04.08.2017 — Supreme Court: No Arbitration Clause for Contracts Affecting Public Interest

The Supreme Court adjudicated a dispute where a state-owned joint stock company was involved. The dispute concerned the contract on provision of utility connection services to the power lines in the special economic zones. Despite the fact that there was an arbitration clause in the contract, the Supreme Court ruled that the case affected public interest, therefore it cannot be adjudicated by an arbitration court. This position of the court allowed the state company to challenge the decision of the arbitral court. This makes including arbitral clauses in contracts with a state-owned companies very risky, since a public interest may be affected.

In this case the Opened Joint Stock Company “Special Economic Zones” (SEZ) and the Opened Joint Stock Company “Federal Company of the United Energy System” (FSK EES) entered into a contract on provision of utility connection services in the special economic zones to the power lines of FSK EES. There was an arbitration clause in the contract, according to which the disputes were to be adjudicated in the non-commercial organization Fund “Law and Economics of the FEC”. Still, after the arbitral court rendered a decision, SEZ challenged it arguing that the dispute cannot be resolved by an arbitral court. The Supreme Court upheld this argument, taking into account the fact that there was a substantial public element in the dispute.

In the Supreme Court’s view, since SEZ was a 100% state owned company and the dispute concerned the contract, aimed at meeting public needs – construction of real estate property in the territory of the special economic zones, thus such a dispute shall be resolved in state courts only (case А40-188599/2014). The above view of the Supreme Court allows to declare that an arbitral court chosen by the parties is not competent to adjudicate the dispute, even after the arbitral court has already rendered a decision. This increases the risks of including arbitration clauses to any contracts which affect public interest, even if the public interest is affected very remotely.

03.08.2017 — US President Signed Law on Anti-Russian Sanctions Expansion

The US adopted a new Law on the sanctions against Russia, Iran and North Korea. The new law expands restrictions for American companies and citizens by reducing the maximum allowed loan period to 14 days for Russian banks, and one month for Russian energy sector companies, respectively. Above that, under the law the US President shall not have the right to abolish the sanctions without prior approval of the Congress.

The new law limits the amount and the timeframes for the foreign investments to Russian oil and gas projects, and provides for the possibility to introduce personal sanctions for those whom the US Government considers to be involved in the cyber attacks, corruption and human rights violations. Any person investing more than USD 5 mln. per year or USD 1 mln. on one occasion or intending to provide services, technologies or other support to the Russian projects in relation to construction of oil and gas pipelines abroad may be sanctioned, too. In particular, the Nord Stream 2 gas pipeline satisfies these requirements.

The US President Donald Thump noted that the restriction of the President’s right to take the decision on the abolishment of the sanctions independently without the prior approval of the Congress interferes with his foreign policy prerogative. Moreover, Mr. Trump expressed dismay at that the newly adopted law may severely impact the American business and the European Union.

02.08.2017 — Supreme Court: Bailiffs Are Entitled To Levy Execution on Special Purpose Monetary Funds

The Supreme Court examined the matter on the Federal Bailiff Service’s right to levy execution on special purpose monetary funds. In the case adjudicated the bailiff issued an order on levying execution on the receivables of the public utility company from the owners of the premises to the payment agent as payment for residential premises maintenance. Despite the company’s arguments about the special purpose of these funds, the Supreme Court referred to the Case Law Digest No. 1 (2016) and declared that the bailiff acted in compliance with law.

In this case the Federal Bailiff Service in the course of the execution proceedings in respect of a property management company levied execution on the company’s receivables from the payment agent, transferred from the residents in payment for the utilities (initially the bailiffs ordered that the payment agent transfers all the 100% of the monetary finds to the Federal Bailiff Service, but reduced this amount to 80% later on). The property management company challenged this order arguing that the monetary funds, that shall be transferred to the company by the payment agent, are designated for a special purpose and shall be used to pay for the property maintenance and utilities (heat, electric power supply), consumed by the residents. Therefore, the actions of the bailiffs violate the rights of the residents, who pay for the utilities.

The court of the first instance rejected the arguments of the property management company, but the appellate court and the court of cassation disagreed and declared that the bailiff’s actions are illegal. The Supreme Court, in its turn, stated that the order on levying the execution on the property management company’s receivables – the monetary funds received from the owners of the premises by the payment agent, is not against the effective legislation. Still, taking into account the fact that the Federal Bailiff Service abolished its order, the Supreme Court did not overrule the decisions of the courts of lower instances. 

01.08.2017 — Internet Discussion May Replace Urban Planning Public Hearings

The Russian Ministry of Construction, Housing and Utilities Infrastructure developed a bill, amending the system of the citizens’ participation in decision-making. The bill provides for changing the existing system of taking into account the opinion of the citizens in the form of public hearings. In particular, the new system suggests that the citizens shall have the opportunity to contribute suggestions in respect of the urban-planning decisions to the authorities directly, including via the internet. The bill also provides for the obligation of the authorities to provide motivated responses to the abovementioned citizens’ suggestions.

At the moment the law provides that before the public authorities take urban-planning decisions, the meeting of the citizens shall be called to discuss the decision. However, the results of such a meeting are not mandatory. Moreover, the current system does not provide for the registration of the participants of the meeting, what does not allow to verify whether the meeting actually took place and how many citizens took part in the meeting. In practice there are many corrupt practices during the public hearings, for example often the meetings are convened at inconvenient time and place, and the authorities ignore the citizens’ suggestions.

To rectify the situation the Ministry of Construction suggested that the facts of the participation and the suggestions expressed by the participants of the discussion shall be recorded, including via making records in the record books or by filing the suggestions to the authorities directly, in particular, via the Internet. In response the authorities will be obliged to react to the citizens’ suggestions and provide a motivated response with the explanation of the reasons for taking into consideration or dismissing the suggestions and remarks.

31.07.2017 — Supreme Court: Mortgage of Land Plots Automatically Extends to Unfinished Construction Buildings Located on Such Land Plots

In one of the recent cases, the bank sought recognition of its mortgage rights over the debtor’s property as part of bankruptcy proceedings. Initially, the bank held the mortgage rights to a land plot. Subsequently, the mortgagor started erecting a hotel at this land plot, and the bank tried to levy execution on the hotel as well. To defend its property, the mortgagor argued that the mortgage agreement merely referred to the land plot, and did not mention any subsequently erected buildings. The Supreme Court, however, rejected this argument and upheld the position of the bank, stating that the building is mortgaged as well, despite the fact that it is not yet finished and the ownership title is not yet registered.

In the case at hand the parties (a bank and a developer) concluded a mortgage agreement to secure the developer’s obligations under the loan agreement. The mortgage agreement referred to the leased land plot, and the buildings of a restaurant and a car wash facility located at the land plot at the time as the mortgaged property of the developer. However, after the agreement was concluded, the developer began the construction of a few other additional objects, including a two-story non-residential building and a hotel. After the developer breached its obligations to repay the loan, the bank sought to levy execution on the mortgaged property, which the bank considered to include the newly-erected buildings as well – the mentioned two-story non-residential building and the unfinished hotel building.

The court of the first instance and the appellate court granted the bank’s claim, but the cassation court reversed the ruling and rejected the bank’s claim, stating that until the hotel is fully constructed, and the ownership title thereto is not officially registered, the hotel is not a legal object and cannot be mortgaged. However, the Supreme Court disagreed with this approach, upholding the bank’s position due to the fact that the unfinished hotel building should be deemed an integral part of the land plot, which is duly mortgaged (case No. А12-12549/2015).