Ensuring the performance of obligations in international contracts

Mainstream

The enforcement of obligations in an international contract is not just a legal formality. It is a mechanism for transforming commercial risk into real money or assets.

The main question is not whether the contract has a section on security. The main question is whether the chosen instrument will allow to get execution at the right time quickly and without procedural barriers exactly where the money or critical assets of the debtor are located.

Therefore, an effective security architecture starts with three checks:

1. Legal autonomy. Is the obligation of the guarantor or pledger really independent of disputes over the underlying contract?
2. Real feasibility. Where are the money, property or collateral holders physically located and are they subject to effective jurisdiction?
3. Sanctions and regulatory permeability. Will the payment or transfer of ownership pass through the currency control filters, blocking decrees and compliance procedures of banks in Russia & CIS?

If the answer to any of these questions is no, an expensive security package may prove to be a legal fiction rather than a remedy.

When it is necessary to structure the security

Structuring security is critical if:

• a foreign buyer from an unfriendly or unstable jurisdiction requests a long delay in payment;
• the seller requires 100% advance payment without an unconditional guarantee of the return of the advance payment;
• a large EPC or investment contract with a long term of execution;
• The parties are companies affiliated with beneficiaries from the CIS, but with assets in complex jurisdictions.
• You provide loans to related entities in a holding with Russian roots;
• there is a risk of bankruptcy of the counterparty or withdrawal of assets by it;
• the counterparty falls under sanctions, but the transaction is still allowed;
• The transaction involves companies from Russia, Belarus, Kazakhstan or Uzbekistan, where there are special requirements for the form and registration of collateral;
• The main contract has an arbitration clause ICC or LCIA, and the security will have to be executed through the state courts of the CIS countries.

The mistake that most participants in the transaction make

Many companies reduce negotiations to the question:

“What percentage of the penalty can we put in the contract?”

That's the wrong trick.

The right question that the strategist asks is:

What set of instruments will give the maximum probability of receiving money or holding an asset within 14 calendar days of default, despite possible objections, arrests and regulatory locks?

Penalty is only one element. Sometimes the best result is an unconditional guarantee from the ultimate beneficiary. Sometimes - pledge of liquid shares, issued under English law. Sometimes a documentary letter of credit with the confirmation of a neutral bank. In most major trades, it is a complex combination of tools.

Step 1. Identify the real risk and beneficial owner

The security is not built on an abstract obligation, but on a specific counterparty and its structure.

It is necessary to understand:

• Who is the ultimate beneficiary of the debtor (especially if a multi-layer structure with Cypriot, BVI or Russian JSCs/LLCs is used);
• What are the actual cash flows;
• where the group’s liquid assets are located (bank accounts in Russia, real estate in Dubai, stock balances in stock);
• whether the provision of a personal guarantee from citizens of the Russian Federation or Kazakhstan violates the norms of currency control or sanctions regime.

Without it, any tool becomes a paper guarantee.

Step 2. Choosing the right and jurisdiction to secure the

A security transaction may be subject to a different right than the underlying contract, and this is often a deliberate strategy.

• Independent guarantee. If the counterparty is a Russian company, the guarantee can be issued under Russian law (Civil Code of the Russian Federation) with an explicit reservation of independence in order to minimize the risks of its invalidation in the guarantor’s homeland. For international banks - according to URDG 758.
• Stock/share pledge. Securities of a Russian JSC or shares in an LLC are recommended to be encumbered under Russian law with a contract drawn up in Russian and English to ensure undisputed registration and foreclosure in the Russian Federation, even if the main dispute is considered in the LCIA.
• Guarantee. An individual with assets in the CIS – it is better to use the law of his country of residence, so that the court decision is enforceable without a long exequatur proceedings.

Step 3. Design an independent guarantee (bank or corporate)

This is the main liquidity filter in transactions with counterparties from the CIS. An independent guarantee (including a bank guarantee) must be unconditional upon request.

Key nodes that need to be checked and registered:

• Exclusion of references of the guarantor to the main contract.
• A clear list of documents for disclosure of the claim (usually: demand + confirmation of the violation; No “court decisions on the merits”
• Irrevocability and specific term (guarantees “until full performance of obligations” courts in the Russian Federation often qualify as not imprisoned on time).
• The mechanism for transferring the right of claim under the guarantee (for syndicates of creditors or in the sale of debt).
• The impact of sanctions clauses. If the guarantee payment is based on the refusal of the European correspondent bank to conduct a SWIFT transfer to the Russian beneficiary, the guarantee should provide for an alternative method of settlement (for example, payment in rubles through a Russian branch or other route).

If the guarantor is the parent company, and not the bank, the text of the guarantee must pass a stress test for independence. 370 Civil Code of the Russian Federation, so that the court in Russia does not reclassify it into a regular guarantee with the right to raise objections on the main transaction.

Step 4. Use the letter of credit as a tool for providing settlements

The letter of credit provides not so much the execution of works as the security of the transaction.

In transactions with high regulatory risks (sanctions, currency control of the Russian Federation), a confirmed irrevocable letter of credit opened in a bank of neutral jurisdiction acquires special importance.

Practical nuance: If the beneficiary is located in Russia and the issuing bank is located in the UAE, it is important to agree in advance with the beneficiary’s bank the possibility of accepting payments so that the letter of credit does not become unenforceable due to the compliance refusal of the Russian bank.

Step 5. Guarantee or guarantee from the beneficial owner

Where the corporate shell is poor in assets, the signature of an individual (the real business owner from the CIS) changes the entire negotiating position.

The strategy should take into account:

• The regime of joint ownership of spouses (according to the Family Code of the Russian Federation or similar norms). Without the consent of the spouse, the recovery may be faced with the division of property.
• Submission of a guarantee to a foreign arbitration is not always automatically recognized as enforceable against a citizen of the Russian Federation, if he does not have foreign assets. In parallel, it is worth obtaining an arbitration clause, but with a direct indication that the decision can be turned to enforcement in the territory of the country of citizenship.
• The responsibility of the guarantor in the bankruptcy of the main debtor in the Russian Federation - it is necessary to model procedural risks in advance.

Step 6. Asset pledge with focus on CIS jurisdiction

In an international context, pledge is not one instrument, but a whole class:

• 100% stake in a Russian LLC. Highly effective, but requires notarization and entry into the USRLE. It is important for the creditor to have an extrajudicial order of foreclosure in the collateral agreement (leaving the subject of the pledge behind him) in order to avoid long trading in the event of a default.
• Stock pledge. When pledged shares of PJSC, restrictions on control over strategic enterprises (FZ-57) are taken into account.
• Pledge of rights under the bank account agreement. The pledger is a Russian company, an account in a foreign bank. The design is complex, but possible: The foreign bank must accept the notice of pledge and agree to lock the account without a court order.

Step 7. Retention of Title (Retention of Title)

In the cross-border supply of goods to the CIS, the retention of ownership clause (Article 1). 491 Civil Code of the Russian Federation is a classic instrument.

However, there is a pitfall in Russia: In the bankruptcy of the buyer, such property may be included in the estate if the court considers that the purpose of the transaction is to circumvent the priority of creditors. Therefore, retention of title must be perfectly documented (identification of goods, date of transfer of rights, act of acceptance) and supplemented by security measures in the form of pledge of goods in circulation as the second tier of protection.

Step 8. Penalty, fine and pre-estimated losses

In contracts regulated by Russian law, the penalty may be reduced by the court (Article. 333 C.C.R.C. In international contracts (English law), liquidated damages should not be penalty, otherwise they are unenforceable.

Strategy for protection in Russia & CIS:

• Duplicate the claim for penalty by an independent obligation to compensate for all losses not covered by penalty, with an explicit indication in the contract of intentional evasion from performance (this limits the application of Art. 333 C.C.R.C.
• Provide for “payment for the use of commercial credit” (art. 823 Civil Code of the Russian Federation) as an alternative instrument for accruing interest on the amount of advance or deferment, which is more difficult to reduce in court than a regular penalty.

Step 9. Interim measures of protection before and during arbitration

While you are going to the ICC or LCIA, assets in Russia, Kazakhstan or Cyprus may disappear.

It is necessary to prescribe in the contract:

• The competence of the Emergency Arbitrator.
• The right of a party to apply for interim measures (seizure of assets) in the state court at the location of the property, despite the existence of an arbitration clause.
• In Russian practice, a foreign arbitration award on interim measures does not have direct effect in itself – you need to go through a Russian arbitration court with an application for arrest in parallel.

Step 10. Planning the exit – an enforcement strategy

Securing is a promise. Enforcement is money.

At the stage of the design of the transaction, you need to have a ready-made scenario:

1. Pre-trial implementation: filing a claim for a guarantee, writing off under a letter of credit, foreclosure on bail in an extrajudicial manner.
2. Recovery arbitration: in parallel with the interim measures.
3. Recognition of the decision: assessment of the speed of exequatur in a particular CIS country (in Russia, the procedure for recognizing arbitration awards is faster than foreign court decisions).
4. Threat of subsidiary liability or bankruptcy: For Russian beneficiaries, the threat of personal liability within the framework of the company’s bankruptcy in the Russian Federation is a powerful incentive to resolve the issue.

Comparison of security instruments

How to strengthen your position before a dispute arises

The best security system is built not at the time of default, but at the stage of signing a contract.

An international contract with reference to the CIS should include:

• the unconditional obligation of the debtor to provide additional security ahead of schedule in case of deterioration of financial ratios or the imposition of sanctions;
• the right of the creditor to unilaterally set off any amounts due to the debtor for performance;
• a clause that any modification of the host contract does not terminate or modify the security obligations without the express written consent of the creditor;
• pre-signed forms of requirements for guarantee and acts of acceptance and transfer of pledge;
• The debtor must inform about currency restrictions and blockings imposed by the Central Bank of the Russian Federation or other regulators.

Common mistakes in structuring the security

1. Accept the guarantee of a bank under blocking sanctions. The claim will be put up, but the payment will not physically pass into Europe or the US.
2. Use English law to pledge Russian shares. The foreclosure would face Russian peremptory substantive law, creating a conflict.
3. Guarantee without a deadline. According to the Civil Code of the Russian Federation, the guarantee is terminated one year after the deadline for the fulfillment of the obligation, if the creditor has not filed a lawsuit.
4. Ignore the institution of “representations and warranties.” In Russian law (art. 431.2 GC) is a powerful tool: If they are unreliable, there is an independent obligation to compensate for losses, which is easier to provide.
5. Confusing deposit and advance. In international transactions subject to Russian law, the consequences of default on a deposit-backed obligation are extremely severe, and courts cannot reduce the deposit amount by analogy with a penalty.

Creditor checklist

Before launching a transaction and accepting a security, answer 16 questions:

1. Who is the security person (legal, not commercial identification)?
2. Is the security transaction subject to a right that is enforceable?
3. Is the guarantee really independent, or does it have hidden accessory elements?
4. Is there a clear amount and duration of the guarantee/guarantee?
5. Are the assets of the guarantor/probate-holder located in the same jurisdiction where it is established?
6. Is the spouse’s consent given if the guarantor is a natural person from the CIS?
7. Is the pledge registered in strict accordance with the requirements of the country of registration of the asset?
8. Will the current sanctions architecture allow you to receive payment from the guarantor to your account?
9. Does the application of foreclosure for pledge fall under the restrictions of the FAS of Russia or the Government Commission?
10. Does the collateral agreement allow you to keep the collateral for yourself at a fair price without bidding?
11. Do you have a notarized statement of debt recognition?
12. Are the risks of a moratorium on bankruptcy (relevant for the Russian Federation) taken into account and how do they affect the implementation of the pledge?
13. Can you quickly file an application for the seizure of assets in a Russian court if the arbitration is in London?
14. Does the guarantee expire when the principal debt is not already contracted?
15. Who is authorized to sign the warranty requirement and do the signatures match the card handed over to the guarantor?
16. Do you have a Plan B (alternative way to get money) in case the main security instrument is blocked by sanctions?

What a strong strategy looks like (the principle of 5 levels)

1. Security Design (Legal Design) Choosing the right mix of tools, law and forum.
2. Due Diligence (asset verification) Real audit of the guarantor’s solvency and the availability of property in the Russian Federation / CIS.
3. Perfection (Completion of legal procedures) Registration, transmission, acceptance of notifications.
4. Monitoring (monitoring). Monitoring changes in sanctions lists, financial indicators and attempts to withdraw assets.
5. Emergency Execution (Crisis Implementation) A pre-agreed scenario of seizing control of a pledge or receiving payment in a gray compliance zone.

Without a fifth level, i.e., without the readiness for immediate action in the face of force majeure and regulatory constraints, the first four levels may be a good legal theory.

FAQ

What is the most reliable tool in transactions with companies from the CIS? For the return of the advance, a confirmed letter of credit or an unconditional guarantee of a first-class bank from a neutral country works best. To control the business - pledge 100% of the share in the LLC with extrajudicial order of foreclosure.

Is it possible to take an independent guarantee of a Russian bank under sanctions as security?It is possible, but it is necessary to clearly understand what route the payment will take. If your receiving bank does not accept payments from the Russian Federation, you will receive a refusal in execution without the fault of the guarantor. It is necessary to agree in advance on a payment agent or settlement mechanism in a “friendly” currency.

What to do if the debtor withdraws assets, and before the arbitration decision is still far? If you have an arbitration clause, apply to extraordinary arbitration. In parallel, immediately apply to the state arbitration court at the location of assets in the Russian Federation (for example, in the ASGM) with a statement of preliminary interim measures.

Will the Russian court reduce the penalty if it is prescribed in an international contract? The courts in Russia actively apply Art. 333 of the Civil Code even in the absence of a debtor's application, if he is a citizen. However, in arbitration practice (ICC) liquidated damages are approached formally and legally, checking only punitive nature.

Can I foreclose on the pledged share in a Russian LLC without a court decision?It is possible if it is directly provided for by a notarized pledge agreement. Out-of-court procedure allows the creditor to keep the collateral for himself or sell it to a third party, which is much faster than the judicial procedure.

A correspondent bank in the payment chain may refuse to conduct a transaction, even if it is formally authorized. This leads to the blocking of calculations. It is necessary to structure transactions without the involvement of banks supporting the sanctions infrastructure, or to use alternative currencies and financial messaging systems.

Related services

• International Arbitration & Cross-Border Disputes (Russia & CIS focus)
• International Trade, Distribution & Supply Chain Contracts
• Sanctions, Export Controls & Russian Counter-Sanctions Compliance
• Asset Tracing & International Judgment Enforcement
• Corporate Structuring & Personal Asset Protection

Related material

• How to make an arbitration clause for a contractor from Russia
• Recognition and enforcement of arbitration awards in the CIS
• Bank Guarantees and Sanctions Compliance in 2024
• Pledge of shares in LLC: extrajudicial recovery and jurisprudence
• Risks of subsidiary liability for CIS beneficiaries
• International Letter of Credit: step-by-step instructions for exporters

Conclusion

Ensuring the fulfillment of obligations in transactions with the Russian and CIS-element requires the rejection of template solutions. You can’t simply copy the form of the guarantee from the previous project or rely on the reputation of the counterparty.

Strong collateral is an autonomous value independent of the vicissitudes of the underlying dispute, which must be realized faster than sanctions filters or asset withdrawal mechanisms work. It is structured not for the sake of a beautiful annex to the contract, but for the sake of unconditional receipt of money in a specified period.

The winner is not the one who has the largest amount of penalty in the contract, but the one who knows in advance: What button to press, which bank to send the claim and in which registry is the pledge, when the debtor says “we have temporary difficulties”.