Azerbaijani Constitutional Court Case on Pledge Contracts

 

“EL” Small Enterprise and Bank VTB (Azerbaijan) OJSC have signed a credit contract. In 2014, the enterprise imported wheat from abroad due to the credit allocated under the credit contract. This product worth AZN 500,000 was pledged in favor of the bank under the “Pledge of goods in circulation” agreement dated May 22, 2015 in order to ensure the fulfillment of monetary obligations before the bank.

 

Under the pledge contract, the pledgor (“EL” Small Enterprise) could not transport wheat from the address specified in the contract without the written consent of the Bank. Another provision allowed the pledgor (“EL” Small Enterprise) to exchange the object of pledge contract (wheat product worth AZN 500,000) with another collateral (money, products, etc.) provided that the total value is not less than the value of the pledged wheat.

 

“EL” Small Enterprise applied to the bank three times in two years to monitor the condition of the pledged wheat, but these appeals went unanswered. According to the claim of “EL” it caused a large amount of material damage to the enterprise, as it caused the wheat product to be changed and destroyed to a point where it could not be used for its intended purpose.

 

The Appellate Court concluded that the pledgor “EL” Small Enterprise had suffered as a result of the bank's inaction because the pledge agreement did not allow to change the place of the wheat without the bank's written consent. For this reason, The Appellate Court considered the position of the pledgor right.

 

The Civil Chamber of the Supreme Court took the opposite position. The Supreme Court noted that requiring the bank's written consent to change the place of the wheat did not exclude EL's right to change the subject of the pledge contract. The purpose of the prohibition was simply to protect the existence and safety of the collateral (wheat) as a means of security. In order to prevent the perish of the subject of the current pledge contract, the pledgor was given the right to change the composition and natural form of the goods. For this reason, the claim of the small enterprise "EL" was not provided.

 

In their complaint to the Constitutional Court, the applicants also provided evidence that the bank had not responded to their appeals, thus preventing them from releasing the pledged goods into circulation and using them to make benefit. However, this argument required a re-examination of the facts of the case, which was beyond the competence of the Plenum of the Constitutional Court, so no position was expressed on the issue.

 

In conclusion, the Constitutional Court noted that when interpreting any provision of the contract between the parties to the dispute, the courts must first consider the legal nature, essence and the purpose of the contract. The courts must compare provisions with other terms and the true expression of the parties' will. The content and legal intentions must be determined. For this reason, no violation of the disputed decision of the Supreme Court was found.