First Principle


 

Law should accommodate practice, not ruin it. Above all things, judges must strive to comply with the legal version of the Hippocratic Oath: do not harm. At times, however, they forget this rule and act like the proverbial bull in a china shop.

The decision of the Supreme Commercial Court of Russia in Meta-Leasing Ltd v Partner-M Ltd (А28-732/2010) is just like that: for no apparent reason it ruins the basis of hire-purchase in Russia. It also reminds us – once again - that sanctity of contract is dead.

Meta-Leasing and Partner-M entered a hire-purchase agreement: the first bought a Volvo harvester for about $360,000, a heavy vehicle used for felling, delimbing and bucking trees, and rented it to the second. The rent was agreed at half a million dollars, payable over three years in monthly instalments. Once it is paid, Partner-M would be able to buy the machine for $35.

Eventually, the hirer stopped paying, the agreement was terminated and the equipment returned to the lessor.

Meta-Leasing did not pursue Partner-M for all the monies outstanding on the contract but insisted on the arrears, about $35,000, for the period when the harvester was used by the hirer. The latter countersued and demanded a substantial part of the rent already paid, about $120,000.

In July 2011 the case reached the Supreme Commercial Court and the panel of thirteen judges ruled for Partner-M. What makes the picture sadder is that this decision was not an unfortunate trip-up in an otherwise right direction. The court had paved the road to hell two months earlier in Kvadrat v Evrotekhnika.

The court’s reasoning revolved around the idea that a hire-purchase agreement is a composition of two elements, rent and sale. And so is the cash. There are two channels - one of using the machine and the other of owning it.

The judges ruled that in the contract the purchase price was so small that it couldn’t be seen as the price of the harvester, even after three years of use. The price, therefore, was hidden in the rent and, because the contract was rescinded and the hirer didn’t achieve ownership of the asset, it was entitled to some of the money it had spent – just as when you pay an advance on a product but don’t actually get it.

What do we want from law?

The fascinating thing about law viewed from a comparative perspective is that however obvious and even conspicuous a solution may seem, a mere reference to a statute or case law or, for that matter, to history isn’t good enough. You should rediscover the heart of the problem and relive the pain of finding the best answer.

Leasing companies do not sell harvesters, they sell money. Hire-purchase is a form of borrowing which allows you to buy things by spreading the cost over a long period of time so that new equipment pays for itself. It is also the shortest way to getting credit: unlike most loans, this one is secured by the things you buy.

In a typical hire-purchase agreement when the original price plus interest – together called, somewhat confusingly, the rent - is paid, the hirer can buy the asset at a nominal price. It is what usually happens and it is exactly what the parties want. When the loan is repaid security is no longer needed, so the title goes to the buyer. It is baffling why Russian judges were so wound up by what we perceive as a fairly standard and natural arrangement.

In the ideal world, things never go wrong. People enter contracts wisely and prudently and stick to their promises. We wish that Meta-Leasing and Partner-M, had not needed to go to court. Unfortunately, this isn't possible. Even the Supreme Court can’t bring about the land of our dreams. Nor can it undo what has been done.

There is, however, something it can do. It can create incentives to other companies to enter contracts wisely and prudently and abide by their promises. It can do this by penalising those who make things go wrong and by putting more responsibility on those who could prevent problems from happening but did not do so. In other words, it should do the opposite to what the Supreme Commercial Court did in Meta-Leasing v Partner-M.

The court penalised the lesssor, who had done nothing wrong, and rewarded the hirer, who not only defaulted but was better equipped to foresee and to fix the problems. The prospects of the deal depended almost entirely on the hirer’s business. Partner-M held the keys to success: first-hand information about the market and the company, staff, equipment and so on.

From now on borrowers will have an incentive to riskier behaviour, to over-optimistic forecasts they give to leasing companies and perhaps even to misrepresentation of data. Because when things go wrong the lessor is the one who foots the bill. When business isn’t kicking in as expected, instead of trying to improve the situation by changing prices, introducing lay-offs or other painful means, the hirer will have an incentive to stop the agreement, return the machine and possibly some of the money it spent.

What incentives do leasing companies have now? They would probably increase everything: down payments, interest, penalties and the size of the companies they deal with. They will try to find additional security for the credit they give – and this is against the very nature of hire-purchase.

On that view the Supreme Commercial Court should have ruled for the lessor. It is not so much a question of fairness, whatever that means, but of making the right rule for the future of hire-purchase in Russia. Currently, this multi-billion industry is a shambles.

picture: © caraman - Fotolia.com

 

 

Law should accommodate practice, not ruin it. Above all things, judges must strive to comply with the legal version of the Hippocratic Oath: do not harm. At times, however, they forget this rule and act like the proverbial bull in a china shop. The decision of the Supreme Commercial Court of Russia in Meta-Leasing Ltd v Partner-M Ltd (А28-732/2010) is just like that: for no apparent reason it ruins the basis of hire-purchase in Russia. It also reminds us – once again - that sanctity of contract is dead.
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