Russian business law: the essentials

The public-legal companies are an organizational-legal form of legal entities, which are new to Russia, that appeared in the CC of the RF in 2014. However, currently neither the CC of the RF, nor other laws, contain any norms establishing the legal status of these organizations. This shortcoming is expected to be corrected soon.

vi) The State Corporations

The possibility to create state corporations is provided in Article 3 of the Federal Law No. 99-FZ dated May 5, 2014. State corporations are created for the purposes of the implementation of social, managerial or other socially useful functions. Each state corporation is created on the basis of a separate federal law that establishes features of the legal status thereof.

Currently the following state corporations are operating in Russia:

– Rosatom State Corporation of Atomic Energy;

– State Corporation for the Promotion of the Development, Production and Export of Hi-Tech Industrial Products “Rostec”;

– State Corporation “Bank for Development and Foreign Affairs (Vnesheconombank)”

vii) The State Companies.

The only state company currently operating in Russia is the State Company "Russian Highways.” It operates under ad hoc federal law. The legislation does not provide a possibility for the creation of new legal entities in the form of state companies.

Svetlana Popova[42]

Chapter 3 – Core Business Contracts

1. The Contract As a Basis for Creating Obligations

1.1. The definition of a contract under Russian law

Under Clause 1 of Article 420 of the Civil Code of the Russian Federation, a contract shall be recognized as an agreement, concluded by two or more persons of the institution, upon modification or termination of civil rights and duties. The general provisions on obligations (Articles 307–419 of the CC of the RF) shall be applied towards the obligations, arising from the contract, unless otherwise provided in the provisions of the CC of the RF, governing individual types of contracts or in the general provisions on contracts set forth in the CC of the RF.

The contract is also a bilateral or multilateral transaction. Therefore, as a general rule, the provisions on transactions set forth in Chapter 9 of CC of RF are applicable to contractual relations. Nevertheless, two exceptions to this rule have been implemented as a result of the amendments to the CC of the RF, which have been in force since July 1, 2015.[43]

The first exception concerns the application of the provisions on the invalidity of contractual transactions, which are related to entrepreneurial activity undertaken by the parties. Thus, as a general rule, the party which accepted the performance of the business contract from the counterparty, and fully or partially failed to ensure reciprocal performance of that contract, cannot claim the invalidity of the contract. The second exception pertains to the application of general consequences of the invalidity of transactions within business contracts. The parties of such a contract, which is a voidable transaction, may agree on additional consequences of invalidity, other than those provided in Article 167 of the CC of the RF. Furthermore, such an agreement should be concluded after the declaration of the contract as invalid, should not affect the rights of third parties, and should not violate the public interest.

Consequently, the following provisions of the CC of the RF need to be taken into account upon conclusion of the contract:

– Subsection 1 of Section 3 of Part 1 of the CC of the RF (general provisions on obligations);

– Subsection 2 of Section 3 of Part 1 of the CC of the RF (general provisions on contracts);

– Part 2 of the CC of the RF (individual types of obligations);

– Chapter 9 of the CC of the RF (transactions) – with some exceptions to be discussed below.

Specific regulation of individual types of contracts can be found not only in the CC of the RF, but also in other laws and regulations (e.g. the Urban Planning Code of the RF).

1.2. General Provisions on Contracts

The CC of the RF contains general provisions pertaining to every type of contract, and provisions regulating certain types of contracts (public contract, contract of adhesion, etc.), as well as provisions on individual types of contracts (purchase and sale contracts, rental agreements, etc.). The provisions on individual types of contracts cover the main rights and obligations of the parties, the rules of concluding a contract, formal requirements of a contract, etc.

Furthermore, the parties can conclude not only the types of contracts which are named directly in the CC of the RF, but also contracts which are not specified therein. The latter category can include contracts containing elements of several named contracts (mixed contracts), and special contracts, which do not contain elements of named contracts (unnamed contracts). Depending on the type of concluded contract, different principles can be distinguished with respect to the regulation of the contractual relationships of the parties.

Relationships under named contracts are defined by the parties, taking into consideration the rules on those contracts provided in the CC of the RF. The imperative norms governing the contract cannot be changed by the parties. When there are dispositive rules governing the contract, the parties can agree not to apply those provisions, or to establish different rules. The criteria for imperative norms have been identified in the Decision No. 16 of the Plenum of the Supreme Court of Arbitration of the RF, dated March 14, 2014.[44]

The Decision No. 16 of the Plenum of the Supreme Court of Arbitration of the RF, dated March 14, 2014, "On the Freedom of Contracts and Its Limits," was the first decision to establish the presumption of the dispositive nature of the norms governing individual types of contracts. According to the Plenum of the Supreme Court of Arbitration of the RF, the legal norms governing the rights and obligations under the contract shall be considered to be imperative, if those include a clear prohibition on adding different clauses to the contract. The norm is also of an imperative nature, if it is necessary for the purposes of safeguarding special interests protected by law (interests of the weakest party of the contract, third parties, public interest, etc.), for avoiding a great disparity between the parties’ interests. In addition, the imperative nature of a legal norm can be implied from the nature of the legislative regulation pertaining to a certain type of contract. In other scenarios, the norm should be considered to be of a dispositive nature.

With respect to the relationship under mixed contracts, or contracts which have elements of a mixed contract, the rules governing these contracts apply in respective portions, unless the parties agreed otherwise, or the rules are implied based on the nature of the mixed contract.

As for unnamed contracts, the rules on individual types of contracts provided in the CC of the RF do not apply directly. However, if the parties do not set in the contract the rules governing a particular aspect of their relationship, then the provisions on the individual types of contracts of the CC of the RF may apply by analogy (analogy of the law – Clause 1 of Article 6 of the CC of the RF).

In any of the aforementioned scenarios, the parties have the right to agree that the individual terms of the contract shall be determined by standard terms developed for contracts pertaining to the respective type, and published in the press (Article 427 of the CC of the RF). In the event that the contract does not contain a reference to such standard terms, they can be applied to the relationship of the parties as customs of trade.

The general stipulations of contract law in the CC of the RF includes provisions applicable to certain types of contracts: public contract, contract of adhesion, preliminary contract, framework agreement, option agreement, subscription contract, and the contract for the benefit of third persons.

1.2.1. The Rules for Concluding Contracts

1.2.1.1. General rules for concluding a contract

As a general rule, a contract is concluded by the means of one party sending an offer, and the other party accepting it. The contract shall be considered to be concluded from the moment of receiving the acceptance by the party which has sent the offer.

Furthermore, a contract shall be considered to be concluded, if an agreement in the required form has been reached between the parties on all of the essential terms of the contract (Article 432 of the CC of the RF). The essential terms of the contract are:

– the subject matter of the contract;

– the terms that are named in a statute, or in other legal acts, as essential or necessary for contracts of the given type;

– the terms with respect to which, by declaration of one of the parties, an agreement must be reached.

1.2.1.2. Declaring the contact as unconcluded

If any of the essential terms of the contract have not been agreed on, the contract, as a general rule, shall be deemed to be unconcluded. In this respect, the following factors shall be considered:

– the party cannot claim that the contract is unconcluded if: first, that the party has accepted the performance of the contract or otherwise acknowledged the validity of the contract; second, considering the particular circumstances, such a claim will contradict the good faith principle (Clause 3 of Article 432 of the CC of the RF);

– the contract shall not be considered as unconcluded, if the essential term, with respect to which an agreement has not been reached, can be covered by the general rules on obligations, or by a framework agreement. The application thereof shall not, however, be in conflict with the nature of the specific contract.[45]

1.2.1.3. State registration of contracts

Some contracts require state registration. Such registration is required, for example, for real estate rental agreements concluded for a period of not less than one year (Clause 2 of Article 609 of the CC of the RF), and for commercial concession contracts (Clause 2 Article 1028 of the CC of the RF). For third parties, the contracts which by law require state registration, shall be considered concluded from the moment of such registration.[46] Such a contract creates obligations for its parties, and cannot be declared by the courts as an unconcluded contract.

In its informative letter No. 165, dated February 25, 2014, the Presidium of the Supreme Court of Arbitration of the RF noted that the contract, which has not been duly registered, does not bear all of the consequences of the contract. Such a contract does not bear consequences which can affect the rights and interests of third parties who are unaware of the conclusion and the content of that contract. On the other hand, all legal consequences arise for the parties of the contract, from the moment an agreement has been reached in relation to all the essential terms. The full range of the consequences of the contract are enforced upon its state registration.[47] Such an interpretation of the provision has previously been conveyed by Decision No. 73 of the Plenum of the Supreme Court of Arbitration of the RF, dated November 17, 2011.[48]

1.2.1.4. Obligatory conclusion of a contract

In certain scenarios, the CC of the RF and other laws provide for an obligation of a party to conclude a contract. For example, such an obligation is set forth for organizations supplying energy, regarding the conclusion of power supply contracts.[49] In case the party/parties have an obligation to conclude a contract, it has to be concluded, in accordance with Article 445 of the CC of the RF. In the event of disagreements regarding the individual terms of the contract, the parties have the right to bring the case to the court, within six months from the moment the conflict arose.

If the party obligated to conclude a contract avoids its conclusion, the counterparty has the right to ask the court to coerce the party to conclude the contract. In this case, the contract is deemed to be concluded with the terms that are determined by the decision of the court, and from the moment that decision has come into force.

1.2.1.5. Conclusion of a Contract at an Auction

Unless otherwise implied from the nature of the contract, it can be concluded at an auction. General provisions on the conclusion of a contract at an auction can be found in Articles 447–449.1 of the CC of the RF. The order of organizing auctions in different domains is regulated in specific legislation.[50]

The auctions shall be held in the form of a tender, auction by bidding, or in another form prescribed by law. The latter category includes, for example, “reverse auctions” (reductions).[51] It can be organized for acquiring goods and services for state, municipal, and private needs.

The contract is concluded with the winner of the auction. Some laws and regulations provide the possibility (or obligation) to conclude a contract with the second place winner, in case the first place winner avoids the conclusion of the contract.

An auction conducted in violation of the rules may be declared invalid by a court, based on a complaint brought by an interested party, or in certain cases by the competition authorities. The declaration of an auction as invalid shall entail the invalidity of the contract concluded with the winner of the auction.

1.2.2. The Rules on the Amendment and Termination of a Contract

1.2.2.1. The grounds for the amendment or termination of a contract

The amendment and termination of a contract are possible by an agreement of the parties, or by a court decision.

An agreement to amend or terminate a contract shall be made in the same form as the contract that has been concluded, unless otherwise implied by the laws, regulations, customs of trade, or by the contract.

Upon one of the parties’ request, a contract may be amended or terminated by a decision of a court in case of:

– a substantial breach of the contract by the counterparty (Article 450 of the CC of the RF). A breach of a contract by one party shall be recognized as substantial, if it entails damages for the counterparty that significantly deprive the party from what they had the right to expect upon conclusion of the contract;

– a substantial change of circumstances (Article 451 of CC of the RF). A change of circumstances shall be recognized as substantial when they have changed the contract to the extent that the contract would not have been concluded, or it would have been concluded on significantly different terms, if the parties could have reasonably foreseen these changes;

– or in other cases provided by law or contract.

Before applying to the court, the party intending to amend or terminate the contract shall comply with the rules of pre-trial procedures, which includes the submission of a proposal to the counterparty to amend or terminate the contract. The court shall consider the request to amend or terminate the contract, if the counterparty rejected such a proposal, or the response has not been received in due course. Non-compliance with the rules of pre-trial procedures shall result in leaving the claim without consideration (Article 148 of the Arbitration Procedural Code of the RF). This, however, does not deprive the claimant from the right to apply again after complying with those rules.

1.2.2.2. Unilateral refusal to perform the contract

The law or the contract may allow the parties to unilaterally refuse to perform the contract (or to exercise relevant rights). In this case, the party may inform the counterparty of its refusal to perform the contract (Article 450.1 of the CC of the RF). The contract is terminated from the moment such notice has been received, unless otherwise provided by law or stipulated in the contract. From that moment forward, the contract shall be deemed to be terminated or amended.

1.2.2.3. The consequences of contract termination

Upon termination of a contract, the obligations of the parties shall be terminated unless otherwise provided by law, or implied from the nature of the obligations (Article 453 of the CC of the RF). The parties do not have the right to demand the return of what was performed by them under an obligation, before the time of amendment or termination of a contract, unless otherwise provided by law, or agreed by the parties. In a situation where before the termination of the contract, one of the parties has performed its obligations but the counterparty has not, the rules of unjust enrichment apply to the relationship.

The Opinion of the Plenum of the Supreme Court of Arbitration of the RF, ruled on the following stipulations, in clause 5 of Resolution No. 35, dated June 6, 2014.[52] According to this ruling, upon the termination of a contract, a party has the right to demand the return of property in the following circumstances:

– the party has transferred some property to the counterparty’s property as a performance of the contract;

– the counterparty has not performed its obligations properly or at all;

– in this respect, the court has found the parties to be in violation of the equality of their performance.

Moreover, all of the encumbrances (e.g. mortgage) of the returned property shall persist, which were existing at the time of being in the possession of the counterparty.

1.2.3. Formal Requirements to the Contract

According to Article 158 and Article 434 of the CC of the RF, all transactions, and particularly contracts, may be concluded in oral or written forms (simple or notarial). Contracts, in which at least one party is a legal person, shall be concluded in written form (Article 161 of CC of the RF), with the exception of the contracts which are performed at the moment of conclusion, or those directed at the performance of a written contract. These contracts may be concluded orally (Article 159 of CC of the RF).

1.2.3.1. Simple written form of a contract

A written contract may be concluded by the means of drawing up a document or exchanging several documents (letters, electronic communication, etc.). In the latter case, the channels of communication must allow for the exact determination that the documents come from the party of the contract. The written form of the contract is also deemed to be observed if the party receiving the offer has taken steps towards the performance of the contract.

1.2.3.2. Contracts certified by notary

For a range of contracts the legislation sets forth a requirement for notarial certification. Such a requirement, for example, exists for transactions related to the alienation of a share, or a portion of a share, in the charter capital of a limited liability company. The requirement of notarial certification of contracts may also be stipulated by the agreement of the parties. Transactions shall be certified by the notary, or an official having the right to take such notarial action. The procedure of notarial certification is set forth in theFundamental Principles of Legislation on Notariat dated February 11, 2003 No. 4462-.1.

If the notarial certification of a transaction is required, the nonobservance thereof results in the transaction being void. If one of the parties to the transaction, however, fully or partially performed the contract, and the counterparty avoided notarial certification, the court may, upon the party’s request, declare the transaction as valid (Article 165 of the CC of RF).

1.2.4. Security for the Performance of Contracts

The main methods of securing the performance of obligations are set forth in the CC of the RF. Those methods include penalty, pledge, retention of property, surety, guarantee, earnest money, and security deposit. This list is non-exhaustive, and the parties have the right to stipulate in the contract other means of securing the performance of obligations.

1.2.4.1. Penalty (Article 330–333 of the CC of the RF)

A penalty is a monetary sum, determined by law or contract, that a debtor must pay to the creditor, in case of nonperformance or improper performance of an obligation.

If a penalty subject to payment is clearly disproportionate to the consequences of the violation of an obligation, the court has the right to reduce the penalty. If the debtor is an entrepreneur, the court may reduce the amount of the penalty, only upon that person’s request. Furthermore, such a debtor must prove that the amount of the penalty stipulated in the contract may result in an unfair advantage to the creditor.

The creditor is entitled to claim damages for the portion not covered by the penalty (Article 394 of CC of RF). The law or the contract may identify the following scenarios:

– when only the penalty may be claimed and not the damages;

– when in addition to the penalty the damages may be claimed in the full amount;

– when the creditor may choose to claim either the penalty or the damages.

1.2.4.2. Pledge (Articles 334–358.18 of CC of the RF)

In the event of debtor’s nonperformance, or the improper performance of its obligations, the creditor (pledgee) has the right to receive satisfaction from the value of the pledged property, with priority over other creditors of the pledger.

In cases defined by law, and according to the procedure prescribed therein, the pledgee may have his/her claim satisfied by means of transferring the pledged property to the pledgee. A pledge arises by virtue of a contract between the pledger and the pledgee, or on the basis of law.

In the event that the rights on the pledged property have been transferred by the pledger to a third party, as a general rule, the pledge remains valid, with the exception of the following cases:

– when the pledged property has been acquired for compensation by a person who did not know and could not have known that the property was the subject of a pledge (No. 2 of Clause 1 of Article 352 of the CC of the RF);

– of the alienation of goods in commerce being the subject of a pledge (Clause 2 of Article 357of the CC of the RF).

The CC of the RF contains general provisions on pledges, and provisions regulating specific types of pledge (pledge of goods in commerce, pledge of securities, pledge of the rights of the shareholders of legal persons, etc.). A mortgage (pledge of real estate) is regulated by a special federal law.[53]

1.2.4.3. Retention of property (Article 359–360 of CC of the RF)

In case of nonperformance by the debtor, a creditor who has property subject to transfer to a debtor, or a person indicated by a debtor, shall have the right to retain the property until the performance of the obligations. If the parties are not entrepreneurs, the retention of property is allowed only for the purposes of securing the obligation to pay for that property, or for the compensation for the creditor’s losses in relation to that property. If, however, the parties to the contract are entrepreneurs, other obligations may also be secured by retention of property.

1.2.4.4. Surety (Article 361–367 of CC of the RF)

Under the contract of “suretyship,” the surety undertakes the duty to the creditor of another person to be fully or partially liable for the performance of its obligations.

The terms of the suretyship, as related to the main obligation, are deemed to be agreed on if the suretyship contract refers to the contract from which the secured obligation arose or will arise. If the surety is an entrepreneur, then the suretyship contract may secure all existing and/or future obligations of the debtor, in a predefined amount.

As a general rule, the debtor and surety are jointly and severally liable towards the creditor. The law or the contract may also establish subsidiary liability of the surety.

The surety who has performed the obligation, obtains the rights of the creditor in relation to this obligation and the rights of the creditor as a pledgee, to the extent that the surety has satisfied the initial creditors’ demands.