Transactions and torts involving a foreign element concluded or committed after 1 November 2013 are subject to the application of new conflict of laws rules. They were adopted as the fourth set of amendments to the Russian Civil Code (the “Amendments”). Overall, the changes seek to balance the interests of those involved, provide for increased legal certainty and some flexibility, and bring Russian law more in line with international law.
Overall, the Amendments bear a clear technical flavour and are particularly interesting from the academic perspective. Yet they are also relevant for practitioners and businesses when they face certain real life issues. In this Alert, we reflect on some practical implications of the Amendments on a selection of transactions or situations, mainly from the perspective of foreign legal entities. These issues include the contractual parties’ freedom to choose the governing law, consumer contracts, the form of a transaction, torts, unfair competition and competition restrictions, and powers of attorney.
A separate CMS Alert is entirely devoted to the Amendments’ impact on shareholders agreements. Another two new conflict of laws rules will also be commented on if and when Russian substantive law is amended as part of the on-going civil Code reform, namely (i) the ability for creditors to pierce the corporate veil of offshore companies that predominantly conduct their business Russia (ii) and the introduction of pre-contractual liability and the duty to negotiate in good faith. The impact of these new rules will depend largely on the content of the substantive law.
1. Scope of the contractual parties’ freedom to choose the governing law
When a contract is connected with a particular country, the rule that the contractual parties’ choice of law may not be aimed at circumventing mandatory rules of that law remains. However, this rule has been slightly refined in relation to the nature of the connection required: all the circumstances pertaining to the substance of the contractual relations are now relevant to determine whether there is a connection.
This change improves the legal certainty of the rule and potentially narrows the scope of judicial discretion, since previously the judge had to determine whether the contract was in fact connected with the country, and now the judge will determine whether all the circumstances pertaining to the substance of the contractual relations are connected with one country.
2. Consumer contracts
B2C general terms of sale are often governed by the law of the country of the seller. Under the Amendments, even if that is the case, a consumer cannot be deprived of mandatory protection rules under the law of the country of its residence. Thus, a consumer residing in Russia (a “Russian Consumer”) cannot be deprived of mandatory protection rules under Russian law. To avoid these rules from applying, the foreign seller now needs to prove that it did not foresee and could not foresee its goods would be distributed in Russia. The Amendments have shifted the burden of proof from the consumer to the seller.
Media coverage in Russia on this particular aspect of the Amendments may have given the impression that Russian Consumers enjoy new opportunities to seek redress in the Russian courts and avail themselves of the Russian mandatory protection rules. However, the impact for sellers incorporated abroad is likely to be more diffuse than reported.
For the resolution of disputes, B2C general terms of sale generally designate a court located in the seller’s country. Despite this a Russian Consumer is entitled under the existing regulations to start legal proceedings in Russia. If he/she does and the Russian court finds in his/her favour, that judgment may only really be enforced in the territory of Russia provided the foreign seller has assets (including bank accounts) in Russia, unless there is a relevant international treaty on the recognition and enforcement of foreign judgments.
3. Form of a transaction
The law of the form of a transaction should now be the same as the law applicable to the transaction itself, which is in line with international law and practice.
However, a breach of the requirements as to form may not be invoked to invalidate a transaction, if the requirements of the law of the country of conclusion of the transaction have been complied with. Also, if one of the parties is a Russian person or entity, compliance with Russian law requirements as to form will preserve the transaction.
A new provision requires transactions subject to compulsory state registration in Russia (other than those relating to immovable property, which must be concluded in the form of the law of the country of location of the relevant property) to comply with Russian formal requirements. Currently, compulsory state registration is required e.g. for transactions involving assignments or licensing of registered IP rights, or for transactions concerning museum specimens or collections.
Torts in general
Parties to a tort can now choose a law other than the law of the forum (i.e. other than Russian law in most cases) to be applicable to that tort. This choice, however, must not affect the rights of third parties and can only be made after the occurrence of the tort.
The extension of freedom of choice in tort actions, again, brings Russian law closer to international law, even if the scope of the Amendments does not include the ability for business parties to agree on the applicable law prior the occurrence of a tort.
Torts in the context of existing B2B contractual relations
For B2B tortious claims arising in the context of existing contractual relations between the parties, the law governing the contract will apply to that claim rather than the law of the place where the tort was committed.
Claiming damages from the insurer
New Article 1220.1 of the Civil Code confirms the possibility for the victim to claim damages directly from the insurer, including the third party liability insurer. Under the new norm, this is so not only when it is possible in accordance with the insurance contract’s governing law, but also when it is permitted by the law applicable to the tort. Insurers should therefore consider this possibility when analysing the risks primarily related to the conclusion of liability insurance contracts.
Defective product liability
As before, the victim of harm caused by a defective product can choose between the laws of:
- the country of the residence or main place of business of (i) the seller, (ii) the manufacturer, (iii) another tortfeasor, or (iv) the victim; or
- the place of purchase of the product.
However, it has become more difficult for the product seller/manufacturer to challenge that choice. Previously, it was enough for it to show that it had not consented to the distribution of the product in the country where the harm occurred. Now, it will need to prove that it had not and could not have foreseen such distribution. The legislator has chosen to extend the protection of the weaker party: the tort victim.
That said, the parties to such a product liability tort are now free to enter an agreement on the applicable law after the occurrence of the damage.
5. Unfair competition and competition restrictions
Until the Amendments, a party alleging a claim for unfair competition affecting a particular market (e.g. Russia) had to show, in particular, that that country’s market had actually beenaffected. Now, an unfair competition action is open to those who can show that the country’s market is at risk of being affected. This change indirectly broadens the scope of unfair competition and is favourable to aggrieved parties, who can start reacting before the damage has been caused.
If the alleged unfair competition only affects a single person or entity, the conflict of law rules governing torts will apply (see section 4 above). When it affects the market of a country, the parties may not agree on the applicable law. This exception confirms the public legal nature of competition regulation.
Competition restrictions were not previously expressly covered in the conflict of rules section of the Russian Civil Code. The same provisions now apply to them as for unfair competition, except that the parties are precluded from choosing the law applicable to this kind of situation.
6. Powers of attorney
A new rule allows principals to choose the governing law of a power of attorney. They can do so provided that:
- no exception applies (for example, when a power of attorney is granted for transactions involving immovable property which require state registration, or for a representation in arbitration or court proceedings); and
- “a third party and the agent have been made aware of such choice” (i.e. an ‘awareness requirement’ is met).
The governing law will cover the form of the power of attorney, its validity period, content, termination, abuse of authority, etc.
If no choice of governing law has been made, or if this choice is deemed not to have been validly made, the law of the country of the agent’s residence or main place of business will apply. If a third party is not and should not have been aware of the agent’s residence or main place of business, the law of the country where the agent has primarily acted in the specific case will apply.
If a power of attorney is incorporated into a contract (as allowed since 1 September 2013 – click here to review our Alert on the second set of amendments to the Civil Code), the governing law of the power of attorney will follow that of the contract, unless the parties have expressly chosen different governing laws for the relevant provisions of that contract.
New practicalities for principals
Particular care must be exercised when relying on, drafting and issuing powers of attorney with a governing law clause for use in Russia. Simply adding such a clause in the power of attorney may not suffice to satisfy the awareness requirement.
For this purpose, the principal should, for example, submit the power of attorney directly to the relevant third party. Also, as matter of evidence, it may be prudent to record, in one way or another, the acknowledgement of receipt (and also possibly an acknowledgement of understanding) of the agent and third party.
Point to note when foreign law is chosen
In cases when a power of attorney must be certified, Russian notaries may be reluctant to do so if it is governed by foreign law, as this practice is not common yet.
Point to note when Russian law is chosen or deemed applicable
If a Russian law-governed power of attorney is silent as to the agent’s authority to determine the procedure for dispute resolution and the governing law of the transactions made under that power of attorney, then the agent will be deemed to be so authorised. If the principal does not wish such authority to be granted, there should be an express mention to this effect in the power of attorney.
For sophisticated foreign parties with adequate legal support, the Amendments reviewed above are generally unsurprising, with some of them even providing some new opportunities (such as enhanced protection against unfair competition).
The new Russian conflict of law rules regarding torts are developing in line with the trends we can observe in other jurisdictions. They tend to specify new types of torts, to provide a more favourable level of protection for consumers and good faith market players, and to enhance the freedom of choice of law by the parties even further.