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Bulletin of the Dispute Resolution and Mediation Practice (Issue 4, 2019)

1. On 10 July 2019, the Federation Council of the Russian Federation approved a draft law that allows citizens to bring group actions in courts of general jurisdiction.

The draft law would allow plaintiffs to file group applications in any category of civil cases, except special proceedings. These could include, for example, claims for protection of consumers' rights, compensation for damages, disputes in the field of housing and communal services, or disputes arising from violations of antimonopoly legislation. The minimum sizes such groups would be twenty persons in a court proceeding and five persons in a proceeding before an arbitration tribunal.
A person or entity may seek protection of the rights and legal interests of an undetermined number of persons for which there is a common defendant, or where the subject matter of the dispute is the common or similar rights and legal interests of the members of the group, or where the rights of the members of the group and the obligations of the defendant are based on similar factual circumstances.


In a class action, a special procedural position is held by the person who is handling the case is representing the interests of the group (i.e., the "head of the class action"). Such a person acts in the interest of a group of persons without a power of attorney and is obliged to conduct the group action in good faith, to instruct a lawyer to conduct the case, and to pay court costs. The "head of the class action" may be removed from the case if he or she waives the case for himself or herself, as well as at the request of a majority of the other plaintiffs in the group. Such a request may be motivated by the inability of the person handling the case in the interests of the group to conduct the case (e.g., in case of illness or prolonged absence), as well when there are reasonable and bona fide doubts about the way that the case is being handled on behalf of the group.
To join a class action, one may choose between two options. The first is to submit a written application to join the plaintiff representing the group in the case. The second is to submit such an application directly to the court after the court has approved the motion to join the plaintiffs’ interests in a class action. It is important to note that joining a class action will only be possible before the court determines whether the case will be assigned to trial. In turn, the members of the group who do not agree with the requirements set forth in the class action have the right to intervene in the case as third parties.
Amendments to the Civil Procedure Code of the Russian Federation to permit class actions have long been discussed by the legal community. This mechanism will greatly simplify the process. Citizens will be able to participate in disputes that they would not have initiated without collective support. Groups of citizens will be more active in defending rights that do not have a specific economic assessment.
If signed by the President of the Russian Federation, the draft law will come into force on 1 October 1 2019.
(Draft Law No. 596417-7, On the Introduction of Amendments to Certain Legislative Acts of the Russian Federation with regard to the Regulation of the Procedure for the Consideration of Claims for the Protection of the Rights and Legal Interests of a Group of Persons)


2. The Plenum of the Supreme Court of the Russian Federation has adopted a resolution on issues of private international law, explaining how Russian courts should choose the appropriate application of the law.

The Supreme Court has stated that a foreign element complicating the relations between the parties can be considered not only in terms of the foreign entity or the object of the relationship itself, but also the fact that the transaction took place abroad, as well as the occurrence of an event that results in the emergence, modification, or termination of civil law relations.

The Supreme Court confirmed that the parties can choose the foreign law even if the foreign element is not present in their relations, and even if both sides of the relationship are Russian companies, and even if the subject of their dispute is in Russia and all the actions and events under the contract take place in Russia.
The Resolution defines the criteria for applying the principle of "the closest link". In addition to the quite obvious criteria, such as residence, establishment or conduct of main activities, location of the facility and place of performance of obligations, additional criteria are introduced that can be taken into account. For example, courts are encouraged to determine whether the application of the law of which country will best realize the universally recognized principles of civil law and the construction of its separate institutions. The Supreme Court also recalls that such principles and institutions include the protection of good faith, the inadmissibility of taking advantage of one's own bad faith, the prohibition of abuse of rights, the protection of the weak party, the preference for maintaining the validity of the transaction, and the prohibition of unreasonable waivers.


The Court also provides examples of rules of direct application, which apply irrespective of the agreement of the parties on the applicable law. These include provisions to limit the negotiability of certain civil matters. For example, the Supreme Court reminds us of restrictions in Russian law on the acquisition by foreign persons of shares and interests in Russian strategic companies.
The Resolution solves the problem of the relationship between general and special international treaties. The document expressly establishes the priority of a special international treaty, irrespective of the number of parties to it and the date of its adoption, unless otherwise provided for in the rules of international treaties. For example, there is the Agreement of the CIS countries On the Procedure of Resolution of Disputes Related to Business Activities. As a special international treaty, it automatically takes precedence over the Minsk Convention of 1993.
The Court expands the principle of "autonomy of will". The parties have the right to choose documents that contain rules recommended by international organizations or associations of states, but which are not laws, such as the principles of international commercial contracts of Unidroit, European principles of contract law, and model rules of European private law.
In Supreme Court noted that the rule of Article 162 of the Civil Code of the Russian Federation on the inadmissibility of the use of testimony in support of the transaction, as well as its conditions in the event of a failure to comply with a written form of the transaction, are settled substantive law. Therefore, the law does not prevent the application of foreign norms containing other consequences for non-compliance with the written contract.
The Resolution clarifies the conditions under which a legal entity or a party acting on its behalf, when contesting a transaction, may not refer to the limitations on the authority to execute a transaction established by the law of its country. These conditions are:
- At the time of the transaction, the party or its representative was outside the territory of its domicile country;
- The law of the country where the body or representative made the transaction does not recognize the restriction; and
- The other party to the transaction did not know and should not have known about the restriction.
In general, the Resolution consolidates already established positions of judicial practice, and its value consists in it explanation of the basic fundamental principles of private international law, which have not been enshrined in the legislation so far.
(Resolution of the Plenum of the Supreme Court of the Russian Federation No. 24, On the Application of the Norms of International Private Law by the Courts of the Russian Federation (9 July 2019))

3. On 17 July 2017, the Presidium of the Supreme Court of the Russian Federation approved the Regular Review of the Judicial Practice of the Supreme Court of the Russian Federation, No. 2 of 2019.

The review included key court decisions in civil, economic, administrative and criminal disputes.
In the field of financial obligations, the decision by the Judicial Chamber for Economic Disputes of the Supreme Court of the Russian Federation of 5 March 2019, No. 305-EC18-15540 (case No. A40-180646/2017), is of particular interest. The Chamber concluded that a person who participated in negotiations on behalf of the debtor and intentionally provided the creditor with false information about the property status of the debtor is obliged to compensate the damage caused to the creditor, even if the debtor was liquidated after the bankruptcy proceedings.
The actual circumstances of the case are as follows. The Company (debtor) and the Bank (creditor) entered into two loan agreements for the total amount of 500 million rubles. During the conclusion of these contracts the General Director and the Chief Accountant, in order to confirm the solvency of the Company, provided the Bank with the information that the Company had significant current assets in the form of inventories and accounts receivable from two other companies that exceeded the loan amount.


Subsequently, the Company repaid only a portion of the loan, and was soon declared bankrupt by the court. The Company was subject to a six-month bankruptcy proceeding. It turned out that the bankrupt Company had no right of claim against the two other companies, but, on the contrary, was in debt to them. The claims of these two companies, as well as the Bank's claims, were included in the creditor claims register for the debtor.
Upon completion of the bankruptcy proceedings, the Company was liquidated, and the Bank's claims were not satisfied in full. The Bank, referring to the provisions of Article 15 of the Civil Code of the Russian Federation, and to Articles 10, 612, and 613 of the Bankruptcy Law, announced that it would seek to impose on the General Director and the accountant of the bankrupt Company joint and several subsidiary liability for obligations under the loan agreement. The Bank alleged that the actions of the General Director and the Chief Accountant were aimed at an unjustified receipt of the loan to the Company, which the borrower did not intend to repay due to the planned bankruptcy. After all, these persons provided unreliable information about the Company's solvency, moreover, in documentary form. The Bank submitted the relevant documents to the court as evidence.
The lower courts dismissed the claim based on the following logic. First, as indicated by the courts with reference to Paragraph 22 of the Joint Resolution of the Supreme Arbitration Court of the Russian Federation and the Supreme Court of the Russian Federation No. 6/8 of 1 July 1996, the concluded loan agreements should be considered in a causal relationship with the bankruptcy of the Company. Secondly, the courts took into account the explanations set forth in Paragraphs 1 and 6 of the Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation No. 62 of 30 July 2013, noting that the General Director and the General Accountant could not be held liable if the conclusion of loan agreements did not go beyond usual business or entrepreneurial risks, evidence of which was not provided by the Bank.
The Supreme Court, in overruling the lower court decisions, noted that, in accordance with Article 8 of the Civil Code, civil rights and obligations arise, in particular, as a result of harm to another person. Therefore, if the Bank was unable to recover its debt within the framework of bankruptcy proceedings, it was not deprived of the right to file claims under Article 1064 of the Civil Code against persons who have caused harm, i.e. the General Director and the Chief Accountant.
The Supreme Court ordered the lower courts to verify the intent of the General Director and the Chief Accountant when they provided the inaccurate information, as well as to find out the degree of prudence of the Bank itself in granting the loan (Paragraph 2 of Article. 1083 of the Civil Code).
This case expands the concept of liability. It involves losses suffered by a particular creditor. In such disputes, it seems expedient for the court to verify the integrity of each of the parties to the transaction. In particular, it is important to disclose the liability of both the debtor's officials and the creditor.
(Review of Judicial Practice of the Supreme Court of the Russian Federation, No. 2 of 2019 (17 July 2019))


4. The Plenum of the Supreme Court of the Russian Federation has issued two resolutions concerning the effects of recently legislated procedural changes on existing cases and appeals.


The highest court clarified the provisions of the Federal Law No. 451-FZ, On Amendments to Certain Legislative Acts of the Russian Federation, (28 November 2018)(“451-FZ”), which is one of the laws that made up the so-called "procedural revolution" involving the principle that "the case is considered according to the rules in force at the time of consideration."
Resolution No. 25 of 9 July 2019 is devoted to the observance of the rules of court procedure for filing complaints. Thus, for example, the Court pointed out that complaints and representations filed before the entry into force of 451-FZ in the "old" cassation instances - in the judicial collegiums of courts of the federal level, in the presidiums of these courts, as well as in the judicial collegiums of the Supreme Court of the Russian Federation - and then to be considered in the same courts under the rules provided for by Chapters 39 and 41 of the Civil Procedure Code of the Russian Federation and Chapters 34 and 35 of the Code of Administrative Procedure of the Russian Federation in the previous version. Similar rules also apply to appeals and private complaints filed before the entry into force of 451-FZ. The Supreme Court reminded the courts of general jurisdiction that the cassation court itself, rather than the court of first instance, is now considering the application to restore the deadline for filing a cassation appeal. However, such applications filed prior to the entry into force of the 451-FZ are considered under the old rules provided for by Article 112 of the Civil Procedure Code, i.e. by the court of first instance.


In Resolution No. 26 of 9 July 2019, the Plenum of the Supreme Court pays special attention to the rules of legal proceedings under the Civil Procedure Code, the Arbitration Procedure Code, and the Code of Administrative Procedure before and after the entry into force of 451-FZ. For example, all these codes have a single rule: If a claim is filed in the wrong court after the effective date of 451-FZ, and a procedural error is revealed after the acceptance of the claim, the court shall not terminate the case but shall transfer it to the appropriate court authorized by law. Such challenges shall be made pursuant to Article 20 of the Civil Procedure Code and Article 25 of the Arbitration Procedure Code, regardless of the date of commencement of the proceedings. Thus, in accordance with the new wording of Article 20 of the Civil Procedure Code, in the course of a collegial review of the case, the challenge filed against two or more judges is now considered and decided in the deliberation room. In turn, according to Article 25 of the new version of the Arbitration Procedure Code, the rules on the challenge of a judge hearing the case alone have become similar to the rules in force in the courts of general jurisdiction. Previously, this issue had been resolved by the chairman of the arbitration court, the deputy chairman of the arbitration court, or the chairman of the court. Now the decision on the challenge is made by the challenged judge.
An interesting exception applies to the form and content of the statement of claim. Even in cases in which the claim is filed prior to the effective date of 451-FZ and left without action by the court, the issue of further acceptance of the claim for consideration shall be determined by the old versions of the Arbitration Procedure Code and the Civil Procedure Code, even when this issue comes before the court after the effective date of 451-FZ. This rule seems logical; otherwise the plaintiff would be put in an extremely burdensome position regarding the need for a rapid filing of the pertinent documents, as required by the latest versions of the codes.

(Resolution of the Plenum of the Supreme Court of the Russian Federation No. 25, On Some Issues Related to the Beginning of Activities of Cassation and Appeal Courts of General Jurisdiction (9 July 2019))
(Resolution of the Plenum of the Supreme Court of the Russian Federation No. 26, On Certain Issues of Application of the Civil Procedure Code of the Russian Federation, the Arbitration Procedure Code of the Russian Federation, and the Code of Administrative Procedure of the Russian Federation in Connection with the Enactment of the Federal Law of 28 November 2018, No. 451-FZ "On Amending Certain Legislative Acts of the Russian Federation” (9 July 2019))


5. The State Duma has adopted a package of draft laws significantly changing the procedure for the amicable settlement of disputes in civil and administrative proceedings.


On 17 July 2019, the State Duma adopted a package of draft laws (Nos. 421600-7, 421476-7, and 421494-7), which expand the possibilities to use conciliation procedures in the administration of justice and which specify the rules of amicable settlement. All three draft laws have now been adopted on third reading and have been forwarded to the Federation Council.
In general, the essence of Bill No. 421600-7 is to make the widest possible expansion of the procedures of reconciliation of the parties under all three codes - the Civil Procedure Code, the Arbitration Procedure Code, and the Code of Administrative Procedures. A retired judge may become a mediator and a court conciliator. The list of such judges who have expressed their desire to become mediators on a professional basis will be kept by the councils of judges of the constituent entities of the Russian Federation. Mediators, court representatives, and other mediators will not be able to be questioned as witnesses about the circumstances that became known to them in connection with their participation in the conciliation procedure.

The Codes introduce an extensive list of provisions establishing the powers of the court to assist the parties in the amicable resolution of the conflict. Article 190 of the Arbitration Procedure Code enshrines the right of the court to propose that the parties to a tax dispute resort to conciliation procedures (if pretrial settlement of disputes is not otherwise provided for by law) in order to clarify the facts of the case and eliminate contradictions in positions, including by means of the reconciliation of mutual settlements. It should be noted that in administrative proceedings the prohibition on the reconciliation of parties in cases of contesting normative legal acts will remain unchanged.
Amendments would also be made to the Fundamentals of the Legislation of the Russian Federation on Notaries, No. 4462-I (11 February 1993). In accordance with the amendments, a notary would certify the mediation agreement reached by the parties in accordance with Federal Law No. 193-FZ, On Alternative Dispute Resolution Procedure with the Participation of the Mediator (Mediation Procedure) (27 July 2010).
Bill 421476-7 would require the Supreme Court to approve the rules of judicial conciliation. Bill 421494-7 would introduce amendments to points in the Tax Code governing pre-trial conciliation of the parties, corresponding to the proposed amendments to Article 190 of the Arbitration Procedure Code, described above.
(Draft Law No. 421600-7, On Introducing Amendments to Certain Legislative Acts of the Russian Federation (as regards improvement of conciliation procedures))
(Draft Law No. 421476-7, On Introducing Amendments to Article 5 of the Federal Constitutional Law ‘On the Supreme Court of the Russian Federation” in Connection with the Improvement of Conciliation Procedures (on the Issue of Clarifying the Powers of the Plenum of the Supreme Court of the Russian Federation in terms of Conciliation Procedures))

6. Jurisdictional conflicts with the Federal Tax Service

Case No. A40-223422/2018 addressed issues of judicial competence to resolve an effort to impose tax liability on a citizen for an offense related to participation in legal entities.
Entrepreneur Pavel Osipov submitted a special declaration to the Federal Tax Service in accordance with the Federal Law On Voluntary Declaration by Individuals, as well as, two months later, a notice of his participation in foreign organizations. The tax authorities fined Osipov 100 thousand rubles. The reason for Osipov's prosecution was the violation of the legal deadline for providing notification of participation in foreign organizations. After an unsuccessful attempt to challenge the decision the internal administrative review of the matter, Osipov appealed to the Arbitration Court of Moscow.
The court of first instance pointed out that Mr. Osipov charged with the tax violation as an individual and not as an individual entrepreneur. In addition, the defendant himself brought to the attention of the court that all the additional charges are related to his activities as an individual, not as an individual entrepreneur. Accordingly, based on Article 150 of the Arbitration Procedure Code, the case was terminated (Case No. A40-223422/2018). The appellate instance upheld this decision.


The Arbitration Court of the Moscow District did not agree and overturned the lower courts’ decisions and remanded the case for a new hearing. The cassation tribunal pointed out that the procedural legislation distinguishes the subject matter competence of courts of general jurisdiction and arbitration courts according to criteria defined by the subjective composition of the process and participation in business or other economic activity. The economic nature of the dispute was evidenced by the Osipov’s participation in a foreign organization and his status as an individual entrepreneur at the time of consideration of the case. These facts were known to lower courts and were not disputed.
Interestingly, the Arbitration Court referred to the position of the Constitutional Court, expressed in Resolution No. 11-P of 25 May 2010. The Constitutional Court pointed out that the joint participation of citizens in the organization is a realization by a citizen of the constitutional right to use their abilities and property for any economic activity not prohibited by law. Participation in a business entity is of an economic nature, which was repeatedly supported by the Supreme Court of the Russian Federation, e.g., Supreme Court of the Russian Federation decision No. 309-KG18-18623 (13 November 2018)). That activity, while not being literally entrepreneurial, nevertheless refers to other economic activities not prohibited by law. Therefore, there were no grounds for termination of Osipov’s case by the courts. (Resolution of the Moscow District Arbitration Court No. F05-9346/2019 in case No. A40-223422/2018)