18.10.2019 — Starting from 2020 Russian Government Is Planning to Repeal Outdated Soviet Legislation Which Constitutes Basis for Monitoring Activities in Many Economic Sectors

The Government of the Russian Federation signed instructions providing for the prospective repeal of more than 20 thousand regulatory documents adopted in the USSR and the Russian Socialist Federal Soviet Republic (RSFSR). These regulations have become outdated and, in the Government’s view, limit economic development. At the moment, many of these regulations are still used as the basis for the monitoring activities of governmental authorities, as the works and services offered by entrepreneurs are checked in accordance with them. Consequently, the planned repeal of these acts will substantially change the legal regulation of monitoring activities.

The Russian Prime Minister Dmitriy Medvedev signed instructions providing for the repeal of regulatory documents of the USSR and the RSFSR in the Russian Federation. To comply with the instructions, the Russian Ministry of Justice is to prepare a draft of a Government Order on the repeal of regulatory documents of the USSR and the RSFSR with the annex of the list of the regulations subject to repeal effective from the beginning of February 2020.

Federal authorities are to submit their proposals for the repeal or, on the contrary, maintenance in force of particular Soviet regulations by 10 October 2019. Taking into account that many Soviet regulations, in particular those that contain technical requirements for the performance of works and services, have no comparable counterparts in modern law, monitoring authorities still follow the Soviet regulations when carrying out inspections. Thus, the repeal of the Soviet regulations will require the adoption of updated instructions and will entail a substantial change in the regulation of monitoring activities.

17.10.2019 — Supreme Court: Statutory Limitation Period Does Not Run During Arbitral Proceedings Even If Recognition and Enforcement of Arbitral Award Is Subsequently Refused Due to Non-Arbitrability of Underlying Dispute

In one recent case, the Supreme Court clarified that submission of a lawsuit to the agreed arbitration institution suspends the statutory limitation period even if afterwards the arbitral award is not enforced by state courts due to non-arbitrability of the underlying dispute. If the arbitration clause was agreed between the parties, the claimant has no grounds to initiate litigation before state courts until the arbitral award is refused enforcement. For this reason, the term of the statutory limitation period, within which the claimant must bring its claim, is suspended for the whole period of arbitral proceedings until the entry into force of the state court order on the refusal to enforce the resultant arbitral award.

In the case examined by the Supreme Court, the contractor applied to the court to enforce an arbitral award against its client. State courts refused to enforce the award, finding that the dispute was not arbitrable, as the contract was concluded to further the public interest (construction of a subway station) and its performance was financed from the budget. Consequently, the dispute was found to be incapable of resolution by arbitration.

Since the arbitral award was not enforced by state courts, the contractor brought the same lawsuit against its client to the Russian state court. However, the client invoked the statutory limitation period and argued that the contractor’s claim had become time-barred at the time. The lower courts agreed with this position and decided that the contractor’s application to the arbitral tribunal on a non-arbitrable dispute cannot be considered as filing a claim in accordance with the law and therefore such application does not suspend the statutory limitation period.

The Supreme Court reversed lower court rulings and clarified that the statutory limitation period does not run after the claimant submitted a lawsuit either to the state court or the agreed arbitral tribunal, provided that the notice of arbitration / statement of claim was accepted for consideration. Consequently, the statutory limitation period is suspended after submission of the lawsuit to arbitration (which is determined as a day of the receipt of the claim by the defendant). If afterwards the arbitral award is found unenforceable, the statutory limitation period resumes only after the state court order on the refusal to enforce the arbitral award enters into force (see Ruling of the Judicial Panel on Economic Disputes of the Supreme Court of the Russian Federation dated 10 September 2019 No. 305-ЭС19-1181 on case No. А40-50736/2018).


16.10.2019 — Harm Is Subject to Compensation If Force Majeure Events Served as Contributing Factor but Not Main Cause of Harm

The Supreme Court clarified that the tortfeasor cannot be released from liability on the ground of force majeure in cases where the force majeure events were only a contributing factor to the harm, i.e. the last event in the chain of events that resulted in the harm, whereas the tortfeasor’s omissions were its primary cause, which created the preconditions for the harm.

In the case examined by the Supreme Court, a tree fell on an individual’s car that was parked in the yard of a high block house. The owner of the car brought a claim against the management company of the relevant territory, seeking a compensation of the respective losses. However, the courts rejected the claims on the ground of force majeure, since they found that the tree fell due to unusually strong wind (24.5 meters per second to 28,4 meters per second).

Nonetheless, the Supreme Court did not agree with the conclusions of the lower courts and noted that although the tree fell due to the strong wind, the wind was preceded by a violation of the tree planting rules, as a result of which the root system of the tree was so weakened that the tree could have fallen at any time. Therefore, the strong wind was only a contributing factor which triggered the fall of the tree, but not its primary cause. Having this in mind, the Supreme Court stated that the management company responsible for maintenance of the relevant territory was obligated to control the safe condition of the planted greenery. Based on this rationale, the Supreme Court clarified that in this case the presence of force majeure events does not release the management company from the liability for the harm caused since its omission created the conditions for causing the harm. (see Ruling of the Judicial Panel on Civil Matters of the Supreme Court of the Russian Federation dated 13 August  2019 No. 11-КГ-15).


15.10.2019 — Shareholder Approval of Transaction Does Not Release CEO from Liability for Losses Caused to Company Through Its Conclusion

In a recent case, the CEO of a company entered into a capital contribution contract, pursuant to which the company contributed assets to the share capital of another business entity. This capital contribution contract had been approved by the company’s general shareholder meeting. However, after the deal was closed, a shareholder of the company submitted a lawsuit against the CEO to compensate the company’s losses as a result of this transaction. When considering the case, the Supreme Court clarified that the mere fact that the general shareholder meeting had approved the transaction does not by itself release the CEO from liability for the breach of his fiduciary duties, as the CEO is personally responsible for managing the company and for deciding whether particular transactions are beneficial for its business. Therefore, the CEO is not entitled to comply with the instructions of shareholders if they contradict the company’s interests.

In the case at hand, the general shareholders meeting approved the capital contribution contract, whereby the company contributed some of its assets (shares in another company) with market value of more than 650 million RUB to the capital of another business entity. In exchange for the contribution, the company received 3.9% of shares in the target business entity, with the nominal value of shares barely exceeding 4 thousand RUB. After the deal was closed, a shareholder of the company brought a lawsuit against the CEO, seeking to compensate the company’s losses, arguing that the shares received by the company were not equivalent to the assets contributed to the target business entity. In order to defend from this lawsuit, the CEO argued that he had acted in compliance with the decision of the general shareholder meeting and therefore cannot be held responsible for the resultant losses.

The Supreme Court did not support this position and clarified that CEOs enjoy integral autonomy in taking managerial decisions and are not entitled to comply with the instructions of the general shareholder meeting if that could harm the company’s interests. Besides, the Supreme Court noted that the resolution of the general shareholder meeting, whereby the capital contribution contract was approved, had no reference to the specific terms and conditions of the contract and did not mention the consideration offered to the company in exchange for the contribution. The Supreme Court concluded that the instructions of the general shareholder meeting cannot by themselves release the CEO from its fiduciary duties of loyalty and care owed to the company. (see Ruling of the Judicial Panel on Economic Disputes of the Supreme Court of the Russian Federation dated 17 September 2019 No. 305-ЭС19-8975 on case No. А40-5992/2018).


14.10.2019 — Absence of Necessary Evidence in Arbitration Case May Lead to Unenforceable Award in Russia

As a general rule, when considering an application for the enforcement of an arbitral award, state courts are not entitled to review the arbitral award on the merits. Nevertheless, the Russian Supreme Court opined that state courts are not prevented from assessing the sufficiency of evidence presented in the case materials, and in the event of its insufficiency, may refuse to enforce the arbitral award.

In one recent case, the construction contractor commenced arbitration proceedings to claim payment for additional construction and engineering works performed under the contract for the reconstruction of a cable line, which was financed from the state budget. The arbitration tribunal granted the contractor’s claims based on a private expert report that confirmed that the additional works were in fact performed.

However, the Russian first-degree court refused to enforce this arbitral award on the ground that the contract was concluded in the public interest and was financed from the state budget. Besides, the contract indicated that any variation orders (additional works) are subject to the conclusion of an additional agreement and state expertise approval of the revised design documentation (including the cost estimate documentation). As the parties to the contract did not follow this procedure, the arbitration tribunal was not entitled to determine the existence of additional works and their value in the absence of state expertise approval of the design documentation (based solely on a non-state expert report). Since state expertise approval for the design documentation could only be obtained until the completion of works, the contractor, having completed the works without waiting for formal state expertise approval, was essentially deprived of the opportunity to claim payment for these additional works.

The Supreme Court supported this position and clarified that absence of the evidence necessary for the proper resolution of the dispute in the arbitration case files may violate the Russian public policy and may serve as a ground for the refusal to enforce an arbitration award. (see Ruling of the Judicial Panel on Economic Disputes of the Supreme Court of the Russian Federation dated 18 September 2019 No. 307-ЭС-7534 on case No. А56-85131/2017).