On May 22, 2013 Russian Supreme Court Presidium approved a court practice overview on civil cases related to loan obligations performance dispute re solut ion (he reinaf ter – the "Overview"). The Overview deals with general jurisdiction courts practice in cognisance and jurisdiction matters related to such disputes, calculation of limitation of actions period, various loan security transactions, as well as in other matters.

It should be noted that in relation to some problematic aspects Russian Supreme Court took a position that is contrary to that of the Supreme Arbitrazh Court of the Russian Federation which had been stated earlier. On certain aspects the positions of the courts were similar.

The Overview was approved in order to prevent mistakes made when disputes of such type are considered. The Chairmen of Russian Federation constituent entities were recommended to make judges familiar with the Overview, so that they can take it into consideration in their law enforcement practice.

Cognisance and jurisdiction

Russian Supreme Court has confirmed its position under which a dispute arising out of a loan agreement under which a surety provider is an individual (and not an entrepreneur) is subject to the jurisdiction of ordinary courts. Even when a claim against a borrower is commercial, such debt enforcement claim filed by a bank shall be considered in a court of general jurisdiction, if the claimant has filed the claim against the debtor and the surety provider as against co-defendants1. This rule is applied the same way when observation procedures are implemented against a debtor.

It should be noted that the practice of the Presidium of Russian Supreme Arbitrazh Court includes another approach under which claims filed against individual surety providers that are not entrepreneurs may be considered in arbitration courts. There was a case in wich the Presidium of Russian Supreme Arbitrazh Court handled a jurisdiction aspect of a dispute out of a claim against a surety provider that was not registered as an entrepreneur, and acknowledged that such dispute was subject to the jurisdiction of arbitrazh courts. In the case mentioned above, an individual acted as a surety provider for a legal entity in connection with the business activity of the latter. The Presidium of Russian Supreme Arbitrazh Court acknowledged that an intention to obtain the surety could be treated as commercial if it was connected with the debtor's business activity. Thus, in certain circumstances disputes out of claims against such surety providers can be considered by an arbitrazh court despite the fact that such surety provider is not an individual entrepreneur (Decree of the Presidium of the Supreme Arbitrazh Court of the Russian Federation No. 9007/12 as of November 13, 2012)2.

Russian Supreme Court has confirmed its position that a court shall not reject a consumer's claim due to the lack of jurisdiction if such consumer applied at the location determined in the relevant agreement. Also, a judge shall not reject a consumer's claim challenging the jurisdiction clause of the relevant loan agreement since the choice of a court out of those with jurisdiction over such cases shall be made by a claimant.

However, Russian Supreme Court has specified that if a jurisdiction clause "has not been challenged and is valid" it continues to be in force when the dispute is being handled. On the one side, such reservation is intended to prevent cases when claims filed by banks in accordance with agreed jurisdiction are rejected, even when a consumer does not challenge the validity of the jurisdiction clause. However, on the other side, a court shall, subject to the strict construction of the Overview, assess such clause from the point of view of its validity and make a decision as to whether, on its basis, to accept the claim or not. Application of these clarifications will make it clear how these instructions will be treated by the courts.

The jurisdiction aspect of disputes on the enforcement of real estate mortgaged as a security for the performance of loan obligations has been resolved so that application of the exclusive jurisdiction rule can be avoided. Russian Supreme Court has confirmed its practice under which a claim for the enforcement of mortgaged real estate (as a loan security) is not an independent dispute on rights to such real estate, since "the substantive background for such relationships in dispute is nonperformance of a loan obligation by the debtor".

At the moment the grounds on which courts of general jurisdiction reject claims filed by banks in accordance with the jurisdiction clause can be called more than strained. Thus, in the opinion of the courts, the term "at the location of the bank" is a non-agreed one since a bank can, in the course of its business, change its location, and it is impossible to determine exactly which particular court has been chosen by the parties. The Overview does not deal with this issue, however, by implication it is possible to say that such way of reaching an agreement on jurisdiction is treated as acceptable. Paragraph 2.2 of the Overview provides that if rights under a loan agreement containing a jurisdiction clause with reference to the location of the bank, are assigned the assignee may apply to a court located at the same place where the original lender is located.

Limitation of actions

The Overview, with a loan account opening and maintenance fee provision (which is void) serving as an example, clarifies a rule under which limitation of actions period shall be calculated in relation to a claim for the application of consequences of such provision being void.

Generally, such period shall commence when the performance of a void transaction commences. Such transaction performance is considered to have commenced when a borrower makes an initial payment to perform the provision on a loan account opening and maintenance fee. Even if such fee shall be paid by instalments, limitation of actions period shall not be calculated for each payment separately.

Meanwhile, in relation to an enforcement claim for a debt due to be repaid by instalments, a limitation of actions period shall be calculated for each overdue payment separately. This approach is applied in relation to bank claims both against borrowers and against surety providers.

In relation to the validity of provisions on additional bank charges to be paid by individual borrowers, the Overview states that courts shall find out whether such amounts are charged for a separate service or are meant to be paid for standard procedures which the bank would have implemented in any case when providing the loan. In the latter case such provision shall be invalid.

Securing loan agreement obligation performance

Insurance

The Overview provides a general approach under which insurance of borrower's liability risks shall be performed on a voluntary basis only. An obligation to perform insurance of someone's life and health as a condition for the provision of a loan can serve as an evidence that freedom of contract is being abused.

To provide an example when insurance is performed on a voluntary basis, two cases are described: (1) a loan agreement provides that the borrower shall execute a life and health insurance agreement within 5 days after the loan was provided, (2) a loan may be provided without insurance but in such case a higher interest rate is applied.

When a loan agreement is executed a bank shall not impose insurance conditions and determine a particular insurance company. When banks provide a loan they shall not insure borrowers' risks at their sole discretion. However, banks may, on their own behalf, execute corresponding insurance agreements in favour of borrowers at the borrowers' consent.

Losses incurred out of late performance of obligations under a borrower's loan obligation insurance agreement by an insurer, shall be indemnified in full. When an insurance compensation payment is delayed the loan obligation does not terminate, and the borrower shall, within such delay period, pay the loan interest, thus, incurring losses due to the insurer's fault.

Surety

If the main obligation changes so that a surety provider's liability increases, or other adverse consequences arise for him/her (without his/her consent), the surety shall terminate.

It shall be noted that judicial authorities have taken different positions on this matter. The Supreme Arbitrazh Court Plenum has clarified that in such case a surety provider's liability to the lender shall be consistent with the initial obligation secured by the surety, as if the obligation had not been changed. To the extent that the obligation has been changed, it shall not be considered as secured by a surety3.

Moreover, the Overview provides that a surety shall not terminate if a loan obligation changes, unless the surety provider's consent to any changes to the main obligation is not expressly provided by a surety agreement. If a surety provider dies the surety shall not terminate: the surety provider's heirs bear a joint and individual liability for nonperformance of obligation secured by the surety, by the borrower to the extent of the value of the inherited property.

Pledge

In relation to the consequences of main obligation changes as to pledge, the Overview reflects a different position. Any change to the amount or maturity date of an obligation secured by a pledge as compared to such obligation as provided by the relevant loan agreement shall not constitute a ground for the pledge to terminate. In such circumstances a pledge secures an obligation to the extent it would have existed if the main obligation had not been changed.

Penalty4

Penalty reduction is the key question in this sphere. Generally, the position reflected in the Overview is that a penalty shall be reduced not to be less than the refinance rate determined by the Central Bank of Russia. However, a different position has developed in the arbitrazh practice. When determining the amount sufficient to compensate lender's losses, an arbitrazh court may take the double refinance rate set by the Central Bank of Russia as the basis. A penalty may be reduced to the single refinance rate level by way of exception only. However, in extraordinary circumstances a penalty may be reduced in such a way that it will be lower than a single refinance rate.

The Overview reflects a position that provisions regulating a penalty amount shall not be applied to loan interest calculation in relationships between parties. Therefore, reduction of charged interests on the amount of loan funds shall be invalid due to their inconsistency with the consequences of non-performance.

Enforcement procedures against mortgaged real estate

In a dispute on enforcement procedures against real estate mortgaged as a security for the performance of loan obligations it is necessary to determine whether a loan obligation breach by the borrower is material. Borrower's liability for any material breach of a secured obligation is a necessary condition for the enforcement of mortgaged property. If such obligation is not connected with performing any business activity by a borrower the absence of borrower's fault in the breach will result in the fact that the mortgaged property cannot be enforced. Any contrary conditions shall be expressly provided by law or by an agreement.

If any mortgaged property is being enforced, the court shall determine an initial selling price on the basis of an agreement reached by parties to the relevant mortgage agreement, in case of any dispute such price shall be determined by the court at its sole discretion. In addition, if a court determines such price on the basis of such property value determined in the relevant agreement it shall take into consideration that at the moment of the enforcement the actual property price has increased materially as compared to the price that existed when the agreement was signed, therefore, the initial selling price shall be raised, too.

If during enforcement proceedings no foreclosure was performed due to a material decrease in the property market price, an interested party (the pledgor, the pledgee) may apply to a court that issued a decision to enforce the property for changing the property initial selling price. Such change shall constitute a change in court decision enforcement procedure and shall not be considered as a change in the earlier decision of the court on its merits.

Termination of a loan agreement

In relation to grounds for termination of an agreement, the Overview pronounces an approach under which agreement provisions containing grounds for its early termination that are not provided by law are invalid. As an example, the Overview includes the following provisions: change of place of residence, termination of employment, degradation of technical condition of a car in pledge, non-provision of an income certificate within 10 days after the request of a bank.

In addition, examples illustrating the application of this regulation refer to an additional circumstance. A loan agreement is considered to be a model one, and the borrower is not entitled to change its contents, in this case the court has acknowledged that provisions containing other grounds for early performance of obligations by the borrower other than those provided by Russian Civil Code, are invalid.