Dechert OnPoint: A Positive Step Forward for the Civil Procedural Code of Georgia

Dechert Georgia, through the contribution of partners Archil Giorgadze and Nicola Mariani, joined by senior associate Irakli Sokolovski as well as Ana Kostava and Ana Kochiashvili, is partnering with Georgia Today on a regular section of the paper which will provide updated information regarding significant legal changes and developments in Georgia. In particular, we will highlight significant issues which may impact businesses operating in Georgia.

Amendments to the Civil Procedural Code of Georgia (the “Procedural Code”) entered into force on 24 June 2016. The main focus of the overhaul were those regulations which are applicable to provisional measures in civil disputes; many Georgian businesses have been subjected to provisional measures against their movable or immovable properties. The amendment process included a long discussion on the disadvantages of the existing procedural framework, and ultimately legislators decided to introduce new mechanisms. According to the explanatory note to the new law, the amendments aim to best serve and equally protect the interests of both parties to civil disputes. This edition of OnPoint provides an overview of the amendments and the new regulatory framework.

Problems with the Previous Regulations

Generally, each claimant can apply to the court with an application for provisional measures. The list of possible provisional measures includes freezing the respondent’s properties or placing an injunction against the respondent’s taking of certain actions (e.g. selling or otherwise transferring, mortgaging, pledging or otherwise encumbering the property, etc.). The application for such provisional measures shall refer to the conditions that demonstrate the necessity for the provisional measure. The claimant should also show the court how the absence of the provisional measure can affect the rights and interests of the claimant and the enforceability of the final court decision, in case the court finds in favor of the claimant.

Georgian case law includes a significant number of cases where the court defined the provisions of the Procedural Code and attempted to set out clear clarifications for the use of provisional measures by the court. One of the main challenges in Georgian case law is that the provisional measures shall be used based on the specific circumstances of each case, which makes it almost impossible to have a clear-cut rule for their application. However, case law and the Procedural Code are absolutely clear on one aspect: when applying provisional measures the court should equally consider the interests of the claimant and the respondent and strike a balance between their interests.

Despite a substantial amount of case law, provisional measures remain controversial. Practice has shown that they are often used against the respondent when the claimant has not provided sufficient argumentation and has not proven the necessity of provisional measures. As a result, in some cases the material rights of respondents are restricted and the operations of business entities are disturbed, suspended or even paralyzed. In some cases the property subject to the provisional measure has a much higher value than stated in the claim of the claimant, which irreparably damages the interests of the respondent.

New Regulations on Provisional Measures

In order to deal with the above mentioned controversial issues, a new provision was introduced into the Procedural Code. The provision directly restricts the application of a provisional measure to the property, the value of which is higher than the claim. The exception can be made only if the respondent owns one property item. In such case, the respondent is entitled to offer a separate property item with a value comparable to the claim or request the consent of the court on division of the property. The new regulations also require that the order of the court specify the amount of the claim.

In this sense, the Tbilisi Appellate Court has recently issued a decision finding that freezing the bank accounts of the respondent is a measure of last resort. The Appellate Court specifically highlighted the risks of paralyzing the company by such invasive measures and found that the bank accounts of the respondent shall only be frozen if the respondent has no other property against which a provisional measure can be used and other conditions for the use of the provisional measure are present.

In sum, the recent changes to the Procedural Code and the case law of Georgian courts underline the necessity of striking a balance between the interests of adverse parties, especially when the parties are business entities.

Conclusions

The new regulations described above show a clear trend toward a more flexible system in terms of provisional measures: a system which equally protects the claimant and the respondent and is actively concerned with the potential outcomes of the measures for business entities and has more flexibility to deal with complex and controversial issues with regard to the provisional measures. The new regulations are a positive step forward for Georgia’s overall business climate.

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Note: this article does not constitute legal advice. You are responsible for consulting with your own professional legal advisors concerning specific circumstances for your business.

Dechert’s Tbilisi office combines local service and full corporate, tax and finance support with the global knowledge that comes with being part of a worldwide legal practice.

Dechert Georgia is the Tbilisi branch of Dechert LLP, an international specialist Law firm that focuses on core transactional and litigation practices, providing world-class services to major corporations, financial institutions and private funds worldwide. With more than 900 Lawyers in our global practice groups working in 27 offices across Europe, the CIS, Asia, the Middle East and the United States, Dechert has the resources to deliver seamless, high quality legal services to clients worldwide. For more information, please visit www.dechert.com or contact Nicola Mariani at nicola.mariani@dechert.com.