Russian Supreme Court Plenum Resolution clarifies key international private law issues

On 9 July 2019, the Plenum of the Russian Supreme Court adopted a Resolution*, which establishes basic principles of international private law at this level for the first time. It also clarifies a number of points to civil legislation of the Russian Federation on international private law, which were adopted in September 2013 and entered into force at the end of 2013*. Below is a summary of key aspects of the Resolution.

Concept of a foreign element

The Supreme Court expanded the concept of a foreign element in international private law. Any legal act committed abroad may be deemed as a foreign element.

Public policy reservation

The Supreme Court clarified that, when Russian law has no provisions similar to those of the applicable foreign law, this in itself is not grounds for the application of the public policy reservation.

This will prevent bad faith actions by persons attempting to evade obligations before the Russian courts by unreasonably stating that a foreign-law-governed obligation contradicts the Russian public order.

Limitation of authority

When challenging a transaction, a legal entity cannot argue that the law governing its status (the so-called “personal law”) limits the conclusion of a transaction if any of the following circumstances exist:

• the transaction was concluded outside the territory of the country whose law is this legal entity’s personal law; or
• the law of the country where the transaction is concluded does not have this restriction; or
• the other party in the transaction did not know and should not have known about this restriction. This means that, if a party still wishes to challenge the transaction, it has to prove that the other party knew this restriction.

This clarification will prevent a groundless challenge of a transaction based on restrictions established by the personal law of one of the parties to the transaction.

Implied agreement on an applicable law

When a court establishes that parties have the will to choose an applicable law, it is entitled to establish the existence of a so-called “implied agreement” on the applicable law. For instance, such an implied agreement can be established where the contract refers to the particular legal rules of a certain country or where the parties to a court action refer to the same applicable law. Another example can be in the case of interrelated agreements when the applicable law clause contained in the agreement first concluded will also apply to the subsequent agreement if the latter has no such clause.

At the same time, the Supreme Court stated that the parties’ choice of a location for the review of their disputes does not mean that they have decided the substantive law of the same state should apply in the case of disputes.

If the parties did not choose the applicable law, it should be determined by the competent court or arbitral tribunal on the basis of applicable conflict-of-laws rules.

Choice of law

Rights of third parties

If the parties choose the applicable law after the conclusion of the contract, third parties who have not expressed their consent to this choice and who are not the parties’ legal successors are entitled to refer to the law that previously applied to the contract when substantiating their claims.

This would apply to third parties in favour of whom the contract was concluded and who asserted their contractual rights before the parties chose the governing law.

Scope of application

The parties to a contract can choose which law applies to the contract, both in its entirety or specific parts, provided that the application of different laws to various parts of the contract does not invalidate the transaction.

Otherwise, the court will recognise the agreement of the parties on the choice of the applicable law as unenforceable and will determine the applicable law based on the conflict-of-laws rules.

Conditional agreement

The parties are entitled to conclude a conditional (alternative) agreement where the choice of an applicable law depends on the choice of the party who will be the claimant or defendant in any future legal proceedings.

Under such an agreement, the law applicable to the contract is established at the time of the first claim.

At the same time, in the opinion of the Supreme Court, a court should recognise that the conditions of an alternative agreement on an applicable law cannot be disparate or asymmetrical in nature and depend solely on the will of one particular party. (For example, the agreement cannot provide only the lender with the opportunity to choose the applicable law from several options, thus depriving the borrower of the same choice). A court should consider such agreements invalid and an applicable law should be determined on the basis of conflict-of-laws rules.

This opinion echoes a previous ruling of the Supreme Court that disparate (asymmetric) arbitration clauses are normally inadmissible.

Connection

The parties to a contract with a foreign element can, in their agreement on an applicable law, choose a law from a jurisdiction that has no connection with the contract or its parties (i.e. they can make the choice of a neutral law).

At the same time, the Supreme Court again stated that this will not affect the application of the imperative norms of the law’s jurisdiction which is connected to all the circumstances surrounding the essence of the relationship between the parties.

Mixed contracts

Generally, the law from the jurisdiction which is, at the time of a mixed contract’s conclusion, the place of residence or principal place of business of the party carrying out the main performance (if such performance can be established) should be applicable based on the principle of close connection.

At the same time, the law, the contract itself or the circumstances may stipulate that the applicable law be determined separately in respect to the various elements that make up the mixed contract.

Incoterms

If the parties used Incoterms in the contract but did not formally state that they apply (in the absence of proof to the contrary), the version of Incoterms effective on the date of the conclusion of the contract is deemed to apply to the contract. In this case, Incoterms will prevail over the dispositive norms of the applicable law.

Unilateral transactions

A person who accepted obligations under a unilateral transaction can choose the applicable law only with the consent of the recipient of the obligation.

Conclusion

This document will become the main commentary on Section VI of the third part of the Russian Civil Code since it addresses almost every norm in this section.

The Resolution represents a detailed statement of the foundations of Russian international private law and is aimed at the practical application of the relevant articles of the Russian Civil Code.

The above clarifications of the Supreme Court and the other clarifications in the Resolution will undoubtedly resolve a number of issues and assist in finding solutions for disputes involving foreign elements. They will also promote the uniform application of private international law norms by Russian courts.

If you have any questions on this eAlert, do not hesitate to contact CMS Russia experts Sergey Yuryev and Mikhail Ivannikov or your regular contact at CMS Russia.

* In Russian