Disputes involving banks (or more broadly – credit organisations in the context of Russian legislative terminology) are subject to the general civil procedural framework prescribed by Russian procedural legislation. Specific procedural regulation may, for instance, apply within bankruptcy proceedings of banks as well as in some aspects of interaction between the Central Bank of Russia (CBR) and other banks.
Civil procedure allowing the involvement of banks as a party to litigation proceedings leads to the case being considered by one of two court branches: courts of general jurisdiction (implying that one of the parties is not a commercial entity) and arbitrazh courts (dealing with all types of disputes involving exclusively commercial parties, also, for example, corporate disputes and other related categories closely referring to entrepreneurship activity). Depending on the competent court, the procedure is governed either by civil procedural legislation or by arbitrazh procedural legislation, however for the purposes of this chapter it will be generically referred to as civil procedure.
Civil procedure in Russia follows an adversarial model, where the parties to the proceedings have to prove the facts they are stating before the court. The court's role is to provide general governance of the proceedings supplemented with support to the parties in obtaining evidence subject to the parties' requirements. Court procedure generally require oral proceedings in person (inter partes) subject to certain exceptions when proceedings are held without the parties' presence in court (ex parte proceedings).
The activities of the bank towards its counterparties are largely considered on the basis of the Civil Code setting up the general legislative framework for regulation of civil-law obligations and activities. In addition to general regulation, the banks' activities falls mainly within the scope of the specific laws listed below, non-exhaustively:
- The Federal Law On the Central Bank of the Russian Federation, 10 July 2002 No. 86-FZ (CBR Law) provides, among others, general regulation of the CBR's legal status, functions and powers as well as specific procedures applicable to interaction of the credit organisations with CBR.
- The Federal Law On Banks and Banking Activity, 2 December 1990 No. 395-1 (Banking Law), together with CBR Law, establishes the general framework for the structure of Russian banking sector, including its working mechanisms. The legal limitations for the activities of the banks as legal entities (special legal capacity) are also established by this law.
- The Federal Law On prevention of legalisation (laundering) of income obtained by illegal means and financing of terrorism, 7 August 2001 No. 115-FZ (AML Law) regulates the applicable procedures for the banks with individuals and legal entities while performing operations with monetary funds and other property for the purposes of due AML and counter-terrorism as well as mechanisms of supervision of these activities by the state authorities (including sanctions proceedings in the case of a breach).
- The Federal Law On Protection of Competition of, 26 July 2006 No. 135-FZ (Competition Law) along with the general regulation of antimonopoly sector, the Competition Law provides specific rules on limits and exercising control over credit organisations by various parties (individuals, entities, groups of entities, etc.) and procedures of authorisation of such control by the CBR.
- The Federal Law of 27 June 2011 No. 161-FZ On The National Payment System regulates the status of the national payment system, including processing of payment services and sets up the requirements for procedure for supervising and monitoring of the above payment system by state authorities.
- The Federal Law On Insurance of Private Deposits in the Banks of the Russian Federation, 23 December 2003 No. 177-FZ regulates the legal status and functions of the Deposit Insurance System, which, inter alia, provides additional protection for individuals' deposits placed within the credit organisations.
ii SIGNIFICANT RECENT CASES
The legal positions interpreting the legislation that deals with the activities of Russian banks are often produced by the Supreme Court. Mainly, such disputes relate to two basic spheres: debt collection by the banks or special collector organisations and consumer's claims related to particular banking services. A large part of bank litigation activity is derived from bank-customer relations and, namely, is based on the claims related to performance of contractual obligations by either of the parties. The remaining portion relates to the various forms of administrative liability incurred by regulators against the banks.
Meanwhile, assessing the potential effects and risks for the banking sector, one of the most significant cases of 2018 was the renewed LLC Dalnaya Step bankruptcy case, resulting in the claims of its newly appointed bankruptcy administrator against a Russian branch of HSBC bank. Thus, a Russian bank was held liable for the amount of nearly US$20 million for performing transactions of its client. Thus, this was the first case in Russian litigation history when the mechanism of subsidiary liability (namely, the personal liability of the controlling parties within the bankruptcy proceedings) has been applied to the bank in regard to the bankruptcy of its client. Although the argument of the courts in the above-mentioned case (including the Supreme Court) is highly disputed among the legal community, this case creates a significant precedent for the Russian courts.
In 2019 the Russian Supreme Court also specifically reviewed and interpreted the application of guarantees (including bank guarantees) in its review.2 Its content may be briefly summarised as follows:
- the amount of the guarantee may be definable (i.e., the parties may set the mechanism for defining it);
- the bankruptcy of the guarantor does not imply termination of the guarantee; and
- the guarantor is obliged to formally check only the documents triggering the payment.
iii RECENT LEGISLATIVE DEVELOPMENTS
From June 2018 legislative initiatives have allowed the performance of remote identification of the banks' clients by means of biometric protocols. This new procedure is aimed at simplifying the identification for access of individuals to the financial services. Thus, the primary identification shall be performed subject to the client's wishes by the authorised banks that are entitled to register individuals within the unified identification and authentication system (ESIA) and the unified biometric system (UBS). After a personal presence has been identified in a bank branch, the bank enters the citizen's data into the ESIA, as well as obtaining biometric parameters and sending them to the UBS.
From beginning of 2020 Russia will sufficiently ease currency control restrictions with respect to payments made by non-residents to accounts allocated in Russia and belonging to Russian residents, on the condition that the jurisdiction of a paying party participates in the automated exchange of account information with Russia (members of FATF and OECD). In particular, this would allow Russian residents with foreign accounts to easily arrange transactions to their own Russian accounts or the accounts of other Russian residents. Additionally, the reporting obligations with respect to the foreign accounts of Russian residents shall be also eliminated, if the yearly balance does not exceed 600,000 roubles (this amendment is also limited to the jurisdictions covered above).3
iv CHANGES TO COURT PROCEDURE
A group of amendments made to the Civil Procedural Code (in court practice of disputes that involve banks mainly regulates proceedings in cases between consumer-individuals and the banks) aimed at establishing the class action concept for the cases involving individuals.4 From 1 October 2019 groups of individuals are entitled to file class action claims against the banks, which may result in additional litigative pressure on them.
Under the introduced amendments the following criteria would have to be satisfied for the claimants to apply the class action procedure:
- all of the class action group members should have claims against the same respondent;
- the substance of the claims should be same or alike;
- the circumstances of the claims should be the same or alike; and
- all the class action group members should have chosen the same legal method of defence.
Such claims would primarily ease the financing of litigation proceedings on the claimants' side and thus ease the individuals' access to justice. This may, in particular, result in an increase in claims brought against banks with respect to certain banking services, for example, debit or credit cards processing, terms of loan agreements, etc.
v INTERIM MEASURES
Interim measures in Russia may be divided into three: (1) preliminary interim measures; (2) measures to secure the claim; and (3) enforcement measures. Depending on the nature of the claim all of these measures can be applied within the proceedings. In addition, Russian procedural legislation allows interim measures to be requested in support of the arbitration proceedings (interim measures granted by the arbitral tribunals per se are not subject to recognition and automatic execution in Russia).
Preliminary interim measures may be requested prior to submitting the statement of claim to the court. The aim of such measure is to provide the future claimant with an immediate mechanism for secure of safe execution of further court decision. The claim on the merits would have to be submitted by the applicant within up to 15 days after such measures were granted.
Measures to secure the claim may be requested and granted at any stage of the proceedings once it is commenced.
At the same time enforcement measures would mainly be performed by the bailiff service at its own discretion in order to secure the execution of the court decision.
The test applying to the content of application for interim measures (hereinafter relates to types 1 and 2) would consist in satisfying the below criteria:
- the non-granting of such measures may seriously complicate the enforcement of a court decision or make such enforcement impossible; or
- the applicant may suffer material damage if an interim measure is not granted.
At the same time, measures sought should comply with the balance of interests of the involved parties and be directly linked with the claim (or future claim) to be considered by the court.
In practice the chance of granting interim measures may be increased by the applicant in case of providing the countersecurity (comprises the temporary security for losses that may be suffered by the party against which the interim measures are sought). This is commonly done by a payment of the specific amount made to the court's deposit or, for instance, by providing the court with the bank guarantee for the respective amount. However providing the mentioned counter security would not require the court to grant the measures sought.
The list of types of interim measures prescribed by the procedural legislation, as follows, is non-exhaustive:
- freezing bank accounts, seizure of monetary funds, and seizing property in the respondent's own possession or in the possession of a third party;
- obliging the respondent to perform certain acts in order to prevent spoilage and impairment of the property in dispute;
- placing a restriction order on the respondent and third parties that prohibits certain conduct or acts related to the subject matter of the claim;
- ordering the placing of property in dispute into the possession of the applicant or a third party; and
- suspending the enforcement of a writ of execution or any other enforcement document.
The interim measures sought may be one or a combination of the aforementioned measures or represent the non-listed measures that would lead to a balance of interest of the parties within the proceedings.
It is worth mentioning that since 2018 escrow accounts have passed legislative regulation and are actively progressing in Russia. For instance, escrow account mechanisms have become fully regulated and are available to banks and notaries public (later mechanism would also require opening a special bank account by the notary public). Thus, interim measures, such as freezing an account or related restrictive measures, cannot be performed with respect to escrow accounts. At the same time, granting interim measures towards a right of the party to claim money from the escrow account may theoretically take place.5
vi PRIVILEGE AND PROFESSIONAL SECRECY
Since bank privilege may not be considered legal privilege in its purest meaning under Russian law, this type shall not be discussed in this chapter: thus, banks are obliged to provide the information that may contain bank privilege to the courts and other public authorities upon their requests due to rules set out in Article 26 of the Banking Law.
The only conception of legal privilege in Russia that would play a similar role to the attorney–client privilege widely recognised by Western and other jurisdictions is the advocate privilege. The concept of advocate privilege is set down and regulated by the Law on Attorney Activity and Advocacy together with the Criminal Procedural Code.6 Advocate privilege provides protection to information exchanged between advocates and their clients. This is justified by the fact that legal privilege is assigned a fundamental role in a democratic society aimed at defending litigants.
Despite the importance of this rationale, Russian practice shows substantial problems in relation to the treatment of legally privileged information, in that such information is commonly used by courts and investigative authorities in a manner contrary to the statutory rules and regulations. The only criterion that a communication must satisfy to be protected by advocate privilege is that it is made in the course of an advocate rendering advocacy services (rendering services under instruction of a client) to a client. Nonetheless, the investigation authorities often extract and seize items marked 'Privileged' or similar type disclaimers, and such items may become a part of evidence, disregarding the objections of advocates.
It should be noted that there is no professional privilege that explicitly covers the activity of an in-house lawyer (including in-house lawyers on banks or other credit organisation. Moreover, an in-house lawyer cannot become an advocate (an advocate cannot be in an employment relationship with any types of entities (including banks, auditors, etc.) other than advocate entities) and thus the privilege regime does not apply to communications between an in-house lawyer and his or her employer.
At the same time, Russia recognises a general constitutional right to the secrecy of correspondence, telephone calls, etc. While this right of secrecy can be used to protect some communications with in-house lawyers, this right applies only to private correspondence and not to official or business correspondence. Moreover, this right can be limited, for instance, if the information is officially requested by authorised state bodies.
In any case, the banks and other involved parties are recommended to use secured communication forms regarding those types of information that may be sensitive or crucial for the litigation proceedings. The parties should also be advised that applicability of privilege rules within civil proceedings (as opposed to criminal proceedings) may suffer difficulties, since, in general, the evidence in the civil proceedings in Russia would be considered in regard to its admissibility (i.e., legally prescribed possibility of proving specific circumstances with certain evidence) and relativity (the relation of evidence to the dispute), while the sources of obtaining the evidence are formally not limited by civil procedural legislation – although, in practice, this question may be raised at the court's discretion.
vii JURISDICTION AND CONFLICTS OF LAW
Both arbitrazh and civil procedural legislation provide general rules on the jurisdiction of Russian courts. Since most parts of these rules are equal to all types of litigants (including the banks), we wish to direct the attention of banking sector practitioners to some specific topics – the jurisdiction of Russian courts in cases involving foreign parties, and disputes subject to the exclusive jurisdiction of Russian courts.
The procedural legislation sets out a list of circumstances under which Russian courts have jurisdiction in disputes involving foreign entities or nationals, including the following:
- the respondent is located in Russia;
- the respondent's assets are located in Russia;
- the respondent has a representative office or branch located in Russia;
- the dispute arose from agreement that was performed or should have been performed within Russia; or
- a close connection between the legal relationship and Russia is at hand.
Below are mentioned examples of disputes that shall fall under the concept of exclusive jurisdiction of Russian courts:
- disputes over property owned by the Russian state;
- disputes over real property in Russia or related property rights;
- disputes over the issuance or registration of patents, trademark certificates, industrial designs, utility models or other IP rights that require the issuance or registration of patents or certificates in Russia;
- disputes concerning requests to nullify entries in state registers; and
- certain types of corporate disputes (i.e., disputes related to establishing of, exercising management, or participation in legal entities).
Regarding conflict of laws regulation in Russia, the law applicable to the parties' relations is determined by the parties themselves (in applicable cases) or is according to the statutory rules (once the parties fail to choose the applicable law or are legally deprived of such possibility).
In late 2013 the Civil Code was supplemented with new rules on conflict of laws amon other in order to harmonise with the provisions of the EC Regulations 'Rome I' and 'Rome II'.
viii SOURCES OF LITIGATION
Among the most frequent sources of litigation by and against banks, litigation arising out of the consumer bank services should be noted. With year-to-year growth of the consumer loans market7 the number of defaulted loans is also subject to increase. Thus, the percentage of defaulted consumer loans remains about 20 per cent,8 while its temporary decrease may mainly be caused by the increase of new loans, which is considered to cause strategic negative macroeconomic effects.
Consumer claims against banks are mainly concentrated on challenging the calculations by the bank within the provided loans or commissions (and other types of payments) under the existing consumer products.
The CBR continuing policy on clearance of banking sector of banks with insufficient funds or those performing systematic non-compliance with the applicable regulation results in withdrawal of such banks' licences, which often gives rise to claims of its clients for the deposited amounts within the liquidation proceedings.
ix EXCLUSION OF LIABILITY
While the Civil Code prescribes the possibility for contractual limitation of liability by the parties, Russian court practice evidences that bank's liability cannot be limited in certain cases. For example, limitation of liability may not apply to the banks' breaches in performance of obligations under the bank account agreements and similar instruments, therefore the concept of full compensation would be generally applied.9 As a separate matter, bank's liability in relations with consumer-individuals may not be limited in cases when such liability is statutorily established.
x REGULATORY IMPACT
The CBR has continued its policy on ceasing the activity of Russian banks performing badly and lack of due corporate governance level, or both, as well as non-compliance with other applicable regulation.
At the beginning of 2019 there were 440 banks operating in Russia, around 450 fewer than in 2013. The overall capitalisation rate of the Russian banks remains above the regulatory minimum, while non-performing loans were relatively high at around 10 per cent by the end of 2018. New regulatory policy initiatives in 2017 allowed the CBR to acquire troubled Russian banks and perform their recapitalisation by means of the Bank Consolidation Fund. Accordingly, by the end of 2017 the CBR acquired control over a number of large private banks. In 2018 the CBR used substantive funds to support such banks. The CBR is declaring it will continue with plans for the elimination of negative assets of the acquired banks for future resale of such banks' shares back to the private sector.
Due to the abovementioned policy of the CBR an overall share of state-controlled banks in Russia (including the banks under the CBR's rehabilitation) reached over 70 per cent compared to the level of 50 per cent in 2013.
1 Alexey Borodak is counsel and Sergey Avakyan is an associate at Norton Rose Fulbright (Central Europe LLP.
2 Review of the court practice on resolution of disputes related to application of legislation on independent guarantees (approved by Presidium of the Supreme Court on 5 June 2019).
3 Federal Law amending Federal Law No. 173-FZ On Currency Regulation and Currency Control dated 10 December 2003 No. 265-FZ.
4 Federal Law On Amendments to Particular Legislative Acts of the Russian Federation dated 18 July 2019 No. 191-FZ.
5 See Article 926.7 of the Civil Code.
6 Article 8 of the Federal law on Advocate Activity and Advocacy dated 31 May 2001 No. 63-FZ, Articles 56 and 450.1 of the Criminal Procedural Code.
7 Consumer lending in Russia: prospects and risks based on household finance survey, CBR, September 2017 (www.cbr.ru/Content/Document/File/27556/analytic_note_170928_e.pdf).
9 See for example, Section 9 of the Resolution of Plenum of the Higher Arbitrazh Court, 19 April 1999 No. 5.