Agreements Must Be Kept: Russia's Draft Civil Code

JURIST Guest Columnist Kambiz Behi of Mostafavi & Associates and JURIST Columnist Edsel Tupaz of Tupaz & Associates examine how recent proposed amendments to the Russian Civil Code could reveal a legislative attempt to move Russia towards more Westernized commercial principles ...


In 2008, Russian President Dmitri Medvedev issued Decree No. 1108 which organized and set up the Committee on Codification and Improvement of Civil Legislation (CCICL). Under its mandate, the CCICL is tasked to draft a new, universal civil code due to the urgent need to improve and update the country's civil laws. The CCICL, which is comprised of key stakeholders from the business and legal sectors, began its work in earnest, focusing for the most part on improving corporate governance and transparency in Russian companies, enhancing and developing legal entities and corporate vehicles, transactions and agreements. The CCICL also deliberated upon a wide range of issues on property rights, contracts, obligations, security instruments and intellectual property, among a host of other legal aspects of property relations and property regimes. The new draft civil code is designed to boost the general investment climate by setting forth positive steps toward further liberalization and privatization of the economy, improved regulation of corporate relations, better legal groundwork for the development of a market economy and the rule of law and fuller integration of Russia into the global economy.

In just three weeks after its submission to the parliament by Medvedev, on April 27, 2012, the State Duma adopted in its first reading Draft Law No. 47538-6, which seeks to amend Parts I, II, III and IV of the existing Civil Code. Ongoing, fundamental changes in the Russian Civil Code, slated for full implementation by September 2012, could be seen as strategic shift in Russian socioeconomic policy — Russia's private law reform is taking place at a pivotal moment, at a time of Russia's impending formal admission into the World Trade Organization (WTO). Once passed into law and put into full effect, it is hoped that the new civil code will go a long way in setting up Russia as a principal business hub, and its capital, Moscow, as an international financial center in the ranks of New York, London, Hong Kong and Singapore.

The current civil code was first adopted in the mid-nineties as the first post-Soviet code. Although it broke away from the previous socialist regime, which was characterized by tighter property regulations amidst a centrally planned economy, it can be argued that the new code falls short of reflecting the contemporary needs of an increasingly mobile business community, which will require more flexible legal instruments and structures to accommodate the velocity and dynamic nature of business and competition. The current code has been criticized, rightly or wrongly, as establishing weak judicial and enforcement mechanisms, as well as precipitating widespread corruption among government officials and private sector actors, impelling many of Russia's larger firms and investments to emigrate to foreign jurisdictions that are more accommodating in general legislative frameworks and better legal enforcement. It comes as no surprise, then, that many Russian businesses which operate solely or primarily in Russia are owned by holding companies registered abroad, with cross-border corporate structures designed to protect the overall company and ensure access to dispute resolution systems abroad because of the perception that those systems are better suited to the task of settling disputes over highly complex commercial transactions. Finally, it has been observed that many investors, Russian and foreign alike, are spiriting their funds and investments en masse to foreign jurisdictions that offer guaranteed investment protection — a feature which the Russian system seems to lack.

But, most importantly, a series of cases involving grave violations of human rights has led to diminished confidence from the West in the Russian legal and economic framework. This has led to massive capital flight. The death of attorney Sergei Magnitsky, who once represented Hermitage Capital — once one of the largest equity funds in Russia — and the harsh sentences against former Yukos executives Mikhail Khodorkovsky and Platon Lebedev, just to cite a few notable examples, evoke serious concerns about the right to a fair trial and the independence of the judiciary in Russia.

It is against this backdrop of criticisms and gaps in the Russian legal system that the draft civil code had passed the first reading. Although it is likely that further revisions may come to fore prior to passage, concerns have arisen that such proposals have been too quickly adopted at the committee level — even as Russian legislators sincerely recognize the need for rapid reform, if not fundamental transformation, of substantive norms in the Russian legal system.

That said, the draft civil code also provides for greater distinctions of corporate rights, and attempts to ensure their better protection in complex shareholder and private arrangements. Article 67.2 of the new provisions grants greater freedom in determining the management structure for private companies, execution of shareholders' agreements and form of incorporation of legal entities.

The new Code provides for a new classification of business entities under two broad categories: public and private companies. The amended Article 66 - 66.3 of the Code, titled "Legal Entities," provides that a commercial entity may be established in the form of either: "(i) a public joint stock company or (ii) a non-public joint stock company." Public companies are characterized in the draft amendments as those that may issue shares or other form of securities to the public. Private companies, in contrast, may be organized more flexibly. Under the new arrangement, the management structure of private firms could be organized in such ways that would allow shareholders the choice to transfer corporate functions from the board of directors to an executive body, or to change the procedures for stockholders' structure, following common practice in Western jurisdictions.

The draft civil code also makes several radical changes in the area of contract law that originate from common law traditions. In the areas of obligations and liability, for instance, the amendments seek to codify certain common law concepts, particularly, a concept of "representations" (Article 431.2) and those of "good" and "bad faith" as understood in contract law under Anglo-American common law. In private law arrangements, the contracting parties are obliged to enter negotiations with sincere, "good" intentions regardless of the outcome of an action. In cases where misrepresentations or "bad faith" (Article 434.1) goes into the formation or performance of the contract, such contracting party would be in breach of contractual relations and must compensate for losses sustained to the other party. Moreover, a person who has acted in "bad faith" may not challenge the validity of that transaction (Article 166). The new legislation therefore enshrines the principle of "good faith" conduct as being a duty of all participants in the civil law system, and actions with "bad faith" sanctionable with liabilities.

It is too early to tell whether Russia's new private law regime will indeed bring about fundamentally positive economic gains in a global economy. Formal changes in statute books, or the "law-in-the-books," is one thing, and the "law-in-action," quite another. Legislation at this stage remains dynamic and full of compromises. But, in light of the Russian Federation's imminent accession into the WTO, the Russian Duma will no doubt send a message that it is taking all domestic measures that it can, at this point, to ensure a bona fide compliance with WTO norms — an endeavor which can strike the legal community at large as an adherence to a time-honored doctrine known as pacta sunt servanda.

Kambiz Behi is a partner of Mostafavi & Associates. Dr. Behi's interests and expertise lie in comparative law, comparative constitutional law, international law and legal anthropology, teaching law and social sciences at universities in the US, Russia and Belarus. He holds a PhD in Social Anthropology and Masters in Regional Studies from Harvard University, and a Master of Laws (LL.M.) from the University of Pennsylvania Law School.

Edsel Tupaz was a private prosecutor of the House prosecution panel in the recently concluded impeachment trial of Philippine Chief Justice Renato Corona. He is a graduate of Harvard Law School and Ateneo Law School. Owner and managing partner of Tupaz and Associates, Tupaz is a public interest lawyer whose expertise lies in comparative constitutional law, international development law, and legal theory, teaching at law schools in the US and the Philippines.

Suggested citation: Kambiz Behi and Edsel Tupaz, Admitting Russia to the WTO Will Create Stronger Economic Ties, JURIST - Sidebar, July 3, 2012, http://jurist.org/sidebar/2012/07/kambiz-behi-edsel-tupaz-russia-civil.php.


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