Resolution of the Plenum of the Supreme Commercial Court of the Russian Federation “On freedom of contract and its limits”

28.04.2014

Goltsblat BLP advises that Resolution of the Plenum of the Supreme Commercial Court of the Russian Federation No. 16 dated 14 March 2014 “On freedom of contract and its limits” (the Resolution) has been published.

The Resolution contains useful practical clarifications and stresses repeatedly that the role of the court consists not just in mechanically applying the rules. The court should take into consideration the spirit, not just the letter, of the rule and explain its decisions.
The Resolution refers to:
(1) the imperative/non-imperative nature of the rules;
(2) application of general conditions;
(3) classification and consequences of clearly onerous provisions in a contract;
(4) interpretation of a contract depending on which party drafted it.

Below, we highlight the Resolution’s most interesting provisions:

1. Criteria are provided for classing rules as either imperative or non-imperative. A rule is imperative if it:

  • clearly stipulates a prohibition;
  • even though it does not contain a clear prohibition, proceeding from the purposes of the legislative regulation, it is required for: (1) defending significant interests protected by law, (2) precluding a gross imbalance of interests, or (3) the imperative nature of the rule does not derive from the essence of the legislative regulation of the given type of agreement.

In all other cases, the rule should generally be regarded as non-imperative. Yet, even if the rule is non-imperative but bears features of an imperative rule, the court may give a restrictive interpretation of the given rule by concluding that there are certain restrictions on the parties’ freedom.

The Resolution requires that courts give greater consideration in enforcing the rules. In particular, it notes that, when giving an interpretation, the court should pay attention not only to the literal meaning of the words and phrases, but also the lawmakers’ intentions in establishing the given rule. For instance, the court may recognise that a rule prohibits only conditions that undermine the position of the protected party and does not contain a similar restriction for the other party (the example is given of a prohibition on unilateral change to the interest rate on a loan being established in favour of the borrower, making a unilateral reduction in the rate permissible).

In deciding whether or not a rule is imperative, the court should point out the essence of the legislative regulation, the need to defend the relevant legitimate interests or to prevent any gross imbalance of the parties’ interests, this predetermining the imperative or non-imperative nature of the rule. In other words, it must explain how it comes to its conclusion.

The Resolution gives a series of practical examples. For instance, it is concluded that the parties to a fee-based services agreement may envisage different consequences of withdrawing from the agreement (clause 782 of the Civil Code of the Russian Federation). In particular, they may determine that both parties, not just the service provider, make reimbursement for losses or replace reimbursement of losses or actually incurred expenses with payment of a fixed sum. It is noteworthy that the Resolution does not clarify the most pertinent questions in this respect, including whether the obligation to make reimbursement may be excluded altogether or unilateral withdrawal from the agreement prohibited.

On the one hand, the Resolution provides the court with a set of tools for resolving disputes in a more precise, individualised manner; on the other hand, it requires that the courts be more qualified and extends the bounds of consideration of the case. 

2. The general rule is that unspecified agreements lacking signs of being a mixed agreement do not come under the rules applicable to individual types of agreement. One exception to this is application to such agreements, by legal analogy, of the imperative rules about specified types of agreement (clause 1, article 6 of the Civil Code of the Russian Federation) in cases when, proceeding from the aims of the legislative regulation, freedom of contract must be restricted in order to protect the interests of a weak party to the contract, third parties or public interests or to prevent a gross imbalance of the parties’ interests.

3. The Resolution touches on application of general conditions (which it calls “model conditions”). If no reference is made to general conditions and the parties do not include a relevant provision in the contract itself, general conditions may apply by custom. The preconditions are thus created for a so-called battle of forms, when it is not clear which side’s general conditions prevail, so greater attention should be paid to provisions relating to standard conditions.

4. In business relations, the court is entitled to protect the transaction’s weaker side, which signed it on obviously onerous conditions, causing a serious imbalance in the parties’ interests, because it was in no position to negotiate other conditions. In such a situation, the court has the right, by applying the provisions of clause 2, articles 428 on accession agreements, to amend or cancel the agreement. The weaker party may also find remedies on the basis of the provisions on abuse (article 10 of the Civil Code of the Russian Federation) or invalidity of such conditions (article 169 of the Civil Code of the Russian Federation). These include provisions on liability being limited only by cases of deliberate breach of contract, release from liability for breach as a consequence of the actions of business partners, and payment of an excessive sum in the event of the rights to unilateral cancellation being exercised.

At the same time, the Resolution also specifies, importantly, that conditions under dispute should be evaluated in aggregate with the other provisions of the agreement and related transactions. Advantages under some contractual conditions may, therefore, compensate for disadvantages under others. Other circumstances should also be taken into account: the standard of professionalism, competition and the possibility of concluding an alternative transaction.

5. It is now important which party actually draws up the agreement. In ambiguous situations, the agreement is interpreted in favour of the counterparty of the party that drafted the agreement or proposed the wording of the relevant condition. Unless otherwise is proven, it is assumed that the given party was the professional player in the relevant sphere (bank, lessor or insurer). It should be noted that the given approach differs from that applied, for instance, in English law, where provisions are interpreted against the party that intends to make use of the relevant provision. The Resolution, on the contrary, sets a provision imposing greater liability on the party that draws up the draft, since all shortcomings will be interpreted to its disadvantage. In this connection, attention should be paid to the wording determining which of the parties prepares the draft and how the agreement should be interpreted should ambiguity occur. 

 

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