ARKA’s exclusive interview with Karen Babalyan, senior lawyer at Ameria CJSC
01.10.2012,
20:23
ARKA’s exclusive interview with Karen Babalyan, senior lawyer at Ameria CJSC
ARKA – How would you assess the legal framework regulating the acquisition and protection of property rights, and what are the main challenges in the relating legislation?
K. Babalyan – The Civil Code, which is the main legal act regulating legal relationships with respect to acquisition, transfer, disposal of property and property rights, was adopted in 1998. Since then a set of important changes has been made to it. However, since its inception and to this day the Civil Code contains a string of serious gaps and discrepancies. More specifically, I would like to focus on the main problem, which is the lack of differentiation between the concepts of property, as well as the concepts of corporeal, property and liability rights.
Even the Roman law (the Roman civil law is the foundation of continental European legal systems, whose carriers are such countries as Germany, Italy, France, Spain, Switzerland; (the legal systems of former Soviet republics, including Armenia, belong to it as well) had a clear differentiation between property and liability rights. I can give a simple example of property law - this is my pencil, it belongs to me, and all the people on earth treat it as my property. In other words, I have an absolute right with respect to the pencil.
On the other hand, there are the so-called liability rights. For example, if I conclude a sale and purchase contract with you with respect to the pencil, I must give it to you; in other words, you have the right to demand the pencil from me only, until physically and legally it is not transferred to your ownership. So, if you want me to transfer it to you according to the contract, but it is either seized from you or stolen, I have no rights in respect to the people having committed either of these offences. The corporeal right is an absolute right and is implemented in relation to an unlimited number of individuals. The law of obligation regulates the obligations assumed by one entity with respect to another. Corporeal and liability rights are usually grouped into the concept of property rights, while property is the subject to such rights.
In this regard our Civil Code creates an absolute mess. The Armenian civil law does not include the concept of property law, while Section 4 of the Civil Code - "The right to ownership and other property rights" governs property rights issues, collateral (including the contractual part of collateral relations), as well as development and easement of land plots. As the title and content of Section 4 of the Civil Code suggests property rights are ownership rights and its constitutive right of possession, use and disposal, security right, as well as development and easement of land plots.
At the same time, Article 132 without defining the concept of property clearly indicates that the property is cash, securities, as well as property rights, i.e. the property rights provided for in Section 4 of the Civil Code. As a result, if we follow the logic and the letter of the Civil Code, but not common legal meaning of property and legal relations, we may arrive at far-reaching conclusions and the possibility of using dubious legal instruments. For example, you can easily sell the money, alienate the right to property disposal, maintaining concurrently the right to use and ownership (in this case it is not clear what happens to property right as such.)
And vice versa. For example, there is nothing in the Civil Code prohibiting the conclusion of sale contract and the transfer of ownership right to enjoyment right, which is an element of another property right. Unlike lease, such alienation will not be time-limited and will not be regulated by the provisions of the Civil Code which govern lease. There are questions that have no answers. For example, I'm sure that Immovable Property Cadastre or notaries are unlikely to agree to registration of such transactions, but I am neither sure if they can legally motivate their refusal. An absurd situation arises, and this is one of the most important conceptual challenges, which, incidentally, was raised by leading lawyers when the Civil Code was being passed in 1990s, but it was ignored.
On the other hand, the Civil Code does not provide for clear separation between liability rights to property and property rights in respect to them. These gaps were partly filled by the practice of the Cassation Court which ruled, for example, that lack of fact of registration of property rights, and, therefore, their absence does not affect the right to claim for obligations associated with the use of property.
There is another problem that lies in discrepant provisions of the Civil Code relating to the acquisition of property rights. On the one hand, there are articles which clearly specify that the person becomes entitled to a particular property from the moment of occurrence of any fact or circumstance, for example, a 10-year continuous bona fide use of property. On the other hand, with respect to immovable property the Civil Code establishes the regime of state registration that is it says that property right arises from the moment of its state registration.
It is very difficult in this case to understand what is the evidence of right or the moment when a person gets right to possess this or that real estate. Therefore, if the other person demands that his/her rights to be recognized with respect to the same property, the question arises: what must be considered as a basis of ownership – the fact of 10-year continuous and bona fide use of property or the fact of its state registration? Can the act of registration as such be right forming act and, if so, on what ground? If not, why tie the fact of the appearance of right to registration fact?
ARKA - How effective is the system of state registration of property rights?
K. Babalyan - Our legislation puts forward excessively absolutized requirements with regard to registration of rights to real estate. The Civil Code clearly sets that any right to immovable property shall be registered, which is absurd from the legal point of view. If you walk or drive by car on the street, and the street is a state or municipal property, it turns out that you make use of your right, and this right, by law, must be registered. Of course, it is absurd. Or, for example, you decide to relax at a hotel, of course, you own and use a hotel room for a while. If we follow the logic of the Civil Code, the contract concluded by you to use the room as well as your right to use the room are invalid, because, as you know, the right to property must be registered. Thus, it is possible that you pre-pay for the room, and then comes someone else who is willing to pay more, and from the legal point of view, the hotel does not violate your rights, giving your room to another person, returning the money you had paid. Another thing that hotels value their reputation, and in practice this does not happen, but the law and lawyers are known to exist for extreme cases when there is a deviation from the usual "peace" or "market" status and models of public relations.
Contradictions also arise in cases where a property owing company allows carrying out activities on its territory. One of the most common examples is instalment of payment terminals in retail trade and services shops. Concluding lease contract and registration of the right to use half square meter at the registry in view of the fact that terminals can be easily moved is absurd again and economically and technically are inexpedient. Imagine the absurdity of the situation when a re-registration is needed for moving on the payment terminal 1-2 meters. People naturally cooperate with each other proceeding from common sense and economic feasibility unless there is a dispute in court. And then, alas, the Civil Code will be applied with all its glory!
The registration system itself, in my view, is not perfect either, although this past January reforms were made and many issues were resolved. But many questions remain open, in particular, there are properties that are not land or structure, such as a pillar, a wall or underground wires and cables; that is their area is rather vertical than horizontal. These objects by law constitute property and rights in relation to them are subject to registration. But the current system does not regulate the procedure, the rules, the legal mechanisms and the consequences of registration of such objects.
ARKA - And what about legal regulation in the sphere of movable property?
K. Babalyan - Here, too, there is a difficult situation that affects, among others, the investment climate. Imagine that I want to buy a business or a company in Armenia the principal assets of which are movable property - machinery, lathes, electronic systems, servers, and so on, which are key to the existence of this business. First of all, I will ask my lawyer to check whether the property is owned by the company. The company can provide at best an agreement, confirming the purchase of the property, but there is no guarantee that at the same time it has no other contracts for its sale. And here comes the problem, which was partially solved in the case of real (immovable) estate through the introduction of registration.
Unfortunately, Armenia still does not have a complete system of registration of rights to movable property (except for motor vehicles). There is a possibility of registering the rights with respect to mortgage and leased property, but not the property and its components. Again we have an absurd situation – the Cadastre and notaries certify and register security right, not being able to check whether the mortgagor is the rightful owner. Thus, one may mortgage a personal property that does not belong to him/her, although the law states that you can mortgage only your own property. At that the registration of movable property should not be mandatory.
As a positive change in this respect, we can mention the introduction of compulsory registration of vehicles in 2011. Another thing is that this responsibility is not assigned to Cadastre, but to traffic police, who are not used to these procedures, which causes a lot of technical problems.
There is another imperative problem - the lack of differentiated approach to different types of property in the Civil Code. For example, the specificity of different types of property, such as land, potatoes and securities requires a different approach to the legislative regulation in their respect. Moreover, with the current level of information technology progress there are types of property that did not fit into the logic of the Civil Code.
We can say that the Civil Code of Armenia is stuck in the 19th century’s trade turnover. For example, the provisions of the Civil Code on the transfer of rights to shares and bonds provide for a regime that operated in the 19th and early 20th centuries. The procedure is carried out manually, and separate written agreement is concluded, while in the modern world, virtually all serious markets have automated rights registration and trading systems.
In addition to the gaps, highly negative is the fact that the Civil Code does not provide for a flexible mode, which could adapt itself to progressing modern technologies. For example, we can take the current e-commerce in the context of an ownership right transfer. Global trade is gradually shifting to electronic and / or automated systems, but our legislation is not ready for this challenge. If the parties agree on the transfer of property rights by electronic means, there are no regulations governing the process, and the process of proving the fact of transaction in court will be extremely difficult. Of course, in practice, no one will have to wait until the law changes, and I'm sure that to date such agreements are concluded in Armenia. Another thing is that if there is a dispute, then it is not easy for the parties, and the court to prove the fact of full transaction.
ARKA – What can you say about protection of property in the context of the problems you have mentioned?
K. Babalyan – First of all I would like to single out the problems of operating mechanisms for protection of property rights through government intervention. To describe the problem, it is enough to cite an example. For example, you leave your own apartment, and, coming back, you see that your neighbour’s family moved into your house, claiming that it belongs to it. You can go to the police or the court. The procedure of turning to police, unfortunately, is imperfect, as all its actions are subject to termination if the case reaches litigation stage. Now imagine that while you go to the police, one of your neighbours go to court and makes a statement of claim, after which you are left in the street. The trial can take months or even years.
In judicial practice of a country with developed judiciary the governing principle is the presumption of honesty and authenticity. That is, if you present a document or a fact you are believed to tell the truth, and the procedure is based on the basis of documents submitted so far as the authenticity of the documents is no doubted at primary examination, while approval is not contrary to common sense. If subsequently the opposite is proved, then for providing false information and documents the perpetrators are held accountable. The court in these legal systems in the situation with the apartment, which I have described, takes the side of the supposedly honest man.
It suffices to show certificate of ownership as evidence that the apartment belongs to you, and the police or the court will quickly restore the right of residence and ownership for the duration of the trial. That is, persons guided by the principles of honesty and law-abiding, and 95% of the population is such, if not more are safeguarded and protected. That is the majority does not suffer because of the dishonest minority. In Armenia, it is not so. Our all-level courts will for a year or more try to establish whether the evidence is authentic, whether the sale and purchase agreement is genuine, under which circumstances the movement was made and so on. Law enforcement agencies are not guided by the principle of the effective detection of the violation, fraud and false statements, and the inevitability of punishment, but by suppression of any possibility of emergence of offence. That is, the court (following largely the procedural law) in this case is guided by the principle of "what if this is really a fake." As a result, the preventive system that seems to be effective affects law-abiding citizens. And the offender side abuses this system.
It should be noted that the same problems are not foreign to the private sector as well. We, for example, do not have the system of check books, we have not developed such traditional payment instruments, such as bills, invoices, etc. Why? Because we are afraid of fraud and fakes and do not believe in the efficacy of the process of identifying and prosecuting those responsible in the first place. And if a bank, which is presented a check or promissory note, uses a variety of time-consuming procedures to verify the authenticity of signatures and other details, the function of notes or checks as quick and effective means of non-cash payments become meaningless. In short, incomplete legislation is a very serious problem in terms of economic development.
ARKA - What is your vision of how these problems can be resolved?
K. Babalyan- Much, of course, is boiled down to the scale and overall financial and political problems - the problem of the efficiency of the state apparatus, etc. Of course, there are also legal problems that can be solved, so to say, by sting attacks, adoption of laws and amendments governing a particular issue (which is mostly being done). But if we do not put the legal system in order, starting from the conceptual issues, if we do not enforce sweeping reform of the law, we will constantly have conflicts between certain provisions of various laws, and it will always result in new problems.
ARKA - What solutions for the protection of clients' rights and overcoming these problems does Ameria suggest as a law company?
K. Babalyan - In principle, it will be much better for the legal system, if a question is not regulated by law at all, if it is regulated incorrectly. Fortunately, the gaps in our legislation do with the first case. The legal system as a whole is a flexible body, which provides the possibility to use the existing positive aspects in order to protect the interests of persons; in our case our dear customers. For example, let us imagine that there is no Civil Code, and the Constitution is used to regulate property rights, which says that each person uses and owns his/her assets at their own disposal. An experienced lawyer can find solutions using a variety of "loopholes" of the legal system and offer the most secure option for legalization of commercial relationships and transactions. For example, we can formulate contractual obligations so as to minimize the risks. Unfortunately, no one can offer absolute solutions. There are essentially insurmountable problems and our duty is to warn our clients of them. Our services are based on these principles. Our clients know what they pay for the lawyer, as we in the framework of objective opportunities do everything that the law-caused problem do not affected their interests. -0–
