On 23 June 2015, the Supreme Court of the Russian Federation (the Supreme Court) adopted the Ruling No 25 on the Application of Specific Provisions of the Civil Code of the Russian Federation by Courts (the Ruling). The Ruling highlights recent changes to the Civil Code of the Russian Federation (the Code) and provides legal interpretations of the provisions recently incorporated in the Code.
The Ruling consists of seven parts: natural persons, legal entities, legal objects and protection of intangible assets, general provisions on contracts, validity of contracts, resolutions of meetings, and representation and power of attorney.
Below is a summary of certain significant issues covered by the Ruling:
1. The court can declare a party acting in bad faith on its own initiative
The Supreme Court reaffirms that persons will be presumed to be acting in good faith until proven otherwise. A court may find that a party did not act in good faith based on a well-grounded statement of the other party. In the absence of such a statement, if the court finds that the party’s actions deviate significantly from good faith behaviour, the court may decide to investigate itself whether the party acted in good faith. In this case, the court shall render judgment based on the circumstances to which the parties did not refer. (For further details, please refer to Section 1 of the Ruling.)
2. Damages must be calculated as precisely as possible
The Supreme Court states that damages must be estimated as accurately as possible. A failure to estimate the exact amount of damages will not prevent a creditor from seeking remedies provided by law. The Supreme Court concludes that a lawsuit must not be dismissed solely on the grounds that the exact amount of damages cannot be calculated. In such a case, the courts have to apply the principle of fairness and estimate damages proportionally to the severity of the offense. (Section 12 of the Ruling)
3. Compensatory damages now include possible future losses
The Supreme Court ruled that a diminution in the value of the claimant’s property as a result of the defendant’s wrongdoing can be treated as actual damages even if such diminution manifests itself only if the property is disposed of in the future.
The Supreme Court gives the following example: when an owner sells a car at a discount because of an accident caused by the third party, that party can be obligated to compensate the discount to the former car owner by a court decision. (Section 13 of the Ruling)
4. Checking the Trade Register is enough for a party to be considered acting in good faith
The Supreme Court holds that a party relying on the information obtained from the Unified State Register of Legal Entities (the Register) acts with due diligence and that, as a general rule, checking the Register for the list of persons authorised to act on behalf of the legal entity is considered enough for the party to have fulfilled its obligation to act with due care.
The law does not establish any obligation to examine the constituent documents of a legal entity for the requirements of the due diligence test to be met. Thus, if there are no limitations on the scope of the authority of the corporate officers listed in the Register, the party is within its right to presume the absence of such limitations. If the Register lists persons authorised to act on behalf of a legal entity jointly, the party can presume that their authority is not limited. (Section 22 of the Ruling)
5. Section 28: Numerous violations of law alone cannot serve asgrounds for liquidation
The Supreme Court states that a company cannot be placed in liquidation solely on the grounds of multiple violations of law. The courts shall only apply such measures if they are proportionate to the severity of the offense and its consequences. (Section 28 of the Ruling)
6. A liquidation claim can be brought before a court by a shareholder if a legal entity cannot achieve its goals
Article 61 (3) of the Code sets forth that a legal entity may be liquidated if it cannot achieve its goals. In case the normal operation of a business entity is impossible or significantly hindered, a shareholder may bring an action to liquidate the entity.
The Supreme Court mentions two circumstances under which such claim can be upheld: (a) other shareholders intentionally avoid attending general meetings and, as a result, no quorum can be reached, (b) the entity is locked in a long-lasting corporate conflict where all parties have breached the law. In both cases, liquidation is considered an ultimate measure left for situations where all other means have been exhausted. (Section 29 of the Ruling)
7. Competition with a legal entity may cause the shareholder to be expulsed
The Supreme Court reaffirms that any shareholder may sue to expel another shareholder if the latter has inflicted damage on the company or otherwise disrupted the company’s operation or hindered the achievement of the company’s goals by neglecting its duty. Specifically, a recurring failure to participate in a general meeting that results in the company’s inability to function normally or meet its goals constitutes grounds for a claim.
The Supreme Court also states that competition with a legal entity constitutes sufficient grounds for bringing a lawsuit with the intention to expel the shareholder engaging in such activity. This rule does not apply to publicly traded companies. (Section 35 of the Ruling)
8. The law does not allow granting general consent for the disposal of unspecified assets
According to the Ruling of the Supreme Court, a third party may grant consent for multiple transactions. However, the Code does not allow consenting to all and any transactions with unspecified assets, unless such consent is explicitly permitted by law or follows from the nature ofthe business relations of the transacting parties. (Section 56 of the Ruling)
9. Withdrawal of consent is governed by the rules of acceptance withdrawal
A third party who has consented to a deal may withdraw its consent if it notifies the parties before the deal is concluded and compensates all losses caused by its withdrawal. As the Russian legislation has no specific provisions regarding withdrawal of consent to a deal, the Supreme Court ruled that the provisions of the Code governing acceptance withdrawal will apply. (Section 57 of the Ruling)
10. Messages of legal significance delivered at the given address are considered received regardless of recipient’s absence
The Code provides that any messages of legal significance shall be sent to the registered addresses of natural persons and legal entities. The Supreme Court reaffirms that messages of legal significance addressed to individual entrepreneurs and legal entities must be sent to their registered addresses or to another address they specify. The Court stresses that whether a person or entity resides or conducts business at the address they provided has no impact on whether the messages are considered received. If a natural person or legal entity no longer resides in the registered address or other address they provided, they bear all resulting risks. (Section 63 of the Ruling)
11. Estoppel principle applies in Russian contract law
The Supreme Court holds that a party to a voidable contract challenging the deal cannot refer to the circumstances it was aware of at the time when it wilfully consented to follow through with the voidable contract. (Section 72 of the Ruling)
12. Unlawful contracts do not necessarily violate the public interest
With regard to the public interest referred to in Articles 166 and 168 of the Code, the Supreme Court noted that unlawful contracts or contracts infringing upon the rights of entities of a public nature do not necessarily constitute violations of the public interest. (Section 75 of the Ruling)
13. Violation of law is not necessarily a basis for the contract to be recognised as contradicting the fundamentals of law, public order and morality
With regard to the invalidity of contracts made for a purpose contradicting the fundamentals of law, public order and morality, the Supreme Court states that a violation of laws or regulations, in particular as regards tax evasion, does not necessarily indicate that a deal of such nature has taken place. (Section 85 of the Ruling)
14. A series of sham transactions may be interpreted as a single transaction
The Code provides that sham transactions covering up the actual deal must be declared void, and applicable laws must then be applied to the actual deal as if it had been concluded by the parties. In the example given by the Supreme Court, donating a stake in a limited liability company for the purpose of further sale to circumvent the obligation to offer the interest to the other shareholders shall be interpreted as a single sale and purchase agreement that is subject to all applicable requirements and restrictions. (Section 88 of the Ruling)
15. Goodwill is now protected by law
The Code provides grounds for voiding a contract made by a representative. A contract can be voided if circumstances point to collusion or other combined actions that would be adverse to the interests of the principal if they cause damage. Damage is described as harm to the principal’s property or infringement of protected interests; specifically, loss of corporate control and damage to goodwill. (Section 93 of the Ruling)
16. Section 99: No criminal investigation is needed for challenging a deal due to fraud
A deal made as a result of fraudulent actions of the other party or third parties can be voided in court. The Supreme Court notes that criminal investigation is not a necessary condition for challenging a deal on the grounds of fraud or duress. (Section 99 of the Ruling)
17. Decisions passed at a meeting cannot be challenged solely on formal grounds
Decisions of meetings cannot be declared void on formal grounds alone if all of the following circumstances are present: (i) the challenging party’s vote cannot influence the decision and (ii) the decision cannot possibly cause significant harm to the challenging party. (Section 109 of the Ruling)
Note that the Ruling relates mostly to the recent changes of the Code and prepares ground for further development of the court practice.