When making a contract there is always a risk that something will go wrong and cause loses to one of the parties. The Anglo-American law provides at least 2 methods to distribute such risks: warranties and indemnities. Among other alterations made in the Russian Civil Code in 2015 was a new Clause 406.1 on indemnification of losses which is very similar to its Anglo-American prototype – indemnity. In this article, we tried to summarize if Russian law borrowed this concept in full.
1. Indemnities basis
In Anglo-American law, indemnity may come from the essence of the obligation occurred between two parties (equitable or implied indemnity) or it can be set by an agreement of parties (express or contractual indemnity). Opposite to Anglo-American law, the Russian Civil Code provides indemnity based only on agreement between the parties. For this reason, indemnity provisions shall be always included in a contract or specified in a separate agreement.
2. Parties
One of the Russian legal regulation peculiarities is that the parties of agreement on indemnification of losses may only be persons conducting the entrepreneurial activity and persons participating in corporate agreements or agreements on alienation of shares or interest in a company’s charter capital. Members of companies’ executive bodies may not be parties to the agreement on indemnification of losses. The Russian Civil Code does not provide the conclusion of indemnification agreements with Company’s directors and officers to minimize their potential personal liability for actions taken in their capacity as directors and officers. For this purpose can be used insurance of civil legal responsibility.
3. Types
English law books identify 4 several types of indemnities: when a debtor indemnifies a creditor against third-party claims; when a debtor indemnifies a creditor against third party delinquency; when a debtor indemnifies a creditor against debtor’s claims; when a debtor indemnifies a creditor against debtor’s delinquency. The Russian law specifies only on indemnity type – compensation for loss at the third party request. Such third parties may not be only companies or individual entrepreneurs but also government bodies.
4. Indemnification amount
The amount of compensation depends on wording specifying a party’s indemnity liability. The most usual wording in English law governed contracts is to compensate “all losses” to cover most negative implications as well as limits for such compensation amount, exclusions indirect losses provisions. The Russian law limits indemnification amount to compensation of sustained losses or losses which will be unavoidably sustained in future. According to the Russian Civil Code, the agreement shall provide for fixed sum or procedure to determinate the amount of indemnity liability. Such an approach is similar to an agreement on liquidated damages under English law. Since indemnity is not a kind of liability under Anglo-American law the general principles of damages recovery do not apply for indemnity compensation. In addition, the courts do not apply the losses mitigation principle. As a general rule, Russian courts do not reduce the indemnity amount as well.
5. The wording in Russian governed contracts
The Russian courts demand the wording to be express and clear. For this reason, it is important to specify indemnity in Russian governed contracts under the following rules:
A separate section in agreement or different clauses in the entire agreement providing only one indemnity provision;
When providing indemnity for breach of representation and warranties clause it is important not only give a link to such clause but specify such representation and warranties provision;
The procedure for the determination of indemnity liability amount shall be very detailed;
In order the courts will not consider indemnity clause as damages, wording “compensation of material losses” shall be used.
We will be happy to advise you on the drafting of agreements with indemnity clause as well as review your existing agreements in order to mitigate possible risks.