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Newsletter. Special Issue. Civil Law. December 2013



Special Issue.

Civil Law.

December 2013

The Civil Law Reform Results in 2013

The year of 2013 is marked by the beginning of the civil law reform, the need for which was substantiated in the Concept of Civil Law Development approved by the Council for Codification and Improvement of Civil Law at the RF President in 2009. Initially it was planned to amend all parts of the Civil Code concurrently, i.e., adopt a restated Civil Code. Consequently, the joint efforts of practically all layers of the juridical community, including Promotion of Corporate Law Development, a non-commercial partnership (in which our firm is a member), resulted in an extensive draft law adopted by the State Duma in the first reading in April 2012. Thereafter the realization of the grand scale and the fundamental nature of many suggested changes as well as concerns over a possible destabilization of business entities’ relationships overcame the idea of a one-time correction of the Civil Code in favor of its step-by-step revision. Therefore, the draft law was split and further was considered by parts. To date, there have been adopted and come into force four out of eight blocks of changes concerning the fundamentals of civil law, objects of civil rights, issues of representation, transactions, limitation periods, and private international law . The changes in the provisions on pledge and in the chapter on the change of parties in the obligation have been adopted recently and will come into force in 2014 .
In this Overview we would like to remind about the most significant changes in the Civil Code made in 2013.

The provisions concerning the basic terms of civil law such as “good faith” and “abuse of the right” were made significantly more specific. The latter was given a definition, and circumvention of the law is now mentioned among its possible forms, apart from the so-called chicanery (i.e., the exercise of the right exclusively with the intention to cause harm to another person). The said changes are likely to result in a wider application of the corresponding categories primarily in the court practice, inter alia for dismissal of the claims of a party acting in bad faith, as well as application of the consequences of civil-law liability if bad-faith actions violate the rights of other persons.
The so-called double registration of real estate (i.e., concurrent state registration of separate types of a transaction contract and the rights to real estate (their transfer under the corresponding transactions)) was repealed. As of March 2013, not subject to state registration are contracts for sale of a house, apartment, part of a house or apartment; sale of undertaking, gift of real estate and rent of real estate. Initially, state registration of real estate lease contracts was repealed following that logic. However, since the lease rights were always registered by way of registration of the lease contract (and the law provided for no additional changes), a legal and practical vagueness that arose in this respect gave much concern to the business community. The problem was removed by the hastily adopted Law of March 4, 2013 which returned the rules on state registration of a contract for lease of real estate made for a term exceeding one year. However, real estate lease contracts signed within the period from March 1 to March 4, 2013 remained in the risk zone.

At the same time, the registering authority was obligated to check the legality of the grounds for registration and bear responsibility for the veracity of the state register.

There were introduced new legal instruments of protection of the rights of right holders and other interested persons – recording of objections against registration of the right or a court dispute over the right.

One of the most significant changes are the novels concerning transactions, representation, and limitation periods.

The approach to invalidity of transactions was drastically changed. The presumption of voidability of transactions inconsistent with the law (instead of the general rule on the nullity of such transactions) has effect now. Additional conditions for contestation of transactions were introduced for the person challenging the transaction to prove: the fact of violation of the rights and lawful interests of such person, and occurrence of consequences unfavorable for the person. If a party knew about the existence of grounds for contestation of the transaction at the time of its consummation, the party forfeits the right to refer to such circumstances in the future. Claims for invalidation of a voidable transaction by the persons that previously approved it or confirmed by their actions their intent to perform it are prohibited now. The circle of persons entitled to claim application of the circumstances of a void transaction was narrowed to the parties of the transaction, excluding any interested persons (unless the law expressly sets forth otherwise). The provisions on certain grounds for invalidation of transactions were specified, supplemented and changed. The super-imperative rule on the obligatory written form of a foreign economic transaction stemming from the soviet era was repealed. In general it could be said that the changes are aimed at ensuring stability and predictability of the civil circulation and protection of the rights of its good-faith participants.

The Civil Code was supplemented with a special article devoted to a legally valid communication with which the transaction or the law connect the occurrence of civil-law consequences for the person. Such communication is also regarded as having been delivered in case the person willfully hindered its receipt.

The list of legal facts underlying the origination of rights and obligations was supplemented with meeting resolutions. Correspondingly, the Civil Code new chapter regulates in detail the procedure for passing resolutions, grounds for their contestation and recognition as null and void. Under the general rule, a meeting resolution inconsistent with the law requirements, same as the transaction, is recognized as voidable, unless its nullity expressly follows from the law.

The institution of irrevocable power of attorney taken from the experience of Western countries became a novel of Russian civil law. Such power of attorney (“POA”) should be made in the presence of a notary and may be issued specially for performance by the attorney of a certain obligation on behalf of the principal or as a security of performance of the principal’s obligation to the attorney and may not be revoked before the expiration of the term of its validity (except where the obligation is terminated or the attorney abuses his rights). The rule on the maximum three-years term of a POA was repealed, same as the requirement to affix a seal to POAs issued by legal entities. A POA is no longer the sole document confirming the representative’s powers which may also be determined in a contract or in a meeting resolution.

The rules on the limitation period were revised considerably by introduction of the so-called objective limitation period beyond which the violated right is not subject to protection by a court. The period is ten years from the time of violation of the right. Now, the three-year limitation period begins from the day on which the person learned or should have learned not only about the violation of his right but also who should be the proper defendant in a lawsuit for protection of the violated right.

The Civil Code chapter on securities was seriously changed – split into three independent parts devoted to the general issues, regulation of paper securities and paperless securities. It is notable that the law distinguishes the “thing” and “other property” as regards securities and money. The first includes paper securities and cash and the second – paperless securities and cashless money.

The new wording of the provisions on securities is aimed at removing the inconsistency between the Civil Code rules and the special laws on securities. To meet the requirements of practice, the legal treatment of paperless securities is described in more detail. Certain new rules purport to suppress any abuse of the right in the event of securities loss and exclude the possibility to make the rights to securities legitimate through a chain of ownerships. Now, there exists a procedure for protection of the security owner’s rights, including reinstatement of the rights and (or) records of the rights attaching to securities. The amended Civil Code contains a new provision that a security inconsistent with the law as to its form or details does not loose its legal validity completely. It cannot be regarded as a security but retains the validity of a written proof. There has been introduced the institution of immobilization of securities, similar to that existing in foreign jurisdictions, which in essence is aimed at transferring securities from the paper form to the paperless form. The matter of responsibility of the security issuer and all its endorsers is regulated. Endorsers bear responsibility for invalidity of the rights certified by the security in all cases, but for the execution under a security – only in cases specifically provided for by the law.

Apart from securities, other provisions on the objects of civil rights underwent modernization. The new term “single real estate complex” was introduced and the term “indivisible thing” was made more specific.
The provisions on the registration of legal entities were revised to a certain extent. Now, the registering authority is obligated to check the veracity of the information on the legal entity to be recorded in the Consolidated State Register of Legal Entities (the “Register”). Correspondingly, the presumption of veracity of such information was introduced, and the consequences of record of unauthentic information or a failure to record information in the Register were determined. In the event of gross irreparable violations of the law the state registration of a legal entity may be found invalid.

Amendment of private international law in connection with a revision of the criterion for determination of applicable law was one of the most complicated tasks. The goal of the changes was to simplify the understanding of the private international law matter at the expense of abandonment of the traditional closest connection criterion and widening of the range of issues directly regulated by the conflict of laws rules. The sphere of application of the legal entity’s personal law (lex societatis) was widened thanks to the extension of its effect to the issues of responsibility of the legal entity’s founders. The issues existing in the sphere of effect of the real statute determining when real rights arise and cease, and whether a thing was movable or immovable property, were described in more detail. The provisions on applicable law with respect to the form of a transaction were changed. Now, the form of a transaction is determined on the basis of the law regulating the essence of the relationship (rather than the law of the country where the transaction was made). Thus, the form and the contents of the transaction are united by a single rule of law. Attention was paid to the cases of special regulation of the transaction form. If lex societatis establishes special requirements to the form of an agreement for setting up the legal entity or to the form of a transaction for the exercise of a participant’s rights, then the corresponding lex societatis should to be used irrespective of the parties’ agreement. The form of a transaction with real estate must be governed by the law of the jurisdiction where the real estate is located, and if the real estate is registered in Russia – by Russian law.

The provisions on the law of obligations were changed considerably. The legislator decided against the application of “two refutable presumptions”, figuratively speaking, which had been used in the determination of applicable law in the absence of the parties’ agreement. The need for a double assessment of the situation in the determination of the law regulating the parties’ relationship was thus removed. Previously, the first place had belonged to the criterion of the closest connection of the contract with this or that law and the associated general presumption of the closest connection of the law of the country where the party carrying out decisive performance under the contract was located, and several refutable presumptions of decisive performance under separate types of a contract. The amended Civil Code fixates the general rule on the application of the law governing the party carrying out decisive performance under the contract and the clear criteria of determination of decisive performance under specific contracts. New connecting factors with respect to contracts on the use of intellectual property appeared in the Civil Code. Under the general rule, subject to application is the law of the country where the exclusive right being assigned and (or) is used is effective.

In general, when analyzing the changes in civil law it could be stated that they were dictated by the time and the need to work out an adequate regulation at the legislative level following the development of the civil circulation needs, taking into consideration the infiltration of Western institutions and trends into the national practice. Many of the changes reflect the modern ideas of the national civil law doctrine and the best practices of foreign countries. The modernization of civil law is also aimed at removing defects and gaps in the regulation of the civil circulation that were found by the established law application practice. We should note however that the corrections, being in many ways the result of a compromise between the supporters of the conservative and the liberal approaches, are far from the key task of the Russian legal system, i.e., making Russian law more competitive. In this respect we believe that the measures taken are just the first steps in that direction.

Starting from July 1, 2014 the seriously revised provisions on pledge will come into force. Among the most important novels are the provisions on the pledge of rights under a bank account contract, management of the pledge, pledge of the entire property of a person carrying out entrepreneurial activity, lapse of the Law on Pledge, and change of parties in an obligation. Changes in Part Two and Part Four concerning corporate relationships and intellectual property are awaiting consideration and will most likely be adopted in 2014.