Vol. 7.1 March 2003

Hiroshi Oda, Russian Commercial Law (The Hague: Kluwer Law International, 2002), xvi + 373 pp. incl. index, ISBN 90-411-1846-2, € 100 (hardcover).

The author of this book has an unusually wide range of abilities. Professor Hiroshi Oda has already published several excellent English-language works on Japanese and on Soviet and post-Soviet law, and has spent twenty years explaining these matters to common-law students at University College London, and elsewhere. He is thus well-placed to tackle the task of explaining the current commercial law of the Russian Federation, perhaps the more so since both Japan and Russia have made use of many German and French sources in fashioning their own structures. But Oda's task in this book is made the more difficult by the fact that, as he explains, Russia is currently gripped by an extreme legal instrumentalism but simultaneously confronted with a huge gap between the law in books and the law in action. The work is almost entirely based on Russian-language sources, primarily the Civil Code (there is no separate Commercial Code), particular statutes (including the most recent), edicts of the president, and ministerial decrees and circulars, while its use of current Russian doctrine and periodical literature is fleshed out with a study of relevant case law, and of statistical information now available on the Internet.

The book begins with a straightforward account of sources of law and the judicial and arbitral systems of dispute-settling. Later chapters deal with the general part of private law, property, obligations, and cover some of the Code's numerous nominate contracts. But the distinctive feature of the book is its coverage of the most important matters of commercial law: partnerships and corporations, banking, taxation, natural resources exploitation, commercial litigation and enforcement of judgments, and of course insolvency. The treatment is written for an Anglophone readership and aims at exposition, not analysis, providing the reader with a lucid description tempered by perceptive critique.

If one may generalise, the overall picture presented by this book is, on the one hand, of fairly straightforward and familiar structures of, for instance, the nominate contracts or the standard types of business entity. One the other hand, the Russian law's current treatment of some topics is very mysterious. We may take just one example, of crucial importance to the business community: the means of securing performance of an obligation by charge, or pledge, or mortgage, over some object or claim (Professor Oda borrows the useful American word 'collateral'). It is generally accepted that credit stimulates economic activity and permits a more efficient use of assets, whence it follows that security, which increases the availability and lowers the cost of credit, is of benefit to debtors as well as creditors, and indeed to the economy generally. Unfortunately, as related by Professor Oda, the current law on charges is far from simple and seems in places downright clumsy.

First of all, as in several other areas, the sources of law are multiple and confused, with a Law on Charges of 1992, the Civil Code of 1995-6, a 1998 Law on Hypothec, a much amended law on Civil procedure, and a crop of judicial decisions (pp. 178, 182) which are barely intelligible.

Second, the charge (i.e. mortgage or pledge) is not one of the real rights listed in the Code (art. 216), but is treated in the general part of the law of obligations (art. 334 et seq.). Certainly the charge behaves like a real right in that during the life of the relevant obligation, if properly constituted and perfected, it burdens the collateral in the hands of anyone and everyone. On the other hand, charged items are not withheld from the property passing to a liquidator or trustee in bankruptcy, and the claims of the chargors rank third, after unsecured creditors on certain obligations arising from tort (personal injury) or contract (employment or copyright) (arts. 25.3, 64.1).

Whether or not the charge should be classified as a real right is a matter on which legal systems can and do differ. One might think that one advantage of the Russian choice is to permit much greater freedom in fashioning the charge: real rights are probably subject to a numerus clausus, whereas the Civil Code, in its very first sentence, proclaims freedom of contract. But this view has to face the fact that the Code's treatment of charge lays down a rigid and cumbersome default structure. In principle one would expect a Code's default patterns to be such as to keep down the costs of negotiating, drafting, and concluding the familiar figures of the law of secured transactions. Then, if the parties want special treatment they can bargain for its inclusion in their contract and its costs will be reflected in the rate of interest.

Yet several general provisions seem to run counter to simplicity. For instance, for the normal charge (and leaving aside the charge on inventory) the Code provides as a general rule that, unless he has stipulated otherwise, the chargor needs, in order to alienate, consent of the chargeholder (art. 346.2). Of course in any system he would need such consent to alienate free of the charge, but to require consent otherwise and as a general rule seems unnecessarily rigid. Furthermore, it seems to conflict with the Russian classification of the charge as a contractual, not a real, right. For if that be so, one would expect the chargor, as owner, to have the power to alienate his own property, even though exercise of the power might be a breach of his contract with the chargeholder (cf. BGB art.137).

On the transfer of ownership of the charged item, of course the charge, unless released, follows the thing. But it may be worth while setting out in full the relevant article of the Code and emphasising certain phrases, as this may give some sense of the difficulties confronting any commentator on the subject, difficulties which Professor Oda patiently and successfully surmounts.

Article 353 Preservation of Charge on Transfer to Another of the Right to the Charged Property.
1. Where, whether by remunerated or gratuitous alienation or by universal succession, the right of ownership or of economic management of the charged property passes to another, the right of charge remains in force.
Unless otherwise provided by agreement with the chargeholder, the chargor's successor takes the place of the chargor and bears all his duties (necet vse obiazannosti zalogodatelia).
2. If the chargor's property subject to a charge has passed by way of succession to several persons, each successor (acquirer of property) bears the consequences flowing from the charge of default in performance of the obligation secured thereby, commensurate with the part of the said property which has passed to him. However if the object of the charge is undivided or otherwise remains in the joint ownership of the successors, they become joint and several chargors.

The first phrase italicised above seems to saddle the successor with all the chargor's duties. On its face this appears to mean that if the chargor was the original debtor, since one of his duties was certainly to pay his debts, then his singular successor can be sued to repay money which he never borrowed and, if the collateral is inadequate, the chargeholder can go, as unsecured creditor, against the successor's other assets. But this conclusion - admittedly an unusual result - is then countered by the next sentence. On succession by several, each bears pro rata those consequences of default in performance of the secured obligation which flow, not from the default, but from the charge: i.e. the share of each is liable to be taken, but none owes performance of the secured obligation.

Equally puzzling is the treatment of the charge on a changing pool of movables, or charge on inventory (called by the Code 'charge on goods in circulation'). The relevant provision (art. 357) will of course permit change in the composition of the charged items in the process of manufacture, and the charge falls away if the goods are transferred (presumably this means in the ordinary course of business, though the Code does not say so). Goods acquired by the chargor may become subject to the charge. But surely what is needed is for the security interest to extend to their proceeds of goods sold, whether that be the price paid, the monetary claim against the buyer, or the credit balance in any account to which payment has been remitted. As described by Professor Oda, the current law does not seem to provide for this at all.

Next, where immovables are the collateral, the general enforcement method of sale requires a court order (art. 349). Sale without such an order is permissible only if provided for by a notarised agreement between the parties concluded after the debtor's default. As regards movables, in general it appears that the charge contract can provide some extrajudicial remedy, but not where the thing has some significant historical, cultural or artistic value for society. This may make it difficult to pawn the family silver.

Anyway, in general what the chargeholder needs on default in performance of the obligation secured is, first of all, the power to take possession of the charged property, and then the power to sell without requiring a court order. Professor Oda reports, however, a 1996 resolution of the Supreme Court and the Supreme Commercial Court that a clause in a charge empowering the creditor to take possession directly is void (p.186). This seems to be another example of the rigidity of the basic default structure. Borrowers have some choice of lenders; the insertion of a possession clause ought to be matched by a reduction in the rate of interest. Freedom of contract would suggest that prima facie such a clause be valid, to be struck down only on some grounds such as the general defects in consent, afforced where relevant by consumer protection principles.

In the light of the rigidities summarised above, it comes as no surprise to find that lenders attempt to fashion security in some other way, notably by arranging that the borrower 'sell' them the asset with an option to buy it back at a price reflecting the loan plus interest. Many legal systems have travelled this road before, with their local variants of the lex commissoria.

In conclusion, it should be said that the book represents a much-needed and valiant attempt to explain to Anglophone readers a complex and confusing body of law. No doubt a new edition will soon be called for, and perhaps there Professor Oda will give us more information on such vital topics as receivables financing, and the immobilisation and intermediation of investment securities.

Bernard Rudden,
emeritus Professor of Comparative Law, Fellow of Brasenose College and Fellow of the British Academy,
Penzance, UK

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