A prior version of this article appeared in the Summer 1997 issue of the U.S.-Russia Business Council’s Russia Business Watch.

 

Russian Legislation on Enforcement of Judicial and Arbitral Decisions

 

 

by Ethan S. Burger, Esq.[1]

Ludwig & Robinson P.L.L.C.

(Washington, D.C.)

 

I.          The Problem of Dispute Settlement and Enforcement in Russia

 

            Western investors in Russia are increasingly finding themselves in commercial disputes with their joint venture partners, suppliers and customers.  The experience of  Nevada Limited Partnership “East-West Investment” (“EWI”) is unfortunately not atypical.  In early 1994, EWI entered into a joint venture with “Minutka Limited”, an entity controlled by a Russian national, Vadim Bordug, to establish and operate Subway sandwich franchise shops.  Bordug contributed the leasehold to a store-front on Nevskii Prospekt in St. Petersburg and EWI contributed financing for the renovation of the premises.  The shop opened in December 1994, and according to EWI’s attorney James Gansinger, was among the top Subway locations in the world.  When the local western management was away on holiday, Bordug’s people took control over the shop (they now operate it under the name “Minutka”).  Bordug is rumored to have ties to the Tambovskii crime group.  In January 1997, EWI won an arbitral award of US$ 1.2 million from a panel of three arbitrators organized by the Institute of Arbitration of the Stockholm Chamber of Commerce.  In March 1998, an Arbitrazh court located in St. Petersburg upheld the Stockholm arbitral award.  It remains to be seen whether the plaintiffs will be able to collect.

 

            To observers of Russian business practices, the ‘Subway’ story will seem all too familiar.  The western party at the outset of a business relationship brings much needed capital and business know-how to a proposed project.  The Russian party has the local contacts, real property, and savvy to make it happen.  Over time, the Russian party learns (or thinks it has learned) all it needs from the western party and gradually fails to comply with the relevant agreements. Open breaches between business partners of the nature of the ‘Subway’ dispute, however,  are relatively rare. Rather, the western party often finds itself looking for reasons that relations with its Russian partner are breaking down, such as communications problems, management turnover, unanticipated costs borne by the Russian party, etc.

 

Some western business people are understandably reluctant to enforce their contractual rights out of fear that their former partners will act outside the confines of the law.  As many Russians sadly remind their western friends and colleagues, “Russia is not really a European country.”  The killing of Paul Tatum in Moscow might be dismissed as an unusual case, but the assassination of former St. Petersburg Deputy Governor Mikhail Manevich and the murder of the Vice President of Neste St. Petersburg, a  subsidiary of a Finnish oil company, are, at a minimum, reminders that doing business in Russia can be rough.

 

            Until recently, many large western investors were willing to write off losses from a transaction gone sour as a “learning experience”. But as companies have increased the size of their investment, this becomes a less palatable option, particularly in the case of publicly-owned companies.  (In contrast, smaller investors were more likely to withdraw from the Russian market altogether.)  Today, western investors are performing better “due diligence” before entering into business relations and increasingly turning to litigation before Russian courts (both courts of general jurisdiction and commercial (arbitraznyi) courts), and to arbitration under the auspices  of local arbitral bodies (such as the International Commercial Arbitration Court of the Russian Federation’s Chamber of Commerce and Industry and the Arbitral (Treteiskii) Court of the St. Petersburg Trade - Industrial Chamber) to solve their commercial disputes.  Russian businessmen are more likely than their western counterparts, however, to rely on their krysha (the persons or organizations being paid to “protect” their businesses) to “informally” settle such matters.

 

In the case of multi-million dollar transactions, the parties often provide in their contracts for international commercial arbitration under the auspices of the International Chamber of Commerce (Paris), London Court of International Arbitration, or the Institute of Arbitration of the Stockholm Chamber of Commerce conducted under such bodies’ or UNICITRAL rules.  Given the absence of bilateral treaties between Russia and the major western countries on the enforcement of judicial decisions, foreign investors do not usually have the option of pursuing litigation in their own countries’ courts involving disputes with their Russian business partners since the resulting decision will generally not be enforceable in Russia, and such business partners are unlikely to have significant assets abroad to attach.  

 

            Litigating in Russian courts has an advantage over arbitration in that the decisions of such courts are binding on all bodies of state power, bodies of local-self government, public associations, officials, and other individuals and legal entities throughout the country (Russian Federal Constitutional Law “On the Judicial System of the Russian Federation”, dated December 31, 1996, Article 6).  The refusal to obey decisions or other acts of a Russian court is a criminal offense punishable by a fine or by deprivation of freedom for up to two years (Criminal Code of the Russian Federation, dated May 24, 1996, Article 315).  In contrast, arbitral awards, including those of foreign arbitral bodies under the 1958 New York Convention (to which Russia adheres but has not formally ratified), are only enforceable within Russia on the basis of a Russian court decision (Civil Procedure Code of the Russian Soviet Federative Socialist Republic (“RSFSR”), dated December 18, 1965, as amended, (hereinafter the “Civil Procedure Code”), Articles 338 and 437).   Unfortunately, the mere issuance of a valid court decision does not automatically result in its performance. 

 

Frequently, defendants (and their banks) simply ignore decisions and orders of Russian courts.  In fact, according to Russian Federation Ministry of Justice data cited in an article in Ekonomika i  zhizn’ (No. 33, August 1997) by A. Belousov, less than 50% of judicial decisions in the country are enforced.[2]  Consequently, successful plaintiffs will often find themselves having to engage the services of private “collection agencies” (many, but by no means all, of which have ties to organized crime) or to do nothing.

 

This low rate can be attributed to numerous reasons.  First, there is a general disrespect for the rule of law throughout the country.[3]  Second, Russian citizens and companies are able to hide their assets with ease.  Third, an established procedure suited to a market economy pursuant to which judicial decisions are enforced is largely absent.  Fourth, has been the absence of well-trained and adequately financed cadres of officials to enforce such decisions.  The situation with respect to these last two items may improve as a result of the adoption of two laws: “On Enforcement (Ispolnitel’nyi) Procedure”, (hereinafter the “Enforcement Law”), and “On Judicial Marshals (Pristavy)”, (hereinafter the “Marshal Law”), both dated July 21, 1997.  These laws replace amended Soviet era acts.  The Government of the Russian Federation and the President are now required to introduce or propose changes to existing normative acts and legislation consistent with the norms of these laws, the substance of which is described below.

 

 

II.         The Legislative Approach to the Problem

 

            Until the enactment of these laws, the applicable rules on enforcement procedure were contained in Instructions approved by USSR Ministry of Justice Order No. 22, dated November 15, 1985, as amended on September 2, 1993, (hereinafter the “Instruction”), the Law “On Judicial Structure of the RSFSR”, dated July 8, 1981, as amended, Temporary Regulations “On the Procedure for Levying Against the Property of Organizations” approved by Presidential Edict No. 199 “On Several Measures for the Realization of Decisions on the Levying Against Property of Organizations”, dated February 14, 1996, and the Civil Procedure Code, Section V.   Such rules envisioned the enforcement of judicial acts by judicial bailiffs (ispolniteli) assigned to raion and municipal Peoples Courts.  Although judicial bailiffs operated under the auspices of the local courts and were subordinate to such courts’ chairmen, they were appointed by the relevant ministers of justice of the republics or the heads of the sections of justice of the executive committees of the territorial, regional or municipal Councils of People’s Deputies.  In a command economy dominated by state enterprises overseen by Communist party officials, the role of judicial bailiffs was not critical.  The situation, however, has changed.  In the past, judicial bailiffs have lacked the resources to properly fulfill their tasks.  This has proven to be a particular problem with respect to enforcement of pledges against real property.  Given their lack of stature, they are not always able to obtain the cooperation of other state bodies (such as the militia and local registration and regulatory bodies that are themselves short of resources).  Furthermore, they are too often intimidated by the persons against whom they are required to enforce judicial acts as well as susceptible to bribes as a result of their low pay.

 

            The Enforcement and Marshal Laws are closely linked.  The Enforcement Law sets out the procedure by which decisions and acts of courts and other state bodies are to be enforced and the Marshal Law creates the personnel charged to carry out this procedure. 

 

 

            The Enforcement Law

 

The Enforcement Law is organized into 12 chapters ((i) Basic Provisions and General Conditions for the Accomplishment of Enforcement Actions, (ii) Persons Participating in Enforcement Procedures, (iii) Bases for the Application of Measures of Forced Execution, (iv)  Imposition of Levying against the Property of a Debtor, (v) Peculiarities of Levying Against the Property of a Debtor-Organization, the Arrest and Sale of Property of a Debtor Organization, (vi) Levying Execution against the Wages and Other Income of a Debtor, (vii) Performance of Enforcement Documents for Disputes of a Non-Property Character, (viii) Distribution of Levied Funds and the Sequence for the Satisfaction of Demands of Claimants, (ix) Completion of Enforcement Actions in Respect of Foreign Citizens, Persons Without Citizenship and Foreign Organizations – Performance of Judicial Acts and Acts of Other Bodies of Foreign States, (x) Enforcement Fees - Expenditures for the Completion of Enforcement Actions - Liability for the Violation of Legislation of the Russian Federation on Enforcement Procedure, (xi) Protection of the Rights of a Claimant, Debtor, and Other Persons During the Completion of Enforcement Actions; and (xii) Concluding and Transition Provisions.  The details of the Enforcement Law are too many to describe in a short article, so I will mention only its major features. 

 

n       Judicial Marshals will act only on the basis of  : (i) an enforcement document or warrant issued by a court on the basis of judicial act, a decision of international commercial arbitral body or other treteiskii sud, a decision of a foreign court and commercial court, a decision of an international human rights body, (ii) a judicial order, (iii) a notarized agreement on alimony, (iv) a certificate of a commission on a labor dispute, (v) a decision of a body of executive power dealing with the attachment of accounts, (vi) a decree of an administrative violation body, (vii) a decree of a judicial marshal, or (viii) a decree of another body in cases envisioned by federal law, (together “enforcement documents”) (Article 7).

 

n       Judicial marshals must accept enforcement documents from any person or body entitled to performance.  Within three days of receipt of an enforcement document that is consistent with applicable requirements, a judicial marshal must issue a decree to the party from whom performance is expected. Such decree must set out a schedule for voluntary performance of the relevant acts.  Such decree is sent to the debtor, claimant and body that issued the relevant enforcement document(s).  The issuance of a decree may be appealed by the debtor within ten days of receipt (Article 9).

 

n       In most cases, the debtor is required to comply with the demands of the decree within two months (Article 13).

 

n       Upon the expiration of the period for voluntary compliance with a decree of a judicial marshal, he is authorized to (i) levying execution against the debtor’s property by arresting the property and selling it in accordance with applicable legislation, (ii) levying execution against the debtor’s  wages, pension, stipend or other income, (iii) levying execution against funds or other property of debtor in the possession of another person, (iv) removal of property indicated in the enforcement document and giving it to the claimant, and (v) other measures envisioned by applicable legislation (Article 45).

 

n       An enforcement procedure is deemed completed upon (i) the actual enforcement of an enforcement document, (ii) the return of an enforcement document without enforcement if so ordered by the court or body that issued it or if so requested by the claimant, (iii) the return of an enforcement document that failed to meet applicable requirements for action, (iv) the forwarding of an enforcement document to an organization for a one-time withdrawal or regular deduction from the debtor’s wages or income, (v) the forwarding of the document to another judicial marshal service or subdivision having appropriate jurisdiction for the matter, or (vi) the termination of the enforcement procedure (Article 27). 

 

n       Judicial marshals are authorized to search for a debtor and his (its) property (Article 28).  This investigative function is critical to the success of the entire system given the difficulty many plaintiffs have in locating the assets of defendants.

 

n       Judicial marshals have the right to elicit the support of specialists to assist in their investigation and to demand and receive the assistance of the militia (Articles 41 and 42).

 

n       While enforcement procedures are generally financed out of the federal (and local) budgets, the debtor in a given case must pay  a “fee” equal to 7% of the value of the relevant property (70% of this fee goes to the federal budget with the remainder going to fund the activities of the Judicial Marshal Services). If a matter involves an object of a non-property character, the fee is 5 minimum monthly wages with respect to a claim against an individual and 50 minimum monthly wages with respect to a claim against an organization. In addition, the debtor must pay for the expenditures incurred during the course of an enforcement procedure  (Articles 81 and 84).

 

n       Claimants may be asked to deposit an amount to cover the cost of certain expenditures in connection with the activities of judicial marshals.  Such deposit is to be returned in full upon completion of the enforcement procedure in most cases (Articles 28 (2) and 83). 

 

n       Debtors who refuse to comply with enforcement documents may be subject to a fine of up to 200 minimum monthly wages and may face additional civil and criminal penalties.  Banks and other credit institutions that fail to comply with enforcement documents may be subject to a fine equal to 50% of the amount levied.  Citizens and government officials who do not comply with the legitimate demands of judicial marshals may face fines up to 100 minimum monthly wages and may face criminal sanctions as well (Articles 85 through 87).

 

n       In addition to their salary and other benefits, judicial marshals are entitled to receive for the timely and proper performance of their duties in a particular case an amount equal to 5% of the sum or value of the property recovered for the claimant (but no more than 10 minimum monthly wages) or 5 minimum monthly wages  for the successful completion of an enforcement procedure involving an item of a non-property character (Article 89). This provision is more than a bit troublesome since it not only may result in judicial marshals rushing to close cases (without proper observance of relevant protections for the debtor), but also creates dangerous precedent for other state officials who may want to receive a “percentage” of the “objects” they are processing.

 

The Enforcement Law also contains numerous provisions aimed at the protection of the rights of both debtors and other persons during the course of enforcement actions.  Only strict compliance with these rules and the observance of constitutional rights will prevent judicial marshals from becoming unrestrained uniformed bounty hunters. It is not clear that the political leadership (both federal and at the local level) has the will and resources to keep this from happening. Given the weakness of civil rights organization and the likely reluctance of lawyers to take on the cases of certain debtors, the possibility for such abuse is great.

 

 

            The Marshal Law

 

            Following a Tsarist model, the Marshal Law calls for the creation of uniformed and armed services of judicial officials entrusted to (i) enforce both judicial acts and acts of other state bodies and (ii) maintain order in Russian courts, including providing physical security to Russian judges.  The perceived need for judicial marshal services reflects a recognition that a mere restructuring of existing state bodies would not be sufficient - fundamental change is needed.

 

The Marshal Law is divided into 6 individual chapters (General Provisions, Powers of Bodies of Justice in the Russian Federation for the Organization of Activities of the Service of Judicial Marshals, Duties and Rights of Judicial Marshals, Guaranty of Legal and Social Protection of Judicial Marshals, Financial and Material-Technical Support of the Service of Judicial Marshals, and Concluding Provisions). It requires the Ministry of Justice to establish the Judicial Marshal Service.  A Deputy Minister of Justice will serve as its head who will have the title of Chief Judicial Marshal of the Russian Federation.  The Judicial Marshal Service will be composed of (i) a Department of Judicial Marshals under the Ministry of Justice headed by the Deputy Chief Marshal of the Russian Federation, (ii) a Judicial Marshal Service of the Administration for the Military Courts headed by a Deputy Head of Administration, (iii) Services of Judicial Marshals of the 89 Subjects of the Russian Federation (hereinafter “Subjects”)[4], each headed by a Deputy Head of the relevant body of justice within such Subjects and holding the title of Chief Judicial Marshal of such Subject, and (iv) district and inter-district Judicial Marshals corresponding to the organization of the court system who have the responsibility for providing security to the courts (Article 5). 

 

Whereas the Chief Marshal of the Russian Federation has overall responsibility for establishing and implementing norms concerning the operation of the Judicial Marshal Services, the Chief Judicial Marshal for the Subjects and the Military Courts have day-to-day responsibilities overseeing the actual conduct of activities of judicial marshals (Articles 8 and 9). This arrangement reflects the federal nature of the country.

 

The Chief Judicial Marshal will be appointed by the Government of the Russian Federation upon the recommendation of the Minister of Justice.  The Deputy Chief  Judicial Marshal of the Russian Federation and the Chief Military Judicial Marshal will be appointed by the Minister of Justice.  The Chief Judicial Marshals in the Subjects will each be appointed by the Chief Judicial Marshal of the Russian Federation upon recommendation of their respective bodies of justice.  The Chief Judicial Marshals of the Subjects appoint both senior and rank-and-file judicial marshals who are required to undergo special training (Articles 4 and 6).

 

Judicial Marshals have the authority to issue obligatory orders, verify documents, seize property and arrest individuals (Articles 12-14).  They have the right to use force if other measures have failed to ensure the discharge of their duties (Article 15).   Separate articles concern the use of physical force, special means (arrest) and firearms (for self-defense and the defense of others) (Articles 15-17).  The actions of judicial marshals are subject to both administrative and judicial scrutiny.  Judicial marshals have individual liability for actions in violation of applicable legislation, and unlawful damage they cause is subject to compensation (Article 19).

 

The Marshal Law contains explicit provisions relating to a marshal’s compensation and benefits (including life insurance) (Articles 20 and 21).  This is significant since it is important for the well-being of the country that discharged Russian servicemen see becoming judicial marshals as a viable career option – otherwise such individuals may choose to become involved in less socially useful activities. It is interesting to note that this law does not explicitly make note of the fact that a judicial marshal will receive compensation for each matter he successfully handles.

 

            While the activities of judicial marshals are to be financed out of the federal budget, the Subjects have the right to independently fund additional expenditures by judicial marshal services out of their own budgets.  The military’s judicial marshals are financed out of the defense budget (Article 22).  The Marshal Law envisioned the judicial marshal system being in place by January 1, 1998 and in full force by January 1, 1999 (Article 25).  According to an article in Commersant published on February 21, 1998, judicial marshals are active in 22 of the 89 RF Subjects.

 

 

III.       Final Observations

 

Russia’s recent record in implementing legislation, particularly far from the major cities, has not been impressive.  This is a consequence of the political leadership not having the will and resources to implement policies as written.  The Russian political leaders seem acutely aware of the consequences of the failure to establish an effective rule of law in the country.  Similarly, the individuals who have reaped the benefits of privatization and the establishment of a market economy are eager to preserve their gains, and thus are also likely to want the judicial marshal system to succeed.  The risks to both the political and business leaders of the country of failing to provide society a non-violent means of enforcing judicial and arbitral decisions are great.

 

The judicial marshal system’s success will depend on many factors: (i) the ability to attract honest and capable people, (ii) its ability to strictly follow the procedures established for its conduct, (iii) its ability to avoid abuses by its personnel, (iv) the willingness by the authorities not to abuse judicial marshals for their own economic or political gain, and (v) the Russian Government’s and Federal Assembly’s commitment to fund the operation of the judicial marshal system until the revenues it generates are sufficient to cover its costs.  In the 1998 Federal Budget, only 441,200 rubles have been  appropriated financing the development of the Federal Marshal Service, far less than was originally requested.  If the judicial marshal services prove themselves capable of achieving the goals set for them, they will generate sufficient revenues to allow them to operate at a high standard of effectiveness. 

 

Consequently, one can expect significant, but not universal, improvement in the enforcement of judicial decisions and state acts as a result of this legislation. Of course, the adoption of laws is a small part of what is required in this area - the rule of law can’t be established by legislation alone.

 

 

*  *  *  *

 


[1] Mr. Burger is Senior Counsel to the Russian - Ukrainian Legal Group, P.A., a Washington-based law firm providing legal support and in-country advice to large and medium-sized international corporate clients doing business in Russia and Ukraine.  Since the break-up of the Soviet Union, he has been advising clients on corporate and commercial matters in Russia, Ukraine, Kazakstan and Belarus.  This experience spans most sectors, including natural resource extraction, consumer products, banking, real estate and mass media. His e-mail address is ethansb@rulg.com.

 

[2] Igor Abramov, Esq., Special Advisor for Trade and Commercial Projects in the U.S. Department of Commerce’s International Trade Administration’s Russia and the Newly Independent States Division, is interested in being advised of U.S. companies’ experiences in enforcing judicial and arbitral awards in Russia as part of his on-going work in this area.  His e-mail address is abramov@usita.gov.

 

[3] For an interesting analysis of why Russians believe the rule of law has not taken hold in the country,  see U.S. Information Agency Report “Why Russians Miss the Rule of Law: 12 Focus Groups in Four Cities”, by Anatole Shub (August 1997, R-2-97).

 

[4] The Russian Federation consists of 89 major political subdivisions or “Subjects” consisting of 21 republics, 49 regions (oblasti), one autonomous region, six territories (krai), ten autonomous districts (okrugi), and two cities of federal significance (Moscow and St. Petersburg).