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Overview of Changes in part 3 of the RF Civil Code

28.11.2013

Overview of changes in
Part Three of the RF Civil Code

On September 30, 2013, in line with the Civil Law Development Concept, the RF President signed Federal Law on Amendment of Part Three of the RF Civil Code, No. 260-FZ, which had been adopted by the State Duma on September 20 and approved by the Council of the Federation on September 25, 2013. The changes concern the matters of private international law (Section VI of Part Three of the Civil Code (the "CC")) and came into force on November 1, 2013.

Below we discuss the changes that seem to be the most important ones.

Private international law

In general it can be stated that the changes made in Section VI are primarily aimed at facilitating the practical application of private international law rules (which are traditionally placed among the most complicated  in civil law doctrine) and at simplifying their understanding by traders and courts.

As was explained by the authors of the discussed revisions to the CC the proposed changes pursue the following principal objectives: stepping away from the definition of applicable law on the basis of the closest connection principle as the fundamental conflict of laws criterion and instead broaden the range of relationships directly regulated by specific conflict of laws rules, because the use of that principle is complicated and the results are hard to foresee; correcting certain conflict of laws rules for the regulation to become more adequate; and improving some provisions from the point of view of a juridical technique.

To this or that extent, the changes are made in practically all institutes of private international law, including the general provisions, provisions on the personal law of legal entities, rules on the law applicable to the real rights (rights in rem), contractual and non-contractual obligations. Changes were made in many criteria of determination of applicable law, the so-called attachment formulas (localization principles).     

The general provisions of Section VI were amended insignificantly, mostly editorially. In particular, the legislator introduces a new term for the so-called "super imperative" rules of national law effective for the parties irrespective of the law governing their relationship (Article 1192). Following the French tradition, the CC now calls such rules “rules of direct application”. The rule of inapplicability of foreign law in the exclusive cases where such application contravenes the fundamentals of public policy (the public policy clause) is supplemented with the direction to take into consideration the nature of the relationship complicated by a foreign element. The purpose of the novel seems to be the narrowing of the possibility for an arbitrary application of the public policy clause. In each particular case the incompliance with public policy now needs to be assessed with regard for specific circumstances (rather than form a formal standpoint) and taking into account that the legal relationship is encumbered one way or another by the presence of a foreign element that imparts a sort of  international feature thereto as opposed to purely domestic relations that in all of their aspects are linked to a particular state only.


The sphere of application of the personal law or personal statute of a legal entity (lex societatis) (Article 1202) has been made more specific. Now, the list of issues determined on the basis of lex societatis (the criterion still being the legal entity’s place of incorporation) has been supplemented with matters related to liability of the legal entity’s founders for the obligations of the entity. In principle, the previous wording of the article seems to have implied the application of lex societatis to these matters, and the supplement is rather due to the desire to exclude any potential doubts in this respect and thus simplify the task of the legal practitioners.

At the same time, the amended Article 1202 contains an important exclusion from that rule: its new Clause 4 provides for application by default t of Russian law if the foreign legal entity is doing its business principally in Russia. Alternatively the personal law of a legal entity may be applied at the creditor's choice. Most probably, the legislator intended to address off-shore  companies which have their principal assets and/or implement business projects in Russia, and the incorporation of which outside this country was not so much due to some business needs but is rather due to a choice of a  comfortable jurisdiction (e.g. taxwise). It seems that the novel would have a rather complicated future, as so far it is difficult to foresee how correctly it would be taken in local court practice, including in the matter of determination of the place where the entity is “principally doing its business”.

The rules on the scope of application of law governing to the real rights – so called real statute (still determined pursuant to the  connection factor of the property's location (lex rei sitae)) have been formulated differently. To simplify the understanding of the range of issues decided on the basis of lex rei sitae and exclude any differences in the construction, the CC has been supplemented with Article 1205.1 containing the list of such issues. Lex rei sitae, now determines not only the contents of the ownership and other real rights, their exercise and protection, but also the types of property (movable or immovable) being the object of the real rights as well as transferability of properties, emergence and cessation of the real rights.

At the same time, in the matter of the real rights the legislator retained a limited application of the autonomy of the parties’ will principle, having included in Article 1206 a new clause 3. Contracting parties were granted (without prejudice to third parties rights) the possibility to choose the law governing their transaction as the law also applicable to the matters of emergence and cessation of the real right in connection with this transaction. Previously, a similar rule was contained in Article 1210(1).

The conflict of laws rules concerning the form of a transaction (Article 1209) have been changed considerably. Previously, the form of a transaction was always determined on the basis of the law of the country where the  transaction is made (lex loci contractus). Now, the general localization rule refers to the law of the country governing the substance of the transaction, i.e., the essence of the relationship (lex causae). The new rule which unites the form and the contents of the transaction is, as it seems, more adapted to the modern practice and simplifies the position of the counterparties located in different jurisdictions and making the transaction simultaneously. As before, non-compliance with the requirement to the form of a transaction under the governing law does not entail automatically its invalidity, however the conditions for retaining the validity of the transaction have been corrected. The new provisions exclude invalidity of a transaction due to the defects of its form, if the requirements to its form under lex loci contractus or under Russian law – with respect to the transaction in which one of the parties is an person (individual or entity) lex personalis is Russian law – have been met. Previously, such reservation only concerned the requirements of Russian law and had effect irrespective of the participation of a Russian person.

In so far as the special rule that the form of a transaction with immovable property is subject to lex rei sitae, and with respect to immovable property registered in Russia – to Russian law, has been retained, it is not quite evident why was Article 1209 supplemented with Clause 3 which establishes the unconditional rule of submission of the form of a transaction to Russian law, if the transaction itself and the emergence, cessation or transfer of the rights to thereunder is subject to registration  in Russia. One may guess that the legislators was guided by the intent to exclude an eventual situation where a Russian registrar would be formally obligated to assess the form of the transaction in accordance with foreign law. In essence, the new rule appears to ratify the already existing law application practice.

The amended Article 1209(2) establishes a special regulation with respect to the form of a contract for setting up a legal entity and the form of a transaction related to the exercise of the rights of an entity's participants. If the law of the country of the legal entity’s incorporation has specific requirements to the form of such contract/transaction, then the form of the contract/transaction is subject to the corresponding lex societatis. It should be noted that the CC does not explain what should be understood by “specific requirements”. In its turn, the amended Article 1214 while allowing for the autonomy of the parties’ will in the determination of the law applicable to the this type of contracts specifically notes that the parties’ agreement on the choice of law does not extend to the imperative rules of the law of the country of the legal entity’s incorporation in the matters falling under scope of the regulation of lex societatis. Upon a comprehensive construction of those rules it could be supposed that the above-mentioned “specific requirements” to the form of a contract for setting up a legal entity/a transaction related to the exercise of the rights of an entity's participants should be understood as the corresponding imperative rules of the law of the place of incorporation. Nevertheless, the lack of clarity in this mater would remain, in all appearances, until higher court instances provide guidance. A reservation that the imperative requirements of the place of incorporation of the legal entity should always be complied with would look more logical and clear.

Following the exclusion from the CC Part One of the provision on special consequences of non-compliance with the written form of a foreign economic transactions, excluded has been the special unilateral conflict of laws rule (inherited from the soviet era) which unconditionally subjected the form of such transactions involving Russian entities to Russian law. Under the present conditions, that rule looked as an atavism in many respects and often (in conjunction with the rule on invalidity of a foreign economic transaction made not in a written form) was used by Russian parties to foreign economic transactions not entirely in good faith.

The amended Article 1210(5) devoted to one of the problems of private international law – circumvention of law – seems to be narrowing possibilities for the application of law other than the law chosen by the parties. Previously, there existed the rule that the choice of law by the parties may not affect the operation of the imperative rules of the legal system with which the contract is really connected, and such rule  de facto allowed for certain discretion in the determination of what should be regarded as the real connection of a contract with one country only. Now, the criterion for the application of law other than that chosen by the parties is made more specific (and therefore the possibility of its arbitrary understanding is narrowed): the choice of law does not affect the imperative rules of the law of only that country with which all circumstances concerning the essence of the parties’ relationship were connected at the time the choice was made.

The majority of the changes introduce by the new law was made to the provisions concerning regulation of the law of obligations, i.e., law applicable to the contractual (transactional) obligations.

As noted above, the legislator preferred to limit the use of the closest connection principle.

Previously, in the absence of the parties’ agreement on applicable law (Article 1211), two refutable presumptions were supposed to be used, i.e., two consecutively applicable criteria which operated unless the law, essence of the contract or circumstances of the case proved otherwise. In the absence of the choice of law, the contract was subject to the law of the country with which it is connected most closely. In that case it was presumed by default (the first presumption) that the contract is closely connected with the country where the party carrying out crucial performance is located (has residence or the principal place of business). Then, for separate types of contracts, there were stipulated their own specific refutable presumptions as to what country should be regarded as carrying out crucial performance. Such multistage construction for the determination of applicable law  seems to have placed serious difficulties for courts and therefore introduced a considerable element of unpredictability in legal relationships.

Now, the localization on the basis of the closest connection is excluded as the general rule. Its place has been taken by the criterion of location of the party carrying out crucial performance (Article 1211(1)). For separate types of contract there have been introduced specific rules (rather than refutable presumptions) of determination of the party carrying out crucial performance (Article 1211(2)). Thus, the need to asses the situation twice, from the legal and the factual sides, in order to come to the conclusion on the applicable law with the help of consecutively applied criteria has been eliminated.

However, the CC does not reject completely the use of the close connection formula and the assessment of legal and factual circumstances but rather offers it as an auxiliary criterion (Article 1211(9)).

Article 1211 has also been supplemented with new (amended) rules containing specific conflict of law rules with respect to contracts for use/disposal of intellectual property: franchising, license and sale/assignment agreements (Articles 1211(6), 1211(7) and 1211(8)). Essentially, with respect to those contracts the CC introduces a uniform conflict of law rule referring to the law of the country where the exclusive rights are used or the exclusive rights being transferred has effect. From a practical point of view, in the majority of cases this means a referral to the law of the country of the rights recipient (franchisee, licensee or purchaser), whereas previously the legislator recognized as applicable the law of the rightholder’s country. Now, the connection to the rightholder’s country becomes auxiliary, i.e., is applicable in the event the exclusive rights are used simultaneously in the territory of several countries.

It could be supposed that to a certain extent such change of the legislator’s approach could facilitate the work of Russian courts by reducing the number of cases where they would have to apply foreign laws in these rather complicated legal relationships. Presumably, in most cases it would be the recipient/purchaser of the rights who would be the responded in a possible dispute, and, all other conditions being equal, it is generally advisable to lodge a claim against the defendant in its own jurisdiction.

The change of the general structure of Article 1211 (in connection with the above-motioned rejection of the double-stage system of presumptions) and the corresponding correction of the juridical language in the practical application of the corresponding provisions can give rise to the question whether certain of the particular conflict of law rules as now set out in that Article were intended as imperative (i.e., whether the autonomy of will is permissible in the choice of law in those cases). We mean the amended Clauses 3 – 8 concerning contracts for construction work, special partnership agreements, contracts made at stock exchanges and auctions, and the above-mentioned agreements with respect to exclusive rights. Those provisions do not directly indicate that the conflict of law rule contained therein operate in the absence of the parties’ choice of law. The previously effective provisions did not contain such reservations either, but there was no cause for doubts since instead of direct indications to applicable law they established the presumption of a close connection (and the close connection criterion was in principle used in the absence of the choice of law by the parties’ agreement). Now, one can only refer to the title of the article as an express indication to the discretionary nature of the corresponding rules, which might turn out to be insufficiently convincing in some cases.

In our view, a systematic construction of those provisions in their correlation with other rules concerning the law of obligations (including with regard for Article 1211(9), Article 1210(1) and others) would be of help.

The understanding of the rules in question as discretionary ones correlates with the basic principle of private international law – the autonomy of the parties’ will which operates with respect to contractual relationships without limitation except for cases expressly provided for by the law (e.g., in relation to rules of direct application).

The conflict of laws rules applicable to contracts involving a consumer have been revised considerably. The basic purpose of the changes is to provide more protection to the consumer as the economically weaker party, particularly to guaranty the customer at least the protection which is provided by imperative rules of the country of his/her domicile (i.e. by jurisdiction that is familiar to the customer). This is specifically relevant for cases of cross-border sale of goods (work, services) where the seller is not present in the territory of the consumer’s residence but in this or that way is oriented to consumers in that territory. Instead of the three previous conditions under any of which the consumer, could not be deprived of protection granted by the imperative rules of the law of the country of his residence by the choice of law by agreement of the parties, (Article 1212), the legislator introduces a new one – the carrying out by the consumer’s counterparty (the professional party) of its activity in the consumer’s country or the direction of such activity by any means to the territory of that country. In the absence of a choice of law by the parties, the law of the consumer’s place of residence shall be applicable (Article 1212(3)).

However, even in the absence of the said circumstances (i.e., where the professional party may not be regarded as carrying out or directing its activity to the territory of the consumer’s country of residence) the parties’ choice of law cannot neutralize the effect of the imperative rules on consumer rights protection existing in country the law of which would have been applicable if it weren't  for such the choice of law (Article 1212(4)).

Thus, the amended CC narrows to a greater extent the possibilities to use the autonomy of will principle for the choice of a comfortable legal system in order to avoid application of imperative rules which for some reason do not suit the professional party.

The CC has been supplemented with several articles determining new conflict of laws rules applicable, inter alia,  in the matters of the transfer of rights from the creditor to another person on the ground of the law, representation, termination of obligations by a set off, determination of admissibility of claims for compensation of damage by the insurer, as well as those applied to obligations arising due to the bad-faith negotiation of a contract, and to obligations arising from the infliction of damage or unjustified enrichment.

The basic task of those novels is to provide a special regulation for certain types of legal relationship, add flexibility to the existing conflict of laws rules and expand the opportunities of the parties in the choice of applicable law on the condition of compliance with certain requirements. The majority of the changes brings more certainty and simplifies the task of determination of applicable law.  However, that aim does not seem to have been achieved in all cases.

For example, seeking to broaden the range of relationships directly regulated by private international law, the legislator seems to have brought ambiguity as to applicable law/the principle of its determination with respect to the issues of transfer of the creditor’s rights to the new creditor by virtue of the law. According to the new rule (Article 1216.1), transfer of the creditor’s rights to a third party which satisfied the creditor’s claims to the debtor is determined under the law that is subject to application to the relationship between the initial creditor and the new creditor. However, it is not clear how (in the absence of an agreement regulating the relationship between the former creditor and the new creditor, which is likely to happen in practice), on the basis of what attachment formula the law applicable to the creditors’ relationship can be determined. In general, it is hard to understand the referral to the relationship of the new and the former creditors, because such relationship might be inexistent. In this respect a referral to the relationship of the initial creditor and the debtor would be more logical.   

With respect to the matters of representation, namely powers of attorney, it is established (Article 1217.1(2)) that, unless the law states otherwise, the relationship between the principal or the representative and the third party is determined in accordance with the law chosen and indicated by the principal in the power of attorney. At the same time, the CC further states that such rule applies if the third party and the attorney were notified of the principal’s choice. In our view, a practical sense of such reservation is not apparent, because the third party, same as the representative, should be deemed to be notified of the applicable law by virtue of the corresponding indication in the text of the power of attorney. Considering the new rule, it is rationally for the principal to give a special written notice in order to avoid disputable situations, which would be hard to do in practice with respect to a power of attorney issued for relationships with an indefinite number of persons. In the absence of the choice of applicable law the corresponding relationship of the parties is regulated by the law of the representative’s country of residence (principal place of business).

It is notable that the new Article 1217.1 goes beyond the subject of private international law in the strict sense of the word (i.e., is not limited by the conflict of laws regulation) specifically stating that the representative acting on the basis of the power of attorney is by default empowered to choose the means of resolution of a dispute and determine law applicable to transactions in which he represents the principal.  That is most probably caused by the legislator’s wish to counteract the approach to the assessment of dispute resolution agreements (clauses) on the basis of an excessively formal understanding of their autonomous nature.

As appears upon the initial analysis, the changes in Section VI of Part Three should be assessed positively. It could be supposed that certain simplification and detailing of many conflict of laws rules, as well as introduction of special regulation with respect to some types of relationship would create a more clear and correct understanding of the essence of the conflict of laws rules, and would make it possible to avoid many mistakes and variances in the practice of their application.