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The Legal positions of the Supreme Court of Arbitration of the Russian Federation that Changed the World

The legal positions of supreme courts are an effect that appeared at the junction of legal systems, the continental legal system on the one hand, i.e. the source of this system being a codified legislation, and the case legal system on the other.

Although the heads of supreme courts persist in denying a gradual intrusion of case law in the legal system of the Russian Federation the facts prove otherwise. Any lawyer working in the field of arbitration proceedings knows that making up a statement of claim and giving legal reasoning via legal norms do not suffice.

In order to be somewhat certain in the result of a case it is required to analyze the existing decisions on analogous or similar cases. The statute is definitely of primary power but interpretation of statutes is the prerogative of the courts and it rarely is well-defined or obvious. Therefore, it is always advisable to make sure that your own interpretation of a statute is the same with the interpretation and application by the courts since it is up to them to rule out the decision. It is absolutely impossible to try and change the existing case practice even though your position is meaningful and reasonable and the judicial practice is not.

For any person of good sense, for instance, even without a legal background is clear that a company that has entered into an agreement with another company cannot and shall not be liable for the latter acting bona fide.

The courts, however, have worked out a well-defined approach in accordance with which where the tax authorities prove that your party is a fake company that evades taxes and located in a place other than at its registered office your expenses and losses in the transaction with such a company shall not be accepted by the tax authorities. Such actions of the tax authorities can be challenged but the statistics prove that for the last three years in 90% of similar cases the judges took the side of the tax authorities. The remaining 10%, as a rule, are a human factor as judges are human too, but it is not serious to account on it.

Lawmakers, as life may have it, are also human, and the laws they make are not perfect, more so that the laws are born under a powerful pressure of various lobby parties. Ill-defined wording, contradictory and often absolutely meaningless provisions of the laws are the reasons why the Russian legislation is shifting towards case law.

The main reason, however, as we see it, why the case law is gradually gaining more room in law application is rapidly changing social and economic relationships of the society. It is these relationships that are to regulate the laws, the law making process, however, is too slow to catch up with the development of the modern society.

The third reason that facilitated the development of case law is bureaucracy. It is known that independence of judges is at large imaginary. As mentioned above, judges are human, too. They receive their remuneration from the government and they follow the instructions of the heads of the judicial branch.

Very few judges can be brave enough to make a ruling that contradicts the existing cases or the first decision on a new type of cases or in accordance with a new law. Judicial community has a syndrome of fear to “set up a case” thus, attracting attention to him/herself.

The Courts of Arbitration, besides, hold almost daily meetings where the heads of the courts define the policy of the court and the judges are explained how to act in certain cases. This cannot be considered completely negative. Without any policy, formed logic and tendency the process of judgment would have been chaotic with no pattern or guidance.

Therefore, case law is officially nonexistent as a source of law in the legal system of the Russian Federation and cannot exist as such. In practice it is widely used. And the Russian legal system can be divided into three types of case law. The first one is the weakest case law type is the position of the court that has passed three instances. The decision that has not passed the three stages cannot be accepted as the final one. Such cases can be considered only within one Court of Arbitration authority where it has passed three instances. Within any other authority the ruling on the similar case can be different.

The second type of case law is a legal position of the Presidium of the Supreme Court of Arbitration of the Russian Federation. It means that the ruling has not only passed three instances but has been confirmed as legally valid by the Presidium of the Supreme Court of Arbitration of the Russian Federation. Here one can be sure that no court will go against this ruling made by the Presidium of the Supreme Court of Arbitration of the Russian Federation However, the Resolution of the Presidium of the Supreme Court of Arbitration of the Russian Federation is merely a judicial act on a certain case and officially there are no obligations to spread this position over all similar cases.

Quite a different thing is the Resolution of the Plenum of the Supreme Court of Arbitration of the Russian Federation on a certain category of cases. This is no longer a legal position on a certain case but a general conclusion of practice of the lower courts carries out by the Plenum of the Supreme Court of Arbitration of the Russian Federation on a certain category of cases and formed as a set of general instructions for the lower courts.

The law obliges the courts of arbitration to follow these instructions as listed in the Regulations of the Supreme Court of Arbitration of the Russian Federation. In fact it is no longer case law but rather a local statutory act that obliges all courts of arbitration to follow a certain pattern. Strictly speaking, a precedent case is considered to be the decisions of courts on certain cases. Apart from precedent cases there are other forms of judicial law-making process: interpretation of the plenums of higher courts, rules of courts, court customs.

The legal community there is an opinion that currently the Resolutions of the Plenum of the Supreme Court of Arbitration of the Russian Federation due to its obligatory character have the status of the source of legislation equally with the statutes and other legal acts. To finally declare the Resolution of the Plenum of the Supreme Court of Arbitration of the Russian Federation as the source of law is not permitted by the Constitutional principle of separation of powers as it does not endow the judicial branch with the law-making power.

For the last few years the Supreme Court of Arbitration of the Russian Federation is gradually implementing the policy of making constitutional the case law system in Russia, today the courts of arbitration must follow the legal positions as instructed by the Plenums and Presidia of the Supreme Court of Arbitration of the Russian Federation.

The first stone in the foundation of the judicial law-making process was put by the Constitutional Court of the Russian Federation. The Regulation of the Constitutional Court of the Russian Federation N 1 – П dated 21 January 2010 has all chances to stay in history as one of the most crucial decisions of the Court during its existence. Essentially, the Regulation of the Constitutional Court of the Russian Federation permits law-making by judges (it cannot always be called case law) within the Russian legal system. It should be noted that it exactly permits i.e. recognizes it de jure, but does not create it since de facto law-making by the courts has been there in Russian for a long time.

The court gas expressly defined that based on the Supreme Court of Arbitration of the Russian Federation not only the courts may reconsider the judicial acts which have been already ruled out but also take decisions on future cases. In the opinion of the Constitutional Court of the Russian Federation the Russian legal system gives “a statutory opportunity to cancel the judicial acts ...in case they contradict the acts of the higher courts in the system of the courts of arbitration in the Russian Federation which give interpretations of the court practice issues. Without specifying which statute(s) grants this opportunity the Constitutional Court of the Russian Federation underlined that interpretation of a statute by the higher courts “is in fact mandatory for lower courts to observe in future.”

The importance of such conclusion is hard to overvalue. The result is as follows: on the one hand the Constitutional Court of the Russian Federation has put some restrictions the opportunity to reconsider the cases via the mechanism introduced by the Supreme Court of Arbitration of the Russian Federation, by pointing out in the first place that it is not acceptable for interpretations to have a reverse power in case it worsens the position of the persons covered by this reverse effect (this is crucial for cases, say, of tax and administrative disputes with government authorities); on the other hand it brought to an end the disputes on legal positions of the Supreme Court of Arbitration and confirmed that they are mandatory and have a precedent power for any future cases, including the civil ones. The result is viewed to be absolutely positive for the Supreme Court of Arbitration.

Is it, however, equally positive for the Russian legal and judicial systems?

On behalf the practicing barristers the answer is a definite yes. The work of judges is also seems to have become easier and more balanced. The year 2012 showed a lot of difference in this respect. It is not that in 2012 there were many determining Resolutions of the Plenum of the Supreme Court of Arbitration of the Russian Federation, but it was in 2012 that the wave that started growing due to the Resolution of the Constitutional Court of the Russian Federation rolled in at its full. There even was an obvious “effect of going too far” when certain courts of arbitration started to rely on the Resolutions of the Plenum of the Supreme Court of Arbitration more than on the statutes. Also in 2012 the arbitration practice revealed those Resolutions of the Plenum and the Presidium of the Supreme Court of Arbitration that are the most essential and the most demanded for decision-taking in certain cases.

As a rule these are such Resolutions of the Plenum and the Presidium of the Supreme Court of Arbitration that contain legal positions allowing to resolve the most disputed and most problematic issues of the legislation. The courts gladly apply these as a priority. In a number of cases failure to apply the Resolutions of the Supreme Court of Arbitration shall be the grounds for cancellation by a higher court of such decision even though the Arbitration Procedure Code of the Russian Federation does not contain grounds therefore. In such situations the indirect logic comes in effect. If the court had not applied the legal position suggested by the Plenum of the Supreme Court of Arbitration that is correct a priori, it means that the law as misinterpreted which is a 100% ground for cancellation of the ruling.

Which legal positions of the Supreme Court of Arbitration of the Russian Federation have been marked in practice 2012 as the most essential ones?

1. Firstly, it is most definitely, the Resolution of the Supreme Court of Arbitration of the Russian Federation dated11.07.2011 N 54 "On certain issues of settlement of disputes arising from agreements relating to property which will be created or purchased in future"(hereinafter called the Resolution of the SCA of the RF№ 54).

This resolution has done away with the obscurity in legal settlement of investment contracts and at the same time has given the green light to contracts on acquisition of property that is to be created in future.

The need for interpretation was caused by the existing social tenseness in the field of investments in permanent construction and development. The largest part of such investors lost their investments without receiving their property. A social category called “deceived co-owners” has appeared. Moreover, while investing into construction and development undisguised fraud took place, and the legislation in the field of investment is obviously mixed up.

The principal problem was that in its commercial sense putting money into construction and development is definitely an investment. From a legal point of view it also is an investment but the legislation on investment does not provide tools allowing effective regulating such relationships.

The legislation on investment activities although being part of the civil legislation does not have legal tools which allow settle disputes between the members of the investment process. Such tools as claim of damages, acknowledgment of rights, void agreement, termination and amendment of agreement do not have a specific connection with typical features of investment relationships. All these tools definitely are contained in the Civil Code of the Russian Federation, but the Civil Code does not single out such type of contract as an investment agreement. Therefore, the courts when considering disputes related to investments in property had been facing a hard task.

The investment legislation did not provide the judges with the required tools which had to be consulted from the Civil Code. The Civil Code in its turn attached every tool for dispute settlement to a certain type of legal relationships as described therein. A separate part of the Civil Code is dedicated to this matter.

Thus, the issue, for example, whether the damages are to be claimed in case only one party refuses to perform the agreement, was ruled out differently as per the Civil Code depending on the type of the agreement. In case of sale and purchase agreement the damages were covered, in case of a service they were covered only under certain conditions. Therefore, in order to apply the norms of the Civil Code of the Russian Federation a judge has firstly to qualify the investment agreement as one of the types of the agreements mentioned in the Civil Code and only after apply the relevant norms of the Code. This stage also caused problems to the judges: how to classify the investment agreement. There was no common opinion and each court resolve this issue at its own discretion and this raised some sort of legal obscurity, which affected, among others, the deceived co-owners as well. A strict classification was not possible because investment agreements were quite variable and the criteria for classification thereof did not exist for the purposes of the Civil Code.

This gap was filled by the Resolution of the Plenum of the SCA of the RF№ 54. This was the most daring resolution of the SCA of the RF; not only did it bring down the established practice but it also replaced partially the statutory norms, and in some cases it was contradictory to the practice. Nevertheless, the resolution gave freedom to the courts and to the “deceived co-owners” since both received definite guidelines on how to act, although such guidelines was not always in line with the law.

What happened here was that the judges fixed a poor law and did the job of the law-makers, for they could not wait for the solution from the law-makers any longer. The rules of the game suggested by the SCA of the RF are not perfect either and sometimes the rights of the co-owners were limited, but this was an option when the poor rules were better than no rules at all.

The Resolution of the Plenum of the Supreme Court of Arbitration of the Russian Federation№ 54 under question has tough internal logic which proves that this document is not a merely of a general character but rather a law-making act that initially aims at certain issues and structured in a certain way in order to accomplished its goals without affecting the neighboring fields of legal regulation.

The legal positions contained in it can be divided into three approximate parts:

  • Qualification of investment agreements;
  • Defining of the moment when the ownership right arises over the newly constructed property;
  • Settlement of outstanding disputes: whether a seller can enter into an agreement regarding the property over which he does not have the ownership right.

We will follow the same structure.

The legal nature of investment agreements as well as the concept of investment in general, has long been a field for endless discussions of lawyers. Investment agreements in the area of construction and development and especially housing are quite a common phenomenon. Unfortunately, such an extensive use is connected, for the most part, with the desire to avoid in the process of building fairly tough statutory requirements in this area and, above all, to avoid entering into the contract of shared construction. For this reason, in Resolution № 54 the Plenum noted immediately that the legal positions expressed in this regulation shall not apply to matters arising under joint construction of real estate .

A myriad of opinions have been expressed about the classification of investment agreements starting from the independent type of contractual relationship alien to the Civil Code of the Russian Federation to the complete rejection of the legal part in the concept of "investment".

The latter view seems to be somewhat meaningful. This viewpoint was supported by the Plenum of the Supreme Court of Arbitration of the Russian Federation, indicating that the concept of "investment" does not have any significant legal contents. Investment implies allocation of funds (usually a temporary one) of a person (the investor) into the business of another person for the purposes of profit from the investment, i.e. this notion is of commercial character.

From a legal viewpoint the process of such allocation can be provided in various types of agreements and contractual terms and conditions, that is why the legal nature of the investment agreement is subject to interpretation by the court in each particular case. Stop! What does the above mean? It means that in every dispute where there is an agreement called an investments agreement by the parties thereto a court must take due care and at the first stage study the legal nature of such agreement and provide a legal classification thereof. This is a considerable instruction for the courts. Failure to comply with it shall often lead to the cancellation of the judgment. The cases where the judgment has been cancelled by a higher instance court for the only reason that the court neglected its obligation to qualify legally an investment agreement are already (!) pretty numerous; this enables us to speak of the practice which is being established in the application of Resolution № 54.

Judicial practice in general is established based on the interpretations based in their turn on generalization of case law, - it is a unique legal phenomenon, quite a widely spread one, as we shall see below. Having overloaded the courts in this manner, though, the Plenum of the Supreme Court of Arbitration has immediately given them “a magic wand” by creating the presumption. The judicial presumption means the concept that a court must follow unless this presumption is proved to be wrong.

The Presumption of the Resolution of the Plenum of the SCA of the RF № 54 is that unless proved otherwise, the courts must assess agreements related to investments activities in the area of investing in construction and renovation of real estate as sale and purchase agreements of a future immovable property . This means that having come across an investment agreement in the area of construction the court must establish the legal nature of the respective agreements and to settle the dispute in accordance with the provisions of chapters 30 ("Sale and Purchase "), 37 ("Contract for construction"), 55 ("Common partnership") of the Code and the like. This is according to the logic of the Plenum of the SCA of the RF, an investments agreement almost always shall be:

  • Either sale and purchase agreement of a property that does not exist yet but that will be created or purchased in the future and after that the provisions of chapter 30 on sale and purchase of the Civil Code of the Russian Federation shall be applied;
  • Or an agreement for construction and development in which case the court shall apply the provisions of chapter 37 of the Civil Code of the Russian Federation on agreements for construction and, in particular, the provisions of clause 3 “Contract for building and construction”;
  • Or agreements for a common partnership in which case the provisions for chapter 55 of the Civil Code of the Russian Federation on mutual activities.

It should be noted that the Plenum of the SCA of the RF left open the list of legal classifications the courts may give to investment agreements, but in practice there are no other classifications other than the three above types. If an investment agreement cannot qualify under these three types it shall be considered, as per the rule of presumption, a sale and purchase agreement of a future property.

The Plenum of the SCA of the RF has explained to the courts the particular criteria which allow qualification of an investment agreement in a certain way.

First of all, the Plenum of the SCA of the RF has eliminated any doubts that it is possible to enter into a sale and purchase agreement for the property the ownership rights over which is missing from the seller. According to the Plenum of the SCA of the RF , clause 7 chapter 30 of the Civil Code has no provisions prohibiting the contract of sale and purchase in respect of immovable property the seller’s ownership right over which has not been registered on the date of effecting the contract in the Common State Register of Rights to Real Estate and Transactions Therewith (hereinafter called the Common Register), but under the terms of this agreement in future the seller shall obtain these rights (the sale and purchase agreement of a future immovable property). At the same time, the courts must bear in mind that for the purposes of state registration of the transfer of title deed for the property to the buyer (Article 131 and 551 of the Civil Code); the seller must have the right of ownership to it .

This means that the seller, having no right of ownership to the property, may still enter into a sale and purchase agreement of the property, but he will be only able to enforce this agreement after he has received the ownership right over the property and has registered it at the Common Register.

What will happen, though, if for some reason the seller that has already entered into such an agreement and has received money from the buyer fails to receive the ownership right for the property which had been promised to the buyer. This is what has happened to the so-called “deceived co-owners”.

The Plenum of the SCA has prepared an answer to this question. If a seller does not have the immovable property which he is to transfer to the buyer (e.g. the immovable property has not been built or it has been built but has been transferred to a third party) or the seller’s ownership right to this property has not been registered at the Common Register, the buyer is entitled a return of the amount paid to the seller as well as payment of the interest thereon (clauses 3 and 4 article 487 of the Civil Code), and compensation for the damages (in particular, the payment of the difference between the cost of property stated in the sale and purchase agreement and the current market price of such property) .

It can therefore be concluded that a deceived purchaser can claim the refund and the damages only (provided he can prove these), but no claim to transfer the property to him even if the construction is completed but is not put in operation yet and not registered with the Common Register, can be made. In the opinion of the Plenum, the Seller cannot be forced by court order to act or create something that is subject to future transfer to a buyer in future .

The Plenum has put an end to a very common practice of recognition of property rights to real estate which has not been completed yet. This practice, definitely, was not consistent with the law and baffled the registration authorities that did not understand how the decision of the court to recognize the right of ownership and registration of the inexistent property should be executed. However, the courts have often used this method to ease social tension. Now the courts must be guided by the rule that if the plaintiff has filed claims for recognition of ownership right to the property and for recovery of the property from the defendant, the court should classify these claims as the claims to force to fulfill the obligations to transfer the individual specific property (Article 398 of the Civil Code of the Russian Federation) and the claims for the state registration of the transfer of ownership of immovable property which is the subject of the sale and purchase agreement (Clause 3 Article 551 of the Civil Code).

Another model of classification and investment agreement is applied in the case where the investor undertakes to make its investment contribution by means of some construction works, and in return the developer transfer to the investor certain areas of the property (for example, a few apartments). Such transactions, according to the Plenum, are to be regarded as a construction agreement and the relevant laws are to be applied to settle the dispute. The mandatory criterion for classifying of an investment agreement as a construction agreement is the fact that one of the parties has the ownership right or another right to the plot and that the other party is given a building or premises for construction . In this case, if under the terms of the agreement a party that has carried out the construction, is entitled to, as payment under the agreement, to receive in the ownership the premises in the building which has been constructed, the said agreement should be classified as a mixed one (Clause 3 Article 421 of the Civil Code), and the rules for sale and purchase of future immovable property shall be applied to the obligation to transfer the premises.

Finally, the third model for classification of investment agreements is a common partnership. An investment agreement should be evaluated according to the rules of Chapter 55 of the Civil Code as " a common partnership" if the conditions of the investment agreement provide that each of the parties makes contributions (transfers the plot, brings in the money, carries out the works, supplies the construction materials, etc.) in order to achieve a common goal, that is the construction of the property . Besides, particular attention was paid by the Plenum to the matters of the transfer as a contribution to the common property of the partners of the plot.

The fact that the basic legal position of the Plenum is the rule that the ownership right to a newly created property could arise only from the owner (or the owner of another right) of a plot. Actually, this rule implies that the Plenum rejects the possibility to recognize the ownership right to the property under construction directly with its purchaser.

Consequently, in case where the property is built on the plot that is not registered as the common ownership of the partners (or lease with a multiplicity of persons on the side of the tenant), the ownership right to a newly created property, according to Article 219 of the Civil Code, may only arise with the partner that has the right to the said plot.

In the situation where despite the agreement, a partner liable to contribute into the common business in the form of the right to a lease or through the transfer of the plot in common ownership of the partners, fails to make the required actions, other members of the partnership are entitled via court to enforce the specified agreement with respect to Clause 3 of Article 551 of the Civil Code. Similarly, the courts should qualify the claims of the members, formulated as the claims to recognize the ownership right to a share in the created property the construction of which is the common goal .

In this case the Plenum also changed its own eight year old position which excluded the possibility of bringing up mutual claims by the members of a partnership. We believe that the change in the approach to this problem is caused by the desire to improve legal indemnity for persons investing in construction but having no title deed to the plot.

Speaking of the legal positions of the Resolution of the Plenum of the SCA № 54, it is necessary to mention the interpretation of the legal nature of the preliminary sale and purchase agreement for future property. If the parties have entered into an agreement which they have called as a preliminary one, under which they undertake to enter in the future into the principal agreement for sale and purchase of the property that will be created or purchased afterwards; but the preliminary agreement establishes the obligation of the purchaser of the property prior to entering into the principal agreement to pay the price of the property or a substantial part thereof, the courts must qualify this agreement as the sale and purchase agreement for future immovable property with the clause of advance payment .

Moreover, the Plenum recognized that the rule on compulsory state registration of sale and purchase agreement of property does not apply to sale and purchase agreements of future residential premises (Clause 2 Article 455 of the Civil Code), the agreement is considered to take effect from the day of signing by the parties.

2. The legal positions of the Resolution of the Plenum of the Supreme Court of Arbitration of the Russian Federation dated 22 December 2011 N 81"On some aspects of application of Article 333 of the Civil Code of the Russian Federation".

For almost ten years in arbitration practice there was the phenomenon the lawyers considered absolutely inevitable like a hangover after a party, it was the reduction of the penalty by the court. Article 333 of the Civil Code allows the courts to reduce any penalty, if the court considers it grossly disproportionate to the effects of the breach. This provision did not apply to the amount of damages which, if proved, was not subject to the reduction. Unlike the damages, the penalty does not need to be evidenced, the fact of breach only must be proved, the breach being the grounds for the penalty, so the parties could contract to provide almost any penalty. At the time first part of the Civil Code was introduced, the rule seemed to be quite reasonable; it was designed to allow the courts to protect the economically weaker party of the dispute from the penalties imposed disproportionately.

The courts, however, in a strange persistence started to apply Article 333 of the Civil Code to almost every case involving the recovery of damages. And in most cases the courts reduced the penalty automatically, without bothering to give the grounds for that and to analyze the proportion of penalties and the consequences of the unfulfilled obligations. Things went so far that it was absolutely useless to establish in an agreement the amount of penalties over 0, 1% of the amount of default per day or over 5% of the agreement. The clients had to be warned about this in advance when drafting the terms of the agreement.

This phenomenon has been called "pro-debtor position of the court" and it seemed so unshakable that the parties in the process did not even ask the court to reduce the penalty amount, knowing that the court will reduce it court automatically. Obviously such an approach was not consistent with either the idea or the wording of Article 333 of the Civil Code. Since the provision of Article 333 of the Civil Code was formulated adequately, there were no complaints to the legislator and changing the article itself did not make any sense. It was necessary to "treat" the widely spread judicial "epidemic".

The Plenum of the Supreme Court of Arbitration of the Russian Federation has undertaken to reverse the lower courts' approach, driven to automatism. First of all, the Plenum has instructed the courts that on the basis of the principle of the civil rights to carry out their own will and to act in their own interest (Article 1 of the Civil Code), the penalty may be reduced by the court on the basis of Article 333 of the Code only upon the statements made by the defendant. Thus, the courts have lost the initiative to apply Article 333 of the Civil Code. The courts are not allowed to reduce the penalty at their own discretion.

In this case the defendant must provide evidence of a clear disproportion of the penalty against the breach, in particular, that the potential size of the lender’s damages which may have appeared as a result of the breach, well below the assessed penalty. The lender in order to disproof such statement may provide arguments supporting the proportionality of the penalty against the consequences of the breach. Since, by virtue of Clause 1 Article 330 of the Civil Code on demand on payment of a penalty the lender is not required to prove the damages caused to him, in order to disproof the defendant's statements to reduce the penalty he can present evidence to show the consequences of such breach of obligation to the lender acting in a civil turnover reasonably and prudently under similar circumstances, including those based on average results of the market (a change in the interest rates on loans and the market prices on certain goods in the same period, currency fluctuations, etc.).

The defendant's arguments about the impossibility to perform the obligations due to the difficult financial situation, on breach by the counterparties; on the debt against other creditors; on the seizure of money or other property of the defendant; on the non-arrival of funds from the budget; on the voluntary repayment of the debt in full or in part on day of the court hearing on the dispute; on the execution of socially important functions by the defendant; on the presence of the debtor's obligation to pay interest on the loan facility (for example, interest on the loan agreement) in itself does not constitute a ground for reduction of the penalty on the basis of Article 333 of the Civil Code.

The practice of application of the interpretations of the Plenum proves that the defendants were unprepared to prove and justify the need to reduce the penalty. Many defendants simply did not know that they have to justify the disproportionate penalties for the recovery requested by the plaintiff.

Besides the rules of evidence of disproportionate penalties set by the Plenum of the SCA of the RF virtually leveled the complexity of proving a disproportionate penalty with proving the damages. In essence, this is correct: the parties agreed amount of penalties in the agreement and their behavior should stem from the fact that in case of a breach the penalty will be charged in full and the amount does not need to be justified. Otherwise, the security function of the penalty disappears, leaving only its punitive component.

In case the defendant claimed that the penalty is disproportionate and proved the fact of inadequacy the court faces the question to what extent the penalty can be reduced. The Plenum recommended the courts in determining the amount sufficient to compensate the lender to proceed from the double discount rate (rates) of the Bank of Russia, which existed during the period of such breach.

The Plenum of the SCA of the RF reminded that the statement of the defendant on the apparently disproportionate penalty against the consequences of the breach can be made solely at the court while considering the case according to the rules of the court of first instance.

The Plenum, in addition, made a number of important positions on the application of Article 333 of the Civil Code. But the most important thing is that the Plenum confirmed that the Russian law contains the presumption of equivalence of the penalty and the consequences of the breach. That is, the amount of penalty, whatever it may be, considered adequate to the breach, until proven otherwise.

There is yet another interesting feature that has found its place in the Resolution of the Plenum of the SCA of the RF № 81 which is often ignored. And yet, this feature is, in fact, recognized the potential for the application of an alternative protection of the defendant in the Russian arbitration.

An alternative protection of the defendant has long existed only in theory and in foreign law, while in Russian legislation it has almost never been used, although it was not banned. The alternative defense is the claim that the defendant is entitled to prove to the court two mutually exclusive positions both of which are aimed at the protection of the defendant.

It seems that an option of such protection is provided by the wording in the Resolution of the Plenum of the SCA of the RF № 81 that the courts should take into account that the statement of the defendant on apparently disproportionate penalties against consequences of the breach cannot itself be construed as a consent of the defendant to the debt liability against the plaintiff or the fact of the breach.

While the Resolution № 81 of the Plenum of the SCA of the RF deprived the courts of the right to initiatives in application of Article 333 of the Civil Code, the Resolution of the Plenum dated 08.10.2012 N 62 "On some issues of consideration of cases by courts of arbitration cases via the summary procedure" the Plenum on the contrary gave courts the right to initiative in the simplified procedure.

Previously the edition of the Administrative Procedure Code provided an opportunity to address some types of cases by summary procedure. These cases were classified under the following categories:

  • cases on property claims based on the documents proving the failure of payment for consumption of electricity, gas, water, heating, communication, rental fees and other expenses related to the use of premises used for the purposes of business activities;
  • lawsuits based on the documents provided by the plaintiff that establish property liabilities of the defendant which are recognized but not complied with by the defendant;
  • lawsuits against legal entities for the amount under twenty thousand roubles, and lawsuits against sole traders for the amount under two thousand roubles;

The simplified court proceedings are supposed to have a shorter time for preparation and consideration of the case, the trial is carried out by a single judge and the parties are not called on the basis of the provided documents.

Such type of trial, however, could be applied only upon the application of the court and only subject to absence of objections from the defendant.

The Federal law dated 25.06.2012 N 86-ФЗ in Chapter 29 of the Arbitration Procedure Code of the Russian Federation «The Simplified Trial» introduced some significant changes. In essence the whole chapter was written from the beginning.

It should be mentioned that the changes were needed as the simplified trial procedure did not work in practice through the previous version because the defendant and the plaintiff rarely trusted the court to proceed with the trial without the participation of these parties. The new version of the Arbitration Procedure Code of the Russian Federation does not provide for a must to receive the consent of the defendant or the application of the plaintiff for the simplified trial proceedings where the case refers to one of the below categories:

  • lawsuits for the recovery of money, if the price of the claim does not exceed three hundred thousand roubles for legal entities, and a hundred thousand roubles for sole traders;
  • cases challenging the non-normative legal acts, decisions of the bodies exercising public authority, if the relevant non-normative legal act and the decision contains the claims to repay the money or to collect the funds or claim of recovery of other property of the applicant provided that such acts and decisions are challenged by the applicant regarding the claim for payment of monies or recovery of monies or an application for recovery of other property of the applicant, and the amount challenged by the applicant should not exceed one hundred thousand roubles;
  • brining up a case for administrative liability provided that the administrative breach is charged with the administrative penalty as a fine, the maximum size thereof should not exceed one hundred thousand roubles;
  • cases challenging the decisions of administrative authorities on bringing up the case for administrative liability provided that the administrative breach is charged with the administrative penalty as a fine, the maximum size thereof should not exceed one hundred thousand roubles;
  • cases on recovery of payments and sanctions provided that the total amount due for recovery mentioned in the application does not exceed one hundred thousand roubles.

Besides, the following cases shall be considered through the simplified trial procedure irrespective of the price of the lawsuit:

  • lawsuits based on the documents provided by the plaintiff that establish property liabilities of the defendant which are recognized but not complied with by the defendant and (or) the documents evidencing the debt under an agreement;
  • claims based on the protest of a bill due to non-payment, non-acceptance and undated acceptance executed by the notary public.

However, despite the fact that the circumstances obstructing the application of the simplified trial procedure, seemed to have disappeared but after the amendments in the Arbitration Procedure Code of the Russian Federation had come into force the courts did not strive to apply the simplified trial procedure. The wait-and-see approach can be explained by the absence of a clear indication of the law to the right of the court to use the simplified trial procedure at its own discretion. The Resolution of the Plenum was required as it clearly indicated that if the formal features (e.g. the lawsuit price, the amount of claims, the amount of the penalty) classify the case as referring to the said list; on the basis of Part 2 Article 228 of the Code in accepting the claim and the statement, the court of arbitration shall decide to apply the simplified trial procedure. The consent of the parties to the investigation of the case by through a simplified trial procedure is not required, the preparation of the case for trial by the rules of Chapter 14 of the Arbitration Procedure Code is not performed.

As far as the current practice is concerned, this stimulus was enough and the simplified trial procedure, as we hope, started to work at its full.

The number of very interesting legal positions established by the Plenum of the Supreme Court of Arbitration of the Russian Federation is of such great importance for the last two years that the frames of this article do not embrace it all. We hope to proceed with this issue in the next issue of the journal.