Choosing Applicable Law in International Contracts: A Guide for Russian Trade

July 31, 2023

BRACE Law Firm ©

Applicable law represents the legislation of a country applied to regulate relations between foreign partners in foreign economic transactions.

Partners in an international transaction represent different states; therefore, the choice of applicable law becomes a necessary condition when concluding a foreign trade contract. Given that the legal norms of partners may differ from one another, a conflict of laws may arise from the interaction between entrepreneurs. To avoid such situations, the parties choose the applicable law when concluding a foreign trade contract, which applies upon the occurrence of disputed issues related to the performance of the foreign trade contract.

In the absence of an agreement between the parties regarding the applicable law, disputed situations are resolved using the norms of international law concerning such disputes.

International Law and Russian Legislation in the Context of Foreign Economic Contracts

The generally recognized principles and norms of international law and international treaties of the Russian Federation are an integral part of its legal system. If an international treaty of the Russian Federation establishes rules other than those provided for by law, the rules of the international treaty apply. [1]

Furthermore, the Russian Federation is a party to the 1980 UN Convention on Contracts for the International Sale of Goods (the "Vienna Convention"). Article 1 of this convention provides that it applies to contracts for the sale of goods between parties whose places of business are in different states, specifically when the rules of private international law lead to the application of the law of a Contracting State. [2] Importantly, the Vienna Convention does not apply to the sale of certain types of goods, such as: securities, sea and air vessels, hovercraft, or electricity; goods sold by auction; by way of execution or otherwise by authority of law; or goods purchased for personal, family, or household use, except where the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were purchased for such use.

Given that foreign partners are residents of different states, it is important to include a clause regarding the applicable norms in a specific transaction and to resolve the issue of jurisdiction when concluding a foreign economic activity contract. Additionally, if foreign partners are parties to the Vienna Convention and other international acts, their provisions also apply to the foreign trade contract being concluded. For example, a court, guided by Article 28 of Law of the Russian Federation No. 5338-1 dated July 7, 1993, On International Commercial Arbitration (the "Law on ICA") and Section 23 of the Rules of Arbitration of International Commercial Disputes, may find that the norms of the Vienna Convention apply to the resolution of a dispute, while the law of the Russian Federation stipulated by the parties in the contract applies subsidiarily. [3]

Thus, when concluding a foreign economic contract, it is essential to pay attention to the national legislation of the partners' countries and the international law norms governing such relationships, and to determine the applicable law for the specific transaction.

Determination of the Applicable Law in a Foreign Trade Contract

International transactions form the basis of national economic development. Given the differences in the legislation of partners, the need to regulate foreign economic transactions at the international level arose. Consequently, the Principles on Choice of Law in International Commercial Contracts were developed (the "Hague Principles on Choice of Law"). [4] [5] In accordance with the Hague Principles on Choice of Law, parties may choose:

• the law applicable to the entire contract or a part thereof;
• different legislative acts for different parts of the contract. [6]

According to Article 3 of the Hague Principles on Choice of Law, the law chosen by the parties may consist of rules of law that are generally recognized at the international, supranational, or regional levels as neutral and balanced sets of rules, unless otherwise provided by the law of the forum.

At the same time, the law chosen by the parties regulates all aspects of the contract between them, including, but not limited to: [7]

• interpretation;
• rights and obligations arising from the contract;
• performance and the consequences of non-performance, including the assessment of damages;
• various methods of extinguishing obligations, as well as prescriptions and limitation periods;
• the term of validity and the consequences of the invalidity of the contract;
• the burden of proof and legal presumptions;
• pre-contractual obligations.

Despite the existence of international norms regulating the procedure for determining the applicable law for foreign economic contracts, in most cases, national legislation also provides a norm regarding the possibility of choosing the applicable law for the contract being concluded. The Civil Code of the Russian Federation (Civil Code) also regulates this possibility for transaction participants. Specifically, Article 1210 of the Civil Code states that parties to a contract may, upon concluding the contract or subsequently, choose by agreement the law applicable to their rights and obligations under that contract.[8] In this case, the agreement of the parties on the choice of the applicable law must be expressly stated or must definitely follow from the terms of the contract or the totality of the circumstances of the case. Furthermore, a choice of applicable law made by the parties after the conclusion of the contract has retroactive effect and is considered valid from the moment the contract was concluded, without prejudice to the rights of third parties or the validity of the transaction regarding its form requirements. [9]

Russian legislation also provides that the court shall resolve a dispute in accordance with the rules of law that the parties have chosen as applicable to the substance of the dispute. Any reference to the law or legal system of a state must be interpreted as referring directly to the substantive law of that state, rather than to its conflict of laws rules. In the absence of any indication by the parties, the arbitration court applies the law determined in accordance with the conflict of laws rules it considers applicable. [10] In this regard, the parties' choice of an arbitration court in the Russian Federation as the venue for dispute resolution does not mean the automatic submission of the parties' contractual relations to Russian substantive law. The absence of an expression of the parties' will regarding the applicable law means that the court competent to hear the dispute determines it, guided by the applicable conflict of laws rules of international treaties or federal laws. [11] In the European Convention on International Commercial Arbitration concluded in 1961, the parties may also, at their discretion, establish by mutual agreement the law to be applied by the arbitrators when resolving a dispute on the merits. [12]

It is important to note that when choosing the law of the Russian Federation, one must consider that, in accordance with the Constitution of the Russian Federation, the Russian legal system includes not only the laws and regulations of the Russian Federation but also the norms of international law, which will also apply when choosing the law of the Russian Federation as the applicable law.

Another regulatory document governing the applicable law, specifically for CIS countries, is the CIS Agreement dated March 20, 1992, On the Procedure for Settling Disputes Related to Economic Activities (the "CIS Agreement"). Pursuant to Article 11 of the CIS Agreement, the rights and obligations of the parties to a transaction are determined by the legislation of the place of performance, unless otherwise provided by the agreement of the parties. Furthermore, the rights and obligations of the parties under obligations arising from harm are determined by the legislation of the state where the action or other circumstance serving as the basis for the claim for damages occurred. [13] Subparagraph "e" of the CIS Agreement establishes that the rights and obligations of the parties to a transaction are determined by the legislation of the place of performance, unless otherwise provided by the agreement of the parties. For example, if a transaction was performed in the city of Almaty, Republic of Kazakhstan, the applicable law will be the law of the Republic of Kazakhstan. [14]

The CIS Agreement contains international conflict of laws rules that differ from the national conflict of laws rules of Section VI of Part Three of the Civil Code. If the CIS Agreement is applicable to the disputed legal relations, the arbitration court is guided by the corresponding conflict rules provided for by the CIS Agreement, rather than the Civil Code. [15]

Additionally, for EAEU countries, the Decision of the EurAsEC Court No. 21 dated July 12, 2012, On the Rules of Procedure of the Court of the Eurasian Economic Community, is used. Pursuant to Article 11, when considering a case, the court applies:

• international treaties in force within the EurAsEC framework;
• international treaties constituting the legal framework of the Customs Union and the Single Economic Space;
• decisions of EurAsEC bodies;
• acts of the bodies of the Customs Union and the Single Economic Space;
• international treaties to which the states that are parties to the dispute are participants;
• general principles of law recognized by civilized nations;
• international custom as evidence of a general practice recognized as a rule of law;
• principles and norms of law as they have been interpreted in previous judicial acts of the court.

It is important to note that the choice of applicable law does not mean the choice of the venue for dispute resolution. However, a variant of either the plaintiff's jurisdiction or alternative jurisdiction is often used. Jurisdiction is determined by the parties to a foreign economic transaction at the contract conclusion stage and is reflected in the text in the arbitration clause section. Resolving a dispute in the court of another state leads to increased costs associated with court cases, including the need to translate documents into the foreign language of the country where the dispute will be heard. Therefore, each participant usually tries to resolve this issue so that the case, in the event of a dispute, is heard in their own country.

When choosing jurisdiction for dispute resolution in another state, one must consider the national legislation of the counterparty's country and the specific judicial body for hearing the dispute. It is often easier for some partners to stipulate in the text of the contract that the dispute will be heard in the judicial bodies of the Russian Federation than to transfer the case for consideration to the judicial bodies of their own state. This is often due to the consequences for the foreign partner in their own country, which may be far more serious than liability under Russian legislation.

Determination of the Applicable Law in the Absence of an Agreed Condition in a Foreign Trade Contract

There are frequent cases where foreign partners in an international transaction have not provided for or chosen the applicable law in the text of the foreign trade contract. In this case, international norms are used to resolve this issue, according to which the arbitration court applies the rules of law that the parties have agreed upon as applicable to the resolution of the dispute on the merits. In the absence of such consent of the parties, in accordance with the UNCITRAL Arbitration Rules, the arbitration court applies the law that it deems appropriate. [16]

According to the European Convention on International Commercial Arbitration, if there is no indication from the parties regarding the applicable law, the arbitrators will apply the law established in accordance with the conflict of laws rule that the arbitrators deem applicable in the given case. 17] The arbitrators will be guided by the provisions of the contract and trade customs. [18] In the absence of any indication by the parties, the arbitration court applies the law determined in accordance with conflict of laws rules that it considers applicable. [19] [20] A conflict of laws represents discrepancies in the regulatory acts governing the same legal relations. In relation to foreign economic transactions, taking into account the provisions of the Resolution of the Plenum of the Supreme Court of the Russian Federation No. 24 dated July 9, 2019, On the Application of Private International Law Norms by Courts of the Russian Federation, conflict rules also include the differences in the legislation of the countries of foreign partners on the same issues. When resolving a dispute arising from a foreign economic transaction [21] for which the parties have determined the venue for dispute resolution but have not determined the applicable law, the arbitration court independently selects the applicable law based on the conflict of laws rules contained in an international treaty or national law. [22]

Furthermore, the arbitration court makes a decision in accordance with the terms of the contract and taking into account applicable customs. [23] Article 38 of the Arbitration Rules of the UN Economic Commission for Europe [24] provides that arbitrators apply the law established by the parties to resolve the dispute on the merits. If there is no indication from the parties regarding the applicable law, the arbitrators apply the law established in accordance with the conflict of laws rule that the arbitrators deem applicable in the given case. In both cases, the arbitrators are guided by the provisions of the contract and trade customs. Regarding trade customs, the norm of the UNIDROIT Principles of International Commercial Contracts applies, according to which the parties are bound by any custom to which they have agreed and by the practice they have established in their relations. Furthermore, the parties are bound by a custom that is widely known and constantly observed in international trade by parties in the corresponding field of trade, except where the application of such a custom would be unreasonable. [25]

In practice, the parties may either agree on all the terms of their contract or simply refer to other sources, including customs, for individual issues. The parties may establish that any custom is applicable, including a custom that has arisen within a branch of business to which neither of the parties belongs, or a custom relating to another type of contract. A custom may be regularly observed by entrepreneurs in a specific field of trade as a whole, but its application in a given case may still be unreasonable. The reasons for this may lie in the special conditions in which one or both parties operate or in the atypical nature of their transaction. In such cases, the custom will not apply.

Meanwhile, in accordance with International Commercial Transactions, [26] the parties are bound by any custom to which they have agreed and by any practice established between them. The parties are bound by a custom that would be considered generally applicable by persons in the same situation as the parties, except where the application of such a custom would be unfounded. [27]

Norms of Russian Legislation in the Choice of Applicable Law and the Absence of an Agreement on Applicable Law

It is important to note that in accordance with Russian legislation, specifically Article 1210 of the Civil Code, parties to a contract may, upon concluding the contract or subsequently, choose by agreement the law applicable to their rights and obligations under that contract. Furthermore, the agreement of the parties on the choice of the applicable law must be expressly stated or must definitely follow from the terms of the contract or the totality of the circumstances of the case. A choice of applicable law made by the parties after the conclusion of the contract has retroactive effect and is considered valid from the moment the contract was concluded, without prejudice to the rights of third parties or the validity of the transaction regarding its form requirements.

At the same time, the law applicable to the contract in the absence of an agreement between the parties on the choice of law is regulated by Article 1211 of the Civil Code. This article states that in the absence of an agreement between the parties on the applicable law, the law of the country where, at the time of the conclusion of the contract, the place of residence or main place of activity of the party performing the obligation of decisive importance for the content of the contract is located applies. [28] The party performing the obligation of decisive importance for the content of the contract is recognized as the party that is, in particular:

• the seller — in a contract of sale; [29]
• the donor — in a deed of gift;
• the lessor — in a lease agreement;
• the lender — in a gratuitous use agreement;
• the contractor — in a work contract;
• the carrier — in a contract of carriage;
• the forwarder — in a freight forwarding contract;
• the lender (creditor) — in a loan agreement (credit agreement);
• the financial agent — in a contract of financing against assignment of a monetary claim;
• the bank — in a bank deposit agreement and a bank account agreement;
• the depositary — in a storage agreement;
• the insurer — in an insurance contract;
• the attorney-in-fact — in an agency agreement (power of attorney);
• the commission agent — in a commission agreement;
• the agent — in an agency agreement;
• the service provider — in a service contract;[30]
• the pledgor — in a pledge agreement;
• the guarantor — in a guarantee agreement.

It is important to note that different rules of law apply to different types of foreign economic transactions. Moreover, different practices for making decisions may emerge when considering disputes on the same issues.

Examples of Dispute Resolution Under Foreign Economic Activity Contracts Regarding Applicable Law

The absence of an agreement on the applicable law in the event of a disputed situation under a foreign economic contract imposes on the judicial bodies the duty not only to consider the dispute on the merits but also to determine the rules of law applicable to the specific contract. For example, in a case concerning the recovery of a prepayment under an international contract for the sale of goods, [31] the court needed to determine the applicable law.

Since the parties did not agree on the substantive law applicable to resolving disputes under the contract, in the opinion of the sole arbitrator, the conflict of laws rule contained in Article 1211 of the Civil Code, "Law Applicable to a Contract in the Absence of an Agreement of the Parties on the Choice of Law", should be applied. Furthermore, since the Respondent, who has its main place of business in the People's Republic of China, acts as the Seller in the contract under consideration, the sole arbitrator concluded that the law applicable to the resolution of this dispute is the law of the People's Republic of China. The sole arbitrator stated that the Russian Federation and the People's Republic of China, where the parties' commercial enterprises are located, are participants in the 1980 UN Convention on Contracts for the International Sale of Goods. The parties did not exclude its application to the relations arising from the Contract. Additionally, Article 142 of the General Provisions of the Civil Law of the People's Republic of China, [32] Article 7 of the Civil Code, and Article 15 of the Constitution of the Russian Federation establish the priority of international treaties over domestic legislation. In this regard, on the basis of Article 1 of the Vienna Convention, the sole arbitrator concluded that the Vienna Convention applies to the parties' relations under this dispute.

At the same time, the agreement on the applicable law in an international contract must clearly determine the law of which country will be used to resolve the dispute. For example, the text of a foreign economic contract may contain the following wording:

"Any disputes and disagreements arising out of or in connection with this contract, occurring both during the term of the contract and after its expiration, which cannot be resolved through negotiations between the parties, shall be resolved by the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation, in accordance with its Rules and Law No. 5338-1 On International Commercial Arbitration dated July 7, 1993." [33]

Pursuant to Article 7 of the Law on ICA and Section 2(2) of the ICAC Rules, the ICAC is entitled to consider disputes if there is a written agreement between the parties to transfer a dispute that has already arisen or may arise to it for resolution. Given the cited provisions of the contract, the arbitral tribunal concluded that a written agreement exists between the Plaintiff and the Respondent to transfer the dispute that has arisen or may arise to the ICAC for resolution.

On the issue of the law applicable to the relations of the parties under the foreign economic contract, the arbitral tribunal established that an indication of the applicable law is contained in the Contract, according to which the contract "is subject to interpretation and regulation in accordance with the current legislation of the Russian Federation". In accordance with Article 28(1) of the Law on ICA and Section 26(1) of the ICAC Rules, the arbitration court resolves the dispute in accordance with the rules of law that the parties have chosen as applicable to the substance of the dispute. Based on the specified provisions of the contract and regulatory oversight, the arbitral tribunal concluded that the substantive rules of the legislation of the Russian Federation should apply to the parties' relations under the contract.

An agreement on arbitration and the applicable law in the text of a foreign economic contract significantly simplifies the resolution of a dispute on the merits, as there is no need to determine the law applicable to the specific case. At the same time, it is important to understand that the choice of national legislation as the law applicable to a specific contract is not used through individual norms regulating specific types of activities; rather, it involves the entire block of legislation, which includes, among other things, the norms of international law.

The absence of an agreement on the choice of applicable law between foreign partners leads to the fact that the resolution of an arising dispute is carried out according to the norms of international law, taking into account the national legislation of the partners.

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References

1. Clause 4 of Article 15 of the Constitution of the Russian Federation (adopted by popular vote on December 12, 1993, with amendments approved during the nationwide vote on July 1, 2020).
2. Award of the Sole Arbitrator of the ICAC at the RF CCI dated February 16, 2022, in Case No. M-85/2021.
3. Award of the Sole Arbitrator of the ICAC at the RF CCI dated February 16, 2022, in Case No. M-85/2021.
4. Developed at the Hague Conference on Private International Law, the "Principles on Choice of Law in International Commercial Contracts" were officially approved by the UN Commission on International Trade Law (UNCITRAL) at its 48th session (June 29 – July 16, 2015) and recommended by the International Chamber of Commerce for implementation into the domestic legislation of states (November 4, 2015).
5. Principles on Choice of Law in International Commercial Contracts, approved on March 19, 2015.
6. Article 2 of the Hague Principles.
7. Article 9 of the Hague Principles.
8. Clause 26 of the Resolution of the Plenum of the Supreme Court of the Russian Federation No. 24 dated July 9, 2019, On the Application of Norms of Private International Law by Courts of the Russian Federation.
9. Clause 13 of the Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 158 dated July 9, 2013, Review of the Practice of Consideration of Cases Involving Foreign Persons by Arbitration Courts.
10. Article 28 of the Law of the Russian Federation No. 5338-1 dated July 7, 1993, On International Commercial Arbitration.
11. Clause 43 of the Resolution of the Plenum of the Supreme Court of the Russian Federation No. 23 dated June 27, 2017, On the Consideration by Arbitration Courts of Cases on Economic Disputes Arising from Relations Complicated by a Foreign Element.
12. European Convention on International Commercial Arbitration, concluded in Geneva on April 21, 1961.
13. Award of the ICAC at the RF CCI dated July 1, 2016, in Case No. 229/2014.
14. Resolution of the Arbitration Court of the Moscow District dated May 10, 2018, No. F05-5655/2018 in Case No. A40-59275/2017.
15. Clause 11 of the Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 158 dated July 9, 2013, Review of the Practice of Consideration of Cases Involving Foreign Persons by Arbitration Courts.
16. Clause 1 of Article 35 of the UNCITRAL Arbitration Rules (revised in 2010).
17. Award of the ICAC at the RF CCI dated June 13, 2000, in Case No. 280/1999.
18. Clause 1 of Article VII of the European Convention on International Commercial Arbitration.
19. Award of the Arbitral Tribunal of the ICAC at the RF CCI dated May 19, 2021, in Case No. M-49/2020.
20. Award of the Arbitral Tribunal of the ICAC at the RF CCI dated February 18, 2022, in Case No. M-120/2020.
21. Award of the ICAC at the RF CCI dated February 9, 2016, in Case No. 145/2015.
22. Clause 8 of the Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 29 dated February 16, 1998, Review of Judicial and Arbitration Practice of Resolving Disputes in Cases Involving Foreign Persons.
23. Section 23 of the Rules of Arbitration of International Commercial Disputes.
24. Arbitration Rules of the UN Economic Commission for Europe, prepared on January 20, 1966.
25. Article 1.9 of the UNIDROIT Principles of International Commercial Contracts.
26. Ramberg J. International Commercial Transactions / translated from English, ed. N.G. Vilkova. 4th ed. Moscow: Infotropic Media, 2011. 896 p.
27. Article 1:105 of International Commercial Transactions.
28. Award of the Arbitral Tribunal of the ICAC at the RF CCI dated April 16, 2021, in Case No. M-93/2020.
29. Award of the Sole Arbitrator of the ICAC at the RF CCI dated February 17, 2021, in Case No. M-63/2020.
30. Award of the ICAC at the RF CCI dated November 23, 2015, in Case No. 54/2015.
31. Award of the Sole Arbitrator of the ICAC at the RF CCI dated December 24, 2020, in Case No. M-2/2020.
32. General Provisions of the Civil Law of the People's Republic of China dated April 12, 1986. Repealed as of January 1, 2021.
33. Award of the ICAC at the RF CCI dated December 26, 2016, in Case No. 90/2016.