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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

409 409 409 411 412 419 420 421 423 423 423 424 425

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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

477 477 477 480 480 483 483 485 485 486 489 490 490 492 11

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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

543 545 547 560 565 577 580 582 586 591 626 631 675 695

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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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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.

206

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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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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 docu