Just a few years ago, investment and M&A transactions were executed mainly under English law, largely due to the lack of legal regulation of the aspects relative to such transactions in Russia. However, the situation has changed, and nowadays we see a growing number of investors and start-ups working under Russian law. One of the reasons for this is an implementation of some of the well-accepted institutions of English law into the Russian legal system. Thus an article on representations (431.2) («заверения об обстоятельствах») appeared in the Russian Civil Code (became effective) on June 1, 2015.
In this note, we will take a quick look at some of the peculiarities of applying the legal provision on assurances about circumstances (representations) introduced by the Civil Code.
- Reason to include in the contract.
The more complex the transaction, the more important it is for the parties to determine their understanding of all its conditions and circumstances under which it is to be performed even before the moment of its realization (closing). Representations serve the purpose as they are an enumeration of all the facts that have arisen in the past (e.g. no violations in the company’s registration) and / or continue at the time of the transaction (e.g. a certain number of clients) and / or will (not) occur in the future (e.g. revenue will not fall within a month).
- Why wording is important.
In English law, which served as the basis for the emergence of this institution in Russia, the language/formulation in enumerating representations and warranties played an important role. What depended on this was the range of remedies the injured party could use — only to recover damages or to withdraw from the contract or both.
The wording of the Russian law does not distinguish between representations and warranties and allows a party to recover damages for any type of false/inaccurate assurances about circumstances. At the same time, the legislator has not determined the types of compensable damages, the need for guilt, the correlation between the recovery of the penalty/forfeit and the cancellation of the contract.
- How does it work?
To answer this question, we turn to the positions that have developed in court rulings:
- The party that has discovered (could have discovered) the inaccuracy of the assurances before the conclusion of the contract, subsequently loses the right to invoke the inaccuracy of such assurances. (Resolution of the Sixteenth Arbitration Court of Appeal dated October 3, 2017 on case А63-1976 / 2017)
- The party that provided an unreliable assurance shall not be liable under Art. 431.2 of the Civil Code of the Russian Federation, if it did not base its assurance on the assumption that the other party will rely on such assurance (Decree of the Tenth Arbitration Court of Appeal No. 10АП-8959/2017 of July 10, 2017 on case number A41-21587 / 14)
- The absence of representations in the contract may be considered by the court as additional evidence of the party’s rashness/ indiscretion. (Ruling of the Arbitration Court of the West Siberian District of 26.05.2016 No. Ф04-1726 / 2016 on case А45-16394 / 2015)
The Ruling of High Court of the Russian Federation in the case N A53-22858 / 2016, considered the possibility of using assurances about circumstances as a measure of protection against claims from state authorities.
The substance of the matter was that the seller did not provide the buyer with the necessary primary documents that are required for VAT refunds. Thus, the seller gave inaccurate assurances (guarantees) that all his operations for buying goods from the suppliers are fully reflected in the seller’s primary documentation, accounting, tax, statistical and any other statements. The court ruled that the seller should provide a compensation for the buyer’s losses equal to the amount of VAT that the buyer could compensate.
This case is important because it allows register/write in the transaction documentation assurances about circumstances (representations) in such a way as to protect the buyer from claims of tax authorities, presented as a result of the actions of the seller. It is notable that the assurances that allowed the buyer to win the case were included into the transaction documentation in a form of an addendum at the stage when the transaction has been already closed.
If you are not sure that the assurances about circumstances stipulated in your contract will work in your favor or you are only planning to conclude an agreement with such provisions, please contact us, we will be glad to help.
If you have any questions, please address to