Further amendments to Civil Code

The second “batch” of amendments to the Civil Code of the Russian Federation has been adopted, which includes Federal Law No. 100-FZ dated 07.05.2013, introducing amendments to Part I, Section I, paragraphs 4 and 5 and Part III, Article 1153 of the Civil Code of the Russian Federation. Most of its provisions come into effect on 1 September 2013.

This Law introduces material changes to the regulations governing fundamental civil law institutes such as transactions, the representation, the limitation period and the invalidity of transactions. In addition, it now includes a new Chapter which regulates resolutions of meetings. There is a summary of the most material changes which may affect the business community below.

Resolutions of meetings are the subject of Chapter 9.1 of the Civil Code as amended. This Chapter has been added due to the uncertainty as to the legal nature of resolutions of meetings as legal facts. With the adoption of the amendments, it becomes clear that resolutions made by meetings do not constitute transactions and shall be governed by special regulations rather than by Chapter 9 of the Civil Code. A resolution of a meeting held in accordance with the established procedure (Article 181.2 of the Civil Code as amended) creates legal consequences for all persons entitled to participate in this meeting, even if any of them disagrees with the resolution adopted; as opposed to a transaction, for the resolution to become effective, the unanimity of wills of all persons entitled to participate in the meeting is not a must. The new Chapter 9.1 of the Civil Code as amended regulates resolutions of general meetings of members (shareholders) of business entities, resolutions adopted by meetings of creditors as part of bankruptcy proceedings, resolutions of co-owners, as well as of other persons as may be provided for by law or arise from the nature of the relationship. The Law also establishes the grounds and the procedure for the invalidation of resolutions of meetings (Articles from 181.3 to 181.5 of the Civil Code).

Material changes have also been introduced in Chapter 9 of the Civil Code, which governs transactions. First of all, it should be noted that the provision, which could be considered as the primary example of an ultimately mandatory provision in private law, has been rescinded, i.e. the mandatory provision for the conclusion of foreign trade transactions in written form. According to Article 1192, paragraph 1 of the Civil Code, an ultimately mandatory provision is the one, which, due to a specific indication contained in the provision itself or given its special meaning, including for ensuring the rights and legally protected interests of participants in civil law relations, is applied to the relevant relationships irrespective of the applicable law. Now the form of such transactions is determined according to general provisions of Article 162 of the Civil Code.

Article 157.1 of the Civil Code as amended sets out the provisions for the approval to be obtained from third parties, bodies of legal entities or public bodies in order to conclude a transaction. This can be either a prior approval, which defines the subject of the transaction, or a subsequent approval, which defines the transaction itself. As a general rule, a transaction concluded without the required approval is voidable. The law may provide that such transaction is deemed void or define legal consequences of such transaction other than its invalidity (Article 173.1 of the Civil Code as amended).

In addition, from 1 September 2013 the law will include an express provision that legal consequences of a transaction which requires state registration shall apply only starting from the date of its registration (Article 164, paragraph 1 of the Civil Code as amended). Despite the fact that this provision has already taken root in the minds of participants of civil law relations as a result of its application by courts, this has been expressly included in the law only now. The law also states that a transaction which changes the terms of a registered transaction is subject to state registration (Article 164, paragraph 2 of the Civil Code as amended).

The concept of legally binding messages has been introduced, which may include, inter alia, statements, notices, notifications and requests (Article 165.1 of the Civil Code as amended). As a general rule, such messages create civil consequences for the recipient from the moment of the delivery thereof to the recipient or its representative. If either a legally binding message was not delivered to the recipient, or the recipient failed to read it due to the circumstances within the recipient's control, as a general rule, the message is deemed received.

The provisions for the invalidation of transactions are also undergoing changes. The principal change concerns the legislators' approach to the invalidation of transactions that violate the law. The general rule has changed. Thus, from 1 September 2013 such transactions will be deemed voidable rather than void (Article 166 of the Civil Code as amended). They will therefore create legal consequences until they are declared void by a court's decision.

Article 166 of the Civil Code reflects the so-called consistent behaviour doctrine. First, the party that confirmed the validity of a transaction by its behaviour shall have no right to claim for declaring the transaction void on the grounds, which the party was or should have been aware of behaving in such a way. Second, if a person referring to the invalidity of a transaction is acting in bad faith, invalidation claims filed by such person shall have no legal value. The rule refers to cases where behaviour of a person after the transaction has been concluded encouraged other persons to rely on the validity of the transaction. These rules reflect the principle of good faith, which came into effect on 1 March 2013 as part of the first “batch” of amendments to the Civil Code (Article 1, paragraph 3 of the Civil Code).

A party to a transaction or other person as may be provided for by law may claim the invalidation of a voidable transaction or the enforcement of the consequences of invalidity of a void transaction. In addition to a party to the transaction, a person that has a legally protected interest to invalidate the transaction can also claim the enforcement of the consequences of invalidity of such transaction (Article 166, paragraphs 2 and 3 of the Civil Code). Thus, persons who have no legal interest will no longer be able to file the above claims to a court.

Legal consequences of transactions concluded for purposes contrary to the principles of public order and morality have been mitigated. Thus, the restitution is now the common legal consequence under the law (Article 169 of the Civil Code as amended). The consequence provided for by the existing Civil Code, i.e. the collection of the proceeds from such transaction to the public revenues, will now be applied only in cases where both parties to the transaction acted deliberately. The similar severe consequence of invalidity has also been excluded from Article 179 of the Civil Code. The common consequence of invalidity of a transaction concluded under the influence of fraud, violence, threat or adverse circumstances is now the restitution, i.e. the repayment of all proceeds from the transaction.

Transactions which are beyond the legal capacity of legal persons are now replaced with transactions which are contrary to the objectives of legal persons’ activities (Article 173 of the Civil Code as amended). This innovation is, inter alia, aimed at preventing the confusion between the provisions contained in this article and the provisions contained in Article 174 of the Civil Code, which now regulates the consequences of limiting the powers to conclude the transaction. This article is also undergoing changes. The legislators have significantly extended the article by providing a more detailed regulation. It now defines consequences of violating the terms of exercising powers or representing interests of a person being represented / legal person by their representative / body of the legal person (Article 174 of the Civil Code as amended).

The legislators describe the notion of a significant misconception when concluding a transaction and give a wide list of examples. The article also sets out the cases where the damage caused as part of such transaction shall not be compensated (Article 178 of the Civil Code as amended). It also defines the notion of fraud in terms of transactions concluded under the influence of fraud, violence, threat or adverse circumstances (Article 179 of the Civil Code as amended).

The law establishes the beginning of the limitation period for claims for the enforcement of consequences of invalidity of a void transaction or the invalidation of such transaction in the context where the claim is filed by a third party which is not a party to the transaction. The beginning of the limitation period shall be the day when such person became or should have become aware of the commencement of the performance of the transaction (Article 181 of the Civil Code as amended). The limitation period for such third party is limited to 10 years from the date of commencement of the performance of the transaction.

Changes have also been introduced in Chapter 10 of the Civil Code, which regulates representation relationships, including those based upon a power of attorney. Transactions concluded by a representative on behalf of the person being represented for his / her own benefit are considered neither voidable, nor void in the existing Civil Code. This ambiguity, which has created the diversity of practice, will be eliminated from 1 September 2013. Such transactions shall be deemed voidable and can be invalidated following the claim submitted by the person being represented, if they are contrary to such person's interests. Until such transaction has been invalidated, it creates legal consequences (Article 182 of the Civil Code as amended).

Some other ambiguities concerning transactions concluded by an unauthorised person, which has also created the diversity of practice, will now be eliminated. A party may actually reject such a transaction before it has been approved by the person represented and signify their refusal to either the “representative”, or the person being represented (Article 183 of the Civil Code as amended). If the person being represented refuses to approve the transaction, then the other party can resort to legal remedies such as a claim for damages or for specific performance.

The legislators have introduced the presumption of approval granted by the person being represented of the parties to the transaction being together represented by a commercial representative in the case where the latter acts in a regulated tender.

From 1 September 2013 a power of attorney can be issued for any period, because the provision regarding a three-year limit has been excluded from Article 186 of the Civil Code. The power of attorney may provide for irrevocability (Article 188.1 of the Civil Code as amended). To be deemed irrevocable, the power of attorney must specifically indicate this. Such power of attorney shall not be revoked until its expiration date, or may be revoked only in cases provided for therein. An irrevocable power of attorney shall be notarised. The powers under such power of attorney cannot be delegated to third parties.

The general rule is now that a power of attorney issued by way of delegation, shall be notarised (Article 187 of the Civil Code). However, if such power of attorney is issued by legal persons or managers of their branches or representative offices, notarisation is no longer required (Article 187 of the Civil Code as amended).

The legislators have introduced a new notification method to notify participants of civil law relations about the termination of representation under the power of attorney, such as the publication of information regarding the revoke of a power of attorney in an official journal. In this case, third parties are deemed notified that the power of attorney has been revoked after one month from the date of the publication (Article 189 of the Civil Code as amended). The signed application for revoking the power of attorney shall be notarised.

It is also worth noting that a new legal reason for terminating a power of attorney has been introduced. If the person being represented or their representative have entered bankruptcy, due to which the respective person loses their right to issue powers of attorney, the power of attorney is automatically terminated (Article 188, paragraph 1, subparagraph 7 of the Civil Code as amended).

The general rule regarding the limitation period of 3 years continues to be in effect, however, a new rule has been introduced which states that the limitation period cannot exceed 10 years from the date of the relevant infringement (Article 196 of the Civil Code as amended).

The legislators have introduced a naturally determined provision, which prohibits any unilateral actions to exercise a right, for which the limitation period has expired (Article 199 of the Civil Code as amended). If a person cannot claim for the performance of an obligation for their benefit in court, then such person shall not have the right to “force the performance” of another person's obligation for its benefit on its own initiative. This provision applies to remedies such as a set-off of any kind, direct debiting of funds, enforcement of pledge without recourse to court.

A special limitation period of 1 year has been introduced with regard to claims brought in cases where parties to a transaction fail to register or notarise the transaction (Article 165 of the Civil Code as amended).

Under Article 200 of the Civil Code as amended, the limitation period starts from the day when the person became or should have become aware of an infringement of its right as well as of who should be the defendant in the action brought to protect this right. This provision has often been interpreted by courts in exactly this way; however, this has only been included in the amended Civil Code.

Special provisions for calculating the limitation period has been introduced with respect to obligations with a specified due date, obligations without a specified due date or due when requested, as well as to recourse obligations (Article 200 of the Civil Code as amended).

Provisions regarding the suspension or pausing the limitation period (Articles 202 and 203 of the Civil Code as amended) and the provision regarding the application of the limitation period to additional claims (Article 207 of the Civil Code as amended) have been detailed.

As to remedies which can be taken in court to protect a right, Article 204 of the Civil Code as amended states that the limitation period shall be paused from the date of bringing a relevant action to court in accordance with the established procedure, and suspended for the whole period of protecting this right in court. Please note that under the existing Civil Code bringing an action to court terminates the limitation period.