The Sovereign’s Servants Were Called to Account

Sergey Pepeliaev
Managing Partner
Pepeliaev Goltsblat & Partners

The issue of the liability of the state authorities for damage caused to business is relevant today. We have seen a considerable number of examples where the state authorities inflicted substantial damage on enterprises and companies through unlawful actions. The sovereign’s servants naturally did not intend to compensate for the damage. However, unprecedented decisions have been issued recently on such cases in arbitration practice, which demonstrate that the material liability of state institutions is not an abstract notion, but instead involves the actual recovery of damages.

The Irbis case

The verdict of the Supreme Arbitration Court on the recovery of damages inflicted on the construction company Irbis in St. Petersburg by the Federal Service of Court Bailiffs (the “Bailiffs Service”) is one of the most recent examples. Here is the background information: The company won a case against its contracting party over the repayment of a debt. The debtor had to pay the construction company over 1 million rubles. The company obtained a writ of execution on the basis of the court decision and applied to the court bailiffs to initiate enforcement proceedings and recover the debt.

The bailiffs arrested the debtor’s liquid property but then lifted the arrest for some reason and arrested the debtor’s promissory notes. It transpired that the promissory notes had no security. Subsequently, it turned out that the debtor no longer had any liquid property. As a result, Irbis won the case in court but unfortunately could not recover any money from the debtor.

The creditor filed an appeal with the state arbitration court but this time against the court bailiffs, holding that it had incurred losses owing to the actions of the Bailiffs Service. The company lost the case in all three instances. However, the construction company from St. Petersburg demonstrated admirable persistence and consistency in defending its claims, and the case was referred to the Presidium of the Supreme Arbitration Court.

Why did the lower courts reject the company’s claims? Simply because this was the first time that a company had demanded that the court bailiffs reimburse losses inflicted on business by the unlawful actions of its officers. This was considered legal nonsense! No judge would be ready to assume such responsibility.

However, at the end of 2009, justice was served. The Superior Arbitration Court eventually satisfied the fair claims of the construction company for the recovery of damages from court bailiffs and quashed the previous decisions of lower courts. The case has not even been sent for review. Experts have called it the Irbis Case. In my opinion, this case is interesting and important in that it establishes a precedent, which may radically alter arbitration practice on similar claims.

Legal fees recovered from the tax office

Cases on the recovery of legal expenses from the state authorities are also interesting.

In 2002, a rule was introduced in the Arbitration Procedure Code stating that legal expenses, including the fees of attorneys and representatives, should be recovered from the nonprevailing party. In the overwhelming majority of cases, the practice of recovering legal expenses concerned small amounts of 5,000 rubles to 10,000 rubles, which did not comply with the actual expenses that were incurred, in particular on complicated multifaceted cases. Everybody understood perfectly well that this was a token payment of the attorney’s fees.

It was only in 2009 that the Supreme Arbitration Court recovered for the first time the actual amount of legal expenses that a company had incurred on trying its case in court. A Murmansk-based trading company MKTI had been fined by the local tax office and, subsequently, contested the penalties at the arbitration court. As a result, it won the case and appealed for the recovery of 1.5 million rubles in expenses spent on attorneys and legal expenses by the nonprevailing party, the Federal Tax Service.

The lower courts partially satisfied the claim. However, the Supreme Arbitration Court ruled that the actual amount of confirmed expenses to be recovered from the state authority in the full volume of the statement of claim should be granted.

After this resolution, it became possible to recover legal expenses and attorney fees in the amount of 500,000 rubles to 600,000 rubles and even 2 million rubles. This is a very strong disciplinary factor for the tax authorities. No administrative and legal reform will yield any results until the state authorities are forced to pay for their errors.

If you lose the case, you should pay the state duty!

This is another typical example of how to recover state duties from the authorities. The Russian Tax Code stipulated that if the state authorities protected state and public interests, they would be exempted from the payment of state duties. But what should be done in cases where a tax office issues a decision on the recovery of tax arrears, the taxpayer contests the resolution in court and wins the case, but the tax office, subsequently, files an appeal with the court of cassation or with the court of appeal. Does the authority have to pay state duty when filing the appeal or not? Does it have to reimburse the company that won the case for state duty?

For a long time the arbitration courts turned a blind eye and nobody recovered the state duty. Then, the Russian Supreme Court and the Supreme Arbitration Court resolved that the state duty should be paid in such cases. The amount of state duty is rather small, but is included in the budget of the state authority, and, naturally, reduces it. The Tax Service in a circular letter strongly recommended that tax divisions steer clear of lawsuits if it is obvious that they would lose such cases, to avoid incurring additional expenses. The Federal Tax Service alone incurred about 3 billion rubles on the payment of state duties across Russia.

That is why amendments were introduced to the Tax Code behind the scenes that exempted the state authorities from the payment of state duties both when they acted as plaintiffs and defendants and filed claims. However, the Supreme Arbitration Court partially restored the status quo and adopted a number of resolutions such as the following: The law has exempted the state authorities from the payment of state duties when they file a claim. However, if the company lodged a claim and paid the duties and, subsequently, won the case, the state authority should reimburse the company for the paid state duty. There have been dozens of resolutions where the Russian Supreme Arbitration Court upheld corresponding decisions of the lower courts.

The above examples provide grounds for claiming that the Supreme Arbitration Court pursues a policy aimed at implementing the principles of real liability of the state authorities for the damage caused to business through their actions. I would even say that in this regard 2009 was the year when a civilized breakthrough was achieved. I believe that this trend in arbitration practice will continue to develop in the future.