in conflict with the public policy of the Russian Federation. 3. An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the award and, if a request had been made under Article 33, from the date on which that request had been disposed of by the arbitral tribunal. 4. The court, which has been asked to set aside an award, may, where appropriate and so requested by a party, suspend the setting aside proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the arbitral tribunal’s opinion will eliminate the grounds for setting aside.

Chapter VIII. RECOGNITION AND ENFORCEMENT OF AWARDS

Article 35. Recognition and Enforcement 1. An arbitral award, irrespective of the country in which it was made, shall be recognized as binding and, upon application in writing to the competent court, shall be enforced subject to the provisions of this Article and of Article 36. 2. The party relying on an award or applying for its enforcement shall supply the duly authenticated original award or a duly certified copy thereof, and the original arbitration agreement referred to in Article 7 or a duly certified copy thereof. If the award or agreement is made in a foreign language, the party shall supply a duly certified translation thereof into the Russian language. 575

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Article 36. Grounds for Refusing Recognition or Enforcement of Arbitral Award 1. Recognition or enforcement of an arbitral award, irrespective of the country in which it was made, may be refused only: (1) at the request of the party against whom it is invoked, if that party furnishes to the competent court where recognition or enforcement is sought proof that: – a party to the arbitration agreement referred to in Article 7 was under some incapacity; or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or – the party against whom the award was made was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or – the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced; or – the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or – the award has not yet become binding on the parties or has been set aside or suspended by a court of the country in which, or under the law of which, that award was made; or (2) if the court finds that: – the subject-matter of the dispute is not capable of settlement by arbitration under the law of the Russian Federation; or – the recognition or enforcement of the award would be contrary to the public policy of the Russian Federation. 2. If an application for setting aside or suspension of an award has been made to a court referred to in the point five of paragraph 1 of Section1 of this article, the Court where recognition or enforcement is sought may, if it considers it proper, adjourn its decision and may also, on the application of the party claiming recognition or enforcement of the award, order the other party to provide appropriate security.

The text of this law is effectively identical to the original (1985) version of the UNCITRAL Model Law on International Commercial Arbitration, except several provisions, such as those contained in the Preamble, Articles 1, 6 and some others. Relevant provisions are translated into English by Valery Musin. 576

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CRIMINAL CODE OF THE RUSSIAN FEDERATION (adopted by the Federal Law of June 13, 1996 № 63-FZ, as subsequently amended) (extract)

Article 14. Concept of a Crime 1. A socially dangerous behavior committed with guilt and prohibited by this Code under threat of punishment shall be deemed a crime. 2. Action or omission although formally containing the indicia of any behavior provided by this Code but which, due to its insignificance, does not constitute a social danger shall not be a crime. Article 19. General Conditions for Criminal Responsibility Only a sane natural person who has attained the age as provided by this Code shall be subject to criminal responsibility. Article 24. Forms of Guilt 1. A person who has committed behavior deliberately or by negligence shall be deemed to be guilty of a crime. 2. A behavior committed solely by negligence shall be deemed a crime only if it is specifically provided by the relevant article of the Special Part of this Code. Article 25. Crimes Committed Deliberately 1. An behavior committed with direct or indirect intent shall be deemed a crime committed willfully. 2. A crime shall be deemed to be committed with direct intent if the person understood the social danger of his actions (omission), foresaw the possibility or the inevitability of the occurrence of socially dangerous consequences and wished occurrence thereof. 3. A crime shall be deemed to be committed with indirect intent if the person understood the social danger of his actions (omission), foresaw the possibility of occurrence of socially dangerous consequences, did not wish but consciously admitted these consequences or treated them with indifference. Article 26. A Crime Committed by Negligence 1. A behavior committed light-mindedly or imprudently shall be deemed a crime committed by negligence. 577

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2. A crime shall be deemed to be committed light-mindedly if the person has foreseen the possibility of occurrence of socially dangerous consequences of his actions (omission) but expected without valid reasons to prevent these consequences. 3. A crime shall be deemed to be committed imprudently if the person has not foreseen the possibility of the occurrence of socially dangerous consequences of his actions (omission) although in case of necessary attentiveness and prudence he could have and should have foreseen these consequences.

Article 37. Necessary Defense 1. It shall not be a crime when harm is inflicted to an attacking person in the course of necessary defense, i.e. in the case of defense of the personality and the rights of resisting person or other persons, law-protected interests of the society or the state against a socially-dangerous attack if such an attack was connected with violence dangerous for the life of the resisting person or another person or with immediate threat of use of such a violence. 2. Defense against an attack not connected with a violence dangerous for the life of the resisting person or another person or with immediate threat of use of such a violence shall be lawful if in this case the limits of necessary defense have not been exceeded, i.e. no willful actions which clearly did not correspond to the character and danger of the attack. 2_1. Actions of a resisting person shall not be deemed exceeding the limits of necessary defense if this person due to unexpectedness of the attach could not properly assess the degree and character of the threat of the attack. 3. Provisions of this article shall equally extend to all persons regardless of their professional or other special training and official status and also regardless of the possibility to avoid a socially-dangerous attack or to approach other persons or authorities for help.

Article 38. The Infliction of Harm in the Course of the Detention of a Person Who Has Committed a Crime 1. The infliction of harm to a person who has committed a crime, in the course of his detention, for the purpose of his delivery to the authorities and prevention the possibility of committing by him of further crimes shall not be a crime if it was not possible to detain such person by other means and of measures needed for that have not been exceeded. 2. Clear disproportion between the measures needed for the detention of the person who has committed a crime and the character and the degree of the social danger of the crime committed by the detained person and the circumstances of the detention, when the harm is caused to the person without necessity, shall be deemed to be the excess of the necessary measures. Such excess shall entail criminal responsibility only in cases of the willful infliction of harm. 578

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Criminal Code of the Russian Federation

Article 39. Extreme Necessity 1. Infliction of harm to interests protected by criminal law in a situation of extreme necessity, i.e., for removing a danger directly threatening to personality or rights of this person or other persons, to law protected interests of the society or the State, shall not be a crime if this danger could not be removed otherwise and there was no excess of the limits of extreme necessity. 2. The infliction of harm that clearly does not correspond to the character and the degree of the threatened danger and the circumstances under which the danger was removed when equal or more substantial harm was caused to the abovementioned interests than the harm prevented shall be deemed to be the excess of extreme necessity. Such excess shall entail criminal responsibility only in cases of the willful infliction of harm. Article 41. Justified Risk 1. Infliction of harm to law protected interests provided the risk is justified by attaining the socially useful purpose shall not be a crime. 2. Risk shall be deemed justified if the abovementioned purpose could not have been attained through actions (omission) not connected with risk and provided that a person that assumed the risk has undertaken sufficient measures to prevent harm to interests, protected by criminal law. 3. Risk shall not be deemed justified if it was beknowingly connected with a threat to life of many people, a hazard of an environmental catastrophe or a social disaster.

Translated into English by Nikolai Kropachev. 579

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Code of the Russian Federation of Administrative Violations (adopted by the Federal Law of December 30, 2001 № 195-FZ) (extract)

Article 1.5. Presumption of Innocence 1. A person shall be subject to administrative responsibility only for those administrative violations in respect of which his guilt has been established. 2. A person in respect of whom the proceedings for an administrative violation are being conducted shall be deemed innocent until his guilt is proved in the procedure provided for in this Code and is established by an effective decision of the judge, or of the body, or of the official who have considered the case. 3. A person who is being brought to administrative responsibility is not obliged to prove his innocence unless otherwise provided in the note to this article. 4. Irremovable doubts in respect of the guilt of a person which is being brought to administrative responsibility shall be interpreted in favor of this person. Note: Provisions of Section 3 of this article shall not extend to administrative violations provided by Chapter 12 of this Code and administrative violations in the sphere of improving of a territory provided by laws of subjects of the Russian Federation — committed with use of transport vehicles in case of fixation thereof by special technical devices working in automatic regime and having the functions of photo- and motion picture shooting or by means of photography and motion picture shooting, audio recording. Article 1.7. Operation of Legislation on Administrative Violations in Time 1. A person who has committed an administrative violation shall be subject to responsibility in accordance with the law effective at the time of committing the administrative violation. 2. Any law reducing or abolishing administrative responsibility for an administrative violation or otherwise improving the position of a person who has committed an administrative violation shall have retroactive effect, i.e., it shall also extend to a person who has committed an administrative violation prior to introduction of such law and in relation to whom the decision to impose administrative penalty has not been executed. A law introducing or aggravating administrative responsibility for an administrative violation or otherwise worsening the position of the person shall not have retroactive effect. 580

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code of russian federation of administrative violations

3. Proceedings by the case concerning an administrative violation shall be conducted in accordance with the law effective at the time of conduction of proceedings by this case.

Article 2.1. Administrative Violation 1. An unlawful, guilty action (omission) of a natural person or a legal entity for which administrative responsibility is provided by this Code or the laws on administrative violations of subjects of the Russian Federation shall be deemed an administrative violation. 2. A legal entity shall be deemed guilty in committing an administrative violation if it is established that it had the opportunity to observe rules and norms for violations of which administrative responsibility is provided by this Code or the laws of a subject of the Russian Federation but did not take all the measures that were within its power to observe them. 3. Imposition of administrative penalty on a legal entity shall not exempt the guilty natural person of administrative responsibility for this violation, and bringing a natural person to administrative or criminal responsibility shall not exempt the legal entity of administrative responsibility for this violation. Article 2.2. Forms of Guilt 1. An administrative violation shall be deemed committed willfully if the person who has committed it understood the illegal character of his action (omission), could foresee the harmful consequences thereof and wished occurrence of these consequences or consciously admitted them or treated them indifferently. 2. An administrative violation shall be deemed committed through negligence if a person who has committed it foresaw a possibility of occurrence of the harmful consequences of his action (omission) but self-conceitedly hoped to prevent such consequences without any sufficient grounds for that or did not foresee the possibility of occurrence of such consequences although should have and could have foreseen them.

Translated into English by Nikolai Kropachev. 581

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ON FOREIGN INVESTMENTS IN THE RUSSIAN FEDERATION (adopted by the Federal Law of July 09, 1999 160-FZ, as subsequently amended) (extract)

Article 2. Basic concepts used in this Federal law The following basic concepts are used for purposes of this Federal law: foreign investor — foreign legal entity whose civil legal capacity is determined in accordance with the legislation of the state where it has been created and that is entitled, in accordance with the legislation of the said state, to make investments on the territory of the Russian Federation; foreign organization which is not a legal entity, whose civil legal capacity is determined in accordance with the legislation of the state where it has been created and that is entitled, in accordance with the legislation of the said state, to make investments in the territory of the Russian Federation; foreign national whose civil legal passive capacity and dispositive capacity are determined in accordance with the legislation of the state of his nationality and who is entitled, in accordance with the legislation of the said state, to make investments in the territory of the Russian Federation; stateless person residing outside the territory of the Russian Federation whose civil legal passive capacity and dispositive capacity are determined in accordance with the legislation of the state of his permanent residence and who is entitled, in accordance with the legislation of the said state, to make investments in the territory of the Russian Federation; international organization that is entitled to make investments in the territory of the Russian Federation in accordance with an international treaty of the Russian Federation; foreign states in accordance with the procedure determined by federal laws; foreign investment — investment of foreign capital in an object of business activity in the territory of the Russian Federation in the form of objects of civil law rights belonging to the foreign investor, provided these objects of civil law rights have not been excluded from circulation, nor has their circulation been restricted in the Russian Federation in accordance with federal laws, including money, securities (in foreign currency and currency of the Russian Federation), other property, proprietary rights, exclusive rights for results of intellectual activity (intellectual property) having monetary evaluation, as well as services and information; direct foreign investment — acquisition by a foreign investor at least 10% of the share, shares (contribution) in the charter (contributed) capital of a commercial organization created or being created in the territory of the Russian Federation in the form of a business partnership or company in accordance with the civil legislation of the Russian Federation; investing capital in fixed assets of a branch of a foreign legal entity being created in the territory of the Russian Federation; making by a foreign investor as lessor in the territory of the Russian Federation financial rent (leasing) of equipment specified in Sections XVI and XVII of the unified Commodity Classification of foreign economic activity of the Customs Union in frames 582

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of EurAsEU (hereinafter — Customs Union) whose customs value is not less than 1 million rubles; investment project — proving of economic viability, volume and terms of making of a direct foreign investment, including project budget documentation which is prepared in compliance with the legislation of the Russian Federation; priority investment project — investment project where the aggregate volume of foreign investments made therein is at least than 1 billion rubles (at least equivalent sum in foreign currency at the rate of the Central Bank of the Russian Federation as of the of introduction date of this Federal law), or investment project where the minimum share (contribution) of foreign investors in the charter (contributed) capital of a commercial organization with foreign investments is not less than 100 million rubles (at least equivalent sum in foreign currency at the rate of the Central Bank of the Russian Federation as of the of introduction date of this Federal law), included in the list which to be approved by the Government of the Russian Federation; recoupment period of an investment project — the period from the commencement of financing of an investment project with involvement of a direct foreign investment until the date when the difference between the accumulated amount of the net profit with depreciation deductions and the volume of investment expenses of the commercial organization with foreign investments or a branch of a foreign legal entity, or a lessor under a financial rent (leasing) contract achieves positive result; reinvesting — making capital investments in objects of business activity in the territory of the Russian Federation out of income or profit of a foreign investor or commercial organization with foreign investments, derived by them from foreign investments; aggregate tax burden — calculated aggregate volume of monetary means payable in the form of federal taxes (except for excise tax, value-added tax on goods manufactured in the territory of the Russian Federation) and contributions to state extra-treasury funds (except for contributions to the Pension Fund of the Russian Federation) by a foreign investor and commercial organization with foreign investments, performing the investment project out of foreign investments as of the date of commencement of financing of the investment project.

Article 5. Guarantees of legal protection of activities of foreign investors in the territory of the Russian Federation 1. A foreign investor in the territory of the Russian Federation shall be granted full and absolute protection of rights and interests which is ensured by this Federal law, other federal laws and other normative legal acts of the Russian Federation as well as international treaties of the Russian Federation. 2. A foreign investor shall have the right for compensation for damages caused to him as a result of illegal actions (omission) of state bodies, local self-government bodies or officials of these bodies, in accordance with the civil legislation of the Russian Federation. 583

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Article 9. Guarantee against changes in the legislation of the Russian Federation unfavorable for a foreign investor and commercial organization with foreign investments 1. In case of introduction of new federal laws and other normative legal acts of the Russian Federation, changing amounts of federal taxes (except for excise tax, value-added tax on goods manufactured in the territory of the Russian Federation) and contributions to state extra-treasury funds (except for contributions to the Pension Fund of the Russian Federation), or amendments and additions in the effective federal laws and other normative legal acts of the Russian Federation, which result in increase of the aggregate tax burden on the activities of a foreign investor and commercial organization with foreign investments on realization of priority investment projects or establish a regime of bans and restrictions with respect to foreign investments in the Russian Federation compared to the aggregate tax burden and regime that were effective in accordance with federal laws and other normative legal acts of the Russian Federation on the date of commencement of financing of the priority investment project out of foreign investments, then such new federal laws and other normative legal acts of the Russian Federation, as well as amendments and additions to the effective federal laws and other normative legal acts of the Russian Federation shall not be applied within the periods stated in Section 2 of this article, with respect to the foreign investor or commercial organization with foreign investments, performing priority investment projects out of foreign investments, provided the goods taken to the Russian Federation by a foreign investor and commercial organization with foreign investments are used specifically for realization of priority investment projects. Provisions of Paragraph one of this Section shall be extended to a commercial organization with foreign investments if a share, shares (contribution) of foreign investors in the chartered (contributed) capital of such organization is more than 25 per cent, as well as to a commercial organization with foreign investments realizing a priority investment project, regardless of the share, shares (contributions) of foreign investors in the chartered (contributed) capital of such organization. 2. Stability of conditions and regime indicated in Section 1 of this article for a foreign investor performing an investment project shall be guaranteed during the recoupment period of the investment project but not more than seven years from the commencement of financing of the above mentioned project out of foreign investments. Differentiation of recoupment periods of investment projects depending on their types shall be determined in accordance with the procedure established by Government of the Russian Federation. 3. In exceptional cases, in the course of realization by a foreign investor or commercial organization with foreign investments of priority investment projects in the sphere of manufacturing or creating transport or other infrastructure with the aggregate volume of foreign investments at least 1 billion rubles (at least the equivalent sum in foreign currency at the rate of the Central Bank of the Russian Federation as of the date of introduction of this Federal law), whose recoupment period exceeds seven years, the Government of the Russian Federation makes a decision on 584

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prolongation of the effective period for the above mentioned investor and commercial organization with foreign investments on the conditions and procedure indicated in Section 1 of this article. 4. Provisions of Section 1 of this article shall not be extended to amendments and additions made to legal acts of the Russian Federation or adopted new federal laws and other normative legal acts of the Russian Federation for purposes of protection of fundamentals of the constitutional system, morality, health, rights and legitimate interests of other persons, ensuring of defense of the country and state security. 5. Government of the Russian Federation shall: establish criteria of assessment of an unfavorable change for a foreign investor and commercial organization with foreign investments in terms of levying federal taxes and contributions to state extra-treasury funds, banning and restriction regime of performance of foreign investments in the territory of the Russian Federation; approve the procedure for registration of priority investment projects by a body of federal executive power indicated in Article 24 of this Federal law; exercise control over performance by a foreign investor and commercial organization with foreign investments of their obligations on realizing priority investment projects within the terms indicated in Sections 2 and 3 of this article. In case of non-performance by a foreign investor and commercial organization with foreign investments of their obligations indicated in Paragraph 1 of this Section, they shall be deprived of the privileges granted thereto in accordance with this article. The amount of monetary means unpaid as a result of the granted privileges shall be subject to return in accordance with the procedure established by legislation of the Russian Federation.

Article 10. Guarantee of provision of a proper resolution of a dispute arisen in connection with performance of investments and business activities by a foreign investor in the territory of the Russian Federation A dispute of a foreign investor arisen in connection with performance of investments and business activities in the territory of the Russian Federation shall be resolved in accordance with international treaties of the Russian Federation and federal laws in a state court or a state arbitration court or an international arbitration court (voluntary arbitration court).

Translated into English by Valery Musin. 585

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ON CURRENCY REGULATION AND CURRENCY CONTROL (adopted by the Federal Law of December 10, 2003 № 173-FZ, as subsequently amended) (extract) Article 3. Principles of currency regulation and currency control The basic principles of currency regulation and currency control in the Russian Federation shall be: 1) priority of economic measures in realization of the state policy in the sphere of currency regulation; 2) abandonment of unjustified interference of the state and its bodies into currency operations of residents and non-residents; 3) unity of external and domestic currency policy of the Russian Federation; 4) unity of the system of currency regulation and currency control; 5) providing state protection of rights and economic interests of residents and nonresidents in the course of performance of currency operations. Article 6. Currency operations between residents and non-residents Currency operations between residents and non-residents shall be performed without restrictions, except for currency operations provided by Articles 7, 8 and 11 of this Federal Law with regard to which restrictions shall be established to prevent substantial reduction in gold and foreign currency reserves, sharp fluctuations in exchange rate of currency of the Russian Federation as well as to support stability of payment balance of the Russian Federation. The said restrictions are of non-discriminative character and will be withdrawn by currency regulations bodies upon elimination of circumstances causing the imposition thereof. Article 10. Currency operations between non-residents 1. Non-residents are entitled without restrictions to perform remittance of foreign currency between themselves from accounts (from deposits) in banks outside the territory of the Russian Federation to bank accounts (to bank deposits) in authorized banks or from bank accounts (bank deposits) in authorized banks to accounts (in deposits) in banks outside the territory of the Russian Federation or in authorized banks. 1_1. Non-residents are entitled without restrictions to perform remittance of foreign currency and currency of the Russian Federation between themselves in the territory of the Russian Federation without opening bank accounts as well as to perform remittance of foreign currency and currency of the Russian Federation without opening bank accounts from the territory of the Russian Federation and to receive remitted foreign currency and currency of the Russian Federation in the territory of the Russian Federation without opening bank accounts. 586

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On Currency Regulation and Currency Control

2. Non-residents are entitled to perform foreign currency operations between themselves with internal securities in the territory of the Russian Federation with due consideration of requirements provided by an antimonopoly legislation of the Russian Federation and legislation of the Russian Federation on the securities market. 3. Currency operations in currency of the Russian Federation between non-residents in the territory of the Russian Federation shall be performed through bank accounts (bank deposits) opened in the territory of the Russian Federation in the procedure provided by Article 13 of this Federal Law except cases established by Section 1_1 of this Article.

Article 13. Non-residents’ accounts (deposits) opened in the territory of the Russian Federation 1. Non-residents are entitled to open bank accounts (bank deposits) in the territory of the Russian Federation in foreign currency and currency of the Russian Federation only in the authorized banks. 2. Procedure of opening and maintenance of non-residents’ bank accounts (bank deposits) in the territory of the Russian Federation, including special accounts, shall be established by the Central Bank of the Russian Federation unless otherwise provided by this Federal Law. 3. Non-residents have the right without restrictions to transmit foreign currency and currency of the Russian Federation from their bank accounts (bank deposits) outside the territory of the Russian Federation to their bank accounts (bank deposits) in authorized banks. 4. Non-residents have the right without restrictions to transmit foreign currency from their bank accounts (bank deposits) in authorized banks to their accounts (deposits) outside the territory of the Russian Federation. Article 15. Taking in the Russian Federation and taking out of the Russian Federation of currency values, currency of the Russian Federation and internal securities Foreign currency and (or) currency of the Russian Federation as well as travelers checks, external and (or) internal securities in documentary form may be taken in and out of the Russian Federation by residents and non-residents without restrictions provided the requirements of customs legislation of the Customs Union in frames of Eur As EC and legislation of the Russian Federation on customs regulations are complied with. Article 19. Repatriation of foreign currency and currency of the Russian Federation by residents 1. Unless otherwise provided by this Federal Law, residents in the course of performance of foreign trade activity shall be obliged, within the terms stipulated by foreign trade agreements (contracts), to procure: 587

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1) receipt of foreign currency or currency of the Russian Federation to their accounts in authorized banks from non-residents due under the above mentioned agreements (contracts) for the goods transferred to non-residents, works performed for them or services rendered to them, information and results of intellectual activity, including exclusive rights thereto, transferred to them; 2) return to the Russian Federation of the monetary means paid to non-residents for the goods not taken in the Russian Federation customs territory (nonreceived in the Russian Federation customs territory), non-performed works, non-rendered services, non-transferred information and results of intellectual activity, including exclusive rights thereto. 1-1. In the course of performance of foreign trade activity residents are obliged to submit to authorized banks information: 1) on maximal periods of time within which residents, in accordance with terms and conditions of agreements (contracts), expect to receive at their accounts in authorized banks foreign currency and (or) currency of the Russian Federation from non-residents for performance of obligations under abovementioned agreements (contracts) by transfer to non-residents of goods, performance of work for them, rendering services for them, transfer to them of information and results of intellectual activity, including exclusive rights thereto; 2) on maximal periods of time within which non-residents, in accordance with terms and conditions of agreements (contracts), are expected to perform their obligations under abovementioned agreements (contracts) by transfer to residents of goods, performance of work for them, rendering services for them, transfer to them of information and results of intellectual activity, including exclusive rights thereto, against advance payments made by non-residents. 1-2. The order of submission by residents to authorized banks of information indicated in Section 1-1 of this Article and its subsequent display by authorized banks in bank control records shall be established by the Central Bank of the Russian Federation. 2. Residents are entitled not to receive to their accounts in authorized banks foreign currency or currency of the Russian Federation in the following cases: 1) upon receipt of currency proceeds to the accounts of legal entities-residents or accounts of third persons in banks outside the territory of the Russian Federation — in order to perform obligations of legal entities-residents under credit contracts and loan contracts with the organizations-non-residents being agents of governments of foreign states, as well as under credit contracts and loan contracts concluded signed with residents of the states-OECD or FATF members for the period exceeding two years; 2) upon payment by customers (non-residents) of local expenses of residents connected to construction by residents of objects in the territories of foreign states — for the period of construction upon termination of which the remainder of monetary means is subject to transfer to residents’ accounts in authorized banks; 3) when using foreign currency received by residents through keeping of exhibitions, sports, cultural and other similar events outside the territory of the Russian Federation to cover the expenses for keeping thereof — for the period of keeping of the events; 588

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4) in the course of performance of set-off the counter-claims under obligations between residents involved in fishery outside the customs territory of the Russian Federation and non-residents rendering services outside the customs territory of the Russian Federation to the above mentioned residents under agency contracts (agreements) concluded therewith as well as between resident transport organizations and non-residents rendering services outside customs territory of the Russian Federation to those residents under agency contracts (agreements) concluded therewith as well as in the course of performance of setoff counter-claims under obligations between non-resident and resident transport organizations when settlements between them are being performed through specialized settlement organizations created by international organizations in the field of international carriage when such transport organizations-residents are members of such organizations. 5) in the course of performance of set-off the counter-claims under obligations resulting from reinsurance contracts or contracts for rendering services, connected with conclusion and performance of reinsurance contracts between a non-resident and a resident — insurance organizations or insurance brokers. 6) upon receipts of currency proceeds to the accounts of transport organizationsresidents in banks outside the territory of the Russian Federation — in order to pay for expenses borne by such transport organizations outside the territory of the Russian Federation connected with payment for air navigation, airport, port dues and other compulsory dues in the territories of foreign states, expenses connected with service outside the territory of the Russian Federation of aircraft, river, sea- going vessels and other transport vehicles of such organizations and their passengers, as well as expenses for ensuring the activity of branches, representative offices and other subdivisions of such transport organizations located outside the territory of the Russian Federation. 3. Foreign currency received according to Subsections 1 and 3 of Section 2 of this article to bank accounts of residents or third persons outside the territory of the Russian Federation shall be used on purposes related to performance by residents of their obligations provided by Subsections 1 and 3, Section 2 of this article, respectively, or transferred to the accounts of residents in authorized banks. 4. Resident shall be deemed performed his duty provided by Subsection 1 of Section 1 of this article in case he procured receipt at his bank accounts of insurance payment under a contract of insurance of risks of non-performance of non-resident’s obligation under foreign trade agreement (contract) in the procedure and within terms which provided by the insurance contract, upon occurrence of the insured event provided by regulations of performance of insurance of export credits and investments against business and/or political risks as established by the Government of the Russian Federation in accordance with the Federal Law of May 17, 2007 No 82-FZ “On the Bank of Development”, provided the correlation between the sum insured and the insured value (level of insurance indemnity) as established by the insurance contract is equal to the correlation established by the abovementioned regulations or exceeds it.

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Article 20. Passport of a transaction 1. To procure accounting and reporting by currency operations in accordance with this Federal Law, the Central Bank of the Russian Federation may provide uniformed rules for residents to register the passport of a transaction in the authorized banks in the course of performance of currency transactions between residents and nonresidents. 2. Passport of a transaction shall contain data necessary to provide for accounting and reporting by currency operations between residents and non-residents. 3. In the course of performance of foreign trade activity a passport of a transaction shall contain: 1) the number and the date of formalization of the passport of the transaction; 2) information about the resident and his foreign counterpart; 3) general information of the foreign trade transaction(the date of the contract, its number (if it is in place), general amount of the transaction (if it is in place) and the currency of the price of the transaction, the date of completion of the obligations under the transaction; 4) information on the authorized bank in which the passport of the transaction is being formalized and via accounts in which payments under the transaction shall be performed; 5) information on re-formalization and or grounds for closing the passport of the transaction. 4. Information indicated in Section 3 of this Article, except Sub-Sections 1 and 4, shall be recorded in the passport of the transaction on the basis of documents submitted by residents. 5. Passport of a transaction shall be used by bodies and agents of currency control for performance of currency control in the order established by the Central Bank of the Russian Federation. The period of time for transfer of a formalized passport of a transaction shall not exceed 3 working days from the date of formalization of the passport of the transaction in the authorized bank. 6. Authorised banks shall transfer registered passports of transactions in electronic version to bodies and agents of currency control according to an order established by the Central Bank of the Russian Federation. The time period for transfer of a registered passport of a transaction shall not exceed three working days from the date of registration of the passport of a transaction with an authorised bank.

Translated into English by Valery Musin. 590

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CONTENTS I. UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS PREAMBLE Part I. Sphere of application and general provisions CHAPTER I. SPHERE OF APPLICATION Article 1 Article 2 Article 3 Article 4 Article 5 Article 6 CHAPTER II. GENERAL PROVISIONS Article 7 Article 8 Article 9 Article 10 Article 11 Article 12 Article 13 Part II. Formation of the contract Article 14 Article 15 Article 16 Article 17 Article 18 Article 19 Article 20 Article 21 Article 22 Article 23 Article 24 Part III. Sale of goods CHAPTER I. GENERAL PROVISIONS Article 25 Article 26 Article 27 Article 28 Article 29 CHAPTER II. OBLIGATIONS OF THE SELLER Article 30 Section I. Delivery of the goods and handing over of documents Article 31 591

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Article 32 Article 33 Article 34 Section II. Conformity of the goods and third party claims Article 35 Article 36 Article 37 Article 38 Article 39 Article 40 Article 41 Article 42 Article 43 Article 44 Section III. Remedies for breach of contract by the seller Article 45 Article 46 Article 47 Article 48 Article 49 Article 50 Article 51 Article 52 CHAPTER III. OBLIGATIONS OF THE BUYER Article 53 Section I. Payment of the price Article 54 Article 55 Article 56 Article 57 Article 58 Article 59 Section II. Taking delivery Article 60 Section III. Remedies for breach of contract by the buyer Article 61 Article 62 Article 63 Article 64 Article 65 CHAPTER IV. PASSING OF RISK Article 66 Article 67 Article 68 Article 69 Article 70 CHAPTER V. PROVISIONS COMMON TO THE OBLIGATIONS OF THE SELLER AND OF THE BUYER Section I. Anticipatory breach and instalment contracts Article 71 Article 72 Article 73 Section II. Damages Article 74 592

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Article 75 Article 76 Article 77 Section III. Interest Article 78 Section IV. Exemptions Article 79 Article 80 Section V. Effects of avoidance Article 81 Article 82 Article 83 Article 84 Section VI. Preservation of the goods Article 85 Article 86 Article 87 Article 88 Part IV. Final provisions Article 89 Article 90 Article 91 Article 92 Article 93 Article 94 Article 95 Article 96 Article 97 Article 98 Article 99 Article 100 Article 101 II. EXPLANATORY NOTE BY THE UNCITRAL SECRETARIAT ON THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS INTRODUCTION Part One. Scope of application and general provisions A. Scope of application B. Party autonomy C. Interpretation of the Convention D. Interpretation of the contract; usages E. Form of the contract Part Two. Formation of the contract Part Three. Sale of goods A. Obligations of the seller B. Obligations of the buyer C. Remedies for breach of contract D. Passing of risk E. Suspension of performance and anticipatory breach F. Exemption from liability to pay damages G. Preservation of the goods Part Four. Final clauses 593

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I. United Nations Convention on Contracts for the International Sale of Goods PREAMBLE The States Parties to this Convention, Bearing in mind the broad objectives in the resolutions adopted by the sixth special session of the General Assembly of the United Nations on the establishment of a New International Economic Order, Considering that the development of international trade on the basis of equality and mutual benefit is an important element in promoting friendly relations among States, Being of the opinion that the adoption of uniform rules which govern contracts for the international sale of goods and take into account the different social, economic and legal systems would contribute to the removal of legal barriers in international trade and promote the development of international trade, Have agreed as follows:

Part I. Sphere of application and general provisions CHAPTER 1. SPHERE OF APPLICATION Article 1 (1) This Convention applies to contracts of sale of goods between parties whose places of business are in different States: (a) when the States are Contracting States; or (b) when the rules of private international law lead to the application of the law of a Contracting State. (2) The fact that the parties have their places of business in different States is to be disregarded whenever this fact does not appear either from the contract or from any dealings between, or from information disclosed by, the parties at any time before or at the conclusion of the contract. (3) Neither the nationality of the parties nor the civil or commercial character of the parties or of the contract is to be taken into consideration in determining the application of this Convention.

Article 2 This Convention does not apply to sales: (a) of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use; 594

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(b) by auction; (c) on execution or otherwise by authority of law; (d) of stocks, shares, investment securities, negotiable instruments or money; (e) of ships, vessels, hovercraft or aircraft; (f) of electricity.

Article 3 (1) Contracts for the supply of goods to be manufactured or produced are to be considered sales unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production. (2) This Convention does not apply to contracts in which the preponderant part of the obligations of the party who furnishes the goods consists in the supply of labour or other services. Article 4 This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with: (a) the validity of the contract or of any of its provisions or of any usage; (b) the effect which the contract may have on the property in the goods sold. Article 5 This Convention does not apply to the liability of the seller for death or personal injury caused by the goods to any person. Article 6 The parties may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions. CHAPTER II. GENERAL PROVISIONS Article 7 (1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade. (2) Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law. Article 8 (1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was. 595

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(2) If the preceding paragraph is not applicable, statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances. (3) In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.

Article 9 (1) The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves. (2) The parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned.

Article 10     For the purposes of this Convention: (a) if a party has more than one place of business, the place of business is that which has the closest relationship to the contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of the contract; (b) if a party does not have a place of business, reference is to be made to his habitual residence. Article 11 A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses. Article 12 Any provision of Article 11, Article 29 or Part II of this Convention that allows a contract of sale or its modification or termination by agreement or any offer, acceptance or other indication of intention to be made in any form other than in writing does not apply where any party has his place of business in a Contracting State which has made a declaration under article 96 of this Convention. The parties may not derogate from or vary the effect of this article. Article 13 For the purposes of this Convention “writing” includes telegram and telex. 596

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Part II. Formation of the contract Article 14 (1) A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price. (2) A proposal other than one addressed to one or more specific persons is to be considered merely as an invitation to make offers, unless the contrary is clearly indicated by the person making the proposal. Article 15 (1) An offer becomes effective when it reaches the offeree. (2) An offer, even if it is irrevocable, may be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer. Article 16 (1) Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance. (2) However, an offer cannot be revoked: (a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or (b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer. Article 17 An offer, even if it is irrevocable, is terminated when a rejection reaches the offeror. Article 18 (1) A statement made by or other conduct of the offeree indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance. (2) An acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror. An acceptance is not effective if the indication of assent does not reach the offeror within the time he has fixed or, if no time is fixed, within a reasonable time, due account being taken of the circumstances of the transaction, including the rapidity of the means of communication employed by the offeror. An oral offer must be accepted immediately unless the circumstances indicate otherwise. (3) However, if, by virtue of the offer or as a result of practices which the parties have established between themselves or of usage, the offeree may indicate assent by performing an act, such as one relating to the dispatch of the goods or payment of 597

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the price, without notice to the offeror, the acceptance is effective at the moment the act is performed, provided that the act is performed within the period of time laid down in the preceding paragraph.

Article 19 (1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counteroffer. (2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance. (3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially. Article 20 (1) A period of time of acceptance fixed by the offeror in a telegram or a letter begins to run from the moment the telegram is handed in for dispatch or from the date shown on the letter or, if no such date is shown, from the date shown on the envelope. A period of time for acceptance fixed by the offeror by telephone, telex or other means of instantaneous communication, begins to run from the moment that the offer reaches the offeree. (2) Official holidays or non-business days occurring during the period for acceptance are included in calculating the period. However, if a notice of acceptance cannot be delivered at the address of the offeror on the last day of the period because that day falls on an official holiday or a non-business day at the place of business of the offeror, the period is extended until the first business day which follows. Article 21 (1) A late acceptance is nevertheless effective as an acceptance if without delay the offeror orally so informs the offeree or dispatches a notice to that effect. (2) If a letter or other writing containing a late acceptance shows that it has been sent in such circumstances that if its transmission had been normal it would have reached the offeror in due time, the late acceptance is effective as an acceptance unless, without delay, the offeror orally informs the offeree that he considers his offer as having lapsed or dispatches a notice to that effect.

Article 22 An acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as the acceptance would have become effective. 598

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Article 23 A contract is concluded at the moment when an acceptance of an offer becomes effective in accordance with the provisions of this Convention. Article 24 For the purposes of this Part of the Convention, an offer, declaration of acceptance or any other indication of intention “reaches” the addressee when it is made orally to him or delivered by any other means to him personally, to his place of business or mailing address or, if he does not have a place of business or mailing address, to his habitual residence.

Part III. Sale of goods CHAPTER I. GENERAL PROVISIONS Article 25 A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result. Article 26 A declaration of avoidance of the contract is effective only if made by notice to the other party. Article 27    Unless otherwise expressly provided in this Part of the Convention, if any notice, request or other communication is given or made by a party in accordance with this Part and by means appropriate in the circumstances, a delay or error in the transmission of the communication or its failure to arrive does not deprive that party of the right to rely on the communication. Article 28    If, in accordance with the provisions of this Convention, one party is entitled to require performance of any obligation by the other party, a court is not bound to enter a judgement for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by this Convention. Article 29 (1) A contract may be modified or terminated by the mere agreement of the parties. 599

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(2) A contract in writing which contains a provision requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated by agreement. However, a party may be precluded by his conduct from asserting such a provision to the extent that the other party has relied on that conduct.

CHAPTER II. OBLIGATIONS OF THE SELLER Article 30 The seller must deliver the goods, hand over any documents relating to them and transfer the property in the goods, as required by the contract and this Convention. Section I. Delivery of the goods and handing over of documents Article 31 If the seller is not bound to deliver the goods at any other particular place, his obligation to deliver consists: (a) if the contract of sale involves carriage of the goods — in handing the goods over to the first carrier for transmission to the buyer; (b) if, in cases not within the preceding subparagraph, the contract relates to specific goods, or unidentified goods to be drawn from a specific stock or to be manufactured or produced, and at the time of the conclusion of the contract the parties knew that the goods were at, or were to be manufactured or produced at, a particular place — in placing the goods at the buyer’s disposal at that place; (c) in other cases — in placing the goods at the buyer’s disposal at the place where the seller had his place of business at the time of the conclusion of the contract. Article 32 (1) If the seller, in accordance with the contract or this Convention, hands the goods over to a carrier and if the goods are not dearly identified to the contract by markings on the goods, by shipping documents or otherwise, the seller must give the buyer notice of the consignment specifying the goods. (2) If the seller is bound to arrange for carriage of the goods, he must make such contracts as are necessary for carriage to the place fixed by means of transportation appropriate in the circumstances and according to the usual terms for such transportation. (3) If the seller is not bound to effect insurance in respect of the carriage of the goods, he must, at the buyer’s request, provide him with all available information necessary to enable him to effect such insurance. Article 33 The seller must deliver the goods: (a) if a date is fixed by or determinable from the contract, on that date; 600

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(b) if a period of time is fixed by or determinable from the contract, at any time within that period unless circumstances indicate that the buyer is to choose a date; or (c) in any other case, within a reasonable time after the conclusion of the contract.

Article 34 If the seller is bound to hand over documents relating to the goods, he must hand them over at the time and place and in the form required by the contract. If the seller has handed over documents before that time, he may, up to that time, cure any lack of conformity in the documents, if the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense. However, the buyer retains any right to claim damages as provided for in this Convention. Section II. Conformity of the goods and third party claims

Article 35 (1) The seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract. (2) Except where the parties have agreed otherwise, the goods do not conform with the contract unless they: (a) are fit for the purposes for which goods of the same description would ordinarily be used; (b) are fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller’s skill and judgement; (c) possess the qualities of goods which the seller has held out to the buyer as a sample or model; (d) are contained or packaged in the manner usual for such goods or, where there is no such manner, in a manner adequate to preserve and protect the goods. (3) The seller is not liable under subparagraphs (a) to (d) of the preceding paragraph for any lack of conformity of the goods if at the time of the conclusion of the contract the buyer knew or could not have been unaware of such lack of conformity.

Article 36 (1) The seller is liable in accordance with the contract and this Convention for any lack of conformity which exists at the time when the risk passes to the buyer, even though the lack of conformity becomes apparent only after that time. (2) The seller is also liable for any lack of conformity which occurs after the time indicated in the preceding paragraph and which is due to a breach of any of his obligations, including a breach of any guarantee that for a period of time the goods 601

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will remain fit for their ordinary purpose or for some particular purpose or will retain specified qualities or characteristics.

Article 37 If the seller has delivered goods before the date for delivery, he may, up to that date, deliver any missing part or make up any deficiency in the quantity of the goods delivered, or deliver goods in replacement of any non-conforming goods delivered or remedy any lack of conformity in the goods delivered, provided that the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense. However, the buyer retains any right to claim damages as provided for in this Convention. Article 38 (1) The buyer must examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances. (2) If the contract involves carriage of the goods, examination may be deferred until after the goods have arrived at their destination. (3) If the goods are redirected in transit or redispatched by the buyer without a reasonable opportunity for examination by him and at the time of the conclusion of the contract the seller knew or ought to have known of the possibility of such redirection or redispatch, examination may be deferred until after the goods have arrived at the new destination. Article 39 (1) The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it. (2) In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the buyer, unless this time-limit is inconsistent with a contractual period of guarantee. Article 40 The seller is not entitled to rely on the provisions of articles 38 and 39 if the lack of conformity relates to facts of which he knew or could not have been unaware and which he did not disclose to the buyer. Article 41 The seller must deliver goods which are free from any right or claim of a third party, unless the buyer agreed to take the goods subject to that right or claim. However, if such right or claim is based on industrial property or other intellectual property, the seller’s obligation is governed by article 42. 602

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Article 42 (1) The seller must deliver goods which are free from any right or claim of a third party based on industrial property or other intellectual property, of which at the time of the conclusion of the contract the seller knew or could not have been unaware, provided that the right or claim is based on industrial property or other intellectual property: (a) under the law of the State where the goods will be resold or otherwise used, if it was contemplated by the parties at the time of the conclusion of the contract that the goods would be resold or otherwise used in that State; or (b) in any other case, under the law of the State where the buyer has his place of business. (2) The obligation of the seller under the preceding paragraph does not extend to cases where: (a) at the time of the conclusion of the contract the buyer knew or could not have been unaware of the right or claim; or (b) the right or claim results from the seller’s compliance with technical drawings, designs, formulae or other such specifications furnished by the buyer.

Article 43 (1) The buyer loses the right to rely on the provisions of article 41 or article 42 if he does not give notice to the seller specifying the nature of the right or claim of the third party within a reasonable time after he has become aware or ought to have become aware of the right or claim. (2) The seller is not entitled to rely on the provisions of the preceding paragraph if he knew of the right or claim of the third party and the nature of it.

Article 44 Notwithstanding the provisions of paragraph (1) of article 39 and paragraph (1) of article 43, the buyer may reduce the price in accordance with article 50 or claim damages, except for loss of profit, if he has a reasonable excuse for his failure to give the required notice. Section III. Remedies for breach of contract by the seller

Article 45 (1) If the seller fails to perform any of his obligations under the contract or this Convention, the buyer may: (a) exercise the rights provided in articles 46 to 52; (b) claim damages as provided in articles 74 to 77. (2) The buyer is not deprived of any right he may have to claim damages by exercising his right to other remedies. (3) No period of grace may be granted to the seller by a court or arbitral tribunal when the buyer resorts to a remedy for breach of contract. 603

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Article 46 (1) The buyer may require performance by the seller of his obligations unless the buyer has resorted to a remedy which is inconsistent with this requirement. (2) If the goods do not conform with the contract, the buyer may require delivery of substitute goods only if the lack of conformity constitutes a fundamental breach of contract and a request for substitute goods is made either in conjunction with notice given under article 39 or within a reasonable time thereafter. (3) If the goods do not conform with the contract, the buyer may require the seller to remedy the lack of conformity by repair, unless this is unreasonable having regard to all the circumstances. A request for repair must be made either in conjunction with notice given under article 39 or within a reasonable time thereafter.

Article 47 (1) The buyer may fix an additional period of time of reasonable length for performance by the seller of his obligations. (2) Unless the buyer has received notice from the seller that he will not perform within the period so fixed, the buyer may not, during that period, resort to any remedy for breach of contract. However, the buyer is not deprived thereby of any right he may have to claim damages for delay in performance.

Article 48 (1) Subject to article 49, the seller may, even after the date for delivery, remedy at his own expense any failure to perform his obligations, if he can do so without unreasonable delay and without causing the buyer unreasonable inconvenience or uncertainty of reimbursement by the seller of expenses advanced by the buyer. However, the buyer retains any right to claim damages as provided for in this Convention. (2) If the seller requests the buyer to make known whether he will accept performance and the buyer does not comply with the request within a reasonable time, the seller may perform within the time indicated in his request. The buyer may not, during that period of time, resort to any remedy which is inconsistent with performance by the seller. (3) A notice by the seller that he will perform within a specified period of time is assumed to include a request, under the preceding paragraph, that the buyer make known his decision. (4) A request or notice by the seller under paragraph (2) or (3) of this article is not effective unless received by the buyer.

Article 49 (1) The buyer may declare the contract avoided: (a) if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; or 604

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(b) in case of non-delivery, if the seller does not deliver the goods within the additional period of time fixed by the buyer in accordance with paragraph (1) of article 47 or declares that he will not deliver within the period so fixed. (2) However, in cases where the seller has delivered the goods, the buyer loses the right to declare the contract avoided unless he does so: (a) in respect of late delivery, within a reasonable time after he has become aware that delivery has been made; (b) in respect of any breach other than late delivery, within a reasonable time:  (i) after he knew or ought to have known of the breach;   (ii) after the expiration of any additional period of time fixed by the buyer in accordance with paragraph (1) of article 47, or after the seller has declared that he will not perform his obligations within such an additional period; or (iii) after the expiration of any additional period of time indicated by the seller in accordance with paragraph (2) of article 48, or after the buyer has declared that he will not accept performances.

Article 50 If the goods do not conform with the contract and whether or not the price has already been paid, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time. However, if the seller remedies any failure to perform his obligations in accordance with article 37 or article 48 or if the buyer refuses to accept performance by the seller in accordance with those articles, the buyer may not reduce the price. Article 51 (1) If the seller delivers only a part of the goods or if only a part of the goods delivered is in conformity with the contract, articles 46 to 50 apply in respect of the part which is missing or which does not conform. (2) The buyer may declare the contract avoided in its entirety only if the failure to make delivery completely or in conformity with the contract amounts to a fundamental breach of the contract.

Article 52 (1) If the seller delivers the goods before the date fixed, the buyer may take delivery or refuse to take delivery. (2) If the seller delivers a quantity of goods greater than that provided for in the contract, the buyer may take delivery or refuse to take delivery of the excess quantity. If the buyer takes delivery of all or part of the excess quantity, he must pay for it at the contract rate. 605

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CHAPTER III. OBLIGATIONS OF THE BUYER Article 53 The buyer must pay the price for the goods and take delivery of them as required by the contract and this Convention. Section I. Payment of the price

Article 54 The buyer’s obligation to pay the price includes taking such steps and complying with such formalities as may be required under the contract or any laws and regulations to enable payment to be made. Article 55 Where a contract has been validly concluded but does not expressly or implicitly fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have impliedly made reference to the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade concerned. Article 56 If the price is fixed according to the weight of the goods, in case of doubt it is to be determined by the net weight. Article 57 (1) If the buyer is not bound to pay the price at any other particular place, he must pay it to the seller: (a) at the seller’s place of business; or (b) if the payment is to be made against the handing over of the goods or of documents, at the place where the handing over takes place. (2) The seller must bear any increase in the expenses incidental to payment which is caused by a change in his place of business subsequent to the conclusion of the contract.

Article 58 (1) If the buyer is not bound to pay the price at any other specific time, he must pay it when the seller places either the goods or documents controlling their disposition at the buyer’s disposal in accordance with the contract and this Convention. The seller may make such payment a condition for handing over the goods or documents. (2) If the contract involves carriage of the goods, the seller may dispatch the goods on terms whereby the goods, or documents controlling their disposition, will not be handed over to the buyer except against payment of the price. 606

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(3) The buyer is not bound to pay the price until he has had an opportunity to examine the goods, unless the procedures for delivery or payment agreed upon by the parties are inconsistent with his having such an opportunity.

Article 59 The buyer must pay the price on the date fixed by or determinable from the contract and this Convention without the need for any request or compliance with any formality on the part of the seller. Section II. Taking delivery

Article 60     The buyer’s obligation to take delivery consists: (a) in doing all the acts which could reasonably be expected of him in order to enable the seller to make delivery; and (b) in taking over the goods. Section III. Remedies for breach of contract by the buyer

Article 61 (1) If the buyer fails to perform any of his obligations under the contract or this Convention, the seller may: (a) exercise the rights provided in articles 62 to 65; (b) claim damages as provided in articles 74 to 77. (2) The seller is not deprived of any right he may have to claim damages by exercising his right to other remedies. (3) No period of grace may be granted to the buyer by a court or arbitral tribunal when the seller resorts to a remedy for breach of contract.

Article 62 The seller may require the buyer to pay the price, take delivery or perform his other obligations, unless the seller has resorted to a remedy which is inconsistent with this requirement. Article 63 (1) The seller may fix an additional period of time of reasonable length for performance by the buyer of his obligations. (2) Unless the seller has received notice from the buyer that he will not perform within the period so fixed, the seller may not, during that period, resort to any remedy for breach of contract. However, the seller is not deprived thereby of any right he may have to claim damages for delay in performance. 607

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Article 64 (1) The seller may declare the contract avoided: (a) if the failure by the buyer to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; or (b) if the buyer does not, within the additional period of time fixed by the seller in accordance with paragraph (1) of article 63, perform his obligation to pay the price or take delivery of the goods, or if he declares that he will not do so within the period so fixed; (2) However, in cases where the buyer has paid the price, the seller loses the right to declare the contract avoided unless he does so: (a) in respect of late performance by the buyer, before the seller has become aware that performance has been rendered; or (b) in respect of any breach other than late performance by the buyer, within a reasonable time: (i) after the seller knew or ought to have known of the breach; or (ii) after the expiration of any additional period of time fixed by the seller in accordance with paragraph (1) of article 63, or after the buyer has declared that he will not perform his obligations within such an additional period.

Article 65 (1) If under the contract the buyer is to specify the form, measurement or other features of the goods and he fails to make such specification either on the date agreed upon or within a reasonable time after receipt of a request from the seller, the seller may, without prejudice to any other rights he may have, make the specification himself in accordance with the requirements of the buyer that may be known to him. (2) If the seller makes the specification himself, he must inform the buyer of the details thereof and must fix a reasonable time within which the buyer may make a different specification. If, after receipt of such a communication, the buyer fails to do so within the time so fixed, the specification made by the seller is binding.

CHAPTER IV. PASSING OF RISK Article 66 Loss of or damage to the goods after the risk has passed to the buyer does not discharge him from his obligation to pay the price, unless the loss or damage is due to an act or omission of the seller. Article 67 (1) If the contract of sale involves carriage of the goods and the seller is not bound to hand them over at a particular place, the risk passes to the buyer when the goods are handed over to the first carrier for transmission to the buyer in accordance with the contract of sale. If the seller is bound to hand the goods over to a carrier 608

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at a particular place, the risk does not pass to the buyer until the goods are handed over to the carrier at that place. The fact that the seller is authorized to retain documents controlling the disposition of the goods does not affect the passage of the risk. (2) Nevertheless, the risk does not pass to the buyer until the goods are clearly identified to the contract, whether by markings on the goods, by shipping documents, by notice given to the buyer or otherwise.

Article 68 The risk in respect of goods sold in transit passes to the buyer from the time of the conclusion of the contract. However, if the circumstances so indicate, the risk is assumed by the buyer from the time the goods were handed over to the carrier who issued the documents embodying the contract of carriage. Nevertheless, if at the time of the conclusion of the contract of sale the seller knew or ought to have known that the goods had been lost or damaged and did not disclose this to the buyer, the loss or damage is at the risk of the seller. Article 69 (1) In cases not within articles 67 and 68, the risk passes to the buyer when he takes over the goods or, if he does not do so in due time, from the time when the goods are placed at his disposal and he commits a breach of contract by failing to take delivery. (2) However, if the buyer is bound to take over the goods at a place other than a place of business of the seller, the risk passes when delivery is due and the buyer is aware of the fact that the goods are placed at his disposal at that place. (3) If the contract relates to goods not then identified, the goods are considered not to be placed at the disposal of the buyer until they are clearly identified to the contract.

Article 70 If the seller has committed a fundamental breach of contract, articles 67, 68 and 69 do not impair the remedies available to the buyer on account of the breach. CHAPTER V. PROVISIONS COMMON TO THE OBLIGATIONS OF THE SELLER AND OF THE BUYER Section I. Anticipatory breach and instalment contracts

Article 71 (1) A party may suspend the performance of his obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his obligations as a result of: 609

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(a) a serious deficiency in his ability of perform or in his creditworthiness; or (b) his conduct in preparing to perform or in performing the contract. (2) If the seller has already dispatched the goods before the grounds described in the preceding paragraph become evident, he may prevent the handing over of the goods to the buyer even though the buyer holds a document which entitles him to obtain them. The present paragraph relates only to the rights in the goods as between the buyer and the seller. (3) A party suspending performance, whether before or after dispatch of the goods, must immediately give notice of the suspension to the other party and must continue with performance if the other party provides adequate assurance of his performance.

Article 72 (1) If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided. (2) If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party in order to permit him to provide adequate assurance of his performance. (3) The requirements of the preceding paragraph do not apply if the other party has declared that he will not perform his obligations.

Article 73 (1) In the case of a contract for delivery of goods by instalments, if the failure of one party to perform any of his obligations in respect of any instalment constitutes a fundamental breach of contract with respect to that instalment, the other party may declare the contract avoided with respect to that instalment. (2) If one party’s failure to perform any of his obligations in respect of any instalment gives the other party good grounds to conclude that a fundamental breach of contract will occur with respect to future installments, he may declare the contract avoided for the future, provided that he does so within a reasonable time. (3) A buyer who declares the contract avoided in respect of any delivery may, at the same time, declare it avoided in respect of deliveries already made or of future deliveries if, by reason of their interdependence, those deliveries could not be used for the purpose contemplated by the parties at the time of the conclusion of the contract. Section II. Damages

Article 74 Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought 610

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to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.

Article 75 If the contract is avoided and if, in a reasonable manner and within a reasonable time after avoidance, the buyer has bought goods in replacement or the seller has resold the goods, the party claiming damages may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable under article 74. Article 76 (1) If the contract is avoided and there is a current price for the goods, the party claiming damages may, if he has not made a purchase or resale under article 75, recover the difference between the price fixed by the contract and the current price at the time of avoidance as well as any further damages recoverable under article 74. If, however, the party claiming damages has avoided the contract after taking over the goods, the current price at the time of such taking over shall be applied instead of the current price at the time of avoidance. (2) For the purposes of the preceding paragraph, the current price is the price prevailing at the place where delivery of the goods should have been made or, if there is no current price at that place, the price at such other place as serves as a reasonable substitute, making due allowance for differences in the cost of transporting the goods.

Article 77 A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated. Section III. Interest

Article 78 If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74. Section IV. Exemption

Article 79 (1) A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. 611

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(2) If the party’s failure is due to the failure by a third person whom he has engaged to perform the whole or a part of the contract, that party is exempt from liability only if: (a) he is exempt under the preceding paragraph; and (b) the person whom he has so engaged would be so exempt if the provisions of that paragraph were applied to him. (3) The exemption provided by this article has effect for the period during which the impediment exists. (4) The party who fails to perform must give notice to the other party of the impediment and its effect on his ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such nonreceipt. (5) Nothing in this article prevents either party from exercising any right other than to claim damages under this Convention.

Article 80 A party may not rely on a failure of the other party to perform, to the extent that such failure was caused by the first party’s act or omission. Section V. Effects of avoidance

Article 81 (1) Avoidance of the contract releases both parties from their obligations under it, subject to any damages which may be due. Avoidance does not affect any provision of the contract for the settlement of disputes or any other provision of the contract governing the rights and obligations of the parties consequent upon the avoidance of the contract. (2) A party who has performed the contract either wholly or in part may claim restitution from the other party of whatever the first party has supplied or paid under the contract. If both parties are bound to make restitution, they must do so concurrently.

Article 82 (1) The buyer loses the right to declare the contract avoided or to require the seller to deliver substitute goods if it is impossible for him to make restitution of the goods substantially in the condition in which he received them. (2) The preceding paragraph does not apply: (a) if the impossibility of making restitution of the goods or of making restitution of the goods substantially in the condition in which the buyer received them is not due to his act or omission; (b) the goods or part of the goods have perished or deteriorated as a result of the examination provided for in article 38; or 612

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(c) if the goods or part of the goods have been sold in the normal course of business or have been consumed or transformed by the buyer in the course of normal use before he discovered or ought to have discovered the lack of conformity.

Article 83 A buyer who has lost the right to declare the contract avoided or to require the seller to deliver substitute goods in accordance with article 82 retains all other remedies under the contract and this Convention. Article 84 (1) If the seller is bound to refund the price, he must also pay interest on it, from the date on which the price was paid. (2) The buyer must account to the seller for all benefits which he has derived from the goods or part of them: (a) if he must make restitution of the goods or part of them; or (b) if it is impossible for him to make restitution of all or part of the goods or to make restitution of all or part of the goods substantially in the condition in which he received them, but he has nevertheless declared the contract avoided or required the seller to deliver substitute goods. Section VI. Preservation of the goods

Article 85 If the buyer is in delay in taking delivery of the goods or, where payment of the price and delivery of the goods are to be made concurrently, if he fails to pay the price, and the seller is either in possession of the goods or otherwise able to control their disposition, the seller must take such steps as are reasonable in the circumstances to preserve them. He is entitled to retain them until he has been reimbursed his reasonable expenses by the buyer. Article 86 (1) If the buyer has received the goods and intends to exercise any right under the contract or this Convention to reject them, he must take such steps to preserve them as are reasonable in the circumstances. He is entitled to retain them until he has been reimbursed his reasonable expenses by the seller. (2) If goods dispatched to the buyer have been placed at his disposal at their destination and he exercises the right to reject them, he must take possession of them on behalf of the seller, provided that this can be done without payment of the price and without unreasonable inconvenience or unreasonable expense. This provision does not apply if the seller or a person authorized to take charge of the goods on his behalf is present at the destination. If the buyer takes possession of the goods under this paragraph, his rights and obligations are governed by the preceding paragraph. 613

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Article 87 A party who is bound to take steps to preserve the goods may deposit them in a warehouse of a third person at the expense of the other party provided that the expense incurred is not unreasonable. Article 88 (1) A party who is bound to preserve the goods in accordance with article 85 or 86 may sell them by any appropriate means if there has been an unreasonable delay by the other party in taking possession of the goods or in taking them back or in paying the price or the cost of preservation, provided that reasonable notice of the intention to sell has been given to the other party. (2) If the goods are subject to rapid deterioration or their preservation would involve unreasonable expense, a party who is bound to preserve the goods in accordance with article 85 or 86 must take reasonable measures to sell them. To the extent possible he must give notice to the other party of his intention to sell. (3) A party selling the goods has the right to retain out of the proceeds of sale an amount equal to the reasonable expenses of preserving the goods and of selling them. He must account to the other party for the balance. Part IV. Final provisions Article 89 The Secretary-General of the United Nations is hereby designated as the depositary for this Convention. Article 90 This Convention does not prevail over any international agreement which has already been or may be entered into and which contains provisions concerning the matters governed by this Convention, provided that the parties have their places of business in States parties, to such agreement. Article 91 (1) This Convention is open for signature at the concluding meeting of the United Nations Conference on Contracts for the International Sale of Goods and will remain open for signature by all States at the Headquarters of the United Nations, New York until 30 September 1981. (2) This Convention is subject to ratification, acceptance or approval by the signatory States. (3) This Convention is open for accession by all States which are not signatory States as from the date it is open for signature. (4) Instruments of ratification, acceptance, approval and accession are to be deposited with the Secretary-General of the United Nations. 614

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Article 92 (1) A Contracting State may declare at the time of signature, ratification, acceptance, approval or accession that it will not be bound by Part II of this Convention or that it will not be bound by Part III of this Convention. (2) A Contracting State which makes a declaration in accordance with the preceding paragraph in respect of Part II or Part III of this Convention is not to be considered a Contracting State within paragraph (1) of article 1 of this Convention in respect of matters governed by the Part to which the declaration applies.

Article 93 (1) If a Contracting State has two or more territorial units in which, according to its constitution, different systems of law are applicable in relation to the matters dealt with in this Convention, it may, at the time of signature, ratification, acceptance, approval or accession, declare that this Convention is to extend to all its territorial units or only to one or more of them, and may amend its declaration by submitting another declaration at any time. (2) These declarations are to be notified to the depositary and are to state expressly the territorial units to which the Convention extends. (3) If, by virtue of a declaration under this article, this Convention extends to one or more but not all of the territorial units of a Contracting State, and if the place of business of a party is located in that State, this place of business, for the purposes of this Convention, is considered not to be in a Contracting State, unless it is in a territorial unit to which the Convention extends. (4) If a Contracting State makes no declaration under paragraph (1) of this article, the Convention is to extend to all territorial units of that State.

Article 94 (1) Two or more Contracting States which have the same or closely related legal rules on matters governed by this Convention may at any time declare that the Convention is not to apply to contracts of sale or to their formation where the parties have their places of business in those States. Such declarations may be made jointly or by reciprocal unilateral declarations. (2) A Contracting State which has the same or closely related legal rules on matters governed by this Convention as one or more non-Contracting States may at any time declare that the Convention is not to apply to contracts of sale or to their formation where the parties have their places of business in those States. (3) If a State which is the object of a declaration under the preceding paragraph subsequently becomes a Contracting State, the declaration made will, as from the date on which the Convention enters into force in respect of the new Contracting State, have the effect of a declaration made under paragraph (1), provided that the new Contracting State joins in such declaration or makes a reciprocal unilateral declaration. 615

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Article 95 Any State may declare at the time of the deposit of its instrument of ratification, acceptance, approval or accession that it will not be bound by subparagraph (1) (b) of article 1 of this Convention. Article 96 A Contracting State whose legislation requires contracts of sale to be concluded in or evidenced by writing may at any time make a declaration in accordance with article 12 that any provision of article 11, article 29, or Part II of this Convention, that allows a contract of sale or its modification or termination by agreement or any offer, acceptance, or other indication of intention to be made in any form other than in writing, does not apply where any party has his place of business in that State. Article 97 (1) Declarations made under this Convention at the time of signature are subject to confirmation upon ratification, acceptance or approval. (2) Declarations and confirmations of declarations are to be in writing and be formally notified to the depositary. (3) A declaration takes effect simultaneously with the entry into force of this Convention in respect of the State concerned. However, a declaration of which the depositary receives formal notification after such entry into force takes effect on the first day of the month following the expiration of six months after the date of its receipt by the depositary. Reciprocal unilateral declarations under article 94 take effect on the first day of the month following the expiration of six months after the receipt of the latest declaration by the depositary. (4) Any State which makes a declaration under this Convention may withdraw it at any time by a formal notification in writing addressed to the depositary. Such withdrawal is to take effect on the first day of the month following the expiration of six months after the date of the receipt of the notification by the depositary. (5) A withdrawal of a declaration made under article 94 renders inoperative, as from the date on which the withdrawal takes effect, any reciprocal declaration made by another State under that article.

Article 98 No reservations are permitted except those expressly authorized in this Convention. Article 99 (1) This Convention enters into force, subject to the provisions of paragraph (6) of this article, on the first day of the month following the expiration of twelve months after the date of deposit of the tenth instrument of ratification, acceptance, approval or accession, including an instrument which contains a declaration made under article 92. 616

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(2) When a State ratifies, accepts, approves or accedes to this Convention after the deposit of the tenth instrument of ratification, acceptance, approval or accession, this Convention, with the exception of the Part excluded, enters into force in respect of that State, subject to the provisions of paragraph (6) of this article, on the first day of the month following the expiration of twelve months after the date of the deposit of its instrument of ratification, acceptance, approval or accession. (3) A State which ratifies, accepts, approves or accedes to this Convention and is a party to either or both the Convention relating to a Uniform Law on the Formation of Contracts for the International Sale of Goods done at The Hague on 1 July 1964 (1964 Hague Formation Convention) and the Convention relating to a Uniform Law on the International Sale of Goods done at The Hague on 1 July 1964 (1964 Hague Sales Convention) shall at the same time denounce, as the case may be, either or both the 1964 Hague Sales Convention and the 1964 Hague Formation Convention by notifying the Government of the Netherlands to that effect. (4) A State party to the 1964 Hague Sales Convention which ratifies, accepts, approves or accedes to the present Convention and declares or has declared under Article 92 that it will not be bound by Part II of this Convention shall at the time of ratification, acceptance, approval or accession denounce the 1964 Hague Sales Convention by notifying the Government of the Netherlands to that effect. (5) A State party to the 1964 Hague Formation Convention which ratifies, accepts, approves or accedes to the present Convention and declares or has declared under article 92 that it will not be bound by Part III of this Convention shall at the time of ratification, acceptance, approval or accession denounce the 1964 Hague Formation Convention by notifying the Government of the Netherlands to that effect. (6) For the purpose of this article, ratifications, acceptances, approvals and accessions in respect of this Convention by States parties to the 1964 Hague Formation Convention or to the 1964 Hague Sales Convention shall not be effective until such denunciations as may be required on the part of those States in respect of the latter two Conventions have themselves become effective. The depositary of this Convention shall consult with the Government of the Netherlands, as the depositary of the 1964 Conventions, so as to ensure necessary co-ordination in this respect.

Article 100 (1) This Convention applies to the formation of a contract only when the proposal for concluding the contract is made on or after the date when the Convention enters into force in respect of the Contracting States referred to in subparagraph (1) (a) or the Contracting State referred to in subparagraph (1) (b) of article 1. (2) This Convention applies only to contracts concluded on or after the date when the Convention enters into force in respect of the Contracting States referred to in subparagraph (1)(a) or the Contracting State referred to in subparagraph (1)(b) of article 1. 617

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Article 101 (1) A Contracting State may denounce this Convention, or Part II or Part III of the Convention, by a formal notification in writing addressed to the depositary. (2) The denunciation takes effect on the first day of the month following the expiration of twelve months after the notification is received by the depositary. Where a longer period for the denunciation to take effect is specified in the notification, the denunciation takes effect upon the expiration of such longer period after the notification is received by the depositary. DONE at Vienna, this day of eleventh day of April, one thousand nine hundred and eighty, in a single original, of which the Arabic, Chinese, English, French, Russian and Spanish texts are equally authentic. IN WITNESS WHEREOF the undersigned plenipotentiaries, being duly authorized by their respective Governments, have signed this Convention.

II. EXPLANATORY NOTE BY THE UNCITRAL SECRETARIAT ON THE UNITED NATIONS CONVENTION ON CONTRACTS 1 FOR THE INTERNATIONAL SALE OF GOODS

INTRODUCTION 1. The United Nations Convention on Contracts for the International Sale of Goods provides a uniform text of law for international sales of goods. The Convention was prepared by the United Nations Commission on International Trade Law (UNCITRAL) and adopted by a diplomatic conference on 11 April 1980. 2. Preparation of a uniform law for the international sale of goods began in 1930 at the International Institute for the Unification of Private Law (UNIDROIT) in Rome. After a long interruption in the work as a result of the Second World War, the draft was submitted to a diplomatic conference in The Hague in 1964, which adopted two conventions, one on the international sale of goods and the other on the formation of contracts for the international sale of goods.

  This note has been prepared by the Secretariat of the United Nations Commission on International Trade Law for informational purposes; it is not an official commentary on the Convention. 1

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3. Almost immediately upon the adoption of the two conventions there was widespread criticism of their provisions as reflecting primarily the legal traditions and economic realities of continental Western Europe, which was the region that had most actively contributed to their preparation. As a result, one of the first tasks undertaken by UNCITRAL on its organization in 1968 was to enquire of States whether or not they intended to adhere to those conventions and the reasons for their positions. In the light of the responses received, UNCITRAL decided to study the two conventions to ascertain which modifications might render them capable of wider acceptance by countries of different legal, social and economic systems. The result of this study was the adoption by diplomatic conference on 11 April 1980 of the United Nations Convention on Contracts for the International Sale of Goods, which combines the subject matter of the two prior conventions. 4. UNCITRAL’s success in preparing a Convention with wider acceptability is evidenced by the fact that the original eleven States for which the Convention came into force on 1 January 1988 included States from every geographical region, every stage of economic development and every major legal, social and economic system. The original eleven States were: Argentina, China, Egypt, France, Hungary, Italy, Lesotho, Syria, United States, Yugoslavia and Zambia. 5. As of 31 January 1988, an additional four States, Austria, Finland, Mexico and Sweden, had become a party to the Convention. 6. The Convention is divided into four parts. Part One deals with the scope of application of the Convention and the general provisions. Part Two contains the rules governing the formation of contracts for the international sale of goods. Part Three deals with the substantive rights and obligations of buyer and seller arising from the contract. Part Four contains the final clauses of the Convention concerning such matters as how and when it comes into force, the reservations and declarations that are permitted and the application of the Convention to international sales where both States concerned have the same or similar law on the subject.

Part One. Scope of application and general provisions A. Scope of application 7. The articles on scope of application state both what is included in the coverage of the Convention and what is excluded from it. The provisions on inclusion are the most important. The Convention applies to contracts of sale of goods between parties whose places of business are in different States and either both of those States are Contracting States or the rules of private international law lead to the law of a Contracting State. A few States have availed themselves of the authorization in article 95 to declare that they would apply the Convention only in the former and not in the latter of these two situations. As the Convention becomes more widely adopted, the practical significance of such a declaration will diminish. 619

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8. The final clauses make two additional restrictions on the territorial scope of application that will be relevant to a few States. One applies only if a State is a party to another international agreement that contains provisions concerning matters governed by this Convention; the other permits States that have the same or similar domestic law of sales to declare that the Convention does not apply between them. 9. Contracts of sale are distinguished from contracts for services in two respects by article 3. A contract for the supply of goods to be manufactured or produced is considered to be a sale unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for their manufacture or production. When the preponderant part of the obligations of the party who furnishes the goods consists in the supply of labour or other services, the Convention does not apply. 10. The Convention contains a list of types of sales that are excluded from the Convention, either because of the purpose of the sale (goods bought for personal, family or household use), the nature of the sale (sales by auction, on execution or otherwise by law) or the nature of the goods (stocks, shares, investment securities, negotiable instruments, money, ships, vessels, hovercraft, aircraft or electricity). In many States some or all of such sales are governed by special rules reflecting their special nature. 11. Several articles make clear that the subject matter of the Convention is restricted to the formation of the contract and the rights and duties of the buyer and seller arising from such a contract. In particular, the Convention is not concerned with the validity of the contract, the effect which the contract may have on the property in the goods sold or the liability of the seller for death or personal injury caused by the goods to any person.

B. Party autonomy 12. The basic principle of contractual freedom in the international sale of goods is re­ cognized by the provision that permits the parties to exclude the application of this Convention or derogate from or vary the effect of any of its provisions. The exclusion of the Convention would most often result from the choice by the parties of the law of a non-contracting State or of the domestic law of a contracting State to be the law applicable to the contract. Derogation from the Convention would occur whenever a provision in the contract provided a different rule from that found in the Convention. C. Interpretation of the Convention 13. This Convention for the unification of the law governing the international sale of goods will better fulfill its purpose if it is interpreted in a consistent manner in all legal systems. Great care was taken in its preparation to make it as clear and easy to understand as possible. Nevertheless, disputes will arise as to its meaning and application. When this occurs, all parties, including domestic courts and arbitral tribunals, are admonished to observe its international character and to promote uniformity in its application and the observance of good faith in international trade. In particular, when a question concerning a matter governed by this Con620

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vention is not expressly settled in it, the question is to be settled in conformity with the general principles on which the Convention is based. Only in the absence of such principles should the matter be settled in conformity with the law applicable by virtue of the rules of private international law.

D. Interpretation of the contract; usages 14. The Convention contains provisions on the manner in which statements and conduct of a party are to be interpreted in the context of the formation of the contract or its implementation. Usages agreed to by the parties, practices they have established between themselves and usages of which the parties knew or ought to have known and which are widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned may all be binding on the parties to the contract of sale. E. Form of the contract 15. The Convention does not subject the contract of sale to any requirement as to form. In particular, article 11 provides that no written agreement is necessary for the conclusion of the contract. However, if the contract is in writing and it contains a provision requiring any modification or termination by agreement to be in writing, article 29 provides that the contract may not be otherwise modified or terminated by agreement. The only exception is that a party may be precluded by his conduct from asserting such a provision to the extent that the other person has relied on that conduct. 16. In order to accommodate those States whose legislation requires contracts of sale to be concluded in or evidenced by writing, article 96 entitles those States to declare that neither article 11 nor the exception to article 29 applies where any party to the contract has his place of business in that State.

Part Two. Formation of the contract 17. Part Two of the Convention deals with a number of questions that arise in the formation of the contract by the exchange of an offer and an acceptance. When the formation of the contract takes place in this manner, the contract is concluded when the acceptance of the offer becomes effective. 18. In order for a proposal for concluding a contract to constitute an offer, it must be addressed to one or more specific persons and it must be sufficiently definite. For the proposal to be sufficiently definite, it must indicate the goods and expressly or implicitly fix or make provision for determining the quantity and the price. 19. The Convention takes a middle position between the doctrine of the revocability of the offer until acceptance and its general irrevocability for some period of time. The general rule is that an offer may be revoked. However, the revocation must reach the offeree before he has dispatched an acceptance. Moreover, an offer can621

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not be revoked if it indicates that it is irrevocable, which it may do by stating a fixed time for acceptance or otherwise. Furthermore, an offer may not be revoked if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer. 20. Acceptance of an offer may be made by means of a statement or other conduct of the offeree indicating assent to the offer that is communicated to the offerer. However, in some cases the acceptance may consist of performing an act, such as dispatch of the goods or payment of the price. Such an act would normally be effective as an acceptance the moment the act was performed. 21. A frequent problem in contract formation, perhaps especially in regard to contracts of sale of goods, arises out of a reply to an offer that purports to be an acceptance but contains additional or different terms. Under the Convention, if the additional or different terms do not materially alter the terms of the offer, the reply constitutes an acceptance, unless the offeror without undue delay objects to those terms. If he does not object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance. 22. If the additional or different terms do materially alter the terms of the contract, the reply constitutes a counter-offer that must in turn be accepted for a contract to be concluded. Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or settlement of disputes are considered to alter the terms of the offer materially.

Part Three. Sale of goods A. Obligations of the seller 23. The general obligations of the seller are to deliver the goods, hand over any documents relating to them and transfer the property in the goods, as required by the contract and this Convention. The Convention provides supplementary rules for use in the absence of contractual agreement as to when, where and how the seller must perform these obligations. 24. The Convention provides a number of rules that implement the seller’s obligations in respect of the quality of the goods. In general, the seller must deliver goods that are of the quantity, quality and description required by the contract and that are contained or packaged in the manner required by the contract. One set of rules of particular importance in international sales of goods involves the seller’s obligation to deliver goods that are free from any right or claim of a third party, including rights based on industrial property or other intellectual property. 25. In connection with the seller’s obligations in regard to the quality of the goods, the Convention contains provisions on the buyer’s obligation to inspect the goods. He 622

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must give notice of any lack of their conformity with the contract within a reasonable time after he has discovered it or ought to have discovered it, and at the latest two years from the date on which the goods were actually handed over to the buyer, unless this time-limit is inconsistent with a contractual period of guarantee.

B. Obligations of the buyer 26. Compared to the obligations of the seller, the general obligations of the buyer are less extensive and relatively simple; they are to pay the price for the goods and take delivery of them as required by the contract and the Convention. The Convention provides supplementary rules for use in the absence of contractual agreement as to how the price is to be determined and where and when the buyer should perform his obligation to pay the price. C. Remedies for breach of contract 27. The remedies of the buyer for breach of contract by the seller are set forth in connection with the obligations of the seller and the remedies of the seller are set forth in connection with the obligations of the buyer. This makes it easier to use and understand the Convention. 28. The general pattern of remedies is the same in both cases. If all the required conditions are fulfilled, the aggrieved party may require performance of the other party’s obligations, claim damages or avoid the contract. The buyer also has the right to reduce the price where the goods delivered do not conform with the contract. 29. Among the more important limitations on the right of an aggrieved party to claim a remedy is the concept of fundamental breach. For a breach of contract to be fundamental, it must result in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the result was neither foreseen by the party in breach nor foreseeable by a reaonsable person of the same kind in the same circumstances. A buyer can require the delivery of substitute goods only if the goods delivered were not in conformity with the contract and the lack of conformity constituted a fundamental breach of contract. The existence of a fundamental breach is one of the two circumstances that justifies a declaration of avoidance of a contract by the aggrieved party; the other circumstance being that, in the case of non-delivery of the goods by the seller or non-payment of the price or failure to take delivery by the buyer, the party in breach fails to perform within a reasonable period of time fixed by the aggrievedparty. 30. Other remedies may be restricted by special circumstances. For example, if the goods do not conform with the contract, the buyer may require the seller to remedy the lack of conformity by repair, unless this is unreasonable having regard to all the circumstances. A party cannot recover damages that he could have mitigated by taking the proper measures. A party may be exempted from paying damages by virtue of an impediment beyond his control. 623

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D. Passing of risk 31. Determining the exact moment when the risk of loss or damage to the goods passes from the seller to the buyer is of great importance in contracts for the international sale of goods. Parties may regulate that issue in their contract either by an express provision or by the use of a trade term. However, for the frequent case where the contract does not contain such a provision, the Convention sets forth a complete set of rules. 32. The two special situations contemplated by the Convention are when the contract of sale involves carriage of the goods and when the goods are sold while in transit. In all other cases the risk passes to the buyer when he takes over the goods or from the time when the goods are placed at his disposal and he commits a breach of contract by failing to take delivery, whichever comes first. In the frequent case when the contract relates to goods that are not then identified, they must be identified to the contract before they can be considered to be placed at the disposal of the buyer and the risk of their loss can be considered to have passed to him.

E. Suspension of performance and anticipatory breach 33. The Convention contains special rules for the situation in which, prior to the date on which performance is due, it becomes apparent that one of the parties will not perform a substantial part of his obligations or will commit a fundamental breach of contract. A distinction is drawn between those cases in which the other party may suspend his own performance of the contract but the contract remains in existence awaiting future events and those cases in which he may declare the contract avoided. F. Exemption from liability to pay damages 34. When a party fails to perform any of his obligations due to an impediment beyond his control that he could not reasonably have been expected to take into account at the time of the conclusion of the contract and that he could not have avoided or overcome, he is exempted from paying damages. This exemption may also apply if the failure is due to the failure of a third person whom he has engaged to perform the whole or a part of the contract. However, he is subject to any other remedy, including reduction of the price, if the goods were defective in some way. G. Preservation of the goods 35. The Convention imposes on both parties the duty to preserve any goods in their possession belonging to the other party. Such a duty is of even greater importance in an international sale of goods where the other party is from a foreign country and may not have agents in the country where the goods are located. Under certain circumstances the party in possession of the goods may sell them, or may even be required to sell them. A party selling the goods has the right to retain out of the proceeds of sale an amount equal to the reasonable expenses of preserving the goods and of selling them and must account to the other party for the balance. 624

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Part Four. Final clauses 36. The final clauses contain the usual provisions relating to the Secretary-General as depositary and providing that the Convention is subject to ratification, acceptance or approval by those States that signed it by 30 September 1981, that it is open to accession by all States that are not signatory States and that the text is equally authentic in Arabic, Chinese, English, French, Russian and Spanish. 37. The Convention permits a certain number of declarations. Those relative to scope of application and the requirement as to a written contract have been mentioned above. There is a special declaration for States that have different systems of law governing contracts of sale in different parts of their territory. Finally, a State may declare that it will not be bound by Part II on formation of contracts or Part III on the rights and obligations of the buyer and seller. This latter declaration was included as part of the decision to combine into one convention the subject matter of the two 1964 Hague Conventions.

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Convention on the Recognition and Enforcement of Foreign Arbitral AWARDS

Done at New York, 10 June 1958; Entered into force, 7 June 1959 330 U.N.T.S. 38 (1959)

Article I 1. This Convention shall apply to the recognition and enforcement of arbitral awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought, and arising out of differences between persons, whether physical or legal. It shall also apply to arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought. 2. The term “arbitral awards” shall include not only awards made by arbitrators appointed for each case but also those made by permanent arbitral bodies to which the parties have submitted. 3. When signing, ratifying or acceding to this Convention, or notifying extension under article X hereof, any State may on the basis of reciprocity declare that it will apply the Convention to the recognition and enforcement of awards made only in the territory of another Contracting State. It may also declare that it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the State making such declaration. Article II 1. Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration. 2. The term “agreement in writing” shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams. 3. The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed. 626

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Article III Each Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon, under the conditions laid down in the following articles. There shall not be imposed substantially more onerous conditions or higher fees or charges on the recognition or enforcement of arbitral awards to which this Convention applies than are imposed on the recognition or enforcement of domestic arbitral awards Article IV 1. To obtain the recognition and enforcement mentioned in the preceding article, the party applying for recognition and enforcement shall, at the time of the application, supply: (a) The duly authenticated original award or a duly certified copy thereof; (b) The original agreement referred to in article II or a duly certified copy thereof. 2. If the said award or agreement is not made in an official language of the country in which the award is relied upon, the party applying for recognition and enforcement of the award shall produce a translation of these documents into such language. The translation shall be certified by an official or sworn translator or by a diplomatic or consular agent. Article V 1. Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that: (a) The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or (b) The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case; or (c) The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced; or (d) The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or (e) The award has not yet become binding on the parties or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made. 627

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2. Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that: (a) The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or (b) The recognition or enforcement of the award would be contrary to the public policy of that country.

Article VI If an application for the setting aside or suspension of the award has been made to a competent authority referred to in article V (1) (e), the authority before which the award is sought to be relied upon may, if it considers it proper, adjourn the decision on the enforcement of the award and may also, on the application of the party claiming enforcement of the award, order the other party to give suitable security. Article VII 1. The provisions of the present Convention shall not affect the validity of multilateral or bilateral agreements concerning the recognition and enforcement of arbitral awards entered into by the Contracting States nor deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon. 2. The Geneva Protocol on Arbitration Clauses of 1923 and the Geneva Convention on the Execution of Foreign Arbitral Awards of 1927 shall cease to have effect between Contracting States on their becoming bound and to the extent that they become bound, by this Convention. Article VIII 1. This Convention shall be open until 31 December 1958 for signature on behalf of any Member of the United Nations and also on behalf of any other State which is or hereafter becomes a member of any specialized agency of the United Nations, or which is or hereafter becomes a party to the Statute of the International Court of Justice, or any other State to which an invitation has been addressed by the General Assembly of the United Nations. 2. This Convention shall be ratified and the instrument of ratification shall be deposited with the Secretary-General of the United Nations. Article IX 1. This Convention shall be open for accession to all States referred to in article VIII. 2. Accession shall be effected by the deposit of an instrument of accession with the Secretary-General of the United Nations. 628

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Article X 1. Any State may, at the time of signature, ratification or accession, declare that this Convention shall extend to all or any of the territories for the international relations of which it is responsible. Such a declaration shall take effect when the Convention enters into force for the State concerned. 2. At any time thereafter any such extension shall be made by notification addressed to the Secretary-General of the United Nations and shall take effect as from the ninetieth day after the day of receipt by the Secretary-General of the United Nations of this notification, or as from the date of entry into force of the Convention for the State concerned, whichever is the later. 3. With respect to those territories to which this Convention is not extended at the time of signature, ratification or accession, each State concerned shall consider the possibility of taking the necessary steps in order to extend the application of this Convention to such territories, subject, where necessary for constitutional reasons, to the consent of the Governments of such territories.

Article XI In the case of a federal or non-unitary State, the following provisions shall apply: (a) With respect to those articles of this Convention that come within the legislative jurisdiction of the federal authority, the obligations of the federal Government shall to this extent be the same as those of Contracting States which are not federal States; (b) With respect to those articles of this Convention that come within the legislative jurisdiction of the constituent states or provinces which are not, under the constitutional system of the federation, bound to take legislative action, the federal Government shall bring such articles with a favourable recommendation to the notice of the appropriate authorities of constituent states or provinces at the earliest possible moment; c) A federal State Party to this Convention shall, at the request of any other Contracting State transmitted through the Secretary-General of the United Nations, supply a statement of the law and practice of the federation and its constituent units in regard to any particular provision of this Convention, showing the extent to which effect has been given to that provision by legislative or other action. Article XII 1. This Convention shall come into force on the ninetieth day following the date of deposit of the third instrument of ratification or accession. 2. For each State ratifying or acceding to this Convention after the deposit of the third instrument of ratification or accession, this Convention shall enter into force on the ninetieth day after deposit by such State of its instrument of ratification or accession. 629

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Article XIII 1. Any Contracting State may denounce this Convention by a written notification to the Secretary-General of the United Nations. Denunciation shall take effect one year after the date of receipt of the notification by the Secretary-General. 2. Any State which has made a declaration or notification under article X may, at any time thereafter, by notification to the Secretary-General of the United Nations, declare that this Convention shall cease to extend to the territory concerned one year after the date of the receipt of the notification by the Secretary-General. 3. This Convention shall continue to be applicable to arbitral awards in respect of which recognition or enforcement proceedings have been instituted before the denunciation takes effect. Article XIV A Contracting State shall not be entitled to avail itself of the present Convention against other Contracting States except to the extent that it is itself bound to apply the Convention. Article XV The Secretary-General of the United Nations shall notify the States contemplated in article VIII of the following: (a) Signatures and ratifications in accordance with article VIII; (b) Accessions in accordance with article IX; (c) Declarations and notifications under articles I, X and XI; (d) The date upon which this Convention enters into force in accordance with article XII; (e) Denunciations and notifications in accordance with article XIII. Article XVI 1. This Convention, of which the Chinese, English, French, Russian and Spanish texts shall be equally authentic, shall be deposited in the archives of the United Nations. 2. The Secretary-General of the United Nations shall transmit a certified copy of this Convention to the States contemplated in article VII.

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UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS 2010 PREAMBLE (Purpose of the Principles) These Principles set forth general rules for international commercial contracts. They shall be applied when the parties have agreed that their contract be governed by them.1(*) They may be applied when the parties have agreed that their contract be governed by general principles of law, the lex mercatoria or the like. They may be applied when the parties have not chosen any law to govern their contract. They may be used to interpret or supplement international uniform law instruments. They may be used to interpret or supplement domestic law. They may serve as a model for national and international legislators.



CHAPTER 1 — GENERAL PROVISIONS

ARTICLE 1.1 (Freedom of contract) The parties are free to enter into a contract and to determine its content. ARTICLE 1.2 (No form required) Nothing in these Principles requires a contract, statement or any other act to be made in or evidenced by a particular form. It may be proved by any means, including witnesses. ARTICLE 1.3 (Binding character of contract) A contract validly entered into is binding upon the parties. It can only be modified or terminated in accordance with its terms or by agreement or as otherwise provided in these Principles.   Parties wishing to provide that their agreement be governed by the Principles might use the following words, adding any desired exceptions or modifications: “This contract shall be governed by the UNIDROIT Principles (2010) [except as to Articles …].” Parties wishing to provide in addition for the application of the law of a particular jurisdiction might use the following words: “This contract shall be governed by the UNIDROIT Principles (2010) [except as to Articles…], supplemented when necessary by the law of [jurisdiction X]. 1

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ARTICLE 1.4 (Mandatory rules) Nothing in these Principles shall restrict the application of mandatory rules, whether of national, international or supranational origin, which are applicable in accordance with the relevant rules of private international law. ARTICLE 1.5 (Exclusion or modification by the parties) The parties may exclude the application of these Principles or derogate from or vary the effect of any of their provisions, except as otherwise provided in the Principles. ARTICLE 1.6 (Interpretation and supplementation of the Principles) (1) In the interpretation of these Principles, regard is to be had to their international character and to their purposes including the need to promote uniformity in their application. (2) Issues within the scope of these Principles but not expressly settled by them are as far as possible to be settled in accordance with their underlying general principles. ARTICLE 1.7 (Good faith and fair dealing) (1) Each party must act in accordance with good faith and fair dealing in international trade. (2) The parties may not exclude or limit this duty. ARTICLE 1.8 (Inconsistent behaviour) A party cannot act inconsistently with an understanding it has caused the other party to have and upon which that other party reasonably has acted in reliance to its detriment. ARTICLE 1.9 (Usages and practices) (1) The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves. (2) The parties are bound by a usage that is widely known to and regularly observed in international trade by parties in the particular trade concerned except where the application of such a usage would be unreasonable. ARTICLE 1.10 (Notice) (1) Where notice is required it may be given by any means appropriate to the circumstances. (2) A notice is effective when it reaches the person to whom it is given. 632

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(3) For the purpose of paragraph (2) a notice “reaches” a person when given to that person orally or delivered at that person’s place of business or mailing address. (4) For the purpose of this Article “notice” includes a declaration, demand, request or any other communication of intention.

ARTICLE 1.11 (Definitions) In these Principles – “court” includes an arbitral tribunal; – where a party has more than one place of business the relevant “place of business” is that which has the closest relationship to the contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of the contract; – “obligor” refers to the party who is to perform an obligation and “obligee” refers to the party who is entitled to performance of that obligation. – “writing” means any mode of communication that preserves a record of the information contained therein and is capable of being reproduced in tangible form. ARTICLE 1.12 (Computation of time set by parties) (1) Official holidays or non-business days occurring during a period set by parties for an act to be performed are included in calculating the period. (2) However, if the last day of the period is an official holiday or a non-business day at the place of business of the party to perform the act, the period is extended until the first business day which follows, unless the circumstances indicate otherwise. (3) The relevant time zone is that of the place of business of the party setting the time, unless the circumstances indicate otherwise.

CHAPTER 2 — FORMATION AND AUTHORITY OF AGENTS SECTION 1: FORMATION

ARTICLE 2.1.1 (Manner of formation) A contract may be concluded either by the acceptance of an offer or by conduct of the parties that is sufficient to show agreement. ARTICLE 2.1.2 (Definition of offer) A proposal for concluding a contract constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. 633

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ARTICLE 2.1.3 (Withdrawal of offer) (1) An offer becomes effective when it reaches the offeree. (2) An offer, even if it is irrevocable, may be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer. ARTICLE 2.1.4 (Revocation of offer) (1) Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before it has dispatched an acceptance. (2) However, an offer cannot be revoked (a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or (b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer. ARTICLE 2.1.5 (Rejection of offer) An offer is terminated when a rejection reaches the offeror. ARTICLE 2.1.6 (Mode of acceptance) (1) A statement made by or other conduct of the offeree indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance. (2) An acceptance of an offer becomes effective when the indication of assent reaches the offeror. (3) However, if, by virtue of the offer or as a result of practices which the parties have established between themselves or of usage, the offeree may indicate assent by performing an act without notice to the offeror, the acceptance is effective when the act is performed. ARTICLE 2.1.7 (Time of acceptance) An offer must be accepted within the time the offeror has fixed or, if no time is fixed, within a reasonable time having regard to the circumstances, including the rapidity of the means of communication employed by the offeror. An oral offer must be accepted immediately unless the circumstances indicate otherwise. ARTICLE 2.1.8 (Acceptance within a fixed period of time) A period of acceptance fixed by the offeror begins to run from the time that the offer is dispatched. A time indicated in the offer is deemed to be the time of dispatch unless the circumstances indicate otherwise. 634

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ARTICLE 2.1.9 (Late acceptance. Delay in transmission) (1) A late acceptance is nevertheless effective as an acceptance if without undue delay the offeror so informs the offeree or gives notice to that effect. (2) If a communication containing a late acceptance shows that it has been sent in such circumstances that if its transmission had been normal it would have reached the offeror in due time, the late acceptance is effective as an acceptance unless, without undue delay, the offeror informs the offeree that it considers the offer as having lapsed. ARTICLE 2.1.10 (Withdrawal of acceptance) An acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as the acceptance would have become effective. ARTICLE 2.1.11 (Modified acceptance) (1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer. (2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects to the discrepancy. If the offeror does not object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance. ARTICLE 2.1.12 (Writings in confirmation) If a writing which is sent within a reasonable time after the conclusion of the contract and which purports to be a confirmation of the contract contains additional or different terms, such terms become part of the contract, unless they materially alter the contract or the recipient, without undue delay, objects to the discrepancy. ARTICLE 2.1.13 (Conclusion of contract dependent on agreement on specific matters or in a particular form) Where in the course of negotiations one of the parties insists that the contract is not concluded until there is agreement on specific matters or in a particular form, no contract is concluded before agreement is reached on those matters or in that form. 635

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ARTICLE 2.1.14 (Contract with terms deliberately left open) (1) If the parties intend to conclude a contract, the fact that they intentionally leave a term to be agreed upon in further negotiations or to be determined by a third person does not prevent a contract from coming into existence. (2) The existence of the contract is not affected by the fact that subsequently (a) the parties reach no agreement on the term; or (b) the third person does not determine the term, provided that there is an alternative means of rendering the term definite that is reasonable in the circumstances, having regard to the intention of the parties. ARTICLE 2.1.15 (Negotiations in bad faith) (1) A party is free to negotiate and is not liable for failure to reach an agreement. (2) However, a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party. (3) It is bad faith, in particular, for a party to enter into or continue negotiations when intending not to reach an agreement with the other party. ARTICLE 2.1.16 (Duty of confidentiality) Where information is given as confidential by one party in the course of negotiations, the other party is under a duty not to disclose that information or to use it improperly for its own purposes, whether or not a contract is subsequently concluded. Where appropriate, the remedy for breach of that duty may include compensation based on the benefit received by the other party. ARTICLE 2.1.17 (Merger clauses) A contract in writing which contains a clause indicating that the writing completely embodies the terms on which the parties have agreed cannot be contradicted or supplemented by evidence of prior statements or agreements. However, such statements or agreements may be used to interpret the writing. ARTICLE 2.1.18 (Modification in a particular form) A contract in writing which contains a clause requiring any modification or termination by agreement to be in a particular form may not be otherwise modified or terminated. However, a party may be precluded by its conduct from asserting such a clause to the extent that the other party has reasonably acted in reliance on that conduct. 636

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ARTICLE 2.1.19 (Contracting under standard terms) (1) Where one party or both parties use standard terms in concluding a contract, the general rules on formation apply, subject to Articles 2.1.20–2.1.22. (2) Standard terms are provisions which are prepared in advance for general and repeated use by one party and which are actually used without negotiation with the other party. ARTICLE 2.1.20 (Surprising terms) (1) No term contained in standard terms which is of such a character that the other party could not reasonably have expected it, is effective unless it has been expressly accepted by that party. (2) In determining whether a term is of such a character regard shall be had to its content, language and presentation. ARTICLE 2.1.21 (Conflict between standard terms and non-standard terms) In case of conflict between a standard term and a term which is not a standard term the latter prevails. ARTICLE 2.1.22 (Battle of forms) Where both parties use standard terms and reach agreement except on those terms, a contract is concluded on the basis of the agreed terms and of any standard terms which are common in substance unless one party clearly indicates in advance, or later and without undue delay informs the other party, that it does not intend to be bound by such a contract.

SECTION 2: AUTHORITY OF AGENTS

ARTICLE 2.2.1 (Scope of the Section) (1) This Section governs the authority of a person (“the agent”) to affect the legal relations of another person (“the principal”) by or with respect to a contract with a third party, whether the agent acts in its own name or in that of the principal. (2) It governs only the relations between the principal or the agent on the one hand, and the third party on the other. (3) It does not govern an agent’s authority conferred by law or the authority of an agent appointed by a public or judicial authority.

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ARTICLE 2.2.2 (Establishment and scope of the authority of the agent) (1) The principal’s grant of authority to an agent may be express or implied. (2) The agent has authority to perform all acts necessary in the circumstances to achieve the purposes for which the authority was granted. ARTICLE 2.2.3 (Agency disclosed) (1) Where an agent acts within the scope of its authority and the third party knew or ought to have known that the agent was acting as an agent, the acts of the agent shall directly affect the legal relations between the principal and the third party and no legal relation is created between the agent and the third party. (2) However, the acts of the agent shall affect only the relations between the agent and the third party, where the agent with the consent of the principal undertakes to become the party to the contract. ARTICLE 2.2.4 (Agency undisclosed) (1) Where an agent acts within the scope of its authority and the third party neither knew nor ought to have known that the agent was acting as an agent, the acts of the agent shall affect only the relations between the agent and the third party. (2) However, where such an agent, when contracting with the third party on behalf of a business, represents itself to be the owner of that business, the third party, upon discovery of the real owner of the business, may exercise also against the latter the rights it has against the agent. ARTICLE 2.2.5 (Agent acting without or exceeding its authority) (1) Where an agent acts without authority or exceeds its authority, its acts do not affect the legal relations between the principal and the third party. (2) However, where the principal causes the third party reasonably to believe that the agent has authority to act on behalf of the principal and that the agent is acting within the scope of that authority, the principal may not invoke against the third party the lack of authority of the agent. ARTICLE 2.2.6 (Liability of agent acting without or exceeding its authority) (1) An agent that acts without authority or exceeds its authority is, failing ratification by the principal, liable for damages that will place the third party in the same position as if the agent had acted with authority and not exceeded its authority. 638

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(2) However, the agent is not liable if the third party knew or ought to have known that the agent had no authority or was exceeding its authority.

ARTICLE 2.2.7 (Conflict of interests) (1) If a contract concluded by an agent involves the agent in a conflict of interests with the principal of which the third party knew or ought to have known, the principal may avoid the contract. The right to avoid is subject to Articles 3.2.9 and 3.2.11 to 3.2.15. (2) However, the principal may not avoid the contract (a) if the principal had consented to, or knew or ought to have known of, the agent’s involvement in the conflict of interests; or (b) if the agent had disclosed the conflict of interests to the principal and the latter had not objected within a reasonable time. ARTICLE 2.2.8 (Sub-agency) An agent has implied authority to appoint a sub-agent to perform acts which it is not reasonable to expect the agent to perform itself. The rules of this Section apply to the sub-agency. ARTICLE 2.2.9 (Ratification) (1) An act by an agent that acts without authority or exceeds its authority may be ratified by the principal. On ratification the act produces the same effects as if it had initially been carried out with authority. (2) The third party may by notice to the principal specify a reasonable period of time for ratification. If the principal does not ratify within that period of time it can no longer do so. (3) If, at the time of the agent’s act, the third party neither knew nor ought to have known of the lack of authority, it may, at any time before ratification, by notice to the principal indicate its refusal to become bound by a ratification. ARTICLE 2.2.10 (Termination of authority) (1) Termination of authority is not effective in relation to the third party unless the third party knew or ought to have known of it. (2) Notwithstanding the termination of its authority, an agent remains authorised to perform the acts that are necessary to prevent harm to the principal’s interests. 639

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CHAPTER 3—VALIDITY SECTION 1: GENERAL PROVISIONS

ARTICLE 3.1.1 (Matters not covered) This Chapter does not deal with lack of capacity. ARTICLE 3.1.2 (Validity of mere agreement) A contract is concluded, modified or terminated by the mere agreement of the parties, without any further requirement.

ARTICLE 3.1.3 (Initial impossibility) (1) The mere fact that at the time of the conclusion of the contract the performance of the obligation assumed was impossible does not affect the validity of the contract. (2) The mere fact that at the time of the conclusion of the contract a party was not entitled to dispose of the assets to which the contract relates does not affect the validity of the contract. ARTICLE 3.1.4 (Mandatory character of the provisions) The provisions on fraud, threat, gross disparity and illegality contained in this Chapter are mandatory. SECTION 2: GROUNDS FOR AVOIDANCE

ARTICLE 3.2.1 (Definition of mistake) Mistake is an erroneous assumption relating to facts or to law existing when the contract was concluded. ARTICLE 3.2.2 (Relevant mistake) (1) A party may only avoid the contract for mistake if, when the contract was concluded, the mistake was of such importance that a reasonable person in the same situation as the party in error would only have concluded the contract on materially different terms or would not have concluded it at all if the true state of affairs had been known, and 640

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(a) the other party made the same mistake, or caused the mistake, or knew or ought to have known of the mistake and it was contrary to reasonable commercial standards of fair dealing to leave the mistaken party in error; or (b) the other party had not at the time of avoidance reasonably acted in reliance on the contract. (2) However, a party may not avoid the contract if (a) it was grossly negligent in committing the mistake; or (b) the mistake relates to a matter in regard to which the risk of mistake was assumed or, having regard to the circumstances, should be borne by the mistaken party.

ARTICLE 3.2.3 (Error in expression or transmission) An error occurring in the expression or transmission of a declaration is considered to be a mistake of the person from whom the declaration emanated. ARTICLE 3.2.4 (Remedies for non-performance) A party is not entitled to avoid the contract on the ground of mistake if the circumstances on which that party relies afford, or could have afforded, a remedy for non-performance. ARTICLE 3.2.5 (Fraud) A party may avoid the contract when it has been led to conclude the contract by the other party’s fraudulent representation, including language or practices, or fraudulent non-disclosure of circumstances which, according to reasonable commercial standards of fair dealing, the latter party should have disclosed. ARTICLE 3.2.6 (Threat) A party may avoid the contract when it has been led to conclude the contract by the other party’s unjustified threat which, having regard to the circumstances, is so imminent and serious as to leave the first party no reasonable alternative. In particular, a threat is unjustified if the act or omission with which a party has been threatened is wrongful in itself, or it is wrongful to use it as a means to obtain the conclusion of the contract. ARTICLE 3.2.7 (Gross disparity) (1) A party may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage. Regard is to be had, among other factors, to 641

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(a) the fact that the other party has taken unfair advantage of the first party’s dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skill, and (b) the nature and purpose of the contract. (2) Upon the request of the party entitled to avoidance, a court may adapt the contract or term in order to make it accord with reasonable commercial standards of fair dealing. (3) A court may also adapt the contract or term upon the request of the party receiving notice of avoidance, provided that that party informs the other party of its request promptly after receiving such notice and before the other party has reasonably acted in reliance on it. Article 3.2.10(2) applies accordingly.

ARTICLE 3.2.8 (Third persons) (1) Where fraud, threat, gross disparity or a party’s mistake is imputable to, or is known or ought to be known by, a third person for whose acts the other party is responsible, the contract may be avoided under the same conditions as if the behavior or knowledge had been that of the party itself. (2) Where fraud, threat or gross disparity is imputable to a third person for whose acts the other party is not responsible, the contract may be avoided if that party knew or ought to have known of the fraud, threat or disparity, or has not at the time of avoidance reasonably acted in reliance on the contract. ARTICLE 3.2.9 (Confirmation) If the party entitled to avoid the contract expressly or impliedly confirms the contract after the period of time for giving notice of avoidance has begun to run, avoidance of the contract is excluded. ARTICLE 3.2.10 (Loss of right to avoid) (1) If a party is entitled to avoid the contract for mistake but the other party declares itself willing to perform or performs the contract as it was understood by the party entitled to avoidance, the contract is considered to have been concluded as the latter party understood it. The other party must make such a declaration or render such performance promptly after having been informed of the manner in which the party entitled to avoidance had understood the contract and before that party has reasonably acted in reliance on a notice of avoidance. (2) After such a declaration or performance the right to avoidance is lost and any earlier notice of avoidance is ineffective. 642

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ARTICLE 3.2.11 (Notice of avoidance) The right of a party to avoid the contract is exercised by notice to the other party. ARTICLE 3.2.12 (Time limits) (1) Notice of avoidance shall be given within a reasonable time, having regard to the circumstances, after the avoiding party knew or could not have been unaware of the relevant facts or became capable of acting freely. (2) Where an individual term of the contract may be avoided by a party under Article 3.2.7, the period of time for giving notice of avoidance begins to run when that term is asserted by the other party. ARTICLE 3.2.13 (Partial avoidance) Where a ground of avoidance affects only individual terms of the contract, the effect of avoidance is limited to those terms unless, having regard to the circumstances, it is unreasonable to uphold the remaining contract. ARTICLE 3.2.14 (Retroactive effect of avoidance) Avoidance takes effect retroactively. ARTICLE 3.2.15 (Restitution) (1) On avoidance either party may claim restitution of whatever it has supplied under the contract, or the part of it avoided, provided that the party concurrently makes restitution of whatever it has received under the contract, or the part of it avoided. (2) If restitution in kind is not possible or appropriate, an allowance has to be made in money whenever reasonable. (3) The recipient of the performance does not have to make an allowance in money if the impossibility to make restitution in kind is attributable to the other party. (4) Compensation may be claimed for expenses reasonably required to preserve or maintain the performance received. ARTICLE 3.2.16 (Damages) Irrespective of whether or not the contract has been avoided, the party who knew or ought to have known of the ground for avoidance is liable for damages so as to put the other party in the same position in which it would have been if it had not concluded the contract. 643

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ARTICLE 3.2.17 (Unilateral declarations) The provisions of this Chapter apply with appropriate adaptations to any communication of intention addressed by one party to the other. SECTION 3: ILLEGALITY

ARTICLE 3.3.1 (Contracts infringing mandatory rules) (1) Where a contract infringes a mandatory rule, whether of national, international or supranational origin, applicable under Article 1.4 of these Principles, the effects of that infringement upon the contract are the effects, if any, expressly prescribed by that mandatory rule. (2) Where the mandatory rule does not expressly prescribe the effects of an infringement upon a contract, the parties have the right to exercise such remedies under the contract as in the circumstances are reasonable. (3) In determining what is reasonable regard is to be had in particular to: (a) the purpose of the rule which has been infringed; (b) the category of persons for whose protection the rule exists; (c) any sanction that may be imposed under the rule infringed; (d) the seriousness of the infringement; (e) whether one or both parties knew or ought to have known of the infringement; (f) whether the performance of the contract necessitates the infringement; and (g) the parties’ reasonable expectations. ARTICLE 3.3.2 (Restitution) (1) Where there has been performance under a contract infringing a mandatory rule under Article 3.3.1, restitution may be granted where this would be reasonable in the circumstances. (2) In determining what is reasonable, regard is to be had, with the appropriate adaptations, to the criteria referred to in Article 3.3.1(3). (3) If restitution is granted, the rules set out in Article 3.2.15 apply with appropriate adaptations.

CHAPTER 4 — INTERPRETATION

ARTICLE 4.1 (Intention of the parties) (1) A contract shall be interpreted according to the common intention of the parties. 644

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(2) If such an intention cannot be established, the contract shall be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances.

ARTICLE 4.2 (Interpretation of statements and other conduct) (1) The statements and other conduct of a party shall be interpreted according to that party’s intention if the other party knew or could not have been unaware of that intention. (2) If the preceding paragraph is not applicable, such statements and other conduc to shall be interpreted according to the meaning that a reasonable person of the same kind as the other party would give to it in the same circumstances. ARTICLE 4.3 (Relevant circumstances) In applying Articles 4.1 and 4.2, regard shall be had to all the circumstances, including (a) preliminary negotiations between the parties; (b) practices which the parties have established between themselves; (c) the conduct of the parties subsequent to the conclusion of the contract; (d) the nature and purpose of the contract; (e) the meaning commonly given to terms and expressions in the trade concerned; (f) usages. ARTICLE 4.4 (Reference to contract or statement as a whole) Terms and expressions shall be interpreted in the light of the whole contract or statement in which they appear. ARTICLE 4.5 (All terms to be given effect) Contract terms shall be interpreted so as to give effect to all the terms rather than to deprive some of them of effect. ARTICLE 4.6 (Contra proferentem rule) If contract terms supplied by one party are unclear, an interpretation against that party is preferred. 645

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ARTICLE 4.7 (Linguistic discrepancies) Where a contract is drawn up in two or more language versions which are equally authoritative there is, in case of discrepancy between the versions, a preference for the interpretation according to a version in which the contract was originally drawn up. ARTICLE 4.8 (Supplying an omitted term) (1) Where the parties to a contract have not agreed with respect to a term which is important for a determination of their rights and duties, a term which is appropriate in the circumstances shall be supplied. (2) In determining what is an appropriate term regard shall be had, among other factors, to (a) the intention of the parties; (b) the nature and purpose of the contract; (c) good faith and fair dealing; (d) reasonableness.

CHAPTER 5 — CONTENT AND THIRD PARTY RIGHTS SECTION 1: CONTENT

ARTICLE 5.1.1 (Express and implied obligations) The contractual obligations of the parties may be express or implied. ARTICLE 5.1.2 (Implied obligations) Implied obligations stem from (a) the nature and purpose of the contract; (b) practices established between the parties and usages; (c) good faith and fair dealing; (d) reasonableness. ARTICLE 5.1.3 (Co-operation between the parties) Each party shall cooperate with the other party when such co-operation may reasonably be expected for the performance of that party’s obligations. 646

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ARTICLE 5.1.4 (Duty to achieve a specific result. Duty of best efforts) (1) To the extent that an obligation of a party involves a duty to achieve a specific result, that party is bound to achieve that result. (2) To the extent that an obligation of a party involves a duty of best efforts in the performance of an activity, that party is bound to make such efforts as would be made by a reasonable person of the same kind in the same circumstances. ARTICLE 5.1.5 (Determination of kind of duty involved) In determining the extent to which an obligation of a party involves a duty of best efforts in the performance of an activity or a duty to achieve a specific result, regard shall be had, among other factors, to (a) the way in which the obligation is expressed in the contract; (b) the contractual price and other terms of the contract; (c) the degree of risk normally involved in achieving the expected result; (d) the ability of the other party to influence the performance of the obligation. ARTICLE 5.1.6 (Determination of quality of performance) Where the quality of performance is neither fixed by, nor determinable from, the contract a party is bound to render a performance of a quality that is reasonable and not less than average in the circumstances. ARTICLE 5.1.7 (Price determination) (1) Where a contract does not fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have made reference to the price generally charged at the time of the conclusion of the contract for such performance in comparable circumstances in the trade concerned or, if no such price is available, to a reasonable price. (2) Where the price is to be determined by one party and that determination is manifestly unreasonable, a reasonable price shall be substituted notwithstanding any contract term to the contrary. (3) Where the price is to be fixed by a third person, and that person cannot or will not do so, the price shall be a reasonable price. (4) Where the price is to be fixed by reference to factors which do not exist or have ceased to exist or to be accessible, the nearest equivalent factor shall be treated as a substitute. 647

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ARTICLE 5.1.8 (Contract for an indefinite period) A contract for an indefinite period may be ended by either party by giving notice a reasonable time in advance.

ARTICLE 5.1.9 (Release by agreement) (1) An obligee may release its right by agreement with the obligor. (2) An offer to release a right gratuitously shall be deemed accepted if the obligor does not reject the offer without delay after having become aware of it.

SECTION 2: THIRD PARTY RIGHTS

ARTICLE 5.2.1 (Contracts in favour of third parties) (1) The parties (the “promisor” and the “promisee”) may confer by express or implied agreement a right on a third party (the “beneficiary”). (2) The existence and content of the beneficiary’s right against the promisor are determined by the agreement of the parties and are subject to any conditions or other limitations under the agreement. ARTICLE 5.2.2 (Third party identifiable) The beneficiary must be identifiable with adequate certainty by the contract but need not be in existence at the time the contract is made. ARTICLE 5.2.3 (Exclusion and limitation clauses) The conferment of rights in the beneficiary includes the right to invoke a clause in the contract which excludes or limits the liability of the beneficiary. ARTICLE 5.2.4 (Defences) The promisor may assert against the beneficiary all defences which the promisor could assert against the promisee. 648

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ARTICLE 5.2.5 (Revocation) The parties may modify or revoke the rights conferred by the contract on the beneficiary until the beneficiary has accepted them or reasonably acted in reliance on them. ARTICLE 5.2.6 (Renunciation) The beneficiary may renounce a right conferred on it. SECTION 3: CONDITIONS

ARTICLE 5.3.1 (Types of condition) A contract or a contractual obligation may be made conditional upon the occurrence of a future uncertain event, so that the contract or the contractual obligation only takes effect if the event occurs (suspensive condition) or comes to an end if the event occurs (resolutive condition). ARTICLE 5.3.2 (Effect of conditions) Unless the parties otherwise agree : (a) the relevant contract or contractual obligation takes effect upon fulfilment of a suspensive condition; (b) the relevant contract or contractual obligation comes to an end upon fulfilment of a resolutive condition. ARTICLE 5.3.3 (Interference with conditions) (1) If fulfilment of a condition is prevented by a party, contrary to the duty of good faith and fair dealing or the duty of co-operation, that party may not rely on the non-fulfilment of the condition. (2) If fulfilment of a condition is brought about by a party, contrary to the duty of good faith and fair dealing or the duty of co-operation, that party may not rely on the fulfilment of the condition. ARTICLE 5.3.4 (Duty to preserve rights) Pending fulfilment of a condition, a party may not, contrary to the duty to act in accordance with good faith and fair dealing, act so as to prejudice the other party’s rights in case of fulfilment of the condition. 649

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ARTICLE 5.3.5 (Restitution in case of fulfilment of a resolutive condition) (1) On fulfilment of a resolutive condition, the rules on restitution set out in Articles 7.3.6 and 7.3.7 apply with appropriate adaptations. (2) If the parties have agreed that the resolutive condition is to operate retroactively, the rules on restitution set out in Article 3.2.15 apply with appropriate adaptations.

CHAPTER 6 — PERFORMANCE SECTION 1: PERFORMANCE IN GENERAL

ARTICLE 6.1.1 (Time of performance) A party must perform its obligations: (a) if a time is fixed by or determinable from the contract, at that time; (b) if a period of time is fixed by or determinable from the contract, at any time within that period unless circumstances indicate that the other party is to choose a time; (c) in any other case, within a reasonable time after the conclusion of the contract. ARTICLE 6.1.2 (Performance at one time or in instalments) In cases under Article 6.1.1(b) or (c), a party must perform its obligations at one time if that performance can be rendered at one time and the circumstances do not indicate otherwise. ARTICLE 6.1.3 (Partial performance) (1) The obligee may reject an offer to perform in part at the time performance is due, whether or not such offer is coupled with an assurance as to the balance of the performance, unless the obligee has no legitimate interest in so doing. (2) Additional expenses caused to the obligee by partial performance are to be borne by the obligor without prejudice to any other remedy. ARTICLE 6.1.4 (Order of performance) (1) To the extent that the performances of the parties can be rendered simultaneously, the parties are bound to render them simultaneously unless the circumstances indicate otherwise. 650

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(2) To the extent that the performance of only one party requires a period of time, that party is bound to render its performance first, unless the circumstances indicate otherwise.

ARTICLE 6.1.5 (Earlier performance) (1) The obligee may reject an earlier performance unless it has no legitimate interest in so doing. (2) Acceptance by a party of an earlier performance does not affect the time for the performance of its own obligations if that time has been fixed irrespective of the performance of the other party’s obligations. (3) Additional expenses caused to the obligee by earlier performance are to be borne by the obligor, without prejudice to any other remedy. ARTICLE 6.1.6 (Place of performance) (1) If the place of performance is neither fixed by, nor determinable from, the contract, a party is to perform: (a) a monetary obligation, at the obligee’s place of business; (b) any other obligation, at its own place of business. (2) A party must bear any increase in the expenses incidental to performance which is caused by a change in its place of business subsequent to the conclusion of the contract. ARTICLE 6.1.7 (Payment by cheque or other instrument) (1) Payment may be made in any form used in the ordinary course of business at the place for payment. (2) However, an obligee who accepts, either by virtue of paragraph (1) or voluntarily, a cheque, any other order to pay or a promise to pay, is presumed to do so only on condition that it will be honoured. ARTICLE 6.1.8 (Payment by funds transfer) (1) Unless the obligee has indicated a particular account, payment may be made by a transfer to any of the financial institutions in which the obligee has made it known that it has an account. (2) In case of payment by a transfer the obligation of the obligor is discharged when the transfer to the obligee’s financial institution becomes effective. 651

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ARTICLE 6.1.9 (Currency of payment) (1) If a monetary obligation is expressed in a currency other than that of the place for payment, it may be paid by the obligor in the currency of the place for payment unless (a) that currency is not freely convertible; or (b) the parties have agreed that payment should be made only in the currency in which the monetary obligation is expressed. (2) If it is impossible for the obligor to make payment in the currency in which the monetary obligation is expressed, the obligee may require payment in the currency of the place for payment, even in the case referred to in paragraph (1)(b). (3) Payment in the currency of the place for payment is to be made according to the applicable rate of exchange prevailing there when payment is due. (4) However, if the obligor has not paid at the time when payment is due, the obligee may require payment according to the applicable rate of exchange prevailing either when payment is due or at the time of actual payment. ARTICLE 6.1.10 (Currency not expressed) Where a monetary obligation is not expressed in a particular currency, payment must be made in the currency of the place where payment is to be made. ARTICLE 6.1.11 (Costs of performance) Each party shall bear the costs of performance of its obligations. ARTICLE 6.1.12 (Imputation of payments) (1) An obligor owing several monetary obligations to the same obligee may specify at the time of payment the debt to which it intends the payment to be applied. However, the payment discharges first any expenses, then interest due and finally the principal. (2) If the obligor makes no such specification, the obligee may, within a reasonable time after payment, declare to the obligor the obligation to which it imputes the payment, provided that the obligation is due and undisputed. (3) In the absence of imputation under paragraphs (1) or (2), payment is imputed to that obligation which satisfies one of the following criteria in the order indicated: (a) an obligation which is due or which is the first to fall due; (b) the obligation for which the obligee has least security; (c) the obligation which is the most burdensome for the obligor; (d) the obligation which has arisen first. If none of the preceding criteria applies, payment is imputed to all the obligations proportionally. 652

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ARTICLE 6.1.13 (Imputation of non-monetary obligations) Article 6.1.12 applies with appropriate adaptations to the imputation of performance of non-monetary obligations. ARTICLE 6.1.14 (Application for public permission) Where the law of a State requires a public permission affecting the validity of the contract or its performance and neither that law nor the circumstances indicate otherwise (a) if only one party has its place of business in that State, that party shall take the measures necessary to obtain the permission; (b) in any other case the party whose performance requires permission shall take the necessary measures. ARTICLE 6.1.15 (Procedure in applying for permission) (1) The party required to take the measures necessary to obtain the permission shall do so without undue delay and shall bear any expenses incurred. (2) That party shall whenever appropriate give the other party notice of the grant or refusal of such permission without undue delay. ARTICLE 6.1.16 (Permission neither granted nor refused) (1) If, notwithstanding the fact that the party responsible has taken all measures required, permission is neither granted nor refused within an agreed period or, where no period has been agreed, within a reasonable time from the conclusion of the contract, either party is entitled to terminate the contract. (2) Where the permission affects some terms only, paragraph (1) does not apply if, having regard to the circumstances, it is reasonable to uphold the remaining contract even if the permission is refused. ARTICLE 6.1.17 (Permission refused) (1) The refusal of a permission affecting the validity of the contract renders the contract void. If the refusal affects the validity of some terms only, only such terms are void if, having regard to the circumstances, it is reasonable to uphold the remaining contract. (2) Where the refusal of a permission renders the performance of the contract impossible in whole or in part, the rules on non-performance apply. 653

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SECTION 2: HARDSHIP

ARTICLE 6.2.1 (Contract to be observed) Where the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the following provisions on hardship. ARTICLE 6.2.2 (Definition of hardship) There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished, and (a) the events occur or become known to the disadvantaged party after the conclusion of the contract; (b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; (c) the events are beyond the control of the disadvantaged party; and (d) the risk of the events was not assumed by the disadvantaged party. ARTICLE 6.2.3 (Effects of hardship) (1) In case of hardship the disadvantaged party is entitled to request renegotiations. The request shall be made without undue delay and shall indicate the grounds on which it is based. (2) The request for renegotiation does not in itself entitle the disadvantaged party to withhold performance. (3) Upon failure to reach agreement within a reasonable time either party may resort to the court. (4) If the court finds hardship it may, if reasonable, (a) terminate the contract at a date and on terms to be fixed, or (b) adapt the contract with a view to restoring its equilibrium. CHAPTER 7 — NON-PERFORMANCE SECTION 1: NON-PERFORMANCE IN GENERAL

ARTICLE 7.1.1 (Non-performance defined) Non-performance is failure by a party to perform any of its obligations under the contract, including defective performance or late performance. 654

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ARTICLE 7.1.2 (Interference by the other party) A party may not rely on the non-performance of the other party to the extent that such non-performance was caused by the first party’s act or omission or by another event for which the first party bears the risk. ARTICLE 7.1.3 (Withholding performance) (1) Where the parties are to perform simultaneously, either party may withhold performance until the other party tenders its performance. (2) Where the parties are to perform consecutively, the party that is to perform later may withhold its performance until the first party has performed. ARTICLE 7.1.4 (Cure by non-performing party) (1) The non-performing party may, at its own expense, cure any non-performance, provided that (a) without undue delay, it gives notice indicating the proposed manner and timing of the cure; (b) cure is appropriate in the circumstances; (c) the aggrieved party has no legitimate interest in refusing cure; and (d) cure is effected promptly. (2) The right to cure is not precluded by notice of termination. (3) Upon effective notice of cure, rights of the aggrieved party that are inconsistent with the non-performing party’s performance are suspended until the time for cure has expired. (4) The aggrieved party may withhold performance pending cure. (5) Notwithstanding cure, the aggrieved party retains the right to claim damages for delay as well as for any harm caused or not prevented by the cure. ARTICLE 7.1.5 (Additional period for performance) (1) In a case of non-performance the aggrieved party may by notice to the other party allow an additional period of time for performance. (2) During the additional period the aggrieved party may withhold performance of its own reciprocal obligations and may claim damages but may not resort to any other remedy. If it receives notice from the other party that the latter will not perform within that period, or if upon expiry of that period due performance has not been made, the aggrieved party may resort to any of the remedies that may be available under this Chapter. 655

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(3) Where in a case of delay in performance which is not fundamental the aggrieved party has given notice allowing an additional period of time of reasonable length, it may terminate the contract at the end of that period. If the additional period allowed is not of reasonable length it shall be extended to a reasonable length. The aggrieved party may in its notice provide that if the other party fails to perform within the period allowed by the notice the contract shall automatically terminate. (4) Paragraph (3) does not apply where the obligation which has not been performed is only a minor part of the contractual obligation of the non-performing party.

ARTICLE 7.1.6 (Exemption clauses) A clause which limits or excludes one party’s liability for non-performance or which permits one party to render performance substantially different from what the other party reasonably expected may not be invoked if it would be grossly unfair to do so, having regard to the purpose of the contract. ARTICLE 7.1.7 (Force majeure) (1) Non-performance by a party is excused if that party proves that the nonperformance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. (2) When the impediment is only temporary, the excuse shall have effect for such period as is reasonable having regard to the effect of the impediment on the performance of the contract. (3) The party who fails to perform must give notice to the other party of the impediment and its effect on its ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, it is liable for damages resulting from such nonreceipt. (4) Nothing in this Article prevents a party from exercising a right to terminate the contract or to withhold performance or request interest on money due.

SECTION 2: RIGHT TO PERFORMANCE

ARTICLE 7.2.1 (Performance of monetary obligation) Where a party who is obliged to pay money does not do so, the other party may require payment. 656

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ARTICLE 7.2.2 (Performance of non-monetary obligation) Where a party who owes an obligation other than one to pay money does not perform, the other party may require performance, unless (a) performance is impossible in law or in fact; (b) performance or, where relevant, enforcement is unreasonably burdensome or expensive; (c) the party entitled to performance may reasonably obtain performance from another source; (d) performance is of an exclusively personal character; or (e) the party entitled to performance does not require performance within a reasonable time after it has, or ought to have, become aware of the nonperformance. ARTICLE 7.2.3 (Repair and replacement of defective performance) The right to performance includes in appropriate cases the right to require repair, replacement, or other cure of defective performance. The provisions of Articles 7.2.1 and 7.2.2 apply accordingly. ARTICLE 7.2.4 (Judicial penalty) (1) Where the court orders a party to perform, it may also direct that this party pay a penalty if it does not comply with the order. (2) The penalty shall be paid to the aggrieved party unless mandatory provisions of the law of the forum provide otherwise. Payment of the penalty to the aggrieved party does not exclude any claim for damages. ARTICLE 7.2.5 (Change of remedy) (1) An aggrieved party who has required performance of a non-monetary obligation and who has not received performance within a period fixed or otherwise within a reasonable period of time may invoke any other remedy. (2) Where the decision of a court for performance of a non-monetary obligation cannot be enforced, the aggrieved party may invoke any other remedy. SECTION 3: TERMINATION

ARTICLE 7.3.1 (Right to terminate the contract) (1) A party may terminate the contract where the failure of the other party to perform an obligation under the contract amounts to a fundamental non-performance. 657

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(2) In determining whether a failure to perform an obligation amounts to a fundamental non-performance regard shall be had, in particular, to whether (a) the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract unless the other party did not foresee and could not reasonably have foreseen such result; (b) strict compliance with the obligation which has not been performed is of essence under the contract; (c) the non-performance is intentional or reckless; (d) the non-performance gives the aggrieved party reason to believe that it cannot rely on the other party’s future performance; (e) the non-performing party will suffer disproportionate loss as a result of the preparation or performance if the contract is terminated. (3) In the case of delay the aggrieved party may also terminate the contract if the other party fails to perform before the time allowed it under Article 7.1.5 has expired.

ARTICLE 7.3.2 (Notice of termination) (1) The right of a party to terminate the contract is exercised by notice to the other party. (2) If performance has been offered late or otherwise does not conform to the contract the aggrieved party will lose its right to terminate the contract unless it gives notice to the other party within a reasonable time after it has or ought to have become aware of the offer or of the non-conforming performance. ARTICLE 7.3.3 (Anticipatory non-performance) Where prior to the date for performance by one of the parties it is clear that there will be a fundamental non-performance by that party, the other party may terminate the contract. ARTICLE 7.3.4 (Adequate assurance of due performance) A party who reasonably believes that there will be a fundamental non-performance by the other party may demand adequate assurance of due performance and may meanwhile withhold its own performance. Where this assurance is not provided within a reasonable time the party demanding it may terminate the contract. ARTICLE 7.3.5 (Effects of termination in general) (1) Termination of the contract releases both parties from their obligation to effect and to receive future performance. (2) Termination does not preclude a claim for damages for non-performance. 658

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(3) Termination does not affect any provision in the contract for the settlement of disputes or any other term of the contract which is to operate even after termination.

ARTICLE 7.3.6 (Restitution with respect to contracts to be performed at one time) (1) On termination of a contract to be performed at one time either party may claim restitution of whatever it has supplied under the contract, provided that such party concurrently makes restitution of whatever it has received under the contract. (2) If restitution in kind is not possible or appropriate, an allowance has to be made in money whenever reasonable. (3) The recipient of the performance does not have to make an allowance in money if the impossibility to make restitution in kind is attributable to the other party. (4) Compensation may be claimed for expenses reasonably required to preserve or maintain the performance received. ARTICLE 7.3.7 (Restitution with respect to contracts to be performed over a period of time) (1) On termination of a contract to be performed over a period of time restitution can only be claimed for the period after termination has taken effect, provided the contract is divisible. (2) As far as restitution has to be made, the provisions of Article 7.3.6 apply.

SECTION 4: DAMAGES

ARTICLE 7.4.1 (Right to damages) Any non-performance gives the aggrieved party a right to damages either exclusively or in conjunction with any other remedies except where the nonperformance is excused under these Principles. ARTICLE 7.4.2 (Full compensation) (1) The aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance. Such harm includes both any loss which it suffered and any gain of which it was deprived, taking into account any gain to the aggrieved party resulting from its avoidance of cost or harm. (2) Such harm may be non-pecuniary and includes, for instance, physical suffering or emotional distress. 659

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ARTICLE 7.4.3 (Certainty of harm) (1) Compensation is due only for harm, including future harm, that is established with a reasonable degree of certainty. (2) Compensation may be due for the loss of a chance in proportion to the probability of its occurrence. (3) Where the amount of damages cannot be established with a sufficient degree of certainty, the assessment is at the discretion of the court. ARTICLE 7.4.4 (Foreseeability of harm) The non-performing party is liable only for harm which it foresaw or could reasonably have foreseen at the time of the conclusion of the contract as being likely to result from its non-performance. ARTICLE 7.4.5 (Proof of harm in case of replacement transaction) Where the aggrieved party has terminated the contract and has made a replacement transaction within a reasonable time and in a reasonable manner it may recover the difference between the contract price and the price of the replacement transaction as well as damages for any further harm. ARTICLE 7.4.6 (Proof of harm by current price) (1) Where the aggrieved party has terminated the contract and has not made a replacement transaction but there is a current price for the performance contracted for, it may recover the difference between the contract price and the price current at the time the contract is terminated as well as damages for any further harm. (2) Current price is the price generally charged for goods delivered or services rendered in comparable circumstances at the place where the contract should have been performed or, if there is no current price at that place, the current price at such other place that appears reasonable to take as a reference. ARTICLE 7.4.7 (Harm due in part to aggrieved party) Where the harm is due in part to an act or omission of the aggrieved party or to another event for which that party bears the risk, the amount of damages shall be reduced to the extent that these factors have contributed to the harm, having regard to the conduct of each of the parties. 660

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ARTICLE 7.4.8 (Mitigation of harm) (1) The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the latter party’s taking reasonable steps. (2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the harm. ARTICLE 7.4.9 (Interest for failure to pay money) (1) If a party does not pay a sum of money when it falls due the aggrieved party is entitled to interest upon that sum from the time when payment is due to the time of payment whether or not the non-payment is excused. (2) The rate of interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment, or where no such rate exists at that place, then the same rate in the State of the currency of payment. In the absence of such a rate at either place the rate of interest shall be the appropriate rate fixed by the law of the State of the currency of payment. (3) The aggrieved party is entitled to additional damages if the non-payment caused it a greater harm. ARTICLE 7.4.10 (Interest on damages) Unless otherwise agreed, interest on damages for non-performance of non-monetary obligations accrues as from the time of non-performance. ARTICLE 7.4.11 (Manner of monetary redress) (1) Damages are to be paid in a lump sum. However, they may be payable in instalments where the nature of the harm makes this appropriate. (2) Damages to be paid in instalments may be indexed.

ARTICLE 7.4.12 (Currency in which to assess damages) Damages are to be assessed either in the currency in which the monetary obligation was expressed or in the currency in which the harm was suffered, whichever is more appropriate. 661

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ARTICLE 7.4.13 (Agreed payment for non-performance) (1) Where the contract provides that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party is entitled to that sum irrespective of its actual harm. (2) However, notwithstanding any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance and to the other circumstances. CHAPTER 8 — SET-OFF

ARTICLE 8.1 (Conditions of set-off) (1) Where two parties owe each other money or other performances of the same kind, either of them (“the first party”) may set off its obligation against that of its obligee (“the other party”) if at the time of set-off, (a) the first party is entitled to perform its obligation; (b) the other party’s obligation is ascertained as to its existence and amount and performance is due. (2) If the obligations of both parties arise from the same contract, the first party may also set off its obligation against an obligation of the other party which is not ascertained as to its existence or to its amount. ARTICLE 8.2 (Foreign currency set-off) Where the obligations are to pay money in different currencies, the right of set-off may be exercised, provided that both currencies are freely convertible and the parties have not agreed that the first party shall pay only in a specified currency. ARTICLE 8.3 (Set-off by notice) The right of set-off is exercised by notice to the other party. ARTICLE 8.4 (Content of notice) (1) The notice must specify the obligations to which it relates. (2) If the notice does not specify the obligation against which set-off is exercised, the other party may, within a reasonable time, declare to the first party the obligation to which set-off relates. If no such declaration is made, the set-off will relate to all the obligations proportionally. 662

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ARTICLE 8.5 (Effect of set-off) (1) Set-off discharges the obligations. (2) If obligations differ in amount, set-off discharges the obligations up to the amount of the lesser obligation. (3) Set-off takes effect as from the time of notice.

CHAPTER 9 — ASSIGNMENT OF RIGHTS, TRANSFER OF OBLIGATIONS, ASSIGNMENT OF CONTRACTS SECTION 1: ASSIGNMENT OF RIGHTS

ARTICLE 9.1.1 (Definitions) “Assignment of a right” means the transfer by agreement from one person (the “assignor”) to another person (the “assignee”), including transfer by way of security, of the assignor’s right to payment of a monetary sum or other performance from a third person (“the obligor”). ARTICLE 9.1.2 (Exclusions) This Section does not apply to transfers made under the special rules governing the transfers: (a) of instruments such as negotiable instruments, documents of title or financial instruments, or (b) of rights in the course of transferring a business. ARTICLE 9.1.3 (Assignability of non-monetary rights) A right to non-monetary performance may be assigned only if the assignment does not render the obligation significantly more burdensome. ARTICLE 9.1.4 (Partial assignment) (1) A right to the payment of a monetary sum may be assigned partially. (2) A right to other performance may be assigned partially only if it is divisible, and the assignment does not render the obligation significantly more burdensome. 663

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ARTICLE 9.1.5 (Future rights) A future right is deemed to be transferred at the time of the agreement, provided the right, when it comes into existence, can be identified as the right to which the assignment relates. ARTICLE 9.1.6 (Rights assigned without individual specification) A number of rights may be assigned without individual specification, provided such rights can be identified as rights to which the assignment relates at the time of the assignment or when they come into existence.

ARTICLE 9.1.7 (Agreement between assignor and assignee sufficient) (1) A right is assigned by mere agreement between the assignor and the assignee, without notice to the obligor. (2) The consent of the obligor is not required unless the obligation in the circumstances is of an essentially personal character. ARTICLE 9.1.8 (Obligor’s additional costs) The obligor has a right to be compensated by the assignor or the assignee for any additional costs caused by the assignment. ARTICLE 9.1.9 (Non-assignment clauses) (1) The assignment of a right to the payment of a monetary sum is effective notwithstanding an agreement between the assignor and the obligor limiting or prohibiting such an assignment. However, the assignor may be liable to the obligor for breach of contract. (2) The assignment of a right to other performance is ineffective if it is contrary to an agreement between the assignor and the obligor limiting or prohibiting the assignment. Nevertheless, the assignment is effective if the assignee, at the time of the assignment, neither knew nor ought to have known of the agreement. The assignor may then be liable to the obligor for breach of contract. ARTICLE 9.1.10 (Notice to the obligor) (1) Until the obligor receives a notice of the assignment from either the assignor or the assignee, it is discharged by paying the assignor. 664

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(2) After the obligor receives such a notice, it is discharged only by paying the assignee.

ARTICLE 9.1.11 (Successive assignments) If the same right has been assigned by the same assignor to two or more successive assignees, the obligor is discharged by paying according to the order in which the notices were received. ARTICLE 9.1.12 (Adequate proof of assignment) (1) If notice of the assignment is given by the assignee, the obligor may request the assignee to provide within a reasonable time adequate proof that the assignment has been made. (2) Until adequate proof is provided, the obligor may withhold payment. (3) Unless adequate proof is provided, notice is not effective. (4) Adequate proof includes, but is not limited to, any writing emanating from the assignor and indicating that the assignment has taken place. ARTICLE 9.1.13 (Defences and rights of set-off) (1) The obligor may assert against the assignee all defences that the obligor could assert against the assignor. (2) The obligor may exercise against the assignee any right of set-off available to the obligor against the assignor up to the time notice of assignment was received. ARTICLE 9.1.14 (Rights related to the right assigned) The assignment of a right transfers to the assignee: (a) all the assignor’s rights to payment or other performance under the contract in respect of the right assigned, and (b) all rights securing performance of the right assigned. ARTICLE 9.1.15 (Undertakings of the assignor) The assignor undertakes towards the assignee, except as otherwise disclosed to the assignee, that: (a) the assigned right exists at the time of the assignment, unless the right is a future right; (b) the assignor is entitled to assign the right; 665

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(c) the right has not been previously assigned to another assignee, and it is free from any right or claim from a third party; (d) the obligor does not have any defences; (e) neither the obligor nor the assignor has given notice of set-off concerning the assigned right and will not give any such notice; (f) the assignor will reimburse the assignee for any payment received from the obligor before notice of the assignment was given.

SECTION 2: TRANSFER OF OBLIGATIONS

ARTICLE 9.2.1 (Modes of transfer) An obligation to pay money or render other performance may be transferred from one person (the “original obligor”) to another person (the “new obligor”) either (a) by an agreement between the original obligor and the new obligor subject to Article 9.2.3, or (b) by an agreement between the obligee and the new obligor, by which the new obligor assumes the obligation. ARTICLE 9.2.2 (Exclusion) This Section does not apply to transfers of obligations made under the special rules governing transfers of obligations in the course of transferring a business. ARTICLE 9.2.3 (Requirement of obligee’s consent to transfer) The transfer of an obligation by an agreement between the original obligor and the new obligor requires the consent of the obligee. ARTICLE 9.2.4 (Advance consent of obligee) (1) The obligee may give its consent in advance. (2) If the obligee has given its consent in advance, the transfer of the obligation becomes effective when a notice of the transfer is given to the obligee or when the obligee acknowledges it. ARTICLE 9.2.5 (Discharge of original obligor) (1) The obligee may discharge the original obligor. 666

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(2) The obligee may also retain the original obligor as an obligor in case the new obligor does not perform properly. (3) Otherwise the original obligor and the new obligor are jointly and severally liable.

ARTICLE 9.2.6 (Third party performance) (1) Without the obligee’s consent, the obligor may contract with another person that this person will perform the obligation in place of the obligor, unless the obligation in the circumstances has an essentially personal character. (2) The obligee retains its claim against the obligor. ARTICLE 9.2.7 (Defences and rights of set-off) (1) The new obligor may assert against the obligee all defences which the original obligor could assert against the obligee. (2) The new obligor may not exercise against the obligee any right of set-off available to the original obligor against the obligee. ARTICLE 9.2.8 (Rights related to the obligation transferred) (1) The obligee may assert against the new obligor all its rights to payment or other performance under the contract in respect of the obligation transferred. (2) If the original obligor is discharged under Article 9.2.5(1), a security granted by any person other than the new obligor for the performance of the obligation is discharged, unless that other person agrees that it should continue to be available to the obligee. (3) Discharge of the original obligor also extends to any security of the original obligor given to the obligee for the performance of the obligation, unless the security is over an asset which is transferred as part of a transaction between the original obligor and the new obligor.

SECTION 3: ASSIGNMENT OF CONTRACTS

ARTICLE 9.3.1 (Definitions) “Assignment of a contract” means the transfer by agreement from one person (the “assignor”) to another person (the “assignee”) of the assignor’s rights and obligations arising out of a contract with another person (the “other party”). 667

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ARTICLE 9.3.2 (Exclusion) This Section does not apply to the assignment of contracts made under the special rules governing transfers of contracts in the course of transferring a business. ARTICLE 9.3.3 (Requirement of consent of the other party) The assignment of a contract requires the consent of the other party. ARTICLE 9.3.4 (Advance consent of the other party) (1) The other party may give its consent in advance. (2) If the other party has given its consent in advance, the assignment of the contract becomes effective when a notice of the assignment is given to the other party or when the other party acknowledges it. ARTICLE 9.3.5 (Discharge of the assignor) (1) The other party may discharge the assignor. (2) The other party may also retain the assignor as an obligor in case the assignee does not perform properly. (3) Otherwise the assignor and the assignee are jointly and severally liable. ARTICLE 9.3.6 (Defences and rights of set-off) (1) To the extent that the assignment of a contract involves an assignment of rights, Article 9.1.13 applies accordingly. (2) To the extent that the assignment of a contract involves a transfer of obligations, Article 9.2.7 applies accordingly. ARTICLE 9.3.7 (Rights transferred with the contract) (1) To the extent that the assignment of a contract involves an assignment of rights, Article 9.1.14 applies accordingly. (2) To the extent that the assignment of a contract involves a transfer of obligations, Article 9.2.8 applies accordingly. 668

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CHAPTER 10 — LIMITATION PERIODS

ARTICLE 10.1 (Scope of the Chapter) (1) The exercise of rights governed by the Principles is barred by the expiration of a period of time, referred to as “limitation period”, according to the rules of this Chapter. (2) This Chapter does not govern the time within which one party is required under the Principles, as a condition for the acquisition or exercise of its right, to give notice to the other party or to perform any act other than the institution of legal proceedings. ARTICLE 10.2 (Limitation periods) (1) The general limitation period is three years beginning on the day after the day the obligee knows or ought to know the facts as a result of which the obligee’s right can be exercised. (2) In any event, the maximum limitation period is ten years beginning on the day after the day the right can be exercised. ARTICLE 10.3 (Modification of limitation periods by the parties) (1) The parties may modify the limitation periods. (2) However they may not (a) shorten the general limitation period to less than one year; (b) shorten the maximum limitation period to less than four years; (c) extend the maximum limitation period to more than fifteen years. ARTICLE 10.4 (New limitation period by acknowledgement) (1) Where the obligor before the expiration of the general limitation period acknowledges the right of the obligee, a new general limitation period begins on the day after the day of the acknowledgement. (2) The maximum limitation period does not begin to run again, but may be exceeded by the beginning of a new general limitation period under Article 10.2(1). ARTICLE 10.5 (Suspension by judicial proceedings) (1) The running of the limitation period is suspended (a) when the obligee performs any act, by commencing judicial proceedings or in judicial proceedings already instituted, that is recognised by the law of the court as asserting the obligee’s right against the obligor; 669

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(b) in the case of the obligor’s insolvency when the obligee has asserted its rights in the insolvency proceedings; or (c) in the case of proceedings for dissolution of the entity which is the obligor when the obligee has asserted its rights in the dissolution proceedings. (2) Suspension lasts until a final decision has been issued or until the proceedings have been otherwise terminated.

ARTICLE 10.6 (Suspension by arbitral proceedings) (1) The running of the limitation period is suspended when the obligee performs any act, by commencing arbitral proceedings or in arbitral proceedings already instituted, that is recognised by the law of the arbitral tribunal as asserting the obligee’s right against the obligor. In the absence of regulations for arbitral proceedings or provisions determining the exact date of the commencement of arbitral proceedings, the proceedings are deemed to commence on the date on which a request that the right in dispute should be adjudicated reaches the obligor. (2) Suspension lasts until a binding decision has been issued or until the proceedings have been otherwise terminated. ARTICLE 10.7 (Alternative dispute resolution) The provisions of Articles 10.5 and 10.6 apply with appropriate modifications to other proceedings whereby the parties request a third person to assist them in their attempt to reach an amicable settlement of their dispute. ARTICLE 10.8 (Suspension in case of force majeure, death or incapacity) (1) Where the obligee has been prevented by an impediment that is beyond its control and that it could neither avoid nor overcome, from causing a limitation period to cease to run under the preceding Articles, the general limitation period is suspended so as not to expire before one year after the relevant impediment has ceased to exist. (2) Where the impediment consists of the incapacity or death of the obligee or obligor, suspension ceases when a representative for the incapacitated or deceased party or its estate has been appointed or a successor has inherited the respective party’s position. The additional one-year period under paragraph (1) applies accordingly. ARTICLE 10.9 (Effects of expiration of limitation period) (1) The expiration of the limitation period does not extinguish the right. 670

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(2) For the expiration of the limitation period to have effect, the obligor must assert it as a defence. (3) A right may still be relied on as a defence even though the expiration of the limitation period for that right has been asserted.

ARTICLE 10.10 (Right of set-off) The obligee may exercise the right of set-off until the obligor has asserted the expiration of the limitation period.

ARTICLE 10.11 (Restitution) Where there has been performance in order to discharge an obligation, there is no right of restitution merely because the limitation period has expired.

CHAPTER 11 — PLURALITY OF OBLIGORS AND OF OBLIGEES SECTION 1: PLURALITY OF OBLIGORS

ARTICLE 11.1.1 (Definitions) When several obligors are bound by the same obligation towards an obligee: (a) the obligations are joint and several when each obligor is bound for the whole obligation; (b) the obligations are separate when each obligor is bound only for its share. ARTICLE 11.1.2 (Presumption of joint and several obligations) When several obligors are bound by the same obligation towards an obligee, they are presumed to be jointly and severally bound, unless the circumstances indicate otherwise. ARTICLE 11.1.3 (Obligee’s rights against joint and several obligors) When obligors are jointly and severally bound, the obligee may require performance from any one of them, until full performance has been received. 671

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ARTICLE 11.1.4 (Availability of defences and rights of set-off) A joint and several obligor against whom a claim is made by the obligee may assert all the defences and rights of set-off that are personal to it or that are common to all the co-obligors, but may not assert defences or rights of set-off that are personal to one or several of the other co-obligors. ARTICLE 11.1.5 (Effect of performance or set-off) Performance or set-off by a joint and several obligor or set-off by the obligee against one joint and several obligor discharges the other obligors in relation to the obligee to the extent of the performance or set-off. ARTICLE 11.1.6 (Effect of release or settlement) (1) Release of one joint and several obligor, or settlement with one joint and several obligor, discharges all the other obligors for the share of the released or settling obligor, unless the circumstances indicate otherwise. (2) When the other obligors are discharged for the share of the released obligor, they no longer have a contributory claim against the released obligor under Article 11.1.10. ARTICLE 11.1.7 (Effect of expiration or suspension of limitation period) (1) Expiration of the limitation period of the obligee’s rights against one joint and several obligor does not affect: (a) the obligations to the obligee of the other joint and several obligors; or (b) the rights of recourse between the joint and several obligors under Article 11.1.10. (2) If the obligee initiates proceedings under Articles 10.5, 10.6 or 10.7 against one joint and several obligor, the running of the limitation period is also suspended against the other joint and several obligors. ARTICLE 11.1.8 (Effect of judgment) (1) A decision by a court as to the liability to the obligee of one joint and several obligor does not affect: (a) the obligations to the obligee of the other joint and several obligors; or (b) the rights of recourse between the joint and several obligors under Article 11.1.10. 672

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(2) However, the other joint and several obligors may rely on such a decision, except if it was based on grounds personal to the obligor concerned. In such a case, the rights of recourse between the joint and several obligors under Article 11.1.10 are affected accordingly.

ARTICLE 11.1.9 (Apportionment among joint and several obligors) As among themselves, joint and several obligors are bound in equal shares, unless the circumstances indicate otherwise. ARTICLE 11.1.10 (Extent of contributory claim) A joint and several obligor who has performed more than its share may claim the excess from any of the other obligors to the extent of each obligor’s unperformed share. ARTICLE 11.1.11 (Rights of the obligee) (1) A joint and several obligor to whom Article 11.1.10 applies may also exercise the rights of the obligee, including all rights securing their performance, to recover the excess from all or any of the other obligors to the extent of each obligor’s unperformed share. (2) An obligee who has not received full performance retains its rights against the coobligors to the extent of the unperformed part, with precedence over co-obligors exercising contributory claims. ARTICLE 11.1.12 (Defences in contributory claims) A joint and several obligor against whom a claim is made by the co-obligor who has performed the obligation: (a) may raise any common defences and rights of set-off that were available to be asserted by the co-obligor against the obligee ; (b) may assert defences which are personal to itself ; (c) may not assert defences and rights of set-off which are personal to one or several of the other co-obligors. ARTICLE 11.1.13 (Inability to recover) If a joint and several obligor who has performed more than that obligor’s share is unable, despite all reasonable efforts, to recover contribution from another joint and several obligor, the share of the others, including the one who has performed, is increased proportionally. 673

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SECTION 2: PLURALITY OF OBLIGEES

ARTICLE 11.2.1 (Definitions) When several obligees can claim performance of the same obligation from an obligor: (a) the claims are separate when each obligee can only claim its share; (b) the claims are joint and several when each obligee can claim the whole performance; (c) the claims are joint when all obligees have to claim performance together. ARTICLE 11.2.2 (Effects of joint and several claims) Full performance of an obligation in favour of one of the joint and several obligees discharges the obligor towards the other obligees. ARTICLE 11.2.3 (Availability of defences against joint and several obligees) (1) The obligor may assert against any of the joint and several obligees all the defences and rights of set-off that are personal to its relationship to that obligee or that it can assert against all the co-obligees, but may not assert defences and rights of set-off that are personal to its relationship to one or several of the other co-obligees. (2) The provisions of Articles 11.1.5, 11.1.6, 11.1.7 and 11.1.8 apply, with appropriate adaptations, to joint and several claims. ARTICLE 11.2.4 (Allocation between joint and several obligees) (1) As among themselves, joint and several obligees are entitled to equal shares, unless the circumstances indicate otherwise. (2) An obligee who has received more than its share must transfer the excess to the other obligees to the extent of their respective shares.

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UNCITRAL ARBITRATION RULES (as revised in 2010)

Section I. Introductory rules

Scope of application*1 Article 1 1. Where parties have agreed that disputes between them in respect of a defined legal relationship, whether contractual or not, shall be referred to arbitration under the UNCITRAL Arbitration Rules, then such disputes shall be settled in accordance with these Rules subject to such modification as the parties may agree. 2. The parties to an arbitration agreement concluded after 15 August 2010 shall be presumed to have referred to the Rules in effect on the date of commencement of the arbitration, unless the parties have agreed to apply a particular version of the Rules. That presumption does not apply where the arbitration agreement has been concluded by accepting after 15 August 2010 an offer made before that date. 3. These Rules shall govern the arbitration except that where any of these Rules is in conflict with a provision of the law applicable to the arbitration from which the parties cannot derogate, that provision shall prevail. Notice and calculation of periods of time Article 2 1. A notice, including a notification, communication or proposal, may be transmitted by any means of communication that provides or allows for a record of its transmission. 2. If an address has been designated by a party specifically for this purpose or authorized by the arbitral tribunal, any notice shall be delivered to that party at that address, and if so delivered shall be deemed to have been received. Delivery by electronic means such as facsimile or email may only be made to an address so designated or authorized. 3. In the absence of such designation or authorization, a notice is: (a) received if it is physically delivered to the addressee; or (b) deemed to have been received if it is delivered at the place of business, habitual residence or mailing address of the addressee. 4. If, after reasonable efforts, delivery cannot be effected in accordance with paragraphs 2 or 3, a notice is deemed to have been received if it is sent to the address*

A model arbitration clause for contracts can be found in the annex to the Rules. 675

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ee’s last-known place of business, habitual residence or mailing address by registered letter or any other means that provides a record of delivery or of attempted delivery. 5. A notice shall be deemed to have been received on the day it is delivered in accordance with paragraphs 2, 3 or 4, or attempted to be delivered in accordance with paragraph 4. A notice transmitted by electronic means is deemed to have been received on the day it is sent, except that a notice of arbitration so transmitted is only deemed to have been received on the day when it reaches the addressee’s electronic address. 6. For the purpose of calculating a period of time under these Rules, such period shall begin to run on the day following the day when a notice is received. If the last day of such period is an official holiday or a non-business day at the residence or place of business of the addressee, the period is extended until the first business day which follows. Official holidays or non-business days occurring during the running of the period of time are included in calculating the period.

Notice of arbitration Article 3 1. The party or parties initiating recourse to arbitration (hereinafter called the “claimant”) shall communicate to the other party or parties (hereinafter called the “respondent”) a notice of arbitration. 2. Arbitral proceedings shall be deemed to commence on the date on which the notice of arbitration is received by the respondent. 3. The notice of arbitration shall include the following: (a) A demand that the dispute be referred to arbitration; (b) The names and contact details of the parties; (c) Identification of the arbitration agreement that is invoked; (d) Identification of any contract or other legal instrument out of or in relation to which the dispute arises or, in the absence of such contract or instrument, a brief description of the relevant relationship; (e) A brief description of the claim and an indication of the amount involved, if any; (f) The relief or remedy sought; (g) A proposal as to the number of arbitrators, language and place of arbitration, if the parties have not previously agreed thereon. 4. The notice of arbitration may also include: (a) A proposal for the designation of an appointing authority referred to in article 6, paragraph 1; (b) A proposal for the appointment of a sole arbitrator referred to in article 8, paragraph 1; (c) Notification of the appointment of an arbitrator referred to in articles 9 or 10. 5. The constitution of the arbitral tribunal shall not be hindered by any controversy with respect to the sufficiency of the notice of arbitration, which shall be finally resolved by the arbitral tribunal. 676

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Response to the notice of arbitration Article 4 1. Within 30 days of the receipt of the notice of arbitration, the respondent shall communicate to the claimant a response to the notice of arbitration, which shall include: (a) The name and contact details of each respondent; (b) A response to the information set forth in the notice of arbitration, pursuant to article 3, paragraphs 3 (c) to (g). 2. The response to the notice of arbitration may also include: (a) Any plea that an arbitral tribunal to be constituted under these Rules lacks jurisdiction; (b) A proposal for the designation of an appointing authority referred to in article 6, paragraph 1; (c) A proposal for the appointment of a sole arbitrator referred to in article 8, paragraph 1; (d) Notification of the appointment of an arbitrator referred to in articles 9 or 10; (e) A brief description of counterclaims or claims for the purpose of a set-off, if any, including where relevant, an indication of the amounts involved, and the relief or remedy sought; (f) A notice of arbitration in accordance with article 3 in case the respondent formulates a claim against a party to the arbitration agreement other than the claimant. 3. The constitution of the arbitral tribunal shall not be hindered by any controversy with respect to the respondent’s failure to communicate a response to the notice of arbitration, or an incomplete or late response to the notice of arbitration, which shall be finally resolved by the arbitral tribunal. Representation and assistance Article 5 Each party may be represented or assisted by persons chosen by it. The names and addresses of such persons must be communicated to all parties and to the arbitral tribunal. Such communication must specify whether the appointment is being made for purposes of representation or assistance. Where a person is to act as a representative of a party, the arbitral tribunal, on its own initiative or at the request of any party, may at any time require proof of authority granted to the representative in such a form as the arbitral tribunal may determine. Designating and appointing authorities Article 6 1. Unless the parties have already agreed on the choice of an appointing authority, a party may at any time propose the name or names of one or more institutions or persons, including the Secretary-General of the Permanent Court of Arbitration at 677

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The Hague (hereinafter called the “PCA”), one of whom would serve as appointing authority. 2. If all parties have not agreed on the choice of an appointing authority within 30 days after a proposal made in accordance with paragraph 1 has been received by all other parties, any party may request the Secretary-General of the PCA to designate the appointing authority. 3. Where these Rules provide for a period of time within which a party must refer a matter to an appointing authority and no appointing authority has been agreed on or designated, the period is suspended from the date on which a party initiates the procedure for agreeing on or designating an appointing authority until the date of such agreement or designation. 4. Except as referred to in article 41, paragraph (4), if the appointing authority refuses to act, or if it fails to appoint an arbitrator within 30 days after it receives a party’s request to do so, fails to act within any other period provided by these Rules, or fails to decide on a challenge to an arbitrator within a reasonable time after receiving a party’s request to do so, any party may request the Secretary-General of the PCA to designate a substitute appointing authority. 5. In exercising their functions under these Rules, the appointing authority and the Secretary-General of the PCA may require from any party and the arbitrators the information they deem necessary and they shall give the parties and, where appropriate, the arbitrators, an opportunity to present their views in any manner they consider appropriate. All such communications to and from the appointing authority and the Secretary-General of the PCA shall also be provided by the sender to all other parties. 6. When the appointing authority is requested to appoint an arbitrator pursuant to articles 8, 9, 10 or 14, the party making the request shall send to the appointing authority copies of the notice of arbitration and, if it exists, any response to the notice of arbitration. 7. The appointing authority shall have regard to such considerations as are likely to secure the appointment of an independent and impartial arbitrator and shall take into account the advisability of appointing an arbitrator of a nationality other than the nationalities of the parties.

Section II. Composition of the arbitral tribunal

Number of arbitrators Article 7 1. If the parties have not previously agreed on the number of arbitrators, and if within 30 days after the receipt by the respondent of the notice of arbitration the parties have not agreed that there shall be only one arbitrator, three arbitrators shall be appointed. 678

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2. Notwithstanding paragraph 1, if no other parties have responded to a party’s proposal to appoint a sole arbitrator within the time limit provided for in paragraph 1 and the party or parties concerned have failed to appoint a second arbitrator in accordance with articles 9 or 10, the appointing authority may, at the request of a party, appoint a sole arbitrator pursuant to the procedure provided for in article 8, paragraph 2 if it determines that, in view of the circumstances of the case, this is more appropriate.

Appointment of arbitrators (articles 8 to 10) Article 8 1. If the parties have agreed that a sole arbitrator is to be appointed and if within 30 days after receipt by all other parties of a proposal for the appointment of a sole arbitrator the parties have not reached agreement thereon, a sole arbitrator shall, at the request of a party, be appointed by the appointing authority. 2. The appointing authority shall appoint the sole arbitrator as promptly as possible. In making the appointment, the appointing authority shall use the following listprocedure, unless the parties agree that the list-procedure should not be used or unless the appointing authority determines in its discretion that the use of the listprocedure is not appropriate for the case: (a) The appointing authority shall communicate to each of the parties an identical list containing at least three names; (b) Within 15 days after the receipt of this list, each party may return the list to the appointing authority after having deleted the name or names to which it objects and numbered the remaining names on the list in the order of its preference; (c) After the expiration of the above period of time the appointing authority shall appoint the sole arbitrator from among the names approved on the lists returned to it and in accordance with the order of preference indicated by the parties; (d) If for any reason the appointment cannot be made according to this procedure, the appointing authority may exercise its discretion in appointing the sole arbitrator. Article 9 1. If three arbitrators are to be appointed, each party shall appoint one arbitrator. The two arbitrators thus appointed shall choose the third arbitrator who will act as the presiding arbitrator of the arbitral tribunal. 2. If within 30 days after the receipt of a party’s notification of the appointment of an arbitrator the other party has not notified the first party of the arbitrator it has appointed, the first party may request the appointing authority to appoint the second arbitrator. 3. If within 30 days after the appointment of the second arbitrator the two arbitrators have not agreed on the choice of the presiding arbitrator, the presiding arbitrator shall be appointed by the appointing authority in the same way as a sole arbitrator would be appointed under article 8. 679

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Article 10 1. For the purposes of article 9, paragraph 1, where three arbitrators are to be appointed and there are multiple parties as claimant or as respondent, unless the parties have agreed to another method of appointment of arbitrators, the multiple parties jointly, whether as claimant or as respondent, shall appoint an arbitrator. 2. If the parties have agreed that the arbitral tribunal is to be composed of a number of arbitrators other than one or three, the arbitrators shall be appointed according to the method agreed upon by the parties. 3. In the event of any failure to constitute the arbitral tribunal under these Rules, the appointing authority shall, at the request of any party, constitute the arbitral tribunal and, in doing so, may revoke any appointment already made and appoint or reappoint each of the arbitrators and designate one of them as the presiding arbitrator. Disclosures by and challenge of arbitrators**2(articles 11 to 13) Article 11 When a person is approached in connection with his or her possible appointment as an arbitrator, he or she shall disclose any circumstances likely to give rise to justifiable doubts as to his or her impartiality or independence. An arbitrator, from the time of his or her appointment and throughout the arbitral proceedings, shall without delay disclose any such circumstances to the parties and the other arbitrators unless they have already been informed by him or her of these circumstances. Article 12 1. Any arbitrator may be challenged if circumstances exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence. 2. A party may challenge the arbitrator appointed by it only for reasons of which it becomes aware after the appointment has been made. 3. In the event that an arbitrator fails to act or in the event of the de jure or de facto impossibility of his or her performing his or her functions, the procedure in respect of the challenge of an arbitrator as provided in article 13 shall apply. Article 13 1. A party that intends to challenge an arbitrator shall send notice of its challenge within 15 days after it has been notified of the appointment of the challenged arbitrator, or within 15 days after the circumstances mentioned in articles 11 and 12 became known to that party. 2. The notice of challenge shall be communicated to all other parties, to the arbitrator who is challenged and to the other arbitrators. The notice of challenge shall state the reasons for the challenge. Model statements of independence pursuant to article 11 can be found in the annex to the Rules. **

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3. When an arbitrator has been challenged by a party, all parties may agree to the challenge. The arbitrator may also, after the challenge, withdraw from his or her office. In neither case does this imply acceptance of the validity of the grounds for the challenge. 4. If, within 15 days from the date of the notice of challenge, all parties do not agree to the challenge or the challenged arbitrator does not withdraw, the party making the challenge may elect to pursue it. In that case, within 30 days from the date of the notice of challenge, it shall seek a decision on the challenge by the appointing authority.

Replacement of an arbitrator Article 14 1. Subject to paragraph (2), in any event where an arbitrator has to be replaced during the course of the arbitral proceedings, a substitute arbitrator shall be appointed or chosen pursuant to the procedure provided for in articles 8 to 11 that was applicable to the appointment or choice of the arbitrator being replaced. This procedure shall apply even if during the process of appointing the arbitrator to be replaced, a party had failed to exercise its right to appoint or to participate in the appointment. 2. If, at the request of a party, the appointing authority determines that, in view of the exceptional circumstances of the case, it would be justified for a party to be deprived of its right to appoint a substitute arbitrator, the appointing authority may, after giving an opportunity to the parties and the remaining arbitrators to express their views: (a) appoint the substitute arbitrator; or (b) after the closure of the hearings, authorize the other arbitrators to proceed with the arbitration and make any decision or award. Repetition of hearings in the event of the replacement of an arbitrator Article 15 If an arbitrator is replaced, the proceedings shall resume at the stage where the arbitrator who was replaced ceased to perform his or her functions, unless the arbitral tribunal decides otherwise. Exclusion of liability Article 16 Save for intentional wrongdoing, the parties waive, to the fullest extent permitted under the applicable law, any claim against the arbitrators, the appointing authority and any person appointed by the arbitral tribunal based on any act or omission in connection with the arbitration.

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Section III. Arbitral proceedings

General provisions Article 17 1. Subject to these Rules, the arbitral tribunal may conduct the arbitration in such manner as it considers appropriate, provided that the parties are treated with equality and that at an appropriate stage of the proceedings each party is given a reasonable opportunity of presenting its case. The arbitral tribunal, in exercising its discretion, shall conduct the proceedings so as to avoid unnecessary delay and expense and to provide a fair and efficient process for resolving the parties’ dispute. 2. As soon as practicable after its constitution and after inviting the parties to express their views, the arbitral tribunal shall establish the provisional timetable of the arbitration. The arbitral tribunal may, at any time, after inviting the parties to express their views, extend or abridge any period of time prescribed under these Rules or agreed by the parties. 3. If at an appropriate stage of the proceedings any party so requests, the arbitral tribunal shall hold hearings for the presentation of evidence by witnesses, including expert witnesses, or for oral argument. In the absence of such a request, the arbitral tribunal shall decide whether to hold such hearings or whether the proceedings shall be conducted on the basis of documents and other materials. 4. All communications to the arbitral tribunal by one party shall be communicated by that party to all other parties. Such communications shall be made at the same time, except as otherwise permitted by the arbitral tribunal if it may do so under applicable law. 5. The arbitral tribunal may, at the request of any party, allow one or more third persons to be joined in the arbitration as a party provided such person is a party to the arbitration agreement, unless the arbitral tribunal finds, after giving all parties, including the person or persons to be joined, the opportunity to be heard, that joinder should not be permitted because of prejudice to any of those parties. The arbitral tribunal may make a single award or several awards in respect of all parties so involved in the arbitration. Place of arbitration Article 18 1. If the parties have not previously agreed on the place of arbitration, the place of arbitration shall be determined by the arbitral tribunal having regard to the circumstances of the case. The award shall be deemed to have been made at the place of arbitration. 2. The arbitral tribunal may meet at any location it considers appropriate for deliberations. Unless otherwise agreed by the parties, the arbitral tribunal may also meet at any location it considers appropriate for any other purpose, including hearings. 682

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Language Article 19 1. Subject to an agreement by the parties, the arbitral tribunal shall, promptly after its appointment, determine the language or languages to be used in the proceedings. This determination shall apply to the statement of claim, the statement of defence, and any further written statements and, if oral hearings take place, to the language or languages to be used in such hearings. 2. The arbitral tribunal may order that any documents annexed to the statement of claim or statement of defence, and any supplementary documents or exhibits submitted in the course of the proceedings, delivered in their original language, shall be accompanied by a translation into the language or languages agreed upon by the parties or determined by the arbitral tribunal. Statement of claim Article 20 1. The claimant shall communicate its statement of claim in writing to the respondent and to each of the arbitrators within a period of time to be determined by the arbitral tribunal. The claimant may elect to treat its notice of arbitration referred to in article 3 as a statement of claim, provided that the notice of arbitration also complies with the requirements of paragraphs 2 to 4 of this article. 2. The statement of claim shall include the following particulars: (a) The names and contact details of the parties; (b) A statement of the facts supporting the claim; (c) The points at issue; (d) The relief or remedy sought; (e) The legal grounds or arguments supporting the claim. 3. A copy of any contract or other legal instrument out of or in relation to which the dispute arises and of the arbitration agreement shall be annexed to the statement of claim. 4. The statement of claim should, as far as possible, be accompanied by all documents and other evidence relied upon by the claimant, or contain references to them. Statement of defence Article 21 1. The respondent shall communicate its statement of defence in writing to the claimant and to each of the arbitrators within a period of time to be determined by the arbitral tribunal. The respondent may elect to treat its response to the notice of arbitration referred to in article 4 as a statement of defence, provided that the response to the notice of arbitration also complies with the requirements of paragraph 2 of this article. 683

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2. The statement of defence shall reply to the particulars (b) to (e) of the statement of claim (article 20, paragraph 2). The statement of defence should, as far as possible, be accompanied by all documents and other evidence relied upon by the respondent, or contain references to them. 3. In its statement of defence, or at a later stage in the arbitral proceedings if the arbitral tribunal decides that the delay was justified under the circumstances, the respondent may make a counterclaim or rely on a claim for the purpose of a set-off provided that the arbitral tribunal has jurisdiction over it. 4. The provisions of article 20, paragraphs 2 to 4 shall apply to a counterclaim, a claim under article 4, paragraph (2) (f) and a claim relied on for the purpose of a set-off.

Amendments to the claim or defence Article 22 During the course of the arbitral proceedings, a party may amend or supplement its claim or defence, including a counterclaim or a claim for the purpose of a set-off, unless the arbitral tribunal considers it inappropriate to allow such amendment or supplement having regard to the delay in making it or prejudice to other parties or any other circumstances. However, a claim or defence, including a counterclaim or a claim for the purpose of a set-off, may not be amended or supplemented in such a manner that the amended or supplemented claim or defence falls outside the jurisdiction of the arbitral tribunal. Pleas as to the jurisdiction of the arbitral tribunal Article 23 1. The arbitral tribunal shall have the power to rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause that forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null shall not entail automatically the invalidity of the arbitration clause. 2. A plea that the arbitral tribunal does not have jurisdiction shall be raised no later than in the statement of defence or, with respect to a counterclaim or a claim for the purpose of a set-off, in the reply to the counterclaim or to the claim for the purpose of a set-off. A party is not precluded from raising such a plea by the fact that it has appointed, or participated in the appointment of, an arbitrator. A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. The arbitral tribunal may, in either case, admit a later plea if it considers the delay justified. 3. The arbitral tribunal may rule on a plea referred to in paragraph 2 either as a preliminary question or in an award on the merits. The arbitral tribunal may continue 684

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the arbitral proceedings and make an award, notwithstanding any pending challenge to its jurisdiction before a court.

Further written statements Article 24 The arbitral tribunal shall decide which further written statements, in addition to the statement of claim and the statement of defence, shall be required from the parties or may be presented by them and shall fix the periods of time for communicating such statements. Periods of time Article 25 The periods of time fixed by the arbitral tribunal for the communication of written statements (including the statement of claim and statement of defence) should not exceed 45 days. However, the arbitral tribunal may extend the time limits if it concludes that an extension is justified. Interim measures Article 26 1. The arbitral tribunal may, at the request of a party, grant interim measures. 2. An interim measure is any temporary measure by which, at any time prior to the issuance of the award by which the dispute is finally decided, the arbitral tribunal orders a party, for example and without limitation, to: (a) Maintain or restore the status quo pending determination of the dispute; (b) Take action that would prevent, or refrain from taking action that is likely to cause, (i) current or imminent harm or (ii) prejudice to the arbitral process itself; (c) Provide a means of preserving assets out of which a subsequent award may be satisfied; or (d) Preserve evidence that may be relevant and material to the resolution of the dispute. 3. The party requesting an interim measure under paragraphs 2 (a) to (c) shall satisfy the arbitral tribunal that: (a) Harm not adequately reparable by an award of damages is likely to result if the measure is not ordered, and such harm substantially outweighs the harm that is likely to result to the party against whom the measure is directed if the measure is granted; and (b) There is a reasonable possibility that the requesting party will succeed on the merits of the claim. The determination on this possibility shall not affect the discretion of the arbitral tribunal in making any subsequent determination. 685

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4. With regard to a request for an interim measure under paragraph 2 (d), the requirements in paragraphs 3 (a) and (b) shall apply only to the extent the arbitral tribunal considers appropriate. 5. The arbitral tribunal may modify, suspend or terminate an interim measure it has granted, upon application of any party or, in exceptional circumstances and upon prior notice to the parties, on the arbitral tribunal’s own initiative. 6. The arbitral tribunal may require the party requesting an interim measure to provide appropriate security in connection with the measure. 7. The arbitral tribunal may require any party promptly to disclose any material change in the circumstances on the basis of which the interim measure was requested or granted. 8. The party requesting an interim measure may be liable for any costs and damages caused by the measure to any party if the arbitral tribunal later determines that, in the circumstances then prevailing, the measure should not have been granted. The arbitral tribunal may award such costs and damages at any point during the proceedings. 9. A request for interim measures addressed by any party to a judicial authority shall not be deemed incompatible with the agreement to arbitrate, or as a waiver of that agreement.

Evidence Article 27 1. Each party shall have the burden of proving the facts relied on to support its claim or defence. 2. Witnesses, including expert witnesses, who are presented by the parties to testify to the arbitral tribunal on any issue of fact or expertise may be any individual, notwithstanding that the individual is a party to the arbitration or in any way related to a party. Unless otherwise directed by the arbitral tribunal, statements by witnesses, including expert witnesses, may be presented in writing and signed by them. 3. At any time during the arbitral proceedings the arbitral tribunal may require the parties to produce documents, exhibits or other evidence within such a period of time as the arbitral tribunal shall determine. 4. The arbitral tribunal shall determine the admissibility, relevance, materiality and weight of the evidence offered.

Hearings Article 28 1. In the event of an oral hearing, the arbitral tribunal shall give the parties adequate advance notice of the date, time and place thereof. 2. Witnesses, including expert witnesses, may be heard under the conditions and examined in the manner set by the arbitral tribunal. 686

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3. Hearings shall be held in camera unless the parties agree otherwise. The arbitral tribunal may require the retirement of any witness or witnesses, including expert witnesses, during the testimony of such other witnesses, except that a witness, including an expert witness, who is a party to the arbitration shall not, in principle, be asked to retire. 4. The arbitral tribunal may direct that witnesses, including expert witnesses, be examined through means of telecommunication that do not require their physical presence at the hearing (such as videoconference).

Experts appointed by the arbitral tribunal Article 29 1. After consultation with the parties, the arbitral tribunal may appoint one or more independent experts to report to it, in writing, on specific issues to be determined by the arbitral tribunal. A copy of the expert’s terms of reference, established by the arbitral tribunal, shall be communicated to the parties. 2. The expert shall, in principle before accepting appointment, submit to the arbitral tribunal and to the parties a description of his or her qualifications and a statement of his or her impartiality and independence. Within the time ordered by the arbitral tribunal, the parties shall inform the arbitral tribunal whether they have any objections as to the expert’s qualifications, impartiality or independence. The arbitral tribunal shall decide promptly whether to accept any such objections. After an expert’s appointment, a party may object to the expert’s qualifications, impartiality or independence only if the objection is for reasons of which the party becomes aware after the appointment has been made. The arbitral tribunal shall decide promptly what, if any, action to take. 3. The parties shall give the expert any relevant information or produce for his or her inspection any relevant documents or goods that he or she may require of them. Any dispute between a party and such expert as to the relevance of the required information or production shall be referred to the arbitral tribunal for decision. 4. Upon receipt of the expert’s report, the arbitral tribunal shall communicate a copy of the report to the parties, which shall be given the opportunity to express, in writing, their opinion on the report. A party shall be entitled to examine any document on which the expert has relied in his or her report. 5. At the request of any party, the expert, after delivery of the report, may be heard at a hearing where the parties shall have the opportunity to be present and to interrogate the expert. At this hearing, any party may present expert witnesses in order to testify on the points at issue. The provisions of article 28 shall be applicable to such proceedings. Default Article 30 1. If, within the period of time fixed by these Rules or the arbitral tribunal, without showing sufficient cause: 687

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(a) The claimant has failed to communicate its statement of claim, the arbitral tribunal shall issue an order for the termination of the arbitral proceedings, unless there are remaining matters that may need to be decided and the arbitral tribunal considers it appropriate to do so; (b) The respondent has failed to communicate its response to the notice of arbitration or its statement of defence, the arbitral tribunal shall order that the proceedings continue, without treating such failure in itself as an admission of the claimant’s allegations; the provisions of this subparagraph also apply to a claimant’s failure to submit a defence to a counterclaim or to a claim for the purpose of a set-off. 2. If a party, duly notified under these Rules, fails to appear at a hearing, without showing sufficient cause for such failure, the arbitral tribunal may proceed with the arbitration. 3. If a party, duly invited by the arbitral tribunal to produce documents, exhibits or other evidence, fails to do so within the established period of time, without showing sufficient cause for such failure, the arbitral tribunal may make the award on the evidence before it.

Closure of hearings Article 31 1. The arbitral tribunal may inquire of the parties if they have any further proof to offer or witnesses to be heard or submissions to make and, if there are none, it may declare the hearings closed. 2. The arbitral tribunal may, if it considers it necessary owing to exceptional circumstances, decide, on its own initiative or upon application of a party, to reopen the hearings at any time before the award is made. Waiver of right to object Article 32 A failure by any party to object promptly to any noncompliance with these Rules or with any requirement of the arbitration agreement shall be deemed to be a waiver of the right of such party to make such an objection, unless such party can show that, under the circumstances, its failure to object was justified.

Section IV. The award

Decisions Article 33 1. When there is more than one arbitrator, any award or other decision of the arbitral tribunal shall be made by a majority of the arbitrators. 688

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2. In the case of questions of procedure, when there is no majority or when the arbitral tribunal so authorizes, the presiding arbitrator may decide alone, subject to revision, if any, by the arbitral tribunal.

Form and effect of the award Article 34 1. The arbitral tribunal may make separate awards on different issues at different times. 2. All awards shall be made in writing and shall be final and binding on the parties. The parties shall carry out all awards without delay. 3. The arbitral tribunal shall state the reasons upon which the award is based, unless the parties have agreed that no reasons are to be given. 4. An award shall be signed by the arbitrators and it shall contain the date on which the award was made and indicate the place of arbitration. Where there is more than one arbitrator and any of them fails to sign, the award shall state the reason for the absence of the signature. 5. An award may be made public with the consent of all parties or where and to the extent disclosure is required of a party by legal duty, to protect or pursue a legal right or in relation to legal proceedings before a court or other competent authority. 6. Copies of the award signed by the arbitrators shall be communicated to the parties by the arbitral tribunal. Applicable law, amiable compositeur Article 35 1. The arbitral tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law which it determines to be appropriate. 2. The arbitral tribunal shall decide as amiable compositeur or ex aequo et bono only if the parties have expressly authorized the arbitral tribunal to do so. 3. In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract, if any, and shall take into account any usage of trade applicable to the transaction. Settlement or other grounds for termination Article 36 1. If, before the award is made, the parties agree on a settlement of the dispute, the arbitral tribunal shall either issue an order for the termination of the arbitral proceedings or, if requested by the parties and accepted by the arbitral tribunal, record the settlement in the form of an arbitral award on agreed terms. The arbitral tribunal is not obliged to give reasons for such an award. 689

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2. If, before the award is made, the continuation of the arbitral proceedings becomes unnecessary or impossible for any reason not mentioned in paragraph 1, the arbitral tribunal shall inform the parties of its intention to issue an order for the termination of the proceedings. The arbitral tribunal shall have the power to issue such an order unless there are remaining matters that may need to be decided and the arbitral tribunal considers it appropriate to do so. 3. Copies of the order for termination of the arbitral proceedings or of the arbitral award on agreed terms, signed by the arbitrators, shall be communicated by the arbitral tribunal to the parties. Where an arbitral award on agreed terms is made, the provisions of article 34, paragraphs 2, 4 and 5 shall apply.

Interpretation of the award Article 37 1. Within 30 days after the receipt of the award, a party, with notice to the other parties, may request that the arbitral tribunal give an interpretation of the award. 2. The interpretation shall be given in writing within 45 days after the receipt of the request. The interpretation shall form part of the award and the provisions of article 34, paragraphs 2 to 6, shall apply. Correction of the award Article 38 1. Within 30 days after the receipt of the award, a party, with notice to the other parties, may request the arbitral tribunal to correct in the award any error in computation, any clerical or typographical error, or any error or omission of a similar nature. If the arbitral tribunal considers that the request is justified, it shall make the correction within 45 days of receipt of the request. 2. The arbitral tribunal may within 30 days after the communication of the award make such corrections on its own initiative. 3. Such corrections shall be in writing and shall form part of the award. The provisions of article 34, paragraphs 2 to 6, shall apply. Additional award Article 39 1. Within 30 days after the receipt of the termination order or the award, a party, with notice to the other parties, may request the arbitral tribunal to make an award or an additional award as to claims presented in the arbitral proceedings but not decided by the arbitral tribunal. 2. If the arbitral tribunal considers the request for an award or additional award to be justified, it shall render or complete its award within 60 days after the receipt of the request. The arbitral tribunal may extend, if necessary, the period of time within which it shall make the award. 690

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3. When such an award or additional award is made, the provisions of article 34, paragraphs 2 to 6, shall apply.

Definition of costs Article 40 1. The arbitral tribunal shall fix the costs of arbitration in the final award and, if it deems appropriate, in another decision. 2. The term “costs” includes only: (a) The fees of the arbitral tribunal to be stated separately as to each arbitrator and to be fixed by the tribunal itself in accordance with article 41; (b) The reasonable travel and other expenses incurred by the arbitrators; (c) The reasonable costs of expert advice and of other assistance required by the arbitral tribunal; (d) The reasonable travel and other expenses of witnesses to the extent such expenses are approved by the arbitral tribunal; (e) The legal and other costs incurred by the parties in relation to the arbitration to the extent that the arbitral tribunal determines that the amount of such costs is reasonable; (f) Any fees and expenses of the appointing authority as well as the fees and expenses of the Secretary-General of the PCA. 3. In relation to interpretation, correction or completion of any award under articles 37 to 39, the arbitral tribunal may charge the costs referred to in paragraphs 2 (b) to (f), but no additional fees. Fees and expenses of arbitrators Article 41 1. The fees and expenses of the arbitrators shall be reasonable in amount, taking into account the amount in dispute, the complexity of the subject matter, the time spent by the arbitrators and any other relevant circumstances of the case. 2. If there is an appointing authority and it applies or has stated that it will apply a schedule or particular method for determining the fees for arbitrators in international cases, the arbitral tribunal in fixing its fees shall take that schedule or method into account to the extent that it considers appropriate in the circumstances of the case. 3. Promptly after its constitution, the arbitral tribunal shall inform the parties as to how it proposes to determine its fees and expenses, including any rates it intends to apply. Within 15 days of receiving that proposal, any party may refer the proposal to the appointing authority for review. If, within 45 days of receipt of such a referral, the appointing authority finds that the proposal of the arbitral tribunal is inconsistent with paragraph 1, it shall make any necessary adjustments thereto, which shall be binding upon the arbitral tribunal. 4. (a) When informing the parties of the arbitrators’ fees and expenses that have been fixed pursuant to article 40, paragraphs 2 (a) and (b), the arbitral tribunal shall 691

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also explain the manner in which the corresponding amounts have been calculated. (b) Within 15 days of receiving the arbitral tribunal’s determination of fees and expenses, any party may refer for review such determination to the appointing authority. If no appointing authority has been agreed upon or designated, or if the appointing authority fails to act within the time specified in these Rules, then the review shall be made by the Secretary-General of the PCA. (c) If the appointing authority or the Secretary-General of the PCA finds that the arbitral tribunal’s determination is inconsistent with the arbitral tribunal’s proposal (and any adjustment thereto) under paragraph 3 or is otherwise manifestly excessive, it shall, within 45 days of receiving such a referral, make any adjustments to the arbitral tribunal’s determination that are necessary to satisfy the criteria in paragraph 1. Any such adjustments shall be binding upon the arbitral tribunal. (d) Any such adjustments shall either be included by the arbitral tribunal in its award or, if the award has already been issued, be implemented in a correction to the award, to which the procedure of article 38, paragraph 3 shall apply. 5. Throughout the procedure under paragraphs 3 and 4, the arbitral tribunal shall proceed with the arbitration, in accordance with article 17, paragraph 1. 6. A referral under paragraph 4 shall not affect any determination in the award other than the arbitral tribunal’s fees and expenses; nor shall it delay the recognition and enforcement of all parts of the award other than those relating to the determination of the arbitral tribunal’s fees and expenses.

Allocation of costs Article 42 1. The costs of the arbitration shall in principle be borne by the unsuccessful party or parties. However, the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case. 2. The arbitral tribunal shall in the final award or, if it deems appropriate, in any other award, determine any amount that a party may have to pay to another party as a result of the decision on allocation of costs. Deposit of costs Article 43 1. The arbitral tribunal, on its establishment, may request the parties to deposit an equal amount as an advance for the costs referred to in article 40, paragraphs 2 (a) to (c). 2. During the course of the arbitral proceedings the arbitral tribunal may request supplementary deposits from the parties. 692

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3. If an appointing authority has been agreed upon or designated, and when a party so requests and the appointing authority consents to perform the function, the arbitral tribunal shall fix the amounts of any deposits or supplementary deposits only after consultation with the appointing authority, which may make any comments to the arbitral tribunal that it deems appropriate concerning the amount of such deposits and supplementary deposits. 4. If the required deposits are not paid in full within 30 days after the receipt of the request, the arbitral tribunal shall so inform the parties in order that one or more of them may make the required payment. If such payment is not made, the arbitral tribunal may order the suspension or termination of the arbitral proceedings. 5. After a termination order or final award has been made, the arbitral tribunal shall render an accounting to the parties of the deposits received and return any unexpended balance to the parties.

Annex Model arbitration clause for contracts Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules. Note — Parties should consider adding: (a) The (b) The (c) The (d) The

appointing authority shall be ... (name of institution or person); number of arbitrators shall be ... (one or three); place of arbitration shall be ... (town and country); language to be used in the arbitral proceedings shall be ... .

Possible waiver statement Note — If the parties wish to exclude recourse against the arbitral award that may be available under the applicable law, they may consider adding a provision to that effect as suggested below, considering, however, that the effectiveness and conditions of such an exclusion depend on the applicable law. Waiver: The parties hereby waive their right to any form of recourse against an award to any court or other competent authority, insofar as such waiver can validly be made under the applicable law.

Model statements of independence pursuant to article 11 of the Rules No circumstances to disclose: I am impartial and independent of each of the parties and intend to remain so. To the best of my knowledge, there are no circumstances, 693

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past or present, likely to give rise to justifiable doubts as to my impartiality or independence. I shall promptly notify the parties and the other arbitrators of any such circumstances that may subsequently come to my attention during this arbitration. Circumstances to disclose: I am impartial and independent of each of the parties and intend to remain so. Attached is a statement made pursuant to article 11 of the UNCITRAL Arbitration Rules of (a) my past and present professional, business and other relationships with the parties and (b) any other relevant circumstances. [Include statement] I confirm that those circumstances do not affect my independence and impartiality. I shall promptly notify the parties and the other arbitrators of any such further relationships or circumstances that may subsequently come to my attention during this arbitration. Note — Any party may consider requesting from the arbitrator the following addition to the statement of independence: I confirm, on the basis of the information presently available to me, that I can devote the time necessary to conduct this arbitration diligently, efficiently and in accordance with the time limits in the Rules.

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RULES OF THE INTERNATIONAL COMMERCIAL ARBITRATION COURT OF THE CHAMBER OF COMMERCE AND INDUSTRY OF THE RUSSIAN FEDERATION1

Contents I. GENERAL PROVISIONS § 1. International Commercial Arbitration Court § 2. Jurisdiction II. ORGANIZATIONAL PRINCIPLES § 3. Arbitrators § 4. The ICAC Presidium § 5. President and Vice Presidents of the ICAC § 6. The Secretariat § 7. Reporters III. COMMENCEMENT OF ARBITRAL PROCEEDINGS § 8. Bringing of a Claim § 9. Contents of the Statement of Claim § 10. Amount of the Claim § 11. Rectification of the Statement of Claim § 12. Statement of Defence § 13. Counter-claim and Set-off § 14. Costs of the Arbitral Proceedings IV. SUBMISSION AND TRANSMISSION OF DOCUMENTS § 15. Submission of Documents § 16. Mailing and Delivery of Documents V. THE ARBITRAL TRIBUNAL § 17. Composition of the Arbitral Tribunal § 18. Challenge of an Arbitrator § 19. Termination of an Arbitrator’s Powers for Other Reasons § 20. Replacements in the Arbitral Tribunal

1   Approved by Order No. 76 of the Chamber of Commerce and Industry of the Russian Federation, October 18, 2005. Effective March 1, 2006, applying to disputes commenced said date. T he ICAC Rules approved by Order No. 96 of the Federal CCI on December 8, 1994, as amended, shall apply to disputes initiated prior to the above date, unless the parties have agreed otherwise.

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VI. ARBITRAL PROCEEDINGS § 21. General Principles of the Proceedings § 22. Place of Arbitration § 23. Language of the Arbitral Proceedings § 24. Duration of the Proceedings in a Case § 25. Confidentiality § 26. Applicable Law § 27. Representation of the Parties § 28. Participation of Third Parties § 29. Preparation of the Case for Arbitration § 30. Amendments or Supplements to the Claim or Explanations of the Claim § 31. Evidence § 32. Oral Hearing § 33. Record of the Oral Hearing § 34. Hearing on the Basis of Written Materials § 35. Adjournment of the Hearing and Suspension of the Proceedings § 36. Interim Measures of Protection VII. TERMINATION OF ARBITRAL PROCEEDINGS § 37. Final Arbitral Award § 38. Making of an Award § 39. Contents of the Award § 40. Separate Award § 41. Award on Agreed Terms § 42. Announcement of the Award § 43. Correction, Interpretation, and an Additional Award § 44. Execution of the Award § 44. Termination of the Proceedings without Making an Award VIII. MISCELLANEOUS § 45. Waiver of the Right to Object § 46. Exclusion of Liability § 47. Application of the ICAC Rules SCHEDULE OF ARBITRATIONS FEES AND COSTS (APPENDIX) § 1. Definitions § 2. Registration Fee § 3. Arbitration Fee § 4. Reduction in the Arbitration Fee § 5. Arbitration Fee for a Counter-claim or Set-off § 6. Apportionment of the Arbitration Fee § 7. Payment of Additional Costs § 8. Payment of Arbitration Fees and Costs § 9. Expenses of the Parties § 10. Different Apportionment of Arbitration Fees and Expenses § 11. Application of the Schedule of Arbitration Fees and Costs 696

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I. GENERAL PROVISIONS § 1. International Commercial Arbitration Court 1. The International Commercial Arbitration Court (ICAC) is an independent permanent arbitration institution (third-party tribunal) operating under the Law of the Russian Federation on International Commercial Arbitration of July 7, 1993. 2. The ICAC has its seat in Moscow. § 2. Jurisdiction 1. The parties to a dispute may agree to refer to the ICAC: Disputes arising out of contractual or other civil law relationships connected with foreign trade and other kinds of international business where the place of business of at least one of the parties is located abroad, or disputes between enterprises with foreign interest and international associations and organizations established in the territory of the Russian Federation or between members thereof, or disputes between them and other subjects of law of the Russian Federation. Civil law relationships resulting in disputes that may be referred to the ICAC for arbitration shall include, in particular, relationships concerning purchase and sale (delivery) of goods, labor and other services; exchange of goods and/or services; carriage of goods and passengers; commercial representation and agency; financial leasing; scientific and technological exchange; exchange of other intellectual products; construction of industrial and other projects; licensing operations; investment; crediting and settlement operations; insurance; joint ventures; and other forms of industrial and business cooperation. 2. The ICAC shall settle disputes subject to an agreement in writing between the parties to refer a dispute that has arisen, or may arise, between them to the ICAC. 3. The ICAC shall also accept for arbitration disputes subject to the jurisdiction thereof by virtue of international agreements. 4. The issue of ICAC jurisdiction in a particular case shall be decided by an arbitral tribunal examining the case. The arbitral tribunal may take a separate decision on the jurisdiction issue before the case is examined on its merits, or deal with this issue in an award on the merits of the dispute. 5. Issuing an award on the merits of a case shall belong to the exclusive authority of the arbitral tribunal examining a particular case. II. ORGANIZATIONAL PRINCIPLES § 3. Arbitrators 1. Arbitrators shall be chosen or appointed in accordance with these Rules from among persons possessing the requisite specialized knowledge in settling disputes within the jurisdiction of the ICAC. The arbitrators shall be impartial and independent in fulfilling their duties. None of them shall be a representative of either party to the dispute. 697

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2. A person assuming the duties of an arbitrator shall fill in and sign a declaration on a form to be approved by the ICAC Presidium, stating his consent to assume and fulfill the duties of an arbitrator in accordance with the ICAC Rules, and shall notify the ICAC of any circumstances likely to cause justified concerns about his impartiality or independence with regard to any dispute in the examination of which he might participate. The arbitrator shall give immediate notice to the ICAC of any such circumstance if he becomes aware of it during the arbitral proceedings. A person consenting to assume the duties of an arbitrator also shall immediately provide the ICAC with a brief personal questionnaire, including particulars such as education, current employment and past record, unless such particulars have been communicated to the ICAC already, or in the event of any changes therein. Such personal questionnaires shall be provided by the ICAC Secretariat to each of the parties in the case on request. 3. The Chamber of Commerce and Industry of the Russian Federation (RF CCI) shall approve, on representation of the ICAC Presidium, a list of arbitrators (hereinafter referred to as the List of Arbitrators), to be in effect for a period of five years. The List of Arbitrators shall contain the full name of the arbitrator, his education and place of employment, academic degree and title, specialty or specialization, and knowledge of foreign languages. Where a new List of Arbitrators has not been approved before the end of the period of time referred to above, the current approved List of Arbitrators shall continue in effect until a new List of Arbitrators is approved. The List of Arbitrators shall be made available to any interested person by the ICAC Secretariat on request. 4. Persons outside the List of Arbitrators may serve as arbitrators as well, unless otherwise specified in these Rules. 5. Where a person elected or appointed to act as an arbitrator fails to comply with the requirements of subparagraph 2 of this paragraph within 15 days after receipt of notice of his election or appointment from the ICAC, unless a longer period is specified by the ICAC because of particular circumstances, he shall be deemed to have declined to assume the duties of an arbitrator and his selection or appointment shall be annulled. § 4. The ICAC Presidium 1. The ICAC Presidium shall comprise ex officio the President and Vice Presidents of the ICAC, five members of the Presidium elected for a period of five years at the general meeting of persons on the List of Arbitrators, and a person appointed by the President of the RF CCI. The President of the ICAC shall act as Chairman of the Presidium. Where no new members have been elected to the Presidium upon expiry of the aforesaid period, the current members of the Presidium shall continue to fulfill their duties until such new members are elected. The Executive Secretary of the ICAC shall attend meetings of the ICAC Presidium with the right of a deliberative vote. 2. The ICAC Presidium shall fulfill duties within its competence in accordance with these Rules; study arbitration practices, including the application of the ICAC Rules; and review opportunities for dissemination of information about the activi698

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ties of the ICAC, international links of the ICAC, and other issues relating to the activities of the ICAC. The ICAC President shall submit to the RF CCI for approval a List of Arbitrators and recommendations on amendments thereto. 3. The ICAC Presidium shall adopt resolutions by a simple majority vote, provided that at least three members of the Presidium, including the Presidium Chairman, are present at the meeting. In the event of vote parity, the Presidium Chairman shall have the decisive vote. Resolutions of the Presidium shall be formalized in minutes. The minutes shall be signed by the Presidium Chairman and Secretary of the Presidium. 4. In urgent situations, the Presidium may adopt resolutions by polling the members thereof, with their responses recorded in the minutes. 5. The Executive Secretary of the ICAC shall fulfill the duties of the Secretary of the Presidium. 6.  No members of the Presidium shall speak out or vote on resolutions adopted by the Presidium on arbitral proceedings in which they take part. 7. The ICAC Presidium may delegate some of its duties to the ICAC President. § 5. President and Vice Presidents of the ICAC 1. The ICAC President and two vice presidents shall be elected at a general meeting of the persons entered in the List of Arbitrators for a period of five years. Where a new ICAC President and new vice presidents have not been elected upon expiry of the aforesaid period, the current ICAC President and vice presidents shall continue to fulfill their duties until new elections are held. 2. The ICAC President shall act within his terms of reference specified in these Rules and act on behalf on the ICAC in and beyond the Russian Federation. 3. The duties of the ICAC vice presidents shall be specified by the ICAC President. In the absence of the ICAC President, the duties of his office shall be fulfilled by a vice president to be appointed by the ICAC President. § 6. The Secretariat 1. The Secretariat shall fulfill the duties necessary for the smooth functioning of the ICAC in accordance with these Rules, including the organization of office work in dispute cases examined by the ICAC. All correspondence between the ICAC and the parties involved in the arbitration shall be through the Secretariat. 2. The Secretariat shall be headed up by an executive secretary to be appointed by the RF CCI upon representation of the ICAC Presidium. To be eligible for appointment as executive secretary of the ICAC, a person is required to have a degree in law and be fluent in the English language. 3. The Executive Secretary of the ICAC shall have a deputy. The Executive Secretary shall allocate duties to his deputy and to other employees of the Secretariat. 699

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4. The Executive Secretary shall be guided by the provisions of these Rules in fulfilling his duties in connection with cases examined at the ICAC, and shall report to the President of the ICAC. § 7. Reporters 1. The Executive Secretary of the ICAC shall appoint a reporter in each case to keep records of the hearings, sit in on closed-door sessions of the arbitral tribunal, carry out appropriate instructions related to arbitral proceedings, and fulfill other duties specified in the Reporters Rules to be approved by the ICAC Presidium. Where a reporter is appointed, the Chairman of the tribunal or the sole arbitrator, unless the arbitral proceedings are closed before an arbitral tribunal is established, shall be requested to nominate the reporter. 2. The list of reporters shall be approved by the ICAC Presidium and shall be updated at regular intervals. Persons who have a degree in law and, generally, are fluent in a foreign language shall be eligible for inclusion in the list of reporters. 3. The duties of reporters also may be fulfilled by persons outside the list of reporters, provided that they meet the statutory requirements.

III. COMMENCEMENT OF ARBITRAL PROCEEDINGS § 8. Bringing of a Claim 1. Arbitral proceedings shall commence with the filing of a statement of claim with the ICAC. 2. The filing date of the statement of claim shall be the date on which it is delivered to the ICAC, or where the statement of claim is sent by mail it shall be the date of the postmark of the post office where it has been mailed. § 9. Contents of the Statement of Claim 1. The statement of claim shall include: (a) names, postal addresses, telephone and fax numbers, and e-mail addresses of the parties; (b) demands of the claimant; (c) substantiation of the jurisdiction of the ICAC; (d) a statement of the factual circumstances supporting the claim; (e) evidence confirming such circumstances; (f) substantiation of the claims with reference to applicable law; (g) amount of the claim; (h) calculation of the amount of each demand; and (i) a list of documents attached to the statement of claim. 2. The statement of claim shall be signed by an authorized person and be accompanied by documented evidence of his powers. 700

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3. Where there is an agreement between the parties, the statement of claim shall contain information about an arbitral tribunal to be composed, in particular, about an arbitrator chosen by the claimant and a reserve arbitrator (§ 17 of the Rules). § 10. Amount of the Claim 1. The amount of the claim shall be: (a) in claims for recovery of money, the amount sought, and, where interest continues to accrue, the amount accruing on the filing date of the claim; (b) in claims for recovery of property, the value of the property sought; (c) in claims for recognition or transformation of a legal relationship, the value of the subject matter of the legal relationship at the moment when the claim is brought; and (d) in claims for an act to be done or forborne from, determined on the basis of available information about the property interests of the claimant. The claimant shall also indicate in his statement of claim the amount of the claim where his statement of claim or any part of the claim is not of a monetary nature. 2. Where the claim consists of several demands, the amount of the claim shall be the total amount of all demands. 3. The amount of the claim shall not include demands for recovery of arbitration fees and costs, and the expenses incurred by the parties. 4. Where the claimant has not stated or misstated the amount of the claim, the ICAC shall, on its own initiative or at the request of the respondent, determine the amount of the claim on the basis of available evidence. § 11. Rectification of the Statement of Claim 1. Where a statement of claim has been filed that does not comply with the requirements of subparagraph 1 of § 9 and § 15 of these Rules, the Executive Secretary of the ICAC may invite the claimant to rectify the defects found within a period of time that shall not, as a rule, exceed one month from the date on which such invitation is received. 2. Where the claimant has not, in spite of the invitation to rectify the defects of his statement of claim, rectified the defects within the applicable period and insists that the arbitral proceedings be held, the ICAC shall either make an arbitral award or rule to terminate the proceedings. 3. Where a statement of claim contains demands arising out of several contracts, it shall be accepted for arbitration, provided that there is an arbitration agreement covering all such demands. § 12. Statement of Defence 1. The Executive Secretary of the ICAC shall give the respondent notice of a statement of claim filed and send to the respondent a copy of the statement of claim 701

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and copies of the documents attached thereto after an adequate number thereof has been submitted. 2. Simultaneously, the Executive Secretary of the ICAC shall invite the respondent to submit a statement of defence within a period of 30 days from receipt of the statement of claim. 3. The statement of defence shall contain: (a) the name, postal address, telephone and fax numbers, and e-mail address of the respondent; (b)  an application in which the respondent acknowledges, or objects to, the demands; (c) a statement of the factual circumstances supporting the position of the respondent; (d) evidence supporting such circumstances; (e) substantiation of the position of the respondent with reference to applicable rules of law; and (f) a list of documents attached to the statement of defence. 4. The statement of defence shall be signed by an authorized person and accompanied by documented evidence of his powers. § 13. Counter-claim and Set-off 1. The respondent may, within the period of time specified in subparagraph 2 of §  12 of these Rules, make a counter-claim or a set-off, provided that there is an arbitration agreement covering such a claim or set-off along with the demands of the principal claim. Where the arbitral proceedings are extended because of unjustified delay on the part of the respondent in submitting his counter-claim or set-off, the respondent may be required to cover the extra costs and expenses incurred by the other party due to the delay. The arbitral tribunal may refuse permission for a counter-claim or set-off to be made because of the delay caused. 2. The counter-claim shall meet the respective requirements of subparagraph 1 of §  9 of these Rules. § 14. Costs of the Arbitral Proceedings 1. The claimant shall pay a registration fee for a statement of claim or a request for security for the claim. The claim or request shall not be deemed filed before the registration fee is paid. The registration fee paid for the statement of claim or request for security for the claim filed shall not be refundable. 2. The claimant shall make an advance payment of the arbitration fee for each claim filed. The registration fee shall be counted toward the advance payment made by the claimant. The case shall not progress until the advance payment of the arbitration fee has been made. 702

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3. The amount of the registration and arbitration fees, the manner of their payment and distribution, and the manner of payment of other arbitration expenses is specified in the Schedule of Arbitration Fees and Costs, which is an integral part of these Rules. IV. SUBMISSION AND TRANSMISSION OF DOCUMENTS § 15. Submission of Documents All documents relating to the commencement and conduct of the arbitral proceedings shall be submitted to the ICAC in five copies, and where the dispute is settled by a sole arbitrator, three copies shall be required, provided that the number of copies shall increase where more than two parties are involved in the dispute, unless otherwise specified, where appropriate, by the ICAC. § 16. Mailing and Delivery of Documents 1. The ICAC shall mail the documents in a case to either of the parties at the addresses given by the party for the documents to be mailed to it or to the other party. The parties shall immediately notify the ICAC of any changes in the addresses given previously. 2. All documents submitted by either of the parties to the ICAC shall be transmitted by the ICAC to the other party, unless these documents have been transmitted by such party to the other party during the arbitral proceedings. Any reports prepared by experts or other documents classified as evidence on which an arbitral award may be based shall be transmitted to the parties as well. 3. The statements of claim, statements of defence, notices of the hearing, arbitral awards, and orders shall be sent by registered mail with return receipt requested, or otherwise, provided that a record is made of the attempt to deliver the mail. 4. Other documents may be sent by registered or ordinary mail, and notices and communications also may be sent by wire, fax, e-mail, or otherwise, provided that a record is made of the communication sent. 5. Any of the aforesaid documents may alternatively be delivered by courier against receipt. 6. A communication shall be deemed received on the day when it is received by a party or when it should have been received if sent as specified in the preceding subparagraphs of this paragraph. 7. Where a party appoints a representative, the documents in the case shall be sent or delivered to such representative, unless said party has notified the ICAC otherwise, and shall be deemed sent or delivered by said party. V. THE ARBITRAL TRIBUNAL § 17. Composition of the Arbitral Tribunal 1. If the parties have not agreed otherwise, an arbitral tribunal in the case shall be established as required under subparagraphs 2 to 9 of this paragraph. 703

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2. An arbitral tribunal shall consist of three arbitrators, unless in view of the complexity of the case, amount of the claim (which shall not, as a rule, exceed $25,000), and other circumstances, the ICAC Presidium determines, in its own discretion, that the case shall be settled by a sole arbitrator. 3. Where an arbitral tribunal is to be composed of three arbitrators, the claimant shall, within 15 days after receipt of a notice from the ICAC, give the ICAC notice of the arbitrator and reserve arbitrator appointed by him, unless the claimant has made such appointment in advance. 4. If the claimant does not choose an arbitrator and a reserve arbitrator within the period of time referred to in subparagraph 3 of this paragraph, the ICAC Presidium shall appoint an arbitrator and a reserve arbitrator for him. 5. Where an arbitral tribunal is to be composed of three arbitrators, the respondent shall, within 15 days after receipt of a notice from the ICAC that an arbitrator and a reserve arbitrator have been chosen or appointed by the claimant, give the ICAC notice of the arbitrator and reserve arbitrator chosen by him. 6. If the respondent does not choose an arbitrator and a reserve arbitrator within the period of time referred to in subparagraph 5 of this paragraph, the ICAC Presidium shall appoint an arbitrator and a reserve arbitrator for him. 7. Where an arbitral tribunal is to be composed of three arbitrators, the ICAC Presidium shall appoint a presiding arbitrator and a reserve presiding arbitrator from the List of Arbitrators. 8. Where an arbitral tribunal is to be composed of three arbitrators to arbitrate between multiple claimants and multiple respondents, the multiple claimants and the multiple respondents shall each choose one arbitrator and one reserve arbitrator. Where the claimants or respondents have not reached an agreement, the ICAC Presidium shall appoint one arbitrator and one reserve arbitrator. The ICAC Presidium may also appoint an arbitrator and a reserve arbitrator for the other party as well. 9. Where a case is examined by a sole arbitrator, the ICAC Presidium shall appoint a sole arbitrator and a reserve sole arbitrator from the List of Arbitrators. 10. The ICAC Presidium may authorize the ICAC President to decide on the appointment of an arbitrator and a reserve arbitrator, including a presiding arbitrator and a reserve presiding arbitrator, and a sole arbitrator and a reserve sole arbitrator. 11. The duties of an arbitral tribunal and the presiding arbitrator thereof, in accordance with these Rules, shall apply to the sole arbitrator as well. § 18. Challenge of an Arbitrator 1. Either of the parties may challenge an arbitrator if circumstances exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence, in particular, if it may be assumed that he personally, directly or indirectly, is interested in the outcome of the proceedings. A challenge also may be made if an arbitrator lacks the qualifications stipulated by an agreement between the parties. A party may send a written notice of challenge stating the reasons therefor to the ICAC within 15 days after being notified of the composition of the arbitral tribunal, or having become aware of circumstances that can serve as a reason for challenge. 704

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Unless a party makes a challenge within the period of time referred to above he shall be deemed to have waived his right to challenge. 2. If the challenged arbitrator does not withdraw voluntarily or if the other party does not agree to the challenge, the decision on the release of the arbitrator from his appointment shall be made by the ICAC Presidium. The ICAC Presidium may, in its discretion, make the decision on the release of the arbitrator from his appointment for reasons referred to in subparagraph 1 of this paragraph. 3. The provisions of subparagraphs 1 and 2 of this paragraph shall also apply to an arbitrator chosen or appointed as reserve arbitrator. 4. The reasons referred to in subparagraph 1 of this paragraph may be cited to challenge a reporter, an expert or an interpreter participating in the proceedings. In this case, the decision on the release from the appointment shall be made by the arbitral tribunal. § 19. Termination of an Arbitrator’s Powers for Other Reasons 1. Where an arbitrator is legally or actually incapable of fulfilling his duties, or does not, for any other reasons, fulfill such duties without unjustified delay, his powers may be terminated in response to his application for voluntary withdrawal or by agreement between the parties. 2. In all other cases, where differences remain over any of the reasons referred to in subparagraph 1 of this paragraph, each party may request the ICAC Presidium to make a decision on the termination of the powers of an arbitrator. The ICAC Presidium may, in its discretion, make the decision to terminate the powers of an arbitrator for reasons referred to in subparagraph 1 of this paragraph. 3. When the ICAC makes a decision to release the arbitrator from his appointment or terminate his powers for any other reasons, it shall not be required to state reasons for its decision. 4. Voluntary withdrawal of an arbitrator or consent of the parties to terminate his powers in accordance with subparagraph 1 of this paragraph or subparagraph 1 of § 18, shall not signify recognition of any of the reasons referred to in subparagraph 1 of this paragraph or subparagraph 1 of § 18 of these Rules. § 20. Replacements in the Arbitral Tribunal 1. Where an arbitrator has declined to assume his duties, or has been challenged, or cannot participate in the proceedings in the case for any other reasons, he shall be replaced by the respective reserve arbitrator. Where such replacement cannot be made, a new arbitrator shall be appointed or chosen in accordance with these Rules. If the arbitrator was appointed by the ICAC, the ICAC shall make the new appointment as well. If the arbitrator chosen by a party has declined to assume his duties, or has been challenged, or his powers have been terminated for any other reasons, the ICAC may make a new appointment. The provisions of this subparagraph shall apply where the parties have not agreed otherwise. 705

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2. Where necessary, and having regard to the opinions of the parties, the new arbitral tribunal may return to the issues that were examined during the previous oral hearings in the case before the replacements. 3. Where the need for replacements in the arbitral tribunal arises after the closure of the hearings of the case, the ICAC Presidium may, taking into account the opinions of the remaining members of the arbitral tribunal and of the parties, and also the circumstances of the case, make the decision to continue the arbitration with the remaining arbitral tribunal. VI. ARBITRAL PROCEEDINGS § 21. General Principles of the Proceedings 1. The arbitral proceedings shall be conducted on an adversarial basis and on the principle of equality of the parties. 2. The parties and their representatives shall make fair use of their procedural rights, refrain from abusing such rights, and observe the time limits designated for the exercise thereof. § 22. Place of Arbitration 1. The arbitration shall have its place and to be conducted in Moscow. 2. The parties may agree to hold hearings in a different place. In this event, all additional expenses arising in connection with the hearings held outside Moscow shall be borne by the parties to the dispute. 3. The arbitral tribunal may, subject to approval by the Executive Secretary of the ICAC, and if necessary, hold hearings and other sessions in a place other than Moscow. § 23. Language of the Arbitral Proceedings 1. The arbitral proceedings in a case shall be conducted in the Russian language. By agreement between the parties, the ICAC may conduct the arbitral proceedings in a different language. 2. The parties shall submit documents related to the arbitral proceedings in the language of arbitration, or in the language of the contract, or in the language of the correspondence between the parties. Written evidence shall be submitted in the language of the original document. The ICAC may, in its discretion or at the request of a party, request the other party to have the documents submitted by it, including written evidence, translated into the language of arbitration, or have such documents translated at the expense of the other party. 3. The ICAC may provide a party, at its request and for its account, with interpreting services for the oral hearings. 706

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§ 24. Duration of the Proceedings in a Case The ICAC shall take measures to secure completion of the arbitral proceedings in a case within 180 days after the date of composition of the arbitral tribunal. If necessary, the ICAC Presidium may, at the request of the arbitral tribunal or in its discretion, extend this period. § 25. Confidentiality The arbitrators, reporters, experts appointed by the arbitral tribunal, the ICAC and its staff, and the RF CCI and its staff shall refrain from disclosing information about disputes settled by the ICAC, which they become aware of and which may impair the legitimate interests of the parties. § 26. Applicable Law 1. The ICAC shall settle disputes in accordance with the rules of law, which the parties have chosen to apply to the subject matter of the dispute. Any reference to the law or the legal system of a country shall be interpreted as direct reference to the substantive law of such country, rather than to the conflict of laws rules thereof. Failing such reference by the parties, the ICAC shall apply a law determined by the conflict of laws rules, which it deems appropriate. In any event, the ICAC shall make decisions in accordance with the terms and conditions of the contract with reference to the trade usages applicable to the transaction. 2. The ICAC shall apply to the arbitral procedure the provisions of these Rules, with due regard to the agreement between the parties, unless it contravenes the imperative rules of the applicable law on international commercial arbitration and the principles of these Rules. When dealing with issues that are not regulated by either these Rules or the agreement between the parties, the ICAC shall, while abiding by the provisions of the applicable law on international commercial arbitration, conduct the arbitration as it considered appropriate, and ensure that the parties are treated with equality and that each party is given a fair opportunity to protect his interests. § 27. Representation of the Parties The parties may deal with the ICAC directly or through their duly authorized representatives, including foreign organizations and citizens, appointed by the parties in their discretion. § 28. Participation of Third Parties A third party may only join in the arbitral proceedings with the consent of the parties in dispute. Invitation of a third party to participate in the arbitration shall require, apart from the consent of the parties in dispute, the consent of the person invited. The invitation of a third party may only be requested before the end of the period for a statement of defence to be submitted. The consent of a third party to the invitation shall be in writing. 707

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§ 29. Preparation of the Case for Arbitration 1. The Chairman of the tribunal shall verify the progress in the preparation of a case for arbitration and, if he deems necessary, take further measures to have the case prepared in particular, he shall order that written explanations, evidence, and other additional documents be requested from the parties. If further measures are taken to prepare the case, time limits shall be set for such measures to be carried out. 2. The Chairman of the tribunal may give the Executive Secretary of the ICAC instructions in connection with the preparation and conduct of the arbitration. He may also request the Executive Secretary to invite the parties to the hearing. § 30. Amendments or Supplements to the Claim, or Explanations of the Claim 1. Either party may, before the termination of the case hearing, amend or supplement his claim or explanations thereof without unjustified delay. 2. The arbitral tribunal may set a period of time for the parties to submit their written statements and evidence for either of the parties to be familiarized in advance with the documents and materials submitted by the other party before the oral hearing of the case. 3. If the arbitral tribunal finds the delay caused by either party to amend or supplement his claim or explanation thereof unjustified, it may impose on such party payment of the additional costs and expenses incurred by the other party due to the delay. The arbitral tribunal may refuse to authorize such amendment or supplement to the claim or explanation thereof, in view the delay caused. § 31. Evidence 1. The parties shall be required to prove the circumstances relied on to support their claims or defence. The arbitral tribunal may require the parties to produce further evidence. It also may, in its discretion, order inspection by an expert and request evidence to be produced by third parties, and also call and hear witnesses. 2. A party may submit written evidence in the original or as a certified copy of the original. 3. The evidence shall be verified as directed by the arbitral tribunal. The arbitral tribunal may ask an arbitrator to verify the evidence. 4. The arbitrators shall assess the evidence according to their sole discretion. 5. Failure by either party to submit appropriate evidence shall not prevent the arbitral tribunal from continuing the proceedings and making an award on the basis of available evidence. 6. Evidence shall be submitted within such period of time as is specified in §  30 of these Rules. § 32. Oral Hearing 1. An oral hearing shall be held to allow the parties to present their case on the basis of the evidence submitted by them and the oral debate to be held. The hearing shall 708

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be held in camera. The arbitral tribunal may, with the consent of the parties, allow persons who did not participate in the arbitral proceedings to appear at the hearing. 2. The parties shall be given notice of the time and place of the oral hearing so that they have at least 30 days to prepare for, and arrive at, the oral hearing. This period may be reduced by agreement between the parties. 3. Where further oral hearings are required, the arbitral tribunal shall set the dates thereof in view of the particular circumstances. 4.  Failure by a party properly notified of the time and place of the hearing to appear at the hearing shall not interfere with the proceedings and making of an award, unless the defaulting party has requested in advance in writing that the hearing of the case be adjourned for a good reason. 5. A party may request the hearing of the case to be held in his absence. § 33. Record of the Oral Hearing 1. A record of the hearing of a case shall be drawn up and shall contain: – the name of the ICAC; – case number; – place and date of the hearing; – names of the parties in dispute; – particulars of the representatives of the parties participating in the hearing; – full names of the arbitrators, reporter, witnesses, experts, interpreters, and other participants in the hearing; – summary of the progress of the hearing; – claims of the parties and summaries of other important statements of the parties; – description of the grounds for adjournment or termination of the hearing; and – signatures of the arbitrators. 2. The parties may familiarize themselves with the contents of the record. The arbitral tribunal may order, at the request of either party, amendments or supplements to be made to the record, if it considers the request justified. 3. A party shall be given a copy of the record at his request. § 34. Proceedings in the Case on the Basis of Written Materials The parties may agree on arbitration of their dispute to be conducted on the basis of written materials only, without holding an oral hearing. The arbitral tribunal may settle the dispute on the basis of written documents in the absence of agreement between the parties to this effect, if neither of the parties requests an oral hearing to be held. § 35. Adjournment of the Hearing and Suspension of the Proceedings Where necessary, the hearing of the case may be adjourned at the request of the parties or on the motion of the arbitral tribunal, or the proceedings in the case may be suspended. Adjournment of the hearing or suspension of the proceedings shall be directed by a ruling. 709

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§ 36. Interim Measures of Protection 1. Unless the parties agree otherwise, the arbitral tribunal may, at the request of a party, order either party to take such interim measures of protection in respect of the subject matter of the dispute as it considers appropriate. 2. The arbitral tribunal may order either party to provide appropriate security in connection with the interim measures of protection taken. 3. The arbitral tribunal may take such interim measures of protection in the form of an interim award. 4. If a party approaches a competent public court with a request for measures to be taken to secure a claim to be filed, or already filed, with the ICAC, or if a public court has issued a decision to take such measures, the party shall give immediate notice thereof to the ICAC. VII. TERMINATION OF ARBITRAL PROCEEDINGS § 37. Final Arbitral Award The arbitral proceedings shall be terminated with the making of a final award. § 38. Making of an Award 1. When the arbitral tribunal finds that all the circumstances related to the dispute have been clarified in sufficient detail, it shall declare the oral hearing closed and shall proceed to make an award. 2. An award shall be made by a majority vote of the arbitrators. If an award cannot be made by a majority vote, it shall be made by the presiding arbitrator. Any arbitrator disagreeing with the award made may express in writing his dissenting opinion, which shall be attached to the award. 3. The award shall be made within the time limits in accordance with § 24 of these Rules. § 39. Contents of the Award 1. The award shall contain, in particular: – the name of the ICAC; – case number; – place of arbitration; – date of the award; – full names of the arbitrators; – names of the parties in dispute and other persons participating in the arbitral proceedings; – subject matter of the dispute and a summary of the circumstances of the case; – reasons for the award; – conclusion on the granting or dismissal of the claim; 710

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– amounts of arbitration fees and costs of the case, and apportionment thereof between the parties; and – signatures of the arbitrators. 2. The date of the award shall be the date of the last signature affixed thereto by an arbitrator of the arbitral tribunal. 3. Where an arbitrator is unable to sign the award, the ICAC President shall certify this circumstance with a statement of the reason for the absence of the signature of the arbitrator. In this event, the date of the award shall be the date of certification of the circumstance. § 40. Separate Award 1. The arbitral tribunal may make separate awards on individual issues or a part of the claims. 2. A separate award shall be subject to the respective provisions of § 39 of these Rules. § 41. Award on Agreed Terms 1. If, in the course of the arbitral proceedings, the parties settle their dispute, the arbitral proceedings shall be terminated. The arbitral tribunal may, at the request of the parties, record such settlement in the form of an award on agreed terms. 2. An award made on agreed terms shall be subject to the respective provisions of § 39 of these Rules. § 42. Announcement of the Award 1. Before the award is signed, the arbitral tribunal shall, within a reasonable time in advance, deliver the draft award to the ICAC Secretariat. The ICAC Secretariat may, without infringing on the independence of the arbitrators make the award, direct the attention of the arbitrators to discrepancies, if any, between the draft award and the formal requirements placed on the award by these Rules. If such discrepancies are not rectified, the ICAC Secretariat may inform the ICAC Presidium of this. 2. The arbitral tribunal shall deliver the award made to the ICAC Secretariat in as many copies as is required for communication to the parties. 3. The ICAC may communicate the award to the parties subject to full coverage of the arbitration costs of the case by the parties, unless such costs were covered by the parties or either of the parties previously. § 43. Correction, Interpretation, and an Additional Award 1. Either party may, with notice to the other party, within a reasonable period of time after receiving the award, request the arbitral tribunal to correct any computational, clerical or typographical errors, or other errors of similar nature. If the arbitral tribunal considers the request to be justified, it shall make relevant corrections within thirty days after receipt of the request. 711

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The arbitral tribunal also may make such corrections on its own initiative within thirty days after the date of delivery of the award to the parties. 2. If agreed between the parties, either of them may, by notice to the other party, within thirty days after receipt of the award, request the arbitral tribunal to give an interpretation of a particular point or part of the award. If the arbitral tribunal considers the request to be justified, it shall give the required interpretation within thirty days after receipt of the request. 3. Either party may, with notice to the other party, within thirty days after receipt of the award, request the arbitral tribunal to make an additional award as to the claims properly presented in the arbitral proceedings but not dealt with in the award. If the arbitral tribunal considers the request to be justified, it shall make the additional award within sixty days of receipt of the request. 4. The ICAC Presidium may, if necessary, extend the periods referred to in the second part of subparagraph 1, second part of subparagraph 2, and second part of subparagraph 3 of this paragraph. 5. Any rulings as to the correction and interpretation of the award or an additional award shall be an integral part of the arbitral award, and shall be subject to the respective provisions of § 39 of these Rules. § 44. Execution of the Award 1. An award made by the ICAC shall be final and binding from the date thereof. 2. An award made by the ICAC shall be implemented by the parties voluntarily within the period of time fixed in the award. If no period is fixed in the award, the award shall be implemented immediately. 3. An award that is not implemented voluntarily within the fixed period of time shall be enforced according to the law and international agreements. § 45. Termination of the Proceedings without Making an Award 1.  If no final award is made in a case, the arbitral proceedings shall be terminated by an order. 2. An order to terminate the proceedings shall be issued when: (a) the claimant withdraws his claim, unless the respondent, within fifteen days after receipt of the notice of withdrawal, raises objections to the termination of the proceedings and the arbitral tribunal recognizes a legitimate interest of the respondent in obtaining a final settlement of the dispute; or (b) the parties agree on the termination of the proceedings; or (c) the arbitral tribunal finds that continuation of the proceedings has become unnecessary or impossible for any reasons, in particular, in the absence of prerequisites required for the case to be arbitrated and decided on its merits, such as where, owing to the claimant’s inaction, the case makes no progress for more than six months. 3. Paragraphs 38 through 44 of these Rules shall apply to an order to terminate the proceedings. 712

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4. An order to terminate the proceedings before an arbitral tribunal is established shall be issued by the President of the ICAC. VIII. MISCELLANEOUS § 46. Waiver of the Right to Object Unless a party raises within the specified period of time or, where none is set, without unjustified delay, during the proceedings conducted at the ICAC, an objection to the noncompliance with any provision of these Rules, the arbitration agreement, or any applicable rules of the law on international commercial arbitration, which may not have been complied with by the parties, he shall be deemed to have waived his right to object. § 47. Exclusion of Liability The arbitrators, reporters, experts appointed by the arbitral tribunal, the ICAC and employees thereof, and the RF CCI and employees thereof shall not be liable to a party or another person for any act or inaction in connection with the arbitration, unless such act or inaction is proved to be premeditated. § 48. Application of the ICAC Rules Unless the parties have agreed otherwise, the Rules of the ICAC in effect at the time of commencement of the arbitral proceedings shall apply to the arbitration of disputes at the ICAC.

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APPENDIX

To the Rules of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation SCHEDULE OF ARBITRATION FEES AND COSTS § 1. Definitions 1. “Registration fee” shall mean a fee paid when a Statement of Claim or a request for security for the claim is filed with the ICAC to cover the costs to be incurred in connection with commencement of the arbitral proceedings. 2. “Arbitration fee” shall mean a fee payable in advance for each claim filed with the ICAC and including an arbitrator’s fee and an administration fee. 3. “Arbitrator’s fee” shall mean a fee payable for services in connection with the arbitration of a case. 4.  “Administration fee” shall mean a fee payable to cover the costs of organization and conduct of arbitral proceedings, including general business expenses made by the ICAC. 5. “Additional costs” shall mean special-purpose expenses arising in connection with the examination of a specific case (in particular, expenses of examination by experts, oral and written translations, reimbursement of the arbitrators’ expenses, witnesses expenses, and so on). 6. “Parties’ expenses” shall mean expenses incurred by the parties to protect their interests in proceedings conducted at the ICAC, in addition to expenses specified in the preceding subparagraphs of this paragraph. § 2. Registration Fee The registration fee shall be payable in the amount of U.S. Dollars 1 000, if the amount of the claim is expressed in currencies other than Russian Rubles. The registration fee shall be payable in the amount of Russian Rubles 30 000, if the amount of the claim is expressed in Russian Rubles. The registration fee shall be a part of the arbitration fee. When the arbitration fee is paid subsequently, the registration fee shall be counted against the amount of the arbitration fee and shall be divided equally between the arbitrator’s fee and the administration fee. The registration fee paid for a Statement of Claim or a request for security for the claim filed shall not be refundable. § 3. Arbitration Fee 1. The arbitration fee shall be calculated in Russian Rubles, if the amount of the claim is expressed in Russian Rubles, by adding up the arbitrator’s fee and the administration fee as follows: 714

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Amount of claim (Russian Rubles)

Arbitrator’s fee (Russian Rubles)

Administration fee (Russian Rubles)

Up to 300 000

23 400

54 600

300 000 to 1 500 000

23 400 + 3% of the amount above 300 000

54 600 + 7% of the amount above 300 000

1 500 000 to 3 000 000

59 400 + 2,7% of the amount above 1 500 000

138 600 + 6,3% of the amount above 1 500 000

3 000 000 to 6 000 000

99 900 + 1,5% of the amount above 3 000 000

233 100 + 3,5% of the amount above 3 000 000

6 000 000 to 15 000 000

144 900 + 0,75% of the amount above 6 000 000

338 100 + 1,75% of the amount above 6 000 000

15 000 000 to 30 000 000

212 400 + 0,42% of the amount above 15 000 000

495 600 + 0,98% of the amount above 15 000 000

30 000 000 to 60 000 000

275 400 + 0,27% of the amount above 30 000 000

642 600 + 0,63% of the amount above 30 000 000

60 000 000 to 150 000 000

356 400 + 0,15% of the amount above 60 000 000

831 600 + 0,35% of the amount above 60 000 000

150 000 000 to 300 000 000

491 400 + 0,12% of the amount above 150 000 000

1 146 600 + 0,28% of the amount above 150 000 000

Over 300 000 000

671 400 + 0,04% of the amount above 300 000 000

1 566 600 + 0,08% of the amount above 300 000 000

2. The arbitration fee shall be calculated in U.S. Dollars, if the amount of the claim is expressed in currencies other than Russian Rubles, by adding up the arbitrator’s fee and the administration fee as follows: Amount of claim (in U.S. Dollars)

Arbitrator’s fee (in U.S. Dollars)

Administration fee (in U.S. Dollars)

Up to 10 000

780

1 820

10 001 to 50 000

780 + 3% of the amount above 10 000

1 820 + 7% of the amount above 10 000

50 001 to 100 000

1 980 + 2,7% of the amount above 50 000

4 620 + 6,3% of the amount above 50 000

100 001 to 200 000

3 330 + 1,5% of the amount above 100 000

7 770 + 3,5% of the amount above 100 000

200 001 to 500 000

4 830 + 0,75% of the amount above 200 000

11 270 + 1,75% of the amount above 200 000

500 001 to 1 000 000

7 080 + 0,42% of the amount above 500 000

16 520 + 0,98% of the amount above 500 000

1 000 001 to 2 000 000

9 180 + 0,27% of the amount above 1 000 000

21 420 + 0,63% of the amount above 1 000 000

2 000 001 to 5 000 000

11 880 + 0,15% of the amount above 2 000 000

27 720 + 0,35% of the amount above 2 000 000

5 000 001 to 10 000 000

16 380 + 0,12% of the amount above 5 000 000

38 220 + 0,28% of the amount above 5 000 000

Over 10 000 000

22 380 + 0,04% of the amount above 10 000 000

52 220 + 0,08% of the amount above 10 000 000 715

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3. The amount payable as arbitration fee shall be rounded off to whole numbers (Russian Rubles, U.S. Dollars, etc.). 4. Taking into account the complexity of a case, and significantly higher costs of arbitral proceedings in time and money, the ICAC Presidium may, if requested so by the arbitral tribunal, issue an order for the amount of the arbitration fee to be increased. 5. Fees due to the arbitrators, reporters, the ICAC President, and members of the ICAC Presidium shall be paid out of the arbitrator’s fee and shall be fixed in accordance with the Schedule of Fees and Costs of the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation. 6. The arbitration fee shall be paid in Russian Rubles, if the amount of the claim is expressed in Russian Rubles. The arbitration fee may, at the claimant’s request, be paid in U.S. Dollars, unless this contravenes the currency regulations in effect in the Russian Federation, converted at the exchange rate of the Central Bank of the Russian Federation on the day of payment. 7. The arbitration fee shall be paid in U.S. Dollars, if the amount of the claim is expressed in currencies other than Russian Rubles. The arbitration fee may, at the claimant’s request, be paid in a freely convertible currency other than U.S. Dollars, or in Russian Rubles at the exchange rate of the Central Bank of the Russian Federation on the day of payment, unless this contravenes the currency regulations in effect in the Russian Federation. The amount of the claim shall be converted to amounts expressed in U.S. Dollars at the exchange rate of the Central Bank of the Russian Federation on the date when the claim is submitted. § 4. Reduction in the Arbitration Fee 1. If a case is examined by a sole arbitrator, the arbitration fee shall be reduced by 20%. 2. If the arbitral proceedings are terminated owing to the claimant withdrawing his claims before the date of the first meeting in the case, in particular, owing to the parties having settled the dispute amicably, or in other cases of the ICAC receiving, before the aforesaid date, notification of the parties’ refusal to have their dispute settled at the ICAC, the arbitration fee shall be reduced by 50%. 3. If the arbitral proceedings are terminated at the first meeting in the case without making an award, the arbitration fee shall be reduced by 25%. 4. The provisions of subparagraphs 1–3 of this paragraph as to reduction in the arbitration fee shall not apply to the registration fee (§ 2 of this Schedule). 5. The ICAC Presidium may, taking into account the circumstances of a particular case, order the arbitration fee to be reduced in different instances and in different amounts than is provided in this paragraph. § 5. Arbitration Fee for a Counter-claim or Set-off A counter-claim or set-off shall be subject to the same rules as apply to the arbitration fee for the initial claim. The arbitration fee for a counter-claim or set-off shall be calculated at rates in effect on the filing date of the initial claim and shall be paid as specified in paragraph 3 of this Schedule. 716

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§ 6. Apportionment of the Arbitration Fee 1. Unless the parties have agreed otherwise, the arbitration fee shall be charged to the party against which the award is made. 2. If a claim is granted in part, the arbitration fee shall be charged to the respondent in proportion to the amount of the granted claims, and the claimant shall bear the arbitration fee in relating to the amount of the claim that have been dismissed. § 7. Payment of Additional Costs 1. The ICAC may require the parties or either of them to deposit an advance for the additional costs of the arbitral proceedings. The advance for the additional costs may be required by the ICAC from the party requesting an additional act likely to lead to additional costs to be incurred in the course of the proceedings, if such request is deemed justified. 2. The ICAC may make performance of any acts in the arbitration of a dispute subject to payment by the parties or either of them of an advance for the additional costs within a fixed period of time. 3. If a party appoints an arbitrator residing permanently beyond the place of the hearings at the ICAC, that party shall be required to deposit an advance for the costs of the participation of such arbitrator in the arbitral proceedings (traveling expenses, accommodation, board, visa, and so on). Failing deposit of the required advance within the fixed period of time, the party shall be deemed to have waived his right to appoint an arbitrator, and the ICAC Presidium shall appoint an arbitrator for the party. If such person is acting as Chairman of the tribunal, the advance for the costs of his participation in the arbitral proceedings shall be deposited by both parties in equal amounts. If the respondent fails to deposit his respective advance amount within the specified period of time, the claimant shall be required to deposit such advance amount. 4. If, in the course of the arbitral proceedings in the case, either of the parties requests the explanations and statements of the parties, or questions, comments, or directions of the arbitral tribunal to be translated, the costs of translation shall be met by that party. If the arbitral proceedings in the case are not conducted in the Russian language, the possible costs of translation shall be charged to both parties in equal amounts. The ICAC may require the respective party or both parties to deposit an advance for such costs. 5. The additional costs shall be apportioned between the parties in accordance with the rules of § 6 of this Schedule. § 8. Payment of Arbitration Fees and Costs 1. All amounts due to the ICAC shall be considered paid on the date on which they are credited to the account of the Chamber of Commerce and Industry of the Russian Federation. 717

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2. The costs of the bank transfer of the aforesaid amounts shall be borne by the party making the respective payment. § 9. Expenses of the Parties The successful party may request the reasonable expenses incurred by him in the course of the arbitral proceedings, in particular, the expenses made to protect his interests through legal representatives, to be paid by the other party. § 10. Different Apportionment of Arbitration Fees and Expenses The ICAC may, taking into account the circumstances of a particular case, order a different apportionment of the arbitration fees, additional costs of the ICAC, and expenses of the parties than that specified in paragraphs 6, 7 and 9 of this Schedule, in particular, it may order one party to reimburse any additional expenses incurred by the other party through inappropriate or bad faith acts of such party, including acts causing unjustified delay in the arbitral proceedings. § 11. Application of the Schedule of Arbitration Fees and Costs This Schedule of Arbitration Fees and Costs shall apply to cases, in which statements of claim were filed after its entry into force.

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