Translated material
Suffering legal entity
Enterprises may have a mechanism for judicial compensation for moral damages from the state budget
In legal practice, the concept of “moral damage” caused by an official to a legal entity may soon become entrenched, for which the treasury will also be held responsible. In May, the Supreme Arbitration Court (SAC) is to reconsider the draft resolution of the SAC plenum on the methods and amounts of compensation to companies for material and non-material damage caused by dishonest actions of officials or rule-making by ministries, departments and other government bodies. True, according to experts, if the company suffered intangible damage, then the official will be able to answer for its compensation with words, and not with money.Companies often have to sue officials , and trials can last for months. During the verification process, a company may have its bank account blocked, may be forced to physically stop production, or the news may be spread throughout the market that the company is unreliable. Even if the court ultimately comes to the conclusion that the inspectors were mistaken in their suspicions or “went too far” with the punishment, it is very problematic to compensate for the harm caused by the official. Although quite a lot of judicial precedents have already accumulated. In this regard, the Supreme Arbitration Court decided to generalize judicial practice, clarifying the procedure for considering such claims.
The draft resolution of the plenum of the Supreme Arbitration Court “On ways to protect the rights and legitimate interests of participants in economic turnover in the event of harm caused to them by state bodies, local governments, as well as their officials” states that companies that have suffered from the actions or inaction of a government agency or a specific official, will be able to file a claim for damages at the expense of the state budget. Companies will not have to prove the guilt of a specific official who exceeded his authority; the court will only have to submit documents confirming the fact of damage and calculations regarding its amount, including taking into account the plaintiff’s lost profits. The court has the right to take into account these calculations, but may also order an additional examination with the involvement of independent experts.
The draft resolution brings a big breakthrough, in particular, for tax arbitration. The Tax Code does not contain any provisions on compensating taxpayers for damage caused by the actions of inspectors. But the most important innovation of the document is the recognition of the fact that legal entities can claim recovery of not only property, but also moral damage. So far, in judicial practice, all attempts by companies to file claims for moral damages have failed. A legal entity cannot experience moral suffering - this is how the judges answered in all cases. It is possible, however, that in the final version of the resolution the concept of “moral harm” will be replaced by “reputational harm.”
The Supreme Arbitration Court also made an attempt to understand such a complex issue as assessing the actions of an official who formally acted within the limits of his competence, but nevertheless caused damage to the company. Arbitration courts will now be able to analyze the actions of officials for their reasonableness and integrity, so attempts to impose obviously impossible or absurd demands on companies can lead to lawsuits.
Practicing lawyers give ambiguous forecasts regarding the application of the regulations in practice. “The draft resolution emphasizes that harm can be caused even by lawful actions of officials. However, this approach is not new to judicial practice. This was enshrined in the decision of the Constitutional Court of July 14, 2003,” recalls Natalya Malofeeva, deputy general director of the audit company MKPTSN. It is also gratifying, in her opinion, that the text of the draft mentions the possibility of so-called recourse to the official who caused the harm on the part of the public legal entity that compensated for this harm. Perhaps, if government officials are held personally liable, they will think about the consequences of their actions.
As the Supreme Court plans, companies and entrepreneurs will not have to spend excessive efforts to prove the extent of harm and the causal connection between the actions of officials and the harm. If one piece of evidence is sufficient to establish a fact, the court will have to limit itself to this. “True, such concepts used by the court as “due diligence”, “due diligence”, “excessiveness”, unfortunately, are hardly feasible in the economic and legal conditions of Russian reality and can be understood differently locally,” Ms. clarifies Malofeeva.
“Due to the absence in our legislation of a definition of intangible harm to business entities, it is especially valuable that the draft contains a number of “signs” indicating the presence of intangible harm. These are: causing concern about business development, increasing the risks of doing business, instability of the investment process, unforeseen costs of staff time to overcome difficulties that have arisen and other obstacles in business management,” explains Ms. Malofeeva.
At the same time, experts fear that non-material damage will be followed by the same non-material compensation. On the one hand, it is pleasant that the absence or insufficiency of funds in the budget is not a basis for non-compensation for property and non-material damage caused. On the other hand, the phrase that “non-material damage is compensated in the form of recognition of a violation of a right or payment of monetary compensation, if recognition of the fact of violation does not allow full compensation for the harm caused,” suggests that recognition of the fact of violation itself will most often Enough, says Natalya Malofeeva.
“An additional opportunity to “bring to justice” public authorities, and even such an innovative model for Russia as compensation for moral damage to legal entities, may lead to a significant increase in the number of appeals to the court with demands to the authorities for compensation for damage,” says the senior lawyer Arbitration group of the Vegas-Lex law firm Ilya Ishchuk. In effect, a new category of cases may be created. And if the courts are quite active in satisfying the claims of organizations for compensation for moral damage and awarding significant amounts, the number of such appeals will increase. Otherwise, the excitement that such a resolution of the plenum of the Supreme Arbitration Court will undoubtedly cause will soon disappear, he believes.
“In general, the possibility of regulating such an issue by issuing a resolution of the plenum of the Supreme Arbitration Court seems extremely doubtful, since according to the law, filing claims for compensation for moral damage is the prerogative of citizens, and providing such an opportunity to legal entities is an issue that needs to be resolved at the level of introducing amendments into federal legislation,” says Mr. Ishchuk.