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RF SC Plenum guidelines on the award of damages and specific performance

24.03.2016 the Plenum of the Supreme Court of the Russian Federation (RF SC) adopted a Resolution called “On the award of damages for a breach of contract”. The Resolution is the first set of guidelines from a supreme judicial authority that offers a comprehensive treatment of damages.

The Court elucidated aspects of recovery of any and all losses, non-compliance damages, as well as liability for bad-faith negotiation, and assessment of interest damages.

In what follows we will focus on the most fundamental and interesting guidelines provided in the document.

The Resolution's first section addresses the issues facing the courts in litigation for damages. Specifically, the Court says that where a creditor seeks to recover in the usual context of a debtor's default, that is where such a default nearly always causes certain losses, a causal relationship is assumed between the default and the losses proved by the creditor (par. 2, cl. 5 of the Resolution). Such a presumption can make it much easier to prove losses in court.

Also, the Court reiterated once again that no claim for damages may be denied just because the amount of losses is impossible to assess with a reasonable degree of accuracy. In such cases, the court have discretion to assess the quantum of damages to be awarded with due regard to all circumstances of the case (cl. 4 of the Resolution).

In the context of a claim for damages, the debtor shall be entitled to adduce evidence of other causes of losses, that is, to challenge the chain of causation between the breach of contract and the losses suffered, with the debtor's responsibility assumed and the absence of responsibility for non-performance or improper performance of obligations to be proved by the debtor (cl. 5 of the Resolution).

The Court paid special attention to the implications of liability limitation agreements. For example, the supreme judicial authority highlighted situations where a debtor's liability cannot be capped, and specifically where such agreements (clauses) are void. E.g., agreements (clauses) are void where limiting the liability of a carrier or security contractor (cl. 6 of the Resolution).

Where an agreement is made to limit a debtor's liability upon the occurrence of certain events, it is the debtor who is required to prove the occurrence thereof. Where liability is limited to an intentional breach of contract, absence of intent can be proved by the debtor where he exercised even a modicum of care and diligence in performing the contract (cl. 7 of the Resolution). The courts can face difficulties in applying these guidelines because it could be quite a challenge to make judgment calls in practice.

The RF SC also provided guidelines for ruling on force majeure. Apart from the settled case law, which requires it to be extraordinary, it must also be unavoidable, that is, no economic agent engaged in activities not dissimilar to the debtor's could have prevented the occurrence of a similar event or its consequences(cl. 8 of the Resolution).

The Court highlighted the issue of recovery of damages upon contract termination. Specifically, cl.11 of the Resolution says that the risks of change in the prices for comparable goods, works or services shall be borne by the party whose non-performance or improper performance of the contract caused its early termination, for example, as a result of contract termination by court order or withdrawal of the other party. Said damages shall be payable in this context irrespective of whether the other party to the contract makes a replacement contract or not.

At the same time, a replacement contract made prior to the termination of the original contract has no effect either on the debtor's duty to provide specific performance or on the creditor's duties to accept such performance.

In this context, no damages shall be payable upon contract termination in the amount of the difference between the price of the original contract and the price of the replacement contract unless the original contract is terminated as a result of a breach necessitating a replacement contract (cl. 13 of the Resolution).

The next section addresses the application of law to recovery under art. 406.1 of Civil Code of the Russian Federation (RF CC) of consequential losses not resulting from a breach of contract, but payable upon the occurrence of events described in the agreement between the parties.

The supreme judicial authority states that recovery is allowed where it is proved that the losses have already been incurred or will inevitably be incurred at a later time, and there is a cause-and-effect link between the event and the losses (cl. 15 of the Resolution).

The court also states that an indemnity agreement, even when incorporated as a clause in the contract, stands on its own, and the invalidity or nullity or the contract shall not invalidate or nullify, in and of themselves, the indemnity agreement (cl. 17 of the Resolution).

The third section of the Resolution addresses liability for bad-faith negotiation. Of interest is a provision whereby a negotiating party is assumed to be in bad faith when providing incomplete or incorrect information to a party, including the omission to disclose circumstances that, given the nature of the contract, must be disclosed to the other party, or an abrupt and unreasonable termination of contract negotiations in a situation where the other negotiating party could not reasonably expect it. Where harm is caused by several counterparties jointly, they shall be liable jointly and severally (cl. 19 of the Resolution).

In the context of disputes over liability for bad-faith negotiation, it is the plaintiff who bears the burden of proving the defendant's bad faith in entering into negotiations in order to injure the plaintiff; for example, that the defendant used this stratagem to obtain sensitive information from the plaintiff or prevent a contract between a third party and the plaintiff (par. 2, cl. 19 of the Resolution).

The court focused on the remedy against bad-faith negotiation. If a counterparty provides incomplete or incorrect information, which gives cause to decline the contract, the injured party shall be entitled to seek damages under cl. 3, art. 431.1 of the RF CC (cl. 21 of the Resolution).

The Court's Resolution also looks into liability for failure to perform in kind (section four of the Resolution). Specifically, the RF SC Plenum indicated that no claim may be denied where seeking performance in kind if this is the only proper remedy available; for example, only the defendant can provide the information sought by the plaintiff or to produce the required paperwork (cl. 22 of the Resolution).

Of the greatest interest are guidelines on non-compliance damages, i.e. damages awarded for non-compliance with a court ruling ordering the debtor to provide performance in kind to the recovering creditor.

Non-compliances with such court rulings shall be established by a bailiff, but not the debtor's bank (cl. 33 of the Resolution). The quantum of non-compliance damages shall be applied towards the losses caused by the non-compliance with the court ruling (cl. 28 of the Resolution).

The court said that a creditor's waiver of the right to seek non-compliance damages shall be null and void where the law or contract or the nature of the obligation do not bar the creditor from seeking specific performance (s. 1, art. 308.3 of the RF CC). That said, the parties are not forbidden from making at the stage of enforcement proceedings a settlement involving the discharge of the obligation to pay non-compliance damages in consideration for a breakup fee, novation or debt waiver (cl. 29 of the Resolution).

Section five of the Resolution covers liability for a default under art. 395 of the RF CC. Specifically, the Court elucidated the difference between interest provided for by the above article and that provided for by art. 317.1 of the RF CC. E.g., interest available under art. 317.1 of the RF CC is not damages, but consideration for the use of money. In light of the above, the courts must ascertain whether the plaintiff's claim for interest is consideration sought for the use of money (art. 317.1 of the RF CC) or damages sought for a default or late payment (art. 395 of the RF CC). Interest charged from the start of delay under art. 395 of the RF CC has no effect on interest due under art. 317.1 of the RF CC (cl. 53 of the Resolution).

An important guideline on the assessment of interest damages is provided in cl. 48 of the Resolution. The clause provides for interest available under art. 395 of the RF CC to be charged up to the date of payment to the creditor, that is, the interest period includes the day of the actual fulfilment of the obligation. Under the previous guidelines, however, the date of debt repayment was not included in the interest period.

As for interest charged on the amount of unjust enrichment, the RF SC Plenum has stated that direct credit per se, with no indication of the payer or purpose of payment, does not mean that the payee became, or should have become, aware of its unreasonableness (cl. 58 of the Resolution).

The last point addressed by the Court in the Resolution is the reduction of liquidated damages pursuant to art. 333 of the RF CC. The Court reiterated once again that in disputes where the debtor is a business, a sole trader or a not-for-profit in the context of income-generating activities, liquidated damages may not be reduced by the court except where reasonably requested by the debtor in any form (cl. 71 of the Resolution).

In this context, an upper or lower limit placed in the contract on the quantum of liquidated damages shall not be cause to deny its reduction pursuant to art. 333 of the RF CC (cl. 70 of the Resolution).

Where, on the other hand, the court has discretion to reduce liquidated damages, a reduction thereof can be requested from the court of appeal, regardless of whether the court of appeal has moved to hearing the case under trial court rules or not (cl. 72 of the Resolution).

In respect of the issue of reduction of liquidated damages, the RF SC stated that, in resisting a motion for the reduction of liquidated damages, the creditor is not required to prove his losses, while being entitled to adduce evidence of relatively typical consequences of similar defaults in similar circumstances, specifying the change in the average indicators on the market (cl. 74 of the Resolution).

In cl. 78 of the Resolution, the Court said that the rules on the reduction of liquidated damages also apply where liquidated damages are set by law.

Last but not least, note the bright-line rule that the debtor forfeits the remedy of reduction of liquidated damages where he has already paid the liquidated damages due, except where the debtor proves that the payment of liquidated damages was made under duress.

The Resolution under discussion is definitely a landmark for the case law because it provides a comprehensive treatment of liability for a breach of contract in respect of all available remedies. Despite the fact that many of the guidelines set forth in the Resolution are not really innovations, some will have an impact on the case law in place, rendering it more predictable for economic agents.
The Resolution is available here.