On March 24, 2016 the Russian Supreme Court adopted Ruling No.7 “On application by courts of certain provisions of the Civil Code of the Russian Federation relating to liability for breach of obligations” (the “Ruling”).
The Ruling is aimed at clarifying a number of issues regarding liability for breach of obligations and other liability issues, which arise from amendments to Part 1 of the Civil Code of the Russian Federation which came into force on June 01, 2015 (the “Civil Code”).
Compensation of damages
The Ruling is aimed at making compensation of damages a more effective tool by simplifying the procedure for proving loss of profits in court proceedings. In particular, the Supreme Court clarified that in evidencing an amount of lost profit, creditors have the right to submit not only proof of claims/actions and their efforts to remedy such loss, but also any other evidence they may possess. For instance, a calculation of loss based on the profit the claimant received before the obligation was violated may be presented as evidence.
The Ruling is also aimed at reducing to a certain extent the difficulty of proving a causal connection between a breach and the resulting damages in court proceedings. The Supreme Court emphasised the standard of proof required for establishing damages, clarifying that when an amount of damages is proven, it is sufficient to prove their existence to a reasonable level of certainty. The Supreme Court also introduced a presumption of the existence of a causal connection where the claimant proves that the damages it has incurred are a typical consequence of a breach of the relevant obligation.
The Supreme Court also clarified the rules and standards for the application of the provisions on force majeure. The Supreme Court emphasised that debtors must take all reasonable steps to mitigate any losses that may be caused to their creditors by force majeure circumstances.
Compensation of losses
“Compensation of losses” is a new concept of Russian law which is to a certain extent similar to the concept of an indemnity under English law. The Supreme Court elaborated on how the courts shall apply these new provisions (article 406.1 of the Civil Code).
The parties to a contract may, by mutual agreement, provide for an obligation of one party to compensate another party for losses arising in connection with the execution, amendment or termination of the contract or otherwise related to the subject matter of the contract, but not for any losses resulting from a breach of the contract. In its Ruling, the Supreme Court emphasised that such losses may be reimbursed if the claimant proves the following: (i) it has already incurred the losses or will inevitably incur them in the future; and (ii) there exists a causal connection between the occurrence of a certain event specified in the contract and the losses the claimant incurred.
Pre-contractual liability (culpa in contrahendo)
The Supreme Court clarified certain provisions concerning negotiations conducted in bad faith (article 434.1 of the Civil Code). In particular, a presumption that the parties to a negotiation have acted in good faith has been introduced. The burden of proof in providing bad faith rests on the plaintiff claiming damages from the other negotiating party. The Supreme Court specifically points out that terminating negotiations without presenting any grounds for such termination cannot be treated per se as an evidence of a party's bad faith.
Failure to perform monetary obligation
The Ruling contains a number of clarifications on the application of article 395 of the Civil Code regulating interest payable on monetary amounts due. The Ruling notes that interest under article 395 of the Civil Code is generally not recoverable if a contract establishes a penalty for violating a monetary obligation.
In addition, the Supreme Court distinguished between the application of article 395 of the Civil Code and article 317.1 of the Civil Code. It clarified that interest under article 317.1 of the Civil Code is not a liability measure but is instead a payment for the use of monetary funds and accordingly that the accrual of interest under article 395 of the Civil Code does not influence the accrual of interest under article 317.1 of the Civil Code.
Judicial penalty (astreinte)
The Supreme Court clarified that a judicial penalty is not applicable to monetary obligations or in disputes arising from administrative, labour, pension, social support, family or personal relationships. The Ruling states that a judicial penalty is only applicable in case of failure to perform civil obligations and actions seeking specific performance.