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Informative Memorandum on the approach of the RF Supreme Arbitration Court regarding disputes over surety

20.08.2012

On August 10, 2012, the RF Supreme Arbitration Court (the “SAC”) published on its site Resolution of the Plenum of the SAC on Certain Issues of Resolution of Disputes Connected with Surety, dated July 12, 2012, No. 42 (the “Resolution”).

  The Resolution is a long awaited and very important document, because it formulates the SAC’s approach to a number of issues which courts treated differently in cases with similar circumstances.

  The main stress in the Resolution is made on the need to give the institution of surety more stability and construct the law rules so that the surety would not be able to refuse to perform the surety agreement at will.

  Below are key issues discussed in the Resolution.


1. The general issues of entering into and validity of a surety agreement

  It is confirmed that the RF Civil Code (the “CC”) does not specify what terms and conditions of the main obligation are to be included in a surety agreement. Therefore, if a surety agreement does not indicate some of the conditions of the secured obligation (e.g., scope of or deadline for performance of the obligation, amount of interest on the obligation), but the obligation is described with sufficient certainty that allows the court to establish what obligation was or will be secured by surety, or the surety agreement refers to an agreement regulating the secured obligation and containing corresponding terms and conditions, the court may not regard the surety agreement as not having been entered into.

  A surety agreement may be entered into on a condition (Article 157 of the CC). For example, it can provide for its coming into force on the condition that the creditor and the debtor or the creditor and third parties enter into other securing transactions (such as a pledge agreement), or that the composition of the surety’s or the debtor’s participants or managing bodies be changed.

  Surety may secure obligations out of transactions made under a dissolving condition or a pendent condition.

  A surety agreement may stipulate, inter alia, a claim to return everything received (the claim for a monetary compensation of the value of the received) under the main agreement out of which the secured obligation arose, if the main agreement is found invalid or unjust enrichment is returned  when the main agreement is found not having been entered into.

  A surety agreement may be executed after the deadline for performance of the main obligation non-performed by the debtor,

 

2. Security of non-monetary obligations

  Surety may secure a non-monetary obligation to transfer goods, perform work, render services, abstain from performing certain actions, etc., because the creditor under such obligations may have monetary claims to the debtor (e.g., the claim for damages, recovery of penalty, return of advanced money).

  It should be taken into consideration that a claim for urging the surety to perform the secured obligation in kind is subject to dismissal. In this case the surety must pay an amount corresponding to the creditor’s property losses caused by non-performance or improper performance by the debtor of the secured obligation. At the same time the surety is not deprived of the right to offer the creditor a proper performance of the non-monetary obligation instead of the debtor in accordance with Article 313(1) of the CC.


3. The surety’s consent to a change of the main obligation in the future

  A surety agreement may provide for the surety’s consent given beforehand to answer to the creditor on the changed conditions in the event of a change of the main obligation secured by surety. Such consent should be express and should set forth limits for a change of the main obligation (e.g., an amount by which the debt can be increased) within which the surety agrees to answer for the debtor’s obligations.

  The surety’s consent to answer for the new debtor to whom the debt under the main obligation will be transferred should be express and should contain criteria that would make it possible to determine with a high degree of certainty the persons to whom the debt can be transferred without losing the effect of surety.


4. The consequences of a change of the main obligation and other conditions connected therewith without consent of the surety

  According to the SAC’s approach, a change of the main obligation in the form of an increase of the amount of debt or the amount of interest, or in the form of a decrease/increase of the term for performance of the main obligation  does not in itself deteriorate the position of the surety and does not terminate surety. In this case the surety answers to the creditor on the initial terms and conditions of the main obligation secured by surety as if the change of the obligation has not taken place. The obligation to the extent of the change is not regarded as secured by surety.

  Besides, surety does no cease in the event of a transfer of the creditor’s rights under the obligation expressed in a foreign currency to a person having no right to receive payments in a foreign currency, deterioration of the debtor’s position due to the creditor’s actions aimed at protecting the creditor’s right (e.g., a claim for early performance of the obligation), additional obligations for the surety under public law rules (contained in banking law, laws on protection of competition, currency control, securities market and others), and revocation of the debtor’s license.

  A change of the state court’s jurisdiction over the dispute regarding the main obligation secured by surety does not terminate surety, unless the surety agreement sets forth otherwise.

  A written agreement between the creditor and the debtor on consideration of the dispute by arbitration or by a foreign court, or a change by the debtor and the creditor of the governing law of their agreement on secured obligation might serve as a ground for finding the surety’s condition deteriorated and surety terminated (except where it is proved that the debtor’s and the surety’s actions were coordinated at the time surety was granted). The surety must prove in what way his rights and lawful interests were infringed.


5. Continuance of surety upon termination of the main agreement

  Upon termination of the main agreement out of which the obligations secured by surety arose, surety continues to secure those obligations which survive such agreement (e.g., the principal amount of debt and interest under a loan agreement, indebtedness in rental payments) or arise as the result of its termination (e.g., the obligation to return everything provided by a party to the agreement or the obligation to pay the value of the property provided).


6. Assertion of infringed and disputed rights

  The Plenum of the SAC devoted attention to the procedural side of dispute resolution. If after the creditor filed a claim against the debtor the surety fulfills the surety agreement, the surety is entitled to apply to the court with a request to join the proceedings as a procedural successor of the creditor in the claim for recovery of the debt under the secured obligation, payment of interest, etc. However, relying on Article 148(1) of the CC, the Plenum notes that if in such a situation the surety files a separate claim against the debtor, such claim should be dismissed and the proceedings initiated upon such claim should be terminated.


7. Other issues

  Apart from the matters discussed above, the Resolution gives explanations regarding the following issues:

• The term of validity of surety and its correlation with the limitation period;
• Consequences of untimely notification by the debtor of the surety in the event of fulfillment of the obligation to the creditor;
• Mutual relations of the sureties in the event of joint and several surety;
• Mutual relations of the surety that partially performed the obligation secured by it and the pledgee with respect to the subject of pledge securing performance of the same obligation;
• Specifics of application of the law rules on surety in the event of reorganization of the surety, bankruptcy proceedings and consideration of cases connected with bonds;
• Consequences of unfair use of the possibility to enter into a surety agreement without the debtor’s consent.