CONSTITUTIONAL COMMERCIAL LAW IN THE COURTS

by

Peter B. Maggs

Professor of Law

Clifford M. and Bette A. Carney Chair in Law

University of Illinois at Urbana-Champaign

INTRODUCTION

            During the Soviet period there were no independent institutions capable of challenging violations of fundamental rights. In our American context, we often think of the fight for Constitutional rights being led by organizations such as the National Association for the Advancement of Colored People and the American Civil Liberties Union. There have been major efforts to create similar non-governmental organizations in Russia, but creation of self-sustaining domestic civil rights groups has been a daunting and generally unsuccessful effort. Part of the reason for failure is that many such organizations were financed from abroad, thus creating general suspicion about their activities. This article will discuss how private business interests in Russia have played an important role as independent entities fighting for the protection and expansion of constitutional rights. Businesses have been particularly active in litigation over taxes, customs duties, and bankruptcy. A quick computer search of 4261 cases decided by the Constitutional Court, shows that 703 had the Russian word for tax in the text, 169 had the word for customs, and 87 had the word for bankruptcy. Many of these decisions established important principles of constitutional law, guarantying key rights to all or extending rights held by citizens to businesses. Many of these cases, though originally brought in a commercial context, have established important principles protecting the Constitutional rights of all in Russia, such as the right to judicial review of administrative action and the right to know the law.

            Businesses have brought Constitutional law cases to all three of the top courts in Russia, the Constitutional Court, the High Arbitrazh Court, and the Supreme Court. Of course, the Constitutional Court has been the center of the development of business-driven constitutional law precedents. The Constitutional Court has regularly cited and followed its the precedents created by these cases. In addition, the courts of general jurisdiction and the arbitrazh courts have followed not only the narrow holdings of the Constitutional Court invalidating laws, but have also applied these holdings more broadly by analogy. This practice was given formal legal status by an amendment of December 15, 2001, to Article 87 of the Law on the Constitutional Court. In a case decided in 2002, the Constitutional Court refused to hear a complaint against a decision by the arbitrazh courts, but rather suggested that the arbitrazh courts had failed to follow Constitutional Court precedent and that they should reconsider their decision on the basis of this precedent. In another 2002 case the Constitutional Court referred to several earlier precedents as the basis for a general rule and indicated the case fell under the general rule. However one of the precedents cited was not published at the Court's website, which at the time purported to include all decisions of the Court that have been published in the mass print media. The citation by a court of precedents that are unpublished or are not readily available is, of course, a bad practice. The Supreme Court has also broadly interpreted business-related Constitutional Court precedents. Thus, for instance, it rejected an argument that a Constitutional Court decision about the legality of tax regulations affecting banks be limited to banks or to the particular tax regulations involved. A number of commercial constitutional law cases have come before the High Arbitrazh Court. In dealing with these cases, the High Arbitrazh Court has applied not only the provisions of the Constitution itself, but also the precedents created by Constitutional Court decisions. One case turned on the application of a decision of the Constitutional Court. The Arbitrazh Court for the East Siberian Region had interpreted this decision as requiring a judgment for the plaintiff; the High Arbitrazh Court had a different reading of the same decision as requiring a judgment for the defendant. Like the Supreme Court the High Arbitrazh court has applied Constitutional Court precedents broadly, for instance in a case on tax regulation.

            Perhaps there is some forum-shopping going on. Two men who were shareholders of a company and the company itself brought an action in the courts of general jurisdiction seeking to have a tax regulation held invalid. The Supreme Court dismissed the case on the basis that the men who were shareholders had no interest in the case. Without their participation, under the law in effect at the time, the case would have been one for the Arbitrazh Courts rather than the courts of general jurisdiction. The Cassation Division of the Supreme Court reviewed this decision and reversed it, holding that the citizens had a right to their day in court under Article 46 of the Constitution, but expressing no opinion on the merits of the citizens' case.

FAIRNESS IN APPLICATION OF LEGISLATION

            Commercial cases have come to the Constitutional Court in various ways. In a 1996 case the Constitutional Court decided a question that had come up more or less simultaneously as an inquiry from a commercial court, a petition by shareholders of a company, and petitions by two other companies. This case involved a claim that a change in customs duties was an unconstitutional retroactive application of taxes. To decide this question the Constitutional Court had to determine when the law that made the change went into effect. It established the important principle that the date when a law was officially published was not the date printed on the official publication but rather was the date when the official publication actually became available to the public. It also reaffirmed the principle that legal persons - as associations of citizens - have the right to bring cases to claim constitutional rights. Other cases, however, involve more substantive principles. In one case the High Arbitrazh Court applied a Constitutional Court decision denying retroactive force to a tax law. As was the case with the Supreme Court parties before the High Arbitrazh Court have frequently complained of violation of the rules of publication of laws. It is not clear that any of these parties was harmed by the lack of publication. Rather it appears that clever lawyers have seized upon violations of the publication requirement as a means to help their clients avoid burdensome taxes, customs duties, and financial regulations. In one case the relevant legal text was in an international agreement. While information on Russian accession to the agreement had been published before the relevant date, the text of the treaty had not been published, and so was held not to be binding under Article 15 of the Constitution. In another case, a taxpayer successfully protested that a local ordinance cancelling a tax break had not been published at the time the tax came due.

            Various other cases brought by businesses established principles of the superiority of treaties over domestic law, the invalidity of unduly vague legislation, and a proportionality requirement for administrative sanctions had to be proportional.

REVIEW OF ADMINISTRATIVE REGULATIONS

            Supreme Court decisions on the power to tax have provided important guidance on a key principle of what in the United States is called administrative law. One decision held that because of the Constitutional restriction requiring taxes to be levied by Federal statute, only regulation of minor details of tax law could be delegated to government agencies. In a similar case, the court rejected a claim that power had been delegated to the Government to regulate communications devices. Another held that a government agency can issue regulations only within the scope of powers delegated to it by law. Thus in one case an organization named Moscow Fund Market successfully attacked a Central Bank regulation requiring sale of hard currency earnings through the Central Bank as violating Article 55 of the Constitution. The Civil Division and Cassation Division of the Supreme Court held the regulation invalid; however the Presidium of the Supreme Court found it to be within the scope of delegation. Yet another applied the principle that a later decree lessening a sanction is retroactive under Constitution.

            The Supreme Court has been particularly strict in its interpretation of Constitutional provisions that allow certain rules to be established only by statute law. The Kol'skaia Metallurgical and Mining Company brought an action to nullify as a Russian government decree imposing a requirement of payment for pollution. The Cassation Division of the Supreme Court held the decree to be unconstitutional on the ground that Paragraph 3 of Article 75 of the Constitution allowed only Parliament to impose a tax. It cited a Constitutional Court decision that had held that the Russian government could not by decree impose a required payment that had the characteristics of a tax, even though it was not called a tax. This decision thus introduced a key principle into the Constitutional jurisprudence of the Supreme Court. In United States legal terminology, this is the principle: "If it looks like a duck, walks like a duck, and quacks like a duck, it is a duck." Another Supreme Court decision followed a similar pattern.

            Business can afford to hire clever lawyers who can look for Constitutional arguments that may enable the businesses to win on technicalities. The Simbirsk Automobile Agency sought invalidation of a Central Bank Instruction on the ground that it had not been published as required by the Constitution. While this was a technicality, since the business apparently was aware of the tax regulation, the decision involved a particularly important principle, given the curse of secret laws in the Soviet era. In reaching its decision, the Supreme Court, cited two earlier Supreme Court decisions on its way to reaching a conclusion in the case.

            The Constitutional Court ruled that the cancellation or expiration of an administrative regulation could not serve as the basis for dismissal of a case challenging the regulation.

PRIOR COURT APPROVAL FOR GOVERNMENTAL ACTION

            In key cases, businesses achieved important expansions of the right to prevent arbitrary action by government officials without court approval. One of the first of the large number of tax cases also established an important general principle. In this case the Constitutional Court found unconstitutional the execution of fines by the tax authorities by seizing money from bank accounts without first getting a court order, thus establishing an important principle applicable to all types of fines. Another case held that a court order was necessary for the seizure of items and documents from banks containing account information. A similar decision held that court approval was required for taking from auditing organizations confidential information about their clients.

RIGHT TO COURT REVIEW OF GOVERNMENTAL ACTION

            Visitors to Russia in the 1990s saw advertising for two Smirnov vodkas, one made by the non-Russian company whose predecessors had been selling vodka for decades in the West under the name Smirnoff ending in two "f"'s; the other made by a Russian company that had been selling vodka for a few years under the name Smirnov ending in a "v" and a hard sign. Both, of course, claimed to be the true successor to the famous pre-Revolutionary Smirnov distillery. And of course both heavily engaged in litigation to vindicate their claim to be the real Smirnov.

            After losing in a trademark proceeding before Rospatent, the Russian Patent and Trademark Office, the two-f Smirnov brought an action in court to overturn the Rospatent decision. The lower courts dismissed the case on the ground that the Law on Trademarks and Service Marks did not provide an avenue for appeal. The Supreme Court, however, declared that the Constitution always allowed appeal of administrative decisions to the courts, and remanded the case for a decision on the merits. This 1994 Supreme Court decision helped to solidify two very basic principles: first, that organizations as well as individuals have Constitutional rights; second, that there is always a right to appeal to the courts from adverse administrative action. Thus while the final outcome of the case, the concurrent registration of the two trademarks, the one with two "f"'s and the other with a "v" and a hard sign, was of interest only to the companies involved, trademark lawyers, and vodka connoisseurs and the companies involved, the principles involved are of great general importance.

            Protection against arbitrary administrative action was also provided by decision requiring that tax authorities give taxpayers a chance to present explanations and documents supporting their positions for consideration by the tax authorities and requiring courts to consider these explanation and documents if the taxpayers challenged a tax assessment. Another decision prevented arbitrary imposition of penalties by bailiffs.

FAIR TRIAL

            In another case, the High Arbitrazh Court reaffirmed the principles of the adversary system of Part 3 of Article 123 of the Constitution. The Procuracy had attempted used its protest power to force High Arbitrazh Court review of a decision awarding rent and penalties to the landlord of an office rented by the Procuracy in St. Petersburg. If the landlord had lost, it could not have forced review; the landlord could only have petitioned for review. The High Arbitrazh Court held that the Procuracy could not exercise to protest in this case, because it would destroy the equality of the adversary process.

RIGHT TO APPEAL ADVERSE COURT DECISIONS

            Another case also broadened the right to judicial protection by holding that the Presidium of the High Arbitrazh Court must allow reopening of a case whenever there is an injustice. A bankruptcy case also affirmed the right of appeal of adverse decisions.

PROTECTION OF PRIVATE PROPERTY AND PRIVATE BUSINESSES

            In numerous cases, businesses strengthened the overall legal guaranties for commercial activity. The Court advanced a theory of equal treatment of juridical persons and private individuals in two tax cases. One of these also decided that state unitary enterprises was entitled to treatment equal to that of private enterprises. Another decision also invalidated tax rules on the ground that they denied equal treatment. Yet another decision ruled that juridical persons should be treated equally with private persons under laws requiring the use of cash registers. However, a customs case, indicated that where there were good reasons, juridical persons could be treated differently from private individuals. A tax case, a bankruptcy case, a privatization case, and a customs case all affirmed the principle of protection of private property against arbitrary and uncompensated taking. A bankruptcy case upheld the sanctity of contractual obligations. An important decision on priority in attachment of bank accounts of insolvent enterprises forced the Constitutional court into a sophisticated analysis of an apparent conflict between different articles of the Constitution. A Constitutional Court decision protected a private seaport pilots' organization against government regulations that would have prevented the organization from competing against government pilot organizations. Shareholders were given a right to a fair court hearing in cases of compulsory purchase of fractional shares. Constitutional Court decisions broadened the right to recovery in case of harm caused to businesses by unlawful court actions (or inactions) in civil cases.  

CONCLUSION

            Litigation by business interests serves two important and beneficial functions in Russian constitutional law. First, it is establishing and reaffirming important principles of general constitutional rights, such as the right to appeal adverse administrative action, that are important not only to business but also to private individuals and non-business organizations. Second it is establishing stronger protection for property and contract rights and stronger limitations on arbitrary bureaucratic regulation of business activity, thus strengthening the foundation of the market economy. Businesses have been highly successful in constitutional litigation in all three court systems, in part because they have been able to hire good lawyers and to pay them to take the time to research court precedents in constitutional law and to use them to the advantage of their clients.