6 January 2005
The commercial laws of The Russian Federation. Part 5. Contracts


a. Formation of Contracts, Offer and Acceptance.

A contract is an agreement of two or more persons that constitutes, modifies, or terminates private rights and obligations. General rules on contracts and their formation are included in Chapters 27, 28 of the RF Civil Code. Section IV of part two of the RF Civil Code establishes specific rules applicable to individual types of contracts.

To form a contract the parties must agree on all substantial terms of the contract in the required form. Substantial terms of a contract are its subject matter and also other terms that described by the law as substantial or required for the contracts of this type and terms, which have to be included in the contract after the demand of one of the parties (Art. 432 of the RF Civil Code). A contract is deemed to be formed at the time when the person who made an offer receives a complete full and unconditional acceptance. A conditional or partial acceptance is deemed a counter-offer and is not sufficient to form a contract. For certain types of contracts (carriage of goods, loan, etc.) the law requires that not merely consent on terms of the contract in the required form, but also physical transfer of a property into possession of another party is required to form a contract. In such a case, the contract is formed at the time of such transfer. A contract that requires mandatory state registration becomes effective after such registration if law does not provide for otherwise (Art. 433 of the RF Civil Code).

An offer is a manifestation of willingness to enter into contract made to one or to several persons, which sets forth required details of the proposed contract and expresses intention of an offeror to enter into contract with the person which accepts the offer on the terms provided therein (Art. 435 of the RF Civil Code). An offer must specify substantial terms of the contract. An offer binds an offeror starting from the time when an offeree receives such offer.

An offeror may revoke his offer by notifying an offeree before an offeree receives the offer. An offer which has been received by an offeree can not be revoked during the period of time specified in it, or during reasonable time required for acceptance plus for correspondence of acceptance to offeror (Art. 436 of the RF Civil Code).

An advertisement or other general notifications addressed to an indefinite number of the persons not known by the offeror is deemed to be an invitation to make offers and not an offer itself, unless such an advertisement/notification expressly provides otherwise. An offer which includes all essential terms of the future contract and intention of an offeror to enter into contract under such terms with any person that accepts it is a public offer (Art. 437 of the RF Civil Code).

An acceptance is the reply of a person, to whom an offer was made, expressing consent to accept the offer and to enter into contract. Silence, i.e. failure to take action or make a statement on the basis of an office, is normally not treated as an acceptance. The law or customs of trade or usual course of business may override this default rule. An acceptance may also be expressed by tendering a performance (such as transfer of funds or provision of services) which eliminates the need for the formal notice of acceptance. An acceptance may be revoked by notice of revocation which must be served upon offeror prior to or simultaneously with the notice of acceptance (Art. 439 of the RF Civil Code).

If a written offer does not specify deadline for acceptance, a contract is deemed formed if the acceptance is received within time frame specified by law or, if the law is silent on that issue, within normally required time for acceptance. When a verbal offer is made without specification of time for acceptance, a contract deemed formed only if an offeree accepts it immediately.

b. Capacity to Contract.

To enter into a contract, a person must be legally capable.

Individuals have general legal capacity after the age of eighteen (Art. 21 of the RF Civil Code). However, insane persons can be deprived of legal capacity under decision of a court, and legal capacity of persons addicting alcohol or drugs can be limited by the court. If a minor under eighteen years of age gets married, he or she obtains the full capacity to contract.

nfants between fourteen and eighteen years old have limited capacity to contract on their own, however, they may enter into any contracts by their own actions, upon written approval of their parents or other legal representatives. The contract made by the said persons is valid even if post written approval is obtained. Without written approval, infants between fourteen and eighteen years old may dispose of their income and other earnings, to realize their copyright and other intellectual property rights, to make depositions to banks and dispose them, to make insignificant everyday transactions (Art. 26 of the RF Civil Code).

An infant under fourteen years may generally conclude insignificant everyday transactions, to receive gifts, and to dispose of funds obtained from parents or with their consent from any third parties (Art. 28 of the RF Civil Code).

Persons, recognized incapable, are not entitled to make any transactions. Persons with limited capacity may only make insignificant everyday transactions (Art. 29-30 of the RF Civil Code).

The capacity of legal entities to contract arises at the moment of their state registration and is terminated it upon completion of liquidation procedures. If a particular type of activity requires a license or permit, the legal entity obtains legal capacity to undertake such activity and make contracts after receiving the special license or permit.

Corporations and other legal entities may have general or special legal capacity. Special capacity restricts the scope of contracts allowed for the entity.

Commercial legal entities normally have general legal capacity to contract, unless limited capacity is provided for under the law or charter documents for individual types of entities. State enterprises, non-commercial legal entities and state bodies have limited capacity and may engage only in the activity that is prescribed by law, regulations or charter documents (Art. 49, 50 of the RF Civil Code).

A contract on behalf of a legal entity can be formed by their officers, who act in accordance with constituent documents, laws and regulations.

c. Formal Requirements of a Contract

Common defects which lead to invalidity of a contract are: illegal subject matter, limited legal capacity or incapacity of a party, purpose of contract contradicting public policy or morals, and deviation of contract terms from imperative rules of law.

The form of a contract is one of the most important elements. Contracts may be concluded in verbal and written form. Verbal contracts are allowed if the law does not specifically prescribe another form. A contract that can be formed verbally is also deemed to be formed by conclusive actions. All contracts that are performed at the moment of their formation can be made verbally if parties do not agree on otherwise or law does not require otherwise (Art. 158, 159 of the RF Civil Code).

A written form is required for all contracts including at least one legal entity as a party, for contracts between individuals for the value over ten minimal statutory monthly wages (currently this threshold amount equals to USD 34) and in other cases prescribed by law irrespective of the amount. Under the Russian statute of frauds provisions (Art. 160-165 of the RF Civil Code), non-compliance with a written form of a contract normally entails impossibility to rely on witness testimony as means of proving the contract, but not invalidity of a contract. In such a situation the contract may be proven by other evidence. In cases specifically provided for by the law or agreed by the parties non-compliance with the written form renders the contract void (Art. 161, 162 of the RF Civil Code). This is the case, for instance, for foreign trade (international) contracts and most contracts related to real property.

For some contracts, certification by a notary (notarial form) is required. The contract is void if such certification is not obtained (Art. 163 of the RF Civil Code).

Compliance with a special procedure of the state registration of contract is a condition of validity of certain contracts. Notably, state registration is required for contracts involving title to land or other real property objects, including lease contracts (Art. 164 of the RF Civil Code).

d. Performance of contracts.

General principles of performance of contracts are declared by the RF Civil Code (Sec. 22 of the RF Civil Code). The Parties shall perform their contractual obligations with due diligence and in accordance with the terms of contracts, rules of law and regulations, and where such terms, rules or regulations are absent, with the customs of trade and/or other normal standards of action.

A creditor is entitled not to accept partial performance unless the parties specifically agree otherwise or performance in parts is allowed by customs of trade or by the rules of law (for instance, the owner of promissory note/bill of exchange is obliged to accept partial payment).

Performance of a contract is due to the creditor under the contract or to a person designated by the creditor. A party rendering performance must verify whether he offers the performance to the proper person. In other words, a debtor bears the risk of rendering performance to an improper person. An obligor may commit any third party to render performance to creditor, unless the obligation is such as to require performance in person. The beneficiary has to accept proper performance rendered by the third party. Any third party who is endangered to lose its right to property (for example lease or mortgage), if beneficiary seeks enforcement against this property, may tender performance to the beneficiary without consent of the obligor. After that this third party acquires the status of beneficiary vis-a-vis the obligor.

The time for performance may be fixed in the contract as the date or period of time when the performance must be rendered. If contract does not contain the reference to a particular date or period of time, it must be preformed within a reasonable time. A contract that is not performed within a reasonable time or a contract that must be performed on demand must be performed within seven days after request of performance send by the obligee unless law, rules, regulations, customs of trade, or terms of contract provide otherwise.

Early performance is authorized between individuals and non-commercial obligations: an obligor may render performance prior to time specified by the contract. The opposite is true for commercial contracts (where both parties act in the course of entrepreneurial activity): early performance has to be specifically allowed by the law, rules, regulations, customs of trade or terms of contract provide.

The law generally prohibits unilateral repudiation or modification of the contract, but provides certain cases when this is admissible (such as a serious breach by other party). Parties to a commercial contract are entitled to agree on additional grounds justifying unilateral repudiation or alteration of their obligations.

Parties to a contract may agree on any place for performance of contract, unless a specific place is prescribed by the law.

If the specific agreement on place for performance is absent, the following default rules apply:
• contracts related to real property must be performed in place where the real property is located;
• contracts for conveyance of goods or other personal property with obligation of delivery must be performed in place of handling such goods or personal property to the first carrier for delivery to obligee;
• contracts on conveyance of goods or other personal property by a trader must be performed at place of manufacturing or keeping of such goods or other personal property, if this place was known to other party to contract at the moment of formation of the contract;
• contracts that provide for payment of funds to a creditor must be performed at principal place of business of legal entity (or at place of residence) of the creditor; and
• any other contracts must be performed at the principal place of business of a debtor (in case of a legal entity) or at place of residence (in case of a person).
Settlements on the territory of the RF must be made in rubles (settlements in foreign currency are allowed only in a few cases). Nevertheless amount payable under the contract may be nominated (pegged to) in any currency or other units.

e. Remedies for the Failure to Perform.

Compensation of damages is a general remedy for the failure to perform a contract (Sec. 25 of the RF Civil Code). Damages in Russian law include direct losses (real damages, i.e. expenses incurred and/or to be incurred as a result of the breach, deterioration or loss of property) and lost profits (consequential damages). The doctrine of an efficient breach of contract is valid in Russia only halfway: the person whose rights are infringed is entitled to recover as “special damages” all income realized by the debtor as a result of breach. However, there are no unfavorable consequences for the debtor who defaulted on a contract because it allowed it to escape losses which are greater than creditor’s damages.

Compensation of damages caused by improper performance does not release a party in breach from rendering a performance, which is still owed. However, by paying damages to a creditor for a failure to perform, the party in breach is released from rendering performance.

If a party defaults on a contractual obligation to convey a particular item or to render work or service, the other party may entrust performance of the obligation to a third party or to perform it itself, and after that recover costs and damages from the party in default.

Penalty is another common remedy which applies if provided for under the law or a contract. Penalties do not necessarily prevent compensation of damages. The default rule is that where a penalty is payable for breach of contract, any losses may be recovered only in part that exceeds the amount of penalty (set-off penalty). However, the punitive penalty (which is recoverable on top of damages), alternative penalty (the creditor has an option to recover either penalty or losses) and liquidated penalty (only the penalty but not losses are paid in case of the breach) are legal as well. Penalty may be expressed as a fixed amount or percentage of value of the obligation. It may also be linked to duration of delay. The court has a discretion to decrease the amount of penalty which is out of proportion to damages caused by a breach.

A special liability is provided by the law for violation of a monetary obligation. If a person fails to return or pay money under contract, the other party is entitled to recover interest accrued on such amount during the period of default. The interest rate on obligations expressed in rubles is normally defined by reference to the interest rate declared by the Central Bank of Russia. For obligations denominated in foreign currency the interest rate is determined by reference to average interest rates on short-term foreign currency bank loans at a place of residence or a place of principal business of the injured party if the official interest rate on foreign currency bank loans is absent on the day of performance of monetary obligation. Recently the Bulletin of the Central Bank has started publishing the “average interest rates on USD loans by commercial banks”. These average rates are used by the courts to determine the amount of interest due on monetary obligations denominated in USD. If the amount of damages caused by breach of a monetary obligation exceeds the amount of interest, the creditor is entitled to compensation of damages in part that exceeds this amount. An obligation may provide for a different interest rate or another rules of interest and damages.

In certain situations the court may order performance in kind. For instance, the creditor may demand seizure and transfer to its possession of a designated item, which has to be given to it under the contract.

To award a remedy the court establishes all conditions of liability, such as: civil law infringement, unfavorable consequences for rights of third parties, which are caused by this infringement, and, in certain cases, fault of an offender. The element of fault is found where an offender was acting deliberately or negligently. In contrast to criminal prosecution, fault is presumed in civil cases. To be exonerated from liability, an offender has to prove that he has no fault in the breach.

In case both the injured party and the offender are at fault, comparative fault rules apply and the degree (amount) of liability is adjusted correspondingly (Art. 404 of the RF Civil Code). Liability for breach of an obligation in the course of entrepreneurial activity arises even where no fault at all exists on part of an offender. Traders are released from liability only where the breach is caused by the act of god (force-majeure).

For certain categories of transactions the law provides for limited liability (for instance carrier’s liability is normally restricted to real damages). A clause on limitation of liability may also be included in the contract.

f. Distinction between Civil and Commercial Contracts.

Russian legislation does not distinguish civil and commercial contracts. There is no Commercial Code in the RF and no dualism of commercial and civil law in the Russian private law. However, the RF Civil Code contains special regulations regarding obligations connected with commercial activity, which may arise from the contracts as well. And only in this sense the term commercial contract may be used. Commercial contracts under Russian law are basically contracts where one or both parties act in a course of entrepreneurial activity. Most contracts may be treated either as commercial or as regular, depending on the parties. However, some forms of contracts regulated by Section IV of Part Two of the RF Civil Code are commercial contracts, it is required that both parties entering into and executing such contracts would act in a course of entrepreneurial activity. These are contracts of supply (delivery), contracting for agricultural produce, financial leasing, and franchising. Regulation of these particular contracts differs from regulation of underlying basic generic contracts (sale of goods, lease).

For other contracts such as contracts of insurance, financial loans it is required that at least one party must be an entrepreneur (insurance or financial institution).

In cases where neither party is an enterpreneur, the contract is governed by rules applicable to generic contracts (such as the contract of loan or the contract of sale of goods).

Commercial contracts are characterized by some distinctive features. Higher standards of liability for breach of contract apply to entrepreneurs (See section 2 “Traders and Non-Traders” for more details). A written form is required for commercial contracts.

g. Special Requirements of Sales Contracts.

The group of sales contracts in Russian law includes, along with a generic contract of sale and purchase, a number of other contracts, such as retail sales, contracts of supply, and real property sales. Each individual type of sales contract is governed by the specific provisions applicable to this type only and also by generic rules applicable to all sales contracts.
To form a sales contract, it is sufficient to reach agreement on the subject matter of contract (i.e., the item(s) to be sold).

Some individual types of sales contracts require agreement on other conditions as well. For instance, for entering into commercial contract of supply (delivery), the parties shall agree on terms of delivery, such as dates for consignments and quantity of each consignment. Sale of real property requires express agreement on the price. Sale of residential real property further requires a provision on the rights of the third parties such as seller’s family members who under the law continue enjoy the right to occupy the premises in spite of the transfer of title to a new owner.

It is not required that the articles offered for sale is to be currently owned by the seller; and thus an undertaking to sell the articles that will be obtained by seller in the future is valid. The title to goods normally passes at the moment of transfer.

General rules are applicable to the form of a sales contract. Some contracts require a special form. The contract of sale of real property must be written, signed by both parties on a same page, and registered with competent administrative body.

The RF is a party to the UN Convention on Contracts for the International Sales of Goods (Vienna Convention 1980), which has direct effect and supercedes national regulation in relation to international trade contracts with parties who have their business enterprises located in other countries – participants of the Convention. Therefore, when the Russian substantive law is designated by the parties as the governing law of an international trade contract, material rules applicable will be not those of the chapter 30 (sales contract) of the RF Civil Code, but those of the Convention.

The Russian Federation did not ratify the United Nations Convention on the Limitation Period in the International Sale of Goods.