01.02.2023 — Public Penalties for Lack of Commissioning Permit May Be Imposed Even if Ownership Title Was Already Registered

In one recent case considered by the Supreme Court, the company built an attic on the roof of its building and immediately started to use the building. The company, however, failed to obtain a commissioning permit after it had completed its alteration as required by law. As a result, the company was ordered to pay a public penalty of 500 thousand rubles. The company sought to challenge that penalty because its ownership title to the building was registered without any issues and because a different court had previously refused to find the attic to be an unauthorized construction. However, these arguments did not convince the court, which supported the supervisory authority’s position and affirmed the public penalty.

In the recent case, the company built an additional structure on the roof of its building, which was legally considered to be part of a condominium unit the title to which was registered in the Unified State Register of Real Estate. The Construction Supervision Authority of Moscow found that the company breached Article 55(1,2) of the Russian Town-Planning Code because it started to use a building after it was structurally altered without first obtaining a commissioning permit. The company was thus subjected to a public fine.

Simultaneously, a different authority requested a Russian court to declare that the additional structure is an unauthorized construction. The owner of the building prevailed in this dispute because it was able to prove that the additional structure was consistent with construction regulations and did not endanger the public safety.

The owner then also challenged the public fine that it was ordered to pay. However, courts of three instances held different views in the case. A decisive end was put by the Supreme Court, which rejected the owner’s argument about the existence of a registered title to a real estate object and the already held court decision refusing to declare the structure to be an unauthorized construction. Neither of those things are a proper substitute for a commissioning permit that was required by law. The Supreme Court thus confirmed that the company had to pay a public fine as required by the construction supervision authority (see Ruling of the Supreme Court of the Russian Federation dated 01 February 2023 No. 305-ES22-18488 on case No. A40-103770/2021).

23.01.2023 — Courts Refuse to Enforce Arbitration Clauses Providing for Seat of Arbitration in Jurisdictions Imposed Sanctions against Russia

A Russian court of cassation reversed the decisions of lower courts which enforced an arbitration agreement providing that all disputes between the parties should be resolved by arbitration in France. According to the court, this arbitration agreement is incapable of being performed because it inhibits the claimant’s access to justice by requiring arbitration in a country that imposed sanctions against Russia. The court also noted that the contract itself has a close connection with Russia, which is its place of performance.

In a recent case a Russian claimant sued a Spanish respondent in a Russian court seeking a contractual payment and interest. The first instance court referred the dispute to arbitration based on the arbitration agreement that was incorporated into the parties’ contract. The appellate court agreed with this reasoning.

However, the cassation court reversed the judgment and remanded the case to the first instance court. The court invoked a recently adopted Article 248.1 of the Russian Commercial Procedure Code, which says that an arbitration agreement cannot be enforced if foreign sanctions that impair a party’s access to justice were imposed against one of the parties. Since France is among the countries that have imposed sanctions against the Russian Federation, the court found that the claimant can litigate its case in a Russian court and not at the contractually agreed forum.

According to the cassation court, the mere fact that sanctions were introduced against the claimant means that it would not have access to justice in France. The claimant, therefore, does not need to prove that sanctions in fact made it impossible to arbitrate its case as agreed in the arbitration clause. Instead, the claimant can proceed directly to a Russian state court, especially as the contract in this case had a close connection with Russia, which was its place of performance (see Decision of the Arbitrazh (Commercial) Court of the Far East District dated 26 December 2022 No. F03-6497/2022 on case No. А73-15265/2022).

16.01.2023 — Supreme Court Issued Digest of Case Law on Cases Related to Unauthorized Construction

The digest of case law on unauthorized constructions maintains the previous trend against demolishing buildings erected without proper authorization unless exceptional circumstances such as the danger to public health and safety can be demonstrated. The digest further lays down a legal test for when a building cannot be considered an unauthorized construction and which buildings can be protected from demolition. The Supreme Court once again stressed that the demolition of an unauthorized construction is a measure of last resort. The digest also addressed procedural issues, such as parties that have standing to demand that unauthorized constructions shall be demolished, and elaborated on the limitation period to file these lawsuits.

The digest of case law emphasizes that the mere fact that town-planning and construction regulations were breached when a structure was erected does not mean that it should be demolished where it is established that the structure does not endanger the public health and does not violate the rights and interests of third parties.

If the court finds that the respondent can plausibly cure the breaches of construction law to prevent the demolition of a building, the court’s judgment should specify two alternative ways of compliance, namely the demolition of unauthorized construction or bringing it into compliance with the regulatory requirements. The respondent may then choose between these two alternatives to execute the judgment.

The Supreme Court also clarified that a building is not to be treated as an unauthorized construction merely because it is not used in accordance with the intended purpose of the land plot on which it is located. A building may only be demolished if the land plot’s authorized use does not in principle allow the construction of similar types of objects, provided that the breach cannot be cured by bringing the building to compliance with the applicable land use and construction regulations.

The Supreme Court again reiterated that the mere absence of a construction permit does not by itself mean that courts should dismiss the developer’s claim to quiet title and declare that the developer is the owner of the resultant building. This rule is applicable unless there are other obstacles to keeping the building.

The Supreme Court also clarified which parties have standing to sue in cases of unauthorized construction. The Supreme Court emphasized that only parties that have a real interest in the demolition of a building are entitled to sue. In case of private claims, this real interest may be based on a specific right the claimant has. If the claimant is a public authority, it has standing to sue only to the extent of its established legal competence and where the suit is justified by reference to the need to protect the interests of third parties and public health. In line with this position, the Supreme Court reversed the decisions of the lower courts to demolish a medical facility built without a construction permit at the request of the local administration. The Supreme Court stated that the courts failed to properly consider whether the administration had an interest in the demolition of a socially significant facility – a children’s clinic.

The Supreme Court also considered procedural aspects of disputes related to unauthorized construction. Among other points, the Supreme Court stated that the parties may not settle these cases without the court’s examination whether town-planning and construction regulations were observed during the construction. This is because an unauthorized construction may only be maintained without demolition if it does not cause threat to the life and health of the public. This requirement also comes into play when it comes to the limitation period within which claims to demolish an unauthorized construction may be filed. The general three-year limitation period applies to such claims only if the unauthorized construction does not endanger the life and health of the public. Otherwise, the limitation period does not apply (see Digest of case law on cases related to unauthorized construction, approved by the Presidium of the Supreme Court of the Russian Federation dated 16 November 2022).

12.01.2023 — Excessive Price of Works in Construction Contract May Lead to Contract Invalidity

Lower courts found a contract to be invalid because its price was higher than the market price by multiple times. The Supreme Court agreed. The reasoning is that the construction contract in question was concluded on manifestly and significantly unfavorable conditions for the customer and its conclusion caused substantial detriment to the customer, which the contractor should have known as a professional participant in the construction market.

A recent case dealt with a contract for interior fit-out works. The total price of the works was slightly higher than 4 million rubles. The customer sought to invalidate the contract in a Russian arbitrazh (commercial) court by reference to Article 174(2) of Civil Code of the Russian Federation, which says that a contract concluded to the manifest detriment of a legal entity is invalid. The customer argued that the terms and conditions of the contract were manifestly unfavorable to the customer and caused detriment to the customer as a legal entity.

According to pre-existing case law and the previous guidance of the Supreme Court, a contract concluded on terms that are clearly and substantially unfair to the other party may be invalidated on this ground, particularly where the value of one party’s performance is clearly lower than the value of the other party’s consideration, such as the price. It is not necessary to prove collusion or conspiracy between the representatives of the parties to the contract in such a case.

In the case at hand, the court-appointed expert study revealed that the market value of the works at the time of the conclusion of the contract was about 800 thousand rubles, which is several times lower than the contractually agreed price. For that reason, the courts of three instances decided that the contract was concluded on manifestly and significantly unfavorable terms for the customer. The courts declared the contract null and void and ordered the contractor to repay the difference between the contract price and the market value of the works to the customer.

The Supreme Court refused to grant leave to appeal and reconsider this case in a hearing of its Judicial Panel for Economic Disputes, effectively confirming the conclusions of the lower courts that the construction contract whose price is several times higher than the market value of the works determined by an expert is invalid. In refusing to accept the case for reconsideration, the Supreme Court noted that the contractor as a professional participant in the construction services market knew or should have known that the price was excessive (see Ruling of the Supreme Court of the Russian Federation dated 12 January 2023 No. 310-ЭС22-28130 on case No. А23-3928/2020).

01.01.2023 — Starting From 2023 Parties to Real Estate Transactions Will Be Able to Use Model Contract Terms Prepared by Rosreestr

On 1 January 2023 the Law on State Registration of Real Estate was supplemented by provisions dealing with model contract terms for real estate transactions. Such model contract terms will be prepared by Rosreestr and subsequently posted on its official website. Parties will be able to use them on a voluntary basis when concluding real estate contracts.

Article 427 of the Russian Civil Code provides that a contract may incorporate published model terms developed for specific types of contracts.

It is common to incorporate model contract terms by reference in international commercial practice, such as by using the International Chamber of Commerce Model Contracts or the Incoterms. In Russia, however, non-profit organizations or state authorities rarely develop similar model terms of contract.

The new legislative amendments will reduce transaction costs in real estate deals. Over time, a new body of case law interpreting model contract terms will emerge, which will make real estate deals more predictable in practice. In addition, it is possible that model contract terms will be applied as trade usage in order to fill contractual gaps (Article 6 of the Russian Civil Code), even where the parties to a real estate deal have not expressly agreed on their application (see Federal Law No. 120-FZ dated 30 April 2021).