According to the Civil Code of Russia, an agreement may be rescinded or altered by (i) the consent of the parties, (ii) by a court’s decision, or (iii) by unilateral refusal to perform an agreement (repudiation of a contract) if such refusal is provided by the applicable legislation or an agreement. Provisions of the Civil Code regulating the rescission and alteration issues did not avoid changes in course of the civil law reform. This article is devoted to examining the changes in order to understand how the amendments solved some pressing challenges in practice, paid tribute to the theory of law and became more business oriented.
Provisions of the Civil Code that regulate the rescission and alteration of an agreement bymutual consent of the parties thereto were supplemented. According to the new Paragraph 2 of Section 1, Article 450, multilateral agreements between business entities may now provide for the rescission and/or alteration by either unanimous agreement of the parties or the will of the majority expressed in the agreement. The latter option was not available before. The definition of the majority may be given by such multilateral agreement.
Repudiation in a Nutshell
Before 1 June 2015, the Civil Code contained very scant regulation of the right to unilateral refusal to perform an obligation (repudiation of a contract) and unilateral alteration thereof. The concept of unilateral refusal (alteration) was mentioned in Articles 310 ‘Invalidity of Unilateral Refusal to Perform an Obligation’, 328 ‘Consideration’ and 450 ‘Grounds for alteration and rescission of a contract’. Gaps in law were filled by court practice, which gave rise to the ideas implemented in the valid edition of the Civil Code. As a result, the aforementioned articles were amended and the Civil Code was supplemented with new Article 450.1 ‘Repudiation of Contract and Waiver of Rights under Contract’.
Who Can Repudiate a Contract?
As a general rule, the repudiation of a contract is not allowed. According to the pre-reform edition of the law (Article 310), the repudiation (unilateral alteration) of a contract could be stipulated by an agreement between business entities. It seems this wording excluded the possibility to agree on the same when one party of the contract is an individual and another is business entity. However, a significant decree adopted by the Plenum of Supreme Court of Russia, which concerned contractual freedom and its’ limits, construed this provision otherwise.
Section 2, using the repudiation matters as an example, is the key part of this decree. It explains how to distinguish optional provisions from imperative ones, i. e. what provisions of the law may be altered by an agreement. This misunderstanding of contractual freedom under Russian law caused serious negative impact to Russian legal system and brought it to naught. Contractingparties were guided by court practice, whilst courts considered contractual freedom admissible when it was directly prescribed by law.
Based on this false conclusion, the repudiation (unilateral alteration) of an agreement between business entities and individuals is prohibited by law. However, the Plenum of the Supreme Commercial Court clarified that the imperative norm is a norm providing for direct prohibition. Other norms are optional. Moreover, imperatives must be construed restrictively: the imperative norm must prevent only those stipulations infringing legitimate rights and interests of a party protected by law (by such imperative norm).
An individual is a weaker party than a business entity, acting as a professional in a certain sphere of business. Article 310, allowing repudiation only between business entities, in fact protects individuals and works against stipulations empowering business entities to repudiate contracts concluded with individuals. Though the right to repudiation may not be given to a business entity under the contract with an individual, the agreement on repudiation of such contract by an individual is legal.
This idea was implemented into new edition of Article 310 of the Civil Code. It is noteworthy that business entities may be entitled to repudiation against individuals in specific cases provided by Russian law.
Good Faith Principle
One of the purposes of the civil law reform was to strengthen the good faith principle.
The concept of good faith has been represented by Article 10 of the Civil Code. Contract law contains special norms with respect to the good faith principle: the new edition of Article 307 of the Civil Code ‘Definition of an Obligation’, provides for the obligation of parties to a contract to (i) act honestly, considering mutual rights and interests, (ii) to collaborate in order to achieve the purpose of an obligation, and (iii) to provide each other with the required information during the establishment and performance and after the termination of an obligation.
The obligation of a party to act in a good faith in course of exercising its rights to unilateral alteration and/or repudiation of a contract is now directly specified by new provisions of Articles 450 and 450.1 of the Civil Code. In case a party goes beyond the bounds of a good faith, a court, state commercial court and arbitration may refuse to protect rights and interests of such dishonest party in full or in part, or to assume other protective measures. The dishonest party may also be bound to compensate damages of a counterparty.
Pay and Go Away!
One of the most desired amendments was implemented into Section 3 of Article 310. Under this section, the parties’ rights to unilateral alteration or repudiation of an obligation may be subject to the payment of certain compensation provided by the agreement to the other party. Such compensation (penalty amount) may be agreed by the parties irrespective of the fact whether the right to unilateral alteration or repudiation is based on the law or the parties’ agreement.
For instance, Article 782 of the Civil Code provides for the right of both, the employer and the service provider, to repudiate a contract at any time. In case the repudiation is initiated by the service provider, the latter must compensate the damages of the employer caused by the repudiation in full. However, if the contract is repudiated by the employer, the service provider is entitled to demand the reimbursement of its actual expenses. Obviously, the actual expenses may not reflect the real transaction costs of the service provider. Based on the newly provided right to agree on the compensation for repudiation, the service provider’s rights and interests may be protected by the agreed penalty amount.
If Performance Requires Licensing
The law now provides for general grounds for repudiation of a contract. In case a party has no license required for the performance of the contract, the other party is entitled to repudiate the contract and recover of damages. This norm was implemented into Article 450.1 of the Civil Code.
Another Brick in the Wall: Waiver
A general rule that has been in effect since the adoption of the Civil Code states that a waiver of rights by individuals and legal entities does not terminate such rights unless otherwise provided by law. The new Article 450.1 of the Civil Code directly regulates such exceptions from the general rule and draws a distinction between the waiver of the right to repudiation and the waiver of other rights.
In a nutshell, the content of the norm related to the waiver of the right to repudiation of a contract is repudiate or forget. In case circumstances entitling a party to exercise its right to repudiation arise, and such party nonetheless confirms the validity of the contract by its actions or inaction, the right to repudiation based on such circumstances is considered terminated and may not be exercised later.
The waiver of other rights covers contractual relationships between business entities. The waiver of rights (as well as the failure to exercise rights at term) provided by law or an agreement prevents the exercise of such rights based on these grounds by the waiving party to a contract in the future, except for cases when the same grounds give rise to the rights again. The law or an agreement may annul the preventive effect of a waiver.
All of the abovementioned amendments came into force on 1 June 2015.