01.02.2019 — Difference Between Price of Contract and Cost of Work Performed Can Be Charged if Change in Materials and Work Technology Did Not Lead to Deterioration in Quality of Work Result

The Supreme Court examined the claim filed by the contractor on the recovery of the difference between the price of works stipulated by the contract and their actual cost in accordance with the closing acts. The courts were of different opinions as to whether the contractor shall have the right to receive the payment in full, in case he has replaced some materials and changed the work technology, what led to a cheaper cost of the actually performed work. The Supreme Court pointed out that the issue in connection with the contractor’s savings shall be conditional on the issue of the presence (absence) of defects and the negative consequences of replacement of the materials and changing the work technology.

In the case at hand, the contractor filed a claim to the court on the recovery of payment under the contract in the form of the difference between the cost of the actually performed work and the fixed price established by the contract. The contractor argued that this difference constitutes the contractor’s savings, to which he is entitled in accordance with Art. 710 of the Russian Civil Code. The court of the first instance dismissed the claim with reference to the fact that the contractor’s savings could not have arisen as a result of decrease of the amount of work performed. It is remarkable that earlier the Presidium of the Supreme Arbitration Court of the Russian Federation had expressed a similar view that in case the amount of work performed is smaller as compared to agreed in the contract, the contractor shall not be entitled to receive the full fixed price of the contract, as the fixed price is determined for the entire amount of work agreed by the parties, and shall be reduced in case of its decrease.

However, the appellate and the cassation courts disagreed with this approach, pointing out that since the actual purpose of the contract was reached and the completed facility was put into operation, the customer is obliged to pay the contractor the fixed price stipulated in the contract in full.

The Supreme Court of the Russian Federation overruled the decisions of the lower courts and remanded the case for a new trial pointing out that when considering the issue on the recovery of the contractor’s savings, the courts shall investigate the quality of the work performed (see Decision № 301-ЭС18-13414 dated 13 December 2018).The contractor is not entitled to recover his savings in the event that the substitution of material by the contractor and the change in the work technology had negative consequences for the quality of the work result. Thus, the Supreme Court essentially allowed the recovery of savings by the contractor in case such savings do not affect the quality of the work result.


31.01.2019 — Reasonable Doubts On Enforceability of Court Decision Are Sufficient For Granting Interim Measures

The Supreme Court reminded to the courts that different standards of proof shall be applied for applying interim measures and adjudication of the case on the merits. The party applying for interim measures does not have to prove that particular property is at the disposal of the debtor and that he attempts to conceal it. Since the grounds for issuing injunction are usually probabilistic in nature, it is sufficient that the applicant brings evidence of reasonable doubts as to the impossibility to enforce the court decision.

In the case No. A40-80460/2015 the courts of three instances refused to grant an asset freezing order, because the applicant failed to prove with a high degree of certainty that it will be impossible to enforce the court decision and to specify the debtor’s property subject to asset freeze in the motion. 

The applicant challenged these decisions in the Supreme Court, which overruled the judicial acts of the lower courts. The Supreme Court stated that the grounds for issuing injunction measures are probabilistic in nature, therefore it is sufficient that the applicant brings evidence of reasonable doubts as to possible obstructions in the enforcement of the court decision. If the court decides to dismiss the motion for the injunction, it has to substantiate that the applicant’s expectations are unsubstantiated and are not in line with the typical practice.

Moreover, the Supreme Court noted that the courts shall not dismiss motions for injunctions only on the ground that the applicant filed an application without specifying particular debtor’s property subject to asset freeze. In case it is impossible to specify particular assets in the injunction, the court shall grant the motion, and the particular property subject to asset freeze shall be determined by the enforcement officer.

30.01.2019 — Supreme Court Confirmed That Receivables May Be Assigned At Price Proportionate to Amount Recovered

The Supreme Court resolved the case concerning the legality of the price clause of the assignment agreement that was conditional on the amount to be actually recovered from the debtor by a court decision. The lower courts declared that this clause constituted contingency fee that was contradictory to the good faith principle. However, the Supreme Court confirmed legitimacy of such a payment term, arguing that the assignee’s actions were economically feasible and did not contradict to the standards of good faith.

In the recently adjudicated case No. A65-31593/2017 the participant in shared-equity construction assigned the right to claim the penalty for developer’s delay. The parties agreed that the price of the receivables shall be proportional to the amount of penalty recovered by the court decision, and that the assignor shall pay only having received the recovered amount from the developer. The court of the first instance and the appellate court granted the claim for the recovery of penalty.

The court of cassation overruled these decisions referring to the fact that the payment clause of the assignment agreement in essence constitutes a so-called “contingency fee” that is not enforceable, since it demonstrates the assignee’s bad faith and his intention to get a maximum financial benefit.

However, the Supreme Court reversed the decision of the court of cassation and stated that such a contractual clause is in line with the legislation in effect. Additionally, the debtor’s statement on the assignee’s unfair conduct shall not be a reasonable ground for refusing in the recovery of penalty provided the debtor had not brought any evidence of the fact that his rights were infringed. The Supreme Court also noted that the courts are entitled to ensure the balance between the interests of the parties through the application of the legal provisions concerning the reduction of excessive penalties under Art. 333 of the Civil Code of the Russian Federation.

29.01.2019 — Russian Government Sets Course for Improving National Business Environment

On 17 January 2019 the Government of the Russian Federation approved the roadmap of measures on improvement of the business environment until 2024. The main purpose of this initiative is to simplify procedures in connection with investments and business in several economic realms. The roadmap touches upon modernization in 12 different spheres of the economy, including the construction sector, real estate registration, international trade and companies’ registration.

The roadmap approved by the Decree of the Government of the Russian Federation No. 20-P on improvement of the business climate first of all addresses the construction sector, that has been traditionally recognized as the most troublesome sector of the Russian economy (according to the rating ‘Doing Business’ of the World Bank In order to optimize the procedure of obtaining permits by 2020 it is planned to reduce the terms for obtaining construction and commissioning permits from 7 to 5 business days. Moreover, the term for expert appraisal of design documents shall be reduced to 22 business days (now the term is 42 business days and extendable for 20 working days). The Roadmap also covers the measures for developing the real estate market through implementation of digital-tech to the real estate registration.

The international commerce and export growth ae also priority for business climate improvement. Developments in this sphere include reduction of the financial costs and time spent by importers and exporters from year to year, including facilitation of customs procedures.  

The Government also intends to modernize company registration and corporate governance. In particular, the registration and notification procedures in connection with withdrawal from the company will be performed by a notary officer who certified the respective shareholders’ application. Moreover, law will provide for the CEO’s professional liability insurance that covers potential losses inflicted to a company. The draft amendments will be introduced to the State Duma in the beginning of 2020.

28.01.2019 — Supreme Court: Registration Authority is not Entitled to Question Registered Title to Real Estate During Legal Review of Documents Submitted for Property Transfer

The state registration authority (Rosreestr) suspended the registration of transfer of title to real estate under a sale and purchase contract on the ground that it had doubts as to the seller’s title to the property and as to whether the construction was legal. The seller challenged the Rosreestr’s decision in court arguing that his title was dully registered. The Supreme Court sided with the seller and explained that the registration authority does not have the right to assess the title that had been registered earlier and refuse to register the transfer of title on the grounds of possible illegality of construction in case the building has not been declared unauthorized construction by the court.

The Supreme Court adjudicated the dispute on declaring illegal the Rosreestr’s decision on suspension of the state registration (the Decision of the Supreme Court dated 5 December 2018 No. 67-КГ18-20). In this case the parties entered in the sale and purchase agreement in respect of the warehouse and filed an application for the state registration of transfer of title to the Rosreestr. However, the Rosreestr refused to register the transfer of title, because it believed that the warehouse was unauthorized construction as the respective permits for construction and commissioning certificate were missing. Therefore, the public authority suspended the registration and requested from the seller to submit the documents confirming its title to the property.

The buyer disagreed with the Rosreestr’s decision and resorted to court arguing that his title had been registered previously and that the building has never been declared unauthorized construction by the court under the statutory procedure (according to Article 222 of the Civil Code of the Russian Federation). The court of the first instance granted the claim in full and ruled that the Rosreestr had gone beyond its powers. The appellate court overruled this decision. The case was transferred to the Supreme Court, which upheld the decision of the court of the first instance and noted that despite the lack of construction permit and commissioning certificate the registration agency is not authorized to question the seller’s duly registered title, in fact acting as a court. Otherwise, the constitutional guarantees of protection of the private property would be violated.