Amendments to the Second Part of the Civil Code of the Russian Federation

Contractual Law Reform

Quite recently material amendments have been introduced to the Civil Code of the Russian Federation, precisely to its part dedicated to corporate and real rights. However, the section of the first part of the Civil Code of the Russian Federation devoted to the contractual law remained untouched by lawmakers.

Nevertheless, now it is the turn of the contractual law. Thus, right before the international women’s day Federal Law No. 42-FZ on the Introduction of Amendments to the First Part of the Civil Law of the Russian Federation dd. 08.03.2015 was drafted and adopted. It shall come into force from June 1, 2015. Under this law, material amendments were introduced to the binding part of the Civil Code of the Russian Federation. According to many experts, most innovations embodied approaches developed by the Supreme Commercial Court of the Russian Federation (now non-existent) and stipulated by it in resolutions of plenary meetings. Therefore, the scientific community, in the whole, views the adopted innovations favorably because they are long overdue and reflect the existing law enforcement.

Let us consider briefly the most significant and interesting amendments introduced in the Federal Law No. 42-FZ dd. 08.03.2015.

New Types of Contracts

As has been mentioned, the Civil Code of the Russian Federation is supplemented with provisions regulating the possibility of execution of new types of contracts, which have not been mentioned in the civil law before.

Option for the Execution of Contract

By virtue of the agreement for the option for the execution of contract (option to the execution of contract), one party by means of irrevocable offer shall grant the other party the right to execute one or several contracts on terms specified by the option. The option for the execution of contract shall be provided for a fee or other consideration, if not otherwise specified by the contract. The other party shall be entitled to execute the contract by accepting such offer following the procedures, in time and on terms specified by the option. The option for the execution of contract may also stipulate that the acceptance is possible only upon occurrence of terms specified by such option, including terms within the control of one of parties¹. The option for the execution of contract shall include terms, which allow defining subject and other material terms of the contract subject to execution. Option for the execution of contract shall be executed in form set forth for the contract subject to execution.

Option Contract

Revised code also includes a separate clause devoted to similar contract – the option contract. Under the option contract, one party shall be entitled to demand the other party to perform actions specified by the option contract within the term set forth by the contract.

However, if the authorized party does not make demand within the said term, the option contract shall be terminated².

The party shall pay the amount of cash set forth by the option contract for the right to make demand under such contract, except cases, when its gratuitousness is stipulated by the option contract. Upon termination of the option contract, “payment for the option” is not subject to return, if not otherwise specified by the option contract.

In essence, both types of contract (option for the execution of contract and option contract) have little or no difference: in both cases there is an authorized party, which unilaterally acquires the right to demand the liable party to perform a certain action; also, in both cases there are provisions for consideration for the option (if parties have not expressly agreed upon its gratuitousness).

The slight difference lies in the form of execution of such contracts: the option contract by itself constitutes an independent type of contracts, whereas the option for the execution of contract may be executed as an independent (separate) contract or integrated into the text of other contract. Also, the specified types of contracts differ in the moment of execution (entry into force) of such contracts: the option contract generally comes into force upon its signing, and the option for the execution of contract (being an offer) comes into force after its acceptance by the authorized party.

It appears that in the future the said types of contracts will be widely used for structuring capital transactions. However, as it is known, agreement of sale and purchase of the share in the authorized capital is subject to notary certification, and option contract should be executed in form specified for the contract subject to execution. Moreover, application on the introduction of amendments to the information on Company Members in the Unified State Register of Legal Entities (USRLE) shall be signed by the seller, not the buyer. Thus, at this stage it is still unclear, under which terms notaries will certify such contract, and also under which terms the authorized party will be able without legal proceedings to hold sellers of the share liable to sign relevant applications on the introduction of amendments to the USRLE. However, answers to these questions will be probably found in the course of ongoing practice, and there will be no obstacles left for practical implementation of such institutions.

Subscriber’s agreement

Another new type of agreement is the agreement executed on demand (or subscriber’s agreement)³. The agreement shall be recognized as the subscriber’s agreement, if it stipulates certain, including regular, payments or other considerations made by one of the parties (subscriber) for the right to demand the other party (contractor) perform certain actions specified by the agreement in the requested amount or volume or on other terms set forth by the subscriber. However, generally the subscriber should make payments or perform other actions under the subscriber’s agreement regardless whether such performance has been demanded by the contract, if not otherwise stipulated by law or the agreement.

New Contractual Institutions

Property Damages

In addition to existing compensation institution (Clause 15 of the Civil Code of the Russian Federation), the revised code stipulates property damages institution⁴. The main difference of this instrument from the compensation lies in the fact that property damages are not related to the breach of obligation by the compensating party (for example, damages may result from impossibility to perform obligation, claims of third parties or state authorities against the party or the third party specified in the agreement and etc.).

Generally, the amount of property damages may not be reduced by court (except cases when the party intentionally facilitates increase of damages). Moreover, damages shall be reimbursed regardless whether the agreement is declared unconcluded or invalid. If damages result from unlawful actions of the third party, claim for damages against such third party shall pass to the party, which reimburses such damages.

It is also stipulated that this instrument may be applied only in relations between entrepreneurs (with exceptions specified for corporate contracts or agreements for alienation of shares or interests in the authorized capital of the business company, which may be executed by an individual not involved in entrepreneurship).

Property damages institution vaguely resembles indemnity in the English law. It is seen that it will be quite in demand in the context of deal structuring because previously absence in such cases of contract breach by the compensating party was the main obstacle.

Representations on Circumstances

The essence of this instrument lies in the obligation of the party, which made invalid representations on circumstances material for execution, performance or termination of contract, to reimburse to the other party losses incurred by invalidity of such representations or to pay the penalty specified by the contract⁵. Representations on circumstances may also be made in relation to the subject of the contract, authority for its execution, compliance of the contract with the applicable law, availability of required licenses and permits, financial standing of the party or the third party.

Similar to property damages, if the contract is declared unconcluded or invalid, it shall not prevent the occurrence of consequences, occurring due to invalidity of such representations. The application area of this institution is also similar: it is applied strictly in relations between business entities (except cases when individuals execute corporate contracts and agreements for alienation of shares/interests in the authorized capital).

The party relying on invalid representations of the other party being essential for it, together with damage or recovery claims shall also be entitled to withdraw from the contract, and if the party executed the contract under the influence of deceit or material misperception incurred by invalid representations of the other party, then instead of withdrawal from the contract it shall be entitled to invalidate the contract.

In the English law there is also a similar version of this institution called warranties.

Unfair Conduct of Negotiations

The procedure of conduct of pre-contractual negotiations (negotiations on the execution of contract) has been institutionalized in the Russian law for the first time⁶.

Generally each party shall solely bear all expenses related to the need to conduct such negotiations and shall bear no liability for the fact that no contract is executed as a result of such negotiations. During the conduct of negotiations on the execution of contract, each party shall act in good faith (in particular, refrain from entering or continuing negotiations if it is known there is no intention to execute the contract). More specifically unfair conduct of negotiations means provision of incomplete or invalid information or non-disclosure of circumstances, under which the other party could not reasonably expect it. The main consequence of unfair conduct of negotiations is the obligation to reimburse damages, which include expenses incurred by the other party due to the conduct of negotiations on the execution of contract, and also due to the loss of possibility to execute the contract with the third party.

The parties may agree upon details for the conduct of negotiations, specify penalty, but may not limit liability for unfair actions.

Fulfillment of Obligations

Agreement between creditors

The revised code stipulates that creditors of one debtor under similar obligations may execute agreement for the procedure for the discharge of their claims, including those regarding the priority and adequacy of their discharge⁷. The parties of such agreement shall not perform actions aimed at the receipt of discharge from the debtor in breach of agreement terms.

Discharge received from the debtor by one of the creditors in breach of agreement terms is subject to transfer to the creditor under other obligation in accordance with the agreement terms. The claim of the creditor, which received discharge by transfer from the other creditor, who received such discharge from the debtor, shall be transferred to the debtor in the respective part.

Agreement between creditors regarding procedures for the discharge of their claims against the debtor is not binding for the parties, which are not parties to such agreement, including the debtor.

Discharge of obligations to the applicable party

In accordance to revised Clause 312 of the Civil Code of the Russian Federation, the debtor shall be entitled not to fulfill obligations to the party acting under the document executed under hand prior the approval of its powers by the principal. Except the following cases: the representative acts under the power of attorney certified by notary, there is written authorization given to the debtor by the creditor, and also if the power is stipulated in the agreement between the creditor and the debtor.

Interest on cash obligation

If not otherwise stipulated, in relations with commercial organizations the creditor shall be entitled to receive from the debtor interest in the amount of debt for the period of use of monetary funds⁸. Unlike interest specified in Clause 395 of the Civil Code of the Russian Federation, right for interest is not related to unlawful withholding of monetary funds. By default, the amount of interest is defined according to the amount of Central Bank rate effective during the applicable periods (legal interest). Accrual of interest on the interest is insignificant, except obligations under bank deposit agreement and contracts related to entrepreneurial activity performed by its parties.

Reciprocal Performance of Obligations

To this extent, amendments has been introduced to Clause 328 of the Civil Code of the Russian Federation, in accordance whereto it was specified that the party under obligation providing for reciprocal performance, shall not be entitled to seek performance in court without fulfilling its owed obligation to the other party.

Conditional Performance of Obligation

It is expressly stipulated that the term for the performance of obligation may be calculated from the moment of performance of obligations by the other party or from the occurrence of other circumstances set forth in the law or other contract⁹. Performance of obligations, and also exercise, amendment or termination of rights may be conditioned upon performance or non-performance by the party of certain actions or occurrence of circumstances specified by the contract, including those within control of one of the parties. Specified amendments should allow structuring conditional obligations without risk of their contest as transactions performed on term fully within control of one of the parties, and also on the ground that the term for the performance of obligation does not comply with the evidences of inevitability of its occurrence.

Securing Performance of Obligations

Consequences of the Main Obligation Invalidity

In accordance with new regulations it was specified that if the contract, where the main obligation was stipulated, is invalid, liability for the return of property received under the main obligation and related to the consequences of such invalidity shall be deemed secured¹⁰.

Reduction of Penalty

It is specified that upon charge of contract penalty from the party performing entrepreneurial activity the penalty may be reduced only (1) under the debtor’s application and (2) if it appears that charge of penalty in full may lead to the receipt by the creditor of unreasonable profit¹¹.

Surety. This section has been materially revised, in particular, the revised code includes explanations of the Supreme Commercial Court of the Russian Federation set forth in Resolution of the Plenary Meeting No. 42 dd. 12.07.2012 dedicated to surety:

Parties performing entrepreneurial activity can now provide general surety securing all existent and/or future obligations of the debtor to the creditor within certain amount¹²;
If security of the main obligation effective as of the moment the surety occurred is lost (or terms of security deteriorated) due to circumstances within the creditor’s control, the surety shall be released of liability to the extent, to which he/she could seek reimbursement by means of lost security, if it appears that he/she is entitled to reasonably rely on it. Agreement with the surety being the citizen stating otherwise is not allowed¹³;
The surety is entitled to withhold performance of its obligation until the creditor has opportunity to obtain satisfaction by means of set-off¹⁴;
It’s expressly stipulated that death or liquidation of the debtor does not terminate surety obligations¹⁵;
The surety, which acquired rights for securing the main obligation (for example, co-pledgor), shall not be entitled to perform them in prejudice of the creditor, in particular, shall not be entitled to exercise them prior complete discharge of the creditor’s claims under the main obligation¹⁶.

Independent Warranty

A new way of securing performance of obligations specified by law appeared: this is granting of independent warranty.¹⁷ This way of securing performance of obligations replaces such way as bank warranty. Unlike the latter, independent warranty may be issued not only by banks, but also by any other commercial organizations.

Deposit

It now expressly stipulated that deposit may secure performance of obligation for the execution of the principal agreement¹⁸.

Security Payment

Security payment becomes another new way of securing performance of obligations.¹⁹ Security payment means monetary amount paid by one of the parties to the other party and securing performance of obligations for the recovery of damages or payment of penalty in case of breach of the contract.

Liability and Recovery of Damages

Recovery of Damages

The revised code of the Russian Federation sets forth that the court shall not be entitled to reject claim for damages only on the ground that their amount is not reasonably evidenced. In such case, the court acting under the principle of justice and proportionality shall define the amount of damages by itself²⁰. The right to claim restraint of violation of negative obligations (obligations to refrain from any actions) has also been defined; such claim may be submitted regardless the claim for damages.

Losses upon Termination of Contract

There are special consequences stipulated in case of early termination of a contract due to its breach by the party in breach²¹. Besides recovery of other losses, the affected party shall be entitled to claim recovery of difference between the costs of the terminated contract and the contract executed instead of it; and if there is no such contract, to claim recovery of difference with the “current cost”.

Interest for the Use of Borrowed Monetary Funds

Interest rate for the use of borrowed monetary funds specified by law is subject to amendments: the bank rate is replaced with average bank interest rate on deposits of individuals published by the Bank of Russia and being valid in the applicable periods in the creditor’s location/place of residence²².

Amendment, Termination, Invalidity of the Contract

Invalidity of the Contract

There has been a general rule defined for invalidation of deals. Thus, in the area of entrepreneurial activity the party, which accepts performance under the contract from the counterparty and with that does not fulfill its obligation fully or partially, shall not be entitled to claim invalidation of contract, except on the grounds specified in Clause 173 of the Civil Code of the Russian Federation (deal contravening aims of a legal entity), Clause 178 of the Civil Code of the Russian Federation (deal executed under the influence of a material misperception), Clause 179 of the Civil Code of the Russian Federation (deal executed under the influence of deceit, constraint, threat or adverse circumstances) or if failure to make reciprocal performance is related to unfair actions of the respondent²³.

Termination of a Multilateral Contract by Mutual Consent of the Majority of Parties

Under the multilateral contract related to the performance of entrepreneurial activity by all its parties the parties may determine that amendment or termination of contract is possible whether my mutual consent of all or the majority of parties to such contract²⁴.

Unilateral Repudiation of Contract

It is stipulated that the party entitled to repudiate the contract shall act reasonably while performing it. If there are grounds for repudiation, but the party: confirms force of the contract, including by means of accepting performance under it; or (only for entrepreneurial relations) waives the right or does not declare exercise of such right in time, the following repudiation on the same grounds shall not be allowed²⁵.

Paragraph 1 of Clause 429.2 of the Civil Code of the Russian Federation (hereinafter, references to the Civil Code of the Russian Federation shall imply the code revised and valid from 01.06.2015).
Paragraph 1 of Clause 429.3 of the Civil Code of the Russian Federation.
Clause 429.4 of the Civil Code of the Russian Federation.
Clause 406.1 of the Civil Code of the Russian Federation.
Clause 431.2 of the Civil Code of the Russian Federation.
Clause 434.1 of the Civil Code of the Russian Federation.
Clause 309.1 of the Civil Code of the Russian Federation.
Clause 317.1 of the Civil Code of the Russian Federation.
Clauses 314, 327.1 of the Civil Code of the Russian Federation.
Clause 329 of the Civil Code of the Russian Federation.
Clause 333 of the Civil Code of the Russian Federation.
Clause 361 of the Civil Code of the Russian Federation.
Clause 361 of the Civil Code of the Russian Federation.
Clause 363 of the Civil Code of the Russian Federation.
Clauses 364, 367 of the Civil Code of the Russian Federation.
Clause 364 of the Civil Code of the Russian Federation.
Clauses 368-379 of the Civil Code of the Russian Federation.
Clause 380 of the Civil Code of the Russian Federation.
Clause 381.1 of the Civil Code of the Russian Federation.
Clause 393 of the Civil Code of the Russian Federation.
Clause 393.1 of the Civil Code of the Russian Federation.
Clause 395 of the Civil Code of the Russian Federation.
Clause 431.1 of the Civil Code of the Russian Federation.
Clause 450 of the Civil Code of the Russian Federation.
Clauses 450, 450.1 of the Civil Code of the Russian Federation.

Alexey Oskin

Deputy Director

Tax and Legal Practice

Korpus Prava (Russia)