Courts will be given the right to terminate contracts retroactively

The Ministry of Justice has developed amendments allowing the courts to determine from what moment the obligations of the parties in the contract terminate. This is done, among other things, to protect business,

When terminating or amending contracts due to changed circumstances, courts will be able to determine the date from which the obligations of the parties will be considered terminated or changed. The corresponding amendment to the Civil Code, prepared by the Ministry of Justice, was considered on January 16, 2023 at the government commission on legislative activities (RBC got acquainted with the bill).

The bill was approved by the government commission, RBC was told in the press service of the Ministry of Justice. As a rule, after that the document is subject to consideration at a government meeting, after which it can be sent to the State Duma.

This amendment was submitted by the Ministry of Justice for public discussion at the end of August and was submitted to the government at the end of October (it was agreed by the Ministry of Finance, the Ministry of Economic Development and the Ministry of Industry and Trade).

According to the current rules, the obligations of the parties are considered modified or terminated if the parties have entered into an appropriate new agreement (it is allowed to fix the date of change or termination in the past). If the issue of reviewing or terminating the contract is decided in COURT, the obligations are considered modified or terminated only after the entry into force of the court decision.

The new amendment is aimed at expanding the possibilities of legal protection of those persons and structures that have not fulfilled or have improperly fulfilled the obligations prescribed in the contract due to a significant change in circumstances, the explanatory note says.

According to the Civil Code, a change in circumstances is recognized as significant if they have changed so much that, if the parties could reasonably foresee this, the contract would not have been concluded by them at all or would have been concluded on significantly different conditions.

If the parties themselves could not agree on changing the contract in the new conditions, it can be terminated or amended by the court at the request of the interested party. There are several conditions for this:

at the time of the conclusion of the contract, the parties proceeded from the fact that such a change in circumstances would not occur; the change in circumstances is caused by reasons that the interested party could not overcome after they arose with the degree of care and diligence that was required of it by the nature of the contract and the conditions of turnover; the execution of the contract without changing its terms would so violate the balance of property interests of the parties corresponding to the contract and would cause such damage to the interested party that it would largely lose what it had the right to count on when concluding the contract; it does not follow from the customs or the essence of the contract that the risk of a change in circumstances is borne by the interested party.

What is the reason for the initiative

As follows from the explanatory note, the need for changes is dictated, among other things, by new conditions - logistical problems and sanctions. The document gives an example when the contract between two Russian organizations included an obligation to install equipment that was not fulfilled because the counterparty, a foreign organization, refused to supply it. The parties could not come to an agreement and change the terms of the contract (for example, by replacing foreign equipment with Russian) and went to court.

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In this case, as the Ministry of Justice writes with reference to the Supreme Court, the court decision entails a change in the obligations of the parties only for the future and does not exempt from liability for violation of obligations before it comes into force. It turns out that the violating party is actually put in a more disadvantageous position, the Ministry of Justice points out. When changing the contract by agreement of the parties, they themselves can agree on the moment from which the circumstances are considered to have changed. However, the court currently cannot recognize the obligation as modified since a significant change in circumstances. Thus, the party that violated the terms of the contract will be obliged to pay a penalty for the period from the moment the circumstances change until the entry into force of the court decision.

Since civil law acts do not have retroactive effect, after the adoption of the bill, the new approach can only be applied to court cases initiated after the date the law came into force, the Ministry of Justice indicated in September following a public discussion of the initiative.

Expert evaluation

The rule is clearly being developed for companies that have suffered or are subject to sanctions, especially the wording will help those companies for which the performance of the contract has become impossible within the contractual terms or economically unprofitable, for example, due to excessively increased transportation costs or the inability to buy products / goods from previous suppliers, said RBC partner of the practice of commercial disputes MEF LEGAL Rimma Malinskaya.

In theory, in the new edition, opportunities for abuse may arise for the violating party, which may not rush to resolve the dispute, realizing that the court in the future will retrospectively be able to release it from liability for an unfulfilled obligation, Malinska warns. “Obviously, at first, until the practice takes shape, there will be rough edges,” she said.

The Civil Code stipulates the case when the termination or amendment of the contract by a court decision does not occur from the date of entry into force of the decision - these are the so-called adhesion contracts (they include contracts with consumers with standard conditions - on issuing a loan, on the provision of communication services, etc.). p. - ), reminds the managing partner of Kucher Kuleshov Maksimenko and Partners Alena Kucher. If such an agreement is amended or terminated by the court at the request of the acceding party, then it is considered valid in the amended wording or not valid from the moment of its conclusion.

The initiative of the Ministry of Justice fully corresponds to the realities of turnover, Kucher believes. Now the formal linking of the moment of change or termination of obligations precisely to the entry into force of the court decision “may turn out to be unfair or unreasonable due to the fact that the moment the court decision comes into force in the dynamics of the transaction and the need to protect the interests of the parties and turnover can be a rather random factor”, she points out. “The possibility of court discretion in certain matters is a necessary counterbalance to an overly formal approach, which, as you know, in contractual relations should be minimized in favor of freedom of contract and protection of the interests of the parties and turnover, based on the specific circumstances of each case,” Kucher emphasized.

In March 2022, a bill was submitted to the State Duma allowing businesses to terminate or freeze a contract if they cannot fulfill their obligations due to sanctions. As conceived by the author, Pavel Krasheninnikov, HEAD of the Duma Committee on State Building and Legislation, the amendments should stabilize legal relations and support Russian business under sanctions, reducing the number of controversial and intractable situations, including those related to the possibility of bankruptcy of Russian entrepreneurs. According to the bill card in the electronic database of the State Duma, it has not yet been considered in the first reading.

The profile committees of the Duma then declared that they supported the concept of amendments, but first, in particular, it was necessary to legislate the debtor's right to terminate the obligation unilaterally in the event of hostile actions of foreign states, by amending Art. 401 of the Civil Code, which regulates the grounds for liability for breach of obligations.