02.06.2015 — Supreme Court guidelines on CEOs employment relations

On 2 June 2015, the Plenum of the Supreme Court of the Russian Federation issued Resolution No. 21 concerning the employment relations with company CEOs. The Resolution contains the approach of the Supreme Court of the Russian Federation with respect to a number of long-pending issues that arise when courts examine disputes between the company (or its participants) and former CEOs, in particular, the issues of jurisdiction over such disputes, as well as issues related to the grounds for dismissal of CEOs and the amount of pecuniary compensation the CEO is paid (the “golden parachute”).

First of all, the Supreme Court of the Russian Federation tried to resolve the issue of jurisdiction over disputes with company CEOs; however, it did not come to a definitive conclusion. Please be reminded that in the past, the approaches of the supreme courts on this issue differed – the Supreme Arbitrazh Court of the Russian Federation referred disputes with CEOs to the jurisdiction of arbitrazh courts, while the Supreme Court of the Russian Federation insisted that they had to be tried in courts of general jurisdiction. Now that the Supreme Arbitrazh Court has been dissolved, the Supreme Court largely remained committed to its previous position and established, as a general rule, that labor disputes with directors had to be tried in courts of general jurisdiction.

However, Resolution No. 21 lists a number of exceptions to this rule. In particular, arbitrazh courts will keep examining cases on the challenging of excessively high payments to CEOs, if such payments had been made during the company’s bankruptcy. Moreover, certain categories of disputes will be tried by both courts of general jurisdiction and arbitrazh courts. Such disputes include, for instance, the disputes on the “golden parachutes” or on the recovery from the CEO of damages caused to the company by his/her actions. The jurisdiction over a dispute on the “golden parachutes” will depend on who files an action with a court – if compensation is sought under the action filed by a director, the dispute will be tried in a court of general jurisdiction; if, conversely, the company’s participants are the ones to decide to challenge the amount of the “golden parachute” negotiated with the director, they can file such claims with an arbitrazh court. As regards the issue of recovery of damages from directors, however, the Supreme Court of the Russian Federation proffered no clear criteria for determining jurisdiction. Such a decision of the Supreme Court of the Russian Federation should be viewed rather as a negative one, since the absence of clear-cut criteria will only engender further conflict in the future and will in no way promote the consistency of court practice.

Another controversial aspect of Resolution No. 21 is its excessive expansion of the courts’ discretion in resolving internal corporate issues of the company’s business, into which courts should not interfere in the first place. Namely, the Supreme Court of the Russian Federation enabled former directors to challenge their dismissal based on the alleged abuse of right by the employer. If the company’s owner could dismiss the CEO at any time without specifying any reasons for its decision before, now the courts will assess whether such a decision of the owner was sufficiently motivated, which basically means that the employer’s unconditional right to decide who manages the company and to change its decision at any time, is now limited.

The courts were also granted the right to revise the amount of the “golden parachute” agreed upon with the director, based on the same ground (violation of the prohibition of abuse of right). Now, even after the director has agreed on the specific amount of compensation in case of dismissal in the agreement with his/her employer, he/she has no unambiguous guarantee that it will be recovered in full. According to Resolution No. 21, the pre-agreed amount of compensation may be reduced both under actions filed by the company’s participants, and by the court on its own initiative, relying on the alleged violation of the company’s interests as a whole, or the interests of its employees.

In applying these new rules, the courts might overstep the fine line between the acceptable level of judicial discretion and arbitrary revision of business decisions from the standpoint of their economic viability, which is a very dangerous practice.

01.06.2015 — Russian Civil Law Amendments: What Do New Rules Have in Store for Business?

0. Introduction

Starting from 1 June 2015, the next set of amendments into the Civil Code of the Russian Federation (the Russian Civil Code) related to the rules on obligations, enters into force and effect. In this article, we describe the most important amendments and discuss how they will affect doing business in Russia.

The amendments essentially follow two directions. The first one is introducing the principle of good faith into the contract law. The idea here is that now, when assessing the parties’ conduct in a dispute the court will rely not only on the letter of the law or contract, but also proceed from the test of good faith. Good faith is an evaluative concept whose content is to be established on a case-by-case basis proceeding from the specific facts. The maxim of good faith: treat others in the way you would like to be treated, that is, refrain from misleading your counterparty, drastic changes in the course of your actions, remember that your preceding acts have been the basis of your counterparty’s conduct. Moreover, it presupposes refraining from acts you are formally entitled to commit, but that are aimed exclusively at harming your counterparty. The principle of good faith suggests that as early as at the stage of negotiations, before the contract is executed, you should be careful in your statements to avoid creating false understanding vis-à-vis your counterparty and abstain from promising something you are clearly not going to do.

The second direction is the systematization of contract frameworks and introduction of new institutes important for contract work. The life does not stand still – commerce requires new, more convenient contract forms. In principle, its participants are free to make any contracts they like, based on the principle of freedom of contract. In the Russian reality, however, an express legislative provision for a particular contractual framework is always better than using options not listed in the law. This is both the guarantee of protection from unpleasant surprises during judicial proceedings, since the judges will have before them not only the parties’ pleadings, but also the text of the statute; and an opportunity for a subtler adaptation of the statute-provided frameworks to the parties’ needs. The amendments also introduce fundamentally new institutes convenient for business, but previously unknown to the Russian law. These include, for instance, representations on circumstances (an analogue of warranties and representations) and obligations to compensate losses (an analogue of indemnities). Before, any representations in the contract, for instance, regarding all necessary permits and approvals for the transaction, imposed on the party an obligation that was more of a moral nature. Now, false representations allow the counterparty to recover damages.

Below, we will review the novelties related to each stage of contract work:

  1. Contract negotiations: the culpa in contrahendo doctrine

  2. Contract execution and drafting the contract terms

    • Freedom of contract: the new trend in the court practice

    • Adhesion contract: now available for b2b-relations

    • Indemnities, warranties and representations: now in Russia as well?

    • New contractual frameworks: option, framework, subscribers’ agreements

  3.  Contract performance

    • Prohibition of bad faith conduct and the principle of estoppel

    • New stimuli for performance: changes in the methods of securing performance

    • Interest: calculating based on new rules

  4. Contract termination and dispute resolution

    • Unilateral repudiation of contracts: break-up fee

    • Astreinte: new opportunities for facilitating enforcement of judicial acts

    • Compensation of damages: simplification of rules

1. Contract Negotiations: The Culpa in Contrahendo Doctrine

One of the key spheres of implementation of the principle of good faith is the negotiation stage of the parties’ relations. Negotiations are based on two ideas:

  • the idea of risks: where the principle of freedom of contract plays the main role and the parties fully assume the risk of not reaching the final agreement;

  • the idea of culpa in contrahendo, that sets the limits of contractual freedom in the form of an obligation to act in good faith and compensate damages, if bad faith negotiations result in not reaching the agreement and the invalidity of the contract.

Both ideas underlie the forthcoming amendments. On the one hand, the general rule provides that the parties to a contract are free in conducting negotiations and are not responsible for not reaching the final agreement. But on the other hand, the amendments set forth the obligation of the parties to act in good faith during the negotiations, otherwise the affected party will be entitled to claim damages. The following conduct during negotiations is regarded as bad faith conduct: 

  • entering a contract without intending to reach an agreement;

  • failure to provide full or accurate information during the negotiations (including failure to disclose circumstances substantial for the other party);

  • sudden termination of negotiations without cause;

  • disclosure of confidential information obtained during negotiations;

  • simultaneous negotiations without informing the other party thereof.

The damages the bad faith party is obliged to compensate include not only the negotiation-related expenses incurred by the other party (transportation costs, attorney and consultation fees), but also the lost gain from losing the opportunity to make a contract with third parties. Now, parties are obliged to act as carefully as possible during negotiations not to create false illusions for their potential counterparties.

The agreements to bargain are now adequately protected. Before, such agreements were viewed by courts as non-obligatory gentlemen’s agreements or as preliminary contracts, which, conversely, was a very rigid requirement and obliged the parties to enter into the underlying contract, now such risks are minimized. In their agreement to bargain, the parties may regulate the allocation of negotiation costs, the confidentiality regime as well as provide for a penalty for breach of such an agreement.

2. Contract Execution and Drafting the Contract Terms 

2.1 Freedom of contract: the new trend in the court practice

Commerce is based on the principle of freedom of business, which in the legal sphere is embodied in the idea of freedom of contract. It is this freedom that enables the parties to make any transactions on any terms. The freedom of contract, however, cannot be unrestricted – it has its scope, both objective and subjective.

It is hard to dispute the need for objective limits – indeed, the parties cannot use their freedom so widely as to harm the interests of the general public, third parties or the weaker party to a contract.

However, apart from such objectively necessary limits, the Russian reality involves multiple subjective impediments preventing the participants of commerce from using their freedom of contract in full. The Russian courts’ approach has always been characterized by excessive rigidity and mistrust to any contractual novelties and derogations from the express stipulations of law. Practically any rule can be interpreted by the court as an imperative one, and the contract terms inconsistent with it – as invalid.

The struggle with such a normativist approach has begun only recently at the level of superior courts and was marked by the adoption last March of the Resolution of the Supreme Arbitrazh Court on the freedom of contract. The Resolution draws the courts’ attention to the fact that, first, the parties are independent in their decision-making and a court cannot on its own initiative interfere into their relations, and, second, that in most cases the parties are free to derogate from the text of the law, and if the rule seems to the court to be imperative and disallowing derogations, the court must provide its reasons for such an interpretation.

The tendency of promotion of contractual freedom, however, does not mean that now the parties have all possibilities for arbitrary action. The freedom of contract is implemented into the legislation and the court practice together with its invariable limitations – the principle of good faith and the idea of protecting the weaker party to a contract, which we will discuss below in more detail.

2.2 Adhesion contract: now available for b2b-relations

One of the limitations of the contractual freedom is represented by the rules on the contract of adhesion. The forthcoming amendments expand the scope of application of such rules – now they become the universal means of protection of the weaker party to any contract and apply not only in the relations with consumers, as before, but also in the relations, where both parties are businesses. Here, it is necessary to establish:

  • whether the contract terms are unfair (here, the contract terms should be evaluated not in isolation, but rather in the context of the contract as a whole, since other contract terms might compensate for the seeming unfairness);

  • which of the parties has a stronger bargaining position, since the draft of an unfair contract should come from the stronger party.

Of course, the possibility of the contract being held unfair by a court is a chance for smaller businesses to get out of unfavorable contract terms by annulling or amending the contract in court. However, on the other hand, it increases the risks for potentially stronger counterparties – banks, monopolies, and, in principle, for any large companies that may now not only suddenly lose a counterparty that has decided to invalidate a contract, but also will be obliged to compensate to the weaker party all that has been received as a result of applying an unfair contract, since contract invalidation has a retroactive effect and applies starting from the execution of the contract. Thus, the weaker party will be entitled to claim compensation of any “unfair” interest, paid earlier to the stronger party. 

Apart from repudiation and amendment of the contract, there are other protections from unfair contract terms as well. In particular, the weaker party may chose not to perform the unfair contract terms whatsoever. In this case, if the stronger counterparty goes to court, the weaker party may claim that the unfair terms are void, or rely on the abuse by the stronger counterparty of its rights. If the court upholds this logic, the stronger party will be denied contract enforcement. If, however, the court disagrees with the weaker party, it will have to perform the contract, as well as pay the respective liabilities for the violation committed. Hence, by failing to perform the unfair terms, the weaker party should be absolutely certain that they are unfair.

2.3 Indemnities, warranties and representations: now in Russia as well?

When concluding a contract, a seller communicates to the buyer a lot of positive facts on the target assets, the company’s standing and etc., in order to persuade the latter to enter into the transaction. Before, the seller was only morally responsible for the accuracy of these facts; now, with the implementation of the principle of good faith, the buyer receives protection. To enhance its level of comfort, the buyer may additionally ask the seller to make representations regarding the accuracy of the facts thus communicated.

Before, there were no adequate forms applicable to such representations in Russia, and the Russian courts were decidedly negative in their attitude towards the institutes recognized in other legal systems, such as the warranties, representations and indemnities. This forced the parties to artificially introduce foreign elements into the transaction and structure transactions under foreign law. Now, the Russian law has two new institutes – representations on circumstances and compensation of losses, which opens new opportunities for structuring transactions specifically under Russian law.

 The institute of representations on circumstances introduced into the Russian law is a rather peculiar combination of the English-law warranties and representations. The key specific features of the Russian representations as compared to the classical English constructions are as follows:

  • English warranties are contract terms; representations may exist both as contract terms and outside the contract, for instance, in case they are made at the stage of negotiations. At the same time Russian representations on circumstances are in no way tied to the contract and can be provided both prior and after its execution. Absent the legislative resolution to this effect, at the level of the contract, the English experience of limiting liability (by entire agreement claims or non-reliance statements) can be borrowed within the contract. 

  • Warranties may be absolute (independent of the knowledge of the party providing them as regards the accuracy of facts) or provided subject to the knowledge of the warranting party. In case of representations the party may both know that representations are false and be mistaken in good faith (the only thing that will depend on that would be the amount of liability). According to the Russian law, as a general rule, to be held liable a party should be aware of the inaccuracy of the representations, that is, effectively act with an intent. The party making representations without the knowledge of the inaccuracy of the information provided will be held liable only in business relations, as well as share sale and purchase agreements and shareholders’ agreements.

  • In case of warranties if the information was disclosed and the counterparty is aware of it, warranty claims are precluded, unless the contract provides otherwise. As for representations if the counterparty knows that the representation is false, it cannot make a claim based thereon. According to the amendments into the Russian Civil Code awareness of the information recipient of the inaccuracy of the representation made does not affect the possibility of claiming damages.

  • Since a warranty is a contract term, it is always presumed that the counterparty relied on the accuracy of the warranty. In case of representations the counterparty should rely on the accuracy of the representation, that is, it should be the representation that caused the party to enter into the transaction. Under Russian law not only the fact that the counterparty relied on the representation, but also whether the representing party was aware of its inaccuracy is relevant (here, such awareness is generally presumed). In this regard, we recommend officially informing the potential counterparty of the facts you deem to be material, when executing the contract, in order to be able to later rely on such disclosure in case of a dispute in court.

  • In case of inaccuracy of a warranty the counterparty may demand compensation of contractual damages (the party is put into the position it would have occupied if the warranty were true). The effects of a misrepresentation are compensation of damages for tort (the party is returned to the position it would have occupied if the contract had not been concluded) or rescission of the contract. The Russian Civil Code provides the following effects of inaccuracy of a misrepresentation on circumstances: compensation of damages (it is unclear if contract damages or tort damages are meant); recovery of a penalty; repudiation of contract; invalidation of contract (in case of fraud or a material misrepresentation).

It follows that one cannot rely on the Russian representations on circumstances being exactly similar to its English-law analogues, which should be taken into account when structuring transactions under Russian law. Please note that the option of including representations in the contract is useful where the buyer of the assets has to rely on the accuracy of the information received from the seller, and it is impossible to carry out a full due diligence, which is in any case more preferable.

Unlike representations, the new Russian institute of compensation of losses generally bears more resemblance with its English analogue (indemnity). 

An indemnity is a separate obligation independent of the underlying obligation. The essence of indemnity is in the compensation of losses that might occur in case of certain circumstances unrelated to the breach of contract (frustration, third-party claims). The advantage of indemnity is that it is not liability, hence, unlike in the case of damages, it does not require proving the wrongdoer’s intent, causation, and unlike penalty, is not subject to reduction (except in case of willful cooperation in mitigating losses).

However, in case of Russian compensation of losses there are specifics. The Russian Civil Code does not provide for the procedure for calculating the amount of indemnity, for which reason we recommend setting out such a procedure in detail in the contract. At the same time in case of indemnity the amount of losses indemnified is determined on the dollar-for-dollar basis.

An indemnity may be provided both by a party to the underlying contract and a third party. However according to the letter of the Russian law, an obligation to compensate losses may be assumed by the party to the underlying contract only, rather than a third party. Possibly the court practice might interpret the rule to be broader.

Besides the institute’s scope in the Russian law is limited; it is only available for:

  • businesses;

  •  individuals in case of a shareholders’ agreement or an agreement to dispose of shares (participatory interests).

Introducing the legislative analogues of indemnities into the Russian law certainly has its advantages. If the past court practice mostly viewed such constructions negatively (re-qualified them into insurance or bank guarantee agreements, held them to be void as made by unauthorized persons), the tendency now should change.

2.4 New contractual frameworks: option, framework, subscribers’ agreements

In principle, introduction into the Civil Code of the contractual constructions of an option (option agreement), framework and subscribers’ agreements constitutes the recognition of instruments long used in commerce, rather than a novelty.

Thus, options used to be used in the sphere of stock market operations and sales of participatory interests in limited liability companies before. Now, however, they can be used in other spheres as well. The Russian Civil Code contains two largely mirroring contractual constructions: an option that allows demanding the contract to be executed, and an option agreement that allows demanding performance of an already executed contract. The choice of the particular alternative depends on the preferences of the parties.

As regards framework and subscribers’ agreements, they have also been commonly used in practice (in the spheres of supplies, communication services and many others). However, the courts have differed as regards viewing framework agreements as unconcluded (because the subject matter has not been agreed upon) and qualifying the amounts received under subscribers’ agreements as unjust enrichment (since no services might have been actually rendered). Therefore, legislative amendments are aimed at putting an end to all doubts among the judges and mitigating the risks for the parties to the contract.

 3. Contract Performance

3.1 Prohibition of bad faith conduct and the principle of estoppels

The general principle of good faith first legislatively introduced in Russia in early 2013 is further developed in the contract law. The parties must act in good faith at all stages of their relations: both prior to the execution of the contract and at the stage of its performance, and even after the obligations have terminated.

What exactly should be understood under the requirement of good faith is an issue to be resolved by the court practice. In this respect, the law only gives general guidance, specifying the requirement of good faith for the obligation of disclosure and mutual cooperation of the parties. 

Expansion of the scope of applicability of the principle of good faith is currently one of the main trends in both the court practice, where references to the principle of good faith have become increasingly frequent, and the legislation, where the general requirement of good faith is expressed in a whole range of particular institutes. One of such institutes rooted in the principle of disclosure is the principle of estoppel, new for the Russian contract law. Its essence consists in depriving the party, whose acts contradict its previous conduct, of judicial protection.

The institute of estoppel in obligations applies to:

  • claims for holding the contract unconcluded: if the party accepted performance or otherwise confirmed the validity of the contract, it cannot later rely on the contract not having been concluded;

  • claims for challenging transactions: a party in business relations cannot rely on the invalidity of a contract, if it accepted performance by the counterparty and at the same time failed to perform its part of the contract (exceptions are made only for situations of concluding the contract contrary to the company’s purposes of business or as a result of mistake, fraud, or where the counterparty has performed the contract in bad faith);

  • unilateral repudiation of the contract: if, while there are grounds to repudiate the contract, the party confirms its validity (for instance, accepts performance) or does not use its right to repudiate within the specified term, it cannot later repudiate the contract on such grounds it had been aware of.

3.2 New stimuli for performance: changes in the methods of securing performance

The law expands the list of possible means of securing performance of obligations, which continues the general trend of strengthening protection of creditor rights that started with the massive reform of the institute of pledge. It should be recalled that now the law allows pledging not only property, but rights as well (contractual, corporate, exclusive rights), and the rights of creditors under pledges are secured by preserving the subject matter of the pledge received from an unauthorized person in case of the pledgee’s good faith and etc. In line with this trend, the law introduces two new means of securing performance of obligations – the independent guarantee and earnest payment.

An independent guarantee is, without doubt, a step forward as compared to the previous regulation. If in the past the law only allowed bank guarantees issued solely by credit and insurance companies, now an independent guarantee can be issued by any commercial organization.

At the same time, the law has resolved many problems that existed in the practice of applying bank guarantees. Namely, bank guarantees did not always work efficiently, since, in order to obtain comfort, the banks looked into the relations between the principal and the beneficiary when carrying out the diligence of the claim submitted to them. Such a practice did not conform to the institute of guarantee as an abstract obligation that does not depend on the underlying principal claim, and hampered commerce. Now the law expressly limits the scope of the diligence by the guarantor of the claim submitted to it similarly to the rules on letters of credit. The guarantor shall check only the compliance of the claim with the terms of the guarantee (and may not assert defenses that do not expressly follow from the text of the guarantee), and the documents attached as evidence to the claim shall be checked only externally (as regards their details), without reviewing the issues of actual performance. Therefore, as a matter of practice, the parties should clearly define the events in case of which the guarantee shall be paid, as well as the list of formal details the documents sent to the guarantor should conform to (document name, date, authorized signing officer and a number of other details).

Should the guarantor have doubts regarding the principal obligation (as regards its validity, the accuracy of confirmation documents, the fact of default under the principal obligation), it may only suspend payment for up to seven days, but it may not refuse to pay. To protect the guarantors, the law contains a rule on the compensation of their damages caused by the beneficiary’s submitting unfounded or false claims.

 Legislative recognition also covers the institute of earnest payment, long known to and widely used in practice. Essentially, a party makes a certain “deposit” to the creditor in case it later incurs obligations normally related to compensation of damages, payment of penalties in case of loss, damage, detecting any other defects in the subject matter of the principal obligation. When such circumstances occur, the sums owed to the creditor will be retained from the amount of the earnest. If such circumstances do not occur, the earnest would generally have to be returned.

In practice, there are problems with distinguishing the institute of earnest from a holding deposit and advance payment, which is important for taxation purposes and to determine the fate of the payment in case of rescission of the contract. Unlike an advance payment, an earnest has wider functions and can be set off not only as payment of the principal debt, but also as penalty, damages and any additional expenses that may arise in the future. Unlike the holding deposit, an earnest may secure not only the existing, but also the future obligations, and, as a general rule, an earnest shall be returned in case the circumstances it is designed to cover do not occur. Another difference from the holding deposit is the absence of risk of return of an earnest in the double amount if the obligation is violated not by the debtor, but by the creditor. 

From the practical standpoint, to clearly distinguish an advance payment, a holding deposit and an earnest, due attention should be paid to the wording used when the contract is executed, to avoid ambiguity in their interpretation. In this regard, we recommend checking the current wording of the contracts and bringing them to comply with the new rules of the law.

3.3 Interest: calculating based on new rules

The amendments also introduce the institute of statutory interest, new to the Russian law. Now, unless the parties have otherwise agreed in the contract, the amount of any monetary debt in b2b-relations is subject to interest in the amount of the refinancing rate. Such interest is assessed for the entire period of using funds, rather than from the date of delay. That is, the law basically prescribes the presumption of non-gratuitous nature of any monetary debt between commercial organizations. In this regard, it is necessary to be careful when concluding contracts connected with advance or deferred payments, and expressly exclude statutory interest on the amount of deferred or advance payment in such contracts.

Statutory interest assessed from the moment of crediting of funds should be distinguished from interest for the use of another’s funds under Art. 395 of the Russian Civil Code assessed only for the period of delay. Such interest existed before the reform; however, its amount was different: while before it was assessed in the amount of the refinancing rate (8.25%), now it is calculated based on average rates for individual deposits. There rates depend on the term of deposit and vary mostly in the range between 2% and 8%, which not only fails to account for the real cost of money in the economy, but is even lower than the refinancing rate. This regulation based on low contractual discipline cannot, in our view, be deemed adequate, since there is no way it can stimulate proper performance of obligations. We see two ways out of this situation:

  • providing for a different amount of interest for the use of another’s funds in the contract (this amount, however, can be lowered by the court at the debtor’s request to the individual deposits rate);

  • simultaneously with the interest under Art. 395 of the Russian Civil code, claiming the abovementioned statutory interest for the entire period of delay (this option is ambiguous, however, since it is yet unclear how the courts will approach such a cumulative assessment of two types of interest on one debt).

In the sphere of interest, we can note two more interesting options to be taken into account when the contract is executed. First, the interest under Art. 395 of the Russian Civil Code can be recovered together with penalty; however, this should be expressly stipulated in the contract. Second, the parties to business relations have one more option of assessing compound interest (interest on interest), which should also be stipulated in the contract. Here, however, one needs to proceed carefully, since in case of disproportion between the types of interest provided in the contract, they may be reduced by the court at the debtor’s request. 

4. Contract Termination and Dispute Resolution

4.1 Unilateral repudiation of contracts: break-up fee

The amendments provide for important novel rules as regards the unilateral repudiation of contracts. In particular, when exercising its contractual or statutory right to unilateral repudiation, the party should act in good faith and reasonably, and, first of all, inform the other party of the unilateral repudiation, since the contract is deemed terminated only after the counterparty receives such a notification.

 The grounds for repudiation have been supplemented with the absence of the necessary licenses (or membership with a self-regulated organization) with the counterparty. Before, having no license was the ground for invalidating the contract and allowed bad faith counterparties to evade contractual liability by relying on the contract’s invalidity.

Probably, the most important novelty is the parties’ opportunity to provide in the agreement for a payment for unilateral repudiation of the contract or unilateral amendment of its terms. Before, this opportunity was recognized only by courts. It should be noted, however, that the said option is available only to the parties to business relations. 

Providing for a payment is possible both in cases where the right to unilaterally repudiate a contract was provided by the parties in the contract, and in the situations when the possibility of unilateral repudiation follows from the law (for instance, the statutory right of the customer to repudiate the contract for non-gratuitous rendering of services at any moment can also be made conditional on the payment of a certain monetary sum). 

The amount of payment for unilateral repudiation remains a debatable question – it is unclear whether the court is entitled to evaluate the proportionality of such payment and whether it can lower the payment by analogy with the rules on the reduction of penalties? The court practice currently allows rulings that the disproportionately high payment for repudiation is unfair. However, whether in such a case the payment will be lowered or whether it will be denied in full depends on the active conduct of the party and its arguments in court.

It is possible to avoid risks of having the payment lowered in court by smart drafting of the term on the payment for repudiation at the stage of execution of the contract. First, such a term should not be put together with liability or included in the section on penalties and damages, since the court may regard such a term as a sanction for the exercise of a right, which is unacceptable. Second, the parties may include in the contract a justification of the payment amount, namely, specify, that the party has incurred substantial expenses in connection with the contract (and describe such expenses) relying on the long-term development of the relations, for which reason in case of repudiation it would be fair to claim the payment as compensation.

4.2 Astreinte: new opportunities for facilitating enforcement of judicial acts

The institute of astreinte (l’astreinte) stemming from the French law, has been recently recognized in the Russian court practice and has not been introduced at the legislative level. Within this institute, the creditor may claim in court not only the performance of the obligations and the contract-based sanctions for default, but also the payment of a certain penalty in case the judicial act is not fulfilled.

This penalty is paid to the claimant and may be either in the form of a fixed sum of money payable lump-sum or from time to time, or in the form of a progressive scale growing along with the period of non-compliance with the judgment. The starting point for the assessment of astreinte is determined by the court; in particular, the court may provide the defendant with a reasonable term for voluntary compliance with the judicial act. The amount of awarded astreinte may be further lowered at the debtor’s request upon its fulfillment of the judicial act, subject to the debtor’s proving the disproportionality of the astreinte and providing valid reasons for the untimely compliance with the court’s judgment.

Please note that for the claimant it is of course more convenient to claim astreinte during the proceedings, but, in principle, the possibility of filing an astreinte claim later, after the main dispute is resolved, is not excluded.

As regards the astreinte, however, there are a number of unresolved issues. For instance, it is debatable whether astreinte may be claimed under pecuniary obligations. As a general rule, in this case interest is assessed only based on the refinancing rate (unless a larger amount is justified by the claimant) up to the actual performance of the pecuniary obligation; here, the additional recovery of an astreinte is not provided by the law yet. The court practice is also confined to awarding only statutory interest under monetary claims, without the additional recovery of the astreinte.

4.3 Compensation of damages: simplification of rules

The amendments make another step within the general tendency of simplification of recovering damages under the Russian law. The standards of proving the amount of damages and their justification in Russian courts are extremely high, and the attempts to combat this malpractice have been made at the level of superior courts multiple times. Now that the legislator too has joined these efforts, it has provided for the possibilities of recovering:

  • estimated damages: an important rule prohibiting full denial of recovery of damages based on the fact that their amount has not been proven, has been introduced – in this case the court should estimate the damages proceeding from the principles of proportionality and fairness;

  • specific damages: if the contract has been violated, a party may conclude an analogous contract with a third party and claim the difference of contract value from the party that breached the initial contract;

  • abstract damages: if the creditor has not made an analogous substitution contract, but there is a market price for comparable products (work, services), the damages can be calculated in the form of a difference between such a price and the contract price.