Choosing foreign law to govern contracts in Russia

Russian contract law being pushed out of the real economy and contracts being entered into under foreign law were the themes of a round table held at Lomonosov MSU at the end of September.

The round table “Contracts under Foreign Law: Reasons, Solutions, Results” was organised by the Contract Law Centre of the Faculty of Law at Lomonosov Moscow State University (“MSU”) aided by a grant fr om the US Russia Foundation for Economic Advancement and the Rule of Law and with the organisational and expert support of law firm Pepeliaev Group and the Moscow Office of the American Bar Association.

The Head of the Lomonosov MSU Contract Law Centre Prof. B.I. Puginsky, S.J.D., and Sergey Pepeliaev, PhD in Law, Managing Partner of Pepeliaev Group, noted that, to improve the Russian Civil Code, it was necessary to determine the actual state of Russian contract law’s ability to compete. “We need to redouble our efforts to make Russian contract law more competitive,” asserts Sergey Pepeliaev, “and that means drafting in practicing lawyers on short-term contracts to work on improving the civil law.”

I. Bolotnov, the Head of Pepeliaev Group’s Commercial Practice, offered a detailed analysis of the reasons for the choice of foreign law. He took the view that the main problem lies in the shortcomings of Russian law and the fact that the Russian Civil Code is out of step with today’s realities.

The participants in the round table pinpointed the main reasons for Russian contract law’s lack of competitiveness as:

• A lack of protection against contracts being broken by either being deemed non-concluded or being invalidated;
• The fact that many provisions of the Russian Civil Code do not take account of modern economic realities (for example, the prohibition on gift agreements between commercial organisations; the lack of contemporary models for commercial agreements; and the lack of constructs necessary for stable legal relationships, such as the institution of representations and warranties);
• Russian law’s excessive lack of flexibility in relation to contracts, which prevents contracts being framed in the best way to conform to specific economic realities;
• Russian law’s failure to recognise fundamental basics of contract law: good faith, cooperation, reasonableness and practicability;
• The imperfection of Russian judicial practice, which has a tendency to fail to respect the principle of “pacta sunt servanda”, i.e. that agreements should be adhered to;
• The lack of clarity of Russian judicial precedents concerning contract law issues and the unpredictability of court decisions.

Taking part in the round table were partners and practicing lawyers from leading Russian and foreign law firms, including: Pepeliaev Group (Russia), Denton Wilde Sapte (UK), VMWTaxand (Netherlands), Debevoise and Plimpton (USA), Salans (France) and Yoram Cohen and Partners (Israel). Among the leading law schools represented at the event were Lomonosov MSU, the Moscow State Institute of International Relations (or MGIMO), the Russian Government’s Russian School of Private Law and the Russian Legal Academy. Also in attendance were practicing lawyers from Russian and foreign companies such as OAO Gazprom, ZAO Slavneft, Vision International People Group Public Lim ited, the PETROVAX Group, OOO Robert Bosch, Atlas, the Tamir Group and CAF.

Attendees at the round table agreed that Russian contract law is unable to compete given today’s actual economic realities and that this presents a threat to the state’s efforts to modernise. The experts agreed that a public debate is needed with a view to increasing its competitiveness and that the most significant shortcomings should be discussed at the First All-Russian Contract Law Conference in spring 2011.