The Invalid Contract And Other Surprises

If you choose Russian law to govern your contract or you fail to choose a governing law and certain tests are met, a court or arbitration tribunal (if the parties have chosen to settle disputes through such a tribunal) will apply Russian law. For example, Russian law may be applied if the contract was signed in Russia and certain other activities took place in Russia -- and do not forget that Russia is a signatory to treaties on mutual enforcement of court judgments with only a few countries. This means that if you win a court decision against a Russian party in, for example, the United States, England, Germany or Japan, you would not be able to enforce that court decision in Russia (or vice versa). So, if an appropriate treaty on enforcement of court decisions is not available, it is important to state in your contracts that the parties will resolve disputes by arbitration -- Russia is a party to the New York Convention on Enforcement of Arbitral Awards of 1958.


In addition to the intricacies of enforcement of decisions relating to contracts, the investor should also be aware of general provisions of Russian legislation which may invalidate a contract, as well as legislation which may give rise to contractual obligations to the surprise of the investor -- the "preliminary contract."


The following transactions, among others, are invalid: fictitious or sham transactions (the latter are transactions concluded for the purpose of concealing another transaction, such as certain transactions to conceal beneficial ownership in property), transactions not conforming to requirements of law (for example, a contract for payment by a Russian resident abroad in foreign currency which contains provisions contrary to legislation on 'export' of currency), transactions concluded for a purpose contrary to legal entities exceeding the legal capacities of such persons (so-called "ultra vires" transactions, e.g. contracts not permitted by a company's charter) -- or contracts not containing required signatures.


Finally, Russian legislation provides for the binding letter of intent, or "preliminary contract." This may be created if the parties set forth certain material conditions in a letter of intent, for example a tribunal may find that the parties must negotiate in good faith a future contract. Of course, the parties are free to agree not to proceed with negotiations. The problem arises when parties disagree on whether to proceed. If the preliminary contract does not set a deadline on entering into a contract, Russian law applies a one-year deadline. To avoid creating a binding letter of intent, the parties should state in the document that there is no intention to create a binding preliminary agreement and should avoid including all material provisions in the document.





William Butler and Maryann Gashi-Butler are Moscow-based attorneys.