Russian Federation: Changes To The Civil Code Of The Russian Federation (The "RCC") Relating To Contract Law And The Law Of Obligations

Last Updated: 10 April 2015
Article by   Orrick and Konstantin I. Kroll

Federal Law No. 42-FZ dated 4 March 2015 (On Amendments to Part I of the Civil Code of the Russian Federation) (the "Law") was signed by the President of the Russian Federation on 8 March 2015 and is aimed at amending certain provisions of the RCC in relation to the law of obligations and contract law. The Law will take effect on 1 June 2015.

We would like to draw your attention specifically to the following amendments made by the Law:

Intercreditor agreements relating to the satisfaction of claims against a debtor (RCC Article 309.1)

Such an agreement may be entered into between creditors of a debtor owing obligations of the same kind to such creditors. The agreement may contain, among other things, provisions concerning the order of priority for the satisfaction of claims or concerning a non-proportional distribution of such claims.
Unilateral refusal to fulfill obligations (RCC Article 310)
An agreement relating to business activities carried out by certain parties may be unilaterally varied or terminated by a party to that agreement if permitted so by the RCC, another law or regulation or by agreement.

Priority of original creditor claims if the debtor's obligations are satisfied in part by a third party (RCC Article 313(5))

If a creditor's rights in relation to the debtor transfer to a third party upon the performance of the debtor's obligations by such party (e.g. pursuant to a suretyship or guarantee) no such right may be exercised to the prejudice of the original creditor. Specifically, the original creditor shall be preferred to the new creditor if the claims are satisfied out of the provided security or if the debtor does not have sufficient funds to satisfy its obligations in full.

Business obligations are presumed to be interest bearing (RCC Article 317.1)

Any monetary obligation between business entities shall be generally presumed to be interest bearing. Except as otherwise agreed by the parties, interest shall accrue on the money used by the other party at the key interest rate established by the Central Bank of the Russian Federation.

Conditional performance (RCC Article 327.1)

The exercise, variation or termination of a right or the performance of an obligation may be subject to an act being done or omitted to be done by a party, that is, such exercise, variation, termination or performance, may be within the full control of that party. This provision introduces a concept similar to conditions precedent.

Independent guarantee (RCC Articles 368-379)

The changes introduce an independent guarantee in lieu of a bank guarantee. An independent guarantee may be issued by a bank, other lending institution or any other business entity. Essentially, an independent guarantee is different from a suretyship in that the independent guarantee is not conditional on the principal obligation guaranteed by it.

Liability for a failure to perform monetary obligation (RCC Article 395)

Penalties for a failure to perform a monetary obligation to a creditor shall be charged under RCC Article 395 at a rate determined as the average interest rates offered by banks for individuals' deposits which apply in the area where the creditor's place of residence or registered office, as the case may be, is located, which have been published by the Central Bank of the Russian Federation and which were in existence over the relevant period, and not with reference to the key interest rate established by the Central Bank of the Russian Federation.

Indemnity obligation (which is similar, but not identical, to an indemnity under English law) (RCC Article 406.1)

An agreement may provide for a party to give an indemnity, which requires such party to compensate the other party for any losses incurred upon the occurrence of an event that is specified in the agreement and that does not involve a breach of obligations by a party. (Such indemnity obligation is not identical to the concept of indemnity under English law.)

Option (RCC Articles 429.2 and 429.3)

The RCC includes two new Articles concerning options, namely, Article 429.2 (Option to Enter into an Agreement) and Article 429.3 (Option Agreement). It will be possible to use appropriate legal concepts to structure option transactions under Russian law.

Representations and warranties (which are similar to representations and warranties under English law) (RCC Article 431.2)

Said Article sets out the consequences arising if a representation made by a party to the other party to an agreement relates to circumstances relevant to entering into the agreement and if that representation is untrue. Such representation may relate to, among other things, the authority to enter into the agreement, the existence of requisite licenses, the party's financial condition, etc. The party relying on a representation that is untrue may claim damages or a penalty set forth in the agreement. If a party's representation that is untrue was essential to the other party to the agreement such other party may terminate the agreement unless otherwise provided by agreement between the parties. If a party was deceived or materially misled into entering into an agreement such party may demand that the agreement be invalidated. (This Russian concept is not identical to the concept of representations and warranties under English law, and it is yet to be seen how this new provision of law will be applied in practice.)

Effectiveness of agreements which are subject to state registration (RCC Article 433)

With respect to the parties to an agreement that is subject to state registration, such agreement shall be deemed to have been concluded upon its signing. With respect to any third party, such agreement shall not be deemed to have been concluded until its registration.

Pre-contractual liability (RCC Article 434.1)

Parties to negotiations may enter into an agreement concerning their negotiations. Such agreement may set forth penalties for a breach of the agreement. In this connection, we believe that a binding provision concerning penalties may be included in (i) a term sheet or (ii) a standstill agreement, as concerns its provisions relating to the negotiation of restructuring.

Decision taken by a majority of the parties to a multi-party agreement (RCC Article 450)

A multi-party agreement may be amended or terminated by decision of all, or a majority, of the parties thereto if so provided by such agreement. The agreement may also establish how a majority should be determined for this purpose (such as a majority lenders principle).

Voluntary waiver (RCC Article 450.1(6))

A concept similar to a waiver under English law is established by Russian law. A party to an agreement may waive a specific right under such agreement. In addition, the new language of RCC Article 310(3) expressly allows a creditor to provide for a waiver fee.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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