Execution and Interpretation of Agreements Recommendations of the Supreme Court of the Russian Federation of 25 December 2018
On 25 December 2018 the Plenum of the Supreme Court of the Russian Federation (“Plenum”) has adopted recommendations for the court practice on the execution and interpretation of agreements. It is evidence of a great progress of the Russian court system that, regarding the interpretation of agreements, the recommendations emphasize to identify the will of the parties, rather than to rely on the wording of the agreements.
The recommendations of the Plenum contain also important clarifications regarding the legal concept of “warranty of circumstances” which is comparable to the English law concept of “representations and warranties” and is meanwhile often used in business transactions which are governed by Russian laws. Other noteworthy statements concern the preliminary agreement, the framework agreement and the public agreement, all of which are legal tools often used in Russia related business transactions. Recommendations consolidate the already established court practice on some issues, as well as clarify issues that cause difficulties and contradictions in court. All recommendations of the Plenum contribute to a further increase of legal certainty for foreign investors. Below we have summarized the most important recommendations.
1. Warranty of Circumstances
Agreements often contain clauses in which a party (“Warrantor”) grants to the other party an explicit warranty (“Warranty”) on circumstances which are relevant to to the conclusion, performance or termination of the agreement. A Warranty may be granted also by a third party which has a lawful interest in the respective agreement. If an event is, at the same time, a breach of a Warranty and a breach of another obligation under the agreement, the consequences for both, the breach of the Warranty (compensation for damages, payment of penalties (if agreed) or termination of agreement) and for the breach of the other obligation apply simultaneously. Therefore:
If, under a Warranty, a seller has provided to a buyer information on characteristics of the goods with which similar goods mostly do not comply and such information turns out as untrue, along with the rules on liability for untrue Warranty, also the provisions on the quality of the goods apply,
The same is true if under an agreement on the sale of shares in a joint stock company or a limited liability company the seller provides information regarding the characteristics of the company and the stock of its assets,
If the Warranty does not directly concern the item of the agreement, but other relevant circumstances (e.g. the financial standing of the Warrantor or a third person, the existence of licenses, the structure of corporate control, the absence of indications for the qualification of the agreement as a significant transaction, requiring corporate approval, or the absence of a conflict of interests etc.), along with the rules on liability for untrue Warranty, also the general provisions on the breach of obligations under the agreement apply.
The following is said regarding the subjective prerequisites of the parties:
If the Warrantor carries out entrepreneurial activity, or the Warranty is granted under a shareholders’ agreement or an agreement on the sale of shares in a joint stock company or a limited liability company, in the event of untruth of the Warranty, the Warrantor bears liability irrespective of its fault (unless otherwise agreed by the respective parties).
It will be assumed that the other party has trusted in the truth of the Warranty.
Regarding a relief from, or a reduction of its liability, the Warrantor may not refer to negligence of the other party (i.e. because it has not itself revealed the untruth of the Warranty).
2. Interpretation and Qualification of Agreements
Regarding interpretation and qualification of agreements, the Recommendations attach importance on upholding the respective agreement and identifying the will of the parties, rather than on sticking at the wording of the agreement:
The determination of the legal type of an agreement should be made on the basis of characteristics of the agreement provided by the law and the essence of the legal provisions concerning the respective type, independently from the title of the agreement and the wording used for the designation of its parties and the description of the actions for the performance of the obligations under the agreement.
Interpretation should avoid that any party gains an advantage from its unlawful or unfaithful behavior and should not lead to an understanding which the parties obviously have not meant.
A clause may be interpreted by comparing it with the other clauses and the concept of the agreement as a whole. A court should focus on the systematic connections of a clause and in consideration of the fact that all clauses are agreed parts of one agreement.
Interpretation should be conducted in consideration of the aim of the agreement and the essence of the laws which apply to the respective type of the agreement.
If validity or conclusion of an agreement is in dispute, the court should assume the validity or conclusion as long as there is no evidence for the contrary. If a clause allows several alternatives of interpretation priority should be given to an alternative which would lead to the lawfulness or the conclusion of the agreement.
Unclearness of provisions of an agreement will be at the expense of the party which has drafted the agreement. It will be assumed that such party professionally carries out the activity, within the sphere of which the agreement has been concluded (e.g. the bank regarding a credit agreement, the leasing company regarding a financial lease agreement or the insurance company regarding an insurance agreement etc.).
3. Lack of Registration of Real Estate Lease Agreement
Agreements on the lease of real estate with a term of one year or more are subject to registration in the Russian real estate register EGRN. Regarding the consequences of the lack of registration, the following was set out:
The rights and obligations provided in the lease agreement apply to both parties. In particular, the parties are obliged to arrange for the registration of the lease agreement.
The lease agreement entails no legal consequences to third parties which do not know and must not know of the existence of the lease agreement.
In the light of the above, in the event of a change of the owner of the real estate, the rights and obligations under the unregistered lease agreement will not be transferred to the new owner if he does not know and must not know of the existence of the lease agreement.
4. Preliminary Agreement
4.1 Requirements to Contents
A preliminary agreement is an agreement under which the parties assume the obligation to enter into an agreement (main agreement), on the terms and conditions agreed upon in the preliminary agreement.
In order to recognize a preliminary agreement as concluded it is sufficient that it describes the item of the main agreement or provides for conditions which enable its determination. The lack of other essential conditions, on its own, is not a reason for considering the preliminary agreement as not concluded. So, if a preliminary agreement on the lease of a building does not contain a clause on the amount of the rental payments, the agreement is concluded. The parties may agree on the rental payments in the main agreement and, if they do not, may turn to the competent court.
A preliminary agreement or a main agreement may be entered into even if, upon signing of the respective agreement, the principle obligation under the main agreement (e.g. the handing of goods or the rendering of services) cannot be fulfilled. In particular, a sale and purchase agreement or a preliminary agreement may be entered into if the purchase item will be created, registered or acquired by the seller in future.
The Plenum has pointed out that an agreement titled by the parties as a “preliminary agreement” which provides for the entering into an agreement on the sale of a future item has to be requalified as the (main) sale and purchase agreement, if it provides for the buyer’s obligation, prior to the entering into the main agreement, to pay the purchase price or a substantial part thereof. In our view, the recommended requalification does not apply if the parties of a preliminary agreement have agreed that the future buyer is obliged to provide to the future seller a security payment for the performance of its obligation to enter into the main agreement, which later will be set off against the purchase price.
4.2 Enforcement of Obligation to Enter into Main Agreement
If one of the parties fails to comply with its obligation to enter into the main agreement, then such party may be enforced thereto by a competent court. The Plenum explained that this option is available only for the party of the preliminary agreement that took steps toward the conclusion of the main agreement within the time limit set by the preliminary agreement. A claim with the demand to conclude the main agreement may be submitted to the court only within six months after the expiry of the term for its conclusion.
4.3 Security for Performance of Obligations
The Plenum refers to the deposit („zadatok“) („Deposit“), a special type of money deposit, which may be used for securing the parties‘ obligations to enter into the main agreement. It mentions that, if the Deposit had to be provided by the party being obliged to make payment under the main agreement, after its signing, the Deposit will be set off against the payment obligation. If the Deposit had to be provided by a party not being obliged to make payment under the main agreement, after its signing, the Deposit, in general, must be reimbursed to such party.
However, in many preliminary agreements, the Deposit is not used as security as the party which has received a Deposit, in the event of not performing its obligation to enter into the main agreement, is obliged to pay to the other party the double amount of the Deposit. Often the parties prefer to agree on a money deposit which they design independently from the legal provisions on the Deposit.
5. Framework Agreements
Parties of a longer business relationship often enter into a framework agreement which provides for general conditions of the cooperation, e.g. organizational, marketing and financial conditions. Specific conditions will be later agreed in agreements, or applications or other statements. E.g. framework agreements may govern the supply of goods through a longer term. Such framework agreements often contain general provisions on the price for certain goods, the delivery conditions, liability of the parties and the legal venue. The concrete purchases are subject to concrete agreements which provide for the quantity of the goods and the calculation of the purchase price.
The Plenum mentioned that the general conditions of the framework agreement should be considered parts of agreements which comply with the intentions of the parties expressed in the framework agreement, unless otherwise agreed by the parties or following from the essence of the respective obligations. A reference in the agreements to the framework agreement is not necessary.
6. Public Agreement – Applicability of Benefits to Businesses
The Plenum has recommended to apply the benefits of the concept of the public contract (“Public Contract”) also to businesses (i.e. legal entities and individual entrepreneurs). The recommendation is, in particular, important for investors desiring to enter into agreements with public utility providers as such public utility providers are obliged to enter into a service agreement with the investor and are limited in applying different prices from the investors.