Russian business law: the essentials

1.2.4.5. Guarantee (Article 368–379 of CC of the RF)

By virtue of a guarantee, the guarantor, upon the principal’s request, undertakes an obligation to pay, to the person indicated by the principal (the beneficiary), a monetary sum in accordance with the terms of an obligation set by the guarantor. This is irrespective of the validity of an underlying secured obligation.

The obligations of the guarantor towards the beneficiary do not depend on the main obligation for the security of which the guarantee was issued, as well as on the relationship between the principal and the guarantor, or any other obligations, even if a reference to such obligations is made in the guarantee.

A guarantee may be issued by banks or other credit organizations (bank guarantees), as well as by other commercial organizations. Before June 1, 2015, the CC of the RF only regulated bank guarantees. Guarantees issued by other commercial organizations are new to Russian law.

1.2.4.6. Earnest money (Article 380–381 of CC of the RF)

Earnest money is a monetary sum given by one of the contracting parties to the other towards payments due under the contract. If the party giving the earnest money is liable for the nonperformance of the contract, the earnest money remains with the other party. If the party receiving the earnest money is liable for nonperformance of the contract, it has the duty to pay the other party twice the amount of the earnest money.

1.2.4.7. Security deposit (Article 381.1–381.2 of CC of the RF)

Monetary obligations may be secured by a security deposit given from one party to the other (security deposit). When the circumstances described in the contract arise, the amount of the security deposit is set off towards the performance of the corresponding obligation. If such circumstances do not arise in the period stipulated in the contract, or if the secured obligation is terminated, the security deposit has to be returned, unless the parties agreed otherwise.

2. Types of Contracts under the Russian Law

2.1. Contracts of Alienation of Property

The CC of the RF identifies a variety of contracts, which allow the transfer of property, by its owner or another person legally holding that property, to a third person. Such contracts include contracts of sale, barter, donation, and rent. These contracts are regulated in Chapters 30–33 of the CC of the RF.

Under the contract of sale, one party (the seller) undertakes an obligation to transfer property (goods) to the ownership of the other party (the buyer), and the buyer undertakes the obligation to accept these goods, and to pay a defined monetary sum (the price) (Article 454 of CC of the RF). Chapter 30 of the CC of the RF includes general provisions on purchase and sale, as well as specific provisions pertaining to individual types of this contract. Those types include contracts of retail sale, supply of goods, supply of goods for state needs, sale of agricultural produce, power supply, real estate sale, and sale of enterprises.

Under barter contract each party undertakes the duty to transfer certain goods to the ownership of the other, in exchange for other goods (Article 567 of CC of the RF).

Under the contract of rent, one party (the rent recipient) provides the other party (the rent payer) with property, and the rent payer undertakes the duty to periodically pay the recipient a certain amount, or to provide money for its maintenance in a different form (Article 583 of the CC of the RF).

Under donation contract the donor shall, without consideration:

– transfer, or undertake to transfer something to the ownership of the recipient;

– transfer, or undertake to transfer to the recipient, property rights of the donor or a third person;

– release, or undertake to release the recipient from the property obligation towards the donor or a third person (Article 572 of CC of the RF).

The contracts of sale, barter, and rent are compensated contracts. The only uncompensated contract in this category is the contract of donation. It should be taken into account that donations between commercial organizations are expressly prohibited under Clause 1 of Article 575 of the CC of the RF.

2.2. Contracts of Transferring the Property for Use

The CC of the RF specifies the following contracts of property use: lease, rental of housing premises, and gratuitous use. With the transfer of the property under these contracts, the lessee obtains the legal title to that property. The rights of the rent payer are protected by proprietorial means – through vindicative and negatory claims (Article 301–304 of the CC of the RF). Furthermore, the rent payer has the right to protect the property, even from its owner (Article 305 of the CC of the RF).

Chapter 34 of the CC of the RF is dedicated to the regulation of the lease. Under the lease agreement (contract for the lease of property), the lessor shall undertake to furnish (for a charge) the leaseholder with property, for temporary possession and use, or for temporary use (Article 606 of the CC of the RF).

The provisions governing the rent of premises can be found in Chapter 35 of the CC of the RF. Under a rent contract of housing premises, one party – the owner of the housing premises or an authorized person (the lessor), undertakes the duty to provide (for payment) the other party (the lessee) with housing premises for possession and use for housing purposes (Article 671 of the CC of the RF). The difference between this contract and the lease contract is the object, which is being transferred to the possession of the counterparty. In this contract the object can only be used as housing premises.

The gratuitous use is governed by Chapter 36 of the CC of the RF. Under the contract for gratuitous use, one party (the lender) undertakes to transfer, or transfers something for gratuitous use by the other party (the borrower). The latter undertakes to return the object of the contract in the same condition with due account for normal depreciation, or in the condition stipulated in the contract (Article 689 of the CC of the RF). Commercial organizations do not have the right to lend property for gratuitous use to their founders, shareholders, directors, members of management, or control bodies.

2.3. Contracts on Providing Services and Performing Works

2.3.1. Contracts on Performing Works

The CC of the RF regulates two types of work contracts: contracts of work for hire (Chapter 37 of the CC of the RF), and contracts of scientific research works, experimental designs, and technological works (Chapter 38 of the CC of the RF).

Under the contract of work for hire, one party (the contractor) undertakes the duty to do certain work at the order of the other party (the customer), and to transfer the results to the customer within the established period of time. The customer, on the other hand, undertakes the duty to accept the results of the work, and to pay for it (Article 702 of the CC of the RF). There are several types of work for hire contracts: consumer work, construction work, design and exploratory work, and work for state and municipal needs. These specific types of contracts are regulated in Chapter 37 of the CC of the RF.

Chapter 38 of the CC of the RF incorporates the regulation of two types of contracts: contracts of scientific research, and contracts of experimental designs and technological works. Under a contract for the performance of scientific research work, the performer undertakes the duty to conduct scientific research, based on a technical order of the customer. Under a contract for the performance of experimental design and technological work, the performer undertakes the duty to develop a model of a new manufacture, draft documentation for it, or for a new technology. In both contracts, the customer undertakes the duty to accept the work and to pay for it.

2.3.2. Contracts on Providing Services

Several chapters of CC of the RF govern the contracts of providing different kinds of services: carriage, freight forwarding, insurance, storage, delegation, commission, entrusted management of property, bank deposits, bank accounts, and agency.

The rules of Chapter 39 of the CC of the RF (contracts of compensated services) apply to the contracts which are not specifically regulated in the code. In particular, the rules of this chapter apply to the provision of medical, auditing, consulting, and information services, as well as to the services related to education and tourism.

3. Common Types of Contracts

3.1. Contract of Sale

3.1.1. General Rules

The general provisions on the contract of sale can be found in Articles 454–491 of the CC of the RF. These provisions subsidiarily apply to individual types of contracts of sale, if the CC of the RF does not provide specific rules for those contracts. The general provisions govern the main rights and obligations of the parties, the quality and assortment requirements, transfer of the right of ownership, and the risk of accidental loss of goods.

The description of goods is an essential term in the contract of sale. This term is deemed to be agreed on if the contract allows for the determination of the name and quantity of goods. According to Article 455 of the CC of the RF, a contract may be concluded for the purchase and sale of goods that the seller has on hand, at the time of the conclusion of the contract, as well as of goods which will be made or acquired by the seller in the future. Furthermore, the general rules on the ability of goods to be circulated, provided in Article 129 of the CC of the RF, shall also be complied with. According to Article 456 of the CC of the RF, the quantity of the goods subject to transfer to the buyer can be stipulated in units or with monetary expression. The term on the quantity of goods can be agreed on by means of establishing in the contract a procedure for such a determination.

The price of the contract is not an essential term for contracts of sale (with the exception of contracts of real estate sale). If the price of the contract is not stipulated in the contract and cannot be implied from the other terms of the contract, the payment of goods shall be made in the amount that is usually paid in comparable circumstances for similar products (Clause 1 of Article 485 of the CC of the RF, Clause 3 of Article 424 of the CC of the RF).

The quality of goods shall correspond to the terms of the contract. In the absence of such terms, the seller shall transfer to the buyer goods that are appropriate for the use which that sort of goods is typically intended for. The consequences of the transfer of goods of improper quality are set forth in Article 475 of the CC of the RF. If the defects of goods are not substantial, the buyer shall have the right, at their choice, to demand either proportionate reduction of the purchase price, or uncompensated elimination of the defects of goods within a reasonable period of time, or compensation of expenses for the elimination of such defects. In case of a substantial breach of the requirements on the quality of goods, the buyer shall have the right, at their choice, to refuse to perform the contract of sale and to demand the return of the amount paid for the goods, or to demand the replacement of goods of improper quality with those corresponding to the terms of the contract.

The seller has the duty to transfer goods that are free from the rights of third parties, with the exception of cases when the buyer agreed to accept goods which are burdened with the rights of third parties (Article 460 of the CC of the RF). The breach of this duty gives the buyer the right to demand a reduction of the price of goods, or the termination of the contract of sale, unless it is proven that the buyer knew or should have known of the rights of third parties to these goods.

In case the third parties have withdrawn the goods from the buyer on the grounds that arose before the performance of the contract of sale, the seller shall be obligated to compensate the buyer for inflicted losses, unless the seller proves that the buyer knew or should have known of the existence of these grounds.

3.1.2. Contract of Retail Sale

The contract of retail sale is governed by Articles 492–505 of the CC of the RF. This contract is distinguished by the following characteristics:

1) the seller is a person conducting entrepreneurial activity in the sphere of retail sale of goods;

2) the purchased goods are meant for personal, family, domestic, or another use that is not connected with entrepreneurial activity.

The contract of retail sale is a public contract. Therefore, the seller does not have the right to give preference to one person over another with respect to the conclusion of a public contract. The price and the other terms of the contract shall be identical for all buyers.

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Примечания

1

Translated by Anatoly Liberman, available at http://www.ruthenia.ru/tiutchevi-ana/publications/trans/umomrossiju.html#en.

2

Fyodor Ivanovich Tyutchev (Russian: Фёдор Иванович Тютчев; December 5, 1803 – July 27, 1873) is generally considered the last of three great Romantic poets of Russia, following Alexander Pushkin and Mikhail Lermontov. See https://en.wikipedia.org/wiki/Fyodor_Tyutchev.

3

PhD, Associate Professor, Lomonosov Moscow State University Business Law Department

4

University of Pennsylvania Law School, LL. M. 2015; University of Pennsylvania Wharton School, WBLC 2015; Lomonosov Moscow State University, PhD candidate, LL. B. 2012.

5

Doctor of Legal Sciences, Acting Deputy Director of ILCL, Head of the ILCL Civil Legislation and Process Department.

6

From 1921 to 1991.

7

Article 10, 11 of the USSR Constitution of 1977.

8

The Putin Curve, Wall St. J. Online, Nov. 26, 2002, http://www.wsj.com/articles/SB1038271514450758308.

9

Russia is among the seven largest economies in the world (РФ вошла в «семёрку» крупнейших экономик мира), VZGLYAD (ВЗГЛЯД), Feb. 8, 2008, http://vz.ru/news/2008/2/8/143489.html.

10

World Bank Believed In Russia (Всемирный банк поверил в Россию), RBK (РБК), March 24, 2010, http://top.rbc.ru/economics/24/03/2010/383833.shtml.

11

Net capital outflow from Russia in 2014 amounted to $151.5 billion (Чистый отток капитала из России в 2014 году составил $151,5 млрд.), RBK(РБК), Jan. 16, 2015, http://top.rbc.ru/finances/16/01/2015/54b96c5e9a7947490508d8d2.

12

"On Measures on Further Development of Legal Science and Improvement of Legal Education in the Country."

13

Eu. P. Gubin, P. G. Lakhno, I. V. Savelyeva were also members of the department.

14

See, for example, I. V. Ershova, G. D. Otnykova, Russian Business Law, 2011.

15

Lomonosov Moscow State University, PhD candidate, LL. B. 2014.

16

Please see below for a more detailed on the correlation between federal and regional acts.

17

Legal Directory Systems "Consultant Plus" and «Garant» may be used for searching for the texts in Russian of the legal acts of the Russian Federation. The database of these systems is available on the official websites as well: http://www.consultant.ru/online/ and http://www.garant.ru/.

18

Besides Russia, as of today it also includes Belarus, Kazakhsatan, Armenia and Kyrgyzstan.

19

By the way, some legal acts of the USSR are still in force in Russia today (to the extent to which they do not contradict to the active Russian legislation).

20

In Russia, there is no uniform approach on how to name the components of the articles of legal acts. Usually the largest components of the articles are called “clauses, sections, or parts.” Thus in the CC of the RF and the Tax Code of the RF, larger components are called "sections," (each «section» corresponds to one federal law, which in total forms these codes).

Sections/parts or clauses of the articles of legal acts can be divided into sub-clauses and paragraphs. Meanwhile, the parts of the articles can also be divided into clauses (that is, both the whole article and the «part» of the article can also be divided into "clauses"). Additionally, many secondary legal acts are divided into clauses, and articles therein are missing.

In order to define how the concrete element of the article is correctly named, it is necessary to find (in the same legal act), references to an element of an article of the same level (see, for example, Clause 2 of Article 3 of the CC of the RF).

21

Additionally, this type of an act of the President of Russia as an assignment/order has recently been widely adopted. The orders of the President do not contain norms obligatory for legal entities and citizens. These documents contain provisions obligatory for subordinate governmental authorities reflecting, as a rule, the most accurate directions of the development of the legislation and the state policy in general. An understanding of some orders of the President of Russia can be useful for entrepreneurs.

22

The Supreme Court of Arbitration of the RF, which previously headed the system of arbitration courts, became part of the Supreme Court of the RF. For details, please, see Chapter on Litigation, Arbitration and Other Means of Legal Protection.

23

The Plenum of the Supreme Court of the RF is a part of the Supreme Court of the RF.

24

Lomonosov Moscow State University, PhD candidate, LL. B. 2014.

25

See Section 3.3 of the present chapter for the classification of legal entities.

26

See section 5.2 for more information about state corporations and state companies.

27

See section 1.B.b of the present chapter for the right of a non-profit organization to generate profit from its activities.

28

Commercial organization can be created for certain purposes which are listed in its charter. In such an event, it will have a limited legal capacity.

29

State and municipal unitary enterprises are given an exception to this rule.

30

As mentioned above, the CC of the RF does not contain any indication to which type of enterprises the advocates formations being legal entities, shall be referred to.

31

The FTS of Russia No. 46 of the city of Moscow is located at the address: 125373, Moscow, Walking Passage, household 3, building 2.

32

Economic companies have charter capital, and economic partnerships have share capital. Everything written in the present chapter on charter capital applies to the joint capital as well.

33

It is possible to receive information on legal entity from official source on the site of the FTS of Russia at: http://egrul.nalog.ru/

34

For example, a public JSC, is obliged to disclose the annual report, annual financial statements, announcement of the shareholders’ general meeting, and other information. A non-public JSC is obliged to do so only if the number of its participant exceeds 50. Furthermore, shareholders of a non-public JSC may have the privilege of stock acquisition, as well as have the ability (if it is provided by a charter) to prohibit the alienation of the stock to a third party. Public JSC shareholders may not have such rights. There are also other differences between public and non-public JSCs.

35

A corporate contract concluded by LLC participants is called "a contract on the implementation of the shareholders’ rights". A similar contract signed by JSC shareholders is called "a joint stock agreement".

36

For more information about the minimum amount of an LLC Charter Capital, see chapter 4.1.2.1.C.

37

See chapter 4.1.2.1.C for the minimum amount of JSC charter capital.

38

The general partnership should not be confused with the simple partnership, which is not a legal entity.

39

The words «peasant» and «farm» are synonym in this entitlement.

40

In this case, both the Russian Federation and its subjects are considered as a state.

41

In the section on corporations, we consider advocacy formations that are legal entities.

42

Legal analyst, Consultant Plus; Lomonosov Moscow State University, LL. B. 2013.

43

See Federal law No. 42-FZ, dated March 8, 2015, “On Amending Part One of the Civil Code of the Russian Federation,” // “ConsultantPlus” Legal Directory System

44

See Decision No. 16, dated March 14, 2014, of the Plenum of the Supreme Arbitration Court of the RF, "On the Freedom of Contract and Its Limits," // “ConsultantPlus” Legal Directory System.

45

See Informative letter No. 165 of the Presidium of the Supreme Court of Arbitration of the RF, dated February 25, 2014, “On the Overview of the Judicial Practice Regarding the Disputes Related to the Declaration of Contracts as Unconcluded,” // “ConsultantPlus” Legal Directory System

46

The finding that the contract, which has not undergone state registration, shall be deemed concluded for third parties and not for the parties of the contract, has been determined in Federal law No. 42-FZ, dated March 8, 2015, “On Amending Part One of the Civil Code of the Russian Federation,” which came into effect on July 1, 2015.

47

See Clauses 2 and 3 of the Informative letter No. 165 of the Presidium of the Supreme Court of Arbitration of the RF, dated February 2, 2014, “On the Overview of the Judicial Practice Regarding Disputes Related to the Declaration of Contracts as Unconcluded,” // “ConsultantPlus” Legal Directory System

48

See Clause 14 of the Decision No. 73 of the Plenum of the Supreme Court of Arbitration of the RF, dated November 17, 2011, "On Some Issues of the Application of the Rules on Rent Contracts, Provided in the Civil Code of the Russian Federation,” // “ConsultantPlus” Legal Directory System

49

See Clause 3 of Article 15 of the Federal Law No. 190-FZ “On Power Supply,” dated July 27, 2010, // “ConsultantPlus” Legal Directory System.

50

See for example, Bankruptcy Law // “ConsultantPlus” Legal Directory System; Federal Law No. 229-FZ “On Enforcement Proceedings,” dated October 2, 2007, // “ConsultantPlus” Legal Directory System;

51

The terms “reverse auction” or “reduction” are not used in Russian legislation. These forms of auctions, however, are prescribed in Federal Law No. 44-FZ, “On the System of Public Procurement Contracts for Products, Works, Services for State and Municipal Needs” dated April 5, 2013, and in Federal Law No. 223-FZ, “On Purchases of Goods, Works and Services by Certain Types of Legal Entities,” dated July 18, 2011. In these laws the term “auction” is used for the identification of such procedures.

52

Resolution No. 35 of the Plenum of the Supreme Court of Arbitration of the RF, dated June 6, 2014, "On Consequences of the Termination of a Contract," // “ConsultantPlus” Legal Directory System