Despite the fact that the state equally participates in civil law relations (Paragraph 1, Article 124 of the Russian Civil Code), applicable laws contain special rules concerning the liability of the state for losses incurred due to exercise of its power authorities.
Proper Defendant to be Determined by Court
Article 16 of the Russian Civil Code sets forth a rule pursuant to which the Russian Federation, a constituent body of the Russian Federation or a local authority is to reimburse for losses suffered as a result of unlawful acts (omission) committed by governmental authorities, local authorities and officials of these authorities, including those resulting from an enactment issued by a governmental or local authority which fails to comply with a relevant law or regulation.
Under Article 1069 of the Russian Civil Code, damage caused through unlawful acts (omission) committed by governmental authorities or local authorities is subject to reimbursement at the expense of the state or local budget respectively. The defendant in this case is a public formation which interests are represented in court on its behalf by relevant governmental or local authorities (Paragraph 3, Article 125, Article 1071 of the Russian Civil Code).
The Supreme Arbitration (Commercial) Court of the Russian Federation and the Supreme Court of Russia have on multiple occasions clarified that if the claimant fails to correctly identify the defendant or an authority acting on behalf of the state it does not prevent administration of justice, since in this case the court itself commits a relevant public formation to stand trial as a defendant in a case and simultaneously determines which authority will represent its interests in the course of the trial1.
Invalidation of an enactment issued by a governmental or local authority and reimbursement for losses resulting from such enactment are independent remedies in the event of violation of civil rights (Article 12 of the Russian Civil Code). That is why a person claiming such reimbursement may first dispute the enactment itself, then demand reimbursement for losses caused due to its issuance.
Disputing non-regulatory enactments in a commercial arbitration court is done following rules set out in Chapter 24 of the Russian Code of Arbitration Procedure, and in general courts – under the rules established by the Russian Code of Administrative Procedure. The specifics of such cases is that the burden of proving that the disputed enactment is in compliance with the law is imposed on the authority which issued the disputed enactment, whereas in a general court the burden of proof that acts or omission on the part of the defendant was against the law is on the claimant. Thus, for instance, in its Ruling of 18.04.2016 No. 305-ЭС15-18687 the Supreme Court of Russia denied to reimburse the claimant for his losses at the expense of the state budget by reasoning that the claims made did not specify what unlawful acts (omission) of the Russian Federation or its authorized authorities resulted in occurrence of damages.
The period for disputing a non-regulatory enactment is three months from the day when the claimant becomes aware of the fact that an enactment violates his or her rights, freedoms or lawful interests (Part 3, Article 198 of the of the Russian Code of Arbitration Procedure, Part 1, Article 219 of the Russian Code of Administrative Procedure). The judgment on recognizing a non-regulatory enactment as failing to comply with law will be binding on the court which will be hearing the claim for damages caused to the claimant due to the enactment.
If a non-regulatory enactment is not disputed in judicial proceedings, this does not prevent from filing a claim for damages flowing from its issuance. Such being the case, the court hearing the claim for damages will equally evaluate the legality of such enactment (Paragraph 4, Newsletter by the Presidium of the Supreme Arbitration (Commercial) Court of the Russian Federation dated 31.05.2011 No. 145).
Where losses are suffered through issuance of a regulatory enactment, the court may satisfy a claim for damages only if such regulatory enactment was held to be invalid in the course of judicial proceedings (Paragraph 6, Newsletter by the Presidium of the Supreme Arbitration (Commercial) Court of the Russian Federation dated 31.05.2011 No. 145).
Cases related to disputing regulatory enactments are normally heard by courts of general jurisdiction pursuant to Chapter 21 of the Russian Code of Administrative Procedure (with the rare exception of cases referred by the Russian Code of Arbitration Procedure to the jurisdiction of the IPR Court which are considered following the rules of Chapter 23 of the Russian Code of Arbitration Procedure). A claim for invalidation of a regulatory enactment may be filed with a court within the entire period of the validity of such enactment (Part 6, Article 208 of the Russian Code of Administrative Procedure).
The same procedure as for regulatory enactments is stipulated for disputing enactments which serve to explain laws and have regulatory effect2.
Causal Connection is Not Always Apparent
One of the most common categories of cases to be encountered in court practice pertaining to recovery of damages caused through unlawful acts (omission) by governmental authorities and their officials are disputes arising in connection with enforcement proceedings.
The right of interested parties to claim reimbursement for damages caused to them as a result of enforcement activities and/or application of enforcement related measures is directly stated in Paragraph 2, Article 119 of Federal Law dated 02.10.2007 No. 229-FZ “On Enforcement Proceedings”.
Similar provisions are contained in Paragraphs 2, 3 Article 19 of the Federal Law dated 21.07.1997 No. 118-FZ “On Bailiff Service” governing matters of liability of bailiffs for committing unlawful acts which resulted in causing damage.
Sometimes courts deny reimbursement of damages inflicted on a claimant due to unlawful acts committed by a bailiff specifying that such acts or omission do not have a direct causal connection with the damages which the claimant suffered (where a judgment was not executed because of an act or omission of the debtor, not the bailiff), and that a possibility of further execution of the judgment has not yet been exhausted (the judgment may be executed by means of another property owned by the debtor).
In its Ruling of 16.08.2016 No. 37-КГ16-9, the Supreme Court of Russia explained that in the meaning of Articles 16, 1069 of the Russian Civil Code, in cases on reimbursement of damages the fact of damage must be established, the guilt of the wrongdoer and the causal connection between unlawful acts (omission) committed by a bailiff and the damage caused. However, if in the course of enforcement proceedings a bailiff fails to perform enforcement acts required to execute an enforcement order at the expense of funds available with the debtor or other property which then turn out to be lost, then the burden of proving the fact that the debtor does not possess any other property on which execution may be levied cannot be imposed on the claimant in a claim for damages caused by unlawful omission of a bailiff. At the same time, the absence of specific performance by itself does not serve as the grounds for imposing on the state the obligation to reimburse for funds not obtained from the debtor under an enforcement order, since the liability of the state in terms of execution of judgments rendered in relation to private persons is limited to a proper execution of formalities associated with enforcement of these judgments and does not imply the obligation to ensure a positive result, if it is conditioned by objective circumstances which depend on the debtor.
In its Ruling of 01.12.2015 No. 41-КГ15-29, the Supreme Court of Russia noted that damage caused due to a bailiff’s failure to perform an enforcement order comes in the form of loss of the property by means of which such enforcement might be carried out. If there are no data available with the court evidencing the loss of property, no liability may be imposed on the state to reimburse for such damage.
If the property by means of which an enforcement order is to be performed is lost by a third party to which this property was transferred into custody by a court bailiff, damages to the claimant are reimbursed at the expense of the state budget pursuant to the rules of Articles 16, 1069 Russian Civil Code (Ruling of Supreme Court of Russia of 14.04.2015 No. 14-КГ15-1). The same rules are applied in cases where a property seized by a bailiff was intended to be then returned to the debtor, however, it proved to be impossible due to the loss of the property by the designated custodian (Resolution of the Presidium of the Supreme Arbitration (Commercial) Court of the Russian Federation dated 27.07.2010 No. 13466/08).
Despite the fact that the relations arising between the person to receive recovery under an enforcement order and the bailiff service are not based on the rules of the law of obligations, where a bailiff fails to timely remit funds collected from a debtor to the recoverer, interest is to accrue on the amount due under the provisions of Article 395 of the Russian Civil Code which the recoverer is entitled to claim from the state. Here, the interest constitutes, essentially, the minimum damages caused by an unlawful omission by the bailiff service which, in accordance with Articles 16, 1069 of the Russian Civil Code, are subject to collection at the expense of the state budget of the Russian Federation (Resolution of the Presidium of the Supreme Arbitration (Commercial) Court of the Russian Federation dated 18.10.2011 No. 5558/11).
Simultaneously, when resolving a matter on collection of interest on the amount of an administrative penalty illegally collected from a claimant into the state budget and then later refunded due to cancellation of the resolution of an antimonopoly authority on its imposition as contrary to law, the Supreme Court of Russia noted that accrual of interest on monies withheld as penalty for an administrative offence is not provided for by law (Ruling of the Supreme Court of Russia dated 25.04.2016 No. 305-КГ15-3882). Similar explanations are contained in Paragraph 38 of the Resolution of the Plenum of the Supreme Court of Russia dated 24.03.2016 No. 7 which states that interest pursuant to Article 395 of the Russian Civil Code does not accrue on amounts of economic (financial) penalties which are unlawfully collected from legal entities and individuals by tax authorities, customs authorities, органами ценообразования and other governmental authorities and are subject to refund from the relevant budget.
When Damages May be Reduced
If a gross negligence by the injured party contributed to occurrence of or increase in damage, the court depending on the degree of guilt of the injured party and the wrongdoer must reduce the amount of damages pursuant to Paragraph 2, Article 1083 of the Russian Civil Code. For instance, by its Resolution of 29.03.2011 No. 14415/10 the Presidium of the Supreme Arbitration (Commercial) Court of Russia reduced damages caused by an illegal seizure by a bailiff of the property owned not by the debtor, but a third party by specifying that the injured party from the date when this property was seized had an opportunity to claim his rights to it, but did not do so having thus demonstrated gross negligence in the form of a negligent attitude to the property which exited his possession, thus contributing to occurrence of damage in the form of losses and further increase in such losses.
It should be also kept in mind that the possibility to recover damages at the expense of the state budget does not set aside the need by the collector to take active steps aimed at obtaining the court awarded property or monies. In the first place, it refers to the so called professional collectors – factoring companies buying out others’ debts at a discount in the hope to then collect them in full.
Thus, in its Ruling of 15.02.2017 No. 305-ЭС16-14064 the Supreme Court of Russia concluded that there are no grounds to collect from the state budget in favor the recoverer damages caused by disposal of seized land lots, despite the fact that the actions of the bailiff in the part concerning cancellation of seizure were held to be illegal, and the bailiff himself was convicted under Article 286 of the Russian Criminal Code for exceeding his official authority.
The court, in particular, specified that the claimant failed to exercise efficient control over the property he was interested in and to implement immediate protection measures. His subsequent filing of claims to challenge transactions on disposition of the disputed property the court regarded as actions committed exclusively with the purpose to create semblance of judicial defense and demonstrate loss of possibility to collect the monies owed from the debtor.
The court noted that the recoverer did not take steps required from the point of view of procedural laws which could have contributed to the efficacy of the actual enforcement, and judicial remedies in the said proceedings were not exhausted, since he only obtained judgments in the first instance. These circumstances, as viewed by the court, evidence semblance of legal activity to facilitate obtaining a recovery on account of guaranteed payments from the state budget.
By referring to the Resolution of the ECHR dated 03.04.2008 in the case “Regent Company v. Ukraine” (Complaint No. 773/03), the court specified that, being a professional businessman, the claimant acquired the right of claim (without producing evidence of the fee based nature of the acquisition) being aware of the issues associated with its performance, i.e., acquired a commercial risk under the said transaction. Consequently, as a professional businessman he should have undertaken his best efforts to satisfy the claims by utilizing his professional skills, instead of counting on covering his business risks under the obtained right of claim on account of guaranteed payments from the state which, in cases where damage is to be reimbursed, acts as a representative of the general public (the population) and allocates in such exceptional cases a portion of budgetary funds to be paid as guaranteed payments by the state in violation of balance with other public, humanitarian interests.
Drawing the attention to the conclusions contained in the Resolution of the ECHR dated 20.09.2011 issued in the case “JSC Oil Company “Yukos” v. Russia” (Complaint No. 14902/04), the court noted that payment of monies presupposing shifting public interests may be effected only in favor of subject that have manifested a completely good faith behavior and undertaken ultimate professional efforts to reach a positive result without counting as the purpose of their business activity on guaranteed payments from the state.
1 See: Paragraph 81 of the Resolution of the Plenum of the Supreme Court of Russia dated 17.11.2015 No. 50; Paragraph 15 of the Resolution of the Plenum of the Supreme Court of Russia dated 23.06.2015 No. 25 «; Paragraph 2 of the Resolution of the Plenum of the Supreme Arbitration (Commercial) Court of Russia dated 22.06.2006 No. 23; Paragraph 1 of the Newsletter of the Presidium of the Supreme Arbitration (Commercial) Court of Russia dated 31.05.2011 No. 145.
2 Relevant amendments to procedural laws were introduced by Federal Law of 15.02.2016 No. 18-ФЗ adopted upon issuance by the Constitutional Court of the Russian Federation of Resolution dated 31.03.2015 No. 6-П.