Contract drafting in Russia: Important aspects of the right to terminate or amend a contract and of the fulfilment of payment obligations
The Supreme Court of the Russian Federation* has established clarifications relating to the right to unilaterally terminate a contract (according to Russian terminology, this is referred to as the right to unilateral refusal of performance) or to unilaterally amend a contractual obligation (“Unilateral Termination or Amendment Right”) and relating to the fulfilment of payment obligations.
Unilateral termination or amendment right
Permissibility in contracts (in particular shareholder agreements)
A Unilateral Termination or Amendment Right can be granted to any party in a contract entered into between undertakings.
In an agreement on the exercise of shareholder rights in a Russian limited liability company or joint stock company a right to terminate the agreement can be agreed upon even if any of the shareholders is no undertaking.
Legal consequences of exercise and its limits
The termination or amendment of a contract after exercising a Unilateral Termination or Amendment Right normally takes place when the other contractual party receives the appropriate notification.
When a Unilateral Termination or Amendment Right is exercised, the beneficiary must act reasonably and in good faith, taking the rights and statutory interests of the opposing party into consideration.
Monetary payment for the exercise of a Unilateral Termination or Amendment Right
1. Requirements for permissibility
Exercising a Unilateral Termination or Amendment Right can be conditioned by a monetary payment if the Unilateral Termination or Amendment Right is provided for by non-mandatory legal provisions or by contract.
If a Unilateral Termination or Amendment Right is provided for by mandatory legal provisions, its exercise may not be conditioned by a specific monetary payment. Examples of this are the right to terminate leases with an indefinite term and the statutory Unilateral Termination or Amendment Right in the event of the other contractual party breaching its obligations.
2. Legal consequences and requirement of proportionality
If the exercise of a Unilateral Termination or Amendment Right is conditional on a payment, the payment is normally due when the right is exercised.
A court can reject the payment claim if the monetary payment to be made by the beneficiary is disproportionate to the disadvantages which the contractual partner has due to the termination or amendment.
Fulfilment by bank transfer
If a payment is made by bank transfer, fulfilment takes place when the amount of money concerned is credited to the correspondent account at the creditor’s bank. If the creditor and the debtor have accounts at the same bank, the monetary obligation is normally deemed discharged when the amount of money concerned is credited to the creditor’s account.
The contractual parties can also establish different provisions in the contract. Other rules can also result from applicable law or customary practices.
1. Roubles or foreign currency to be converted to roubles
The rouble is generally the currency which applies to monetary obligations. A contract can, however, provide that a payment in an amount of roubles is owed which is equivalent to a certain amount in a foreign currency. In such cases, the amount to be paid in roubles is normally determined on the basis of the official exchange rate quoted by the Central Bank of the Russian Federation on the payment date.
The conversion rate for a currency or the procedure for determining it can be agreed in a contract.
2. Interpretation rules in the event of uncertainties
The official exchange rate quoted by the Central Bank of the Russian Federation for the currency normally applies to the conversion of currencies listed by the Central Bank of the Russian Federation.
If the currency is not listed by the Central Bank of the Russian Federation, the exchange rate is determined based on evidence to be provided by the parties on the exchange rates established by the banks of the country concerned and international organisations regarding the currency in question and one of the currency listed by the Central Bank of the Russian Federation.
A foreign currency can be used as a means of payment in cases which are regulated by law. If a foreign currency is agreed in a contract, but the currency in which payments are to be made is not specified, the payment must be made in roubles.
The invalidity of a clause in which a foreign currency has been agreed as the means of payment does not normally lead to the invalidity of the entire contract. In this case, the rouble is deemed the agreed currency if payment has not yet taken place.
Interest in the event of default
1. Types of interest
Interest can be demanded as follows if a monetary debt is defaulted on:
- agreed interest for the agreed use of amounts of money by the debtor (e.g. interest for receipt of a loan) and
- interest within the scope of civil-law liability (in particular statutory default interest).
2. Limited permissibility of compound interest
An agreement according to which interest is to be paid on agreed interest is only valid in contracts between undertakings and in contracts relating to bank deposits.
Default interest or contractual penalties can, however, as a rule be charged on agreed interest which has not been paid in due time.
Order of fulfilment
1. Right of debtor to determine order
Payment obligations are fulfilled by an amount not sufficient to fulfil all payment obligations in the order as determined by the debtor upon or directly after fulfilment. The debtor and the creditor can enter into agreements in this respect.
2. Order of fulfilment if not determined by the debtor
The following rules apply if the debtor has not determined the order of fulfilment:
- Only obligations which have not become statute-barred are fulfilled.
- Obligations whose performance deadline has expired are fulfilled first. The fulfilment of obligations whose performance deadline has expired or has not yet expired are normally fulfilled in accordance with the following rules:
- Unsecured obligations are fulfilled before secured obligations.
- Secured and unsecured obligations whose performance deadline ends earlier are fulfilled first. If a performance deadline does not exist, those which arose earlier are fulfilled first.
- Several obligations of equal rank are fulfilled proportionally.
3. Order of fulfilment for principal obligation and further obligations
In the absence of any agreement to the contrary, fulfilment with respect to a specific payment obligation takes place in the following order:
- Costs incurred by the creditor for acceptance of the payment,
- Agreed interest for the use of the outstanding amounts of money,
- Principal obligation,
- Interest in the context of civil-law liability.
*Order No. 54 of 22 November 2016 “on several questions regarding the application of the general provisions of the Civil Code of the Russian Federation regarding obligations and their fulfilment.”