Job in Russia without Fear

- Anna, there is the opinion that the Russian and Western approaches to entering into and execution of contracts are different. Do you agree with it?

- Yes, it is really so. We have different legal culture, which naturally has its impact. Unfortunately, in some cases transactions fall through, sometimes because a European entrepreneur does not understand the requirements put forward by the Russian colleague.

- Just recently we have received a letter from a British businessman who is perplexed: in European practice, a written contract between the parties to a transaction in many cases is not required at all. In Russia, he is required to sign the contract...

- Yes, the Russian legislation specifies explicitly: transactions that are made between legal entities and with individuals must be executed as a written contract (Article 161 of the Civil Code of the Russian Federation). This applies directly to international (foreign economic) contracts made with foreign partners. Only in this case, the written contract, which sets forth the subject matter of the arrangements, rights, obligations and liability of the parties, is not only a legal guarantee, but also an "authorization" document for completing formalities related to the performance of a foreign economic contract. For example, the bank acting as an agent of currency control requires submission of a written contract to perform currency transactions, which include, in particular, cash settlements between the Russian (the resident) and foreign (the non-resident) parties. The foreign economic contract is also required for the customs clearance of the goods crossing the Russian border.

- By the way, Russian corporate lawyers are sometimes especially concerned about a due diligence investigation of the other party to the contract requesting heaps of documents from it: the Articles of Association, extract from the register of legal entities, etc. Do they have the same practice in the West?

- In European countries such investigation is referred to as due diligence ("due circumspection"). It is generally performed for making a decision on acquisition of a new business. The similar investigation of the future contracting party is performed quite rarely. The reason for this is that contractual relationships in the West tend to be built on trust to the partner. It is assumed that the contracting party acts honestly, as it is known well that "reputation comes first". Nevertheless, when choosing a potential partner in business we would recommend such due diligence.

- That's OK, but how should a Western business person perform inspection of his or her Russian partner?

- Let me point out that the do-it-yourself inspection is unlikely to have the required effect. The reason for this is that the legislation in another country is different (sometimes quite substantially); it is important to know certain procedural aspects and to understand the practices. Due to this, we would recommend a foreign business person to entrust a law firm located in Russia with due diligence inspection of the Russian contracting party. Then the customer will be able to receive explicit answers to important questions: whether this company is legally incorporated; whether it goes through bankruptcy or liquidation; who its owners and managers are; how long this legal entity has been on the market, etc. You can't but agree that such information can be essential for making a decision whether it is feasible to enter into a million-euro contract with the subject entrepreneur.

- Another quite important nuance - who must sign a contract? Is inspection of this person is required in terms of his or her authority to act as a signatory?

- The foreign practice shows that contracts are often signed by top-managers rather than by the CEO of the company. In Russia typically the signatory is the director (president, general director) of the company. Foreign business people should give serious consideration if the contract is signed by another person acting, for instance, by virtue of the power of attorney. We would advise that this person should be checked for his authority to enter into this transaction. If the required authority is not given, the transaction will not have any legal implications to the Russian company; however, the foreign contracting party may incur sizeable losses.

Furthermore, it is advisable to check whether the company's executive does not overstep his or her authority when entering into the subject contract. The fact is that owners may often restrict the right of the company's directors, not allowing them to enter into major or individual types of transactions. It is highly important to have such information prior to making a decision.

- Is the corporate seal a mandatory or optional attribute of the foreign economic contract?

- In Russia, the seal on a contract (if a legal entity is the party) is established practice, rather than a legal requirement. In other words, in Russia it is common practice to secure the signature in the contract with the seal, thus, giving a feeling of certain assurance to the contracting party. On the other hand, many western companies do not put the seal in their contracts; some of the companies even do not have it. Furthermore, the experience of Hedman Partners Attorneys-at-Law shows that Russian supervisory agencies understand the cases when the contract is not stamped by the foreign contracting party.

- What is the usual procedure for discussion of terms and conditions of a foreign economic contract and is this discussion required?

- From the perspective of western lawyers, their Russian colleagues work in an odd manner: they agonize over each or every other provision of the contract, offering their version; prepare long memorandums of disagreements and agreements, etc. Here is advice to a Russian business person: such way of doing business can scare away a foreign partner! There is one recommendation: too much water drowned the miller. Any provision of the contract is worth discussing if it is impossible, violates materially the rights of the party to the contract, is required by the Russian practice, etc.

- Anna, taking into consideration that the Customer (Buyer) and the Contractor (Seller) are located in different countries, we are talking, first of all, about the exchange of signed and scanned copies of the contract. Is it a problem that the Russian party does not have the original document and how serious is it?

- We strongly recommend doing a thorough job and receive the original document of the foreign economic contract signed by both parties. The copy is invalid as a document. It can become a "stumbling block" if a tax or any other audit is initiated; besides, accountants and auditors generally work only with original documents. If, God forbid, you decide to litigate with the foreign contracting party, there is no sense going to court without original documents.

- Are electronic digital signatures allowed when signing a contract? What does the Russian legislation say in this respect?

- Undoubtedly, in the age of information technology, remote execution of contracts and signing of documents are becoming more and more popular with parties. In many cases, people do not have to see each other in order to enter into and finalize a transaction with the electronic digital signature. This practice is especially popular in transactions with securities and banking operations. The Russian legislation has a special regulation of relations in this respect in the form of the Law "On electronic digital signature". The signature is deemed equivalent to the handwritten signature provided that the key certificate is valid, the signature authenticity is confirmed and the signature conforms to the data indicated in the certificate.

- Many European companies use the so-called engagement letters in transactions with their contracting parties. Do such letters have the binding force of a contract from the perspective of the Russian legislation?

- In our business, we often encounter the situations when entering into an international transaction, one of the parties signs and delivers the other party the documents that constitute, in fact, its unilateral declaration of intent - letters of commitment (to pay or to fulfill specific obligations), or the aforesaid engagement letters (the letter where one party acknowledges its obligation to the other party in terms of performing certain actions - the obligation to render services, to deliver goods, to be its representative, etc.). Such documents have the right of existence, but legally they are not contracts, because the contract must constitute the intention of two or more persons to perform specific actions. The problems related to such documents can arise both during the performance of a transaction and in attempting to compel the contracting party to perform its obligations through court action. Yet we recommend the "standard" contract signed by both parties and, if required, applying such letters to individual obligations.

- Anna, it is no secret that "European" contract forms even look different as compared to "Russian" standard forms. How can it be explained?

- The first thing that catches the eye is the size of the contract: Russian contracts longer than 3-5 pages are rare, but in Europe 20 pages are standard. Note that the subject matter of the contract and corresponding rights and obligations of the parties are outlined on the same 2-4 pages. The rest of the contract is taken by some general legal principles and regulations for contracting parties.

Foreign lawyers point out that working on contracts they give equal attention to law matters and business matters. In Russia, contracts are more focused on matters of business: manner and time of payment, terms of delivery and so on.

However, lately Russian companies, especially those of them that are geared to the foreign market, have been practicing contracts of the European standard. In legal practice it is seen as a certain trend.

- What are the main differences in the structure and content between "western" and "our" contracts?

- The "western" contract generally has the preamble that constitutes an introductory part and outlines the purpose of the contract. It is followed by the Terms and Definitions Section, which is also very useful, as it helps the parties to agree upon meanings of the terms "before they leap" further. The Warranties and Representations Section includes quite essential provisions. Such clauses are rarely included in Russian contracts.

Then we can see such familiar sections as: Subject Matter of the Contract, Rights and Obligations of the Parties and others. Finally, the "European" contract contains an entire set of conventional rules that are generally not tied to a specific situation and "migrate" from one contract into another.

- Russian lawyers are likely to deem such contract provisions as a "futile exercise", aren't they?

- Yes, that's right. Russian contracts rarely include such provisions as the waiver of the contractual rights, severability clause, survivorship of the parties, rights for intellectual property that is created during the life of the contract, non-solicitation both during the life of the contract and after its expiration, etc. These provisions by no means are considered redundant.

If we look at the Russian court practice in connection with contract performance, we can see clearly that many disputes could be avoided, if parties stipulated certain "general" provisions in their contracts. Let's take, for example, the following dispute: the supplier sends the buyer the notification of the goods shipment to the email box that is out of service. The buyer did not receive the notification, did not receive the goods on time, as a result, the goods perished or were stolen. The dispute arises - who is in fault? It the contract had stipulated all the applicable methods of forwarding notifications and addresses, the dispute would have been most unlikely.

- Anna, how do usually Russian and foreign contracts deem the liability of the parties?

- Western lawyers are very scrupulous in their wording about the liability of the parties, trying to avoid any disputes that may arise in future. They include a large number of clauses when the party (the Supplier or the Contractor) does not incur liability.

Such practice usually does not exist in Russia. The liability of the parties is described in very general wording. However, we run to another extreme: if the other party does not fulfill its obligations, it encounters risk of "incurring" quite sizeable damages in the form of penalties and fines.

- Foreign partners quite often offer contracts with the "limited" liability of the Supplier (Contractor) to Russian contracting parties. Is it justified and is it legal?

- From the perspective of the Russian legislation, such provisions are absolutely lawful. Article 15 of the Civil Code of the Russian Federation specifies that "the person whose right is violated may require complete indemnity for losses incurred by him/her, unless the law or the contract stipulates loss indemnity in a smaller amount". Therefore, the provisions stipulating that the liability of the Supplier (Contractor) is limited only to the actual and factual damage that was incurred by the Buyer (Customer) due to the non-fulfillment of the contractual obligations by the Supplier (Contractor) can take effect (i.e. in this case the Customer's losses in the form of the lost profit are excluded and are not claimed against the Supplier).

- The law of which state - Russia or the country of the foreign partner - is the international contract governed by?

- The parties determine this law by themselves. On the one hand, the Russian legislation is closer and much clearer for the Russian contracting party. On the other hand, our laws are rather strict, try to regulate everything and contain a lot of restraints. As a result, sometimes parties willfully try to avoid them.

There are cases when the contract does not stipulate the governing law. There is nothing horrid about it, as in this case rules of the international private law will be applied. As a rule, such a contract will be governed by the law of the country, with which the contract has the closer connection (the legislation of the country of the seller, supplier, contractor, provider, lender, etc.).

Nevertheless, there are exceptions in the voluntary choice made by parties in relation to the applicable law. For example, real properties, inland and marine vessels as well as aircrafts are governed by the law of the country where this property is registered.

- What is then the best option for the place of jurisdiction, if any disputes arise due to non-fulfillment of the international contract?

- There are usually two options - disputes may be transferred to the courts of the country where one of the contracting parties resides. The second option provides for the third country that is deemed by the parties as neutral. In the meantime, companies often neglect the importance of these provisions of the contract, hoping that everything will be alright. When business people encounter delays, debts and sizeable losses, they clutch their heads, because they do not have any idea how they can file a lawsuit to the court of Hong Kong or Argentina that are stated in the contract.

In any case, it should be noted that the law of the country that governs the contract, the court that is authorized to settle the dispute as well as the substantive and procedural law that will be applied in the court must be in one "bundle". For example, Russian arbitration courts apply only the legislation of the Russian Federation and international treaties ratified by Russia; they do not have any right to apply laws of foreign countries, even though the parties explicitly stipulated this in their contract.

- What benefits do parties have when indicating one of the international commercial arbitrations or arbitral tribunals as the venue where the dispute is subject to adjudgement?

- International commercial arbitrations are not national courts. They generally deal with international disputes and, therefore, are more flexible in their requirements to the participants of the proceedings: the hearing can be performed in any language, the arbitration can apply laws of any country, the parties can take part in selection of arbitrators, etc.

On the other hand, the cost of arbitration in international commercial arbitrations is many times as high as the cost of the proceedings in state courts. Besides, there is a special enforcement procedure applied for decisions of such arbitrations.

In Russia, the most famous arbitration court that operates within this system is the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (ICAC at RF CCI). In other countries, the most popular arbitration courts are the London, Stockholm and other arbitration courts.

- A few words about the language of the contract. As the saying states: the pen is mightier than the sword. Can the document be prepared only in one language, for example, in English, as the established language of business communication?

- We strongly recommend that the contract should be bilingual: it should be made both in a foreign and the Russian language. The Russian version is necessary for the Russian party: for the bank as the currency control agent, for customs authorities, etc. If the Russian version is not available, the supervisory agencies usually demand that the contract should be provided with the formal translation into the Russian language.

- When the contract is translated from one language into another for the bilingual version, there are inevitably different interpretations of the same provisions. What can be done to avoid it?

- It is very simple - the contract must specify which version is prevailing if any disagreements arise. Generally, it is the version in the language that is available to all the parties to the contract.