Contracts

This chapter of Doing business in Russia sets out the legal framework and general principles of Russian contract law. It also gives practical considerations to keep in mind when entering into an agreement with a Russian counterparty.

Legal framework

The Russian Civil Code (the “Code”) represents the main law regulating how to conclude, perform, secure performance of, amend and terminate contracts 1 Terms “agreement” (“dogovor”) and “contract” (“kontrakt”) are to a large extent synonymous in Russia, with the term “contract” being more commonly used with supply and construction agreements. . It also sets forth rules for contractual breach and liability. Besides, the Code establishes certain rules on how contracts may be structured (e.g. preliminary, framework, adhesion, subscription agreements).

The Code sets both general rules applicable to all types of agreements and specific requirements applicable to certain types of agreements (e.g. sale-purchase (supply), services, construction, lease, agency, IP licence agreements). The Code expressly allows entering into agreements not specified or directly regulated in it, subject to their compliance with general rules. 

Certain specific types of agreement are subsidiarily regulated by other laws. For example, requirements to public procurement agreements are set forth by the Procurement Law 2 Federal Law No. 44-FZ “On the Contractual System in the Sphere of the Procurement of Goods, Works and Services for State and Municipal Needs” dated 5 April 2013. . Special rules are also stipulated for mortgages 3 Federal law No. 102-FZ “On Mortgage (Pledge of Immovable Property)” dated 16 July 1998. Please see the Real estate and construction chapter. , insurance 4 Law No. 4015-1 “On Organisation of Insurance Activity in the Russian Federation” dated 27 November 1992. , leasing 5 Federal law No. 164-FZ “On Financial Leasing” dated 29 October 1998.  contracts, etc.

Since provisions of the Code remain quite schematic in certain areas, resolutions of and court practice reviews by the Russian Supreme Court or the Supreme Commercial Court 6 The Supreme Commercial Court was abolished in 2014, but some of its resolutions remain valid and followed by lower courts in practice.  become important as they illustrate approaches and interpretations of legal provisions taken by Russian courts. Most of them relate to such matters as freedom of contract, conclusion, interpretation of agreements, liability issues and peculiarities of certain types of agreement. 

General principles

Freedom of contract 

By default, individuals and legal entities are free to determine with whom and on what terms to enter into agreements. Even though the Code provides for general rules governing agreements, in most cases, parties to an agreement are free to deviate from such general rules and agree otherwise, unless law clearly prohibits altering the respective rules (so-called “imperative” rules). 

The parties may also enter into a mixed-nature agreement combining features of different types of agreement specified in and regulated by the Code. For example, even though Russian law does not specifically regulate distribution agreements, the parties may conclude such an agreement combining elements of supply, services, agency and other necessary agreements. 

Also, as mentioned above, individuals and legal entities are free to conclude agreements not specified in the Code, in which case matters not covered by provisions of such agreement will be regulated by general rules set in the Code. 

Neither the name of an agreement, nor specified terms used to define its parties (e.g. “buyer” “seller”, “contractor”, etc.) determine in themselves the legal nature of the agreement. They do not qualify the agreement as being this or that type specified in the Code. However, when making such a qualification, Russian courts or other authorities (e.g. tax authorities) may take them into account alongside with other attributes.

Governing law, disputes resolution and language

The parties to an agreement may generally choose as its governing law Russian law or, provided the agreement involves a foreign element, foreign law. Russian law may be preferable if contractual relations involve Russian state bodies and companies. The use of foreign law, namely, English law or the law of the state of New York, remains a common option, although the choice of foreign law cannot completely exclude the relevance of Russian law, whose imperative rules may not be entirely overcome.

When selecting the forum in which disputes will be heard, the parties should take into account the chosen governing law and the issue of enforceability of court decisions or arbitral awards in Russia or abroad. The parties are free to choose state courts (Russian or foreign), arbitration or other forms of dispute resolution, such as mediation. 

Russia has treaties allowing reciprocal enforcement of national court judgments with only a few countries, which makes the choice of national courts less preferable in cases when the Russian judgment should be enforced outside Russia or a foreign decision in Russia. Russia is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and an arbitral award obtained in another signatory jurisdiction should be enforceable by a Russian court (Please see the Dispute resolution chapter).

Agreements between foreign and Russian individuals and legal entities are usually drafted as bilingual texts. An agreement with a Russian counterparty would normally be drafted in Russian and a foreign language (e.g. English). It is important to have a Russian version to facilitate some interactions with the Russian authorities or banks. These agreements should contain a clause on the prevailing language to avoid disputes relating to any discrepancies between texts. The prevailing language usually depends on the forum selected by the parties and aligns with the language of the dispute resolution or arbitration. 

Negotiations

The Russian Civil Code establishes:

  • a duty on those entering into contractual negotiations to act in good faith and not to enter into negotiations frivolously; and
  • the notion of bad faith negotiations and defines the concept of bad faith as where one party to the negotiations provides the other party with incomplete information or conceals certain facts, or unexpectedly breaks off the negotiations without due cause. 

If a party breaches the above requirements, it will have to reimburse the aggrieved party’s losses, which are defined as the expenses incurred by the good faith party for the conduct of the negotiations and any expenses related to the lost opportunity to conclude a contract with a third party. 

The rules will clearly apply to negotiations carried out between Russian individuals and entities. We assume they would also apply to negotiations of agreements that are mandatorily governed by Russian law. Application of the rules to cross-border negotiations is a more complex issue, which remains uncertain until the relevant court practice has been formed.

To minimise the associated risks, the negotiating parties should establish the time when negotiations have formally started. This could be achieved by way of execution of a letter of intent, a memorandum of understanding or any other document that could be used as evidence if a claim for reimbursement of expenses related to termination of negotiations (as described above) is filed. However, if the document contains essential provisions of the future agreement, it may be considered binding on the parties, hence requiring careful drafting.

In order to have an argument that Russian rules on pre-contractual negotiations do not apply to the parties and rules of a foreign jurisdiction apply, it is further advisable that the letter of intent or any document that evidences the commencement of negotiations contain applicable law provisions to avoid automatic application of the conflict of rules principle.

Corporate capacity and authority

As a rule, the general director, or any person acting under properly delegated authority (by way of a power of attorney), has the capacity to bind a Russian company. 

If the agreement value equals or exceeds 25% of the balance sheet asset value of the company (and no lower threshold is provided for in the charter), the agreement will constitute a “major transaction”. If the value is between 25% and 50% of this balance sheet value, unanimous approval of the board of directors (if appointed) would be required, and if over 50%, approval of a 75% majority of shareholders who participated in the meeting, would be required for a joint-stock company. Similar thresholds apply to a limited liability company, and an approval of a simple majority of all participants would be required, unless otherwise provided for in the company’s charter. 

“Interested party transactions” (e.g. agreements that may involve affiliates or cross-management) do not require any corporate approval unless the management of the company or a shareholder with no less than a 1%-stake requested such an approval. However, the company’s charter may envisage different rules for corporate approvals of “interested party transactions”. 

The lack of such approval does not automatically render the agreement void. However, it entitles the company, members of the board or shareholders/participants owning more than 1% of the charter capital to challenge the agreement in court.

Conclusion and requirements as to form

To enter into an agreement, its parties must agree upon the material terms specified for the respective type of agreement by the Code. For example, the type and quantity of goods to be sold under a supply contract are material terms. Thus, if the parties to a supply agreement agree on these terms, the supply agreement may be deemed concluded by Russian courts, unless the parties expressly specified other terms they also consider as material. 

Unless otherwise specified by law, agreements are concluded in simple written form. Certain types of agreement between individuals may be concluded orally. But the law requires concluding certain types of agreement before a public notary who certifies them (e.g. annuity agreements or sale-purchase agreements in respect of a share in ownership rights for real estate) or undergoing state registration (e.g. real estate lease agreements concluded for more than eleven months (please see the Real estate and construction chapter)).  

Agreements should be signed by the parties’ authorised representatives. As a rule, such powers are granted to the general directors of Russian companies by virtue of their charter. When an agreement is signed by someone other than a general director, it is prudent to check his/her power of attorney. Russian law does not require agreements to be sealed by companies. Nevertheless, in practice, Russian companies use seals to stamp agreements and require the same from their counterparties. 

Russian law does not require to sign contracts as a single document in hard copy, except in certain cases specifically provided by law (e.g. in case of the sale and purchase of real estate (please see the Real estate and construction chapter)). In general, it is sufficient to accept the offer of the counterparty. Therefore, in some cases, the mere exchange of emails may qualify as an agreement, provided the parties agreed upon all the material terms. Thus, discussing terms and conditions of a future agreement in writing should be performed with caution. For the same reason, caution should be exercised when accepting an agreement signed by the counterparty with a so-called “disagreement protocol” (“protokol raznoglasiy”).

Contracts can also be concluded electronically. For more details on e-contracts and e-signatures, please see the E-commerce chapter.

Representations

Representations (“zavereniya ob obstoyatelstvakh”) (an intended equivalent of “representations” and “warranties” as used in contracts under English law 7 However, representations under Russian law have some significant differences from English law concept. ) constitute quite a new concept in Russian contract law. They can be given by a party with respect to both its status and activity. Typical representations under a Russian-law governed contract relate to aspects such as the legal status of the company (including that it holds valid licences and permits required to perform the agreement), compliance with tax laws, obtaining all necessary corporate approvals, the absence of threat of insolvency.

If any of the representations made are breached or false, the counterparty will be entitled to claim damages, including for direct damage and loss of profit, if inflicted, or liquidated damages 8 Under Russian law, liquidated damages (“neustoyka”) mean an amount of money defined by law or an agreement to be paid by a debtor to a creditor in case of non-performance or undue performance of the agreement. In this case, the creditor is relieved from having to prove the damage inflicted. Liquidated damages may be represented in the form of a fixed amount of money (“shtraf”) (e.g. EUR 5,000 for each breach) or in the form of an amount of money calculated on the basis of the amount due and/or the duration of the delay in performance (“penya”) (e.g. 0.05% of the price of the agreement for each day of delay).  if provided for in the agreement. Moreover, should the representations be considered material by the counterparty who relied on them, this counterparty may unilaterally terminate the agreement on an out-of-court basis. 

Payment obligations and currency control

Russian law does not set forth mandatory terms of payment, including any maximum or minimum payment deferment. Parties to an agreement are free to determine a payment schedule suitable to their commercial needs and particular relationship. 

The contractual price may be set in any currency at the parties’ discretion. That being said, the currency defined in a contract may differ from the currency of payment. To mitigate foreign exchange risks, the parties may define the exchange rate applied and/or a currency corridor within which the currency may fluctuate for the purposes of the agreement. 

However, foreign currency operations between Russian residents are generally prohibited. Contracts between residents may be denominated in foreign currencies, but the actual payment must be made in Russian roubles. Foreign currency transactions between residents and non-residents are generally permitted, although higher value foreign trade contracts must be registered with an authorised bank, and residents must repatriate roubles and foreign currency received from international trade and commercial activities to accounts held with Russian banks (Please see the Currency control chapter).

Security

The performance of obligations under agreements may be secured by a pledge, retention, a suretyship, an independent guarantee (including a bank guarantee), a financial collateral, a security deposit or any other means provided by the parties’ agreement. In general, the parties are free to select the type of securement most suitable for their relationship and purposes. 

Amendment and termination

As a rule, agreements may be amended or terminated upon mutual agreement of the parties. Addenda must be executed in the same form as that applicable to the agreement (e.g. in writing, with or without notarial certification).

In case of a disagreement between the parties, the agreement may be amended or terminated through the courts under the respective grounds set forth in the agreement, in the law or if one of the parties committed a material breach of the agreement.

Unilateral termination for convenience is prohibited, unless expressly allowed in the law or agreement itself. For example, the Code establishes that a service agreement may be terminated unilaterally on an out-of-court basis provided the party initiating termination compensates the other party’s losses. 
There are no statutory requirements as to the terms of termination notices in case of termination for convenience, and the parties are free to set a term at their discretion. Termination for convenience may also be subject to a termination fee. 

Invalidity

An agreement (a portion thereof) may qualify as void or voidable if it contradicts Russian law. Void agreements (“nichtozhnye sdelki”) qualify as such by the effect of law and irrespective of whether such qualification is given by a court (i.e. no court decision required). Voidable agreements (“osporimye sdelki”) become invalid after being qualified as such by a court. Thus, an agreement simply contradicting Russian law is considered voidable. However, if this agreement affects public or third parties’ interests, it is deemed void (e.g. an agreement violating an express prohibition or consumer protection law).
As a rule, an agreement may be challenged by an aggrieved party to the agreement, unless otherwise is expressly provided for by law. 

By default, depending on the situation as specified above, it may be challenged:

  • within three years from the beginning of the contract’s performance in case of a void agreement; or
  • within one year from the date when a party became aware or should have become aware of grounds for challenging the agreement in case of a voidable agreement. 

Unless otherwise is provided for by law, the parties must return all money or assets received under the agreement, or reimburse the cost incurred by the other party in the performance of the agreement (if certain assets may not be returned for whatever reason). If only part of the agreement is declared invalid, the remainder remains in effect, unless it may be assumed that the agreement would be concluded without the invalidated part. 

Contractual liability and limiting one’s liability

Each party is responsible for any breach of the agreement irrespective of its fault, unless non-performance was caused by a force majeure event (i.e. extraordinary and unavoidable circumstances). That said, the burden of proof that force majeure events really occurred and affected the performance lies on the breaching party. As a rule, the lack of available goods on the market, a party’s poor financial standing, a financial crisis or fluctuations of exchange rates between currencies do not qualify as force majeure events in Russian law.

A breach of the agreement entitles the suffering party to claim damages in respect of both: 

  • direct loss (i.e. expenses that the suffering party has incurred or should have incurred to remedy its rights, loss or damage to property); and
  • lost profit (i.e. income that was not received due to the breach of the agreement by the breaching party). 

Companies may face problems with proving the exact amount of damages in court. Therefore, agreements typically set forth liquidated damages to cover at least a portion of aggregate damages. By default, other losses may be claimed in the amount not covered by the liquidated damages. However, the courts may reduce liquidated damages in case of disputes if such liquidated damages are recognised as inadequate by reference to the breach.

The Code also allows to limit the parties’ contractual liability. Typically, the parties exclude liability for lost profit and/or limit the total amount of liability by a particular threshold. However, there are several exceptions when such limitation of liability in the agreement is invalid and unenforceable, the main one being the prohibition from excluding liability for wilful misconduct. 

Practical considerations

Permanent establishment and tax structuring 

When entering into an agreement with a Russian counterparty, a foreign party should consider the risks of permanent establishment and possible tax implications. Particularly, regularly acting through a dependent agent in Russia may be considered as a permanent establishment. However, there are no clear criteria of such qualification. This is usually determined on a case-by-case basis. That said, the commercial activities of a foreign company should be assessed in their entirety, and various contracts are assessed together. Please see the Tax system chapter for more details.

Incoterms 

To simplify negotiations and cooperation during the performance of a supply agreement, parties to both foreign trade and local contracts may apply Incoterms rules. 

If they do so, the parties should carefully choose the Incoterms basis applicable to their relationship and bear in mind that it cannot substitute the agreement itself. Even though Incoterms govern many aspects of delivery, transfer of accidental loss or damage, allocation of costs and state duties, some crucial aspects of delivery remain unregulated by Incoterms. For example, Incoterms do not regulate the moment when title to delivered goods is transferred to the counterparty, which, in turn, should be synchronised with the transfer of risks provided by Incoterms rules. 

Customs clearance 

As a rule, customs clearance (please see the Customs regulations chapter) of goods imported into Russia should be conducted by a Russian-based company. In any case, customs clearance is subject to customs payment and takes time, which should be also considered by the parties upon drafting a contract, including in respect of delivery terms, date of fulfilling delivery obligations, allocation of expenses for customs clearance. 

Documenting the performance of contracts

Contracts usually contain technical clauses setting forth:

  • how to exchange communications;
  • that acts of delivery and, if applicable, certificates of testing must be signed;
  • how to make claims; or
  • a requirement to follow a pre-trial dispute procedure (please see the Dispute resolution chapter). 

Even if these clauses may seem insignificant for the performance of a contract, it is important to strictly follow them to avoid claims being rejected for failure to comply with the prescribed procedures. 

Expertise