How to Make the Pen Mightier than the Sword?

"RusBusinessNews" keeps on studying subtleties of the international contracting process. Anna Kraeva, General Director of the Hedman Partners Attorneys-at-Law Office in Ekaterinburg, together with Vadim Dynin, Head of the Agency, is analyzing Russian and foreign practice.

- 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.

- 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. 

- 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. 

- 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.

- 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 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. 

- 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. 

- 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.

- 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. 

- 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. 

Fact Sheet:

Hedman Partners Attorneys-at-law - an international law firm founded in 1975. The head office is in Helsinki. The firm has its offices in Ekaterinburg, St. Petersburg and Tallinn; the partner companies of the Hedman Group are located in Riga and Vilnius.