On 8 March 2015, the President of the Russian Federation signed the Federal Law No. 42-FZ, “On amending the first part of the Civil Code of the Russian Federation,” which came into force on 1 June 2015. The changes are part of the big reform of the Russian Civil Code that is aimed to bring Russian law in line with the current business and legal trends and established practices. It is expected that the amendments will prompt businesses to structure their deals under Russian law that is becoming more flexible and business-friendly. Below is a brief summary of some of the changes.
Indemnity obligation, which is similar to an indemnity under English law, has been added to the Russian Civil Code. Parties, acting in the course of business, may agree in the contract that one party shall reimburse the other party for its pecuniary losses arising upon occurrence of certain events identified in the agreement.
The currently existing concept of a contractual penalty remains valid in the Russian legislation. Further, the court cannot reduce the amount of the losses under an indemnity, except when it is proved that a party purposefully contributed to the increase in the amount of losses. In addition, losses under an indemnity may be compensated regardless of declaring the agreement not concluded or invalid, unless the parties agree otherwise.
The Civil Code now expressly provides that a party may make representations to another about circumstances relevant to the conclusion, performance or termination of the agreement. In the event of a misrepresentation, the party giving false representation must compensate the other party for any losses or pay a penalty as determined in the agreement. If the representations were material to the other party, such other party may terminate the agreement in addition to other available remedies, unless otherwise provided in the agreement.
“Good Faith” Conduct of Contract Negotiations
The recently introduced principle of “good faith” has been further developed and clarified in terms of conduct of contract negotiations. Business negotiations were not regulated in Russia and, therefore, such pre-contractual stage did not lead to any legal consequences until recently. However, from 1 June 2015 it is prohibited to:
- Enter into or to continue negotiations if there is no intention to reach an agreement.
- Keep silent about any material terms that the other party should be informed about.
- Terminate negotiations abruptly or without a reasonable cause.
The defaulting party will be responsible for compensation of losses, which include losses incurred by the counterparty in connection with the negotiations and the loss of opportunity related to the conclusion of an agreement with any third party.
Among other amendments introduced to the Russian Civil Code are those that relate to conditions precedent, option agreements, breakup fee provisions, independent guarantee (which is a guarantee that may be granted not only by the bank, but another financial institution) and security payment as a new means to secure obligations.