The Supreme Court of the Russian Federation provides the interpretation of Part One of the Civil Code

On Tuesday, 23 June 2015, the revised draft of the resolution of the Plenum of the Russian Supreme Court (SC) titled “Some issues regarding the application of the general provisions of the Civil Code of the Russian Federation” will be discussed.

At its previous meeting on 9 June, the Plenum discussed the project for the first time and sent it back for revision, and on the majority of its provisions, the judges were unanimous in their opinion. For the legal world, this is more than a notable event, since the last generalization of practices and systematic explanation of the first part of the Civil Code of the Russian Federation emerged 19 years ago as the joint Resolution of the Supreme Court and the Higher Arbitrazh Court of the Russian Federation, 1 June 1996, No. 6/8. The new Resolution will replace the outdated one and cancel some of its provisions, which is only logical because of the substantive changes to the Civil Code and the existence of new institutions. Nevertheless, the document does not represent any legislative innovation. The judges emphasized that its aim is to eliminate contradictions in practice, reinforce standard approaches, and account for the controversies resulting from amendments to the Civil Code. The document is a comprehensive product of generalization of the legal practice, and it explains almost all general parts of the Civil Code.

According to one of the judges, the Resolution could promote uniformity of the legal practice–both in arbitration and general jurisdiction–regarding the application of Part One of the Civil Code. The purpose of the document is to ensure the stability of economic relations and of civil matters.

The most expected explanation, according to Lidia Mikheeva, deputy chairman of the Board of Private Law Research Center, is the principle of good faith. As a rule, good faith is presumed, until proven otherwise, but the court should not take a passive stance in this regard. On its own initiative, the court may recognize behavior to be unscrupulous along with the initiative of the opponent in a dispute. Judges generally supported such an interpretation of the powers of the SC, but some practitioners considered that it violates the principle of adversarial proceedings, as the parties themselves must bear the risks of acceptance or rejection of the misconduct of an opponent.

The SC reiterated that the parties have the right to compensation for loss of profits. Currently, the recovery practice is uncommon because of the difficulty to prove exact costs and the high degree of subjectivity. The Court pointed out that, in calculating lost profits, the courts must understand that the calculation, “as a rule, is approximate and probabilistic in nature,” and an approximation cannot be used as grounds for rejecting the claim.

Clarification for damages is important. The courts should establish the monetary amount with a reasonable degree of certainty, and the claim cannot be denied only because of the inability to establish precise amounts. This approach already is rooted in disputes over intellectual property rights.
In its statement on the recovery of compensation for the breach of exclusive intellectual property rights, the SC emphasized that courts must consider the evidence the plaintiff submitted that indicates the total estimated volume of counterfeit goods. If the defendant does not deny the calculation, the court shall award the plaintiff full recovery of the amount. The SC also stressed that “the real damage includes not only the actual costs incurred but also the costs that this person must make to restore their violated rights.” By the real damage, the SC considers the reduction of the cost of the property.

In the area of civil rights, the SC stated again, now through its Resolution of the Plenum, that tilling land is a part of the land and is not an independent immovable asset (Section 1, Article 133 of the Civil Code). The draft contains this clarification in the context of solving the question regarding the recognition of immovable objects that are lawfully under construction. The draft is important for a large number of disputes on the recognition of ownership of land, based on the ownership of the surface of the land, such as asphalt or concrete.

Regarding the interpretation of legal entities, the SC states that nonprofit organizations that carry out income-generating activities are subject to the provisions which apply to persons engaged in entrepreneurial activity.

The presumption that a person relying on the data of the Unified State Register of Legal Entities (USRLE) did not know and should not have been aware of the unreliability of the data is another useful clarification for business. Third parties relying on USRLE data about persons authorized to act on behalf of a legal person, generally speaking, have the right to proceed from the limitlessness of their powers. The provisions of the constituent instrument defining the conditions for the exercise of powers of persons acting on behalf of a legal entity cannot affect the rights of third parties and serve as a basis to recognize the transaction made in violation of these provisions as invalid, even if constituent documents are published on the Internet. The court shall interpret all the ambiguities and contradictions in the statements of constituent documents of the limited powers of the sole executive body in favor of the absence of such restrictions.

Furthermore, the SC mentioned again that repeated violations of the law cannot serve as the basis for the court decision to liquidate a legal entity. This exceptional measure should be proportionate to the authorized legal entity’s violations and the consequences thereof.

The SC gives an interesting perspective of the definition “decision of assemblies.” By the term, the Court understands all possible decisions of the civil legal community, for example, decisions of collegial bodies of the legal entity (meetings of members, boards of directors, etc.), decisions of the creditors and the creditors’ committees in bankruptcy proceedings, and the decisions of part owners. Such unification, according to some experts, is fraught with the complicated application of special rules and future controversial practices of the courts.

The Court also explained the meaning of significant adverse effects within Paragraph 4 of Article 181.4 of the Civil Code. The decision of the assembly is valid if it did not lead to a breach of the legitimate interests of both the Party and the civil legal community, which may lead to losses, deprivation of the right to receive benefits from the use of civil-law property, restriction or deprivation of the possibilities to take in the future management decisions on the part of the party, or exercise control over the activities of the civil-legal community.

The SC also developed statements in the draft regarding the resolution of cases involving corporate intractable conflicts. The Court allows forced liquidation of an organization in the event of “deadlock” and long-term corporate conflict.

A large portion of the draft is dedicated to transactions. Interpreting Paragraph 3 of Article 157 of the Civil Code, the Court pointed out that the law does not prohibit the conclusion of transactions under the resolutory or suspensive condition, the occurrence of which depends also on the behavior of parties of the transaction (for example, a supply contract executed under the precedent of providing a bank guarantee, which ensures the fulfillment of the obligations of a buyer upon payment for goods, a lease contract execution for a newly constructed building, based on the registration of property rights of a landlord, etc.). The parties must act in good faith. Regarding silence as a consent for transaction, the Court explained that, for transactions requiring consent under the law, it considers the failure to respond to a request for the execution of transaction, within a reasonable time (Paragraph 2 of Article 157.1 of the Civil Code), as a refusal to give consent. Nevertheless, a third person who gave prior consent to a transaction has the right to withdraw it by notifying the parties of the transaction before it is concluded and after having compensated them for their losses. Based on the analogy of the law, the provisions of revocation of acceptance are applied to such a refusal (Section 1, Article 6 and Article 439 of the Civil Code): if one party of the transaction receives information about the withdrawal of consent of a second party after the transaction execution, the refusal is invalid.

Regarding the conditions and nullity of transactions, the Court maintains its previous positions. A transaction that violates the requirements of the law or other legal act is debatable (Section 1, Article 168 of the Civil Code). A transaction that violates the requirements of the law or other legal acts and “infringes public interests or the rights and legitimate interests of third parties” is invalid. By the public interest, the Court understands “the interests of an indefinite number of people, safety of life and health of citizens, as well as defense and security, environmental protection.”

An important matter is explanation of the property of those under arrest and the interpretation of a pledge in this regard. A transaction concluded in violation of arrest imposed by a court or executive authority is valid, since it does not prevent a creditor or another authorized person from realizing the rights ensured by the arrest, in particular, by filing a lawsuit to foreclose on a property (Paragraph 5, Articles 334, 348, 349 of the Civil Code). The draft states that, “according to the provisions of Paragraph 2, Article 174 of the Civil Code, the disposal of the property of the debtor, in violation of the creditor’s rights or any other authorized person whose interests are provided for, as a result of the arrest, can only occur if it is proven that the purchaser of the property knew or should have known of the ban on the disposal of the debtor’s property and failed to take all reasonable steps to determine the restrictions on the alienation of the debtor’s property.”

The last block of clarifications is dedicated to the representation and execution of the power of attorney.

According to most experts, the resolution incorporates “humane and fair ideas,” reflects a systematic approach to the interpretation of the Civil Code, and does not contradict it. According to the authors, the resolution will have a positive impact on legal practice, since it is aimed at stabilizing economic relations. Of course, it will not produce any sort of revolution nor should it. The resolution aims to develop uniform approaches to civil relations.

According to the SC, the judges plan to adopt the resolution before the end of June. We believe that the second review will be final.