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Anna Vasilyeva, Kachkin & Partners Corporate and Dispute Resolution Practice associate, comments on the material on unilateral agreement termination concluded on the basis of “Take or pay” principle.

Russian company and a Swiss company entered into an agreement under the “Take or pay” principle. The foreign counterparty withdrew from the deal. The second party tried to prove such a unilateral refusal unacceptable, but the Supreme Court dismissed the complaint. Experts expect the Economics Board to explain in detail the rules by which the “take or pay” principle should work in Russia in the definition’s motivation part. At the same time, experts warn about the possible negative consequences of such a decision.

The OTEKO-Portservice Company has entered into an agreement with the Swiss Kaproben Handels AG. The Russian company was going to perform a complex of works and services in relation to forwarding, transshipment, storage and accumulation of coal.

Kaproben pledged to provide the operator with the coal for transshipment in a timely manner within the framework of the “Take or pay” principle — and pay the remuneration. By the term «Take or pay» the parties agreed to understand the customer’s guaranteed obligation to ship the guaranteed annual coal volume. The Swiss company also pledged to pay the cost of undelivered coal volume transshipment at the transfer rate. Kaproben was only exempted from payment if the goods were not delivered through no fault of theirs.

In 2019, Kaproben wrote to its Russian counterparty that it was withdrawing from the contract unilaterally. OTEKO-Portservice considered that the Swiss could not do this, and applied to Moscow Arbitration Court with a claim to declare the unilateral refusal of the transaction illegal (case No. А40-328885 / 2019).

Courts disagreed

The first instance supported the Russian company. The court qualified the agreement between the parties as mixed and decided that neither the Civil Code, nor the terms of the agreement itself allow for its unilateral termination.

The Court of Appeal and the District Court decided that the parties entered into an agreement for the provision of services for compensation. Therefore, the defendant rightfully exercised the right to an unmotivated unilateral refusal to perform the contract, provided to him by paragraph 1 of Art. 782 Civil Code.

The courts also recalled that Russian law does not regulate the “take or pay” contractual model and the legal consequences of its application. The condition of the contract on the application of this principle does not limit the customer in his right to refuse to perform the contract.

The supreme court supported the cassation

OTEKO-Portservice appealed to the Supreme Court. According to Russian society, the courts allowed the customer to arbitrarily withdraw from the contract, ignoring the agreements of the parties on the conditions for unilateral refusal to perform the contract. Thus, the Swiss company was unlawfully released from its obligation to supply OTEKO-Portservice with orders. The actions of Kaproben, according to the applicant, constitute right abuse, since they were committed in circumvention of the law and intention of causing harm to the OTEKO-Portservice society.

On August 16, the economic board checked the arguments of the complaint, but decided to dismiss it. Thus, the unilateral withdrawal of the contract by the Swiss company was recognized as legal.

“Take or pay” agreements are not very common in Russia, say experts interviewed by Pravo.ru. This is largely due to the fact that it is not spelled out in Russian laws. Nevertheless, the parties can build an agreement on the basis of this principle — the right to this gives them the principle of freedom of contract, enshrined in Art. 421 of the Civil Code. “Judicial and arbitration practice points to the admissibility of such a condition in the contract, since a fine (penalty) can be established for any obligation violation agreed by the parties, including expressed in non-use of the minimum amount of services established by the parties,” explains ART DE LEX dispute resolution practice the lawyer Bogdan Nemoy.

This dispute is an important signal to the legislator that big business has a serious and long-overdue request to introduce the “take or pay” model into Russian legislation and its settlement, said Alina Kudryavtseva, adviser to DLA Piper, who represented the interests of Kaproben in the Supreme Court.

Based on the issues discussed at the hearing, Kudryavtseva believes that the court’s conclusions will be in line with the position expressed in clause 4 of the Plenum of the Supreme Arbitration Court No. 16 «On freedom of contract and its limits.» The position is that the customer has a fundamental and inalienable right to withdraw from the service contract on the basis of Art. 782 Civil Code. The parties can settle the possible consequences of such a refusal only by including the corresponding independent conditions in the agreement. “It is more likely that the full definition text will carry over the arguments that the rule on the unilateral services provision contract withdrawal possibility is imperative, and the parties cannot exclude it by an agreement,” Anna Vasilyeva, Kachkin & Partners Corporate and Dispute Resolution Practice associate, expects a similar decision.

The definition of the Supreme Court may be important for practice, says Nemoy, if it reflects an analysis of the “take or pay” contract structure legal nature, including the effect of such a condition on the unilateral contract withdrawal possibility.

At the same time, Vasilyeva warns of the possible Supreme Court «negative impact» position if the judges support the conclusion that the discussed principle provides for the obligation of one party to accept and pay for the service in the established minimum amount, and in case of performance limits violation, the other party has the right to demand penalty payment. “The courts can take this into account and qualify the conditions of “take or pay” as providing for the penalties payment in case of non-demanding execution in any case — and, accordingly, the possibility of their reduction in court,” the expert explains.

The material was published on the website «Pravo.ru» 18.08.2021