Evgeny Zverev, senior associate of a law firm, made comments on a ruling of the Supreme Arbitration court presidium in an article entitled “The State held liable for damage to Business”

10 July 2009

The Supreme Arbitration Court of Russia has adopted the ruling which sets a precedent: any damage caused by formally lawful actions of prosecutors, law enforcement officials, or public officers, is to be recovered at state expense. The affected companies may also claim an indemnity for tarnished reputation.

According to the Civil code of the Russian Federation, any damages incurred by individuals or entities as a result of illegal actions committed by government agencies or their officials, are to be recovered at state expense out of federal treasury. Yet so far the courts have not only applied equivocal judgments to actions of the powers that be, but also made ambiguous interpretations of their rights.

Justice Fireworks

The conflict blazed up around pyrotechnic products owned by “Centr-suvenir” CJSC. The law enforcement officials have seized over 8 thousand packages with fireworks by order of an investigator from the Procuracy. Almost a year later, since no evidence of foul play was found in operation of the company, it was decided to return the goods. However, more than half of the packages vanished into thin air from military supply depot where they were stored under instructions of the same Procuracy.

The company made a claim for damages in amount of 4.8 million roubles. Businessmen estimated damage to the company reputation impaired by illegal actions of law-enforcement agencies at some half million roubles. All “partators”, i. e. the General Prosecutor’s Office, the Ministry of Internal Affairs and the Ministry of Defence of the Russian Federation have been summoned to appear as defendants. The claimant asked to hold them jointly liable for damage to be recovered, since decision on property seizure was taken by officials of the Procuracy, while seizure actions were carried out by police workers, and the goods were in custody of the Ministry of Defence.

However, the Moscow Arbitration court disallowed the claim, since it held lawful the actions of the Procuracy and law enforcement agencies related to search and seizure of property. To put it simply – the prosecutor had the right to adopt a contentious resolution, policemen also operated within the confines of the law. And damage inflicted on an innocent person was of no account.

Both appeals and cassation instance came to the same conclusion.

There is a supreme judge

The affected company managed to secure review of the case in the Supreme Arbitration Court of Russia (SAC).

The arbitration tribunal chaired by arbitrator Nadezhda Ksenofontova has concluded that matter in contest is the real damage caused by loss of property which was returnable to its owner. The respective criminal case was handled by agencies of the Procuracy, its officials authorised the search and seizure of property. Therefore, this supervisory agency is the organisation entitled to store seized property.

The court has also stressed the point that a special act regulating matters of storage of material evidences and liability for failure to ensure their safety should be applied in legal proceedings. This regulating act was approved 20 years ago by several Soviet governmental agencies (including KGB) and Supreme Court of the USSR, and remains in force to this day.

On July, 9th the Presidium of SAC has adopted final ruling related to this dispute: “Centr-suvenir” CJSC shall be compensated in full for damage caused by loss of property, at state expense out of federal treasury. Moreover, the claim for damages by impairment of business reputation was presented for new trial. The ruling of the Supreme Arbitration Court of Russia de-facto sets a precedent and is binding for all the national arbitration courts.

The lawyers interviewed by a contributor of "Fontanka" welcomed the ruling adopted yesterday: “Unfortunately, the courts would very seldom satisfy claims for damages made against the state, possibly, for fear of creating dangerous precedents, – acknowledged Maria Nikolaeva, partner of a law firm Pen&Paper. – such claims are usually disallowed on formal grounds which are often irrelevant to the issue. The case cited is illustrative of the situation – actual facts hadn't quite been examined by courts! The arbitration court has only established the legitimacy of proceedings carried out by officials and related to initial seizure of the said property which were not contested by the claimant. And on that ground the arbitration court dismissed the property claim. It is to be hoped that attention devoted by Supreme court to this situation shall promote compliance with legal order in our society”.

According to Evgeny Zverev, senior associate of a law firm “S&Kvertikal”, “ruling adopted by SAC follows the trend focused on protecting rights of owners of property seized as material evidence, outlined by the Constitutional Court of Russia in July, 2008, when regulations of the Criminal Procedure Code of the Russian Federation, which actually allowed investigative agencies to dispose of material evidence have been ruled unconstitutional. Such conclusions were based on contradiction between the said provisions and prohibition against dispossession with no court ruling, enshrined in the constitution of Russia. Probably, abusive practice allowed at storage and realisation of seized material evidence, became significant economic factor which has eventually compelled SAC, following the Constitutional Court of Russia, to explicitly state their tough position on the issue”.

In the preceding year alone more than 25 thousand decisions on criminal prosecution of companies and private entrepreneurs as well as almost 13 thousand non-regulatory acts of diverse government agencies, including decisions made by revenue service on tax collection, made by customs officers concerning seizure of goods etc., were ruled illegal. Each such case is indicative of public officers’ wrongful interfering in the lawful entrepreneurial activity. However, businessmen are usually unwilling to continue litigation. The SAC keeps no separate statistical records concerning claims for damages (filed and satisfied) inflicted by the state; however, according to expert opinion such claims are very few. Probably the ruling adopted yesterday shall compel businessmen to combat for their rights.

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