Damages under Government Contracts in Russia: Litigation

 

June 15, 2025

BRACE Law Firm ©

 

Any corporate economic activity involves risks. For example, if a party breaches contractual terms, the other party incurs unplanned expenses and financial losses, i.e., damages, which the defaulting party must compensate. For this reason, legal "damages" are among the most common occurrences in law enforcement practice.

The public procurement sector is not purely commercial. Federal Law No. 44-FZ dated April 5, 2013, On the Contract System in the Sphere of Procurement of Goods, Works, and Services for Ensuring State and Municipal Needs (the "Law No. 44-FZ", "44-FZ", or "Contract System") aims to satisfy state needs; the Customer does not pursue profit when entering into a contract. Only the contractor possesses entrepreneurial elements and a focus on profit extraction.

Since 44-FZ incorporates the principle of effective expenditure of budget funds, pricing, counterparty selection, and contract entry and performance follow strictly regulated rules. At first glance, such a system should function without causing damages. However, damages do arise in the procurement sphere because either the Customer or the contractor may suffer financially from a violation of the law or the contract.

Recovering damages under 44-FZ has specific characteristics:

• The Customer may compensate for losses even before entering into a contract at the procurement stage if a bidder (the "Bidder") evades signing the contract;
• The contract system actively uses security measures to protect the Customer. Bidders first provide bid security to participate in the procurement itself and then (usually) provide the Customer with contract performance security. Therefore, the Customer can compensate for damages through such security, although this is not always feasible;
• 44-FZ prohibits compensation for lost profits associated with the unilateral termination of a contract. This is an exception to the general regulatory rule that damages may be recovered in full.

This article examines these aspects of damage compensation within the contract system, their regulatory framework, and the implementation mechanism. It pays particular attention to judicial practice reflecting key trends in commercial dispute resolution.

Concept of Damages and Basic Recovery Rules

Article 15 of the Civil Code of the Russian Federation (the "Civil Code") establishes the general characteristics of damages: a person whose right is violated (the "Creditor") may demand compensation for damages from the violator (the "Debtor").

There are two types of damages:

• Actual Damage:expenses the Creditor has incurred or will have to incur to restore the violated right, as well as the loss of or damage to the Creditor's property;
• Lost Profits:lost income the Creditor would have received if its right had not been violated.

As a general rule, all damages (actual damage and lost profits) must be compensated in full, but the law may limit this right in specific cases (Article 400 of the Civil Code). Such a limitation exists in Law No. 44-FZ: in the event of a unilateral refusal to perform a contract, one may only claim actual damage (this mechanism is detailed below).

Article 393 of the Civil Code sets out the basic principles of damage compensation:

• Compensation should aim to place the Creditor in the position it would have occupied had the breach of right not occurred;
• The court determines the amount of damages considering all circumstances, based on the principles of fairness and proportionality to the violation;
• When calculating damages, prices existing at the place and time the obligation should have been performed (or, if not performed, on the day the claim is filed) apply;
• When recovering lost profits, courts consider the measures the Creditor took to obtain them;
• The amount of damages must be proven with a reasonable degree of certainty. If it is impossible to calculate the exact amount, this is not grounds for dismissing the claim.

The methodological basis for considering disputes includes clarifications in Resolution of the Plenum of the Supreme Court of the Russian Federation No. 7 dated March 24, 2016, On the Application by Courts of Certain Provisions of the Civil Code of the Russian Federation on Liability for Breach of Obligations (the "Plenum No. 7") and Resolution 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 (the "Plenum No. 25").

A very common reason for damage compensation is when a contract is terminated prematurely due to a breach by the Debtor, forcing the Creditor to enter into a new contract at a higher price (a substitute transaction). In this case, the Debtor must compensate (Article 393.1 of the Civil Code):

• The price difference between the terminated contract and the newly concluded contract;
• If a new contract was not concluded, the Creditor may compensate for the difference between the terminated contract and the current market price for comparable goods, works, or services.

The substitute transaction framework is based on the premise that the party responsible for the termination and non-performance of the contract bears the risk of price changes for comparable items. This protective tool has specific features:

• A substitute transaction may consist of several contracts rather than just one. Goods may be not only identical but also equivalents (substitutes), and the new contract may be concluded in a different location;
• A presumption of good faith applies to the Creditor's substitute transaction. However, the Debtor may prove the Creditor acted in bad faith, intentionally inflated the price of the new contract by concluding it on unreasonable terms, or otherwise contributed to the increase in damages;
• Compensation for a substitute transaction does not deprive the Creditor of the right to demand compensation for other damages arising from the breach.

Article 394 of the Civil Code describes the interaction between damages and liquidated damages (penalties). Generally, damages are recoverable to the extent they exceed the penalty—known as an offset penalty. However, the law or contract may establish other combinations:

• Exclusive penalty:only the penalty is recoverable; damages are not compensated;
• Punitive penalty:damages are recovered in full over and above the amount of the penalty;
• Alternative penalty:the Creditor may choose to recover either the penalty or damages.

Judicial recovery of damages is possible upon proving a combination of circumstances:

• Defaulting party's unlawful acts: i.e., a breach of obligation;
• Existence and amount of damages: For instance, the Creditor's costs for restoration materials constitute actual damage, even if the restoration increased the property's value. A decrease in property value is also considered actual damage, even if it manifests in the future; Calculation of lost profits may be approximate and probabilistic, but this is not a reason to deny the claim;
• Causation: The link between the Debtor's breach and the Creditor's damages. Courts consider the ordinary conditions of civil circulation: if a link would arise in ordinary business dealings, it is presumed;
• Fault of the Debtor: The Debtor must prove the absence of its fault, as fault in causing damages is presumed unless proven otherwise.

The absence of any of these conditions will result in the dismissal of the claim.

Damages Related to a Bidder's Evasion of Contract Conclusion

When the winner of an electronic procedure evades signing the contract, the Customer withholds the bid security provided by the Bidder. If this evasion causes the Customer damages exceeding the security amount, the Customer may demand compensation for damages not covered by the security.

The basis for calculating such damages is the substitute transaction—the new contract the Customer had to conclude at a higher price. The amount of damages is the mathematical difference between the price offered by the evading Bidder and the price of the substitute transaction.

When considering such disputes, courts must clarify and consider several circumstances.

First, there must be a direct causation between the contract evasion and the Customer's damages. Such a link is confirmed by a substitute transaction:

• A contract concluded by the Customer within the same procurement with the second-place bidder;
• A contract concluded following a newly conducted repeat procurement. Such procurement must be initiated shortly after the failed one and on similar terms.[1]

Second, the fact of evasion must be established—i.e., a violation of the regulatory deadline for signing the contract. Article 51 of Law No. 44-FZ establishes the procedure for concluding a contract following an electronic procedure.

A contract may be concluded no earlier than 10 days after the procurement result protocol (the supplier determination protocol) is posted in the EIS. No later than 2 business days after this protocol is posted, the Customer prepares and posts a draft contract in the EIS. The winner then has 5 business days to perform one of the following:

• Sign the contract and provide contract performance security (if required);
• Prepare and post a protocol of disagreements on the electronic platform;
• Post a refusal to enter into the contract.

The Customer signs the contract within 2 business days from the date the winner signs it and provides security.

If the Bidder submits a protocol of disagreements, the Customer may accept them and post a new version of the contract. If the protocol is rejected, the Customer re-posts the draft contract along with explanations for the rejection. In this case, the Bidder must sign the contract within 1 business day. The Customer posts the signed contract in the EIS and on the electronic platform within 2 business days of its conclusion.

Thus, the procurement winner must comply with the following regulatory deadlines for signing:

• 5 business days from the date the Customer posts the draft contract;
• 1 business day from the date the Customer posts the draft contract following the consideration of a protocol of disagreements.

If the Bidder fails to sign the contract or provide security within these periods, it is deemed to have evaded conclusion. Even if the winner signs the contract but the Customer does not receive security (or receives it late), this is also considered evasion. The Customer prepares an evasion protocol and posts it in the EIS, which grants the right to conclude the contract with the second-place bidder.

Notably, before 2021, the contract conclusion procedure allowed for a deferral if force majeure circumstances prevented signing. In such cases, the winner had to notify the Customer within 1 day, and the signing could be postponed for up to 30 days. Documentation had to confirm the force majeure; otherwise, the Customer could recover damages.[2] However, in 2021, Articles 54 and 83.2 were removed from Law No. 44-FZ, and the current law lacks such a long deferral option.

Third, the court establishes the fault of the Bidder and its intent to conclude the contract. Evasion may result from deliberate actions (or omissions) or negligence. Negligence occurs when a Bidder fails to take necessary measures to sign the contract or creates conditions making signing impossible. Fault can manifest as intent or negligence.

However, courts interpret the fault factor inconsistently. Withholding the bid security always precedes the recovery of damages. This withholding is an unconditional right of the Customer, exercised regardless of the "evader's" fault. The law does not allow for the return of bid security even if the winner failed to sign the contract through no fault of its own. The act of declaring a bidder to have evaded is also formal and depends on the degree of the bidder's fault.[3]

Consequently, some courts believe that intent is not a mandatory condition for damage compensation upon contract evasion. The fact of evasion and proven damages exceeding the bid security are sufficient. If the Customer concluded a substitute transaction, this alone provides sufficient grounds for recovering damages.[4]

Occasionally, courts apply the approach used by antimonopoly authorities when deciding whether to include an evading bidder in the Registry of Unscrupulous Suppliers (the "RNP"). Paragraph 41 of the Review of Judicial Practice on the Application of Russian Legislation on the Contract System in the Sphere of Procurement of Goods, Works, and Services for Ensuring State and Municipal Needs, approved by the Presidium of the Supreme Court of the Russian Federation on June 28, 2017 (the "Review of June 28, 2017"), establishes that if a bidder did not intend to evade and took measures to sign, its behavior is deemed in good faith, and it shall not be included in the RNP. Thus, the FAS avoids a formalistic approach and evaluates the person's intent to enter into contractual relations.

Fourth, the court considers the decision of the antimonopoly authority regarding the Bidder's inclusion in the RNP.

By regulation, a Customer must notify the antimonopoly authority of contract evasion. This is a formal action: the Customer is not required to investigate the reasons for evasion or evaluate the Bidder's behavior; notification must occur regardless. The FAS then reviews the situation and decides whether to include the "evader" in the RNP. Consequently, by the time a damage claim is filed, an FAS decision usually exists, and courts are forced to consider the authority's findings. However, these decisions are not binding on commercial courts, as administrative practice cannot dictate rulings in economic disputes. The fact that a bidder was not included in the RNP does not deprive the Customer of the right to withhold bid security and does not warrant its return. Courts note that the law does not link the fate of the bid security to the bidder's presence in the RNP. A similar approach applies to damages.[5]

Thus, inclusion in the RNP and the right to claim damages are different types of liability. Inclusion in the RNP is a public law sanction, while recovery of damages is a compensatory measure aimed at making the Customer whole. Therefore, if the antimonopoly authority "pardons" a bidder, it does not mean the commercial court will automatically follow suit and deny a damage claim.

The situation results in a conflict: bid security is withheld from an evader in any case based on a formal principle. However, the FAS applies administrative sanctions based on an individualized approach. When an arbitration dispute over damages arises, the court must choose between the formal and individual approaches.

Currently, an individualized approach prevails in commercial court practice regarding damage recovery.

For example, a court rejected a claim to recover damages from a bidder who provided contract security in an improper form: the text of the bank guarantee did not meet the documentation requirements. The Customer refused the contract due to improper security. The Bidder promptly sent an explanatory letter requesting the cancellation of the evasion protocol and filed a claim with the bank to replace the guarantee. The bank corrected the guarantee, and the Bidder notified the Customer, attaching the new guarantee. However, the Customer treated this as evasion, issued a protocol, and subsequently re-posted a similar procurement, resulting in a contract at a higher price. The court found that the Bidder took steps to fix the bank's error, so its behavior was in good faith. The court also considered the FAS decision not to include the bidder in the RNP.[6]

In another case, a bidder provided cash contract security in an insufficient amount. The Customer declared evasion, but the Bidder transferred the missing amount the next day. The FAS decided not to include the bidder in the RNP. The court noted that after the evasion protocol was posted, the Bidder immediately contacted the Customer and conducted an internal audit. The audit and negotiations revealed the underpayment was accidental and unintentional. The court also considered that the bidder already had the goods in stock to perform the contract. This confirmed the winner's genuine intent. Consequently, the Customer's damage claim was dismissed.[7]

If courts find no objective or valid reasons for the failure to sign, and the bidder fails to prove it took corrective measures, damages will be recovered. For instance, in one precedent, the winner failed to conclude the contract or provide security on time. The court established that the bidder had a real opportunity to sign and post the draft contract and security but failed to do so. The court viewed these actions as aimed at evading the contract.[8]

Despite the need to identify the bidder's true intentions and consider its good faith, some precedents still apply a formal approach. The basis for such a ruling is the mere fact that the winner failed to sign the contract within the regulatory period. Under this approach, damages may be recovered even if the antimonopoly authority decided not to include the violator in the RNP. The FAS position on the lawfulness of bidder behavior does not always align with the position of judicial instances in commercial disputes involving financial claims.

A vivid example is Case No. A43-37141/2023, considered by the Arbitration Court of the Volga-Vyatka District. The auction winner, upon receiving the draft contract, identified a technical error in one of its appendices and sent the Customer a protocol of disagreements. The bidder is granted this right under Article 51(3)(2) of Law No. 44-FZ. The Customer did not sign the protocol and re-sent the contract without corrections. Consequently, the bidder did not sign within the deadline, and the Customer entered into a contract with the second-place bidder at a higher price. An evasion protocol was issued, and information was sent to the FAS for inclusion in the RNP. However, after an audit, the FAS did not include the bidder in the RNP. The Customer sued for damages. The first and appellate courts dismissed the claim, finding the bidder had no intent to evade and that the delay was caused by the need to correct the Customer's error. The courts applied the antimonopoly methodology and cited paragraph 41 of the Review of June 28, 2017, which justifies such delays. The court found no signs of bad faith, guilt, or unlawfulness.

However, the cassation instance disagreed. Evaluating the procurement circumstances, the district court applied a formal approach: the Customer rightfully rejected the protocols of disagreements and provided written explanations. The auction winner failed to sign within the legal deadline, which constitutes evasion. Even the FAS decision not to include the bidder in the RNP did not convince the cassation court. Ultimately, damages were recovered from the "evader" in the amount of the difference between its bid price and the price of the contract concluded with the second-place bidder. [9]

Damage Compensation via Contract Security

When a Customer incurs damages, it may compensate for them using the contract performance security provided by the contractor. The contract system allows two methods of security: cash deposits and the issuance of a bank (independent) guarantee.

However, several circumstances limit the possibility of using security for damage compensation.

The first obstacle is that security is not required for all contracts. By law, it is mandatory only for tenders and auctions. For RFQs and most single-source contracts, security may be waived. Additionally, Customers may choose not to require security for contracts with treasury support. Security requirements also do not apply if:

• The counterparty is a state-funded institution (kazennoye uchrezhdeniye);
• The procurement subject is a loan;
• The Customer is a unitary enterprise and the contract subject is the issuance of an independent guarantee.

When procurement is limited to small business entities, bidders have a special option to waive security by providing documentary proof of their good faith.

Thus, security is not present in all contracts, meaning it does not guarantee the Customer 100% protection against financial losses.

The second obstacle: if the Customer incurs damages, the contract has been breached or improperly performed. In this case, the Customer must first demand that the contractor return any unearned advance payment. The Customer must also recover penalties (fines and late fees). If the contractor does not pay these voluntarily, the Customer withholds them from the security. The law does not explicitly set the priority for such withholdings, but it follows the logic of the parties' interaction: the contractor is obligated to return unearned advances, while the Customer is obligated to claim penalties. Only after these primary settlements are resolved may the Customer proceed to calculate and recover damages. One must also consider that security is limited to a fixed amount, which is often insufficient to cover penalties, advance returns, and damages.

The third obstacle: the deadlines for using the security are not infinite. If security is provided in cash, the Customer must generally return it within 30 days of contract performance (or 15 days for small business procurements). A contract may specify a shorter period. In the event of early termination, the law does not set a return deadline, so parties must agree on one or apply the contract's term, starting from the termination date.

As for bank guarantees, they also have a limited term: the guarantee must be valid for at least one month beyond the contractor's primary obligation deadline.

Often, Customers claim substitute transaction costs as damages. Such a transaction may occur after some time due to procurement timelines. In this situation, by the time the Customer has confirmed damages, cash security may have been returned and the bank guarantee may have expired.

The fourth obstacle: if security is in the form of a bank guarantee, the right to recover damages must be explicitly stated in the text. The law does not have an exhaustive list of claims a Customer can make under a security guarantee. The standard form for an independent guarantee essentially leaves this list open with the phrase "the guarantee ensures the principal's performance of its obligations under the contract concluded with the beneficiary, including without limitation the principal's obligations to pay penalties (fines, late fees)."[10]

A stable practice has formed: if a Customer wants to use a bank guarantee for damage compensation, this condition must be clearly reflected in the guarantee's text. The Customer sets bank guarantee requirements in the procurement documentation. These requirements list the types of monetary claims the Customer can satisfy using the security, including the right to recover damages. If the Customer required this and a bidder provided a guarantee omitting this wording, the Customer has grounds to reject the security for non-compliance. Such a bidder is deemed to have evaded the contract.[11] Antimonopoly authorities unequivocally take the Customer's side here. By participating in a procurement, a bidder impliedly agrees to all documentation terms. Accordingly, it bears all risks if the security does not meet the requirements.[12]

Furthermore, if the Customer requires the ability to compensate for damages via security, the bidder must use the exact wording provided by the Customer, not just mention the term "damages." Several precedents exist where a Customer required compensation for damages caused by "non-performance or improper performance" of the contract. The bidder provided a guarantee covering damages only "in connection with contract termination." The Customer rejected the guarantee, and the FAS upheld this. The rejected guarantee limited the Customer's rights by restricting damage recovery solely to termination scenarios.[13]

• In summary, to use contract security to withhold damages, several conditions must simultaneously be met:
• The contract must actually have security;
• The contractor must have satisfied other monetary claims (voluntarily or via security): advances returned, penalties paid;
• The security amount must be sufficient to cover the damages or a portion thereof;
• The security must be available at the time damages are claimed (cash not yet returned, bank guarantee not expired);
• The bank guarantee's wording must leave no doubt about the Customer's right to compensate for damages using the security.

Specifics of Damage Recovery upon Unilateral Contract Termination

The contract system imposes a significant restriction on damage recovery: if a contract is terminated due to a party's unilateral refusal, the other party may only demand compensation for actual damage incurred. Such damage must result from the circumstances that provided the grounds for the unilateral refusal.[14]

Thus, if a party declares a refusal that causes the counterparty damages, the counterparty cannot recover lost profits.

Parties have repeatedly challenged this rule in court, arguing it violates the Constitution of the Russian Federation (the "Constitution").

For example, in 2024, the Constitutional Court of the Russian Federation considered a complaint regarding a conflict between this 44-FZ rule and the settlement procedure for bank guarantee payments.[15] The complaint arose from a dispute involving a guarantor bank. A contractor breached the deadlines and volume of services. Consequently, the Customer unilaterally refused the contract and demanded payment from the bank under the security guarantee. The bank paid the Customer and subsequently claimed the funds from the contractor under Article 375.1 of the Civil Code. However, the contractor argued the Customer's demand was groundless and that the contractor suffered damages by having to reimburse the bank.

The appeal argued that Article 95(23) of Law No. 44-FZ creates uncertainty regarding the bank guarantee payment amount upon contract termination. According to the petitioner, this rule prevents it from recovering damages from the Customer in the amount of the difference between the bank guarantee payment (which the Customer allegedly received groundlessly) and the Customer's actual claims against the contractor. The Constitutional Court rejected the complaint, clarifying that the rule does not prevent compensation for harm not directly related to the contract refusal. Specifically, the law does not prohibit a principal (i.e., the supplier or contractor) from compensating for damages under a bank guarantee pursuant to Article 375.1 of the Civil Code.

The prohibition on recovering lost profits upon unilateral contract termination has also been repeatedly challenged and reviewed for constitutionality.[16] The Constitutional Court upheld the rule, explaining that the prohibition aims at the effective use of budget funds and ensuring fair competition in state procurement. Per Article 400(1) of the Civil Code, the law may limit full damage compensation in certain cases. Since a supplier enters into a contract based on the principle of freedom of contract, this limitation does not violate its constitutional rights. The Customer's right to unilateral refusal due to lack of funding (without a breach by the contractor) and its exemption from lost profit liability do not mean the law allows the Customer to abuse its rights.[17] Therefore, the parties' property interests and constitutional rights are not violated.

When considering disputes over damages related to contract refusal, courts consider the following:

• A proven causation between the termination and the incurred expenses is necessary. Courts primarily identify the reasons and circumstances of the refusal (e.g., whether it was caused by the counterparty's breaches);
• The unlawfulness and fault of the party that refused the contract must be established;
• The plaintiff must prove the existence, amount, and nature of the damages (i.e., what caused the expenses and how they relate to the terminated contract). The plaintiff must prove that the defendant's actions caused the harm. If contract termination was not the sole cause of the damages, the court will dismiss the claim even if the expenses are documented.[18] An example is a precedent where a contractor claimed employee hiring and salary expenses as damages. The court viewed these as ordinary business expenses of the contractor, which are not compensable damages.[19]

Suppliers and contractors often submit calculations of lost estimated profit after a Customer's unilateral refusal. Courts unequivocally reject such claims. The estimated value of non-delivered goods or works (services) that the contractor did not perform and the Customer did not officially accept are qualified as lost profits. Consequently, such estimated profit is not compensable.[20]

A different approach applies to expenses related to contract performance preparation. It is common for a supplier to purchase goods or a contractor to buy materials and equipment before the contract is terminated. If these preparatory measures caused financial expenses, courts generally view them as actual damage (even if no goods, works, or services were actually accepted).

For example, under a construction contract, the contractor was responsible for site security. The Customer performed its obligations improperly. During the contract, a forced suspension of work occurred, followed by claims; the contractor had to pay for security throughout the suspension period until termination. The court recovered damages for site security from the Customer.[21]

When a plaintiff's expenses involve property acquisition, the court evaluates whether the contractor could have used it in other business activities or if it was uniquely for the terminated contract. One case involved a repair contract where the contractor claimed the cost of materials and storage as damages. The contractor explained the materials could not be used elsewhere or sold at cost. They remained in a warehouse until the trial concluded. The court granted the damage claim.[22]

If a contractor did not actually start work, the court may deny damages altogether. In some cases, courts look at the volume performed and the existence of an acceptance certificate to qualify lost profits. In one precedent, the court justified its denial by stating that the contractor did not perform the contract, so no damages existed in any form. Since work was not performed, there were no material or labor costs. The court explained that payment for work not performed cannot be considered lost profits. The claimed amount would have been received only if the results were delivered to the Customer.[23] This interpretation is an exception, as it merges lost profits with unjust enrichment: if the contractor had performed and the Customer refused the contract or results, the contractor would have a right to sue for unjust enrichment rather than lost profits.

Bank guarantee fees are unanimously recognized as actual damage if a Customer unilaterally terminates a contract for reasons unrelated to the supplier's breaches.[24] The assumption is that the supplier would have recouped the guarantee costs via contract payment. However, if the Customer's fault results in premature termination, the supplier incurs direct damages and may recover them.

Expenses for an expert examination that a party had to order to confirm contract breaches (usually quality disputes) are also recognized as actual damage. If the examination recorded a breach and lead to termination, the party may demand reimbursement.[25]

Fees paid to an electronic platform operator for procurement participation are a specific type of expense. Courts view these as entrepreneurial risks, so they are not considered damages and are not compensable upon termination.[26]

Lost income is not considered damages in "on-demand" contracts where the volume is not pre-determined and the Customer has the right not to order the full contract amount. A court rejected a contractor's claim where work was performed based on specific Customer assignments. The parties interacted through gradual selection within a maximum contract price. The Customer was not obligated to order the full volume. The Customer did not select 100%, and the contractor viewed this as lost profit. Furthermore, the Customer purchased similar works from other contractors during the contract term. The court denied the lost profit claim.[27]

A classic example of a court decision on damages under Article 95(23) of Law No. 44-FZ is as follows: A Customer groundlessly refused a contract. The supplier demanded damages: costs for goods purchased for the contract, bank guarantee fees, and lost profits (the difference between the purchase cost and the contract price). The court granted the claim for actual goods and guarantee costs but denied the lost profits.[28]

Contractors sometimes argue they already paid penalties (fines or late fees) for the breach. However, damages and penalties are different legal concepts; paying a penalty does not prevent a claim for damages.[29]

Finally, the prohibition on lost profits applies only to unilateral termination. Therefore, it is recommended not to limit bank guarantees to exclude lost profits in advance. FAS practice exists on this: a Customer required the ability to recover damages in a guarantee. A bidder provided a guarantee with the phrase "damage compensation (if any) (excluding lost profits)." The Customer rejected this, and the FAS agreed, citing Article 15(2) of the Civil Code, which includes lost profits within the definition of damages.[30] This is because damages can arise not just from unilateral refusal but from other cases, such as partial performance. Thus, security guarantees should provide broader recovery options than Article 95(23) of Law No. 44-FZ.

Final Conclusions

In conclusion, damage recovery under Law No. 44-FZ is governed by general civil law but possesses specific characteristics.

The Law No. 44-FZ system of security measures protects the Customer's property interests and compensates for losses. This system is "one-sided": the Customer provides no security to bidders or contractors. There are two types: bid security (provided by all bidders) and contract performance security (provided by the winner). Their mechanisms for damage recovery differ:

• Bid security is inherently compensatory and includes potential Customer damages. Therefore, if a bidder evades the contract, additional damages are compensated only if they exceed the security amount;
• Contract performance security has a broader scope: it covers various financial risks, including advance returns and penalties. Usually, the Customer satisfies these claims first, leaving damages outside the security's protection to be recovered in court.

Furthermore, bank guarantees have very limited terms and must explicitly mention the right to recover damages. Cash security must also be returned after contract termination.

Thus, while bid security is a universal tool for Customer damage compensation, contract performance security is more of a facultative tool, as Customers often lack the practical ability to use it for damages upon breach.

Commercial courts consider damage disputes under general procedural rules and Plenums No. 7 and No. 25. The court identifies the breach, confirms the causation, and establishes the violator's intent and degree of fault. If damages are sought from a bidder or contractor, the court considers the antimonopoly authority's RNP decision. However, this decision is not binding on the court, and the FAS's view on good faith may differ from the court's view on damage liability.

If damages arise from a unilateral contract refusal, the Creditor may only compensate for actual damage; lost profits are not recoverable. This limitation applies to both the Customer and the contractor.

______________________________

References

[1] Determination of the Supreme Court of the Russian Federation No. 305-ES24-1925 dated March 27, 2024, in Case No. A41-95108/2022; Resolution of the Arbitration Court of the Moscow District No. F05-31485/2023 dated December 26, 2023, in Case No. A41-95108/2022.

[2] Determination of the Supreme Court of the Russian Federation No. 305-ES23-23540 dated January 24, 2024, in Case No. A40-269131/2022.

[3] Resolution of the Arbitration Court of the Volga District No. F06-2851/2024 dated April 22, 2024, in Case No. A65-15704/2023.

[4] Resolution of the Arbitration Court of the Moscow District No. F05-20006/2023 dated September 19, 2023, in Case No. A40-269131/2022.

[5] Resolution of the Eleventh Arbitration Appellate Court No. 11AP-19474/2023 dated January 19, 2024, in Case No. A65-15704/2023.

[6] Resolution of the Arbitration Court of the Ural District No. F09-4443/23 dated August 9, 2023, in Case No. A60-67674/2022.

[7] Resolution of the Eleventh Arbitration Appellate Court No. 11AP-17355/2024 dated December 24, 2024, in Case No. A72-8613/2024.

[8] Resolution of the Arbitration Court of the Moscow District No. F05-2354/2024 dated April 26, 2024, in Case No. A40-96066/2023.

[9] Resolution of the Arbitration Court of the Volga-Vyatka District No. F01-6133/2024 dated February 21, 2025, in Case No. A43-37141/2023; Resolution of the First Arbitration Appellate Court No. 01AP-5578/2024 dated August 29, 2024, in Case No. A43-37141/2023 (vacated by the higher instance).

[10] Decree of the Government of the Russian Federation No. 1005 dated November 8, 2013, On Independent Guarantees Used for the Purposes of the Federal Law On the Contract System in the Sphere of Procurement of Goods, Works, and Services for Ensuring State and Municipal Needs.

[11] Decision of the Moscow OFAS Russia dated November 24, 2022, in Case No. 077/07/00-17299/2022; Decision of the Moscow OFAS Russia dated December 26, 2023, in Case No. 077/10/104-18218/2023.

[12] Decision of the Moscow OFAS Russia dated May 11, 2022, in Case No. 077/06/106-6892/2022; Decision of the Murmansk OFAS Russia dated October 4, 2021, in Case No. 051/06/106-693/2021; Decision of the Leningrad OFAS Russia dated October 1, 2021, in Case No. 047/06/83.2-2150/2021.

[13] Decision of the Moscow OFAS Russia dated June 14, 2022, in Case No. 077/06/106-8889/2022; Decision of the Moscow OFAS Russia dated March 14, 2022, in Case No. 077/06/106-3845/2022.

[14] Letters of the Ministry of Economic Development of Russia No. D28i-109 dated January 22, 2015, No. D28i-2492 dated August 18, 2015, No. D28i-3382 dated November 16, 2015, No. OG-D28-6771 dated May 30, 2016.

[15] Determination of the Constitutional Court of the Russian Federation No. 3216-O dated November 29, 2024, On the Refusal to Accept for Consideration the Complaint of MontazhSpetsStroy LLC regarding the Violation of its Constitutional Rights by Articles 15 and 375.1 of the Civil Code of the Russian Federation, Article 95(23) of the Federal Law On the Contract System in the Sphere of Procurement of Goods, Works, and Services for Ensuring State and Municipal Needs, and Clause 11 of the Rules for Determining the Amount of Fine Charged in the Event of Improper Performance by the Customer, Non-Performance or Improper Performance by the Supplier (Contractor, Performer) of Obligations Provided for by the Contract (Except for Delay in the Performance of Obligations by the Customer, Supplier (Contractor, Performer)).

[16] Determination of the Constitutional Court of the Russian Federation No. 114-O dated January 30, 2024, On the Refusal to Accept for Consideration the Complaint of RBV Medical Group LLC regarding the Violation of its Constitutional Rights by Article 95(23) of the Federal Law On the Contract System in the Sphere of Procurement of Goods, Works, and Services for Ensuring State and Municipal Needs.

[17] Determination of the Constitutional Court of the Russian Federation No. 2990-O dated December 24, 2020, On the Refusal to Accept for Consideration the Complaint of GlavInvestStroy LLC regarding the Violation of its Constitutional Rights by Article 95(23) of the Federal Law On the Contract System in the Sphere of Procurement of Goods, Works, and Services for Ensuring State and Municipal Needs.

[18] Determination of the Supreme Court of the Russian Federation No. 301-ES19-13536 dated March 16, 2020, in Case No. A11-16565/2018.

[19] Determination of the Supreme Court of the Russian Federation No. 301-ES20-11743 dated September 3, 2020, in Case No. A11-16564/2018.

[20] Determination of the Supreme Court of the Russian Federation No. 307-ES21-7771 dated June 15, 2021, in Case No. A56-16579/2020; Determination of the Supreme Court of the Russian Federation No. 303-ES21-7488 dated May 26, 2021, in Case No. A51-25575/2019.

[21] Determination of the Supreme Court of the Russian Federation No. 303-ES21-12430 dated August 9, 2021, in Case No. A59-6026/2016.

[22] Determination of the Supreme Court of the Russian Federation No. 303-ES21-14182 dated July 21, 2021, in Case No. A80-321/2019.

[23] Determination of the Supreme Court of the Russian Federation No. 306-ES19-26640 dated January 23, 2020, in Case No. A06-848/2019.

[24] Clause 13 of the Review of Judicial Practice on the Resolution of Disputes Related to the Application of Legislation on Independent Guarantees, dated June 5, 2019, approved by the Presidium of the Supreme Court of the Russian Federation.

[25] Letter of the Ministry of Economic Development of Russia No. D28i-3866 dated December 31, 2015.

[26] Determination of the Supreme Court of the Russian Federation No. 304-ES21-12257 dated August 3, 2021, in Case No. A46-972/2020.

[27] Determination of the Supreme Court of the Russian Federation No. 304-ES21-27812 dated March 25, 2022, in Case No. A27-27097/2020.

[28] Determination of the Supreme Court of the Russian Federation No. 307-ES24-4507 dated June 13, 2024, in Case No. A56-131750/2022.

[29] Letter of the Ministry of Economic Development of Russia No. OG-D28-10952 dated September 7, 2016.

[30] Decision of the Moscow OFAS Russia dated September 16, 2021, in Case No. 077/06/106-16476/2021; Decision of the Moscow OFAS Russia dated September 6, 2021, in Case No. 077/06/106-15667/2021.