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26.02.2021 — Supreme Court Clarified Conditions for Claiming Return of Advance Payment Provided by Customer for Purchase of Equipment from Contractor

In one recent case the Supreme Court stated that since construction works, as a general rule, shall be performed using the contractor’s resources, the customer terminating the construction contract is entitled to claim the return of the advance payment even if the contractor has already used these funds to purchase equipment. At the same time, the contractor’s right to claim reimbursement of the related losses depends on the grounds for the customer’s termination of the contract. In particular, the contractor may claim compensation if the termination was initiated by the customer on its own initiative and not due to the contractor’s breach. 

In the present case the customer unilaterally terminated the construction contract, explaining that the contractor had missed deadlines for the performance of works, and claimed the return of the advance payment in court. At the same time, the advance payment claimed by the customer had already been used by the contractor to purchase the equipment necessary for the project.

The lower courts dismissed the customer’s claim, stating that the contract combines elements of construction and supply and the customer had no grounds to terminate the contract with regard to the supply of equipment since it had already been purchased by the contractor and was ready for shipment. Therefore, the courts concluded that the customer may protect its rights by concluding the agreement on substitution of the party to the supply agreement. 

The Supreme Court did not agree with the lower courts and stated that the works under the construction contract are usually performed at the contractor’s expense, therefore, the customer fully terminated the contract, both with regard to the performance of works and the supply of equipment by the contractor. However, the lower courts did not examine the grounds for the customer’s termination of the contract and the lawfulness of the customer’s references to the missing deadlines for the performance of works. Depending on the grounds for termination of the contract (at the customer’s discretion or due to the contractor’s breaches), the termination will have different consequences, and the contractor will be entitled to claim reimbursement of its losses, including those related to the purchase of equipment, only if the customer terminated the contract at its discretion. Therefore, the Supreme Court remanded the case for a new trail instructing the lower courts to examine these issues (the Decision of the Supreme Court of the Russian Federation dated 26.02.2021 No. 305-ЭС20-18871 on case No. А40-134159/2019).

24.02.2021 — Penalties for Personal Data and Russian Internet Security Violations to be Increased from End of March

The President has signed the law increasing the administrative penalties for personal data breaches and violations of the Russian Internet security from the end of March 2021. In particular, the law increases fines for unlawful and non-targeted processing of personal data, as well as for processing of personal data without the written consent of citizens. Furthermore, the law prescribes to provide unrestricted access to the personal data processing policy. Non-compliance with the new requirements will entail the imposition of fines on companies and their officials.

The amendments to the Code of Administrative Offenses will enter into force on 27 March 2021. Their declared purpose is to ensure additional protection of the citizens’ rights with regard to processing of their personal data. The amendments double the administrative fines for unlawful or non-targeted processing of personal data, processing of data without the written consent of citizens, as well as for operators’ failure to provide unrestricted access to the personal data processing policy and measures for personal data protection. Fines for companies may amount to 150 thousand rubles and up to 500 thousand rubles for a repeat offense.

The new law also provides for the liability of Internet service providers for violations of the requirements set by the Russian Government to install and use technical tools to combat threats to the Russian Internet (which include, among others, notification of the Russian controlling authority (Roscomnadzor) about the technical data on the design of the operators’ networks, channels load, etc.). Fines for violations by companies may amount to one million rubles. The heavier fines may be imposed on the owners of networks that do not comply with the requirements for means of communication used for investigative activities, which may amount to two million rubles (see the Federal Law dated 24.02.2021 No. 19-ФЗ).

17.02.2021 — Reform of Bankruptcy Legislation in Russia

The Russian Ministry of Economic Development has submitted the bill introducing the reform of bankruptcy of legal entities to the Russian Government. The proposed amendments are aimed at increasing the use of rehabilitation procedures to restore debtors’ solvency, including by debt restructuring, which will be available not only to individuals but also to legal entities. 

The bill drafted by the Russian Ministry of Economic Development introduces the shift of the overall focus of bankruptcy legislation from the liquidation of a debtor to the restoration of its solvency. In particular, instead of financial rehabilitation and external administration, which are very seldom used in practice at the moment, it is proposed to introduce the debt restructuring procedure as the only out-of-liquidation bankruptcy procedure, aimed at the restoration of the debtor’s solvency and not connected with its liquidation.

Moreover, the bill implies the increase of the requirements for bankruptcy managers to combat the practice of appointing the affiliated managers, favorably disposed to debtors and interested creditors. For these purposes, the bill introduces the scoring of bankruptcy managers, the random choice of self-regulating organizations and the detailed regulation of training and examination of bankruptcy managers. According to the Ministry of Economic Development, upgrading the competence of bankruptcy managers will allow to extend their powers and reduce the legal costs of the parties to the bankruptcy proceedings. In this regard, the Ministry of Economic Development has proposed to delegate the authority to assess whether the creditors’ claims are justified and must be included in the register to bankruptcy managers instead of courts which now handle this process (see the Bill No. 433-ИТ/Д224 dated 15.01.2021).

11.02.2021 — Pledge and Acquisitive Prescription: Constitutional Court Interpreted Rules on Property Rights

The Constitutional Court issued the Digest of Case Law for 2020, which included the most significant clarifications regarding property rights. In particular, the Constitutional Court interpreted the rules on the grounds for termination of the pledge provided by a third party, which is not a debtor in the principal obligation. The Digest also covered the rules regarding the purchaser’s good faith with respect to the grounds for the acquisition of ownership through acquisitive prescription.

With regard to the grounds for termination of pledge, the Constitutional Court clarified that if the pledger is a third party and the term of the pledge is not specified in the pledge agreement, then the pledge shall terminate according to the rules on termination of suretyship (namely, if the creditor fails to file a claim against the pledger within one year from the due date of the obligation secured by the pledge). The court is entitled to consider the pledge terminated on its own initiative regardless the parties’ objections. At the same time, considering the existing guidelines of the Supreme Court, the pledge period must be clearly specified in the agreement. In particular, the linking of the pledge period to the date of performance of the principal obligation, which is common in practice, is not considered as the specified pledge period. This clarification must be taken into account by creditors when signing the pledge agreement.

Another important clarification of the Constitutional Court relates to rules regarding the purchaser’s good faith for the purposes of the acquisitive prescription. The Constitutional Court clarified that the purchaser of the property (including real estate) may be considered as acting in good faith also if the purchaser must have known about the lack of the grounds for the acquisition of ownership. According to the Court, good faith implies that the taking of possession is not unlawful and was carried out by seemingly lawful actions. Such concept of good faith must apply when the title owner failed to possess the property for a long time, showing no interest in it, failing to fulfill the obligation on its maintenance, as a result of which the property has ended up to be essentially abandoned by the owner (see the Digest of case law of the Constitutional Court of the Russian Federation for 2020).

04.02.2021 — Focusing of Company’s Activities on Russian Market Allows its Clients to Submit Claims to Russian Courts

In one recent case the Supreme Court confirmed that the Russian consumers may submit claims against a foreign company to the state courts in Russia even if a foreign company has no representative office in Russia. A consumer has such a right if the company’s activities are focused on the Russian market, in particular, if goods are purchased by a buyer via the Russian client-oriented website.

In the case at hand the Russian consumer claimed the termination of the agreement concluded with the Belorussian dental clinic due to the defects in the provided services. The lower courts refused to accept the claim since the defendant was a foreign legal entity that had no representative office in Russia, and the consumer did not prove that the company’s activities were focused on the Russian consumers (in particular, the company’s website did not have the Russian domain “.ru”).

However, the Supreme Court did not agree with the lower courts and reversed the courts’ decisions. The Supreme Court emphasized that the courts in Russia may review the cases involving foreign entities if the defendant publishes the advertisement directed at attracting the attention of the Russian consumers. Such direction may be evidenced by the use of the Russian language on the company’s website, provision of price information in Russian rubles, publication of contact details, in particular, phone numbers with the Russian codes, as well as other analogous evidence, for example, if the owner of the website has ordered the services directed at increasing the citation of his website among the Russian Internet users (see the Decision of the Supreme Court of the Russian Federation dated 15 December 2020 No. 34-КГ20-6-К3).