On 11 October 2011, the Presidium of the Supreme Commercial Court of the Russian Federation (the "SCC") resolved a dispute between OJSC Pavlovo-Posadskaya shveynaya fabrika clothing factory (the "Seller") and OOO Ofitser (the "Buyer") relating to the sale and purchase of a participatory interest of 44.31% in OOO Promstroyinvest.

Specifically, the SCC ruled whether the general provisions of the Civil Code of the Russian Federation (the "Civil Code") on the sale and purchase of tangible goods could be applied equally to the sale and purchase of participatory interests in a limited liability company (a "LLC").

In this case, the Buyer defaulted in its payment of instalments for the participatory interest under the sale and purchase contract. The Seller subsequently filed a lawsuit against the Buyer for breach of contract, claiming a return of the participatory interest and damages, as per the rules for the sale and purchase of goods by way of instalments.

The first instance court confirmed that the parties may use the general provisions of the Civil Code for intangible rights (as well as intangible assets), thereby ruling in favour of the Seller.

However, the court of appeal and the cassation court, respectively, reversed the decision on the grounds that participatory interests in a LLC are not tangible; therefore, the parties have no right to use the general provisions of the Civil Code. Further, it was held that if the parties intend to pay for goods by way of instalments, they must include this clause directly in the contract.

The SCC subsequently reversed the decisions of the court of appeal and the cassation court and ruled in favour of the Seller. The SCC outlined two critical points in its ruling: (i) the Seller lawfully applied the general provisions of the Civil Code on the sale and purchase of tangible goods to participatory interests in a LLC, as these provisions cover personal (intangible) rights as well as tangible goods; and (ii) the parties had the right not to include a clause on instalments directly in the contract. In this case, the courts must determine only the essential terms of a contract, such as price, procedure, timeframe and amount of the payments.

Consequently, it is apparent that contracts for the sale and purchase of participatory interests in a LLC may feasibly contain the general provisions of the Civil Code, following the SCC ruling that the Civil Code governs such contracts.

Moreover, the courts are not permitted to apply strict interpretation to the terms of the contract, but must instead focus on the parties' intentions.

[Please see full information on the ruling in Russian at the official site of the Supreme Commercial Court of the Russian Federation: http://www.arbitr.ru/vas/presidium/nadzor/39179.html]