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Confiscation of Assets Received under a Transaction Contrary to the Fundamental Principles of Legal Order or Morality in Commercial Courts Practice and Draft Amendments to the Civil Code of Russia

D.O. Tuzov, Doctor of Law, rofessor of Civil Law Department, St. Petersburg State University, Russia

Since the adoption, in 1994, of Part One of the Russian Federation Civil Code containing provisions on transactions and their invalidity, the doctrine and judicial practice have revealed numerous problems related to the application of these provisions and worked out certain approaches to their solution . It is only too natural that these problems and approaches have become a subject-matter of careful consideration in the course of legislative drafting that started in 2008, in accordance with the Edict of the RF President[1] and was aimed at improvement of the current Civil Code; this work was conducted in the process of elaboration and discussion of the Draft Conception of Improvement of the RF Civil Code[2] (hereinafter – the Draft Conception), preparation of the final version of the Conception[3] (hereinafter – the Conception) and, finally, elaboration of the draft amendments to the Civil Code of the RF[4] (hereinafter also - the Draft).

The proposals on amending the legislation concerned, in particular, the provisions of Art. 169 of the Civil Code on forfeiture to the state of assets received under a transaction contrary to the fundamentals of law and order or morality, and a similar provision of Art. 179 of the Civil Code. The corresponding innovations of the Draft, in general, deserve to be approved; however, they possess a number of drawbacks[5]. This article is devoted to their analysis.

 

1. Confiscation in the Current Civil Legislation and Commercial Courts Practice

The Civil Code of the RF provides for forfeiture to the Russian Federation of the assets, received under a transaction and payable in compensation of the received, with regard to the fraudulent party (parties) to transactions contrary to the fundamental principles of law and order or morality (Art. 169 of the Civil Code) and performed under the influence of fraud, coercion, threat, ill-intentioned agreement of the representative of one party with the other party or confluence of grave circumstances (Art. 179 of the Civil Code).

In accordance with Art. 169 of the RF Civil Code, “a transaction entered into for a purpose knowingly contrary to the fundamental principles of law and order or morality shall be void” (para 1). In accordance with the same article (para. 2 and 3), the fraudulent party (if both parties are fraudulent, then this rule concerns both parties) shall not have the right to reclaim assets it provided under these transactions (exclusion of restitution). Both the assets provided in fact and the assets due in return, but not transferred, are subject to forfeiture to the state (confiscation). This article should refer to transactions the provision of assets under which is frequently considered to be criminally punishable or is on the verge of being illegal, or at least is condemned by the public morality.

The Soviet and contemporary Russian civilistic doctrines know the term of “antisocial transactions”, which determines this kind of transactions; recently it has become a term used in judicial practice: it was used, more specifically, in one of the rulings of the Constitutional Court of the RF[6], and also in the decision of the Commercial Court of the City of Moscow on the high-profile case of Private Joint-stock Company “PricewaterhouseCoopers Audit” and Open Joint-stock Company “Oil Company “Yukos”[7]. This term is also used by the authors of the draft laws on improvement of the Civil Code of the RF (e.g., § 2(1.2), Section V of the Draft Conception[8]). This term, unknown to the current legislation, does not appear good enough. Not only does it use the extralegal criterion of “sociality” (which does not come down to the established by Art. 169 criterion of correspondence to fundamental principles of legal order or morality) but it also describes only transactions classified under Art. 169 of the Civil Code, which, paradoxically enough, implies recognition of the “social” nature of transactions not conforming to the current legislation and classified under Art. 168 of the Civil Code.

As early as several years ago, in spite of the common practice of filing to commercial courts (as a rule, by tax agencies) claims to deem transactions invalid on the grounds stipulated by Art. 169 of the Civil Code and to forfeit the assets received under these transactions to the state, such claims were relatively seldom satisfied. Without any exact statistics on application of Art. 169 of the Civil Code in judicial practice, on the basis of the materials of the latter, it is possible, however, to conclude that in the most numerous category of cases where plaintiffs raised a question of application of confiscation,( namely, claims filed by tax agencies to deem the transactions invalid under Art. 169 of the Civil Code as entered into for the purpose of tax evasion and fulfillment of other obligations before the budget which these agencies have indentified as a purpose knowingly contrary to the fundamental principles of law and order or morality[9]), commercial courts in most cases dismissed these claims, not finding grounds to hold the relevant transactions invalid, stating, among other reasons, the lack of proof by the plaintiff of intent of the parties, or pointed out that bringing claims of this type was not in the competence of the tax agencies[10].

The interest of civilistic doctrine and practicing lawyers to Art. 169 of the Civil Code, which until quite recently was considered to be “a dead letter”, has been unexpectedly aroused[11] by a number of high-profile cases of tax agencies’ claims to deem invalid (on the grounds of Art. 169 of the Civil Code) contracts entered into by large enterprises-defendants, such as Bashkir Fuel and Energy Complex, Open Joint-Stock Company “Oil Company “Russneft”, “PricewaterhouseCoopers Audit” LLP and Open Joint-stock Company “Oil Company “Yukos” and to forfeit, as “application of consequences of invalidity” of these contracts, assets received under these contracts to the state”[12].

Thus, for example, the abovementioned decision of the Commercial Court of the City of Moscow dated March 20, 2007, issued in the case of “PricewaterhouseCoopers Audit” LLP and Open Joint-stock Company “Oil Company “Yukos”, satisfied in full the stated claims of the tax inspectorate of the City of Moscow: the contracts on rendering audit services entered into by the defendants were deemed invalid as transactions entered into for a purpose contrary to the fundamental principles of law and order or morality (Art. 169 of the Civil Code), and the compensation for audit services received under them in the amount of 16 million 769 thousand 249 rubles (equal to 480 000 USD) was forfeited from “PricewaterhouseCoopers Audit” to the state. The ruling of the 9th Commercial Court of Appeals terminated the proceeding on the appeals petition of “PricewaterhouseCoopers Audit”, and the decision of the court of the first instance was declared to have entered into legal force[13].

The cases caused such a strong response among the representatives of Russian business circles and legal practitioners community that they resulted in elaboration and adoption of a special ruling of the Plenum of the Supreme Commercial Court of the RF[14], which created a certain obstacle to the above-mentioned initiative of the tax inspectorates.

It can readily be understood that what caused such a response, as well as the intense interest of tax agencies in the relevant category of cases, was not only the ground for invalidity itself, stipulated by Art. 169 of the Civil Code, i.e., contradiction of the purpose of the transaction to the fundamental principles of law and order or morality, but the sanction, established by this article and uncommon civil legislation, allowing to forfeit assets received under such a transaction (and also the assets meant for compensation of the received) to the state and, therefore, fulfilling a punitive function - confiscation. The publications that appeared in connection with the above-mentioned judicial cases repeatedly noted that Art. 169 was “a weapon applied in a differentiated way for business takeover”, that “the article is convenient for confiscation of the assets received in a legitimate way without amending the legislation”[15], that as “reflecting the principle of expropriation of expropriators”[16] “it poses, perhaps, the main threat to business”, that “lawlessness, giving up of the law in order to please political expediency, lies in its foundation”[17].

II. General Characteristics of Confiscation under Art. 169 of the Civil Code

The punitive nature of the sanction in question implies that of its application proceeds from the assumption that there is an offence for commission of which this sanction is established as a measure of liability. This statement is confirmed by the contents of Art. 243 of the Civil Code providing for a single case of termination of the ownership right without compensation against the will of the owner and characterizing uncompensated forfeiture of assets to the state (confiscation) as a sanction for commission of a crime or another offence..

Even a brief familiarization with Art. 169 allows to assert that the transactions provided for by the said article cannot be considered to be offences forming prerequisites for nonadmission of restitution and confiscation. An invalid transaction per se is not a juridical fact and, therefore, cannot be an offence. Unlawfulness stipulating, in accordance with the law, the forfeiture of the assets,provided under the transaction, to the state characterizes other related actions which are beyond the limits of the transaction or constitute only one of its elements; at that, the transaction itself is not an element of an offence[18]. These actions may accompany the transaction or constitute its execution . This refers to actions aimed at providing assets[19] that are made under the transaction. Their close connection with the transaction consists in the uniformity of a purpose knowingly contrary to the fundamental principles of law and order or morality. These particular actions aimed at providing assets constitute an objective element of an offence provided for by Art. 169 of the Civil Code as the ground for nonadmission of restitution and application of confiscation. Only from the moment when the parties start providing assets under the transaction, does the objective element of the legal violation show up . The confiscation is impossible without actual assets provided by at least one party[20].

The sanction established by Art. 169 of the Civil Code is very specific not only in its punitive nature uncommon for the civil law, but also (as distinct from the sanction of Art. 179 of the Civil Code, which is identical in nature) in ambiguity of grounds for application thereof consisting in knowingly contradictory purpose of the transaction to the fundamental principles of law and order or morality. Art. 169 of the Civil Code is a spectacular example of the so-called elastic paragraphs (or clausulae generales, in accordance with another, more neutral terminology)which open a gate to judicial discretion. This is confirmed in the Russian law by the the above-mentioned practice of consideration by the commercial courts of tax agencies’ claims.

 

III. Nonadmission of Restitution, soluti retentio and Confiscation

Does the confiscatory sanction stipulated by Art. 169 and 179 of the Civil Code correspond to the fundamental principles of the civil legislation?

The crucial distinction of the structure of nonadmission of restitution, based on the Roman Law and traditionally accepted in the contemporary Western legal systems, from the structure of nonadmission of restitution in the Russian law and in some other (post-socialist) states lies in the fact that the first is based on the principle of soluti retentio (retention of the executed), and the second is inalienable from the forfeiture of the received under the transaction to the state.

Not a single European codification stipulates the forfeiture of everything received under a transaction to the state as “a consequence of invalidity” of relevant transactions . These legal systems are guided by another principle determining the fate of the assets received under these transactions: soluti retentio. In accordance with this principle, the fraudulent party, i.e., the one whose provision is “shameful” (turpis) as contrary to the good will or public order, cannot demand to get the provided back. At the heart of this rule is the consideration that the court should not hear and satisfy the demands of the party which in substantiation of these demands refers to its own unfair practices, its shameful conduct. And this position is well-grounded. However, here the legislations of the western countries draw the line: the principle of soluti retentio means that in the event of nonadmission of restitution with regard to the fraudulent party which has made a provision, the latter remains with the other party, even if it is also a fraudulent party[21].

By all means, this decision has its drawbacks and inconveniences, noted and criticized by foreign legal writers (in particular, this approach de facto allows to achieve the purpose of the relevant transaction)[22], however, they cannot be compared with harmful consequences that the consolidation in the Russian legislation (one of very few) of the contrary confiscatory principle entails.

The legislative solution taken in the Russian civil law is known only to some private-law systems of the contemporary world, and at present, mainly to the systems of certain states, which earlier were the parts of the former USSR as union republics and which were under a considerable impact of the Civil Code of the RF[23]. Using the terminology of comparative law, this approach can be, therefore, called a “stylistic peculiarity” of the Soviet and post-Soviet civil law. In accordance with some data, the provisions which established confiscatory consequences for certain types of invalid transactions were included into the first Civil Code of the RSFSR (1922) at the personal request of V.I. Lenin and were a concrete normative manifestation of his legislative policy in the sphere of civil law[24]. As is well-known, confiscation was wide ly applied in the policy of the Soviet state at the first stages of development thereof, and, therefore, the consolidation thereof in the Civil Code as a sanction for conclusion of lawless transactions was more than natural in those conditions.

 

IV. “Civil law” Confiscation, Principles of Punitive Responsibility

and Private Law

At present, the question regarding feasibility and expediency of preservation of the measure in question in the contemporary Civil Code consistently arises. In the first place, it should be emphasized that confiscation in its current form does not provide for the proportionality between the public maleficence of the performed and the severity of punishment, the fundamental principle of punitive liability. Even the Soviet literature paid attention to this circumstance. Sometimes, as I.G. Tashker noted, “…the gravity of property-related consequences for the participants of the transaction is disproportionate to their guilt or the harm caused by the transaction. The absence of such proportionality is the “heel of Achilles” of Art. 147 of the Civil Code”[25](Art. 169 of the current Civil Code).

The thesis of disproportionality of confiscation, under Art. 169 of the Civil Code to the degree of gravity of the offence became topical in Russia several years ago in connection with the claims filed by tax agencies on deeming void the transactions aimed at tax evasion, in the opinion of these agencies. The cost of assets transferred under these transactions may be several times higher than the amount of tax which was not paid, as , for example, in the claim of a tax agency on forfeiture of stocks of the enterprises of the Fuel and Energy Complex to the state[26]. It is fairly stated that “in this situation, there is no balance of private and public interests”. In fact, the constitutional duty of payment of taxes, which is not contested, stands higher than such constitutional principles as equal protection of all forms of ownership, the proportionality of responsibility (a tax sanction in the form of confiscation of property) to the committed offence (nonpayment of tax), the principle of stability of civil turnover”[27].

Besides, as is well-known, the Tax Code of the RF establishes effective sanctions for the nonpayment of a tax: the violator shall pay the amount of the tax itself, pecuniary penalty and also, as a measure of responsibility, the fine in the amount of 40 % of the nonpaid amount. Even more, if the actions of a taxpayer contain elements of the relevant crime, the guilty person shall be subject to criminal responsibility, including deprivation of liberty. The application of confiscation under Art. 169 of the Civil Code of the RF in these conditions contradicts another fundamental principle of punitive responsibility – ne bis in idem.

Meanwhile, the working draft of the above-mentioned ruling of the Plenum of the Supreme Commercial Court of the RF dated April 10, 2008, contained an explanation which, as it was noted in the discussion of the said draft at the Presidium of the Supreme Commercial Court[28], in the event of the literal interpretation thereof would create an official ground for such a “double” responsibility. The Draft (para.5) states:

“When considering the disputes arising out of administrative, tax and other public legal relationships, the courts shall take into consideration that the consequence in the form of forfeiture of assets received under the transaction to the Russian Federation, provided for by Art. 169 of the Civil Code, is an independent measure applied exclusively as a special consequence of invalidity of a void transaction. The sanctions, established for the commission of public offences, cannot be classified as consequences of invalidity of transactions. The relevant demands are of an independent nature and shall be considered in the disputes arising out of public (not civil) legal relationships [,] taking into consideration the norms of the relevant legislation”[29].

The final version of this Draft provision has not undergone anysignificant changes. The following paragraph added to the quoted wording does not change the essence of this explanation:

“In the cases when the transaction in and of itself forms a set of elements of a public offence or the said offence is related to the conclusion of this transaction, within the framework of consideration of a dispute arising out of public legal relationships, sanctions, established by the legislation as a measure of responsibility for commission of the said offence shall be subject to application, but not the consequences stipulated by Art. 169 of the Civil Code of the RF” (para 2, p. 5; italics mine. – D. Т.).

It is easy to notice that this wording does not exclude the application to the participants of one and the same transaction, who have already born “public” responsibility, of the punitive sanction provided for by Art. 169 of the Civil Code, though under another procedure, within the framework of consideration of the dispute on deeming the transaction invalid and application of the relevant consequences.

Finally, the practice of application of Art. 169 leads to the fact that the impossibility to embrace all the cases of significant violation of state interests by formally established elements of administrative offences and crimes is compensated in fact by a subsidiary action of the norms of the Civil Code establishing punitive responsibility, the gravity of which does not differ from that of administrative and criminal, including for the offences described with the use of extremely ambiguous characteristics which are the criteria of the fundamental principles of legal order or morality.

This said, however, we do not mean that it is necessary to develop and improve the institute of confiscation under civil legislation, represented by Art. 169 of the Civil Code (and also Art. 179 of the Civil Code, the analysis of which is beyond the scope of this research). If, in order to keep the tradition, Art. 169 of the Civil Code is to be preserved as establishing the ground for invalidity of the transaction (which is also undesirable as was mentioned above), in any case, the institute of confiscation, I believe, should be excluded from the civil legislation as a foreign matter contradicting the essence and principles of private law, let alone the mentioned uncertainty of the criteria for finding a transaction invalid and for applying confiscatory sanctions to the parties thereof; this uncertainty gives wide opportunities for judicial discretion and practically turns the confiscation from a juridical remedy into a political one. If the party to an invalid transaction, making the provision, by acting in this manner committed an offence involving assets penalty, the law must clearly state with regard to the sets of elements of similar offences, establish a clear procedure for application of kinds of punishment for their commission , stipulate the guarantees of observation of laws in application of these punishments. But all this is the task of public, not private law[30].

 

V. Tendencies and Innovations in Legislative Drafting with Regard to Improvement of the Civil Code

As noted by the authors of the reform of the RF Civil Code, “the Conception suggests to somewhat revising the correlation of private and public elements in civil law. The search for balance between the said elements is typical of the entire history of civil law development . The Conception proposes its own understanding of this balance which is based upon the achievements of the European doctrine of private law and considers Russian realities that are reflected in judicial practice”. In particular, “in a number of cases, the idea is to give up public elements of regulation in favor of “private-law” approaches. Such are the proposals on removing

The sanction of confiscatory nature in Art. 179 of the Civil Code and on limiting the sphere of application of a similar sanction for transactions contrary to morality (Art. 169 of the Civil Code)” (Introduction, p. 8).

Re-thinking the role of “civil-law” confiscation and its place in the system of measures of legal responsibility deserves an unconditional support and is, no doubt, one of the positive elements of the reform of the RF Civil Code. The authors' thoughts on nonconformity of confiscatory measures to the civil legislation and the idea that the function of punishment must be fulfilled by the public law, are absolutely grounded.

As noted with regard to Art. 179 of the Civil Code,

“…the confiscatory sanction ...is not typical of civil legislation and is not known in the majority of foreign legal systems. In the cases when the actions of the person who caused the invalidity of a transaction contain elements of crime, measures of criminal responsibility must be enforced. If no criminal responsibility is established for certain actions, the consequences of invalidity of a transaction must remain in the sphere of regulation by civil law based upon principles of private autonomy and dispositivity (free exercise of material and procedural rights by the parties to legal proceedings)” (para 1, p. 1.6.7, § 2, Section V of the Draft Conception).

Some fair remarks have been made with regard to Art. 169 of the Civil Code (p. 1.2.2, § 2, Section V of the Draft Conception): that forfeiture to the state of assets received under a transaction “is a sanction with considerable public-law elements” (para 1)[31], that “in this case, private law starts to fulfil the function of punishment, i.e., play the role of criminal or administrative law” (para 2), that in this case, very often “the sanction in the form of forfeiture to the state of everything received by the violator does not correspond to the criterion of proportionality” (para 5), that “private law does not have enough instruments necessary for fulfilling of the said function...”, and, therefore, “...the resources of private law to a lesser extent allow to fulfill the public function of punishmentthan the resources of public law” (para 2)[32].

Only one conclusion should be inferred from these correct remarks: the existence, in the contemporary civil-law codification, of the sanction in question introduced for the first time into the Russian legislation with adoption of the RSFSR Civil Code of 1922 for the purpose of struggle against exploitative classes, in the contemporary conditions cannot be justified by any arguments, and, therefore, the said sanction as an archaism should be excluded from the Civil Code.

However, this idea was consistently implemented in the draft amendments to the Civil Code only with regard to Art. 179, from which the confiscatory measure was proposed to be fully excluded. A different situation arises with regard to Art. 169 of the Civil Code. The new version of this article, proposed in the Draft, looks as follows:

The transaction entered into for a purpose knowingly contrary to the fundamental principles of legal order or morality shall be void and incurs the consequences established by Art. 167 of the Code in force. In the cases provided for by law, the court may forfeit to the Russian Federation all assets received under this transaction by the parties that acted intentionally or apply other consequences established by the law.

One may point out two material elements of this innovation.

First, by refusing from confiscation as an indispensable “consequence” of transactions classified under Art. 169 of the Civil Code, the Draft does not include the principle of soluti retentio, but introduces - by reference to Art. 167 - the bilateral restitution as a general rule[33].

Reasons behind this decision raise doubts. Let us recall that it was the principle of soluti retentio, neglected by the authors of the reform, that was established in Western legal systems as an obstacle to the restitution demands based upon the relevant transactions, the satisfaction of which would contradict both legal and moral consciousness of the society and the dignity of the court. In fact, in accordance with the proposed version of Art. 169 of the Civil Code, for example, a fence-dealer may bring a claim to court regarding the return of the money paid by him with reference, in substantiation of this claim, to the obvious contradiction of the sale-purchase transaction entered into by him to the fundamental principles of legal order and morality[34], i.e., to his own dishonesty and, moreover, to his own criminal conduct. And this demand will be subject to satisfaction.

It appears that it is for these situations that the exclusion from the general rule of “bilateral restitution” is made in favour of the principle of soluti retentio. This exclusion is stipulated by p. 4 of Art. 167 of the Civil Code (in the version of the Draft))[35].

4. The court has the right not to apply the consequences of invalidity of a transaction (p. 2 of the present article) if the application thereof will contradict the fundamental principles of legal order or morality.

There could be two main objections against such an innovation. First, the dispositive wording “the court has the right...” unreasonably provides a jurisdictional agency with the discretional power to decide whether the restitution is to be applied or not, even when it is established that this application will be contrary to the fundamental principles of legal order and morality. It is difficult to imagine the situation when the refusal of the court “to exercise” the said “right” could correspond to the tasks of legal regulation in the sphere of invalidity of transactions. The other, more general drawback of the analyzed innovation is that the solution of the problem of contradiction of application of restitution to the fundamental principles of legal order or morality is left to the discretion of the court. Such an innovation will broaden, to an even greater degree, the freedom of judicial discretion in application of Art. 169 of the Civil Code, which will do no good to the legal certainty and stability of the civil turnover.

Second, for some exceptional cases the Draft still preserves the sanction of confiscation. The Conception says:

“Such a consequence as the forfeiture to the state of assets received under the transaction shall be applied as an alternative consequence of invalidity of transaction only in a limited number of cases, primarily when a particular socially unacceptable pecuniary action is not punished by a sufficient sanction under criminal or administrative law”[36] (General Provisions, p. 5.2.2).

Besides, originally, in accordance with the opinion of the reform’s authors (as far as one can judge from the materials of preparatory work), these exceptional cases were also to be determined at the discretion of the court. Thus, the Draft Conception (p. 2.2.1, § 2, Section V) proposed “to make adjustments to the contents of Art. 169 of the Civil Code, providing for application of the confiscatory sanction not as an obligatory consequence of invalidity of the relevant transaction, but as a mechanism which may be applied by the court in the cases when it is difficult or impossible to use other public law means of protection and punishment of violators of public order and morality” (italics mine. – D. Т.).

The draft amendments to the Civil Code, as we have seen, limit the application of confiscation by the cases directly stipulated by law. At the same time, the Draft preserved the provision about court’s discretion in application of this measure in some particular cases when it is allowed by law (“In the cases, stipulated by law, the court may forfeit to the Russian Federation...”).

The outlined approach cannot be accepted irrespectively of certain changes in wording. The main danger of confiscatory sanction of Art. 169 and its inapropriateness in private law codification are in the fact that this sanction allows a legal practitioner, in essence, to fill in the gaps in the criminal legislation and the legislation on administrative offences, punishing a person by the same confiscatory measures; however, when his/her action cannot be classified with the help of sets of elements of crimes or of administrative offences proscribed by law (it is no mere chance that the Draft’s authors, as we have just seen, in description of a relevant action use such an extralegal term, invented by them ad hoc, as a “socially unacceptable pecuniary action”). Thus, in essence, public law guarantees, in accordance with which nobody can be punished for an action not classified by law as a crime or an administrative offence, are eliminated.

The authors of the draft amendments to the Civil Code named some particular cases, when, in their opinion, the preservation of the confiscatory sanction of Art. 169 would be feasible: (а) “conclusion of a transaction in regard to a thing excluded from turnover (illegal sale of arms, realization of counterfeit money or securities, sale of counterfeit medications or alcoholic products dangerous to life and health of the population, etc.)”; (b) “conclusion of a transaction the subject-matter of which is an action having the characteristics of a crime or an administrative offence” (para 7, p. 2.2.2, § 2, Section V of the Draft Conception).

It is worth noting that in most cases classified under the first principle, the thing in question in any case is subject to forfeiture by the state, however, not as a sanction for an offence, but simply because the relevant property cannot stay in the possession of an individual (counterfeit money or securities, counterfeit medications or alcoholic products dangerous to life and health of the population). In the cases classified under the second principle, with regard to actions containing characteristics of crimes or administrative offences, the confiscatory sanction must be determined by the relevant law imposing criminal or administrative responsibility; and if the said law does not do it, the Civil Code should not fill in this gap.

Taking into consideration the fact that the Draft, stating the right of court to apply confiscation “in the cases proscribed by law”, speaks about law in general, i.e., about any law, not only about the Criminal Code and the Code of Administrative Offences, it can be assumed that apart from two grounds, iphotized by the Draft’s authors, there will often be other cases when the sanction in question, if preserved in the Civil Code, will be introduced beyond the scope of the Criminal Code and the Code of Administrative- Offences and then applied at the discretion of the court.

Analyzing “the right” of the court to apply the confiscation, one should take into consideration the provisions of p. 4 of Art. 166 of the Civil Code (in the version of the Draft):

4. The court has the right to apply the consequences of a void transaction on its own initiative in the cases when it is necessary for the purpose of protection of public interests and other cases provided for by a law.

Therefore, confiscation as a matter of principle may be applied, as well as restitution, on the court's initiative irrespective of any demands of the parties or the third persons.

Even in the event of a positive solution of the issue on the expediency of preserving the sanction of Art. 169 of the Civil Code, such competence of the court in absence of a claim of the agency interested in confiscation, and the enforceability of the relevant court decision look rather doubtful[37]. It appears that there are no grounds to assign to the court fiscal functions which are alien to it[38]. If relevant state agencies are inactive, it is the prosecutor who should apply for protection of public interests, which is his direct duty.

To sum up, it should be stressed again that the need to establish punishment by confiscation for certain actions that are not proscribed by the Criminal Code or the Code of Administrative Offences, should be satisfied by improving the codes in question n, i.e. by introducing clear sets of elements of actions for which this punishment is established. Without establishment of these sets of elements, but in the case of preserving confiscation in Art. 169 of the Civil Code, the Civil Code and the judge are assigned functions alien to them, and there remain a lot of opportunities for an arbitrary application of confiscation.

Therefore, it is necessary to completely exclude the confiscatory sanction of Art. 169 from the Civil Code (i.e., exclude para. 2 and 3 of the article) as it was proposed by the Draft with regard to the similar sanction of Art. 179 of the Civil Code, having corrected, if necessary, the norms of the Criminal Code of the RF and the Code of Administrative Offences of the RF.

Apart from this legislative measure which must be taken in any case, it seems reasonable to refrain from uncertain criteria used for establishing the grounds for invalidity of a transaction in Art. 169 of the Civil Code by completely excluding this Article from the Civil Code, which is highly unlikely to cause any adverse consequences (the Russian practice did without applying this Article for a long time), but will further improve legal certainty.

It should be noted that the majority of transactions which may be classified as invalid in accordance with the ground provided for by Art. 169 of the Civil Code and the examples of which are quoted by the Draft’s authors (p. 1.2.1, § 2, Section V of the Draft Conception), at the same time are unlawful, i.e., invalid under Art. 168 of the Civil Code. Therefore, the ground for invalidity stipulated by Art. 169 of the Civil Code is hardly useful. On the contrary, uncertainty, ambiguity of such a criterion of voidness as a contradiction of the transaction to fundamental principles of legal order and morality may cause only negative consequences for the legal order.

As the Draft’s authors believe Art. 169 of the Civil Code must be preserved, they proceed from the assumption that the legal provision declaring as void all the transactions entered into for a purpose contrary to the fundamental principles of legal order or morality, is useful and refer to foreign legislation containing a similar rule and also to foreign practice of application of the rule (p. 1.2.1, § 2, Section V of the Draft Conception). However, this analysis is somewhat one-sided, leaving without considering the opposite viewpoint, which has been expressed both in the foreign and Russian doctrines. In accordance with this viewpoint, the consolidation of such uncertain criteria of invalidity of a transaction as its contradiction to social or public order, fundamental principles of legal order, morality, deanery, fundamental principles of ethics, etc. (“elastic paragraphs”) is unjustified and only opens way to unlimited judicial abuse of discretion[39]. As noted above, the Russian juridical community has recently become a witness to this situation: in order to curb the new trend in the practice of commercial courts’ satisfying claims of tax agencies find transactions void on the ground of Art. 169 of the Civil Code when these transactions in the opinion of these agencies, are aimed at tax evasion, the special explanation of the Plenum of the Supreme Commercial Court of the RF was required.



[1] Ukaz Presidenta RF “O sovershenstvovanii Grazhdanskogo kodeksa Rossiiskoi Federtsii” No. 1108 [The RF President’s Decree “On Improvement of the Civil Code of the Russian Federation” No. 1108]. Rossiiskaia gazeta [Ros. Gas.]. July 23, 2008.

[2] Proekt Kontseptsii sovershenstvovania Grazhdanskogo kodeksa Rossiiskoi Federatsii [The Draft Conception of Improvement of the Civil Code of the Russian Federation]// Vestnik Vysshego Arbitrazhnogo Suda Rossiiskoi Federatsii [The Supreme Commercial Court of the RF Bulletin]. No. 4, 2009, p. 9, et seq.

[3] The portal of Russian private law. Available at: http://www.privlaw.ru/index.php?section_id=24.

[4] The State Duma Committee on Civil, Criminal, Arbitration and Procedural Law. Available at: http://www.komitet2-10.km.duma.gov.ru/site.xp/051054056124054053054.html.

[5] See: D.O. Tuzov. Obshchie voprosy nedeistvitel'nosti sdelok v proekte Kontseptsii sovershenstvovaniia Grazhdanskogo kodeksa Rossiiskoi Federatsii [General Issues of Invalidity of Transactions in the Draft Conception of Improvement of the Civil Code of the Russian Federation] // Vestnik Vysshego Arbitrazhnogo Suda Rossiiskoi Federatsii [The Supreme Commercial Court of the RF Bulletin]. No. 6, 2009, p. 38, et seq.

[6] Postanovlenie Kostitutsionnogo Suda Rossiiskoi Federatsii “Ob otkaze v priniatii к rassmotreniu zhaloby otkrytogo aktsionernogo obshchestva “Ufimskii neftepererabatyvayushchii zavod” na narushenie konstitutsionnykh prav i svobod stat'oi’ 169 Grazhdanskogo kodeksa Rossiiskoi Federatsii i abzatsem tret'im punkta 11 stat'i 7 Zakona Rossiiskoi Federatsii “O nalogovykh organakh Rossiiskoi Federatsii” No. 226-О [Ruling of the Constitutional Court of the RF “On Refusal to Accept for Consideration of the Complaint of Open Joint-stock Company “Ufimsk Oil-Processing Plant” on Violation of Constitutional Rights and Freedoms by Art. 169 of the Civil Code of the Russian Federation and Para 3, Point 11, Art. 7 of Law of the Russian Federation “On the Tax Agencies of the Russian Federation” No. 226-О]. Pravovaia Informatsionnaia poiskovaia sistema “Konsul'tant Plus" [Legal Informational System "Consultant Plus"]. June 8, 2004.

[7] Arbitrazhnyi’ Sud goroda Moskvy [The Commercial Court of the City of Moscow]. Case No. А40-77631/06-88-185, dated March 20, 2007. The text is available at: http://www.prigovor.ru/info/37698.html.

[8] From now on in the present article the Draft Conception is used and quoted not only as a historical document reflecting the course of works on preparation of the draft amendments to the Civil Code, but also as a kind of "motives" or "an explanatory note" to the said draft, the majority of provisions of which were not included into the final version of the Conception only owing to a limited volume of the latter.

[9] The authors of the reform of the Civil Code also share this viewpoint, they believe that "the transactions aimed exclusively at tax evasion" present "a type of immoral conduct". Proekt Kontseptsii sovershenstvovania Grazhdanskogo kodeksa Rossiiskoi Federatsii [The Draft Conception of Improvement of the Civil Code of the Russian Federation]// Vestnik Vysshego Arbitrazhnogo Suda Rossiiskoi Federatsii [The Supreme Commercial Court of the RF Bulletin]. No. 4, 2009, 1.2.1, paragraph No. 2.

[10] See: D.О. Tuzov. Nedopushchenie restitutsii i konfiskatsii pri nedei’stvitel'nosti sdelok: Teoreticheskii ocherk [Nonadmission of Restitution and Confiscation in Invalidity of Transactions: Theoretical Essay]. Мoscow, 2008.

[11] Formerly the problem attracted attention of only a few Russian civilists. It was touched upon in some works of the Soviet period [see, for example: 9; 10; 11; 12; 13; 14; 15; 16]. In the post-Soviet works its first systematic description and research was made in 1999. [17, § 6, pp. 159-198]. The more extensive, already quoted monographic research undertaken during the period of the noted revival of interest to the said topic was published in 2008.

[12] See: Record. Taxes. Law: Professional Weekly. April 1-7, 2008, available at: http://www.blinvastri.ru/news/news~299.

[13] See: Merchant No. 12 (3829), Jan. 29, 2008, available at: http://www.kommersant.ru/doc/846598.

[14] See: Postanovlenie Plenuma Vysshego Arbitrazhnogo Suda Rossiiskoi Federatsii “O nekotorykh voprosakh praktiki rassmotreniia sporov, sviazannykh s primeneniem stat'i 169 Grazhdanskogo kodeksa Rossiiskoi Federatsii” No. 22 [Ruling of the Plenum of the Supreme Commercial Court of the Russian Federation “On Some Issues of Practice of Consideration of Disputes Related to Application of Art. 169 of the Civil Code of the Russian Federation” No. 22] // Vestnik Vysshego Arbitrazhnogo Suda Rossiiskoi Federatsii [The Supreme Commercial Court of the RF Bulletin]. No. 5, 2008.

[15] See: Business-News.Ru (Regional Business News), available at: http://business-news.ru/novosti/makro_novosti/detail.htm?itemid=373138. http://www.rbcdaily.ru/2008/04/04/focus/333957.

[16] See: Consultant

http://ns2.bile.ru/business/insurance/statya_169_grazhdanskogo_kodeksa_nekonstitucionna.html

[17] See: S.G. Pepelyaev. No. 7, 2, available at: http://nalogi-spor.ru/art/488; S.G. Pepelyaev. Nalogi i pravo: Pravoprimenenie po-bol'shevitski [Taxes and Law: Law Application in a Bolshevik's Manner]// Gazeta Vedomosti [Newspaper Vedomosti]. No. 112, June 17, 2007, avalaibal at: http://www.prorazvitie.ru/show.php?action=show_stat&mykey=615; S. Astakhov. Nakazanie konfiskatsiei: VAS rassmotrit vopros ob "antisotsial'nykh" sdelkakh [Punishment by Confiscation: the Supreme Commercial Court Will Consider the Issue on "Antisocial" Transactions]// Rossiiskaya Biznes-gazeta [Russian Business Newspaper] January 22, 2008. No. 637, available at: http://www.rg.ru/2008/01/22/vas-sdelki.html

[18] See: V.P. Shakhmatov. Sdelki, sovershennye s tsel’u protivnoi interesam gosudarstva i obshchestva [Transactions Concluded for a Purpose Contrary to the Interests of State and Society]. Tomsk, 1966, p. 222.

[19] I avoid using the term of "performance", as confiscatory consequences are connected not only with performance in its own sense, but also with the constitutive provision in conclusion of real contracts.

[20] A different situation arises with regard to the Civil Code of the Republic of Kazakhstan of 1994, which established confiscation as a consequence of only one conclusion (!) of the transaction aimed at achievement of a criminal purpose: everything provided for execution irrespective of the fact if this transaction was executed even partially is subject to confiscation (p. 4, Art. 157). Thus, the civil law establishes punishment only for criminal intentions (criminal intent), which was not possible in accordance with the criminal law for a long time. The said norm raises serious doubts as to the legitimacy thereof.

[21] See: D.О. Tuzov. Nedopushchenie restitutsii i konfiskatsiya pri nedeistvitel'nosti sdelok: Teoreticheskii ocherk [Nonadmission of Restitution and Confiscation in Invalidity of Transactions: Theoretical Essay]. Мoscow, 2008, p. 51, et seq.

[22] See: P. Rescigno. Manuale del diritto privato italiano. 7 ed. Napoli: Jovene, 1987, p. 745; G. Alpa Istituzioni di diritto privato. Torino: Utet, 1994, p. 1087, 1091; F. Gazzoni. Manuale di diritto privato. 7 ed. Napoli: Edizioni Scientifiche Italiane, 1998, p. 758; D. Medicus Bürgerliches Recht: Eine nach Anspruchsgrundlagen geordnete Darstellung zur Examensvorbereitung. 19., neubearb. Aufl. Köln; Berlin; Bonn; München: Heymanns, 2002, § 697, S. 490; D.О. Tuzov. Nedopushchenie restitutsii i konfiskatsii pri nedeistvitel'nosti sdelok: Teoreticheskii’ ocherk [Nonadmission of Restitution and Confiscation in Invalidity of Transactions: Theoretical Essay]. Мoscow, 2008, p. 55, et seq.

[23] See, for example, Art. 157 of the Civil Code of Kazakhstan. In connection with the mentioned above it is interesting to pay attention to the fact, that the new legislation of a number of states, the former Soviet republics refrained from confiscation in the event of invalidity of transactions (see, for example, the new civil codes of Ukraine, Estonia).

[24] Rol' V.I. Lenina v stanovlenii i razvitii sovetskogo zakonodatel'stva [The Role of V.I. Lenin in Formation and Development of the Soviet State]. Moscow, 1969, p. 245.

[25] I.G. Tashker. Nekotorye voprosy nedeistvitel'nosti protivozakonnykh sdelok [Some Issues of Invalidity of Lawless Transactions]// Sovetskoe gosudarstvo i pravo [The Soviet State and Law]. No. 8, 1958, p. 116.

[26] See: Corporate Lawyer, available at: http://www.dm-b.ru/Art.s/1775.html; Recovery with Immoral Inclination. Available at: http://www.rg.ru/2008/01/22/amoral.html.

[27] Corporate Lawyer. Available at: http://www.dm-b.ru/Art.s/1775.html.

[28] Antisocial Transactions Haven't Yielded to Definition: the Presidium of the Higher of Arbitrazh Court Began Discussing Art. 169 of the Civil Code. Available at: http://www.kommersant.ru/doc/876707/print.

[29] The draft Ruling at the time of its discussion was placed at the website of the Supreme Commercial Court of the RF, available at: http://www.arbitr.ru/_upimg/3D5608C4061386395125E2DE141D2CFE_vas_zp_2008­04­04.pdf.

[30] See: Е.А. Sukhanov. Antisotsial'nye sdelki v nauke i praktike [Antisocial Transactions in the Science and Practice]// Zhurnal ’Yurist’ [Journal  ”Lawyer”]. No. 8, 2005.

К.I. Sklovskii. Aktual'nye problemy primeneniia stat'i 169 GK RF v sudebnoi praktike [Topical Problems of Application of Art. 169 of the Civil Code of the RF in Judicial Practice]// Zakon [The Law]. No. 5, 2008.

К. Sasov. Statya 169 Grazhdanskogo kodeksa nekonstitutsionna? [Does Article 169 of the Civil Code Correspond to the Constitution?] // Konsultant [Consultant]. June 27, 2005, available at: http://ns2.bile.ru/business/insurance/statya_169_grazhdanskogo_kodeksa_nekonstitucionna.html

S.G. Pepelyaev. Po-bolshevistski... [In a Bolshevik's Manner...]// Nalogoved [Tax Specialist]. No. 7, 2 available at: http://nalogi-spor.ru/art/488.

S.G. Pepelyaev. Nalogi i pravo: Pravoprimenenie po-bol'shevistski [Taxes and Law: Law Application in a Bolshevik's Manner]// Vedomosti [Gazette]. No. 112, 2007, available at: http://www.prorazvitie.ru/show.php?action=show_stat&mykey=615.

D.О. Tuzov. Restitutsiia v grazhdanskom prave// Avtoreferat dissertatsii na soiskanie stepeni kandidata yuridicheskikh nauk. [Restitution in Civil Law: Thesis for the degree of Candidate of Law]. Tomsk, 1999, p. 197.

[31] However, it should be specified, that it is in essence a public-law sanction.

[32] We should only add that the private law shall not exercise a public function of punishment and consequently have the necessary tools to do it.

[33] In general, this reference without adding anything new only litters the text of the law as for the implementation of this innovation the second sentence of Art.169 in a new version would be enough. Taking into consideration the juridical technique chosen by the drafters of the Draft the general rules of Art. 167 simply become excessive.

[34] The authors of the new version of Art. 169 of the Civil Code qualify "receiving stolen goods" in the same way (see para 3, p. 1.2.1, § 2, Section V of the Draft Conception).

[35] Formerly it was proposed to be provided for directly in Art. 169:"The clause that the court shall have the right not to apply general consequences of invalidity if it does not correspond in a concrete case to the fundamental principles of legal order and morality, can be also included into the text of Art. 169 of the Civil Code of the RF" (para 1, p. 2.2.2, § 2, Section V of the Draft Conception). The similar rule was proposed to be established for the transactions qualified under Art. 179 of the Civil Code: "In a number of cases (in particular, for the transactions concluded under influence of deception and violence) it is possible to grant refusal of application of restitution for the party using unfair practices for the benefit of the other affected party to the transaction" (para 2, p. 2.6.6, § 2, Section V of the Draft Conception). The inclusion of the relevant clause into Art. 169 of the Civil Code will make it general and will mean the right of the court to refuse the restitution in case of any ground of invalidity of the transaction at its own discretion.

[36] The Draft Conception determined these cases in a more general way as there was a following addition: "and when the application of the said sanction is difficult" (para 4, p. 1.2.2, § 2, Section V).

[37] The same shall be said about granting to the court of the right on its own initiative to apply bilateral restitution, "as a result of which the illegally privatized property shall be returned to the state in case of evasion of the empowered agencies from bringing the relevant claim" (para 6, p. 1.10, § 1, Section V of the Draft Conception).

[38] For the same reason, inconsistent is the proposal to consolidate "the right of the court to address the competent agencies with a notification on the cases of invalid transactions, found by the court, to which in accordance with the results of the relevant investigation can be applied the measures of recovery to the revenue of the state of any property of the parties to the transaction, if the court does not apply recovery of the property to the revenue of the State in view of an unproved intent of the parties or due to other considerations" (para 2, p. 2.2.2 of the Draft Conception).

[39] I.А. Pokrovskii. Prinuditel'nyi’ al'truizm [Involuntary Altruism]// Vestnik prava [Law Bulletin]. 1902. Book 2, p. 12, et seq.

I.А. Pokrovskii. Osnovnye problemy grazhdanskogo prava [Fundamental Problems of Civil Law]. Мoscow, 1915. p. 216, et seq.

D.О. Tuzov. K voprosu o sdelkakh, protivnykh osnovam pravoporiadka i nravstvennosti [On the Issue of Transactions Contrary to the Fundamental Principles of Legal Order and Morality]// Zakon [The Law]. No. 6, 2008.

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