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A New Russian Law on Trade

On 1 February 2010, Federal Law No. 381-FZ, dated 28 December 2009, titled “On the Fundamentals of State Regulation of Trading Activities in the Russian Federation” (hereinafter – the “Law”) came into force.  It took several years to develop this regulation. Armed with this law, the Russian Government will try to limit excessive economic pressure exerted by large retail chains on domestic goods producers and to protect the interests of such producers. Therefore, the majority of the restrictive and prohibitive rules of the Law are aimed at regulating trading operations involving retail chains.

According to article 22 of the Law, Russian and foreign companies must, within 180 days of the enactment of the Law, bring their contracts, including those concluded earlier, in line with the Law. Beginning 1 August 2010, all trading operations in Russia should comply with the requirements of the Law. Foreign companies are active participants in these activities. Thus, this article will analyse the main provisions of the Law fr om the perspective of their influence on the trading business of foreign companies in Russia.

First of all, it should be noted that, according to clause 4, article 1 of the Law, its provisions are not applicable to the following types of trading operations:

- foreign trade;
- trading on commodity exchanges or retail markets; and
- operations relating to the sale of securities, real estate or industrial or technical products (including electric power, heat or other types of energy).

Fr om a practical viewpoint, the rule stipulating that the provisions of the Law are not applicable to foreign trade is of great importance to foreign companies. Building a system of contractual relations with Russian contracting parties based on foreign trade contracts enables companies to mitigate the negative implications of the Law and related legal risks. However, if building such a contractual system by involving foreign companies proves impossible, the Law will be applied to the company’s operations, including all its restrictions.

The Law mainly regulates wholesale operations involving retail chains and hardly affects retail trade. According to article 2 of the Law, a retail chain means “a system of two or more trading facilities under common management or a system of two or more trading facilities that operate under the same commercial name or other means of identification.”  This definition of a retail chain creates additional legal risks concerning trading within a group of companies as well as the use of distribution, dealer, franchising or similar contractual schemes to sell goods. Such activities might be regarded as being performed through a retail chain, which might lead to accusations of failure to comply with the rules regulating these activities, as prescribed by the Law.

Another feature of the Law is that it does not regulate all wholesale operations, but only those involving foodstuffs. According to the Law, foodstuffs mean natural and processed products on the market to be consumed by human being as food, bottled water, alcohol products, beer and beer-based beverages, non-alcoholic beverages, chewing gum, food additives and nutritional supplements (article 2 of the Law).  At present, the Law does not regulate trading operations involving non-foods. There are, however, certain proposals to supplement the Law with provisions that would apply its rules to wholesale operations involving non-foods.  The most important rules regulating wholesale operations with foodstuffs are stipulated in articles 9 and 13 of the Law.

In addition, the Law includes a special rule prohibiting retail chains fr om buying additional trading areas if their share, in monetary equivalent, of all the foodstuffs sold within a constituent entity of the Russian Federation during the previous financial year, exceeds 25%. Resolution No. 305 of the Russian Government, dated 4 May 2010, stipulates a procedure (rules) for calculating the relevant amount of goods sold.

Article 9 stipulates special rules for concluding and performing a contract for the supply of foodstuffs. These rules take priority over general rules for concluding and performing a supply contract stipulated in articles 507-524 of the Russian Civil Code.  The laws of many countries lack the concept of a supply contract. This contract was invented by Soviet lawyers in the 20th century for the purposes of a planned administrative economy. After the transition to market business principles in Russia, the supply contract, albeit slightly modified, continues to be used.

According to article 506 of the Russian Civil Code, under a supply contract, the supplier conducting entrepreneurial activities undertakes to transfer, within a stipulated timeframe, goods produced or purchased thereby to the buyer for use in entrepreneurial activities or other purposes not related to personal, family, household or other use.  The Law does not expressly require that only a supply contract be used in wholesale operations with foodstuffs. However, many Russian lawyers interpret article 9 of the Law as a specific ban on applying any other types of contract. To date, there are no decisions on the application of article 9 of the Law. Therefore, foreign companies using other contracts (distribution, dealer, etc.) to formalise trading operations run the potential legal risk that such contracts may be reclassified and even invalidated by virtue of article 168 of the Russian Civil Code, and thus, subject to the consequences of invalidity, as stipulated in article 167 of the Russian Civil Code.

The rules under article 9 vary depending on the nature of the foodstuff supplier. Clauses 1 and 2 of this article stipulate rules that apply solely to retail chains and suppliers who supply or intend to supply foodstuffs produced or purchased thereby to retail chains. The rules stipulated in clauses 3-12 of article 9 apply to all trading organisations and all suppliers of foodstuffs.

Clauses 1 and 2 obligate retail chains and suppliers selling foodstuffs to retail chains to disclose to each other information about the selection criteria used by the contracting parties to conclude their supply contracts and the material conditions of such contracts.

There are two ways of disclosing this information:

-  by placing it on the Internet web-site of a supplier and/or retail chain; or
-  by providing the information requested by a supplier and/or retail chain within 14 days of the receipt of the relevant request.

The supplier and/or retail chain are free to choose the way to disclose information.

The legal consequences of noncompliance or improper compliance with these disclosure requirements under Russian law are currently unclear. However, Russian courts are highly likely to regard violations of this requirement as:

-  grounds for invalidating a contract concluded to conceal (not duly disclose) information under article 178 (misrepresentation) and article 179 (deceit) of the Russian Civil Code;
-  proof of unfair practice by the person who concealed (failed to properly disclose) information resulting in a subsequent refusal to protect its infringed right under article 10 of the Russian Civil Code; or
-  grounds for finding that obstacles have been created for access of goods on a wholesale or retail commodity market for the purposes of applying sub-clause a, clause 1, article 13 of the Law.

Following article 432 of the Russian Civil Code and chapter 30 of the Russian Civil Code, which stipulate a list of material conditions of a supply contract, the party disclosing information under clauses 1 and 2 of this article of the Law must disclose at least the following parameters of contractual conditions:

1) the description (assortment) of foodstuffs to be supplied or purchased;
2) the amount of foodstuffs to be supplied or purchased; and
3) the delivery timeframe of foodstuffs to be supplied or purchased.

The Law implies that the provision of information concerning material conditions of a supply contract does not constitute an offer. Incorrect submission of relevant information might, however, provide grounds for classifying the information as an offer, all the more so if information concerning material conditions of the supply contract is placed on an Internet web-site. In order to mitigate such risks, we recommend that companies state explicitly that the information provided shall in no way be considered as an offer.

Clauses 3-6 of article 9 contain an important novelty under Russian Law. In particular, these clauses distinguish between the “product price” and the “contract price” and stipulate special rules for formulating conditions of a contract for the supply of foodstuffs pertaining to the product price and the contract price.  Under a general rule, the parties to a contract may determine the conditions stipulating the product price on their own. There are some exceptions to this rule when the product price and the wholesale mark-up (extra charge) on the price of this product are regulated by federal laws.

A condition stipulating the contract price in addition to the purchase price for goods may include only one type of remuneration, i.e., bonus for the purchase by a retail chain of a certain quantity of foodstuffs. Moreover, this remuneration may not exceed 10% of the price of the products purchased. However, it is prohibited to include this remuneration in the contract price relating to the purchase of certain types of socially important foodstuffs included in a list, determined by the Russian Government pursuant to clause 6, article 8 of the Law.  The Law prohibits any other types of remuneration in the contract price (e.g., bonus for the goods promotion, bonus for the increase of the goods market share, etc.).

In the case of a framework supply contract, the performance of which is formalised through separate sale contracts, the remuneration should be determined based on each one-off sale contract, as opposed to the framework supply contract. This is attributable to the fact that, according to Russian law, title to goods under such a contractual system is transferred on the basis of one-off contracts, as opposed to the framework contract.

Clauses 7, 8 and 9 of article 9 restrict or lim it the conditions of a supply contract stipulating a timeframe for paying forgoods. This timeframe is linked to the shelf life of foodstuffs and may not exceed:

- 10 business days for goods with a shelf life of less than 10 days;
- 30 calendar days for goods with a shelf life ranging from 10 to 30 days, inclusively;
- 45 calendar days for goods with a shelf life exceeding 30 days and for alcohol products made in     Russia.

These timeframes commence from the date on which goods are transferred to a retail chain.

According to the Law, goods should be paid for within the above timeframes, provided that the supplier has duly performed its obligation to transfer the corresponding supply documents. In other words, the obligation to pay for the goods is a counter obligation to the obligation to transfer supply documents. The list of documents to be transferred along with the goods is determined under Russian laws and statutes and may also be agreed by the parties to a supply contract. If the supplier fails to duly perform its obligation to transfer the supply documents, the stipulated payment timeframes are extended for the period required for the supplier to transfer the relevant documents at the request of the trading organisation.

Clause 11 of this article allows trading organisations to render various promotion services for goods (advertising, marketing, etc.) to their suppliers. Such services may, however, be rendered only under separate fee-based services contracts. The Law prohibits the inclusion of promotional services in a foodstuffs supply contract.  Clause 12 also prohibits the conclusion of a supply contract by coercing the contracting party to conclude a fee-based services contract for goods promotion. This ban reiterates the general ban on coercion to conclude a contract, as stipulated in clause 1, article 421 of the Russian Civil Code. In addition, article 179 of the Russian Criminal Code stipulates criminal liability for coercion to conclude a contract.

Article 13 of the Law stipulates special antimonopoly bans on wholesale operations with foodstuffs performed solely by retail chains, and in particular bans:

a)  on creating discriminatory conditions in trading activity;
b) on imposing the conditions of a supply contract on the contracting party; and
c) on using a commission contract or a mixed contract which contains features of a commission contract.

The ban prohibiting the creation of discriminatory conditions for trading activity means a ban on the creation of such conditions for accessing a wholesale or retail commodity market that would make the position of a contracting party unequal to the positions of other counterparties (clause 8, article 4 of the Federal Law “On the Protection of Competition”).  In particular, the violation by a retail chain of the requirements stipulated in clauses 1 and 2, article 9 concerning disclosure of information may be regarded, for purposes of applying article 13, as an instance wh ere a retail chain creates obstacles hindering access to a wholesale or retail commodity market. The establishment of unequal selection criteria for contracting parties and unequal material conditions of a supply contract for different contracting parties may, in light of clauses 1 and 2, article 9, also be considered for purposes of applying the provision stipulated in the article, which prohibits the creation of discriminatory conditions.

As for the ban on imposing conditions of a supply contract, the following issue should be borne in mind. Russian law lacks a regulatory definition of the term “imposition of contractual conditions.” At present, the Russian antimonopoly authorities regard as an “imposition” a situation when a party simply insists on contractual conditions wh ere such conditions are unfavourable to the other party (Letter No. AG/29484 of the Federal Antimonopoly Service of Russia dated 12 November 2008) - even if the party that insists on such contractual conditions does not hold a dominant position on the market.  Such law enforcement practices give rise to a special threat for foreign companies trading in Russia. In order to mitigate this threat, we recommend that companies prepare and use in its negotiations economic calculations concerning the subject market and substantiate in writing the contractual conditions which were the subject of negotiations or dispute between the parties, which could later be the subject of accusations that such conditions were imposed on a party.

The ban on the use of a commission contract and a mixed contract containing features of a commission contract has not affected commercial practice much. This is due to the fact that Russian law provides for contracts of trade representation, which replace commission contracts - namely, agency agreements, contracts of commercial representation and mandate agreements.  The Law does not prohibit the use of contracts of trade representation, instead of commission contracts, for trade purposes. The use of such contracts, however, poses the risk that such contracts could be reclassified as mixed contracts containing features of a commission contract. In order to mitigate such risk, one should determine the subject and content of these contracts correctly.

The following types of legal liability may be levied for violations of the rules stipulated in the Law:

  1. Civil liability.

The subjects of this liability include suppliers of goods (manufacturers, wholesalers) and/or trade organisations having the status of a legal entity or a sole trader. Possible types of liability include:

-  recovery of losses inflicted (article 393 of the Russian Civil Code);
-  recovery of statutory or contractual forfeit (article 394 of the Russian Civil Code); or
-  recovery of interest for use of somebody else’s money (article 395 of the Russian Civil Code).

In addition, the conditions of a supply contract that run counter to the requirements of articles 8, 9 and 13 of the Law are invalid by virtue of articles 168 and 180 of the Russian Civil Code. Therefore, following a claim filed by an interested contracting party, the consequences of invalidity stipulated in article 167 of the Russian Civil Code may be applied, by way of returning everything received under such contracts. If a trade organisation cannot return the goods, the court is entitled to obligate it to reimburse the money value of the goods received thereby.

  1.  Administrative liability.

The subjects of this liability include suppliers of goods (manufacturers, wholesale intermediaries) and/or trade organisations having the status of a legal entity or a sole trader, as well as officials of these legal entities (heads and other employees of these organisations in charge of organisational, managerial or administrative functions). At present, Russian law does not stipulate any special types of administrative liability for violating the Law. Liability for these violations may be addressed by the general rules of the Russian Code of Administrative Offences, such as article 14.31 of the Russian Code of Administrative Offences (abuse of dominant position on a commodity market), article14.32 (conclusion of an agreement restricting competition) and some others.

Administrative fines levied on companies for such violations can be very sizeable (up to RUB 1 million and even higher if the fine is based on a company’s turnover).  At present, amendments to the Russian Code of Administrative Offences are being prepared. These amendments will stipulate special corpi delicti of administrative liability for violations of the Law.

  1.  Criminal liability.

Subjects of criminal liability include individuals who are heads or other employees of legal entities, whether performing organisational, managerial or administrative functions or not, and individual entrepreneurs. Certain violations of articles 9, 13 and 14 of the Law may be classified as an exclusion, a restriction or an elimination of competition (article 178 of the Russian Criminal Code), coercion to conclude a transaction or a refusal to conclude it (article 179 of the Criminal Code). The types of criminal liability for said corpi delicti include a fine of up to RUB 1 million or a prison sentence.

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