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On Risks of Including the Provisions of Law in Contracts

17 August 2020
Kirill Shcherbakov
Partner
Corporate Practice
Litigation & Arbitration. Bankruptcy
The Civil Code of the Russian Federation (hereinafter referred to as the "Civil Code") contains a number of rules that not only prescribe a certain model of conduct for participants to civil relations but also offer them to independently develop alternative options for relationships. Such rules are called dispositive¹ and usually contain the wording "except as otherwise provided in this contract".

In contrast to dispositive rules, mandatory (obligatory) rules of the Civil Code are to be applied regardless of whether they are included or not included in the contract. A change in the wording in comparison with the rule of the Civil Code will lead to the application of the rule established by law, except in cases where the rule is dispositive.

Relations under a lease agreement can serve as an example of the situation where a dispositive option of regulation can be less conflicting and risky than the general rule.

In accordance with Article 329 of the Civil Code, the fulfilment of the obligations can be secured by a penalty, pledge, retention of the debtor's property, surety, independent guarantee, deposit, security deposit and other methods provided for by law or contract.

Based on this rule, a lessor can include a condition in the lease agreement that in case of non-payment, access to the premises will be restricted to the lessee and the lessee's property will be retained. Sometimes, this rule is not stipulated in the agreement at all, but in the case of non-payment, the lessee will still lose access to its property, since the lessor acts on the basis of the provisions of the law. Moreover, in some cases, the lessor tries to satisfy its contractual claims at the expense of the lessee's property, guided by Article 359 of the Civil Code on the retention of the debtor's property.

These rules not only create a conflict between the parties, but also carry risks for the lessor itself. For example, the lessor's actions can be qualified as a criminal offence – arbitrariness². Quite often, the property of the lessee's employees (personal belongings) or third parties (which is stored in the premises) is retained together with the lessee's property, or the value of the retained property significantly exceeds the amount of the debt. This may be the basis for filing a claim to initiate not only civil but also criminal proceedings against the lessor’s actions.

The above-mentioned criminal and civil law rules create a contradiction in the protection of the rights of the lessor and the lessee.
To avoid this problem, you can use the following methods when entering into an agreement:
1. Explicitly stipulate retention as a method of securing lease obligations, prescribe a list of property that can be retained, make sure that it belongs to the lessee, specify the conditions for evaluating the specified property in order to retain it in an amount equal to the amount of the debt.
2. Choose other ways to secure the fulfilment of the lease payment obligations (for example, a security deposit or a guarantee) and stipulate that the property located in the rented premises cannot be retained without the consent of the lessor and access to the specified property cannot be restricted. In this case, it is desirable to stipulate how exactly access to the property will be provided or how it will be transferred to the lessee.

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¹ A dispositive rule is a legal rule that provides for a certain model of conduct, but at the same time provides legal entities with the opportunity to regulate relations between themselves at their own discretion within the limits of legal means.
² Arbitrariness means the unauthorized commission of actions contrary to the order presented by law or any other normative legal act, actions whose lawfulness is contested by an organization or individual if such actions have inflicted substantial harm (Article 330 of the Criminal Code of the Russian Federation).
Kirill Shcherbakov
Partner
Corporate Practice
Litigation & Arbitration. Bankruptcy
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