Contract Between Russian and Kazakhstani Companies: Legal Guide

March 31, 2023

BRACE Law Firm ©

Trade interaction with the Republic of Kazakhstan regarding the import and export of goods represents mutually beneficial bilateral cooperation. The potential of the Russian and Kazakh markets allows for the satisfaction of a significant amount of consumer demand in both states.

It is important to note that Russia and Kazakhstan belong to a single customs zone. Consequently, goods move across the territory of the Eurasian Economic Union (the "Union, EAEU"), which significantly facilitates their customs clearance. However, despite the unified economic space and EAEU customs regulation, entrepreneurs often face questions when drafting and executing sales contracts with participants from the Republic of Kazakhstan.

The movement of goods across the Union's customs border occurs in accordance with the Customs Code of the EAEU [1] and the Treaty on the Eurasian Economic Union [2], which regulate the procedure for customs control of imported/exported goods. At the same time, one must consider that the legislation of Russia and Kazakhstan regulating trade relations differs. Therefore, parties to a foreign trade transaction use international Incoterms rules to select the basis for the delivery of goods and determine the governing law for the international contract being concluded.

Cooperation between Kazakh and Russian entrepreneurs includes both the import and export of goods. Chemicals, rubber, food products, and mineral products are imported from Kazakhstan to Russia. Russia, in turn, supplies the Republic of Kazakhstan with dairy products, medical devices and preparations, refrigerators, plant cultivation products, meat, cement, etc.

Any interaction regarding the establishment of trade relations begins with the execution of a foreign trade contract. To draft a foreign trade contract, entrepreneurs must settle several issues:

• agree on the volumes of products supplied, the contract value, the currency of payment, and delivery dates;
• determine the Commodity Nomenclature of Foreign Economic Activity (the "TN VED") code of the EAEU for the goods, the type of transport for delivery, and the delivery basis according to international Incoterms rules;
• regulate the issue of necessary customs clearance for the goods and their insurance;
• stipulate the liability of the parties for a breach of the foreign trade contract.

Notably, parties generally draft foreign trade contracts and customs documents in Russian; however, considering the provisions of the EAEU Customs Code, they may also draft them in the state language of an EAEU member state [3]. Furthermore, parties must fill out customs documents in Russian if they are completed in the territory of one Union member state and must be submitted to the customs authorities of another EAEU member state during customs operations. For the convenience of the participants in a foreign trade contract, the text of the contract is set out in two languages: Russian and Kazakh or English. The text must be identical in both languages so that the parties clearly understand the terms of the foreign trade contract. However, to determine a method for resolving inconsistencies, it is recommended to establish which language takes precedence for their resolution.

Main Sections of a Foreign Trade Contract with a Company from Kazakhstan

Like any interaction with foreign partners in the field of trade, the process begins with the coordination of the main terms of the foreign trade contract, which include:

• the subject matter of the contract, i.e., the name of the goods supplied, and the determination of the quantity and assortment;
• the value of the goods, the total contract amount, the payment procedure, the currency of payment, and the deadlines for making payments for the supplied goods;
• delivery terms, where international Incoterms rules are typically used to determine the delivery basis;
• packaging and labeling of the goods;
• product quality and the acceptance procedure;
• customs clearance of documents, if the parties deem it necessary to highlight them in a separate section of the foreign trade contract;
• notification of the buyer regarding the delivery of the goods to the destination;
• force majeure circumstances;
• resolution of disputes arising between the parties and their consideration in court;
• liability of the parties to the foreign trade contract;
• legal addresses, details, and signatures of the parties.

In addition, the text of the contract must include a preamble reflecting the names of the legal entities and the persons entitled to sign such a document.

These are the main sections of a foreign trade contract. However, the list of contract terms is not exhaustive, and the parties may provide for additional sections, exclude major ones, or formulate them in a way that satisfies the interests of both parties to the international contract.

Before executing a contract, the parties conduct negotiations and agree on key points—from the subject matter of the contract, transport logistics, and the transaction currency to customs clearance, the liability of the parties, and the governing law — which are subsequently reflected in the text of the foreign trade contract.

Subject Matter of a Foreign Trade Contract with a Legal Entity from Kazakhstan

For the correct identification of the goods, it is important to specify in the subject matter of the contract not only the name of the supplied products but also their characteristics: size, color, completeness, etc. At the same time, for safe transportation, the goods must be packed in a way that avoids possible damage. Characteristics of the cargo packaging can be specified in the subject matter of the contract.

Furthermore, if the goods are not delivered in a single shipment but in parts, it is also necessary to stipulate a delivery schedule or regulations. The parties may move specific indicators to a separate annex to the contract — the Specification.

Cost of Goods and Payment Procedure with a Company from Kazakhstan

For convenience of calculations and a unified understanding of the transaction value, this section reflects the total contract amount, the payment currency, and the price per unit of product.

Parties to an international transaction must decide on the currency of the foreign trade contract and the procedure for recalculating the contract price in case of an increase in the exchange rate of the currency adopted for settlements under a specific contract.

It is important to reflect the payment procedure in the text of the contract. This section includes:

• payment deadlines for the supplied goods;
• the name and code of the currency;
• a list of documents required for payment.

In the payment section, it is also important to specify the payment terms: prepayment, payment upon delivery, or advance payment. Notably, the currency of the price does not always coincide with the currency of payment; the parties agree on this during the negotiation stage and also reflect this information in the text of the foreign trade contract.

Payment terms for cargo are usually tied to the delivery dates of the goods, and in this case, the contract stipulates a specific number of days from the moment of delivery. At the same time, situations may occur where payment under the contract has been made, but the advance or full payment is not returned to the buyer; therefore, the text of the contract also reflects the procedure for returning funds in the absence of delivery.

Transport Logistics under a Contract with a Company from Kazakhstan

Goods transferred from the seller to the buyer must be delivered to the destination. For the convenience of the business community, international Incoterms rules for the delivery of goods were adopted, which regulate the delivery terms and the procedure for the parties' actions under a foreign trade contract. It is important to note that Incoterms rules reflect only general delivery terms; the parties to a foreign trade contract must additionally agree on all important and material aspects of the delivery of goods and reflect them in the text of the contract.

The choice of the delivery basis depends on the capabilities of the seller and the buyer. Large suppliers can assume all obligations for cargo delivery, leaving the buyer only to accept it at the destination. The selected delivery basis is reflected in the text of the foreign trade contract. Given the unified understanding of the delivery terms, they become clear to all participants in the foreign trade transaction, including the seller, the buyer, the carriers, and the customs authorities.

Delivery Deadlines in Contracts with Companies from Kazakhstan

The delivery of goods may depend on various factors, from product manufacturing to the carrier's capabilities. Therefore, the parties to a foreign trade contract must reflect the delivery deadlines in the text of the contract:

• depending on the receipt of prepayment;
• by specifying a specific delivery date;
• by reflecting the number of days from the date of execution of the contract.

Acceptance of Goods at the Destination

The buyer must accept the goods sent by the seller at the place of delivery. Although Incoterms rules define the obligations of the parties regarding the delivery and acceptance of goods, it is recommended that the parties to a foreign trade contract additionally reflect the moment of the transfer of risk of accidental loss and the transfer of title to the goods, the terms of their acceptance at the place of delivery, and the procedure for filing claims regarding quality, quantity, and assortment.

Force Majeure Circumstances

Force majeure circumstances are conditions upon whose occurrence the parties are released from liability for non-performance of the provisions stipulated by the foreign trade contract. Such conditions include natural disasters (floods, fires, earthquakes, and other disasters), wars, strikes, and military coups. However, despite the clear list of circumstances recognized as force majeure, in conditions of unstable economic and political situations, it is important for the parties to the contract to include changes in legislation as force majeure. The introduction of sanctions restrictions has significantly affected the performance of foreign trade contracts.

Dispute Resolution and Arbitration with a Company from Kazakhstan

Despite the careful drafting of the texts of foreign trade contracts, disputes arise for various reasons.

Often, before submitting a dispute to judicial authorities, the parties conduct negotiations to resolve the emerging issues.

It is important to reflect the venue for the consideration of disputes in this section of the contract. If the law of the Republic of Kazakhstan is chosen, disputes will be considered in the international arbitration court of the Republic of Kazakhstan using the relevant legislation: the Civil Code of the RK; the Law of the RK On Arbitration; resolutions of the Supreme Court of the RK On the Preparation of Civil Cases for Trial, On the Application by Courts of Certain Norms of Civil Procedural Legislation, On the Court Decision, etc. At the same time, choosing the law of the Republic of Kazakhstan as the governing law for the terms of a foreign trade contract is not mandatory; this norm is decided during negotiations before the conclusion of an international transaction.

In the case of applying liability for non-performance or untimely performance of obligations under the contract, the parties generally apply a penalty; however, the penalty itself must be provided for by the foreign trade contract.

In addition to the main sections reflected in the texts of contracts, the parties to an international transaction may provide for all important terms they deem necessary to reflect in the agreement.

It is also important to note that during the consideration of court cases, parties may refer to the recognition of the contract as unexecuted and demand a refund. However, case law allows for the opposite conclusion: if the fact of the customer's coordination of the items ordered for delivery is confirmed, and a phased delivery of the goods to the customer and the fact of their acceptance have taken place, the court sides with the defendant. In such cases, the contract is recognized as executed, and all consequences of an executed agreement arise for the parties [4].

Cases are not uncommon in practice where parties apply to court, alleging the falsification of documents under a foreign trade contract. However, since the delivery of goods is confirmed by international waybills signed by the buyer's director and bearing the buyer's seal, the court finds no grounds to satisfy the buyer's motion regarding the falsification of waybills or the motion for an expert examination of the waybills. Consequently, the court decides to satisfy the claims for debt recovery [5]. It is important to note here that when interacting with foreign partners, participants in international transactions often rely on the good faith of their counterparties and do not even verify the foundation documents or the signatory of the foreign trade contract, which is a significant error that later leads to unfavorable consequences.

Furthermore, the parties may specify the legislation of the Russian Federation as the governing law in the terms of the foreign trade contract. In this case, cases will be considered in the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (the "ICAC at the CCI of the RF"). An example of this is the decision of the panel of arbitrators of the ICAC at the CCI of the RF dated April 27, 2021, in case No. M-45/2020. In accordance with this decision, the ICAC at the CCI of the RF partially satisfied the claim for recovery of debt and penalties under a supply contract, as the defendant had no legal grounds for retaining part of the advance payment received for goods not accepted by the plaintiff. The portion of the advance payment corresponding to the quantity of undelivered goods was subject to return. However, given that the plaintiff did not send the defendant an inquiry regarding the reasons for the delay or the estimated delivery dates, the penalty was not subject to recovery.

In the consideration of this case, Russian procedural legislation was applied to resolve procedural issues, specifically the Law of the Russian Federation dated July 7, 1993, No. 5338-1 On International Commercial Arbitration, with the Regulations on the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation attached to it as an integral part.

In addition to the consideration of court cases involving entrepreneurs from different countries, it is important that a rendered court decision be enforced in the counterparty's country. Upon receiving a court decision, the other party is obliged to execute it within the established timeframe. In the event of non-compliance with the court decision on a voluntary basis, the enforcement of the judicial authority's decision may be carried out compulsorily in accordance with the legislation of the country that applies to the given decision.

Main Mistakes when Executing a Contract with Entrepreneurs from the Republic of Kazakhstan

When drafting a foreign trade contract, parties to an international transaction make several common mistakes that can negatively affect their interaction during the performance of the agreement. These mistakes include:

• insufficient drafting of the contract text or the use of simplified versions of the agreement with minimal terms;
• incorrectly reflecting and formulating the subject matter of the contract, which changes the essence of the agreement, including the legal norms that regulate the international transaction;
• using the contract text proposed by a foreign partner without working through the main points and without verifying the consequences that may arise during the performance of the contract;
• the absence of a section on the governing law and the venue for court proceedings. Relying on their partners' experience and not knowing RK legislation, Russian entrepreneurs often assume that a breach of the terms of a foreign trade contract will not affect their activities due to the difference in jurisdiction;
• the absence of a section on the liability of the parties, reflecting only the presence of a penalty for delay in the performance of obligations and full compensation for losses, without studying the legislation of the counterparty, which may differ significantly from Russian law.

Signing a simple text of a foreign trade contract does not protect the parties from a dispute; it only complicates the work of identifying the governing law and allocating liability when a dispute arises. Moreover, verbal agreements do not allow parties to determine or subsequently prove what they agreed upon in the international transaction.

To avoid main mistakes when executing a foreign trade contract, it is important to pay attention to details and study the legislation of the partner country. To simplify interaction with Kazakh partners, many entrepreneurs involve competent intermediaries. Generally, such specialists will not only explain the trade legislation of the Republic of Kazakhstan but also draft a foreign trade contract, taking into account all the specifics arising from interaction with Kazakh entrepreneurs.

The participation of a qualified intermediary in interactions with foreign partners allows for the settlement of all issues during the execution of a foreign trade contract, ensures all important points are reflected in the contract text, and minimizes the risk of unfavorable consequences for the parties to the foreign trade transaction.

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References

1. Customs Code of the Eurasian Economic Union – Annex No. 1 to the Treaty on the Customs Code of the Eurasian Economic Union.
2. Treaty on the Eurasian Economic Union, concluded in Astana on May 29, 2014.
3. Clause 1 of Article 8 of the Customs Code of the Eurasian Economic Union.
4. Resolution of the Arbitration Court of the Volga District dated March 4, 2022, No. F06-15599/2022 in Case No. A55-17051/2020 On Recognizing a Contract for the Supply of Goods as Unexecuted and Recovering the Transferred Advance.
5. Resolution of the Arbitration Court of the Ural District dated February 12, 2021, No. F09-8644/20 in Case No. A60-55638/2019 On the Recovery of Debt for Supplied Products.