As any other supply contracts, also supply contracts entered into with Russian buyers should thoroughly define both the goods that the agreement concerns, as well as the quantity and quality of the goods that the supplier shall deliver to the buyer under the supply contract. Technical details and specifications of the goods can be attached to the contract as appendices.
If the purpose is to agree on a long-term cooperation and continuous supply of goods, the parties usually provide for a mechanism on the submission and approval of future orders in the supply contract in order to avoid negotiation of a new contract for each delivery. In this case the orders are documented as appendices to the supply contract.
In the latter case the supply contract constitutes, in practice, a framework agreement for the supply of goods.
The supply contract should naturally specify the price of the supplied goods. Although the price is, in practice, always negotiated and agreed upon by the supplier and the buyer, the parties do not always remember to agree on and specify which of the parties is responsible for transportation costs, insurance, customs duties, taxes, other costs possibly related to the delivery, and for customs clearance at export and import. Failing to agree upon the aforementioned costs may result in unnecessary disagreements between the parties. In general, the aforementioned are regulated by the term of delivery, which means that the supplier shall carefully study the obligations that the selected term of delivery imposes on the supplier.
Terms of payment
For the supplier a full advance payment constitutes the most favorable term of payment since it allows the supplier to avoid credit risks. Also in Russia the collection of an unpaid purchase price or the recovery of supplied goods through legal action is time-consuming and expensive.
If the buyer refuses payment of the purchase price in advance in full, the supplier may propose a partial advance payment, in which case a part of the purchase price is paid before delivery and the remaining part usually when the goods have been delivered. The contracting parties may also agree on multiple installments due in accordance with the progress of the delivery (for example, at signing, delivery, installation, and commissioning).
When signing a contract with a new client an advance, full or partial, is a practical way to verify that the client is actually capable of arranging payment of the purchase price from Russia. Selling on credit or on extended credit should be considered carefully with new customers.
Also in Russia bank guarantees and letters of credit can be used to ensure payment.
Terms of delivery
The delivery terms of the International Chamber of Commerce are generally used in cross-border supply contracts with Russian buyers (Incoterms 2000 and Incoterms 2010).
When contemplating which term of delivery to apply a foreign supplier should especially take into account at what stage the risk of the goods passes to the buyer, of which costs the supplier is responsible for and which contracting party is responsible for export and import clearance of the goods. It is important to note that a foreign company cannot carry out the import clearance in Russia, so especially the DDP term should be used with caution.
For the supplier the Ex Works term is most favorable as the only obligation of the supplier with regard to the delivery is to have the product ready for loading at its mill or warehouse. The CPT, CIP and DAP terms are also possible to use, even though they impose more extensive obligations on the supplier.
The supplier may be required to compensate damage suffered by the buyer in practice when the delivery is delayed or if the there is a defect in the delivered goods or they for some other reason do not comply with the agreed product specification.
The supplier should not that unless limited in the supply contract, the supplier is usually also liable for damages consisting of the buyer’s lost profit. This is the case, for example, when the supply contract is regulated by Russian law or by the CISG. Therefore, since the amount of lost profit easily becomes considerably high, the supplier should exclude lost profit from the scope of damage for which the supplier is liable under the contract.
Quite often the supplier and buyer agree upon a fixed contractual penalty constituting, for example in case of delays, a certain nominal amount per each starting week of delay following the agreed delivery date. The parties should also agree on how defects in the goods are compensated and what the priority of the remedies is, such as price reduction, delivery of replacement goods, or fixing the goods.
The supply contract should also specify the penalty interest rate in case the buyer fails to pay the purchase price or an installment thereof in a timely manner.
As Russia is a party to the Convention on International Sale of Goods, the CISG is applied to many cross-border supply contracts unless the parties specify a governing law in the supply contract. Usually both parties wish to have the contract governed by their domestic laws. In case the governing law cannot be agreed upon, the parties may choose the CISG as a compromise.
The venue of dispute resolution or jurisdiction may be agreed upon by the parties of the supply contract by means of including a so-called dispute resolution clause in the contract.
Notwithstanding that a supplier may want to specify a domestic court as venue for dispute resolution, one should take into account that most countries lack a bilateral treaty on recognition and enforcement of foreign judgments, which in practice renders the judgment issued by the domestic court ineffective as it cannot be enforced in Russia.
Owing to the above, it is better to agree on arbitration as foreign arbitration awards are recognized and enforced in Russia under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Alternatively, the parties may agree upon dispute resolution in a Russian court, in which case the judgment of the court is naturally enforceable in Russia.
When one of the parties of a supply contract is Russian, the contract is usually drawn up in two languages. The first language is usually English or another language of the supplier, while the second language has to be Russian, since the Russian law requires contracts of Russian companies to be drawn up in Russian. In this case the contract usually dictates which language shall have priority in case of discrepancies between the text versions.
Our firm is glad to assist with the preparation of proper supply contracts.
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