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Civil Code Explained

30.07.2012 15:56 / Kommersant Money

Russian law is on the brink of revolution. This Autumn the State Duma will pass amendments to the Civil Code. While their effect on major corporations has been discussed many times, the common citizen impact is unknown even to lawyers.

As early as 2008, President Dmitry Medvedev initiated a large-scale Civil Code reform. The search of compromise between professors who drafted amendments and the business lobby delayed the bill for four years. In April, the State Duma passed it in the first reading, the second and third are due in Autumn. The amendments remain a legal bone of contentment, however, most of them will undoubtedly be passed.

Even professional lawyers doubt whether these new norms will be put into practice. The point is, they were partly borrowed from Western law and are Russia-compatible only to a low degree. The majority of Russians have little idea how the liberal ex-President`s good intentions will turn out for them.

Transfer of rights: power of attorney and notarization

Civil Code amendments eliminate the three-year maximum for powers of attorney. POA becomes indefinite. Associate at Nektorov, Savelyev and Partners Sergey Savelyev points out that POA is not limited in many countries and the Russian CC is merely "adjusting to normal". He adds that most people will still include termination date in the POA, as a custom or "for security". Open-term POA makes it unneccesary to prolong and renew, and also prevents varied interpretation of POA term in court, in case the document is issued for longer than the current 3-year limit.

Still, even an open-term POA can be revoked. To this end, the court or tax authority that the POA is intended for will have to be notified. Problems could arise if the POA was issued to multiple persons or unnamed persons. The proxy is served with a written notification, and prior to that all contracts made under the POA are considered valid. "Since we do not have a strong practice of revoking POAs, lifting the minimum term could complicate business and lead to abuse from third parties", says Head of Legal at MEF Audit Ivan Chemichev.

Notaries win anyway. CC amendments cut down the number of unnotarized POAs: municipal housing authorities will not be able to certify POAs, and deposit collection by proxy will not be certified by the banks.

Notaries` main source of income will become mandatory notarizaion of rights subject to state registration. Primarily, this is real estate rights — land, house, flat, garage (today, notarization is only necessary for selected transactions like mortgage and rent). The upside is that the documents taken to the notary will be forwarded by him to Rosreestr (state registrator of real estate rights), hence no queues. However, transaction prices will rise: notary fee plus the current state duty. Today the fee is a percentage of the conract amount according to degree of kinship, transaction type and property value. This calculation will be a thing of the past as soon as the new Notary Act is in force, which will happen simultaneously with the new Civil Code, says Head of Land and Real Estate at Sameta legal advisory Rostslav Agapov.

"The new norms must be accompanied by adequate notary fees and a maximum limit on paperwork costs. The average Moscow price for a notarized POA is RUB 1k, of which the stamp duty is a mere 200, while the rest is so-called legal and technical services. A princely sum for those who don`t earn a lot", states Ivan Chemichev.

At the same time, notaries will carry the mandatory obligation to review the legality of contract and the citizen`s right to it. The procedure is time-consuming, especially collecting information from various state authorities (Child Custodianship Services, Health Services), but since notaries are overloaded and the parties wish to expedite the proceedings, the check is likely to become a formality. Legality review is currently with Rosreestr, however notary and registrator responsibilities are divided. For instance, in mortgage registration the obligation to review documents and legality is with the notary. What will be left to notaries and what will fall within Rosreestr`s purview remains unclear.

Lawyers say this bueraucratic double layer of functions is ripe for conflict or, conversely, collusion between notary and state authority. Yet when notary authorises an illegal transaction, he is liable for damages, and when he intentionally conspires with a party, he faces criminal charges on account of fraud. "The proposal is to hold Rosreestr liable for damages arising from unlawful refusal in state registration and making a false or illegal property rights entry in the Uniform State Register of Rights", notes Partner at Avelan legal advisory Sergey Kazinets. "These damages will be compensated from state funds".

Bank Deposits

A major part of the CC amendments relates to bank deposits. Opening a deposit will become possible with a savings certificate, a document that also doubles as a security. Certificates vary by rate (fixed, floating or coupon), par value (Roubles or foreign currency), issued to a name or bearer. Savings certificates provide an option to refuse on-demand withdrawal (not allowed for deposits today).

"This provision will mean higher rates versus regular deposits, since the bank does not have to factor in the risk of on-demand withdrawal on the certificate. However, maximum certificate amount may be subject to law", says Liniya Prava attorney Alexander Sorochan.

Sergey Kazinets notes that important changes will happen in bank liablilty: it will be responsible for unauthorised withdrawal at all times, even when authorization could not be verified. The limit of liability depends on the amount withdrawn plus interest, and if the fault lies with the bank, it compensates the client for all damages arising from the withdrawal.

Also, according to regulations, the bank is under obligation to notify the client of every account transaction and known high risk levels. "Failure to notify the client results in the bank carrying transaction risks at all times, unless the bank proves that the client was negligent, for instance, writing the PIN on the card", says Igor Dubov, attorney at Yakovlev and Partners. He thinks that clients will probably receive text notifications from banks, and these text messages must be sent free of charge as they are required by the law. However, most lawyers think that banks will invent a way to charge for these notifications and until the courts and Rospotrebnadzor set the matter straight, people will have to pay.

Bank Accounts

The project envisions new bank account types for private individuals. The escrow account is used for safekeeping of cash, securities or valuables of the depositor, to be transferred to the beneficiary in the event of fulfillment of contractual conditions. For instance, the buyer of an apartment in a house under construction deposits cash in an escrow account for the bank to transfer money to the seller after the buyer gains ownership rights. Escrow accounts will help avoid or minimize using deposit boxes. Escrow account balance can not be used until a condition is fulfilled, these accounts cannot be seized. However, says Igor Dubov, depositor`s debt can affect his right to claim the asset, such as the flat.

Nominal account is for tranasctions with funds owned by beneficiary. The owner of the account may be a custodian, executor et al., with the bank controlling the use of funds in the beneficiary`s interests. Nominee account agreement can limit operations performed by an authorised party under owner`s instructions by naming a particular person who can receive funds or by purpose of transfer.

Account seizure, freezing or debiting the account in the interests of the owner is not allowed, and covering the beneficiary`s liabilities is possible only by court order, says Alexander Sorochan. Amendment or termination of nominee account contract requires approval from the beneficiary. Igor Dubov points out that there is a risk of conflict between beneficiary and nominee, while effective account control on behalf of the bank is pending clarification from the Central Bank.

Mutual account serves two or more clients, with each one entitled to the funds. The movie Nine Yards was based on two persons trying to withdraw money from a mutual account opened for three. Today the opening of one account for two clients is not allowed by the Russian law. Amendments allow the bank and the clients to set their own rules of mutual account use. For instance, you can stipulate that certain operations are allowed to one client or by mutual consent of all. Parties also decide the equality of client shares in the incoming funds.

Alexander Sorochan adds that termination of contract by one client requires no approval from the remaining parties, the leaving party is paid their share and the others remain bound by the contract. Igor Dubov thinks opening an account for a private individual and a company could pose a problem: "If the bank goes bankrupt, the compensation procedure for these accounts is unclear: private individuals are covered by a maximum RUB 700k state insurance, companies are not".

The Civil Code amendments also include electronic payment rules (ESP). These are bank card transfers, e-cash (WebMoney, YandexMoney). The bank is required to notify the client on all e-payments and accept liability for unauthorised withdrawal. Ivan Chemichev welcomes the idea of regulating e-payments by law: "This will help protect individuals, because today clients are not always notified of e-payments, and credit card fraud is on the constant rise".

Consumer Loans

The draft amendments include a separate section for Consumer Loans. Today, the CC only stipulates general loan provisions, commodity and commercial loans. Consumer loans are a special type of loan agreement between bank and client. The loan is for personal, family, domestic and other non-commercial purposes only.

Alexander Sorochan says that until a customer contract is in place, banks willl have to notify clients of interest amount and payment schedule as well as all loan price factors. If the bank fails to stipulate a fee, the individual who learns about the fee post factum, can terminate the contract and return the loan. In this case, interest will accrue for the loan use period according to the standard refinance rate, which is much lower than the bank rate.

The amendments allow a 14-day cancellation period for consumer loan, with interest due for the actual loan use period only. The borrower will be entitled to advanced repayment with zero penalty. The amendment expressely states that the parties are covered by the Consumer Rights Act and the Consumer Loan Act (pending). New consumer loan rules will apply to signed but unexecuted contracts.

Collateral

Amendments are also planned for pledging. The draft introduces the notion of "bona fide pledgee" for cases when property is pledged to a party that has no title or disposal right to it and the pledgee is unaware of this fact. "If someone drives a car under POA and pledges it without owner`s consent, the car still becomes collateral, because the lender in this case is a bona fide pledgee", says Alexander Smirnov, Head of Commercial Practice at Goltsblat BLP. The rule does not apply when the collateral is lost or stolen from owner.

Another norm in the new Civil Code is designed to protect the bona fide buyer, recieving collateral that has been alienated without pledgee`s consent. "Today, when a car is pledged to a bank and sold without pledgee`s consent, courts often retain collateral", explains Alexander Smirnov. "Amendments stipulate that the pledge is terminated when the buyer of collateral was not and could not be aware of the pledge. The pledgee is granted the right to demand advanced repayment of debt".

Contracts and Ownership

Major changes are expected in ownership rights protection. Legislators have tried to protect legally incompetent Russians by introducing several new grounds for invalidity of contract. It is now possible, for instance, to contest a contract executed without due third party or state office permission, if the other party was aware or should have been aware of such absense.

Associate at Nektorov, Savelyev and Partners Sergey Savelyev says this amendment generalizes the existing norms that regulate necessary permissions. Article 35 of the Familiy Code stipulates the necessary approval of one parent of a transaction with co-owned real estate by another parent. The amendment also covers invalidity of contracts for property with limited disposal rights. This mainly concerns property seizure and is meant to protect lenders from mala fide borrowers, says Savelyev.

The lack of capacity list has been amended. Today a contract can be contested if it is executed by an alcohol or drug abuser. Legislators propose to include gamblers on the list, since addiciton to gambling can also threaten family well-being. This is one of the most pressing challenges today: too many people burn their cash at casinos and bookmaker`s, more young people get hooked on gambling online, where virtual loss still costs actual money.

The most significant change has been made to "fool`s deals". Lawyers welcome the amendment regarding invalidity of error in essentia contracts. The amended version of the Civil Code presents a detailed description of the term, including a list of five material errors in essentia. For instance, a misrepresentation, a written or typed error or has made a mistake of identity towards the nature of contract or the counterparty. The latter occurs when a developer misleads the client, inducing the party to assign right of demand or sign a preiminary contract (sometimes with a third party) instead of a sale and purchase or shared construction participation agreement.

New unconscionability rules were, however, met with a sceptical response by lawyers. The draft proposes to allow contracts based on the presence of terms that are excessively unfair to one party "due to inexperience, lack of consideration or will" to be contested. Alexander Smirnov points out that the draft contains no strict qualification approaches to any particular type of behaviour.

"Thus the noble intention of protecting common people`s interests backfires, opening a massive loophole for abuse, because these grounds can be used for contesting almost any contract with a non-businessman or a person entering a serious contract for the first time", says Sergey Savelyev. "Our nation now officially calls itself a nation of fools". Alexander Smirnov agrees, calling the norm "a mental safety blanket" for people that sign contracts without reading, negligently trust fraudulent sellers and sales representatives, take loans from banks with questionable reputation and end up surprised at the stipulated rip-off rates and harsh sanctions.

The draft introduces a new concept called "possession". Ivan Chemichev explains that the Civil Code draft sees possession as "factual domination" over property, and not as a right. Now the owner can appeal for protection of the property that he is in factual possession of and has free access to, without having to prove his title to it. Protected possession is especially important for real estate, but can be used for movables like vehicles, computers, home appliances, mobile phones and jewelry. Possession is therefore protected in itself, both legal and illegal. Sergey Kazinets thinks that the new rules will bring an end to the widespread pratice of refusing state protection to bona fide citizens who lost their possession rights, only because factual transfer of ownership has taken place by contract (common for apartment raiders).

The new concept, according to the Civil Code reformers, is aimed at expedited return of property to owner. Today, if someone takes away your belongings (drives you out of the apartment, occupies your land plot or house, snatches your mobile), the owner has to prove his right (of ownership or rent) in court, and during litigation the property remains out of the owner`s control, says Darya Izotova, Attorney at Egorov, Puginsky, Afanasiev and Partners.

The amendments are custom-made for expedited possession protection by filing a return claim with the state authorities or the courts, and later, if necessary, sue for ownership. However, given the dragged-out proceedings in Russian courts, by the time the decision arrives to have the property returned, its qualities or the thing itself may be long-lost. "Besides, improper registration of title to property occurs so frequently that the new law could give rise to property theft schemes", points out Ivan Chemichev. Sergey Savelyev thinks that making sure the owner gets his property back ASAP is primarily a police function, and possession in the Civil Code is an attempted compensation for ineffective Russian law enforcement.

Protection will only be granted to owners who can prove a minimum of one year ownership in court. Darya Izotova thinks that proving possession will be especially difficult for movables. Evidence, even engraving does not prove the term of possession, especially when both parties can bring witnesses. Ivan Chemichev fears that one-year possession right protection will do little to help settle disputes in a civilized manner. According to him, property often remains out of owner`s sight for a year or more for a reason. For instance, what if property is used on a seasonal basis or the owner is temporarily employed or resides in a different region or abroad?

Intellectual Property

Civil Code part 4, regulating intellectual property rights (enacted December 2011), has also been amended. Some of the key new terms are "website" and "internet provider". Providers are subdivided into "online media" that post online content (Google, Yandex, Mail.Ru) and those that provide web hosting for such content (Facebook, Vkontakte, other social networks).

Online media are liable when found guilty. Providers are not liable for pirated content if it does not initiate distribution, does not choose the end user and does not split the content or receive profit from exploiting other parties` exclusive rights and is techically capable of modifying or deleting data, says Attorney at Baker Botts Ekaterina Tilling. If the provider complies with all of the above and warns users of intellectual rights violation, the user bears all risks.

Current law allows free non-commercial use without author`s or copyright owner`s consent: public domain, reproduction for private use, and free use for informational, scientific or cultural purposes. The latter does not require author`s consent, but the name and the original source must be mentioned. Amendments specify the list of public offices that may use the copyrighted material in non-commercial public performance. These are schools and hospitals, social services and prisons.

A truly revolutionary Civil Code amendment is applying "open source licensing", formerly patents-only, to other intellectual product, including music. Copyright owners can grant free use rights to anyone on his terms and for a stated period. An exception is made for commercial licensing contracts already executed on the same terms with the copyright owner. Ekaterina Tilling thinks that the introduction of "open licenses" in Russia will help bypass licensing contracts for broadcasting networks, if a copyright owner wishes to allow free public use on limited terms.

The concept has been borrowed from foreign jurisdictions, where Creative Commons licenses allow authors to waive certain rights and reserve others. Creative Commons are widespread in culture, education, music communities and record companies. Free music distribution pioneers were Radiohead, who offered their "In Rainbows" album online in 2007. For several months, fans could pay any price or download the album for free ("Pay what you want"). Radiohead`s example was followed by Nine Inch Nails, REM, The Charlatans, Lyapis Trubetskoi. Zemfira and Aquarium offered their back catalogue for free download.

Anna Zanina, Anastasia Gorshkova

Corporate and contract law