Supply contracts with foreign entities

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Ivan Katyshev
Head of Legal Services at Intercomp

How we correct mistakes before contract signing

Today, not only international companies but also other market players enter into cross-border contracts. International cooperation becomes necessary when products, which cannot be purchased in Russia, are required for participation in public procurement or for daily operations. As the number of cross-border transactions increases, the number of court disputes also increases.

To avoid being among those who need to defend their position in court, it is vital to negotiate and agree upon all important contract terms and conditions.

In the table below, you will find outlined frequently disputed issues together with the main mistakes found in cross-border supply contracts, possible risks, as well as recommendations and proper wording that can be used to correct these mistakes.

 
 Mistake/Inaccuracy

 Risk  Correction method  Correct wording
The parties have provided for no particular applicable law or little-known applicable law. If a Russian buyer signs a contract with a foreign seller without providing for a particular applicable law, their relationship will, by default, be governed by the laws of the seller’s country of registration (Article 1211(2) Russian Civil Code). When a cross-border supply contract provides for a certain applicable law, the law provided for in the contract applies and governs the relationship arisen between the parties under that contract (Article 1210 Russian Civil Code). Providing in the contract for Russian law as applicable law. The parties may choose the applicable law by which they wish their relationship to be governed (Article 1210 Russian Civil Code). The applicable law chosen by the parties must be expressly specified in the contract or inferred from the contract terms and conditions (Article 1210(2) Russian Civil Code). The law provides for no specific requirements for the terminology that should be used in the choice of law clause (Item 14(8) Letter of Russian Supreme Commercial Court Presidium No. 158 dated July 09, 2013 Practice review <…>, Russian Supreme Commercial Court Ruling No. 6417/11 Case No. А40-26764/10-101- 99B, А40-27719/10-101-106B dated October 04, 2011) The parties agree that the rights and obligations under this contract shall be governed by Russian law
The contract provides for the jurisdiction of a foreign court
  1. The Russian party could bear travel expenses and costs of litigation in a foreign jurisdiction
  2. The Russian party will need to contend with the lack of knowledge of how cases are handled in a foreign jurisdiction
  3. The Russian party will have to challenge the decision rendered by a foreign court during the decision enforcement proceedings (Article 244 Russian Commercial Procedure Code)

Agreeing upon the jurisdiction of a Russian state commercial court. The parties are entitled to specify in the contract the jurisdiction of their choice (Articles 249, 252 Russian Commercial Procedure Code)
Another option would be to provide for a tribunal that would be suitable for both parties (taking into account the judge expertise, procedural rules and the parties’ knowledge of law)
All disputes arising from this contract shall be referred to Moscow State Commercial Court
The parties have not correctly worded the jurisdiction clause If the parties have not clearly worded the jurisdiction clause (for example, the intended tribunal is not designated by its proper name), the party that initiates proceedings will need to prove the competence of the chosen court (Supreme Commercial Court Ruling No. 1787/11 Case А40-4113/2010 dated June 14, 2011, Decision of the International Commercial Arbitration Court at the Russian Chamber of Commerce and Industry Case No. 217/2001 dated September 06, 2002) Providing for a specific permanent court

In the absence or incompleteness of arbitration clause, entering into a separate arbitration agreement. Standard texts should be used for such clause. They can be found in tribunal regulations
All disputes arising from or in connection with this contract, including its performance, shall be settled by the International Commercial Arbitration Court at the Russian Chamber of Commerce and Industry in accordance with its rules
A supply contract with a related foreign company provides for the payment of a license fee in the form of a percentage of the revenues derived by the Russian company. Companies are deemed related if one company owns more than 25% of the other company’s shares (Article 105.1(2) Russian Tax Code)
  1. If the Russian company records losses (or shows signs of low profitability), it will have to transfer a percentage of non-existent revenues. There is a risk that the Russian company could be recognized as an actual representative office of the foreign company. This will be so if a court considers that the loss-making company operates for the benefit of the foreign company, and the loss-making company’s position will need to be defended in court (Supreme Commercial Court Ruling No. 16404/11 dated April 24, 2012)
  2. The Federal Tax Service will impose additional taxes on unreasonable payments (Supreme Commercial Court Ruling dated January 14, 2016 Case No. А40-138879/14)
Specifying and justifying license payments (in particular, upon import of parent company’s goods) in an amount in line with market level.
Solutions:
1) Not charging license fees;
2) Setting license fees as a fixed amount (the Russian company should not record any losses or low profitability);
3) Decreasing license fees down to a level that can be justified as market level.
In addition to the cost of products, the buyer shall also pay to the supplier a license fee for use of trademark in the amount of RUB____ for each product item
The Russian version of a bilingual contract has been translated inaccurately, and the terminology is used incorrectly Difficulties in interpreting the contract correctly. For example, the parties have not worded the jurisdiction clause accurately to provide for referral of disputes to the ICAC. The Russian version provides for cases to be examined by the tribunal at the Russian Chamber of Commerce and Industry, while the English version provides for the Arbitration Court of Russia. The translation into English does not reflect that disputes should be referred to the ICAC so it will be necessary to go to court to get this clause interpreted according to UNIDROIT principles, unofficial codification of international trade rules (Decision of the International Commercial Arbitration Court at the Russian Chamber of Commerce and Industry dated September 06, 2002 Case No. 217/01).
Another example, in the Russian version of a contract, the parties to the contract have provided that disputes or disagreements should be examined by a commercial court in the seller’s country, and in the German version of this contract, the parties have specified “Schiedsgericht”, which in Russian is an arbitration court. The court declared the clause of the Russian version valid as the parties failed to provide for any language prevalence (Supreme Commercial Court Ruling dated June 14, 2011 Case No. А40-4113/10)
Specifying that in case of disputes, one version of the text of the contract will have prevalence over the other This contract is made in two original bilingual copies (Russian-English), one copy for each of the parties. In case of inconsistencies between the Russian and the English text, the Russian version shall prevail