International Commercial Contracts in Russia: Regulation & Drafting

 

July 14, 2022

BRACE Law Firm ©

 

Foreign Economic Activity (the "FEA") is a crucial element of entrepreneurship — this has led to the development and regulation of legal norms between counterparties from different countries.

The concept of foreign economic activity in Russian law is reflected in Article 1 of Federal Law No. 183-FZ dated July 18, 1999, On Export Control (the "Law No. 183-FZ") and implies foreign trade, investment, and other activity, including industrial cooperation, in the field of international exchange of goods, information, works, services, and results of intellectual activity (rights thereto).

At the same time, in accordance with Article 2 of Federal Law No. 164-FZ dated December 8, 2003, On the Fundamentals of State Regulation of Foreign Trade Activity (the "Law No. 164-FZ"), foreign trade activity is activity involving transactions in the field of foreign trade in goods, services, information, and intellectual property. From a legislative perspective, the concept of "foreign economic activity" is broader than the concept of "foreign trade activity". This is because the concept of "foreign economic activity" also includes investment and other activities. Based on the essence of the above definitions, the concept of "foreign economic contract" will also be broader than the concept of an "international commercial contract" and "foreign trade contract". However, for the purpose this article, the concepts of "foreign economic contract", "international commercial contract", "international contract" will be used as identical.

At the same time, state regulation of foreign trade activity is based on the Constitution of the Russian Federation and is carried out in accordance with Law No. 164-FZ, other federal laws, and other regulatory legal acts of the Russian Federation, as well as generally recognized principles and norms of international law and international treaties of the Russian Federation.

Interaction between foreign trade counterparties is carried out on the basis of an executed International Commercial Contract, which is a transaction between two or more parties that are economic entities from different states. Typically, such a contract is concluded in writing, prescribing the terms of cooperation between the parties to the transaction, and is regulated by several legal systems.

An International Commercial Contract possesses certain distinctive features:

• The parties to the transaction are subjects of different states;
• It is subject to the norms of international and Russian law;
• The parties to the transaction must determine the law applicable to the transaction;
• Separate state control of such legal relations;
• Special rules for processing the import/export of goods.

Types of International Commercial Contracts

It is customary to classify International Commercial Contracts into the following categories:

• By the nature of supply;
• By the subject of the transaction;
• By the form of payment;
• By the direction of the transaction;
• Depending on the number of counterparties.

By the nature of supply, the following contracts are distinguished:

• One-time contract. The parties to the transaction conclude an international agreement for a single interaction.
• Framework contract. The parties to the transaction cooperate for a long time; goods are supplied or a service is rendered repeatedly.

By the subject of the transaction, the following international agreements are distinguished:

• Sale and purchase;
• Provision of services;
• Lease or international financial leasing;
• Contractor agreement (work);
• International transportation of goods.

By the form of payment, international contracts are divided into the following types:

• Contracts with payment in monetary form. Settlement under such contracts is carried out in a specific currency, by a form of settlement (collection, bill of exchange, letter of credit, check), as well as methods of payment (cash, transfer, with a provided advance).
• Contracts with payment in commodity form (so-called barter transactions). In this case, for example, the sale of one product involves the simultaneous purchase of another product, and no monetary settlements are made between the parties to the transaction.
• Contracts with payment in mixed form. In this case, both of the above forms of payment are applied: partially in monetary equivalent, partially in commodities.

By the direction of the transaction, the following are distinguished:

• Export;
• Import;

The number of counterparties in one foreign economic transaction may vary:

• Bilateral (only two parties participate in the international contract);
• Multilateral (three or more counterparties participate in the foreign economic transaction).

Form of International Commercial Contract

International agreements may be concluded in both written and oral forms; however, due to the fact that foreign economic activity is often associated with a large number of issues that need to be settled when concluding an international transaction, the best way to consolidate the main provisions of the arrangements between the parties is a written International Commercial Contract in the form of a single document.

Despite the possibility, for example, not to conclude an agreement in writing when supplying goods, parties to international transactions prefer to document all agreements reached in writing. The possibility of not having a written international contract is provided for by Article 11 of the United Nations Convention on Contracts for the International Sale of Goods, which states that a contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses [1].

At the same time, in accordance with the norms of Russian civil legislation, transactions between legal entities must be made in simple written form, except for transactions requiring notarization [2]. Since September 1, 2013, non-compliance with the simple written form of a foreign economic transaction no longer entails its invalidity [3].

In accordance with Item 1 of Article 1209 of the Civil Code of the Russian Federation, the form of a transaction is subject to the law of the country applicable to the transaction itself. Thus, the form of the contract is determined by the law of the country to which the contract itself is subject. However, a transaction committed abroad, where at least one of the parties is a person whose personal law is Russian law, cannot be recognized as invalid due to non-compliance with the form if the requirements of Russian law regarding the form of the transaction have been observed. At the same time, if the law of the country of incorporation of a legal entity contains special requirements regarding the form of the agreement on the creation of the legal entity or a transaction related to the exercise of the rights of a participant in the legal entity, the form of such agreement or transaction is subject to the law of that country.

It is also worth noting that if one party to the agreement is an individual using, acquiring, or ordering movable things (works, services) for personal, family, household, and other needs, the law of the country of the consumer's place of residence applies to the form of the agreement involving the consumer, at their choice.

Conditions of an International Commercial Contract

As with any other agreement, an international contract should include the main conditions under which the obligations of the parties to the transaction will be fulfilled. Such conditions include:

1. Preamble of the contract. As a general rule, the preamble reflects the full official names of the parties to the transaction, indicating their organizational and legal form, the contract number, the date of its conclusion, etc.

2. Subject of the transaction. The description of the subject of the concluded agreement is an important element of the contract. By and large, the main agreements concluded between counterparties from different countries are agreements for the sale and purchase of goods. For the convenience of describing and coding goods, in 1983, the participating countries signed the International Convention on the Harmonized Commodity Description and Coding System [4]. At the level of the Eurasian Economic Union, Decision of the Council of the Eurasian Economic Commission No. 80 dated September 14, 2021, On Approval of the Unified Commodity Nomenclature of Foreign Economic Activity of the Eurasian Economic Union and the Unified Customs Tariff of the Eurasian Economic Union, as well as on Amending and Recognizing as Invalid Certain Decisions of the Council of the Eurasian Economic Commission, was also signed. The document regulating the commodity nomenclature at the level of the Russian Federation is Resolution of the Government of the Russian Federation No. 718 dated November 27, 2006, On the Customs Tariff of the Russian Federation and the Commodity Nomenclature Applied in Foreign Economic Activity.

3. Payment terms under the contract, if the monetary form of payment is selected. The unit cost of the goods and the total cost of all goods are also included in the terms of the contract if the goods are supplied. An important condition in this section of the contract is the indication of the currency of the International Commercial Contract; the entire amount of the transaction may depend on it.

The settlement currency between the parties to the contract is indicated with the name and code of the currency in accordance with Decision of the Customs Union Commission No. 378 dated September 20, 2010, On Classifiers Used to Fill out Customs Documents.

4. Unforeseen circumstances or force majeure. This section specifies the grounds for releasing the parties from liability and the consequences of the occurrence of force majeure circumstances. To confirm such force majeure circumstances, it is necessary to obtain a force majeure certificate. It is issued by the Chamber of Commerce and Industry of Russia (CCI of Russia) upon witnessing the occurrence of such circumstances.

5. Applicable law. In foreign economic transactions, this section is very important given that the conditions of the international transaction are regulated depending on the selected applicable law.

6. Term of the contract and term of delivery, provision of services, etc. Terms in any contract are a significant element of the agreement; many circumstances under the terms of the transaction, including payment, depend on their observance. Terms can be indicated by a specific date, a number of days from the date of signing the contract, or a number of days from the moment of making a prepayment.

7. Delivery terms, in the case of concluding a goods supply agreement. The fundamental document in the international supply of goods is Incoterms (in the current edition), which establishes generally accepted definitions and rules regarding the supply of goods between trading partners.

8. Information on insurance, if there is a need for such a section; for example, when supplying goods, it is worth insuring the cargo being supplied.

9. Liability of the parties. This part of the contract prescribes penalties, interest, fines, and compensation for damages in case of violation of obligations under the contract.

10. Dispute resolution procedure. This section prescribes the procedure for filing, the terms for considering a claim, etc.

11. Arbitration clause. A section of the contract that stipulates issues of settling possible disputes that may arise between the parties during the execution of the contract. Arbitration and commercial courts (arbitral tribunals).

12. Other conditions. These can be either separate sections of the contract or a general section in which all other conditions that the parties want to settle in the text of the contract are prescribed.

13. Signatures of representatives of both parties to the transaction with their decoding and seals (if the legal entity has a seal).

Taking into account the general conditions of an International Commercial Contract when forming an international agreement allows the parties to the transaction to carefully formulate the important conditions of the transaction being concluded and assess possible risks. Despite the mutual liability provided for by the parties to the transaction, such transactions are subject to control by the state.

Choice of Applicable Law in an International Commercial Contract

An important aspect when concluding an international agreement is the question of the choice of applicable law. The parties to a transaction may, when concluding an agreement or subsequently, choose by agreement between themselves the law applicable to their rights and obligations under this agreement [5].

By virtue of the principle of autonomy of will in private international law, the parties to an agreement may, when concluding the agreement or subsequently, choose by agreement between themselves the law applicable to their rights and obligations under the agreement. Such an explicitly expressed agreement may be framed in the form of a condition (clause) on applicable law in the text of the agreement or in the form of a separate agreement [6].

The agreement of the parties on the choice of applicable law must be explicitly expressed or must definitely follow from the terms of the agreement or the totality of the circumstances of the case. At the same time, the choice of applicable law made by the parties after the conclusion of the agreement has retroactive effect and is considered valid, without prejudice to the rights of third parties and the validity of the transaction in terms of requirements for its form, from the moment of the conclusion of the agreement. It is also worth noting that the parties to the agreement may choose the applicable law both for the agreement as a whole and for its individual parts.

In the event that the parties to an international transaction have not decided on the law applicable to the agreement, the law of the country where, at the time of conclusion of the agreement, the place of residence or main place of business of the party carrying out the performance having decisive significance for the content of the agreement is located applies. In accordance with Part 2 of Article 1211 of the Civil Code of the Russian Federation, the party carrying out the performance having decisive significance for the content of the agreement is recognized as the party being, in particular:

1. the seller — in a sale and purchase agreement;
2. the donor — in a gift agreement;
3. the landlord — in a lease agreement;
4. the lender — in a gratuitous use agreement;
5. the contractor — in a contractor agreement;
6. the carrier — in a carriage agreement;
7. the forwarder — in a transport expedition agreement;
8. the lender (creditor) — in a loan agreement (credit agreement);
9. the financial agent — in an agreement for financing against assignment of a monetary claim;
10. the bank — in a bank deposit agreement and bank account agreement;
11. the custodian — in a storage agreement;
12. the insurer — in an insurance agreement;
13. the attorney-in-fact — in a commission agreement (agency agreement);
14. the commission agent — in a commission agency agreement;
15. the agent — in an agency agreement;
16. the executor — in an agreement for paid provision of services;
17. the pledgor — in a pledge agreement;
18. the surety — in a suretyship agreement.

Other types of agreements and the law applicable to them are reflected in Article 1211 of the Civil Code of the Russian Federation.

An agreement containing elements of various agreements is subject to the law of the country with which this agreement, considered as a whole, is most closely connected, unless it follows from the law, terms, or essence of this agreement or the totality of the circumstances of the case that the applicable law is subject to determination for such elements of this agreement separately. At the same time, if trade terms accepted in international turnover are used in the agreement, in the absence of other indications in the agreement, it is considered that the parties agreed on the application to their relations of customs denoted by the corresponding trade terms.

Currency Control Regarding an International Trade Contract in Russia

Given that the second party to an international transaction is a foreign economic entity, settlements under International Commercial Contracts are often carried out in foreign currency. In accordance with Federal Law No. 173-FZ dated December 10, 2003, On Currency Regulation and Currency Control, currency control in the Russian Federation is exercised by the Government of the Russian Federation, currency control bodies, and currency control agents.

Currency control during foreign economic transactions is associated with the need to verify the legality of operations conducted by counterparties. It is worth noting that the currency control bodies in the Russian Federation are the Central Bank of the Russian Federation, the Federal Customs Service, and the Federal Tax Service. At the same time, currency control agents are authorized banks and professional participants in the securities market that are not authorized banks, as well as the State Development Corporation "VEB.RF". The purpose of currency control, which is performed by currency control bodies and agents, is state control of currency operations and the exclusion of illegal outflow of foreign currency from the Russian Federation.

The legality of conducted currency operations is ensured through the verification of documents submitted to regulatory authorities. Supporting documents are submitted in accordance with Instruction of the Bank of Russia No. 181-I dated August 16, 2017, On the Procedure for Submission by Residents and Non-Residents of Supporting Documents and Information to Authorized Banks when Carrying out Currency Operations, on Unified Forms of Accounting and Reporting on Currency Operations, and the Procedure and Terms for Their Submission (the "Instruction No. 181-I").

In accordance with Instruction No. 181-I, a part of International Commercial Contracts must be registered. Such contracts include import contracts or credit agreements if the amount of obligations under them equals 3 million rubles or exceeds this equivalent; for export contracts, this amount is increased to 10 million rubles or more. The amount of obligations under the contract (credit agreement) is determined as of the date of conclusion of the contract (credit agreement) or, in the case of a change in the amount of obligations under the contract (credit agreement), as of the date of conclusion of the latest amendments (supplements) to the contract (credit agreement) providing for such a change in the amount at the official exchange rate of foreign currencies against the ruble.

It is worth noting that when concluding an International Commercial Contract, it is important to observe the deadlines for its registration, which are determined by the provisions of Clause 5.7 of Instruction No. 181-I. Additionally, the documents that must be submitted to register the contract are also reflected in the provisions of Instruction No. 181-I. After submitting the necessary documents, the bank assigns a unique number to the International Commercial Contract in accordance with Appendix No. 4 of Instruction No. 181-I. Furthermore, if one agreement simultaneously contains conditions of both a contract and a credit agreement, two bank control sheets are formed and maintained for such an agreement, indicating a separate unique number for the contract (credit agreement) in them.

State Expertise and Accounting of Foreign Economic Transactions for Export Control Purposes

State expertise of foreign economic transactions involving goods, information, works, services, and results of intellectual activity (rights thereto) that can be used in the creation of weapons of mass destruction, means of their delivery, other types of weapons and military equipment, or in the preparation and (or) commission of terrorist acts and regarding which export control is established by the legislation of the Russian Federation, is carried out in accordance with the Rules approved by Resolution of the Government of the Russian Federation No. 294 dated April 16, 2001, On Approval of the Rules for Conducting State Expertise of Foreign Economic Transactions involving Goods, Information, Works, Services, and Results of Intellectual Activity (Rights Thereto) in Relation to Which Export Control is Established. State expertise is conducted to determine the compliance of a foreign economic transaction involving controlled products with the international obligations of the Russian Federation and state interests.

Also, a document regulating the state expertise of foreign economic transactions is Order of the Ministry of Economic Development of Russia No. 270 dated August 7, 2001, On State Expertise of Foreign Economic Transactions involving Goods, Information, Works, Services, and Results of Intellectual Activity, which establishes the procedure for conducting state expertise of foreign economic transactions involving goods, information, works, services, and results of intellectual activity regarding which export control is established at the Ministry of Economic Development of Russia, as well as interaction with interested federal executive bodies in the process of its implementation.

Accounting for foreign economic transactions for export control purposes is carried out in accordance with Resolution of the Government of the Russian Federation No. 583 dated June 13, 2012, On the Procedure for Accounting for Foreign Economic Transactions for Export Control Purposes. In accordance with this resolution, Russian participants in foreign economic activity must keep records of foreign economic transactions they perform involving goods, information, works, services, and results of intellectual activity (rights thereto) that can be used in the creation of weapons of mass destruction, means of their delivery, other types of weapons and military equipment, or in the preparation and (or) commission of terrorist acts and which are included in the list of types (groups) of goods, works, services, and results of intellectual activity (rights thereto).

Russian participants in foreign economic activity must ensure the completeness and reliability of the accounting of foreign economic transactions they perform. Accounting for foreign economic transactions is carried out in the journal of foreign economic transactions.

Features of Concluding International Commercial Contracts under Sanctions

Along with the established rules for concluding International Commercial Contracts in the territory of the Russian Federation, until December 3, 2022, special economic measures may be established and applied in the form of a ban (restriction) on the import into the territory of the Russian Federation of certain types of products and (or) raw materials [7]. Such measures are commonly referred to as sanctions and may be applied by individual states, groups of states, or international organizations to a state that has violated the norms of international law. Often, sanctions are expressed in a ban on the import of goods, works, and services, a ban on export to these states, and a restriction or complete ban on financial transactions through banking organizations.

When concluding an International Commercial Contract, participants in an international transaction must check restrictions for interaction with a specific counterparty, as well as restrictions on specific goods, work, or service before signing the contract.

In conditions of unstable international relations, for the future possibility of settling a sanctions situation, it is necessary to add a sanctions clause to the international agreement, in which the further actions of the parties to the International Commercial Contract in the event of such events are provided.

Taking into account the specific international situation, the Government of Russia has taken appropriate measures and establishes restrictions or a ban on the export of certain types of goods:

• Resolution of the Government of the Russian Federation No. 311 dated March 9, 2022, On Measures to Implement Decree of the President of the Russian Federation No. 100 dated March 8, 2022.
• Resolution of the Government of the Russian Federation No. 313 dated March 9, 2022, On Measures to Implement Decree of the President of the Russian Federation No. 100 dated March 8, 2022.
• Resolution of the Government of the Russian Federation No. 312 dated March 9, 2022, On the Introduction on a Temporary Basis of a Permissive Procedure for the Export of Certain Types of Goods Outside the Territory of the Russian Federation.

The bans introduced by the Government of the Russian Federation allow vital goods necessary for the population of the Russian Federation to remain in the territory of the country.

Control Regarding Certain Types of International Commercial Contracts

Regarding foreign economic activity, the public authorities of the Russian Federation exercise control in specific areas. As an example, Government resolutions can be cited, in accordance with which control is exercised regarding specific types of economic activity:

• Resolution of the Government of the Russian Federation No. 634 dated August 29, 2001, On Approval of the Regulation on Exercising Control over Foreign Economic Activity regarding Microorganisms, Toxins, Equipment, and Technologies;
• Resolution of the Government of the Russian Federation No. 686 dated September 24, 2001, On Approval of the Regulation on Exercising Control over Foreign Economic Activity regarding Chemicals, Equipment, and Technologies That Can Be Used in the Creation of Chemical Weapons.

In addition to specific control over specific types of International Commercial Contracts, general control of international transactions is worth noting. This is due to the fact that most contracts are concluded in foreign currency. Currency operations in the Russian Federation, in accordance with Article 22 of Federal Law No. 173-FZ dated December 10, 2003, On Currency Regulation and Currency Control, are the subject of currency control. Currency operations within the framework of international transactions are carried out in accordance with Instruction of the Bank of Russia No. 181-I dated August 16, 2017, On the Procedure for Submission by Residents and Non-Residents of Supporting Documents and Information to Authorized Banks when Carrying out Currency Operations, on Unified Forms of Accounting and Reporting on Currency Operations, and the Procedure and Terms for Their Submission.

Administrative Liability under International Commercial Contracts

Despite the liability provided for by the International Commercial Contract itself, the legislation of the Russian Federation also provides for administrative liability for failure to fulfill certain conditions under international transactions.

Thus, for example, Resolution of the Government of the Russian Federation No. 1207 dated November 22, 2012, On Exercising Control over Foreign Trade Barter Transactions and Their Accounting, establishes the procedure for accounting and control of transactions performed during foreign trade activity and providing for the exchange of goods, services, works, and intellectual property, the conditions of which provide for the export of goods from the Russian Federation, including those resulting from services rendered, works performed, as well as implying the transfer of exclusive rights to intellectual property objects.

In this case, violation of this norm in accordance with the CAO RF for failure to fulfill, within the established terms during foreign trade barter transactions, the obligation to import into the Russian Federation goods equivalent in value, provide equivalent services by foreign persons, perform equivalent works, transfer equivalent exclusive rights to intellectual property objects, or grant the right to use intellectual property objects, or the obligation to credit funds to accounts in authorized banks if foreign trade barter transactions provide for the partial use of monetary and (or) other payment means, or in the case of the sale of goods without their import into the Russian Federation, or failure to confirm the fact of fulfillment of such an obligation, entails the imposition of an administrative fine:

• on officials in the amount of 10,000 to 20,000 rubles;
• on legal entities — from 1/2 to one time the amount of the cost of the goods that were the subjects of the administrative offense [8].

For violation of export control legislation, Russian legislation also provides for administrative liability (Art. 14.20 of the CAO RF). For example, non-compliance with the established procedure for keeping records of foreign economic transactions involving goods, information, works, services, or results of intellectual activity for export control purposes, as well as violation of the established terms for storing relevant accounting documents, entails the imposition of an administrative fine:

• on officials in the amount of 1,000 to 2,000 rubles;
• on legal entities — from 10,000 to 20,000 rubles.

As an example, where a limited liability company was held liable under Article 14.20 of the CAO RF for violation of export control legislation, one can cite the Resolution of the Sovetsky District Court of the City of Nizhny Novgorod dated October 5, 2021, in Case No. 5-1142/2021. In the case, a contract for the supply of goods was concluded between a Russian participant in foreign economic activity (a Russian LLC) and a foreign participant. Under the contract, the LLC carried out a foreign economic operation with panoramic masks, regarding which export control is established [9], without a special permit by transferring said goods to a representative citizen of the Republic of Kazakhstan, who exported them to the territory of the Republic of Kazakhstan, thereby committing an administrative offense provided for by Part 1 of Article 14.20 of the CAO RF. Having reviewed this case, the court ruled that the LLC is guilty of committing an administrative offense.

At the same time, Article 15.25 of the CAO RF provides for liability for violation of the currency legislation of the Russian Federation and acts of currency regulation bodies. This norm is related to currency regulation, in which the Russian party to the international agreement becomes a participant if the settlement under the transaction is conducted in foreign currency. As an example of holding administratively liable, one can cite the Resolution of the First Cassation Court of General Jurisdiction dated April 15, 2022, No. 16-781/2022. The basis for the issuance of resolutions by the tax authority under Part 1 of Article 15.25 of the Code of Administrative Offenses of the Russian Federation against an official of LLC "Kombinat proizvodstvennykh predpriyatiy" were facts of violation by the director of the company of Part 2 of Article 14 of the Federal Law on Currency Regulation and Currency Control, expressed in the payment of wages to an employee of the company who is a citizen of a foreign state (a non-resident) in cash in the currency of the Russian Federation, bypassing bank accounts in an authorized bank.

Based on the foregoing, it can be concluded that the preparation of an International Commercial Contract is one of the most complex areas of legal work, including the specifics of drafting and concluding an International Commercial Contract, accounting for the nuances of the legislation of the contract parties' jurisdictions, currency and export control, as well as a number of other nuances.

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References

[1] United Nations Convention on Contracts for the International Sale of Goods. Concluded in Vienna on April 11, 1980.

[2] Sub-clause 1 of Clause 1 of Article 161 of the Civil Code of the Russian Federation.

[3] Federal Law No. 100-FZ dated May 7, 2013, On Amending Subsections 4 and 5 of Section I of Part One and Article 1153 of Part Three of the Civil Code of the Russian Federation.

[4] International Convention on the Harmonized Commodity Description and Coding System. Concluded in Brussels on June 14, 1983.

[5] Clause 1 of Article 1210 of the Civil Code of the Russian Federation. [6] Clause 26 of 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.

[7] Decree of the President of the Russian Federation No. 100 dated March 8, 2022, On the Application of Special Economic Measures in the Sphere of Foreign Economic Activity in Order to Ensure the Security of the Russian Federation.

[8] Article 14.50 of the CAO RF.

[9] Clause 1.1.4.1 of Section 1 of Decree of the President of the Russian Federation No. 1661 dated December 17, 2011, On Approval of the List of Dual-Use Goods and Technologies That Can Be Used in the Creation of Armaments and Military Equipment and in Relation to Which Export Control is Exercised.