Russian contract law was substantially amended in 2015. The amendments were not spontaneous but rather the result of a longer process. The Civil Code of Russia, providing for contractual regulation, is subject to a material reform based on the Concept on Civil Legislation Improvement adopted in 2009. Due to practical reasons, it was decided to implement the amendments in stages.
The main purposes of the amendments to Russian contract law were (i) to ensure the compliance of the regulations with the civil law doctrine and (ii) to implement new ‘attractive’ legal concepts. The latter is to make Russian law more magnetic for business entities, primarily Russian, and to encourage them to actively choose Russian law as the governing law, instead of foreign – such as English – law. It is noteworthy that some new legal concepts are analogous of those provided by English law. Thus, for example, indemnity, warranties and representations now have their distant relatives in the Russian Civil Code starting 1 June 2015.
Also the amendments introduced into the Civil Code the legal concepts, such as option, which were not defined by Russian law before the amendments, but were legal and usable (under Russian law). This measure is stipulated by constrained approach of most Russian lawyers and state courts to law enforcement matters related to such ‘directly unregulated’ matters. Thus, the mentioned measures are to ensure definiteness in minds.
Below, we highlight certain aspects of the amendments.
Indemnity in Russian
As a rule, the right to agree on the obligation of a party to recover losses of the other party incurred due to the circumstances specified in an agreement, when such losses are not considered as a breach by the recovering party, is a prerogative of business entities. An exception to this rule, when such right is applicable to individuals, covers shareholders’ agreements and agreements on disposal of shares or stakes in joint-stock companies and limited liability companies established under Russian law.
The circumstances causing the right to demand recovery may be: disability to perform an obligation, requirements of state authorities or third parties to a party or a third party specified in the agreement, etc.
According to the amendments, the material term of agreement on recovery is the amount of recovery. An exact amount can also be substituted by its calculation method. In case losses are incurred at the fault of a third party, such third party is obliged to recover damages of the party that paid indemnity under the agreement.
The clause on recovery survives invalidity and loss of a contract, unless the parties agree otherwise.
This amendment is implemented into the Civil Code of Russia as new Article 406.1.
Representations, Matryoshka, Balalaika…
Representations under Russian law are regulated by Article 431.2 of the Civil Code. Before 1 June 2015, the law did not recognise representations as a legal concept. This means that since 1 June 2015 contracting parties have been provided with the additional protection with regard to the exchange of information.
Thus, the legislation in force obliges the contracting parties to provide each other with reliable representations on the matters having importance for the conclusion, performance andtermination of the agreement. This obligation must be performed by counterparties during,before and after entering into an agreement.
The law clarifies that representations may concern: (i) subject matter of the agreement, (ii) authorities on entering into such agreement (e. g. information on corporate approvals), (iii) conformity of an agreement to the applicable law, (iv) licenses and other permits, and (v) financial status of a party, etc.
Liability for the provision of unreliable representations may be imposed on a party if it proceeded or had reasonable grounds to proceed from the assumption that its counterparty will rely on given representations. The Civil Code presumes that a party giving representations proceeds from such assumption.
Due to the provision of unreliable information, the damaged party is entitled:
- to demand for (a) the recovery of damages caused by unreliable representations, or (b) payment of a penalty (if directly provided by the agreement);
- to terminate the agreement unilaterally (unless otherwise provided by the agreement); or
- to demand for the invalidation of the agreement at court (in case of entering into an agreement under the influence of fraud or material delusion).
The legal concept of representations is applicable to the relations in which a party is acting as a business entity as well as for shareholders’ agreements and agreements on disposal of shares or stakes in companies.
Postpone Payment Carefully
When the parties agree to postpone a payment, this means in practice that one party credits another. This can be exemplified with the supply of grain. The parties to a supply agreement decide that the purchaser pays for the grain in two months following the date of shipment. The moment of shipment and payment are divided by the period of time during which the purchaser uses unpaid grain. For ‘agreements on supply of grain’ concluded before 1 June 2015, the purchaser uses such unpaid grain for free (default rule), unless the parties agreed otherwise. But, if our ‘grain supply agreement’ was concluded after that date, the use of grain becomes payable by the purchaser for the period of such postponement (new default rule).
Thus, the creditor, under the payment obligation between the two business entities, is entitled to interest for the period when the debtor used the monetary funds. This new default rule is provided by Article 317.1 of the Civil Code and applicable to the relations of business entities. A creditor may be released from the obligation to pay interest by law or an agreement. Thus, the wording ‘the parties do not consider the postponed payment as a commercial credit’ included in a supply agreement will be sufficient to release the purchaser from the obligation to pay interest on the postponed payment.
In case interest is not specified by the agreement, it equals to the refinance rate of the Russian Central Bank valid in the relevant periods.
The Russian legislation also provides for interest on ‘outstanding payments’ (meaning illegal use of creditor’s monetary funds, such as outstanding payments, illegal retention of monetary funds, unjust savings, etc.). Such interest is regulated by Article 395 of the Civil Code. It is important to distinguish the latter from the interest on postponed payment under Article 317.1: while the interest on postponed payment is an agreed value of commercial credit, the interest on outstanding payment is a measure of liability following the delay in payment by the debtor.
The law allows charging compound interest with respect to the agreements between business entities.