Legal implications of Russia imposing retaliatory sanctions

Pepeliaev Group advises that Russia's imposing retaliatory sanctions may be treated as a force-majeure event. Currency risks are possible.

Russian President's Executive Order No. 560 "On Special Economic Measures to Protect the Russian Federation's Security" dated 6 August 2014 (the "Order") and the Russian Government's Resolution No. 778 dated 7 August 2014 "On measures to implement Presidential Executive Order No. 560 'On Adopting Special Economic Measures to Provide for Security of the Russian Federation' dated 6 August 2014" (the "Government's Resolution", or the "Resolution") have banned the import into the Russian Federation of some foods produced in the USA, the EUand in Canada, Australia and Norway.

The ban applies to the following goods and groups of goods set out in a list appended to the Government's Resolution: meat, meat products, poultry, seafood, dairy products, fruit, vegetables, and nuts. The Resolution stipulates that, for the purposes of it being applied, the codes from the Commodity Classification for Foreign Trade of the Customs Union should be used referring to the relevant goods; the names of the goods are given for the users' convenience. However, there is one exception: for the group of goods 'Salted meat, meat in brine, dried or smoked meat' (from code 0210), both the Commodity Classification code and the name of the goods should be used.

The restrictions do not apply to baby food. The restrictions do not apply to pet food either, except for peas for animal nutrition (code 0713 10 900 1) and field beans (code 0713 50 000 0).

Pepeliaev Group's comments: According to most force-majeure clauses, the ban on the export or import of goods into/from the country of one of the counterparties, which makes it impossible to perform the contractual obligations, is treated as a ground for a party to be exempted from its liability for not performing its contractual obligations. The Russian Chamber of Commerce and Industry (the "RCCI", or the "CCI") is of the same opinion. Thus, Russia introducing retaliatory

Liability for third parties failing to perform obligations, as per the Russian Civil Code

Although the failure of the Supplier (e.g. a foreign company) to meet its contractual obligations to the Dealer (e.g. a Russian company) or the failure of the Dealer to meet its obligations to the Supplier caused by force-majeure events, may not serve as a ground for liability to be imposed under the contract, it is a different issue when the Dealer fails to meet its obligations to the Buyers.

According to article 401 of the Russian Civil Code (the "Civil Code"), if the debtor's counterparty fails to meet its obligations, this is not a circumstance which releases the debtor from its liability.

The actual aim of this legislative provision is to prevent the Dealer's risks being shifted to the Buyers.

Thus, in accordance with the provisions of the Civil Code, the Dealer is liable to the Buyer when the former does not meet its obligations to supply the goods, even in a situation where the goods cannot be received from the Supplier.

Taking into account the above, drafting a legal position as to whether there are any grounds for the Dealer to be freed from its liability (or holding the Dealer liable for not meeting its contractual obligations) would require a detailed analysis of the specific circumstances (whether it was possible to replace the goods in good time, whether the Buyer was ready to accept such replacement, etc.).

Liability for third parties not meeting their obligations, as set out in the UN Convention for the International Sale of Goods

Unlike the Civil Code, the UN Convention for the International Sale of Goods signed in Vienna on 11 April 1980 (the "Convention", or the "Vienna Convention") stipulates that if the Dealer is in breach of the contract it may be freed from its liability provided that the Supplier was at fault for such breach and that such breach was caused by force majeure events (article 79 of the Convention).

In other words, if the applicable piece of legislation is the Vienna Convention, the Dealer is not liable to the Buyers if it fails to meet its obligations to supply the goods in a situation where the goods cannot be received from the Supplier owing to force majeure events.

Currency risks

Pursuant to article 19 of Federal Law "On currency regulation and currency control", a resident under Russian currency legislation (a Russian counterparty) must ensure that it receives to its currency account with an authorised bank foreign currency earnings from a non-resident which is a foreign counterparty. This must happen within the period set by the relevant foreign trade contract, or that the advance payment is refunded if the foreign counterparty did not supply the goods within the period set by the relevant foreign trade contract. If the above obligations are not met or are met improperly, administrative liability will be imposed pursuant to article 15.25(5)(4) of the Russian Code of Administrative Offences. This takes the form of an administrative fine of up to the whole amount (100%) of the funds not credited to the accounts with the authorised bank.

Conclusions and recommendations

We recommend that companies which are unable to meet their obligations to counterparties as a result of Russia imposing retaliatory sanctions, should analyse their contracts to identify the above risks and devise an action plan to manage such risks.

Help from your adviser

Pepeliaev Group's lawyers possess extensive experience of representing clients and defending them in court, including in courts of the state commercial courts system, as well as before arbitral tribunals (which exist as independent institutions or are formed to consider a specific case), managing currency risks and handling cases concerning administrative offences of currency legislation. Our lawyers are ready to provide professional assistance and support, for instance, when rights and interests are defended in arbitration tribunals (including situations where an ad hoc tribunal is formed), when supplemental agreements are drafted to avoid any currency risks, and in the context of proceedings regarding administrative offences of currency legislation.

For more information please feel free to contact:

in Moscow: Yuri Vorobyev, Partner, Head of the Dispute Resolution and Mediation Practice

Pepeliaev Group, tel.: (495) 967-00-07 or at: y.vorobyev@pgplaw.ru;

Elena Ovcharova, Head of the Administrative Law Defence of Business Group, tel.: (495) 967-00-07 or at: e.ovcharova@pgplaw.ru

 in St. Petersburg: Sergey Spasennov, Partner, Head of St. Petersburg office of Pepeliaev Group 

Tel.: +7 (812) 640-60-10 or at: s.spasennov@pgplaw.ru

 in Krasnoyarsk: Egor Lysenko, Head of Krasnoyarsk office of Pepeliaev Group (Siberia), tel.: +7 (391) 277-73-00 or at: e.lysenko@pgplaw.ru