Information Bulletin on the Practice of Dispute Resolution and Mediation (Issue 1, November 2017)
REVIEW OF THE PRACTICE OF THE JUDICIAL CHAMBER ON ECONOMIC DISPUTES OF THE SUPREME COURT OF THE RUSSIAN FEDERATION (Chamber)
In November 2017, the Supreme Court of the Russian Federation considered several disputes covering bank guarantees, that further outlined a new trend in this category of cases. In general, the Supreme Court demonstrated a pushback from formalism towards the essence legislative regulation in determining the grounds for the payment of bank guarantees. It is important to pay attention to the acts that were adopted on disputes between guarantors and beneficiaries.
Decision of the Supreme Court from November 03, 2017 No. 305-ES17-5496
The beneficiary filed a claim to collect a bank guarantee from the bank. The court of first instance recognized the claims and fully satisfied them. However, the courts of appellate and cassational instances considered the findings of the first instance to be false, and dismissed the case not seeing the grounds for satisfaction. The courts motivated their decision by the fact that the beneficiary did not submit the required original documents to the bank during the first appeal. Besides that, the duplicative request containing the original documents was sent after the expiration of the bank guarantee.
The beneficiary filed an appeal to the Supreme Court of the Russian Federation. In the opinion of the Supreme Court, the courts of appealate and cassational instances did not take into consideration the substance of legislative regulationof disputable legal relationships, when interpreting the provided guarantee terms. The Chamber indicated that the purpose of securing by guarantee is to ensure the fulfillment of the obligation, not to compensate the losses incurred by the beneficiary.
The Chamber also found it wrong for the courts to conclude that the beneficiary declared a new independent claim when the duplicative request was sent after the expiry of the bank guarantee period. The conclusion that the beneficiary missed the deadline for claims on guarantee payment is also wrong. Referring to the provisions on the guarantor’s liability established in the Uniform Rules for Guarantees on Demand, the Chamber indicated that it was the bank who, without notifying the beneficiary of the change of legal address, violated the terms of the guarantees. This did not allow the beneficiary to forward the request within the deadline set by the agreement. Therefore, the bank does not have the right to refer to the fact that the demand and related documents are inappropriate.
The Chamber came to the conclusion that the bank's refusal was illegal. Its violations were the basis for repealing the acts adopted by the courts of the second and third instances. Thus, the Supreme Court formulated a new legal position protecting the rights of the beneficiary: the guarantor is not entitled to refuse the payment under the guarantee because of formal inconsistencies of the submitted documents, if the actions of the guarantor itself made it impossible for the beneficiary to apply with the application for payment of the bank guarantee.
Besides that, the Chamber made an important conclusion: to forward a set of documents to a claim addressed to the guarantor is not a new independent demand for payment. Therefore, the expiration of the warranty period by the time does not entail termination of obligations under it.
Decision of the Supreme Court from December 01, 2017 No. 305-ES17-11587
The beneficiary filed a claim to recover the guarantee amount from the bank. The courts of three instances refused to satisfy the claims, because the beneficiary submitted a payment order to the bank that confirms the transfer of the prepayment to the principal and is sealed by the beneficiary. But in accordance with the terms of the bank guarantee, such a payment order must contain an execution notation made by the beneficiary's bank or the Federal Treasury body.
The Judicial Chamber on Economic Disputes of The Supreme Court of Russian Federation did not agree with the adopted judicial acts. After studying the motivation of the lower courts, the Chamber noted that the courts had reached a false conclusion. Based on the terms of the bank guarantee, the presentation of such payment order is necessary only in cases of the principal’s failure to return the prepayment. In this case, the requirements of the beneficiary were based on the principal's failure to fulfill the obligations to put into operation and transfer the object of participatory construction.
The Chamber also came to the conclusion that the dispute was not heard for the announced reasons. Initially, the refusal to pay the bank guarantee was motivated by the absence of documents confirming the emergence of the principal's liability. However, the courts refused to pay the guarantee amount to the beneficiary on another, not declared to them, basis. As a result, the Supreme Court repealed the judicial acts on this case and sent the case to a new trial.
Thus, the Judicial Chamber on Economic Disputes of The Supreme Court of Russian Federation noted a very important position for all participants of civil legal relations. The Chamber departed from the literal interpretation of the terms of the contract, indicating that it contradicts the essence of legislative regulation of relations on guarantees. This position is new for the Russian law enforcement and indicates its convergence with approaches applied in continental law jurisdictions, e.g. Austria, Switzerland and Germany. This case seems to be an example of a positive trend.
Several important positions were formulated by the Chamber when considering bankruptcy disputes. Let us note the most important judicial acts in this category of cases.
Decision of the Supreme Court from May 22, 2017 No. 304-ES17-1258
In the case of adjudication of bankruptcy of the debtor bankrupt, a third party (bank) has applied to the court with a request to replace one of the creditors with a bank. The basis for succession is the bank’s fulfillment of the creditor's claims.
The court of first instance refused to satisfy the petition, and the bank appealed against the ruling to the appellate and cassation courts. They left the definition unchanged. Referring to Art. 10 of the Civil Code of the Russian Federation, the courts considered the bank’s deposit to a notary to pay off debts to the creditor for actions, solely to change the order of consideration of applications for bankruptcy and introduce a "controlled" procedure with the approval of its receiver. So, the courts saw the abuse of the law, exclusion the possibility of applying Art. 313 of the Civil Code of the Russian Federation.
The bank appealed to the Supreme Court. In the opinion of the Chamber, the courts did not take into account that the financial interest of any creditor in the bankruptcy case is the debtor’s full repayment, and all the rights and instruments of influence for the procedure that are provided by the creditors are used to pursue this goal. Accordingly, the first applicant's power to nominate an arbitration administrator is an instrument to satisfy the ultimate interest of the creditor.
Moreover, the courts had to take into account the fact that the bank had fully satisfied the first applicant party's claims, including financial sanctions, and that other claims of the bank were a lot more significant than the first claimant's requests. Therefore, there were all grounds to believe that the creditor, whose claim was executed by the bank, behaved in bad faith, in the absence of reasonable and legitimate economic grounds. That is why the bank applied the following provisions of the paragraphs listed in part 3 p. 1 of Art. 327 of the Civil Code of the Russian Federation on notary deposit.
Therefore, the Chamber concluded that, when fully repaying the debt to the first applicant and expecting to obtain the status of the first applicant, the bank acted as a reasonable participant in civil law transactions; and its fears of losing influence over the bankruptcy procedure while being the major creditor showed the legitimate legal interest in the application of the provisions of Article 313 of the Civil Code of the Russian Federation.
Decision of the Supreme Court from 26.05.2017 No. 306-ES16-20056 (6)
In the case on adjudication of bankruptcy of the debtor, the landlord claimed the payment of the rent. It was recognized by the courts of the first, appellate and cassational instance as justified and was included in the register. One of the competitive creditors appealed against the judicial acts in the Supreme Court, referring to the ostensibility of the claim, since the parties to the transaction were affiliated with each other.
The Chamber repealed the judicial acts on the basis of Art. 10 of the Civil Code of the Russian Federation, since the courts did not take into account that the presence of intra-group relations and the mutual economic interests of the debtor and the creditor is essential for the proper resolution of the dispute.
The establishment of this fact makes it possible to give a proper assessment of the good faith of the actions of both the creditor and the debtor, who is obliged to pay the rent in a timely manner. The Chamber pointed out the position stated in the descision of the Supreme Court from June 15, 2016 No. 308-ES16-1475. According to this position, in a bankruptcy case the proof of finding the mutual economic interest is permissible not only through confirmation of legal affiliation (in particular, belonging to the same group of companies through corporate participation), but also factual.
In the case above, the lease transaction was non-standard, since the tenant did not have an economically justified need for renting premises and transferred the premises to sublease to other participants in the group of companies, and for five years prior to bankruptcy the landlord did not claim the recovery of a rent debt. The choice of such a structure of intra-group relationships allowed the creation of controlled fake debt for further reduction of independent creditors’ claims in the bankruptcy of each of the tenants (sub-lessees). These facts could indicate the filing of an application to include the requirements in the register with the unlawful purpose of reducing the number of votes of independent creditors in the interests of the debtor and its affiliates.
These circumstances were not taken into account by the courts, therefore the Chamber canceled their judicial acts and sent the case for new consideration to the court of the first instance. So the Chamber drew the courts' attention to the infeasibility of formalism in the cases on the recognition of debtors as bankrupt. The Chamber noted the need to pay attention to the economy of relations between debtors and creditors.
There are also several descisions of the Chamber on the issues of repayment of the limitation period for the main and additional obligations, as well as the problems of determining the net balance in leasing disputes.
Decision of the Supreme Court from October 16, 2017 No. 302-ES17-7699
The landlord appealed to the court with a demand to collect money from the tenant for the use of the leased property, as well the penalty for the delay in lease payments.
At the request of the defendant, the courts of three instances applied the statute of limitations and refused to collect the unpaid balance on lease payments and penalties, but they satisfied the plaintiff's claim to recover interest for using other people's money under Art. 395 Civil Code of the Russian Federation.
The Chamber abolished the judicial acts regarding the collection of interest, since, in accordance with part 1 Art. 207 of the Civil Code of the Russian Federation, the limitation period for additional requirements (interest, penalty, bail, guaranty, etc.), including those after the commencement of the limitation period for the main claim, is expired with the expiration of the limitation period for the main requirement. The requirement to pay interest is additional to the main demand, and its term has expired accordingly.
Thus, the Chamber reminded the courts of the need to divide the contractual obligations into basic and supplementary, as well as the rules for applying the limitation periods. This should positively effect the development of law enforcement practice by all courts of the judicial system of the Russian Federation.
Decision of the Supreme Court from Nivember 14, 2017 No. 306-ES17-5704
The lease holder appealed to the court with a request to the landlord to collect unreasonable gains under nine leasing agreements. Courts of the first and appellate instances satisfied the demand. However, the district court refused on the grounds that the courts did not determine the final obligation of one of the parties to leasing contracts, referring to paragraph 7 p. 1 of Art. 63 of the Bankruptcy Law, that prohibits taking into account the counterclaims from the start of the oversight.
The Chamber did not agree with the findings of the district court. The Chamber considered the obligations arising from the nine treaties to be independent, since each of the claims was to be considered as an independent one, and also a separate decision for each of them should have been adopted. According to the clause 13 of the Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation of 23.07.2009 No. 63 "On current payments for monetary obligations in the bankruptcy case", if the lease purchase agreement was concluded and financing was provided by the lessor before the bankruptcy case of the lessee was initiated, based on the balance of counter obligations, refer to the register. In the opinion of the Chamber, the lower courts reached the correct conclusion that the balance of counterclaims in favor of the lessor belongs to the register requirements and is subject to review in the bankruptcy case. That is, in this case, the mechanisms for collecting the amounts in favor of the lessee and in favor of the lessor are different.
The Chamber abolished the decision of the district court and left in force the decision of the court of first instance and the ruling of the appellate court. Thus, the Chamber resolved yet another problem of delineation of claims that are subject to resolution in bankruptcy cases with claims, consideration of which is possible outside of their framework, if the claim arose after the commencement of the bankruptcy procedure.
The review was prepared by Elizabeth Mogilnaya