Modification or termination of contracts due to international economic sanctions from the standpoint of Russian legislation and court practice

Moreover, the Supreme Court Ruling of the Supreme Court of the Russian Federation No. 18-KG13-70 dated July 30, 2013. has explicitly stated that in applying Art. 451 of the Civil Code, it is necessary to determine the following circumstances:

— the existence of a substantial change of circumstances;

— the time of its occurrence;

— the possibility to reasonably foresee this change.

Having analysed the court practice since 2018, the author did not stumble upon any cases that would contravene this criterion. Since the court practice is strictly adhered to it, the author believes that it can be considered relevant. For the purposes of categorisation, the author hereafter refers to this criterion as “Criterion No. 1A”.

As described previously, there is at least one more condition of applicability of Art. 451 of the Russian Civil Code formulated on the basis of the court practice. This criterion entails that the claimant has to demonstrate his good faith by means of certain actions.

The so called “bona fides” principle is one of the pillars of Russian civil law. For this reason, it would be incorrect to say that it is a unique criteria applicable solely to the above described situations. The basic rule is specified in Art. 10 of the Russian Civil Code: the bona fides of the participants and the reasonableness of their actions are presumed. As a rule, the burden of proof lies on the one who challenges someone else's good faith Ruling of the Supreme Court of the Russian Federation No. 5-KG15-92 dated September 1, 2015.. Upon evidence showing that a person has acted in bad faith, this person then bears the burden of proving the good faith and reasonableness of his or her actions Review of court practice of the Supreme Court of the Russian Federation No. 2 (2015) (approved by the Presidium of the Supreme Court of the Russian Federation on June 26, 2015)..

In assessing the actions of the parties as done in good or bad faith, one should proceed from the behaviour expected of any person who takes into account the rights and legal interests of others and assists them, including obtaining the necessary information Decree of the Plenum of the Supreme Court of the Russian Federation No. 25 dated June 23, 2015 “On the application by courts of certain provisions of Section I of Part One of the Civil Code of the Russian Federation”, para. 1; Rulings of the Supreme Court of the Russian Federation No. 51-KG20- 12-К8, 2-5/2018 dated February 2, 2021, No. 18-KG19-147 dated January 21, 2020, No. 306-ES18-16390, A65-31592/2017 dated February 11, 2019, No. 50-KG17-27 dated January 9, 2018, No. 49-KG16-18 dated September 20, 2016, No. 78-KG16-36 dated August 30, 2016; Review of court practice of resolving cases on disputes arising in connection with participation of citizens in shared construction of apartment buildings and other real estate (approved by the Presidium of the Supreme Court of the Russian Federation on July 19, 2017).. As we can see, this principle appears to be very similar to the category of justice and fairness (Gernhuber 1983, 764). Importantly, it is also connected with the principle of equality of the parties to a contract. The bona fides principle provides guidance as to whether a contract really needs to be amended or terminated. So, in case one of the parties abuses its rights and is in fact able to perform under the contract but tries to benefit from the application of the “substantial change of circumstances” doctrine, this principle should prevent such a party from fulfilling its intentions.

The principle of equality of the parties to a contract also provides a guideline as to whether the “substantial change of circumstances” doctrine applies. Courts usually take into account whether there were any actions on the part of a party, demonstrating his or her good faith. For example, in the previously mentioned Neighbour's Drilling case Case No. A40-149566/2019. the court took into consideration the fact that the Claimant sent the Respondent a proposal to replace the arbitration clause with a prorogation agreement, while the Respondent did not express an intention to cooperate.

Although this condition of applicability of Art. 451 of the Russian Civil Code is linked to the Criteria Nos. 3 and 4, the author considers appropriate to separate it out as “Criterion No. 6”.

Therefore, the author identifies the following main criteria:

-- Criterion No. 1: The parties could not have reasonably foreseen that circumstances would substantially change;

-- Criterion No. 1A: The contract in question was concluded before the date of imposition of sanctions;

-- Criterion No. 2: The parties would not have been interested in entering into the contract, or would have entered into it on different terms, had they been able to anticipate such a change of circumstances, because of the impact on business relations between the parties of the specific sanctions imposed with respect to one of the parties to the contract;

-- Criterion No. 3: The occurrence of these events could not have been avoided with a reasonable degree of care and diligence;

-- Criterion No. 4: Execution of the contract would upset the balance of interests of the parties, and one of the parties would likely suffer considerable damage or lose what it could have expected at the time the contract was entered into;

-- Criterion No. 5: The risk of substantial change of circumstances has not been imposed on one of the parties by contract or law;

-- Criterion No. 6: The claimant demonstrated his good faith by means of certain actions.

Having analysed the relevant court practice since 2018, the author confirms that courts assess whether facts of a case meet the above criteria.

Conclusions

In Russia modification or termination of a contract by a court is permitted with reference to Art. 451 of the Russian Civil Code. In such a case, one must prove that international economic sanctions constitute a “substantial change of circumstances”, which is based on clausula rebus sic stantibus. The Russian Civil Code does not explicitly provide for possibility to modify or terminate a contract due to sanctions. According to the performed analysis of the court practice, modification or termination of a contract due to imposition of sanctions is quite a rare phenomenon in Russia. Nevertheless, this possibility is real. Therefore, it is utterly important for a claimant to understand under which circumstances this could be possible. If a party to a contract intends to mitigate the risk of possible negative consequences related to the sanctions, which could be imposed on a counterparty (particularly blocking sanctions, such as inclusion in the SDN List or in the EU Designated Persons List), it is important to focus on two main aspects:

— thorough due diligence;

— attention to the relevant provisions of the contract in question.

Importantly, it is possible to exclude application of Art. 451 of the Russian Civil Code by the contract. Should there be any doubt regarding the sanctions status of a party to the contract, the thorough due diligence is a sufficient element of the risk mitigation strategy. It is also necessary to review the contract itself to avoid the possibility of contractual exclusion of application of Art. 451 of the Russian Civil Code. The author would also suggest including the so called “sanctions clause”. The nature of such a clause is similar to an anti-corruption clause (Primakov 2018, 10). A sanctions clause is a provision in a contract aimed at providing a guarantee that the counterparty is not subject to sanctions. The clause may stipulate the procedure to be followed should sanctions be imposed on the counterparty, including the obligation to immediately notify the other party to the contract. Moreover, it is advisable to explicitly provide for the possibility to modify or terminate the contract in such a situation. The sanctions clause may read as follows: “The parties hereby represent and warrant that they will not be using the goods, services, or other means received in accordance with this contract in order to circumvent the provisions of sanction legislation applicable to the parties' operations and, in particular, to help third persons to circumvent sanction legislation”.

Currently, there are several disputable issues with respect to sanctions clauses, e. g. whether such a clause contradicts public interests or legal order in Russia, or whether such a clause somehow puts one of the parties to the contract at a disadvantage. In practice, sanctions clauses are included in contracts between a Russian company and a foreign company subject to US or EU legislation or their subsidiaries. Most often, in the case of the imposition of sanctions affecting the business relations of the parties, they initiate negotiations in order to mitigate the possible negative consequences of the imposed sanctions. The court is rarely engaged. In this regard, it is interesting to note the well-known Siemens case Cases Nos. A40-126531/17-68-571 and A40-171207/17-111-1562.. Generally, this case is the only one where the court provided an extensive analysis of the question of sanctions clauses admissibility. For the purposes of this study, it is not necessary to go into the details of the case. Importantly, the court took the position that the principle of freedom of contract allows the parties to include a sanctions clause in the contract. The court additionally pointed out that the trade restrictions listed in the clause constitute a factor that may affect international trade and foreign economic relations. Taking into account such restrictions allows participants adhere to the rules of law. In general, to reduce the risks associated with a substantial change of circumstances, it is necessary to treat the contract carefully and attentively, to verify all its provisions and to specify the course of action in case of any impediment to the performance of the contract, including sanctions.

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