Information Bulletin for the Dispute Resolution and Mediation Practice (Issue 1, 2018)

REVIEW OF THE PRACTICE OF THE JUDICIAL CHAMBER ON ECONOMIC DISPUTES OF THE SUPREME COURT OF THE RUSSIAN FEDERATION (CHAMBER)

During the second half of January and the first ten days of February, the Supreme Court of the Russian Federation considered several interesting disputes, from the point of view of procedural law, concerning the distribution of the burden of proof, the evaluation of evidence, as well as the division of jurisdictions between the courts of first, appellate, and cassational instances. The most important decisions appear below.

DECISION OF THE SUPREME COURT FROM JANUARY 18, 2018, NO. 305-ES17-13822

A supplier filed a claim to collect the debt a buyer owed, based on a contract.  In support of the claim, the supplier submitted signed paper invoices as well as digital invoices that included the digital signature of the customer's representative since the supplier kept almost all documentation in electronic form.

The courts of three instances did not find grounds to satisfy the supplier’s claim. Agreeing with the arguments of the buyer, the courts recognized that the two parties had not agreed to the electronic document management procedure. In addition, electronic documents meant the involvement of a third party and required specific instructions, which did not exist.  Finally, the courts concluded that there was no proof of the delivery of the goods in question.

Disagreeing with this decision, the supplier appealed to the Supreme Court. Upon reviewing the appeal, the Chamber dismissed the previous court decisions, claiming that they violated the basic principles of arbitration proceedings.

The Chamber indicated that, if the plaintiff provides convincing evidence to which the defendant takes exception, without submitting relevant documents, the imposition of an additional burden of proof on the plaintiff to refute the defendant’s position contradicts the adversarial nature of court procedure.

The Chamber also noted that the courts had to assess the submitted documents to see if they comply with the Electronic signature law as well as to account for the lack of proof on the part of the buyer.

Thus, the Supreme Court of Russian Federation reminded the lower courts about the fundamental principles of the arbitration process and that their violation is unacceptable.

In our view, this ruling will affect the further development of law enforcement, since it is now clear that using electronic document management systems has the protection of the state, similar to the protection the courts provide when the documentation is on paper. Furthermore, the court once again recalled the rules governing the burden of proof the parties have in any proceeding.

DECISION OF THE SUPREME COURT FROM JANUARY 23, 2018, NO. 305-ES17-14513

In May 2015, a seller and a buyer concluded a contract of sale. After two and one-half years, the buyer filed a claim to invalidate the contract because of a violation of corporate law.

The courts of first and appellate instances saw no grounds for invalidating the contract and refused to satisfy the claim. They indicated that, despite a violation of the approval procedure for major transactions, there was no property damage to either the buyer or seller. The courts also referred to the expiration of a limitation period.

The court of cassational instance repealed the judicial acts, in this case, and sent the case for retrial. With that, the district court examined the evidence and considered the findings of the lower courts to be unjustified, based on the incomplete clarification of the circumstances relevant to the case. 

However, the Supreme Court of Russian Federation abolished the district court decision, claiming that the court of cassational instance had exceeded its jurisdiction. 

Referring to the position of the Constitutional Court of Russian Federation, stated in the decision of February 17, 2015, No. 274-О, the Chamber pointed out that the court of cassational instance is entitled to evaluate only the correctness of substantive and procedural enforcement, but it is not entitled to examine fully the evidence and establish the facts of a case.

As a result, the Chamber came to the conclusion that the court of cassational instance had reached a decision without a legal basis and in contradiction to legal principles. As a result, the decision of the court of cassational instance is subject to repeal, while the judicial acts of the courts of first and appellate instances remain in force.

We believe that this decision is significant for the judicial system.  This case determines the limits of illegal re-evaluation of evidence in a case, and it clearly reflects the essence and the purpose of the division of powers between the courts of different instances.

DECISION OF THE SUPREME COURT FROM FEBRUARY 8, 2018, NO. 305-ES17-15339

As part of a bank's bailout, GK ASV identified a suspicious transaction to replace a reliable borrower with a borrower associated with a company that had negative net assets on the date of the transaction. On these grounds, the bank challenged the agreement.

The courts of three instances came to the conclusion that there was not enough evidence to satisfy the claim. In their opinion, the transaction before the bailout (financial rehabilitation) was economically justified since, shortly before, the bank and one of the companies had signed a pledge agreement regarding the repayment of funds placed in the bank, based on the terms of a subordinated deposit as additional security to cover the obligations of the original borrower. According to the opinion of the three courts, this enabled the replacement of the borrower on the loan, without violating the rights of third parties. In addition, the courts referred to the provision of Paragraph 5 of Article 166 of the Civil Code of the Russian Federation that prohibits the contradictory behavior of the contract party.

The Supreme Court of the Russian Federation did not agree with this position.

The Chamber noted that, despite its legal nature, a pledge of rights regarding the subordinated deposit could be neither the security for a loan nor the basis for replacing a reliable borrower with sufficient funds to repay the loan with one who obviously is unable to service the loan.

The Chamber specifically outlined the inadmissibility of referring to Paragraph 5 of Article 166 of the Civil Code of the Russian Federation while challenging transactions on special bankruptcy grounds.

As the Chamber pointed out, special arrangements for invalidating transactions aimed at protecting not so much the interests of a private entity that is a party to the transaction but are designed to look after the interests of its creditors who did not make any claims upon validity of a transaction.

Besides that, in the opinion of the Chamber, the lower courts did not evaluate the limitation period as well as the objection to it, which is an essential violation of the norms of the law.

As a result, the Chamber repealed the judicial acts and demanded a new trial.

Thus, the Supreme Court of the Russian Federation formulated two essential legal positions. First, the court clarified the use of a subordinated deposit as security for a loan. Second and more important, the Supreme Court of the Russian Federation pointed out the inapplicability of Paragraph 5 of Article 166 of the Civil Code of the Russian Federation for challenging transactions on special bankruptcy grounds. This is a significant contribution to the enforcement of existing legal practice.

DECISION OF THE SUPREME COURT FROM JANUARY 22, 2018, NO. 308-ES17-13540

Under the terms of a lease agreement, a tenant was entitled to transfer office premises to a sublessor, without the prior approval of the landlord. Later, the parties signed an additional agreement, whereby the tenant assumed the obligation to repair all the premises at his own expense. However, later the landlord informed the tenant that he no longer consented to the tenant providing the premises to sublessors and demanded that the tenant cease the practice.

The landlord appealed to the court to terminate the lease, believing that the tenant’s continued transferral of the property to sublessors to be illegal.  The landlord also maintained that the tenant had failed to repair the premises (non-performance of obligation).

The courts of first and second instances refused to satisfy the claim, indicating that the landlord did not prove there was a breach of the supplemental agreement. The courts also noted that the letter of revocation concerning the transferring of the premises to a sublessor was essentially an extension of the lease, something to which both parties must agree, in accordance with Paragraph 1, Article 450 of the Civil Code. Furthermore, the primary purpose of the lease was for the tenant to transfer the premises to a sublessor.  Thus, the courts came to the conclusion that the tenant did not violate the lease and denied the plaintiff’s claim.

The district court did not agree with findings of the lower courts, with respect to the letter revoking the ability of the tenant to sublease the property. The court, referring to the paragraph 18 of the Information letter of the Supreme Arbitration Court of the Russian Federation, Resolutions of the Plenum of the Supreme Arbitration Court of the Russian Federation no. 55 and no. 57, pointed out that the landlord’s consent for the tenant to sublease the property is a unilateral transaction that does not depend on the tenant. The district court qualified the disputed contract as a prior consent to perform transactions, but since the will to revoke the consent cannot be limited to the interests of the tenant, the lessor legally exercised his right to withdraw the consent unilaterally.

The case came to the Supreme Court of the Russian Federation, which dealt with interpreting the norms of substantive law and the application of the legal positions of the Supreme Court of the Russian Federation . The Chamber concluded that the court of cassational instance wrongfully applied the norms of the substantive law.

The Chamber noted that, at the conclusion of the lease, the property owner expressed the will to grant the tenant the right to sublease the property, without the consent of the owner. At the same time, the agreement of the parties on the right of the tenant to sublease leased property did not include a clause that the landlord could revoke the transaction. The Chamber concluded that only a change in civil legislation could make such a provision.

The Chamber overturned the decision of the cassation court and left in the force the decision of the courts of the first and second instances.

Thus, the Supreme Court of the Russian Federation determined that revoking the consent to transfer a property to a sublessor can be a unilateral transaction only when the contract between the two parties contains such language.

DECISION OF THE SUPREME COURT FROM FEBRUARY 1, 2018, NO. 305-ES17-12783

Under the terms of a contract concluded between a supplier and a buyer, the supplier was obliged to deliver certain goods to the buyer within 30 days. The goods were delivered with ten days delay, but the parties concluded an additional agreement that outlined a procedure for determining penalties for delivery delays of more than 90 days.

The customer filed a court claim to collect penalties from the supplier for a delay in the supply of goods and calculated the size of the claim in accordance with the terms of the contract, without regard to the amendments of the additional agreement.

The courts of three instances satisfied the claim of the buyer, referring to the fact that the period of calculation of the penalty preceded the conclusion of the additional agreement. The courts rejected the arguments of the supplier that the goods were delivered within 90 days, based on the wording of the additional agreement, and that no penalty should apply.

The Chamber of the Supreme Court of the Russian Federation did not agree with this position. The Chamber noted that the courts did not properly assess the content of the additional agreement or the nature of the amendments. In addition, the Chamber indicated that the lower courts did not apply the rules of interpreting contracts established in Article 431 of the Civil Code of the Russian Federation. The courts should have determined the content of the additional agreement, taking into account its literal interpretation, and if it was impossible to determine the intent of the wording, the courts should have considered all the circumstances related to the performance of the contract as well as the correspondence of the parties.

Thus, the Supreme Court of the Russian Federation once again reminded the courts about the rules for interpreting contracts and additional agreements. In our opinion, it will favorably affect emerging court practice, and it prompts the parties concluding contracts to express their intentions more clearly when entering into contractual relations and when concluding additional agreements.

Elizaveta Mogilnaya prepared this review.