State authorities count cost as companies recover damages

The liability of state authorities for damage caused to businesses is a controversial issue in Russia. In numerous cases state agencies have inflicted substantial damage on companies through their unlawful actions, with no intention of paying compensation. However, unprecedented decisions of the arbitrazh (ie, commercial) courts have recently demonstrated that material liability of state institutions is not merely an abstract notion, but allows for the recovery of damages in practice.

Claims against court bailiffs

One of the most recent examples of the new judicial approach is the Supreme Arbitrazh Court decision in favour of Irbis, a construction company that sought to recover damages fr om the Federal Court Bailiffs Service. Irbis won a case against a contracting party for the repayment of a debt, as a result of which the debtor was required to pay Irbis over Rb1 million. Irbis obtained a writ of execution and asked the bailiffs service to initiate enforcement proceedings and recover the debt.

The bailiffs arrested the debtor's liquid property, but then lifted the arrest for an unknown reason and arrested the debtor's promissory notes. However, it transpired that there was no security for the notes. It subsequently became clear that the debtor had no remaining liquid property - Irbis had won its case in court, but could not recover fr om the debtor.

The creditor filed suit against the bailiffs service before the state arbitrazh court, claiming that it had incurred losses as a result of the bailiffs' actions. Irbis lost the case at three instances, but persisted with its claim. The case was ultimately referred to the presidium of the Supreme Arbitrazh Court.

The lower courts appear to have rejected Irbis's claims simply because this was the first time that a company had sought to recover losses inflicted on its business by the unlawful actions of the bailiffs service. In practice, such a claim was considered legal nonsense and no judge was prepared to assume responsibility for upholding it. However, justice was ultimately served. The Supreme Arbitrazh Court eventually satisfied Irbis's claims for the recovery of damages fr om the bailiffs service and quashed the lower courts' decisions. The decision establishes a precedent that may radically alter arbitrazh court practice in respect of similar claims.

Recovering legal fees from tax authorities

In 2002 a rule was introduced into the Code of Arbitrazh Procedure wh ereby legal expenses, including fees payable to attorneys and other representatives, are recoverable from a losing party. However, in almost all cases such recovery was lim ited to relatively small amounts - typically between Rb5,000 and Rb10,000 - that did not reflect the expenses incurred, particularly in complex cases. It was generally accepted that such recovery was little more than a token payment.

It was not until 2009 that the Supreme Arbitrazh Court first allowed full recovery of the expenses that a commercial party had incurred. A Murmansk-based trading company, MKTI, had been fined by the local tax office and had subsequently contested the fine in court. It won the case and sought recovery of Rb1.5 million from the Federal Tax Service for attorneys' fees and legal expenses.

The lower courts partially satisfied the claim. However, the Supreme Arbitrazh Court ruled that the confirmed expenses were recoverable in full and ordered the Federal Tax Service to pay the full sum in the statement of claim.

Parties have since sought recovery of legal expenses and attorneys' fees up to a value of Rb2 million. The possibility of having to pay such sums has a powerful restraining influence on the tax authorities. This is widely regarded as a welcome development, as administrative and legal reform cannot yield results unless the state authorities are forced to pay for their errors.

State duty

The Tax Code stipulates that as the state authorities protect state and public interests, they are exempt from state duty. However, this raises difficult questions in cases wh ere a tax office issues a decision on the recovery of tax arrears and the taxpayer successfully contests the decision in court, only for the tax office to file an appeal. Must the authority pay state duty when filing the appeal? Must it reimburse the successful party for its payment of state duty?

For a long time the arbitrazh courts simply ignored the issue and no state duty was recovered. The Supreme Court and the Supreme Arbitrazh Court then resolved that state duty should be paid in such cases. The amounts in question are relatively small, but they are payable from the state authority's budget. A circular from the Federal Tax Service strongly advised its tax divisions to avoid lawsuits if it is clear that they are likely to lose and incur additional expenses. The Federal Tax Service is estimated to have paid Rb3 billion in state duty.

Such losses led to the amendment of the Tax Code to exempt state authorities from state duty when filing claims or appearing as plaintiffs or defendants. However, the Supreme Arbitrazh Court has partially restored the status quo and has issued a number of resolutions on the subject. Among other things, it has ruled that although the law exempts state authorities from state duty when filing a claim, if a company lodges a claim, pays duty and wins the case, the state authority must reimburse the company for the duty paid. The court has upheld dozens of such decisions by lower courts.

Comment

These examples are evidence of a Supreme Arbitrazh Court policy that seeks to impose liability on state authorities for actions that cause damage to companies. It could be argued that 2009 marked a breakthrough on this issue - it is hoped that this trend in arbitrazh court practice will continue.