Up Again Russia: Suppliers and Contractors

Restructuring

1. Navigating the supply chain in a distressed market:

a. My company supplies goods and I am concerned about the solvency of my customers. Are there any steps I can take to mitigate risk/my exposure?

In order to reduce credit risk, the company should consider restructuring supply and payments such that supplies are paid either in advance or promptly on delivery and deferred payment arrangements are excluded to the extent possible from a commercial perspective. The company should also consider obtaining collateral or other credit support to secure the payment obligations arising from supply of goods by the customer. Among the types of credit support available under Russian law, in our view obtaining a bank guarantee would be most appropriate from a risk-mitigation perspective and consistent with market practice. Obtaining collateral (i.e. pledge) should also be considered, although it is less common in supply and other commercial operations.

However, in bankruptcy proceedings, only pledge will give the creditor secured creditor status and ringfence the pledge’s assets from other creditor claims, subject to applicable statutory haircut. Such secured creditor will be entitled to receive up to 70% of proceeds received from the sale of the pledged property in priority to other pledgor's creditors.

At the same time, transactions entered into by a consumer within a certain period up to three years before commencement of the bankruptcy proceedings may be challenged on the grounds provided for by the Russian bankruptcy law. In particular, the following transactions can be challenged:

  • undervalue transactions (i.e. transactions where the consideration received or to be received by the debtor is inadequate or which aimed at defrauding creditors)
  • preferential treatment transactions (i.e. transactions that result or may result in an unfair preferential satisfaction of claims of one or more creditors over other creditors)

That said, provision of a pledge may be successfully challenged if granted in anticipation of the insolvency proceedings against the customer.

b. My company relies upon the supply of goods/services and I am concerned about the solvency of my supplier? Are there any steps I can take to mitigate risk?

Russian law allows a creditor to file a claim for specific performance. However, specific performance in the case of the bankruptcy might not be available.

Litigation and Regulatory

2. How will legal disputes that have arisen as a result of COVID-19 or its effects (for instance, in relation to force majeure) be affected by restrictions being lifted and resuming business operations in whole or in part?

Because disputes are settled on the basis of the facts related to the dispute, the exact effects of restrictions being lifted will depend on the circumstances of each particular case and provisions of the contract in question.

Generally, lifting restrictions will affect performance of the contracts and imposition of liability as follows:

  • Generally, if while the restrictions were in force you relied on force majeure to withhold performance, when the restrictions are lifted performance of the contract should be resumed.
  • Likewise, if force majeure precluded application and accrual of the liability for a failure to perform the contract, the liability will again start to apply and accrue.

Also, as a part of lifting the restrictions, the Russian courts have resumed operation in full. They have started accepting documents not only in electronic form or by post. The courts have also restarted conducting hearings on all cases.

3. How should you manage those disputes once COVID-19 restrictions are lifted?

The approach to managing disputes should be determined on a case-by-case basis.

First, you need to evaluate the impact of restrictions imposed on the parties' positions and the dispute. For example, if while the restrictions were in force you relied on force majeure to withhold performance, when the restrictions are lifted such obstacle no longer exists.

Second, you should secure evidence of impact of restrictions and of the steps taken by you or the other party while the restrictions were in force and after they were lifted. This may include preparation of internal corporate documents, obtaining additional documents from counterparties, and filing for a certificate of a chamber of commerce confirming force majeure.

Third, if your counterparty is facing financial difficulties caused by the impact of COVID‑19, it is advisable not to delay bringing the claim or restructuring the overdue payments.

4. What should you do when restrictions are lifted if you have suffered loss under a contract as a result of COVID-19 or the restrictions, but have not yet taken legal action in relation to that loss?

First, you should assess the validity of the claim, whether the claim is supported with necessary evidence, identify a legal basis on which the claim can be brought, and whether there are any grounds for release of your counterparty from liability (e.g. force majeure).

As a party who suffered losses, you also need to take reasonable measures to mitigate the losses.

To file a claim, you should review the dispute resolution clause in your contract and initiate legal action within the prescribed limitation periods.

Before filing a claim with the court, you should send a pre-trial claim to the other party.

Although the limitation periods were not changed, the Supreme Court has clarified that the statute of limitations may be suspended due to the COVID-19 restrictions if a party proves that, within the last six months of the period, it was prevented from filing a claim by a force majeure event.

All the above is often done by outside legal counsel with experience in litigation and local specifics.

5. Is there any risk of mass claims being brought against your business? If so, how would such claims be brought? Are third party funders able to fund such claims?

In Russia, mass claims can be brought by a group of at least 20 claimants (in civil proceedings involving individuals) or five claimants (in commercial litigation in arbitrazh courts). The claims need to be of the same type, based on the comparable facts, and brought against the same respondent. The risk of mass claims is higher in areas of consumer protection and tort liability.

Russian law does not have specific regulation of third-party funders' activities. But there is no express prohibition on third-party funding, so generally it is possible to involve a third-party funder.

6. What should I do about recording contractually or otherwise any of the changes put in place during the COVID-19 lockdown period?

We recommend you and your counterparty sign an addendum to the contract to reflect in writing the changes implemented due to COVID-19 restrictions (e.g. suspension of deadlines for performance, extension of the payment terms).

Other recommendations and requirements may apply depending on the governing law, nature of your contract and its specific provisions (e.g. notarial certification). In general, Russian law allows parties to agree on retroactive application of such changes to the contract.

7. Any return to normal will likely not be as immediate as the impact of COVID-19 when it started (e.g, sales/orders will take time to ramp up, raw materials will take time to flow through supply chains, etc.) what should I think about and do to best manage this in my contracts?

We recommend that you analyse the contracts, taking into account the risks of undue performance or non-performance that arose due to COVID-19 restrictions. For instance, you should consider any delays due to COVID-19 restrictions and, if necessary, negotiate with your counterparty extension of the contractual deadlines.

We suggest that you also check and seek legal advice whether:

  • the contract contains a force majeure, material adverse change in circumstances or another similar provision;
  • the pandemic or related governmental restrictions could serve as triggering grounds under such clauses; and
  • the contract provides for a requirement to notify the other party of the force-majeure or its end.

If your contract does not contain such a clause, we suggest you negotiate with your counterparty in order to address COVID-19-related risks and conclude the relevant addendum.

You may also check if there are grounds to file a claim for termination or amendment of the contract on the basis of material adverse change in circumstances.

8. What additional protections or changes to existing provisions (e.g. force majeure) should I put into any new supply arrangements having regard to COVID-19?

We recommend you analyse the risks relating to COVID-19 and the relevant restrictions, and update your contracts accordingly if needed.

Depending on the circumstances of your case, it will be helpful to consider including in your contracts a force majeure clause with an express reference to pandemic (epidemic or disease outbreak) or restrictions imposed because of it.

Alternatively, you may include an express statement that such events do not qualify as force majeure (e.g. if as a customer you are interested in receiving the supplies despite the imposed restrictions).

In addition, you should consider clarifying the consequences of a force majeure in your contract; for example, extension of the term of performance, relief from liability for a breach of contract, or termination of the contract if force majeure lasts longer than a certain period.

We also recommend considering whether the contract should be supplemented with other clauses referring to COVID-19 and the related restrictions, such as:

  • a renegotiation, adaptation or material adverse change in circumstances provision;
  • unilateral termination/amendment of the contract;
  • an indemnity clause; and
  • a limitation of liability clause.