Interview with Sergey Sarbash, the head of the Sixth Division of the Supreme Commercial Court of Russia

How judges think? More specifically, how Russian judges think? We talk with Sergey Sarbash, a maverick judge and the head of the most curious part of the Supreme Commercial Court. This is quite an informal interview, more like a chat, to have a better look at one of those running Russian legal machine.

Text as delivered follows.
Copyright of The Legal Communications Ltd, December 2011

The Sixth Division of the Supreme Commercial Court is quite unique. What is so special about it?

The Sixth Division has, indeed, a special agenda and two main tasks.

First. The final decision in the Supreme Commercial Court is taken by the Presidium comprised of 16 judges. Judges of the Supreme Commercial Court send cases to the Presidium. When the Presidium is to consider a case, a co-reporter from our division is appointed to oppose the main reporter and deliver a different point of view. This is the first task of our division.

The second task relates to the way in which cases are distributed within the court. In the Supreme Court, there are five specialised divisions – corporate law, ownership, real property, obligations and contracts, administrative liability and taxes and cases are considered by these specialised divisions.

However, a computer randomly selects one case from each division every day and sends it to us. So, in a way, we act as a group of oppositionists.

We watch what sort of case law is being developed by the specialised division in relation to this case. And if we disagree we can send this case to the Presidium and defend a different point of view.

We are some sort of dissidents.

That is why you are a vocal advocate for judicial dissent?

Dissent is not just available to judges in the Supreme Commercial Court. Any court judge can dissent. This is a comparatively new institution in Russia. And here I’ll blow my own trumpet, if you like. I was the first to dissent. A case came up in which I disagreed with a view taken by the Presidium.

Was that unusual?

Yes, very much so. A dissenting voice can upset some judges who may even feel they are being insulted professionally. But fellow judges made their support felt and so did all my colleagues as well as the court administration. I knew that they liked me and would not take offence. And no-one did. No-one took offence.

Was it purely a legal matter?

Oh, yes. It was a purely legal matter. Nothing political. But I thought the question was important for the protection of rights. It was a dispute about interest on late repayment of debt. Not the sort of thing that hits the headlines. Purely professional.

Would you agree that the Supreme Commercial Court not only interprets the law, but creates it?

Generally speaking, yes. And I don’t think that this is peculiar to Russia. All courts in the continental system, which by their very nature should not create precedents, do in fact make law by means of interpretation, filling gaps, resolving conflicts between legal acts. From this perspective, yes, they create a new understanding of the law.

Moreover, the law is made of words which can be understood in different ways. As a result supreme courts give a definitive interpretation of the law when they resolve disputes or when they give so-called ‘abstract determinations’ – in other words, resolutions issued by the Plenum of the Supreme Court, a characteristic feature of our legal system.

In that sense, we have an integrated system. The creation of case law is influenced – and rightly so - by lawyers, who defend their clients’ interests, representatives of the state, other people taking part in a dispute, resulting in an integrated system. The legislator’s perspective is expressed clearly or otherwise in a legal act. Business has a part to play as well and so do disputants and judges who all determine the interpretation of legal norms. At the end, this becomes a legal reality.

If we return to judicial dissent, how the existence of different views influences the development of law?

Dissent, as is often the case, has two sides. On the one hand, it introduces some uncertainty in the law. The Supreme Court might have made a decision with which one or more judges disagree. The question therefore arises, how strong the legal position of the court really is? Can it be relied on?

On the other hand, dissent also warns the general public of a lack of clarity in the legal system and flashes up a signal to the legislator: if the judges of the Supreme Court do not agree on how to interpret this law the legislator’s will is not clear. This matter needs to be addressed.

I think the legislator understands judicial dissent as a call for additional regulation.

Does the legislator respond to such signals?

It is too early to say because the institution is still being formed. Government departments monitor changes in legislation. And I believe they should take notice of judicial dissent. The Ministry of Justice should keep these dissenting opinions in mind when making recommendations to the government.

Do you think Russian law favours a creditor or a debtor?

My personal opinion is that commercial courts don’t protect creditors enough. We can see the lack of protection in the widespread practice of reducing the penalty for breach of an obligation, the difficulty of recovering damages, the severity of courts in proving damages and the so-called ‘cause-effect relationship’.

We should make it extremely costly to breach anybody’s rights. This will reduce the caseload and breaking the law will become less frequent.

Do we need to change the law to achieve this, or the interpretation of the law?

Efforts are needed in either direction. We need to analyze court practice and see where it falls down in its protection of creditors’ rights. We need to correct the law here and there. And lawyers do not always do their job properly. We have to move in all directions and then there will be a synergetic effect.

Amendments to the Civil Code which are likely to be adopted next year contain some constraints on the activities of foreign companies. How serious are they?

In the draft law there are no constrains as such on the activities of foreign companies. Only companies from offshore jurisdictions will be affected and even this can’t really considered as a constraint but more a regulation whose intention is to establish a level playing field on disclosure of information.

Otherwise the whole thing is slanted unequally. National companies and companies from classic, if I may say so, jurisdictions are required to disclose information about owners and as well as other information in accordance with corporate law. Offshore companies get round this requirement and obtain an unfair advantage.

We might have neglected this inequality, if it were not for evidence that some offshore companies are taking advantage of it in bad faith. For example, if a company took over another firm’s property and the owner wanted it back, but the new possessor maintains that he is a bona fide acquirer. But we don’t know who is behind this company. The court cannot find that out because there is no legislation that allows it to do so.

Often you get the impression that offshore companies are not backed by foreigners but by unscrupulous Russian businessmen who got hold of someone else’s property. Is it fair? I don’t think so. It’s bad protection of ownership. We want to give more protection to those who have been deprived of their property.

Is the Supreme Commercial Court involved in the development of the new law?

The Supreme Commercial Court is primarily engaged in the interpretation and application of the law. This is its main task.

In cases when the law is ineffective or there is gap in it or it is not clear, the court gets involved. It tries to establish an interpretation of the law, within its competence, which would protect rights more effectively.

The judges of the Supreme Commercial Court and particularly me –I’ll blow my own trumpet again - belong to expert bodies that prepare new laws. A number of judges of the Supreme Commercial Court are members of, for example, the Presidential Council, which, incidentally, has prepared these changes to the Civil Code to strengthen the rights of creditors.

Why are they involved? Because they know the practice and problems of law enforcement. On the other hand, researchers and representatives of other legal professions, including those from the business community are involved too.

What other changes in respect of foreign companies are in the new Civil Code?

I understand your concern. But I do not see any special treatment in respect to foreigners in the law, except for laws affecting offshore companies which are now widely debated. But in regard to foreign companies in general I do not recall any special features or exceptions. Our legislation assumes the equality of all subjects. The rules are the same for everyone.

Sometimes one can get an impression that some favouritism toward Russian companies exists. Would you not agree?

I cannot exclude that this can happen in some cases in lower courts. It is hardly possible to guarantee that this never happens. As regards to the practice of the Supreme Commercial Court, I do not see this problem at all.

On the contrary, there are many cases when judges of the Supreme Commercial Court, including ones from our division, side with a foreign company. We all understand the responsibility that rests on the law enforcers in terms of creating favourable conditions for business and investment. So, no one here is going to harm foreign investors. On the contrary, we protect them.

To what extent do you take into account the considerations of economic efficiency? Would you agree that sometimes decisions which are consistent with the law are bad for business?

Of course legislation is not always perfect and there are times when it does not suit business. The question is why this happens. If this is merely a flaw in the legislation, then courts can find and reveal this imperfection. In this sense, courts are good instruments to encourage legislators to change things and improve them.

On the other hand, it is a fact that the law always lags behind economic needs - and not only economic, any needs. It is inevitable. Legislation always lags behind life.

Is it inevitable?

Yes, it is inevitable. Any regulation can be formulated in a particular economic climate and when these conditions change new factors that were not taken into account emerge.

As a result, the regulation becomes less effective and not quite fair which is why we need courts. They can adapt imperfect, ambiguous, erroneous law to the realities of the day and avoid making unfair decisions based on such ineffective laws.

Can you think of some specific cases?

It's hard for me to say outright. There were a lot of cases.

Here’s one. You mentioned the insufficient protection of creditors’ interests, including the court practice, including that of the Supreme Commercial Court, of reducing the penalty to be recovered from the person who failed to perform an obligation. There was the case, for example, in which the Supreme Court changed the practice of commercial courts very sharply by giving quite another direction: that a court cannot on its own initiative reduce the penalty unless the respondent asks for such a reduction.

Previously the practice was quite different. The courts reduced the penalty at their sole discretion, ex officio. The Presidium of the Supreme Court changed the approach that had been developed before the last crisis, in 1998. Maybe then it was justified. The Presidium of the Supreme Court stood for the adversarial system. The court practice was changed and now courts are not allowed to intervene in a dispute.

What are the most sweeping changes to expect in 2012?

I think that court practice will move on along the lines that we’ve been talking about. We must strengthen the protection of creditors. We must reduce the number of violations of the rights of creditors, owners and shareholders. These are the directions, I think, that, at the moment, are the most urgent. The legal system is not quite effective in the protection of these rights.

We must find a way to protect rights, not by words but by deeds. And, moreover, we must find an interpretation of the law which would help prevent the violation of the law. Our legal system should strive to prevent the violation of rights, rather than struggle with the consequences of such violations. These are the directions to move in. This concerns the application and interpretation of existing laws as well as making new legislation.

What should be done in the view of accession to WTO?

There are two points I would like to make. First, there will be integration processes in the legal field. The leading part here will be played by the legislator and the Government; it is their task to integrate our legislation, and to make sure that our enforcement practices are not in conflict with the principles of the economic community, so that we fit in there and do not become strangers.

On the other hand, our foreign colleagues should, perhaps, help us here so that all members of this organisation were treated equally. Otherwise, a sense of injustice will spread, double standards - these are ours, those are yours. This should not happen in a voluntary organisation like this. This is very important for all the law enforcement agencies of the participating countries.

Do you expect any changes in the court practice in this regard?

A new layer of legislation, so far unfamiliar to us, will appear. We’ll have to make some efforts to adopt this new material. So far, we were not affected by WTO. We apply our domestic law.

Now, more international factors are being brought into our life. There are other integration processes. There is the Eurasian Economic Community. It brings additional regulation too.

Apparently, we'll be in a difficult situation because we’ll have to adopt new international legal elements. And the task of our courts is to prevent collisions here, so that one element will not interfere with another, and everything will work well together. We'll have to work in this direction and there are things to be learnt. We don’t know everything very well here, to tell the truth.

Is there a point in studying foreign law? Or, perhaps, we are so different that should follow our own special route?

Not at all. Moreover, the Supreme Commercial Court has already got a department engaged in the studying and adaptation of best foreign practices. The department is staffed with analysts, many with advanced academic degrees, whose job is to prepare analytical reports on foreign practices.

Every time we have to deal with a foreign element, this analytical force is asked to cope with complex issues.

Moreover, recently the court’s divisions, particularly those dealing with private law, appointed experts who help judges to compare the case law they create with similar practices in foreign legal systems, so that we could see whether we are moving in the same direction and if not, why not.

We’d like to compare our views with those of our foreign colleagues. And we have created special resources to achieve this. We have a rich library. The best legal works are available here. And we use them. If you want, we can go to my office. For example there is a fundamental book by the Dutch professor Dalhuisen. His book is on my desk.

What about the law that existed until 1917, the law of the Russian Empire?

Of course, we utilize it and we started utilizing it long ago, when the country made a turn from the planned economy to a market economy. We realized that in Imperial Russia we once had a market economy.

It is well known that, until certain historic events, Russia was creating a civil code which never became law but very rich analytical materials have been left for us to use.

Later, these materials helped create the Soviet Civil Code of 1922, the period of New Economic Policy. They didn’t talk much about it, but as I say, these materials were actually used. We are returning to them now. Why ignore the intellectual material that was accumulated then, even if it is distant in time? Of course, many things are no longer applicable. The world has changed. But many ideas are still valid.

Like what?

Very much in the field of civil law: contracts, contractual stability, some details, elements. Rich materials prepared by the drafting committee were published, and we use them. Again, we can go to my office – you’ll see what a good office I have – I have the draft of the civil code.

Sometimes, when there is a complex problem and I'm not sure how to solve it - according to our law it may seem this way, according to foreign law, some other way - I take the draft code from the shelf. What did they think? What regulation did they propose? I compare and think why they offered this solution here and a different solution there. It enriches the views on a problem and helps you to think of a fair solution that would strike a balance between conflicting interests and, sometimes, even reconcile the different parties.

So, you get a bird’s eye view of the law?

Yes, it’s a natural methodological device for me. When I think over a problem I always look at the solution proposed by the lawmaker and then I look at what legal researchers think of it, how court practice is being developed – we've got another branch of courts, so I refer to the practice of the courts of general jurisdiction too - then I turn to foreign law and see what our foreign colleagues think of it.

In many respects, life is standardized. There is a contract of sale anywhere: here, in England and in Africa. Why not see how they solve this problem? Why not take advantage of someone else's brains? We can refer to history. Why not? Sometimes good solutions, brilliant solutions, are simply forgotten. We just need to dust them off and bring back to our world.

What may we expect in 2012?

It seems that various government agencies and business organisations have taken a very serious drift to innovative development. I think this trend will increase. You know Russians can be slow to start. You know, things start slowly in Russia, but once they finally get the green light, they can’t be stopped. The Russian bear just pushes on ahead. If they said innovation, then there will be innovation.

We couldn’t start moving before but now, it seems to me, as one famous politician liked to say, the process has begun, and it cannot be stopped. I think the creativity of our people will begin to show in business. I do not rule out that one day our foreign colleagues will come to us to learn something.

This will affect legislation in the field of innovation?

This will affect a wider range of issues, not just innovation. Russian business, I think, begins to fit in with the best international trends, not necessarily associated with new technologies. This may be a development in traditional sectors of the economy. It seems to me that despite the crisis, there is a strong aspiration for development. And little by little, this trend will find support from the state, which finally starts to realize that this process should not be thwarted, but instead should be helped in every way.

When the state finally faces up to business, and puts it shoulder behind business, we’ll feel all the strength of the economy we are capable of.

When will it finally happen?

I think it's already happening. There won’t be a zero-hour. Critical mass gradually accumulates and at some point we will see the results. In the coming years we should be able to see some effect of this development. I would like to hope so.

What would you recommend to the readers of RussianLawOnline?

I would suggest getting rid of myths. We all are susceptible to all kinds of myths. There is a myth that Russia is a dreadful country and you’d better stay away from it - well, it’s not true. In fact, there are civilized institutions, including judicial protection, here. All businesses, foreign and domestic, can rely on judicial protection, on impartial, fair protection without favouritism or other negative aspects.

The Supreme Commercial Court puts much effort to this end and will do more. And I do not think that there is a substantial risk in investing in Russia.