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Informative Memorandum. Amendment of part one and part three of the Civil Code

19.06.2013

Informative Memorandum
AMENDMENT OF PART ONE AND PART THREE OF THE CIVIL CODE

03 June 2013

On May 7, 2013, the RF President signed the Federal Law on Amendment of Subsections 4 and 5 of Section I of Part One and Article 1153 of Part Three of the RF Civil Code (the “Law”) adopted by the State Duma on April 24, 2013 and approved by the Council of Federation on April 27, 2013. The Law introduces changes in the Civil Code concerning making of transactions, invalidity of transactions, representation in civil relationships, and limitation periods. The majority of changes will come into force on September 1, 2013.

Below are key changes introduced in the Civil Code (the “CC”) by the Law:

Transactions

Considerably amended are the CC rules on transaction forms, manner of making, and invalidity.

For example, the rule that non-compliance with the requirement of state registration of a transaction entails its invalidity is revoked. Instead, a new rule states that a transaction subject to state registration generates legal consequences after such registration. Thus eliminated is the ground for speculation whether the unregistered transaction should be regarded as invalid or as not entered into.  The rule inherited from soviet lows  and fairly archaic nowadays stating that a foreign economic transactions made not in a written form is invalid (the said rule gave rise to numerous disputes and often was the object of misuse) losses its force. The threshold at which transactions between individuals must be made in a simple written form is changed from ten-fold minimum monthly wages to ten thousand rubles.

The approach to invalid transactions is drastically changed. In particular, the presumption that all transactions which do not comply with the law are void is replaced by the general rule that such transactions are voidable (the general rule of nullity of all transactions inconsistent with the law is retained only with respect to transactions infringing upon public interests and third-party rights).

With respect to voidable transactions the amended CC sets additional conditions under which voidable transactions may be regarded as invalid: infringement of the rights or lawful interests of the person challenging the transaction, including occurrence of consequences unfavorable for him, as well as infringement of the rights and lawful interests of third parties, if the transaction is challenged in their interests. There is introduced an absolutely new rule which, in line with the general tendency of enhancing stability and predictability of civil turnover and protection of its good-faith participants, is called to limit possibilities for misuse:  if a party’s behavior shows its will to retain the transaction in force, then the party may not challenge the transaction on the ground which the party was or should have been aware of at the time her will was expressed.  In line with the same approach another provision states that a claim of invalidity of the transaction has no legal effect if it is made by a person acting in bad faith (whose behavior, in particular,  gave other persons ground to rely on the validity of the transaction).  We believe that the practice of application of the said novels (at least in the foreseeable future) will be rather complicated and controversial.

Under the new general rule, the claim for application of the consequences of invalidity of a void transaction may be made not by any interested person, as it was before, but by one of the parties to the transaction only; other persons may make such claims exclusively in cases stipulated by the law.  A claim for invalidation of a void transaction separately from a claim for application of the consequences of its invalidity is permitted “if the person making such claim has a lawful interest in invalidation of the transaction”. The new CC rule fixates the right of a court to dismiss the claim for application of the consequences of invalidity of the transaction it that would contravene the fundamentals of law and order or moral.

Many rules on certain grounds for invalidation of transactions are considerably changed and supplemented.  A transaction made without required consent of a third party, certain body of the legal entity or a governmental authority is voidable and may be invalidated, if the other party new or should have known about the absence of the required consent.  At the same time, probably also for the purpose  of compliance with the good faith principle, there is introduced a rule that the person that gave consent to the transaction may not challenge it on the grounds which the said persons knew or should have known about at the time of the expression of consent.

The provisions on the consequences of violations committed by representatives in the making of transactions are revised. Article 174 which previously regulated  only the cases of excess (including by the bodies of legal entities) of granted authority sets another ground for invalidation of a transaction – making of the transaction to the prejudice of the interests of the principal (provided that the other party knew or should have known about the marked damage, or there took place a damaging collusion or other damaging joint actions of the representative and the other party). Previously, a similar rule regulated exclusively the cases of a “malicious agreement” between the representative and the other party which resulted in the confiscation by the state of everything received under the transaction.

The Law makes more specific and supplements the meaning of a significant delusion of the person at the making of the transaction as the ground for challenging it.  Delusion is significant where “the party reasonably and objectively assessing the situation would not have made the transaction if it knew the real state of things”.  Delusion is supposed to be “sufficiently significant” in the following cases: evident slip of the tongue, slip of the pen, misprint of the party, delusion with respect to the subject or nature of the transaction as well as of the person with whom the party enters into the transaction or the person connected with the transaction, etc.  Invalidation of a transaction in connection with a significant delusion is not allowed where the counterpart “expresses consent to retain the transaction in force on the terms and conditions which the party acting under a delusion relied upon”.

The Law gives a definition (albeit not exhaustive) of deceit in relation to the corresponding ground for invalidation of a transaction: “deceit is also understood as a willful concealment of the circumstances which the person should have disclosed with as good faith as was required from him under the conditions of the turnover”. The consequences of invalidity of such transaction are changed: the property received by the aggrieved party is not transferred to the state revenue in all cases. Now, applied is the general rule on bilateral restitution. Besides, the aggrieved party is reimbursed for losses, including lost profit (previously, it was real damage).

Excluded is the provision that transactions made by a legal entity without the license for corresponding activity (if required) are invalid.
 
Legally effective communications

The CC is supplemented with a new article about the so-called legally effective communications, i.e., statements, notifications, notices, demands, etc. with which occurrence of civil-law consequences for the person is connected.  Thus the possibility of qualification of communications such as transaction types seems to be excluded.  According to the new provisions, legally effective communications with which the law or the transaction connects civil-law consequences for the other person entail such circumstances for the person from the moment of delivery of the communication. A communication is regarded as delivered to the person also in cases where the communication could not be handed over to the person for reasons within his control (unless the law, the transaction. or the custom or the practice of the parties’ relationship requires otherwise).

Resolutions of meetings

Subsection 4 of Section I of the CC is supplemented with a new Article 9.1 “Resolutions of Meetings” containing the general rules on the procedure for passing of resolutions by meetings, grounds for invalidation of such resolutions, including recognition as voidable and void. The said rules apply unless the law stipulates or in the manner prescribed by the law it is established otherwise .

In view of the detailed regulation of that scope of issues in special corporate laws,  inclusion of those provisions in the CC does not seem justifiable now.  Collision of the new rules with the existing special laws might cause problems in the law application practice.

The amended CC contains requirements to the quorum for passing resolutions – presence in the meeting of at lease fifty percent of the total number of the members.  Resolutions are passed by the majority of votes. It is noted that every item on the agenda should be the subject of a separate resolution, except where the members unanimously establish otherwise. Irrespective of the manner of voting – absentee or in person – the results must be recorded in the written minutes of the meeting (otherwise the resolution may be challenged).

The Law establishes the general presumption of voidability of an invalid meeting resolution, unless from the law it follows that the resolution is void. The grounds for challenging are the manner of convocation and holding of the meeting, lack of authority of a member’s representative, failure to record the voting results in writing (see above), violation of the equality of rights of the members, and other cases specially set forth by the law. A resolution may be challenged “within six months from the day when the person whose rights have been violated by the passing of the resolution  learned or should have learned about it”, but no later than two years from the day when the resolution became known to the other members.  The Law also sets requirements to the procedure for challenging a resolution: the person must inform other members about his decision to file a claim and provide them with other information. Persons who did not join the claim forfeit, under the general rule, the right to challenge the resolution in the future.

A resolution is regarded as void if it is passed on the issue that was not included in the agenda (except where all members are present in the meeting), is beyond the powers of the meeting, is passed in the absence of the required quorum, or contravenes the fundamentals of good order and moral.  The CC does not set any specifics of recognition as void of a meeting resolution.

Representation

The general rules on representation are supplemented with the provision on the consequences of violation of the prohibition against simultaneous representation. A transaction made by the representative personally for himself in the name of the principal as well as for another person whom he represents simultaneously may be invalidated on a claim of the principal in the absence of the principal’s consent or a special permission of the law. The fact of violation of the principal’s interests is presumed.

According to the changes, if a transaction is made by an unauthorized person, the counterparty who acted in goof faith may reject such transaction before its approval by the principal.  The counterpart retains the same right along with a compensation of losses in the event that the principal subsequently refuses to approve the transaction or his response does not follow within a reasonable period of time. However, losses are not subject to compensation if the counterpart knew or should have known about the lack of the representative’s authority or excess of such authority.  Along with the right of unilateral rejection the counterpart has the alternative right to claim performance of the transaction by the unauthorized person.

Power of attorney

The corresponding rules of the CC are significantly liberalized.

The most important novel is the recognition of the institution of irrevocable power of attorney which is widely used by and exists for a long time in the countries with developed law and order.  Such power of attorney may be issued where it is necessary to secure performance of the obligation of the principal before the representative or other persons in whose name the representative acts in the event the obligation is connected with entrepreneurial activity. Nevertheless, an irrevocable power of attorney may be revoked prematurely after termination of the obligation it secures and in the event the representative abuses his powers. An irrevocable power of attorney must be certified by a notary public.

Another important change is the revocation of the three-years limitation to the maximum term of validity of a power of attorney.  The new provisions of the CC extend the effect of the rules on a power of attorney to the cases where the representative’s powers are set in a contract or a meeting resolution, thus breaking down the monopoly of a power of attorney as the sole written instrument capable of confirming the powers of a representative. With respect to legal entities, the requirement of a seal is excluded.

The list of cases requiring certification of a power of attorney by notary public is broadened. Now, notarization of a power of attorney is required not only for making transactions in the presence of a notary public, but also for filing an application for state registration of title or transactions, disposal of registered rights, and with respect to irrevocable powers of attorney. There is an exception from the rule on notarization of the power of attorney issued to a substitute attorney by legal entities, heads of branches and representative offices of legal entities.

Limitation period

Certain changes are made in the provisions on the limitation period and the rules for its calculation.

The general three-year limitation period is retained. However, it is now calculated from the day when the person learned or should have learned not only about the infringement of his right but also about the proper defendant in the claim for protection of such right.  In such case the limitation period may not exceed ten years from the day of infringement (if that period is exceeded, the moment when the person learned about the infringement and the proper defendant looses its legal effect). Similar rules are set for requirements based on the nullity of a transaction for the person who is not a party to it.

The Law introduces a one-year limitation period for claims for making a transaction and compensation of losses in the event one of the parties evades its notarization or state registration.