26.01.2018 — State Courts Are Against Abuses in Challenging Decisions of Arbitral Tribunals

Often the non-prevailing parties in arbitration try to challenge the arbitral awards or obstruct to their recognition and enforcement, arguing that the dispute has a public-law nature or social significance, the arbitral award is contrary to public policy and affects public interest, etc. However, currently the state courts form a trend against abuses by the non-prevailing parties at the enforcement stage. The conduct of the party during the arbitration is taken into account, in particular, if the party widely participated in the arbitration proceedings, did not challenge the jurisdiction of the arbitral tribunal and stated its position, then after the arbitral tribunal renders an arbitral award, it shall have no right to object to the execution of this award, in particular, on the ground that the dispute was non-arbitrable.

In one of the recently adjudicated cases No. А40-189594/2017, the Russian Deposit Insurance Agency (DIA) challenged the decision of the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (ICAC). The ICAC dismissed the claim brought by the DIA acting for the bank for the recovery of a large debt. DIA argued that since it was engaged in bankruptcy procedures on behalf of the state, its activities are of a public-law nature, therefore the ICAC has no jurisdiction to adjudicate the dispute on the ground of non-arbitrability.

However, the court disagreed with this argument, since the DIA initiated this dispute at the ICAC itself, took an active part in the arbitral proceedings, never asked for the arbitrators’ recusal, which evidences that the DIA voluntarily agreed with the ICAC’s jurisdiction to adjudicate the dispute. Under these circumstances, the DIA’s attempt to challenge the decision of the arbitration on the ground of non-arbitrability of the dispute was perceived by the court as an abuse of rights, and the state court upheld the decision of the ICAC in force.

25.01.2018 — Building Permit Will Not Protect Property From Demolition

In a recent case the Supreme Court considered whether the local administration’s claim to the company to demolish capital objects erected on state land shall be granted, if the contract with the local administration provided for the developer’s right to place only temporary structures on the land plot and stipulated the developer’s obligation to demolish them after the contract expires. The Supreme Court decided that, despite the fact that the developer received construction permits from public authorities allowing to construct capital facilities on the land plot, the developer had to take into account, first of all, the provisions of the contract with the owner of the land plot. Since this contract did not allow the construction of capital objects, all buildings erected by the company are subject to demolition and the company has no right to purchase or lease the land plot according to the procedure established for the owners of the real estate objects located on state land plots.

In this case, the company entered into an agreement with the local administration to place non-capital objects on public land plots (temporary trade pavilions). The contract was concluded for a period of 15 years and provided that after the expiration of the contract the pavilions should be dismantled. However, in violation of the terms of the contract, the company erected capital facilities on the land plot and after the term of the contract expired, it refused to demolish them. The company argued that the real estate objects were erected on legal grounds and in accordance with the construction permits. Thus, the company claimed that the termination of the contract was aimed at depriving the company of ownership title to the real estate, and the company as the owner of real estate had the exclusive right to purchase or to lease the public land plot on which the buildings are located.

Thus, the administration filed a claim to the court on the demolition of the company’s buildings. The courts of the first and appellate instances agreed with the arguments of the company and refused to grant the claim. However, the Supreme Court overruled the decisions of lower courts and stressed that by signing the contract, the company agreed that it was entitled to place only non-capital facilities on the land plot, and also assumed an obligation to return the land plot without any buildings (see Decision of the Russian Supreme Court dated 16.01.2018 № 305-ЭС17-14514).

Thus, in the view of this position, developers shall take into account the provisions of contracts with land owners to avoid the risk of declaring that real estate object is an unauthorized construction subject to demolition.

24.01.2018 — Supreme Court Explained When Employer Is Not Obliged to Pay Bonuses to Employees

The Supreme Court resolved the dismissed employee’s claim on the recovery of a bonus from the former employer. The bonus was paid on a regular basis, and therefore the employee believed it to be a part of his salary. After the company stopped paying the bonus, the employee filed a claim to the court. The Supreme Court dismissed the claim and emphasized that the bonus is a right, and not an obligation of the employer and is paid at its discretion.

In the dispute at hand (case No. 69-KG17-22) a bank employee filed a claim to court for the recovery of a monthly bonus from the employer. The employee’s remuneration comprised of two components: salary and monthly premium, which, in accordance with the company’s personnel policies, was calculated as a percentage of the salary multiplied by the performance ratio of the bank’s general performance indicator. In the last few months this indicator amounted to 0%, and therefore the employer stopped paying bonuses to employees, which was the reason for the employee’s claim to the court.

The courts’ position on whether the company is obliged to pay bonus to the employee were varied, and the case was referred to the Supreme Court. Having examined the labor contract with the employee and the company’s internal regulations, the Supreme Court concluded that the bonus was an incentive payment, and was not a part of the salary, and therefore the payment of bonus was the employer’s right, and not obligation. The Supreme Court also pointed out that the voluntary nature of bonuses is provided in Art. 191 of the Russian Labor Code, which stipulates that the payment of bonus depends on various circumstances, including the employee’s individual performance and the company’s economic results, etc. Thus, the Supreme Court dismissed the employee’s claim.

Therefore, in order to avoid controversial situations with employees, companies are recommended to state explicitly in the labor contract and company’s internal regulations that the bonus is not an obligatory payment or indicate clearly the conditions under which the employer will be obliged to pay bonus, in particular, when the company achieves certain financial indicators.

23.01.2018 — Transparency of Corporate Structure of Business in Russia Has Decreased

According to the results of the recently conducted study, the experts found out that in the last 3 years, despite the global trend on business transparency and various initiatives introduced by Russian authorities, the Russian market is becoming less transparent. In particular, due to a variety of reasons, including sanctions, decrease in the activity of Russian companies in international markets and significant increase of the regulatory burden, in 2017 there are half as much companies that publicly report on their activities, comparing to 2015.

A large-scale study conducted by the experts of the Russian Regional Integrated Reporting Network showed that corporate transparency of business in Russia is declining from year to year. Thus, experts found out that from 2015 to 2017 the percent of companies that do not report on their activities publicly has more than doubled: from 25 to 57.5%. According to experts, this negative trend is explained by the curtailment of Russian business in Western markets, the public companies’ change of their status to non-public, the increase in the regulatory burden on business, and foreign sanctions against large Russian companies.

At the same time, the corporate reports even of those companies that are obliged by law to publish these reports, are far from transparent. According to experts, telecommunications companies are the most transparent, while companies operating in infrastructure, agriculture and food products in general publish information on subsidiaries and affiliates that does not meet the criteria for transparency.

22.01.2018 — Supreme Court: Penalty for Overdue Advance Payment May Be Charged Only if It Is Expressly Provided by Law or by Contract

The Economic Chamber of the Supreme Court adjudicated a dispute on the recovery of penalties for overdue advance payment under a technological connection agreement. In support of its claim the claimant referred to the general contractual provision on penalties for non-performance of the customer’s obligations. Yet, the customer, to the contrary, argued that no penalty shall be charged on advance payments. The Supreme Court declared that in principle the parties may agree on penalty for the failure to transfer advance payment timely, still, it may be charged only when it is expressly provided by law or by the agreement of the parties. At that a general provision on the penalties for the violation of all contractual obligations is not enough for this purpose. Since in the case at hand there was no direct provision on the penalty for the violation of timeframes for transferring advance payments, the Supreme Court decided that in such circumstances no penalty on advance payment shall be incurred.

In the case at hand (case No. 310-ЭС17-11570), a grid operator and a company entered into a contract on technological connection to the electrical grid. The contract provided for a payment schedule, which included advance payments. However, the company made payments behind the time limits, thus the grid operator filed a claim on the recovery of penalties for the late payment. The grid operator referred to the provision of the contract that in case of any party’s violation of the contractual obligations such a party shall pay penalty to the other party.

The court of the first instance dismissed the claim, arguing that the respective contractual provision on penalties was not applicable to penalties for late advance payments. The appellate court decided that, according to the literal interpretation, this contractual provision may be also applied to the payment of penalties for the violation of any obligations of the parties, including for the violation of the payment schedule. Thus, the appellate court reversed the decision of the court of the first instance and granted the claim in part, reducing the amount of contractual penalty in accordance with Art. 333 of the Russian Civil Code. The court of cassation upheld the position of the appellate court.

However, the Supreme Court disagreed with the lower courts and pointed out that penalties may be charged for advance payments only if it is expressly established by law or explicitly provided by the contract. Thus, on the one hand, the Supreme Court confirmed that while in principle a penalty for the late transfer of advance payment may be charged, a general provision on the penalties for all contractual obligation is not enough for this purpose. Such a position makes it important that the contract parties include a provision on the penalty on the advance payment expressly to avoid interest-free credit and the respective abuse of rights by the customer.