The Plenum of the Supreme Court of the Russian Federation adopted Resolution No. 54 “On Certain Issues of Applying the General Provisions of the Russian Civil Code on Obligations and Their Performance”* on 22 November 2016.
The Resolution contains 59 paragraphs that clarify various provisions of the Russian Civil Code.
Among other things, the clarifications on the following issues are of interest to businesses from a practical perspective:
- creditors’ subordination agreement;
- allocation of expenses related to the performance of an obligation between the creditor and the debtor;
- unilateral termination of an obligation;
- reasonableness and good faith in exercising one’s rights;
- confirmation of the authority of a creditor’s representative;
- time of performance of a monetary obligation;
- currency of a monetary obligation.
Overall, this Resolution of the Plenum of the Supreme Court of the Russian Federation is aimed at unifying the related court practice.
Parties to civil law relations should take into account the position expressed by the Plenum of the Supreme Court as the lower courts will follow it in practice.
Creditors’ subordination agreement
Creditors may enter into a subordination agreement in respect of their debtor’s obligations when such obligations are of the same nature (e.g. an obligation to pay money).
In practice, such agreement may be needed, for instance, to avoid bankrupting a debtor if all its creditors decide to enforce their claims against the debtor at the same time.
The law prohibits imposing any obligations on third parties under a contract that they are not signatories to. Therefore, the creditors’ entry into such agreement will not create any obligations for the debtor. The debtor has to continue to act in accordance with its contracts with each of the creditors.
Therefore, a creditors’ agreement must be drafted in such a way as to avoid a conflict between it and the terms of the contracts signed by the creditors with the debtor.
If a creditor fails to comply with the subordination established by the agreement with another creditor and accepts performance from the debtor out of its turn, it must transfer the benefit of such performance to the other creditor and bear, as a general rule, all the expenses for such transfer.
It should also be noted that in the event of bankruptcy, the priority of claims against the debtor is set by law. Therefore, the creditors’ subordination agreement will not apply if it conflicts with the bankruptcy laws.
Allocation of expenses related to the performance of an obligation between the creditor and the debtor
Under the general rule, any expenses for performance of an obligation must be borne by the debtor. However, if a creditor causes any additional costs to the debtor (e.g. if the creditor changes the location of its office), the creditor has to reimburse such expenses to the debtor.
The creditor also bears any expenses related to its acceptance of the performance of obligations by the debtor (e.g. postage and mobile telephony expenses, etc.).
That said, the creditor and the debtor may agree on any other procedure for allocating the expenses incurred during the performance of an obligation. In practice, it can make sense to do so when drafting agreements.
Unilateral termination of an obligation
In accordance with Article 310 of the Russian Civil Code, the right to unilaterally terminate an obligation or to modify its terms may be provided for in a contract between businesses.
The right of unilateral termination may also be granted to a person that is not engaged in any business activities and has entered into a contract with a business. The reverse situation is expressly prohibited by law.
The Plenum has clarified the application of this rule to corporate agreements. Specifically, the Supreme Court has confirmed that a corporate agreement between the participants in a commercial company may allow each of the participants to unilaterally terminate such an agreement.
This clarification is obviously aimed at emphasising the business nature of relations between the participants in a company, which is a commercial organisation. This clarification fills the loophole in the legislation that relates to the status of corporate agreements and eliminates the ambiguity over the possibility to unilaterally terminate such agreements.
The right to unilaterally terminate a contract may be exercised by notifying the other party. Such notice is deemed to have been given if delivered to the addressee, even if the addressee did not receive it personally or read it.
The parties to a contract may elaborate and include a specific notice delivery procedure in their agreement. The parties are recommended to do so in order to avoid problems that may arise in practice when proving the delivery of such notice.
The agreement may also provide for a unilateral termination fee. However, the court may disallow the payment of or decrease the fee if its amount is disproportional to the adverse consequences of the unilateral termination or if the party entitled to such fee knowingly acted in bad faith.
Pursuant to the clarifications of the Plenum, the unilateral termination fee cannot be provided for in two instances:
- when the right of unilateral termination is provided for by a mandatory provision of the law (e.g. the termination of a lease agreement concluded for an indefinite term);
- when the right of termination arises from the other party’s failure to perform or properly perform its contractual obligations.
Reasonableness and good faith in exercising one’s rights
The Plenum has once again emphasised that the parties to an agreement must observe the principles of reasonableness and good faith. A failure to do so may lead to a court’s refusal to provide judicial protection to the breaching party.
For example, if under a loan agreement, a bank unilaterally and disproportionately increases the interest rate on its loan and the borrower refuses to pay the interest, a court may refuse to grant remedy otherwise available to the bank.
Given the above, the parties to contracts are recommended to take additional care when drafting agreements and exercising their rights under them. For example, the inclusion of obviously onerous or simply unusual conditions in an agreement may result in its unenforceability if a court considers that the party, which had proposed such conditions, acted in bad faith.
Confirmation of the authority of a creditor’s representative
In accordance with law, a debtor may demand that the person accepting performance from the debtor prove that he is duly authorised to act on behalf of the creditor. In particular, if the creditor’s representative does not have a notary-certified power of attorney, the debtor may refuse to perform its obligations to such representative of its creditor.
A notary-certified power of attorney is not required if the authority of the creditor’s representative is evident from the existing circumstances (e.g. the transfer takes place at the creditor’s premises) and if the creditor had previously provided the debtor with a power of attorney that authorises its representative to act on its behalf.
The Supreme Court has clarified that the parties may contractually agree to use a different procedure for proving the authority of the creditor’s representatives. For example, an agreement may allow the representative’s authority to be confirmed by email. In this case, the debtor will have no right to request any additional documents to confirm the representative’s authority.
Time of performance of a monetary obligation
The Plenum has confirmed that the obligation to make non-cash payment is deemed to have been performed when the relevant funds are credited to the correspondent account of the creditor’s bank.
If the debtor and the creditor have their accounts in the same bank, the obligation is deemed to have been performed when the funds are credited to the creditor’s current account in that bank.
It is a common practice for the parties to an agreement to continue to state that payment obligations are deemed to have been performed when the funds are debited from the debtor’s account. However, courts are likely to disregard such provisions.
Currency of a monetary obligation
Under the general rule, the currency of a payment under a contract governed by Russian law is the Russian rouble. Payments may be made in a foreign currency only if permitted by the Russian currency control laws.
However, the parties to an agreement may specify the amount to be paid in a foreign currency (that said, the actual payment will be made in Russian roubles). In this case, if the parties fail to set their own exchange rate in the agreement, the amount to be paid will be converted into Russian roubles by using the official currency exchange rate of the Bank of Russia as of the date of the payment.
* In Russian