by George Burn

Post prepared by Karina Chichkanova (Partner, Head of Salans’ St. Petersburg Real Estate Group) and Galina Pashkovskaya (Associate)

In connection with the constantly increasing volume of construction in Russia, one of the main issues that developers and construction companies encounter is the problem of managing the waste that results from wrecking or construction works, as well as “abandoned” waste located at the land plot under development.

“Ownership of and responsibility for waste” provisions of Russian law and construction work contracts or waste removal and disposal contracts in Russia are very important and should not be ignored by the parties.

The key legal issue that arises in connection with construction waste with regard to the general contractor, subcontractors, and the customer is: to whom does the waste belong and who will be responsible for it? The answer to that question is particularly important, since it is the owner’s responsibility to make the payments for disposal of industrial and consumer waste, which is considered a negative impact on the surrounding environment. Along with the ecological payments, the owner’s responsibility for waste includes the obligation to clear the land plot of waste, to remove and site (store and bury) the waste, and the obligation to perform actions towards the recultivation and renewal of the land, which differs depending on the hazard class of the waste. All of these incurs additional and in some cases very significant expenses for the waste’s owner.

The main regulatory act in the sphere of waste management in Russia is the Federal Law “On industrial and consumer waste” dated 24 June 1998, No. 89 FZ (“Law on Waste”). The Law on Waste establishes two basic situations in which ownership rights to waste arise:

(i) Construction waste. Generally, waste is the property of the entity that owns the raw materials, materials, semi-processed items, and other articles or products, as well as the goods (products) whose use resulted in the creation of such waste. Usually, disposal of waste produced during demolition work will therefore rest with the owner of the building. And the contractor will bear responsibility for the waste created in its activities as a result of using its materials.

Thus, unless the contractor’s agreement or an agreement on waste removal expressly stipulates transfer of the rights to the waste to the contractor, or to the party performing the removal of waste, the customer that ordered the work makes ecological payments and is responsible for waste disposal, waste removal, and clearing the land. However, the transfer of responsibility for waste to contractors is common in Russian practice. Thus it is very important for contractor to have all agreements reviewed by legal and ecological experts to avoid subsequent confusion as to responsibility for waste and properly manage the contractor’s risks and expenses arose from such ownership to waste.

(ii) “Abandoned” waste. The lack of specially-equipped facilities for disposal of the waste (landfills, slurry pits, etc.) has led to the creation of a number of unsanctioned landfills in most regions in Russia. As a result, large areas have been polluted. Historically, all land in Russia was owned by the state, and the state still remains a major land owner and actively grants the state land for development purposes. It is not uncommon for plots of land granted by the state for construction to turn out to be a former landfill site, perhaps containing industrial waste, resulting in significant soil contamination. It also worth mentioning that ecological regulations on maximum permitted emissions (MPE) and maximum permitted concentrations (MPC) in Russia are often stricter than in other parts of Europe, which can lead a foreign investor inadvertently to expose itself to administrative or even criminal liability.

In practice, determining the original owner of the waste – the person who illegally dumped the waste on the empty land plot – is often impossible. Under the Law on Waste such waste is called “abandoned” waste. The state has released itself from liability for abandoned waste by setting forth in the Law that the entity in possession (whether in ownership or lease) of the plot on which the abandoned waste is found may acquire it through the use of such waste or by performing some other action that bears witness to its having been taken into possession in accordance with then Russian сivil law. Thus the owner of abandoned waste becomes the person or entity that has begun to use it. It means in practice that a contractor that begins preparatory work usually bears responsibility for abandoned waste and payment of the ecological fees.

Frequently, in order to speed up the development project, clients will push contractors to start the work before the ecological investigation of the plot has been completed. The contractor, not having full information on the extent of the plot’s contamination when beginning work, takes on all risks connected with hidden waste “buried” on the plot.

We recommend that contractors, when entering into an agreement on performing land works or works for the preparation/clearing of the territory for construction, including removal of the soil, request detailed information from the customer with regard to the condition of the plot’s soil, thoroughly assess the risks connected with this and set out in works contracts legal mechanisms to protect their interests. In this context, it is very important that works contracts contain a provision delimiting responsibility of the parties for waste, both visible and hidden.

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These problems are of course not the only issues. In Russia, one often encounters plots that contain abandoned military dumping (graves, articles, ammunition), or archeologically valuable items. This of course also creates a number of problems for the owners and possessors of land plots, as well as for their contractors. However, this will be the topic of a separate post.

Kluwer Construction Blog

by Andrew Ness

When forced to litigate in the U.S., many businesses – especially multinational ones – prefer to be in federal rather than state court. The U.S. Supreme Court just made it a bit easier to fulfill that desire.

Most construction disputes are contract cases not involving federal law, so a federal court will only have jurisdiction if the suit involves more than $75,000 and is between citizens of different U.S. states. The key question is usually: where is a corporation a “citizen” for the purpose of determining whether such “diversity of citizenship” exists?

By statute, a corporation is a citizen of both the state (1) where it is incorporated, and (2) where it maintains its “principal place of business.” While the state of incorporation is obvious, for nearly 60 years, federal courts have struggled to define a corporation’s principal place of business. Last month, the United States Supreme Court reconciled divergent tests and clarified this at last. In Hertz Corp. v. Friend, No. 08-1107, slip op. (Feb. 23, 2010), the Court held that a corporation’s principal place of business is just one place, its headquarters. By limiting corporations to one static principal place of business, Hertz increases the number of states where a corporation is not a citizen, meaning it increases the likelihood of getting access to the federal courts in a particular case.

For 60 years, the Circuit Courts of Appeal have been split over where a corporation had its principal place of business. Some circuits held it was the state containing the corporation’s “nerve center.” Others held it was any state where the corporation conducted significant activities. Thus, in the Ninth Circuit a corporation had a principal place of business wherever the corporation conducted “significantly larger” or “substantially predominant” operations. Under such fluid standards, corporations with a presence in all 50 states might be considered a citizen of most or even all 50 states, effectively precluding access to federal courts. What’s worse, the fluidity of the tests made it impossible to predict the outcome from one case to the next.

In Hertz v. Friend, Hertz was sued by California residents in state court. Hertz removed to federal court, asserting it was not a California citizen. The lower court concluded Hertz’s principal place of business was California under the Ninth Circuit test, Hertz was a California citizen, and thus there was no jurisdiction in federal court. The Ninth Circuit agreed.

The Supreme Court reversed, concluding that a corporation’s principal place of business is best interpreted as “the place where a corporation’s officers direct, control, and coordinate the corporation’s activities.” The Court noted in most cases, this should be the state containing the corporate headquarters, “provided that the headquarters is the actual center of direction, control, and coordination.” Id. Hertz’s headquarters is in New Jersey, so it was not a citizen of California and the federal court thus had jurisdiction.

With this relatively simple test for determining principal place of business, Hertz reduces the likelihood that a corporation will be deemed a citizen of more than two states, and makes predictable what those states are. So corporations should have relatively predictable access to federal courts in the remaining 48 states.

Kluwer Construction Blog

by Andrew Ness

The U.S. has been a staunch supporter of arbitration since 1925, when the U.S. Arbitration Act became law. The Arbitration Act makes arbitration agreements binding and simple to enforce, without significant exception. Rather suddenly, a substantial backlash against mandatory arbitration has appeared on the scene. One of the clearest indicators is the proposed Arbitration Fairness Act (H.R. 1020) that was introduced in the House of Representatives in February of 2009, and is still very much in play. While the anger is not directed at construction dispute arbitration, the concern is that commercial arbitration will end up being limited in important ways, as well as mandatory arbitration schemes where the use of arbitration is seen as one-sided and unfair.

The proposed AFA would limit the scope of the Arbitration Act to exclude from its coverage: a) disputes between an employer and employee arising out of their employment relationship; b) consumer disputes between an individual and the seller or provider of real or personal property, services, money, or credit for personal, family, or household purposes; and c) disputes between a franchisor and a franchisee.
More significantly, the AFA would take away in all arbitrations the arbitrators’ authority to determine the validity and enforceability of arbitration agreements. This is a hallmark of U.S. arbitration law that has been generally successful in keeping courts from interfering in the interpretation and enforcement of arbitration agreements. It would be a major departure from current federal policy and several decisions of the United States Supreme Court.

Supporters of the proposed change believe that mandatory arbitration is being used in ways unfair to parties of unequal bargaining power who routinely fail to read the “fine print” mandating arbitration in many consumer transactions, such as when opening a bank account or obtaining a credit card. Among other objections, opponents fear that adding such restrictions would have the unintended consequence of reducing the effectiveness of arbitration as a cost effective remedy for commercial disputes. In reality, the pending legislation is likely to undergo significant revisions in both House and Senate committees before any final votes are taken.

While the construction industry is not specifically targeted by the AFA, concerns have arisen that subcontractors and suppliers, for example, may attempt to claim unequal bargaining power when confronted with standard arbitration clauses contained in many form subcontracts. As a result, those concerned about cost effective and efficient dispute resolution in the construction industry, both within the U.S. and internationally, are following the AFA’s progress through Congress closely.

Kluwer Construction Blog