Negotiating with Russia

In June 2015 a number of significant amendments to the Russian Civil Code ?came into force. Some of these amendments may be of interest to English dispute resolution lawyers involved in Russia-related litigation or arbitration.

The new article 434.1 provides that a party involved in pre-contractual negotiations has a duty to act ‘in good faith’. In the event of a breach of this duty, ?the innocent party is entitled to damages. Breaches may include provision of false or incomplete information in the course of negotiations and ‘sudden’ ?and ‘unjustified’ termination ?of negotiations. Article 434.1 ?also states that the parties may enter into an express agreement as to how the negotiations ?shall be conducted. However, ?any agreement purporting to exclude the duty to act in good faith in pre-contractual negotiations will be void. 

Another amendment ?dealing with pre-contractual negotiations is contained in article 428. A party may apply ?to court to have the contract terminated or varied if, at the time of entry into the contract, the parties had a ‘manifestly unequal bargaining power’ ?(this term is not defined and it remains to be seen how it will ?be construed by the courts). 

It should be noted that these provisions on pre-contractual negotiations may apply even ?if the parties do not intend to subject their relationship to Russian law and the jurisdiction of the Russian courts. This may be the case when, for example, negotiations are held in Russia. 

In contrast to Russian law, under English law there is no general implied duty to negotiate in good faith, and a party is entitled to threaten to withdraw or actually withdraw from further negotiations at its discretion (Walford v Miles [1992] 2 AC 128). However, English law, like Russian law, allows the parties to enter into an express legally binding agreement governing the conduct of the negotiations.  

Indemnities

Another highly significant amendment is contained in article 406.1, which provides ?that parties may agree that compensation shall be payable by one party to another for the ‘losses’ incurred in circumstances specified in the contract and ‘not connected with a breach of an obligation by a party to the contract’. The contract shall specify the amount of compensation for the losses or a method for the determination of such amount. However, the term ‘losses’ is not defined. It can be argued that this mechanism is broadly similar to an indemnity under English law.

Article 406.1 further provides that the court is not entitled to reduce the amount of the losses claimed, except in circumstances where it is established that the claimant’s actions contributed ?to an increase of the amount. Moreover, the right to claim such losses does not depend on the validity of the contract containing the ‘indemnity’ provision.

Indemnities are frequently used in commercial transactions governed by English law (and the laws of some other major jurisdictions). The introduction of a similar mechanism into Russian law is clearly a positive development, encouraging the use of Russian law in corporate and commercial transactions involving Russian assets. 

Hybrid mechanism

The new article 431.2 contains provisions which are somewhat similar to representations and warranties under English law. ?A party who has made to the other party a false representation regarding a ‘material’ matter may be liable in damages (including liquidated damages if provided for in the contract). An innocent party who has relied on a material false representation or has been induced to enter into a contract by deception may also be entitled to terminate the contract or apply to court for a declaration that the contract is void. 

It should be noted that ?article 431.2 applies not only ?to representations made ?before or at the time of entry ?into a contract but also to representations made after the contract has been entered into. 

It can be argued that in ?effect article 431.2 has created ?a ‘hybrid’ mechanism, which has features of both representations and warranties under English law. In contrast to English law, there is no clear distinction between the two concepts, ?in particular with respect to the available remedies and rules on the quantum of damages.  

Another provision is similar ?to astreinte under French law. Pursuant to article 308.3, ?the court has the power (on application by a creditor) to impose a fine on a debtor for failure to comply with a court order. The amount of the ?fine is decided by the court ?at its own discretion, based ?on the principles of fairness, proportionality, and prevention of unjust enrichment. It is hoped that this new provision will improve the situation with the enforcement of court orders ?in Russia.

Dmitry Chernyy is a partner at Muranov, Chernyakov, and Partners and Alexander Muksinov, pictured, is an associate at Edwin Coe www.rospravo.ru www.edwincoe.com