Warning – investment agreements!

In the conditions of the Russian legal chaos, the investment agreements will die off despite the policy of liberalization of the construction sphere, which the State conducts, and the elimination of administrative barriers. Such was the opinion exchanged by the experts during the seminar “Organization of industry in Russia – legal aspects”, organized by the Law Committee of the Russo-German Chamber of External Commerce in Moscow on June 18 of 2013.

For example, Olga Chaikovskaya, representative of Beiten Burkhardt, pointed out that the implementation of the measures of simplifying formalities for the investors and developers, which the Government has been taking since 2011, and the transition to the electronic circulation of documents is at a low level. According to her, only a few of the required by-laws have been adopted. Vladislav Mazur, Adviser to DLA Piper, expressed the common idea that the reverse situation would also be disadvantageous to the protection of the business’s rights. The lawyer stressed: “An abundance of normative acts does not make an investor’s life easier, and can actually lead him to dead end situations”.

The experts were unanimous that investors should not fall for “provocations” by certain members of the authorities to circumvent a provision, and should instead always stay in the legal framework, even though it is extremely difficult in the Russian reality. One of the causes for this is the incredible amount of peculiarities, which are essential when registering rights for land plots allotted for construction – when executing a lease agreement, purchasing buildings (Brownfield), receiving construction permits, signing agreements with construction companies and project organizations as well as utilities agreements (electricity, supply of gas and water) etc. This was one of the reasons for the event participants to be skeptical towards the Government plans to improve the Russian position in the World Bank’s Doing Business rating to number 20 within 7 years.

Advocate Tatiana Starikova, Head of Private Clients’ Practice of the Law Firm "YUST", summarized the speeches of her colleagues and reminded that investment agreements are most often the basis for the realization of investment projects in the sphere of construction and reconstruction. The very concept of such agreements appeared in Russia in 1991 during the perestroika, when not only the laws on allotting land plots for construction were underdeveloped, but the very social and economic relations were quite chaotic. And the powers of public law organizations filled the legal gaps by investment agreements. It should be noted that the current legislation sill has no such civil law agreement construction as an investment contract.

The advocate pointed out that, due to its empowerment, it is the public organization (an obligatory party to such contract) that dictates the conditions for developing the territory by the investor. And the list of the organization’s obligations, which is included in the text of the investment agreement, shows that this is the list of its public law functions, which it is still required to fulfil pursuant to the law (to lease the land plot, to approve the project documentation, to issue construction permits etc.), and without pay.

According to Tatiana Starikova, investors make significant financial contributions, inter alia, for the performance of duties, which the authorities must perform pursuant to the law.

The court practice, which is the process of forming, does not allow the investors to look at the solution of the problem with optimism. According to the HCA of Russia, the exaction of such payments (in monetary or natural form, for example – by subsequent transfer of the erected immovable property objects to the public organization’s ownership) is legal, and the obligations arise on the basis the civil law agreement between the parties (see the Resolutions by the Board of the HCA of Russia No. 5495/11 dated 11.10.2011 and No. 12444/12 dated 05.02.2013). The Board of the HCA of Russia stated: since the developer has freely undertaken such obligations – to pay the public organization for performing public law functions – it must comply with those taking into account the basic principles of performance as fixed by Articles 309-310 of the CCRF. The Chamber of the HCA of Russia, in its determination to submit the case for consideration by the Board (the determination No. BAC-12444/12 dated 19.11.2012) somehow compared the investment agreements, which stipulate the investors’ obligations to pay monetary amounts to the public law organization for the execution by the city administration of its public law duties, to donation agreements. Said court resolutions illustrate the fact that the investors will be unable to avoid paying (otherwise no investment agreements will be executed with them, and no business will be founded in Russia) nor to recover said monetary amounts. Moreover, the investors always risk “getting stuck” in the system: for example, the requested construction permit is not issued and no denial of such is given to them. And the project time goes on. After several repeated requests, all that is left for them is resorting to courts claiming enforced performance of public functions stipulated in the investment agreement. The HCA of Russia takes the following position on such disputes: the parties to civil law agreements may not allege it and demand that public organizations execute their public law duties (see the Resolution by the Board of the HCA of Russia No. 1704311 dated 03.04.2012). Tatiana Starikova concludes: “Thus the investors are doomed to a dead-end situation”.

The expert prognosticates that the investment contracts will die off and will be gradually replaced by concrete types of civil law agreements (for example, agreements of lease of a land plot allotted for construction, of joint actions), and the public law organization authorities will perform their power functions pursuant to the law, the way it is in Germany, for example. The necessary duty for the development of infrastructure, the workload of which really grows as new immovable property objects appear, will objectively be of a fiscal nature along with taxes, levies, other compulsory payments.

At the conclusion of the event, the experts agreed that, before implementing an investment project and doing business in Russia, one should most thoroughly study all possible risks that accompany the structuring of the transaction and conduct legal due diligence, the results of which will allow to hold the tender with profit as well as minimize negative consequences if the transaction does not follow the investor’s plan.

Publications on the matter: Results of intellectual activity as a subject matter of investment agreements // Legal Insight. № 5 (6), 2011

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