Application of the UNIDROIT Principles in the Practice of Russian State Courts

UNIDROIT Principles 2016Through years the Principles of International Commercial Contracts developed under auspices of UNIDROIT (“the UNIDROIT Principles”) have gained a wide recognition in many countries worldwide. This is true also with regard to Russia.

Not only arbitral tribunals in Russian-seated arbitrations, but also its state courts invoke the UNIDROIT Principles, even where the parties did not expressly provide for their application in the contract.

Below the abstracts of some illustrative judgments are classified according to the UNIDROIT Principle which the court invoked.

1. “Contra proferentem” rule

Ruling of the Supreme Court of the Russian Federation N 304-ЭС15-4108 of 2 July 2015

In the case Department of Construction of the Khanty-Mansiysk Regional Administration v. System Engineering Company LLC the court ruled on whether the performance time under a construction contract comprises the time for the state inspection of the works. The contract was silent in that respect. The wording of the contract, the context and the practices established between the parties did not allow establish the common intention of the parties behind the contract term. The dispute was purely domestic. The сourt applied Russian law including Russian case law, and in addition, invoked the UNIDROIT Principles to confirm its finding.

Firstly, the court noted that the Russian Civil Code prioritizes the literal interpretation of the contract terms. The common intention of the parties, their consequent practices, and the context only become relevant if the literal interpretation proves to be unfruitful. Having said that, the Code doesn’t supply an answer for settings where both tests can’t provide a clear-cut interpretation of a provision.

Secondly, the court opined that a contractual provision with an ambiguous meaning should be interpreted against the party who proposed that provision. Arriving at this finding, the court referred to the ruling “Contractual Freedom and its Limits” of the Russian Supreme Commercial Court (the highest court competent to hear commercial cases till August 2014 which then merged with the Russian Supreme Court). The court backed up its position with the “contra proferentem” rule, an internationally recognized rule of contract interpretation, enshrined in Art. 4.6 of the UNIDROIT Principles “If contract terms supplied by one party are unclear, an interpretation against that party is preferred”.

Based on this, the court dismissed the claim and didn’t include the time for the state inspection of the works into the performance time.

Ruling of the Commercial Court of the Moscow Region N А40-3175/2017 of 28 December 2017

The court heard the case Ministry of the Internal Affairs of the Russian Federation v. Sberbank. The case revolved around a bank guarantee to a supply agreement, more specifically if a reference in such a guarantee to the principal contract confers on the bank the right to raise objections that the defaulting party would have under the principal contract. The parties were both Russian companies and the court applied Russian law backing its position with the UNIDROIT Principles.

The court reminded the parties that a bank guarantee is independent from the underlying obligation and a reference in the main contract doesn’t change the nature of a bank guarantee as envisaged by Art. 370 of the Russian Civil Code. Thus, the court upheld the finding of the lower court that the bank guarantee in question was of an independent character. Furthermore, it cited the “contra proferentem” rule embodied in Art. 4.6 of the UNIDROIT Principles and expressly recognised it as a well-established rule to interpret commercial contracts. Although the court didn’t explicitly explain the reference to the UNIDROIT Principle, the latter seems to account for the fact that the bank guarantee had been drafted by the bank and hence, the reference to the underlying obligation was interpreted against the drafter.

2. Duty of best efforts

Ruling of the Commercial Court of the North Caucasus District of the Russian Federation

N А32-1846/2014 of 3 September 2015

The court heard the case YUMEK-Kommunalnyi Service v. Direction for the Construction and Operation of Objects for Rosgranitsa with the subject matter revolving around an agreement to conduct an energy survey and to provide a program of energy saving to the client. More specifically, the main issue was whether the service provider had properly performed the contract even if it did not attain a specific result. Both parties to the dispute were Russian companies. The court applied Russian law and concurrently referred to the UNIDROIT Principles.

Relying on the definition contained in the service agreement, on the Russian Civil Code provisions (Arts. 702, 779, 781) and on some federal laws (e.g. Law “On Products Supplies for the Federal Needs”), the court noted that obtaining accurate data on the used energy resources constituted one of the main aims of energy survey. The court found that the service provider failed to obtain such data and therefore to properly perform the contract.

The court drew special attention to para. 2 of Art. 5.1.4 of the UNIDROIT Principles (“Duty to achieve a specific result. Duty of best efforts”): “To the extent that an obligation of a party involves a duty of best efforts in the performance of an activity, that party is bound to make such efforts as would be made by a reasonable person of the same kind in the same circumstances”. Although the court didn’t expressly explain why it invoked the duty of best efforts in the context of the service agreement, it has apparently done so to set out the content of the service provider’s obligations vis-à-vis the client.

The Russian Supreme Commercial Court Ruling N 17984/13 of 8 April 2014

In the case First National Pension Fund v. Filipp Yudin the dispute arose out of an agency agreement according to which, in a nutshell, the agent undertook to find clients for the non-governmental pension fund. Both parties to the dispute were Russian companies and the court’s ruling relied on Russian law and on the UNIDROIT Principles.

Under the contractual terms, the agent’s fees depended on the number of persons concluded agreements with the fund through the agent. The court pointed out that under Russian law the agency agreement may be either specific-result or best-efforts oriented. In the present case the agency agreement, as follows from its terms, contained a duty to obtain a specific result. The court referred to Art. 5.1.4 of the UNIDROIT Principles (“Duty to achieve a specific result. Duty of best efforts”). The court noted that this provision should be used by courts to determine the criteria of establishing the parties’ contractual rights and duties.

3. Foreseeability of harm

Ruling of Supreme Commercial Court of Russian Federation N 437/08 of 14 March 2008

In the case Kitey minor private enterprise v. Temryukmortrans LLC the claimant asked to recover not only the outstanding debt for the repair of a vessel, but also damages resulting from payment of a fine imposed by Ukrainian currency control authorities for failure to timely obtain the foreign currency proceeds. Kitey was a Ukrainian company whereas Temryukmortrans was a Russian joint stock company. The court applied Russian law and invoked the UNIDROIT Principles.

The court said that the defaulting party must compensate losses incurred by the other contracting party. At the same time, the court invoked the “Foreseeability of harm” doctrine as an indispensable condition for redress provided for by Art. 7.4.4 in the UNIDROIT Principles: “The non-performing party is liable only for harm which it foresaw or could reasonably have foreseen at the time of the conclusion of the contract as being likely to result from its non-performance”. The court reiterated that the liability is limited to the amount reasonably foreseen for non-performance when the contract was concluded.

The court found that the contract at hand didn’t impose an obligation on the defaulting party to take into account foreign currency requirements and to compensate the fines resulting from its violation. The court concluded that Temryukmortrans could not have known Ukrainian regulations on foreign currency and ruled that such harm can’t have been reasonably foreseen.

4. Good faith and fair dealing

Ruling of Supreme Commercial Court of Russian Federation N ВАС-2211/13 of 1 August 2013

The court dealt with the principle of good faith and fair dealing in a supply contract in the Samson Distribution v. Taneko case. Samson AG was a German joint-stock company while the respondent was a Russian joint-stock company. The court applied Russian law drawing support from the UNIDROIT Principles.

The contract didn’t provide for a specific country of origin of the goods, but Germany was implicitly intended. However, Samson supplied goods not from Germany but from Russia. Taneko found that out and successfully brought a claim and recovered the price variation together with party and tribunal costs. Samson, in turn, regarded this as an unjust enrichment of the buyer as the contract didn’t provide for a specific country from which the goods were to be supplied.

The court noted firstly that the principle of good faith is a fundamental public policy principle of the Russian law enshrined in Art. 304 of the Russian Civil Code. In the court proceedings over recovering the price variation, the claimant didn’t contest the different origin of the goods supplied and therefore he couldn’t claim the application of unjust enrichment provisions. Besides, the court backed its decision with the UNCITRAL Principle of “Good faith and fair dealing” (Art. 1.7(1): “Each party must act in accordance with good faith and fair dealing in international trade”) to confirm the right of the buyer to obtain reliable information about goods and to seek redress from the seller in case of a breach.

5. Force majeure

Ruling of Supreme Commercial Court of Russian Federation N ВАС-14316/11 of 28 December 2011

The court heard the case Unics v. EX Cargotransservice where the subject matter was the responsibility of the carrier for damage incurred to the goods due to force majeure circumstances. The parties were Russian joint stock companies and the court applied Russian law with the support from the UNICITRAL Principles.

Firstly, the court, referring to Art. 796 of the Civil Code, reiterated that the carrier is responsible for the loss of goods unless he submits evidence that the loss occurred due to a force majeure circumstance.

Secondly, the court referred to international practices, namely para. 1 of Art. 7.1.7 of the UNICITRAL Principles so as to define the content of force majeure: “Non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences”. The court underlined that the defaulting party must not only refer to such kind of circumstances but must also prove that it couldn’t avoid or overcome the consequences of force majeure.

Ruling of Supreme Commercial Court of Russian Federation N ВАС-3352/12 of 3 May 2012

The court heard the case KIT Finance Investment Bank v. Formula Pereezda LLC where it decided whether a fire in the warehouse, which has resulted from a short circuit and has caused loss of the property in custody, constitutes a force majeure circumstance. The dispute was purely domestic and the court applied Russian law in combination with the UNIDROIT Principles.

The custodian argued that it undertook all possible measures to stop the fire, including engagement of professional fire forces, but that proved impossible. The lower court concluded that the custodian was excused from liability by a force majeure impediment.

However, the highest court disagreed with them. It referred to para. 3 of Art. 401 of the Russian Civil Code, which excuses the custodian for loss of the property in custody only due to circumstances of force majeure nature, and to Art. 7.1.7 of the UNIDROIT Principles as best international practices for defining the notion of force majeure. The court observed that an impediment is of force majeure nature if it is beyond the control of the party either due to impossibility on the part of that party to anticipate it or to avoid it or to overcome its consequences. The panel of judges forwarded the case to the court Presidium. It found that a force majeure impediment must result from external impact and be unavoidable “objectively”, that is, regardless of the “human factor”. The mere fact that a particular number of fire forces failed to stop the fire does not amount to a force majeure impediment. Therefore it does not excuse the custodian from the liability for the loss of the property in custody.

Conclusion

The above selection of cases is not exhaustive. However, it illustrates that Russian courts take into account the UNIDROIT Principles to interpret the provisions and notions of Russian legislation, and even to fill the gaps in it.

Usually, Russian courts refer to the UNIDROIT Principles to support their findings in addition to substantive domestic law even where the parties nowise referred to the Principles in their contract. Though the courts sometimes reiterate that the Principles are not compulsory in Russia, they do refer to them even in purely Russian domestic cases.

Dmitry Davydenko, Chief Expert at the Arbitration and Mediation Center of the Russian Chamber of Commerce and Industry, Director of CIS Arbitration Forum,

Ildar Sakaev, Intern of CIS Arbitration Forum

About the Author:

Dr Davydenko is the Director and co-editor of the CIS Arbitration Forum. He is Chief expert of Arbitration and Mediation Center at the Russian Chamber of Commerce and Industry. He also provides expert opinions on Russia-related international business law matters. He took part as co-arbitrator in the ICC arbitral proceedings and is listed as a recommended arbitrator of International Commercial Arbitration Court and Maritime Arbitration Commission at Russian Chamber of Commerce and Industry, as well as some other arbitral institutions. Included in the list of best practitioners in arbitration in Russia as of year 2017 by Who's Who Legal and Global Arbitration Review (GAR).

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